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Operator: Ladies and gentlemen, thank you for standing by for the Cigna Group's Fourth Quarter 2025 Results Review. At this time, callers are in a listen-only mode. We will conduct a question and answer session later during the conference and review procedures on how to enter the queue to ask questions at that time. If you should require assistance during the call, please press 0 on your touch-tone phone. As a reminder, ladies and gentlemen, this conference, including the Q&A session, is being recorded. We'll begin by turning the conference over to Ralph Giacobbe. Please go ahead. Ralph Giacobbe: Thanks. Good morning, everyone. Thanks for joining today's call. I'm Ralph Giacobbe, Senior Vice President of Investor Relations. With me on the line this morning are David Cordani, Cigna Group's Chairman and Chief Executive Officer, Brian Evanko, President and Chief Operating Officer, and Ann Dennison, Chief Financial Officer. In our remarks today, David, Brian, and Ann will cover a number of topics, including our fourth quarter and full year 2025 financial results, and our financial outlook for 2026. Following their prepared remarks, David, Brian, and Ann will be available for Q&A. As noted in our earnings release, when describing our financial results, we use certain financial measures including adjusted income from operations and adjusted revenues which are not determined in accordance with accounting principles generally accepted in the United States, otherwise known as GAAP. A reconciliation of these measures to the most directly comparable GAAP measures, shareholders' net income and total revenues, respectively, is contained in today's earnings release which is posted in the Investor Relations section of the cignagroup.com. We use the term labeled adjusted income from operations and adjusted earnings per share on the same basis as our principal measures of financial performance. In our remarks today, we will be making some forward-looking statements including statements regarding our outlook for 2026 and future performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. A description of these risks and uncertainties is contained in the cautionary note to today's earnings release and in our most recent reports filed with the SEC. Regarding our results in the fourth quarter, we recorded after-tax special item charges of $483 million or $1.82 per share. Details of the special items are included in our quarterly financial supplement. Additionally, please note that when we make prospective comments regarding financial performance, including our full year 2026 outlook, we will do so on a basis that includes the potential impact of future share repurchases and anticipated 2026 dividends. With that, I'll turn the call over to David. David Cordani: Thanks, Ralph. Good morning, everyone, and thanks for joining our call. 2025 was a pivotal year for our company. We delivered new innovations for the benefit of our customers, strengthened meaningful partnerships, and extended strategic client relationships. Today, I'll briefly focus my comments on our financial commitments for 2025 and how we are leading through a dynamic environment by evolving and advancing our business for the benefit of our customers, clients, and partners. Then Brian will provide an update on our performance in our growth platforms and perspective on the year ahead. Then Ann will review additional details on our results and our '26 outlook, and we'll take your questions. Let's get started. In 2025, I'm pleased to report that the Cigna Group delivered full-year adjusted revenue of $275 billion or 11% growth. Full-year adjusted earnings per share of $29.84, a 9% increase, building on a multiyear track record of sustained earnings growth. We also took steps forward in improving our customer experience as evident by the increase in our customer net promoter score year over year in each of our largest businesses. At the Cigna Group, we also continue to shape our portfolio in 2025, emphasizing businesses where we see clear opportunities to generate attractive, sustainable growth. For example, we further expanded our specialty capabilities to serve hospitals and health systems, in part with our new investment in Shields Health Solutions. And we completed the sale of Cigna Healthcare's Medicare business earlier last year. We are well-positioned to continue leading and growing in a rapidly changing environment. To that end, I want to briefly comment on our global settlement with the Federal Trade Commission announced yesterday. The settlement is a comprehensive resolution of all matters brought by the FTC regarding our pharmacy benefits business. It includes the industry-wide insulin lawsuit and ongoing investigations. To be clear here, the beneficiary of the settlement is our customers and patients. The settlement noted $7 billion in out-of-pocket cost relief over the next ten years for the 100 million customers and patients we serve. The savings will be delivered through lower insulin prices and reduced costs for brand-name medications for consumers at the pharmacy counter. The settlement will also increase transparency for our customers and clients and strengthen our relationship further with community pharmacists. We were well-positioned to execute on the terms of this settlement because of the new pharmacy benefit model that we began developing at the beginning of 2025 and announced in 2025. Our new model clearly positions us to achieve this comprehensive settlement. It enhances the value we provide to customers and clients all while we continue to strengthen our position and deliver on our long-term shareholder commitments. With the FTC matter now resolved, and the additional clarity from the federal PBM reform legislation that passed earlier this week, we are squarely focused on driving affordability improvements and value for those we serve. We know health care affordability affects everyone, from individuals and families to employers and governmental organizations. At the Cigna Group, we are steadfast in our focus on leaning in to lower health care costs and expanding access to quality care and medications. But doing so requires confronting the underlying cost drivers, including both the demand and the supply side. For health care in the United States is growing rapidly. Our population is aging, and chronic conditions are increasing. Today, chronic disease and mental health conditions account for roughly 90% of total health care spending. Together, these forces drive heightened demand for health care services and, as such, increase costs. Now relative to supply, in most industries, when additional supply comes online, costs go down. However, in health care, costs are rising even as additional supply becomes available. Consider that since 2000, the cost of a hospital stay has increased more than 220%. And according to 2024 data, the median price of a new drug launch was over $370,000, compared to only $2,000 just twenty years ago. The organizations and professionals that supply and deliver care, be they hospitals, doctors, pharmaceutical manufacturers, and medical device companies, are advancing significant innovations. But they are coming at an elevated cost. At the Cigna Group, we're moving forward with purpose and conviction to counter these forces. Let me share a few ways of how we're doing that. First, our approach to investing in and shaping our portfolio guides us to collaborate rather than own physician practices or pursue capital-intensive care delivery infrastructure. This gives us more agility to offer new solutions and services that expand access, lower costs, and focus on prevention and treatment adherence. Our transformative rebate-free pharmacy benefits model is one of those improved innovations for prescription drugs. Another example is our new Clarity solution in Cigna Healthcare that Brian will talk about in a few moments. A second way we are addressing affordability is by informing decisions more clearly on the location where care is provided, as locations can significantly impact patient affordability, whether in a hospital, freestanding facility, or a physician's office. A third way is through meaningful partnerships and collaboration. For example, when the new Trump Rx site launches, EverNorth is the pharmacy partner to the site and will dispense EMV Serrano treatment for fertility. This will make treatments more accessible for all Americans struggling to start or expand their families at the lowest available cash price. And we're helping providers focus on care by minimizing their administrative burden, for example, in prior authorization processes. Over the past year alone, we further reduced the number of prior authorizations by 15%. And going forward, we are partnering with the administration to further streamline the prior authorization process. And the fourth way we are driving affordability is by leveraging competition and encouraging the use of the most cost-effective solutions. Generics and biosimilar medications are important opportunities here. Today, for example, in the United States, approximately 90% of all prescriptions filled are generic, and they make up only 10% of the total pharmacy spend. As a result, the US has some of the lowest generic prices in the world and highest uptake levels, reflecting what happens when robust competition is harnessed. We see similar promise with biosimilars. Our company is already saving Americans money on the widely used brand-name medications such as Humira and Solara. We offer access to $0 out-of-pocket offerings for our patients, saving them thousands of dollars each year. Looking ahead, in the coming years, there will be more than $100 billion of savings for the US in the biosimilar space alone. At the Cigna Group, we will continue to make advancements in each of these areas in addition to the work we do day in, day out to support our customers, patients, and clients every day. Now to summarize, and again at the Cigna Group, we have demonstrated the ability to evolve to meet the needs of our stakeholders, something we've done over years and decades. Against the backdrop of a disrupted operating landscape in 2025, we delivered full-year adjusted earnings per share of $29.84, returned over $5 billion to shareholders through dividends and share repurchase. Looking ahead to 2026, our adjusted EPS outlook of at least $30.25 reinforces the sustained growth and strength of our company. We will also continue to make strategic investments in strengthening our capabilities and broadening our total addressable market profile while we remain focused on harnessing the breadth of our capabilities across our organization for the evolving needs of those we serve. With that, I'll turn the call over to Brian. Brian Evanko: Thank you, David. Good morning, everyone. I'll start by outlining some highlights of our business performance in the fourth quarter and the full year. I will then highlight the key innovations we introduced in a dynamic environment and outline our view of the years ahead. Our performance underscores the value we provide for those we serve through our three business platforms, providing multiple paths for sustainable growth, including our specialty and care services businesses within EverNorth, our pharmacy benefit services business, also within EverNorth, and Cigna Healthcare, our health benefits business. During the quarter, our EverNorth portfolio demonstrated continued performance. Starting in our Specialty and Care businesses, we delivered strong results with 14% adjusted revenue growth, reflecting the demand for our services. And we saw 13% year-over-year growth in the number of specialty scripts in 2025. This is supported by the shift to biosimilars and our industry-leading patient support in Accredo. Our portfolio shaping efforts have resulted in an expansion of our specialty capabilities to serve hospitals and health systems, in part through our investment in Shields Health Solutions that we announced in late 2025. Next, in EverNorth Pharmacy Benefit Services business, our fourth quarter and full-year results reflect continued solid performance. We built on our track record of innovative benefit solutions to meet market demands. This includes our suite of GLP-1 solutions. In 2025, we added inReachRx, a new patient support model designed for pharmacies dispensing GLP-1 drugs, committed to providing enhanced clinical services. We also expanded our patient assurance program to include these GLP-1 medicines, which sets caps on member out-of-pocket costs to improve predictability and affordability. And we are proud of our continued focus on service. We delivered a seamless January 1 implementation for new and existing clients, ensuring customers and patients have access to care when they need it. Overall, we're pleased to deliver another year of solid results across our EverNorth portfolio. Now turning to Cigna Healthcare, our consultative approach and focus on affordability are driving strong overall performance. We delivered financial results that were slightly ahead of expectations. We maintain disciplined pricing while driving affordability and introducing or expanding differentiated clinical offerings. We're doing this in a number of ways, including encouraging customers to utilize lower-cost generic and biosimilar medicines, optimizing sites of care between hospital facilities and lower-cost alternatives, and improving administrative processes for providers. We also continue to maintain a disciplined pricing stance. For sold business in 2026, our price increases are in excess of what we achieved for the comparable period in 2025. We expanded our suite of AI-powered digital tools to improve and personalize customer experiences. These include a provider matching tool to help customers find in-network providers based on their specific needs and preferences, and a real-time cost tracking tool to provide a simple breakdown of costs both before and after clinician and specialist visits. We also launched new partnerships to expand our offerings. For example, we collaborated with Progyny and Caret to offer new coverage options for employers to support patients through their fertility journeys. And we announced an industry-first collaboration with Headspace to support the mental health of millions of Cigna Healthcare customers with exclusive digital features and content. We see partnerships like these as critical to building a more sustainable model for health care and further accelerating innovation for our customers. Performance across Cigna Healthcare underscores our focus on driving innovation, improving personalization, thoughtfully shaping our product portfolio, and our execution orientation. As we look ahead over a multiyear horizon, we are focused on leading the changes needed in health care to better serve our customers and clients, resulting in improved affordability and access. To do this, we are taking bold actions including investments in defining the future of health care. Let me outline a few of these. First, we're focused on putting the customer at the center of everything we do through new innovations that are data-driven and tech-forward. To do this, we are focused on personalizing the health care experience by leveraging and growing our digital and analytics capabilities. Already this year, we have seen a significant increase in digital registrations for our US employer businesses and decreased call volumes. We are facilitating seamless interactions for customers based on their engagement preferences, whether that be mobile, web, text, or phone, including chat options with AI virtual assistance and easy connectivity to our service agents for even more personalized support. Beyond this, we are finding new ways to utilize data and analytics, insights, and digital tools to better identify patients who need help earlier, particularly those with complex and high-cost conditions. We continue to lead the way transforming our models and capabilities for those we serve through meaningful innovations. In October, we announced the transformation of our pharmacy benefits model to meet the demands of the market and improve both affordability and transparency for our customers and patients. As David mentioned, our new rebate-free model will help people stay healthy and get the medications they need by lowering costs and supporting local pharmacies, so care is always within reach. We have received positive feedback about our new model from our broker partners, clients, and other stakeholders. Moving ahead and following our recent settlement with the FTC, we are confident in the transformation of pharmacy benefits we are leading for the industry. In Cigna Healthcare, we are similarly driving step changes in our product offerings to create patient-centered solutions that simplify health care and ensure we're rewarding outcomes rather than volume. One example is Clarity, our newest offering that we introduced in November, which puts customers and patients in control so they can focus on getting the care they need. Designed with cost transparency available to customers at the time they need it, Clarity helps individuals manage their health with ease and saves clients up to 10% in medical costs. And it has a simple co-pay-only structure. Clarity also has a single digital front door for all Cigna Healthcare customers, integrating experiences for pharmacy, dental, and supplemental health. And patients have access to our trusted national network without referrals, supported by clinically sound, externally validated quality measures. Finally, in our specialty and care services business, our expanded suite of offerings has helped grow these businesses from around 25% of the company three years ago to around 35% this year, driven by high secular growth and our deliberate portfolio shaping to increase exposure in this highly attractive growth sector. And we see significant runway for additional growth in our specialty platforms in the future. This includes leveraging competition and the shift to more biosimilars and specialty generics, with expected launches and uptake across other drug classes such as oncology, bone, autoimmune, and inflammatory conditions. Guided by a clear mission and vision that prioritizes improving health care and keeping the customer at the center, paired with a partnership orientation and a portfolio intentionally shaped for sustained growth markets, we are leaning into the disruption necessary to drive industry transformation. As I wrap up, I'd like to reflect on some bright spots for the quarter and the full year. Throughout 2025, we delivered through a dynamic environment. Revenues for the full year increased 11%, driven by specialty pharmacy growth and client relationships. We had a strong selling season in pharmacy benefit services, with the retention rate over 97% for 2026. And we grew customers in our select segment in Cigna Healthcare by 7%. We are leading change in our industry, from our commitments to better that we announced early last year to our partnership with the administration on improving prior authorization, to our announcements of affordable fertility drugs available for Trump Rx, to our transformative new model for pharmacy benefits, and our introduction of Clarity in Cigna Healthcare. Our mission, coupled with our capabilities, deep expertise, and diverse portfolio of businesses, positions us well to continue our track record of delivering for all stakeholders. Now, I'll turn it over to Ann. Ann Dennison: Thank you, Brian, and good morning, everyone. Today, I'll review Cigna's fourth quarter and full year 2025 results and I'll provide our outlook for 2026. We are pleased to deliver another strong year for the Cigna Group, reflecting focused execution across EverNorth and Cigna Healthcare, with both segments achieving pretax adjusted earnings at or above the outlook we shared a year ago. For full year 2025, we delivered consolidated adjusted revenues of $275 billion, adjusted after-tax earnings of $8 billion, and adjusted earnings per share of $29.84. Now turning to our segment results. I'll start with EverNorth. 2025 marked another year of growth in EverNorth, and the introduction of an industry-leading innovation in pharmacy benefit services, as we advance our more simple, predictable, and transparent rebate-free model. We also advanced our specialty and care services capabilities through a strategic investment in Shields Health Solutions as we build on our market-leading position and enhance our offerings in one of the largest and fastest-growing areas in health care. Fourth quarter revenues grew to $63.1 billion and pretax adjusted earnings grew to $2.2 billion, in line with expectations. Our specialty and care services business delivered strong growth, generating $26.7 billion in revenue, an increase of 14% year over year, and $1 billion in adjusted earnings. This performance reflects sustained momentum in our fastest-growing business, driven by robust specialty volumes and rising biosimilar use, which continues to generate meaningful savings for our patients and clients. Our pharmacy benefit service business delivered $36.3 billion in revenue and $1.2 billion in adjusted earnings, reflecting the impact of our strategic investments, including initiatives to enhance patient experience. Overall, the fourth quarter capped another year of growth for EverNorth. The underlying strength across our EverNorth businesses reinforces our confidence in making deliberate near-term investments to transform our pharmacy benefit services model, positioning us well for sustained long-term value creation. Turning to Cigna Healthcare. In 2025, Cigna Healthcare delivered strong results above our original expectations in a dynamic environment. This performance underscores the strength and resilience of our purposefully constructed portfolio, including the divestiture of our Medicare businesses, which positions us to navigate volatility and drive durable growth. For the fourth quarter of 2025, Cigna Healthcare delivered adjusted revenues of $11.2 billion and pretax adjusted earnings of $734 million. Adjusted earnings slightly exceeded expectations, as favorable net investment income more than offset modestly higher medical costs. The higher medical costs equated to approximately 60 basis points of MCR or about $50 million, without notable impact to any one part of the portfolio. Relative to our stop-loss products, the full-year MCR was slightly higher in 2025 compared to 2024, consistent with what we expected and communicated at the beginning of the year. And we remain on track with our margin improvement plan. Overall, we're pleased with Cigna Healthcare's performance in 2025. Looking ahead, we remain focused on driving greater affordability and value for the patients and clients we serve, continuing to execute with discipline against our financial targets. Now turning to our 2026 outlook. We expect full-year 2026 consolidated adjusted revenues of approximately $280 billion, and we expect full-year 2026 consolidated adjusted income from operations of at least $30.25 per share. Considering earnings seasonality, we expect first-quarter EPS to be slightly above 25% of our full-year guidance. Now turning to our 2026 outlook for each of our segments. In EverNorth, we expect full-year 2026 adjusted earnings of at least $6.9 billion. As we discussed previously, we expect investment spending to build the infrastructure required for our transformative rebate-free model to commence in 2026, with this spend more back-half weighted. As a result, we expect EverNorth's first-half earnings to be higher than the historical pattern, with the first quarter representing over 20% of full-year earnings. For Cigna Healthcare, we expect full-year 2026 adjusted earnings of at least $4.5 billion. Within Cigna Healthcare, we expect earnings seasonality to be consistent with prior years, with the first quarter representing over 30% of our full-year adjusted earnings expectations for the business. Assumptions underlying our 2026 outlook for Cigna Healthcare include a medical care ratio in the range of 83.7% to 84.7%, incorporating the pricing actions taken across stop-loss and individual exchange businesses, as well as the assumption of a cost trend environment that remains elevated. We expect the first quarter 2026 medical care ratio to be below 81%, reflecting typical seasonality. We expect approximately 18.1 million total medical costs customers at year-end, including growth in our middle, select, and international markets, offset by lower membership in our national accounts and individual exchange business. For the enterprise, we project an adjusted SG&A ratio of approximately 5% for 2026, consistent with the 2025 level, reflecting both the investments to advance our pharmacy benefit services model and continued improvements in operating efficiency. We expect the consolidated adjusted tax rate to be approximately 19%. Now moving to our 2025 capital management position and 2026 capital outlook. Our fourth-quarter cash flow was strong, and we finished the full year by delivering $9.6 billion of cash flow from operations. In 2025, we repurchased 11.9 million shares of common stock for approximately $3.6 billion and returned $1.6 billion to shareholders via dividends. We also improved our debt-to-capitalization ratio to 43% during 2025, including an improvement of 190 basis points in the fourth quarter. Now framing our 2026 capital outlook. We expect to deliver approximately $9 billion of cash flow from operations. As previously noted and consistent with 2025, we expect the majority of operating cash flow to be realized in the second half. Our capital deployment priorities remain consistent with our long-term framework. We expect to deploy approximately $1.3 billion to capital expenditures, and we expect to deploy approximately $1.6 billion in shareholder dividends, reflecting our increased quarterly dividend of $1.56 per share. Our guidance assumes full-year weighted average shares outstanding to be in the range of 261 million to 265 million shares. And during 2026, we expect to continue progressing towards our long-term debt-to-capitalization ratio of approximately 40%. Now to close, as we move into 2026 and beyond, we remain confident in the strength and the resilience of our enterprise. Our disciplined execution, balanced portfolio, and strategic investments to drive innovation, affordability, and enhanced customer and patient experience all position us well to deliver differentiated value for our customers, clients, and shareholders over the long term. We are confident in our ability to deliver full-year 2026 adjusted earnings of at least $30.25 per share and our ability to deliver attractive long-term EPS growth. And with that, we'll turn it over to the operator for the Q&A portion of the call. Operator: Ladies and gentlemen, at this time, if you do have a question, please press *. If someone asked your question ahead of you, you can remove yourself from the queue by pressing star 2. Also, if you're using a speakerphone, please pick up your handset before pressing the button. One moment please for the first question. Our first question comes from Lisa Gill with JPMorgan. Your line is open. You may ask your question. Lisa Gill: Oh, thanks very much, and good morning. David, I feel like we've been waiting for a long time for this PBM legislation to finally pass. It's finally passed. You've put behind you the FTC suit. Can we talk about a few things? The first is the change in economics. You talked about this with the new plan in October, but now that everything's kind of settled in place, we've got legislation, etcetera, can you spend a few minutes talking about the margin profile of what we would expect in the steady state for the PBM? And then secondly, one of the things that stood out to me in the FTC settlement was the moving of the GPO back to the US from Switzerland. I want to understand what that means to the tax rate. My understanding is that the tax rate over in Switzerland is about 15%. When I think about it then coming back, you know, what's the financial implication for that as well? David Cordani: Good morning, Lisa. Thanks for your comments and your question. So first, pulling back up, we've been saying for some time that the pharmacy services space would go through a clearing event, be it driven by market innovation, legislation, or regulation. When you step back, many of those forces converged this week. And the clarity of direction that we established back in 2025 with the work we started in early 2025 and announced in the third quarter of 2025 with our new innovative model, from our point of view, is directly aligned. So to the first part of your question, at a level, as we said in the third quarter of last year, we believe the margin profile will remain similar. We have significant experience with a variety of programs today with the diverse population we serve, be it fee-based, full pass-through, the continued innovation we drive with our clinical programs and services that we are able to offer. From a big picture standpoint, we believe the margin profile will be similar and therefore, we believe the underlying growth algorithm for the pharmacy benefit services portion of our portfolio will remain intact to be similar as we get through this innovation. And importantly, before I come to your tax question, it's important to really underscore the underpinnings of our innovation. First and foremost, it starts with a customer-first orientation in its design, is therefore built to ensure that we are capable of delivering the lowest out-of-pocket cost for the consumer each and every time they consume a pharmaceutical at the counter. Most likely through their benefit program. In the vast majority of cases, that's the instance in unique cases where it could be a cash pay program or a direct program, etcetera. We have the ability to be able to support that. Additionally, meaningfully expanding the support programs for independent local rural pharmacies. And then lastly, as we've discussed, it's built on a more modern no rebate, no spread framework that gives full visibility to employers on a fee-based transparent environment. And, ultimately, provides shareholders more visibility of the sustainability relative to it. So big picture, no change in overall margin profile. And therefore, no change in the growth algorithm over time for the pharmacy benefits services business. As it relates to the second part of your question, the Ascent GPO has been and continues to be an important tool to improving affordability for customers and patients. We will move capabilities to the United States, bringing them closer to our US operations. We remain confident in the, as I said before, the growth algorithm of the business. At the macro level, you could think about an outside impact to the effective tax rate of our organization of up to 1%. Over time, because there's a phase-in here. If unmitigated. So if you want to put a box around that, you could think about a maximum impact of 1% in the future if unmitigated. Therefore, given the strong performance of our core portfolio in our diverse enterprise, we see that as totally manageable even at the outside parameters of that against our long-term earnings growth algorithm of 10 to 14%. Thanks for your question. Operator: Thank you. Our next question comes from Scott Fidel with Goldman Sachs. Your line is open. You may ask your question. Scott Fidel: Hi. Thanks. Good morning. Just wanted to follow-up on Lisa's and then ask a follow-up around Brian's comments on the new pricing model with the customer. So first question, following up on Lisa's question, is just it really does feel like there's been a real sea change, inflection, and just the amount of activity and developments that actually occurred around sort of moving the PBM pricing model forward. And just from curious from your perspective is, do you feel like at this point now, you've largely fully aligned your PBM model with how the regulators, with how the policymakers, have been really pushing the industry to adapt to? Or are there still some regulatory battles, residual battles still ahead? And then why don't I just ask Brian around the PBM clients in terms of moving to the new pricing model, just the traction that you're seeing there in terms of your updated view on the ramp that you're expecting. In terms of, you know, '26 through '28. The percentage of clients that you expect to move on to the PBM pricing model? Thanks. David Cordani: Scott, good morning. It's David. Let me take the first part of your question, and I'll transition to Brian for the second part. First, just contextually, it's important to note we are proud of the significant value that has been delivered over a long period of time to the people we have the privilege of serving. Our customers across the United States. And by way of context there, fully 80% of the Express Scripts customers have less than $250 out of pocket over the course of a full year. I'm going to come back to that in a moment. And as I noted, through the good work of the pharmacy benefit services industry over a long period of time, 90% of all drugs consumed in America are generic, and they make up just over 10% of the total cost equation. But 10% are brand, which make up almost 90% of the cost equation. That's creating undue pressure and force on everybody in the model today, including out-of-pocket dislocation for consumers. So when you come back to our model, we are confident that our model is built, the new innovation is built through a customer-first, no rebate, no spread, fully transparent, fee-based model where we step into the advocacy role for the consumer at the point of consumption of a pharmaceutical each and every time at the counter to dynamically shop and make sure they get the lowest out-of-pocket costs. So when you look at any of the legislation or regulation, it's been oriented around improving affordability and predictability, harnessing ultimately, transparency, and expanding value for ultimately the consumers along with the clients. Our innovation squarely goes in that direction, and we are excited and confident to lead the way for the industry. I'll transition to Brian for the second part of your question. Brian Evanko: David. Morning, Scott. As it relates to the adoption rates and the pricing model, etcetera, consistent with what we talked about in the third quarter call. The entire Cigna Healthcare fully insured book will be adopting the new model in 2027. We expect at least 50% of our EverNorth business will adopt the model by year-end 2028. Early feedback from clients, brokers, and other external stakeholders has been positive to date. And I think importantly, coming back to link Lisa's question and yours, the core value creators in both our legacy models and our new rebate-free model really remain the same. Think about securing better unit pricing for prescription drugs, administering benefits for plan sponsors, and supporting patients with clinical safety checks and advanced clinical programs. Those three core value creators are the same in the legacy model as they are in the new model that we've introduced. The primary difference is the way in which we're compensated. So there's two primary ways we get paid in the future in this model. The first is a core admin fee. That'll be per member or per script, delinked from the price of the drug, that'll grow with inflation over time. And then the second category would be for clinical programs and other innovations that we bring to market. And we expect to take risk on this portion of compensation. But in aggregate, as David said earlier, we expect to achieve a comparable level of profitability between the legacy model and the new model, although the sources of profit will evolve as I outlined. Scott Fidel: Okay. Thank you. Operator: Thank you. Our next question comes from Charles Rhyee with TD Cowen. Your line is open. You may ask your question. Charles Rhyee: Yes. Thanks for taking the question. First one, on clarification is, I think, Brian, you kind of mentioned that with the settlement, the timing of the settlement requirements, is that aligned with the launch of the new rebate-free model is the first just sort of clarification question. But the second, my second question really is more, you know, obviously, all these settlement agreements are related to the standard offering, right, which largely aligns, it feels like, with the new model that you're launching by 2028. You know, I guess the question is, to the extent that clients don't take this new offering, you know, what is the responsibility for Cigna or EverNorth in this case to push the new standard offering so that these requirements are met? And if clients don't choose to take the new offering, you know, is there any sort of liability to Cigna down the road? And in particular, I'm kind of looking at, for example, ensuring members' out-of-pocket expenses are, you know, lowest net cost. But if an employer doesn't choose that new option or if the employer chooses to maybe increase a coinsurance amount or deductible, is there any kind of responsibility that falls back to Cigna? Thanks. David Cordani: Charles, good morning. It's David. Let me take the second part of your question, and I'll tag team with Brian on that as well, part of your question he can pick up on. So a few important points here. First, macro. We have and we continue to believe in offering choice to the marketplace. And we serve a diverse number of clients from governmental agencies to health plans to employer clients, etcetera. Two, as Brian noted, we will adopt this innovation on 01/01/2027 for the Cigna Healthcare Guarantee Cost book of business where Cigna is the purchaser. So we will lead in the accelerated adoption. And third, we expect to see significant adoption in 2028, as Brian mentioned before. Second, it will be our standard offering. It will be our lead offering in 2028. And that is congruent with the settlement and the direction. Third, there is no liability that we assume if the adoption rate is above or below that. We will lead the market. We will support this with marketing dollars because we are convicted and believe that this is the future of pharmacy benefit services for the benefit of consumers as well as clients as well as community pharmacists. So our conviction, we will lean in and support the aggressive adoption of this, but choice will still be in the marketplace. We will still be able to afford enable solutions and afford solutions, either rebate, rebate pass-through, otherwise, as the market goes through its transitional process and ultimately, adopt this model on a forward basis. Anything to add to that or to the first part of the question? Brian Evanko: Pretty comprehensive answer, David, but just a few additional comments, Charles. So our launch plan from the standpoint of our new rebate-free model is unchanged based upon the FTC agreement that we reached this week. So we'll continue with the same milestones, same expectations. And importantly, as David made reference to earlier, inherent in our new model is what we call our price assure technology, which guarantees patients the lowest possible price on the drug when they get it filled. So whether that's the price we've negotiated with drug manufacturers, whether it's a cash pay alternative, whether it's their co-pay, whatever the lowest possible price is, we're guaranteeing in the new model that the patient will get that. And so that enables us to meet the spirit of the FTC's goals as well to drive lower patient out-of-pocket. And to the point of what else could be a little bit different, Lisa's question earlier, the move of our GPO capabilities from Switzerland to the US is unrelated to the new rebate-free model. So there's some elements of the FTC agreement that are unrelated to it. But the launch plan for our rebate-free model is unchanged as a result of the agreement. Charles Rhyee: Thank you. Operator: Thank you. Our next question comes from Kevin Fischbeck with Bank of America. Kevin, your line is open. You may ask your question. Kevin Fischbeck: Great. Thanks. I'm a little bit surprised that the MLR in 2026 isn't expected to make any progress given exchanges should be repriced and smaller and stop loss. It sounds like you're repricing that again, getting, generally speaking, better pricing this year than last year. Why is that? And then, I guess, if you could just maybe give us a sense on the current business mix, what the right MLR to think about is when the business is fully repriced? In the future. Thanks. Ann Dennison: Morning, Kevin. So I'll start by just reminding you what I mentioned in my prepared remarks, our 2026 MCR outlook incorporates the pricing actions we've taken across stop loss and the individual exchange businesses as well as the assumption that the cost trend environment remains elevated. So when thinking about the walk, the MCR walk from 25 to 26, I point to two things that reduce the MCR and two things that increase it. With respect to the reductions, within stop loss, pricing is tracking in line with expectations, and we've achieved rate increases consistent with our targets for improvement in 2026. And then the second is for our individual business, we've repriced for margin improvement. So those are the two things that will reduce MCR going into '26. Items that increase the MCR on a comparative basis, if you recall, the 2025 MCR benefited from several one-time items in our individual business, both of which impact the jump-off point for the year and tempered the year-over-year MCR improvement. And beyond those items, there are mixed dynamics to consider as well. And lastly, I'd say sort of overall, our assumptions incorporate appropriate prudence given the continued elevated cost environment. So to summarize, our MCR outlook incorporates stop loss and individual pricing actions, one-time impact to 25 as well as mixed considerations impact that year-over-year view. And we continue to assume an elevated cost environment and appropriate prudence. And for your question around, you know, the MCR, I'd point you to the outlook that we provided in terms of range where we expect to end up for 2026. Operator: Thank you. Our next question comes from Justin Lake with Wolfe Research. Your line is open. You may ask your question. Justin Lake: Thanks. Good morning. I wanted to ask a couple more PBM questions. As you look out to 2027, it certainly seems like you don't expect the business transition associated with the FTC settlement and the legislation to be a headwind to earnings, but wanted to confirm that is the case, and you expect 2027 PBM's earnings growth at this distance to be in line with your long-term algorithm. And then just from an accounting perspective, is there any changes to PBM revenue recognition here from all these business model changes effectively, you know, to move away from spread pricing, rebate guarantees, towards a fee-based model. Will PBM still be able to book the total pharmacy spending as revenue? Or would it move to kind of booking fee revenue similar to ASL on the medical side? Thanks. Brian Evanko: Morning, Justin. So on the first part of your question, at this point in time, the FTC agreement will not impact our '27 financial outlook. Many of the agreements and commitments are multiyear in nature as we talked about earlier. And as David said, our long-term growth algorithm for PBS remains intact as we move through the transitional period here. As we talked about on the third quarter call, we do expect 2026 and 2027 to have investment-related costs as we build out technology and infrastructure to support our new rebate-free model. So that's really the only thing I'd have you think about as it relates to 2027 in terms of the PBS outlook. On the revenue recognition question, at this point in time, we do not expect there to be changes in the way that our revenue is being recognized in the PBS segment. Even with the transition to a fee-based model as opposed to a spread or rebate-oriented model that we have today. So we'll refine that over time and certainly can take that offline with you, but do not expect a change in the denominator and the margin profile. Operator: Thank you. Our next question comes from Erin Wright with Morgan Stanley. Your line is open. You may ask your question. Erin Wright: Great. Thanks. I know there's a lot of focus on the PBM, but can you talk about the specialty business? You mentioned some of the strong organic growth there. Can you unpack a little bit some of the key drivers there, what you're anticipating in 2026? Any other implications, you know, from some of the dynamics at the PBM side as well. But also biosimilar pipeline. And as we head into 2026, how you're thinking about that? Thanks. Brian Evanko: Good morning, Erin. It's Brian. So as we mentioned in our prepared comments, really pleased with the momentum of the specialty business, 14% top-line growth and attractive earnings contributions alongside of that. And we've talked about, before with you, this is already a $400 billion plus addressable market growing at a high single-digit secular growth rate, and we're really well-positioned to capitalize on that over the longer run. And we certainly saw those dynamics emerge throughout 2025. So the full year we had 13% growth in prescriptions, higher rate of growth in our Medicare book of business, but also strong growth in the commercial employer and the Medicaid portfolio, in our EverNorth business is really well-positioned to capitalize on each of those different payer types. We continue to expect long-term average annual income growth of 8% to 12% in this business, benefiting from some of these strong secular tailwinds. A few specific TRCs or cost categories I'd highlight that were particularly strong growers include inflammatory, asthma, and allergy. Those generated a good bit of the year-over-year growth in the specialty space. As it relates to biosimilars, we're really pleased to see the building momentum across the United States, really Humira the past two years becoming mainstream. Was a great win for the market. And as David said earlier, we expect another $100 billion of specialty drug spend to be subject to competition from biosimilars and generics by 2030. Each of these biosimilars have a slightly different adoption rate based on factors such as interchangeability, dosage levels, branded alternatives, and other dimensions. But we've, as you know, introduced a $0 patient out-of-pocket for both Humira and Stellara. And the Humira penetration in 2025 ended up representing the vast majority of eligible scripts. So that's clearly been a success story for American HealthCare. From the standpoint of patients getting significant savings, financiers, whether those be employers or health plans, getting the benefit of the savings on these biosimilars, and we look forward to continue driving savings for patients in the future in the biosimilar and specialty generic space. To kind of wrap this up, this space we're really excited about. It's 35% of the company's income now. That percentage will continue to grow in the future as we execute. Operator: Thank you. Our next question comes from AJ Rice with UBS. Your line is open. You may ask your question. AJ Rice: Hi, everybody. Thanks for the question. First, just a point of clarification to the previous comments. You guys gave the outlook for the new rebate-free model. And what that might mean for growth. You talked about it in the third quarter. You haven't really changed that today, but you obviously had the FTC settlement and other things. Were those, I know those don't happen overnight. Were those largely contemplated when you made your comments about the outlook in the third quarter? And then the other thing I was wondering on your deals with manufacturers, on the pharmacy side. Do those need to be significantly renegotiated? How much of an unknown is that over the next few years? And do you envision formulary changes significant any other things we should be thinking about from the cost side of the pharmacy business? David Cordani: AJ, good morning. It's David. Few parts to your question there. First, on your opening portion of your question. You're correct. Our outlook for the 2026 timeframe and our outlook for the direction of our new pharmacy benefit innovation remains consistent, both the adoption target for '27, the adoption target for '28, and the overall margin profile. Two, as I noted earlier, we began working on that in early 2025, the architecture of it, the design of it, etcetera, and we announced it in October, as you recall, of '25. And the architecture of what we built is quite congruent with where the regulatory environment was heading and was likely to head. When you step back, you can look at the legislative environment or the regulatory environment and say, what is the focus? The focus here is on increased transparency. The focus is on an environment that puts the customer first and tries to optimize the customer's out-of-pocket and improve the customer's affordability. It's one that is more performance-oriented. In some examples, I'll focus on the critical role of independent pharmacists in rural locations, etcetera. That was contemplated in our design that we began approximately a year ago. So, therefore, no change in the direction as a result of the settlement. No change in our direction as a result of what we saw in the legislation that passed this week. On the second part of your question, yeah, there's work that sits in front of us to do, as Brian talked about in the third quarter call, and we referenced briefly here, in terms of the build-out of the capabilities. But it is very familiar work to us and for our organization in terms of whether it's the technology work that needs to be enhanced, amplifying capabilities that we're already using for the benefit of consumer pricing at the point of consumption today. Or the work directly back with the manufacturers in terms of the restructuring of the economic arrangements that are aligned with this more transparent model on a go-forward basis. And your final question is, will there be formulary changes? The formulary is a bit fluid. Governed by clinical efficacy and comparative effectiveness. So clinical efficacy around the notion of the clinical impact of like-for-like drugs when they're similar, then it moves on to comparative effectiveness, which is the economics to generate that, but always led from a clinical standpoint with independent oversight. The fluid nature of that will transpire. But my closing comment would be I would not expect that the transitional model to the future, it will be a direct correlation to a formulary change. The formulary will continue to be guided by the proper governance of clinical efficacy first and then comparative effectiveness optimizing the total cost structure. So taking all in, again, we could not be more pleased with the direction that we have set for the industry around the transparent customer-centric rebate-free fee-based model and the ability to secure a broad closure of issues both from a regulatory standpoint and clarity from a legislative standpoint. AJ, thanks for the question. AJ Rice: Okay. Thank you. Operator: Thank you. Our next question comes from Steven Baxter with Wells Fargo. Your line is open. You may ask your question. Steven Baxter: Yeah. Hi. Thank you. I was hoping you could maybe expand a little bit more on the health care medical membership outlook that you gave. Seems like we're seeing a bit more of an outsized shift into ASO funding models based on some of the other reports this earnings season. Maybe that's the higher cost run environment. So was hoping you could expand a little bit on what you're seeing there, whether you might see more outsized growth in Select this year, and then just broadly how you're thinking about in-group enrollment trends given some of the uncertainty in the macro right now. Thank you. Brian Evanko: Morning, Steven. It's Brian. So as it relates to the Cigna Healthcare membership outlook, as you saw in the press release, we expect flat year over year at about 18.1 million lives. And really, you can think of that big picture as we expect growth in our US Employer and international health businesses offset by a decline in individual exchange customers. Within the US Employer portfolio, we expect to see growth in both our select and middle market sub-segments, reflecting the continued strength of the consultative model along with our integrated medical, pharmacy, and behavioral offerings plus our focus on affordability for these employers. I would not expect an outsized year of growth in your question on Select necessarily, but we do expect growth in that space in 2026. And that growth in Select and middle market is partially offset by some decline in national accounts customers in 2026, similar to what we signaled to you previously. Within the individual exchange business, we expect to end 2026 with fewer than 300,000 customers, reflecting another year where we prioritized margin over growth. So, again, the net effect of all of this is membership that's approximately flat, although we anticipate an attractive year of earnings growth within Cigna Healthcare. As it relates to the funding mix, we expect our group risk business to be stable for 2026 compared to 2025. So think of around 2.2 million lives, which again reflects our disciplined pricing posture. As we talked about in prior settings, our select segment mix today is roughly two-thirds self-funded. And our net growth in Select has been coming from ASO and level-funded style solutions in recent years. And as a reminder, we're not active in the under 50 regulated small group markets. So our commercial group risk business here is essentially all large group in nature. On in-group enrollment trends, we are not seeing anything out of the ordinary. Obviously, we continue to monitor economic data and unemployment data, but today, we have not seen anything out of the ordinary. And our 2026 outlook reflects our current view of what the economy will do. Operator: Thank you. And this question comes from Jason Cassorla with Guggenheim. Your line is open. You may ask your question. Jason Cassorla: Great. Thanks. Good morning. I wanted to ask on specialty and care for 2026. I just wanted to confirm are you still anticipating AOI growth at the higher end of your 8% to 12% target for '26? And then can you help spike out what the implied AOI growth would be when excluding the income attribution from the Shield investment? Just maybe, like, more core basis growth would be helpful. Thanks. Ann Dennison: Sure. Morning, Jason. So for specialty and care, we expect earnings to grow towards the high end of the long-term growth rate, reflecting both strong fundamentals and the contribution from the Shield investment. We're really pleased with what we saw in 2025 overall for specialty and care. Our expectations for 2026 remain consistent with what we shared coming out of the third quarter. We haven't shared the details specifically around Shields. It's built into our expectations. But that takes us to the high end of the range. Operator: Thank you. Our next question comes from Andrew Mok with Barclays. Your line is open. You may ask your question. Andrew Mok: Hi, good morning. The operating cash flow and CapEx guidance implies less than 80% free cash flow conversion on your pretax income, which is below recent history and lower sequentially. So can you walk us through the drivers of that pressure and comment on the expected impact of the new rebate-free model on working capital? Thanks. Ann Dennison: I'll start with the cash flow expectations. So we were really pleased with $9.6 billion for this year coming out. And as I said in my prepared remarks, we do expect a dynamic of higher cash flow or more cash flow in the back half of the year next year. Stepping back and looking at our 2026 cash flow expectations, that's the decline up to the $9 billion that we're guiding to next year. Roughly $600 million less than what we saw in 2025. That primarily reflects the lower contribution from the PBS business from our pharmacy benefit services business. And really, that includes the impact of large client renewals and some of the investments that we're making in 2026. Brian Evanko: And, Andrew, the rebate-free model will not impact the '26 cash flow outlook. And as we get closer to '27 to '28, we can square that up for you a bit in terms of reconciling how that moves year over year. Andrew Mok: Great. Thank you. Operator: Thank you. I will now turn the call over to David Cordani for closing remarks. David Cordani: First, thank you for your questions and your time today. I just want to reiterate a few items. First, with our momentum, we are confident we will deliver on our adjusted EPS outlook of at least $30.25 for 2026. Important to note in the context of a very dynamic environment in 2025, we delivered competitively attractive results, and I'm proud of how our team works tirelessly each and every day for the benefit of those we serve. Where we work to know our customers, help them by delivering personalized solutions and support programs for their unique needs, and working every day to make it easier to access affordable care. We look forward to our future conversations. And have a good day. Operator: Ladies and gentlemen, this concludes the Cigna Group fourth quarter 2025 results review. Cigna Investor Relations will be available to respond to additional questions shortly. A recording of this conference will be available for ten business days following this call. You may access the recorded conference by dialing (866) 405-7290 or (203) 369-0603. There is no passcode required for this replay. Thank you for participating. We will now disconnect.
Operator: Good morning. Welcome to Byrna Technologies Inc.'s Fiscal Fourth Quarter and Full Year 2025 Earnings Conference Call. My name is Kevin and I will be your operator for today's call. Joining us for today's presentation are the company's CEO, Bryan Ganz, and CFO, Laurilee Kearnes. Following the remarks, we will open the call for questions. Earlier today, Byrna Technologies Inc. released results for its fiscal fourth quarter and full year ended November 30, 2025. A copy of the press release is available on the company's website. Before turning the call over to Bryan Ganz, Byrna Technologies Inc.'s Chief Executive Officer, I will read the Safe Harbor statement. Some discussions held today include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Byrna Technologies Inc.'s most recent 10-Ks and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements as a result of new information, future events, or otherwise. As this call will include references to non-GAAP results, please see the press release in the Investors section of our website ir.byrna.com, for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. Now I will turn the call over to Byrna Technologies Inc.'s CEO, Bryan Ganz. Sir, please proceed. Bryan Ganz: Thank you, Kevin, and thank you everyone for joining us today. This morning, we issued a press release providing our financial results and business highlights for the fiscal fourth quarter and full year ended November 30, 2025. I'll start this morning by turning the call over to our CFO, Laurilee Kearnes, who will review our financial results for the period. Following her remarks, I'll discuss the operational highlights that drove our $35.2 million in revenue and continued GAAP and non-GAAP EBITDA profitability for the fourth quarter. I'll then offer insights into our strategy moving forward before we open the call to questions from our covering research analysts. Laurilee? Laurilee Kearnes: Thank you, Bryan, and good morning, everyone. Let's review our financial results for fiscal Q4 and the full year ended November 30, 2025. Net revenue for Q4 2025 was $35.2 million, a 26% increase from the $28 million reported in 2024. The $7.2 million increase is primarily due to strong dealer and chain store performance with direct-to-consumer and international channels contributing solid year-over-year growth. The comparison also reflects growth over a particularly strong 2024, when demand was elevated around the U.S. Election. For the full year 2025, net revenue totaled $118.1 million, up 38% from $85.8 million in 2024. This increase was driven by the company's expanded brand visibility, the broadening physical retail presence, and the successful launch of the Byrna SCL. Gross profit for Q4 2025 was $21.1 million or 60% of net revenue, compared to $17.6 million or 63% of net revenue for Q4 2024. The increase in gross profit was driven by the increase in overall sales. Gross margin decline was primarily due to the greater mix of dealer and chain store sales as well as the continued amortization of startup costs associated with the introduction of the CL Launcher and transfer of the ammunition factory from South Africa to Fort Wayne, Indiana. For the full year 2025, gross profit was $71.5 million or 61% of net revenue, compared to $52.8 million or 62% of net revenue for the same period in 2024. This $18.7 million increase in gross profit was due to the increase in total revenue for the year. The 1% decrease in gross profit margin was once again primarily due to the amortization of product costs associated with the introduction of the groundbreaking new CL launcher and the startup of our new ammunition facility in Fort Wayne, Indiana. Closing the South African operation is expected to save the company $1.5 million in 2026. Byrna Technologies Inc. expects margin improvement in fiscal 2026 as one-time startup costs associated with the new CL launcher and the new ammunition factory are completed. Additionally, we implemented a broad-based price increase of 4% to 5% as of February 1, 2026. At the same time, we introduced the new Byrna CLXL, expanding the number of variants for the high-margin Byrna SCL launcher. Operating expenses for Q4 2025 were $17.1 million compared to $13.5 million for Q4 2024. The increase reflected higher advertising expenses and marketing costs to support the rollout of more than 500 additional chain store locations in Q4. The company also increased headcount in its marketing and engineering department as part of its strategic investment in exciting new products and the new markets they will open for Byrna Technologies Inc. This investment is expected to drive significant growth starting later in 2026 and beyond. For the full year 2025, operating expenses were $59.6 million compared to $46.1 million for the same period in 2024, reflecting a 29% year-over-year increase to support our growth. The $13.5 million increase supported the revenue increase and was used to drive consumer awareness of both Byrna Technologies Inc. and the less lethal product category. At the same time, the company invested in retail marketing and engineering. Net income for Q4 2025 was $3.4 million compared to $9.7 million for Q4 2024. This decrease was primarily driven by a $5.6 million income tax benefit that occurred in the prior year period. The tax benefit arose from the release of tax valuation allowances related to net operating loss carryforwards and other tax assets. For the full year 2025, net income was $9.7 million, down from $12.8 million in the prior year period. Excluding the $5.6 million tax benefit from Q4 2024, net income improved by $2.5 million. Adjusted EBITDA, a non-GAAP metric for Q4 2025, totaled $6 million compared to $5 million in Q4 2024. This brings adjusted EBITDA for the full year 2025 to $16.8 million compared to $11.5 million in the prior year. Cash, cash equivalents, and marketable securities at November 30, 2025, totaled $15.5 million compared to $25.7 million at November 30, 2024. Inventory at November 30, 2025, totaled $32.7 million compared to $20 million at November 30, 2024. We expect the end of the fiscal first quarter to be a low point in inventory and then we will begin to build it back up to support the ramping demand. Subsequent to quarter-end, the company entered into a $20 million credit facility with Texas Capital Bank. This is made up of a $5 million revolving line of credit and a $15 million delayed term draw. This credit facility is intended to support strategic growth initiatives, including potential acquisitions. I will now pass the call back to Bryan for additional insights into our performance. Bryan? Bryan Ganz: Thank you, Laurilee. Fiscal 2025 was truly a landmark year for Byrna Technologies Inc. We scaled Byrna Technologies Inc. from a largely direct-to-consumer business model driven by conservative-leaning celebrity endorsers into a more diversified multi-platform model focused on reaching a broader audience through our nationwide dealer base and expanded advertising opportunities. For the year, we achieved a remarkable 38% revenue growth and we finished the year up 26% in the fourth quarter even when compared to an extremely strong 2025 Q4 that benefited from the uncertainty surrounding the election last year. The 38% year-over-year growth came on the heels of our extraordinary 100% plus growth in 2024, demonstrating the continued momentum of Byrna Technologies Inc. and the growing acceptance of less lethal personal safety solutions as a mainstream product category. The strong results we delivered in Q4 capped off what has been an exceptional year of execution across all areas of the business. Let me start by discussing our brick-and-mortar outlets, which have been one of the key drivers of our growth this past year. For 2025, Byrna Technologies Inc.'s brick-and-mortar sales increased from $15.2 million in fiscal year 2024 to $31 million in fiscal year 2025, an increase of more than 100%. This represents approximately half of our year-over-year revenue growth in 2025. This increase was the result of strong performance across all areas of Byrna Technologies Inc.'s brick-and-mortar dealer base with our show dealers up 29.9%, our premier dealers up 40.4%, our traditional dealers, which include both chain stores and independent dealers serviced both directly and through distributors, up 73.4%, and Byrna Technologies Inc.'s company-owned retail stores up 186.5%. From a dollar standpoint, the largest contributor to our extremely strong brick-and-mortar performance was our chain store sales. As we expanded from around 200 chain store locations at the start of 2025 to approximately 900 locations by year-end. Of particular importance was our partnership with Sportsman's Warehouse, which we kicked off halfway through 2025. What makes Sportsman's so special is the ability for their customers to test fire the complete range of Byrna Technologies Inc.'s handheld launchers as part of our try-before-you-buy campaign. Due to the success of this initiative, Sportsman's is rolling out the Byrna Technologies Inc. program to all but a handful of their locations this year, giving virtually all of Sportsman's customers the opportunity to test fire the Byrna Technologies Inc. launchers in 2026. In addition, we will be installing our self-contained shooting pods in a number of additional Sportsman's Warehouse locations, essentially doubling in 2026 the number of stores outfitted with Byrna Technologies Inc.'s custom enclosed shooting experience. We expect the growth in our brick-and-mortar sales to continue unabated in 2026 due to three factors. First, our sales were heavily back-end loaded as most of the locations carrying Byrna Technologies Inc. were not online until the end of 2025. This year, we are starting out with 900 chain stores carrying Byrna Technologies Inc. Second, we are going deeper with our current roster of dealers as they expand the range of Byrna Technologies Inc. products they offer, including our brand new Byrna CL XL. Third, we are continuing to sign up new dealers as they see the success of our existing dealer base. At SHOT Show, we received verbal commitments from large chains representing an additional 500 plus locations. For the most part, these chains are in regions of the country where our current dealers do not have significant coverage, including most importantly the state of Texas. Two years ago, as we looked to expand our brick-and-mortar footprint, we contemplated rolling out up to 100 company-owned stores. While the five company-owned stores that we currently operate are extremely successful, generating approximately $800,000 in annual revenue on average, setting up these stores is expensive and time-consuming. In addition, finding landlords that will allow us to offer a shooting experience has been difficult. Through our strategic partnerships with big-box retailers such as Sportsman's, we have been able to scale rapidly with minimal capital investments and without the hassle of securing and building out new locations. While our top-line margin is slightly lower selling through our dealers rather than our company-owned stores, our net margin is similar as there is very little in the way of ongoing operating costs once these stores have been set up and personnel have been hired and trained. The strong performance across these chain stores has been encouraging, particularly during the holiday season, when both Sportsman's and Bass Pro set new weekly sales records for Byrna Technologies Inc. products. In fact, a few of the individual stores are approaching 600 plus brick-and-mortar locations where customers can purchase launchers. These locations are comprised of independent dealers, premier dealers, show dealers, and company-owned retail stores. Altogether, they bring our total footprint to more than 1,500 retail locations where you could touch, feel, and often shoot a Byrna Technologies Inc. before you buy. And as I mentioned, we expect that number to grow to approximately 2,000 locations in 2026. With respect to our company-owned retail stores, we rolled out four new locations in 2025. These stores ramped quickly, delivering a strong performance for the year. Our Byrna Technologies Inc.-owned and operated flagship locations in Las Vegas, Scottsdale, Nashville, Salem, and Fort Wayne are generating approximately $800,000 in annualized sales per store on average. These locations, along with our Sportsman's Warehouse and Premier dealers, have demonstrated the strength of the experiential retail model and validated the economics of operating our own stores. In addition to the strong economics, these stores have also allowed us to gain valuable information about our customers. While we do not have immediate plans for the wholesale expansion of the company-owned store model, we are open to establishing additional stores in select markets where we do not have adequate representation. We see our company-owned stores as a valuable test bed for merchandising strategies, customer sales techniques, and product launches that we can then share with our premier dealer and strategic retail partners. To support Sportsman's Warehouse and our other dealers that offer a shooting experience, in 2025, we intentionally directed people from our website to our company-owned stores and to authorized Byrna Technologies Inc. dealers that offer a shooting experience. While this may be considered a cardinal sin in the world of e-commerce, and likely had some impact on our byrna.com growth rate this year, the strategy allowed us to prime the pump by giving our new dealers a kick start. At the same time, we were able to take advantage of the substantially higher conversion rate at brick-and-mortar locations when customers have an opportunity to test fire the Byrna Technologies Inc. As a result of this initiative and the rollout of 600 additional brick-and-mortar locations, brick-and-mortar dealers were the fastest-growing segment of our business in 2025, as I said, growing more than 100% year-over-year and climbing from 17.7% of sales in 2024 to 26.7% of sales in 2025. We expect this to continue throughout 2026 and well into 2027 as brick-and-mortar dealers should remain the fastest-growing domestic consumer segment of our business. Although still a small part of our overall business, international sales also continue to show strong momentum, generating 66% growth from the prior year. With regard to our DTC channels, both byrna.com and amazon.com continued to show strong momentum throughout the fiscal year, growing by 18.4% despite our Try Before You Buy campaign where we intentionally sent online customers to authorized Byrna Technologies Inc. dealers. Amazon continues to grow faster than byrna.com, clocking in at 46.9% year-over-year growth for the year. This was due in part to the fact that only byrna.com had a dealer locator that urged consumers to try before they buy at one of our company-owned stores or authorized dealer locations. As a result of this faster growth in 2025, Amazon now accounts for 28.6% of our DTC sales, up from 23.2% last year. As we mentioned in the past, we are somewhat agnostic about whether the sale takes place on amazon.com or byrna.com as our net margins are somewhat similar due to the savings in advertising, freight, credit card processing fees, and Shopify fees. Also, due to Amazon's quicker delivery times for its prime customers, we typically see a boost in Amazon sales as we get closer to Christmas because they can deliver in time for Christmas for an additional four to five days longer than we can at byrna.com. The overall increase in sales in 2025, especially in the second half of the year, can be attributed in part to the effectiveness of our AI-enabled advertising campaigns, including our now iconic We Don't Sell Bananas commercial. With these ads, we are able to easily modify our content to meet the different requirements of cable and streaming networks where we could not previously advertise. This allowed us to expand the number of channels where we could advertise, allowing for broader distribution to a wider audience. This has resulted in Byrna Technologies Inc. being able to secure a Super Bowl commercial spot in the Pittsburgh market for the game this coming Sunday. This will be the first time we are able to run an ad of this prominence, and we are optimistic that it will not only generate immediate sales but also build brand awareness. This year, the purpose is to test the effectiveness of advertising in this iconic event in a single regional market. If it proves to be cost-effective, we look to expand our Super Bowl advertising budget significantly in 2027. The Super Bowl ad is just one more example of our willingness to be creative as we look to new ways of getting our message out. Several years ago, when we were banned from advertising on Meta and Google properties, we turned to our celebrity endorsement model, with an emphasis on conservative-leaning radio talk show personalities. This program continues to be an important part of our marketing strategy. Our roster has remained relatively unchanged this past year, but we are pleased to welcome back Dan Bongino. Dan stepped away from the podcast during his time with the administration, but prior to his departure, he was one of our highest-performing influencers. We are excited to resume work with Dan and his team and believe his return will provide meaningful promotional impact for the brand, especially as we expect him to draw a large audience interested to hear about his time in the administration. As part of our effort to expand our marketing advertisement to broaden our consumer reach, we are exploring product placement opportunities. Byrna Technologies Inc. recently was featured in an unsolicited cameo appearance on the HBO hit, I Love LA, underscoring the progress that we have made over the last few years in making Byrna Technologies Inc. a part of the mainstream conversation regarding personal self-defense. This has led to our decision to help finance a small independent film that will prominently feature our launchers. Viewers of this film will see the product in use in numerous real-life scenarios. More importantly, we will be able to show the product being used in advertisements that promote the movie, something we could not do when we advertise the product itself. These advertisements will drive people to the website for the movie where they will be able to watch the full trailer, listen to interviews with actors discussing the Byrna Technologies Inc. and the value of non-lethal self-defense, and see the products that were used in the film. We view this initiative as a creative way to reach a new audience, leverage on-screen talent, and further expand the awareness of Byrna Technologies Inc. and the less lethal product category. I'd also like to address our manufacturing initiatives this past year. To support our continued growth, we are increasing monthly production by 33%. We temporarily ramped up production early in 2025 to support the launch of the compact launcher. We are now making permanent changes and refinements to our assembly process, moving from an assembly line process to more efficient production cells that allow each employee to perform a greater number of operations. This has improved product quality and boosted morale, which should ultimately result in improved margins, which will be further enhanced as we scale production. As a reminder, our Fort Wayne facility has the flexibility to significantly increase output as needed by going to a second or even third shift. With the production cells, we can also easily flex production between the compact launcher, the Byrna SD, and Byrna LE models based on real-time demand trends. I'm also pleased to report that our new ammo factory in Fort Wayne is now the most advanced payload projectile ammunition factory in the world. We can produce both 0.61 caliber and 0.68 caliber ammunition in a lights-off hermetically sealed clean room. With our new capabilities, the highly anticipated 12-gauge payload rounds will be going into production this month. As we continue to refine our proprietary robotic assembly, welding, inspecting, and packing equipment, we are seeing continued productivity gains. And for the first time since we opened the U.S. ammo factory, we are generating favorable manufacturing variances. I would now like to speak about our new product developments. The release of the compact launcher in May was a pivotal moment for Byrna Technologies Inc. This launch represents the most revolutionary less lethal launcher ever made because of its small form factor and significant stopping power. Never in the history of less lethal weapons has so much stopping power been available in such a small piece of real estate. It will feature, however, a larger magazine with a seven plus one shot capacity, greater overall shot capacity, and more power than the base CL. With the CLXL, customers can quickly fire 15 shots in rapid succession if necessary. This enhanced version of the CL was developed based on feedback we received from our customers, and as a result, it is no surprise that the CLXL was an overwhelming hit at SHOT Show where we debuted it just a few weeks ago. At Byrna Technologies Inc., of course, we never sleep, as evidenced by the introduction of the CL in May and now the CLXL. We are constantly looking at ways to improve our launchers and our accessories to enhance the user experience. Towards that end, I am pleased to report that just this week we assembled the first production prototype of our next-generation launcher, and I plan to test fire it next week. It is essentially the same size as the CL but will feature a modular design that will allow us to easily install different engines in the same chassis. In this way, we can offer different levels of performance, of course, at different price points using the same chassis, in much the same way that Porsche does with its 911 model. Most importantly, this new launcher will have far fewer parts, be easier and quicker to assemble, and most importantly, cost around 40% less to produce. Moving to a single chassis that can accept different engines, we can reach the price point, midpoint, and high-end points of the less lethal market with a single platform. This will significantly simplify factory operations and dramatically reduce component inventory. We plan to start rolling out the price point launch version of this revolutionary new modular launcher towards the end of 2026, quickly followed by our mid-level and high-level variants. With regard to accessories, every so often I get a call from a Byrna Technologies Inc. customer, Byrna Technologies Inc. owner that has used their launcher in a case of self-defense, and yet they get arrested as the assailant claims that the Byrna Technologies Inc. owner attacked them. If there are no witnesses, it becomes the case of he said, she said. To help combat that situation and provide Byrna Technologies Inc. owners with the proof that they acted in self-defense, Byrna Technologies Inc. will be bringing out a Byrna cam in late Q2 or Q3 of this year. While there are already cameras that fit on the Picatinny rail of a handgun, these cameras today are very bulky and quite expensive as they must be able to withstand the rigors of firearm recoil. Since Byrna Technologies Inc. has no recoil, we can make a smaller, less expensive camera that will fit on the Picatinny rail of our micro-compact CL and sell for less than $200. When a Byrna Technologies Inc. owner needs to defend themselves, they can switch on the camera and capture the encounter on both video and audio if they so desire. If they are pointing their weapon at the ground, the camera will show that, allowing them to refute someone that claims he pointed his weapon at me. We introduced the product to our dealer council members last month at a meeting that I attended, and we received overwhelming and enthusiastic support. We have high hopes for this accessory when we introduce it in late Q2 or early Q3 as we continually look to enhance the user experience. Along the same line, I'm extremely excited about our new subscription-based products that should be the next evolution of Byrna Technologies Inc. Regarding the fiscal outlook, as we look ahead to fiscal 2026, we are confident in our ability to continue to deliver strong top-line growth while expanding profitability. Our balance sheet is strong, with cash increasing $6.5 million from $9 million at the end of Q3 to $15.5 million at the end of Q4, despite spending over $1 million buying back our own stock. We expect the cash balance to continue to grow throughout 2026 as sales are projected to increase year-over-year each quarter and as we work through the inventory that we built up in preparation for the CL launch that occurred halfway through 2025. In addition to our strong and growing cash balance, we just announced a new $20 million credit facility with Texas Capital Bank. $15 million is earmarked specifically for acquisitions, and $5 million is for working capital should the need arise. While I do not have anything on the acquisition front that I can announce at this time, we are continually looking for strategic opportunities that would help us further our goals with regards to the development of new products, new markets, and new technologies. In conclusion, many of you are familiar with the rule of 40, whereby growth companies should maintain growth rates and EBITDA that when added together exceed forty. It is understood that as companies become larger, growth rates tend to moderate, while at the same time EBITDA margins expand. We have been well above the 40 threshold the last couple of years, and we expect to be well above this threshold in 2026 as we continue to grow revenues while simultaneously expanding our margins. We exited fiscal 2025 with tremendous momentum, highlighted by the strong demand we saw on Black Friday and Cyber Monday. The timing of these events falling over the final weekend of fiscal 2025 and into the start of 2026 drove high order volumes and provided a good start for Q1 2026. Building on this strong start, there are several encouraging catalysts that bolster our outlook for fiscal 2026, including our expanded retail footprint as we start the year with more than 1,500 brick-and-mortar locations carrying Byrna Technologies Inc., strong post-holiday dealer restocking orders, increasing brand awareness driven by both more mainstream advertising placements and new creative ways of reaching the market, and the continued development of new products including the Byrna Cam, our new modular launcher, as well as subscription-based devices as we plan for another strong year. From a profitability standpoint, we are laser-focused on expanding gross margins in 2026. We expect to be able to increase margins by several percentage points due to one, a more favorable product mix this year as the higher margin compact launcher represents a growing share of our launcher sales; two, continued manufacturing efficiencies and the economies of scale that will reduce manufacturing costs; and three, the price increases that just went into effect a few days ago. On the operating expense side, while we continue to invest in marketing and selectively add headcount to support new initiatives, we expect to see meaningful leverage as our operating costs are projected to grow at a significantly slower rate than our revenue. We remain in the very early innings of penetrating what we believe is a mass market. Today, there are more than 775,000 Byrna Technologies Inc. in customers' hands, and we believe that the less lethal personal safety category is becoming more universally accepted and Byrna Technologies Inc. is becoming widely recognized as the leader in the less lethal personal self-defense space. Harvard Business School and Stanford released a study in October that looked at the attitudes of gun owners. Interestingly, they found that fully 43% of gun owners preferred a weapon that would incapacitate and not kill. As such, the Byrna Technologies Inc. was mentioned numerous times throughout the study, and we were the only less lethal company to be mentioned. This strong desire for non-lethal options coupled with Byrna Technologies Inc.'s growing recognition should allow Byrna Technologies Inc. to benefit as the less lethal market continues to expand. As we continue to normalize the category, expand our product offerings across multiple price points, and build out a recurring revenue model, we see a clear and compelling path to sustained multiyear growth. In closing, fiscal 2025 was truly a transformational year for Byrna Technologies Inc. We achieved record revenues, expanded our retail presence to more than 1,500 stores nationwide, successfully released the compact launcher, brought ammunition production onshore, and laid the foundation for new devices that we believe will augment Byrna Technologies Inc.'s growth in the years to come. I want to thank our team for their exceptional execution, our retail partners for their continued support, endorsers and influencers for helping us reach new audiences, and most importantly, our customers who have embraced Byrna Technologies Inc. as their personal safety solution of choice. We appreciate your continued support and look forward to the year ahead. Now before I open this up to Q&A, I want to address a question that I've been asked recently regarding my personal plans. As many of you know, my contract with Byrna Technologies Inc. is up later this year, and I turn 68 next month. First, let me assure everyone that I plan to remain involved for as long as the company needs me. As a significant shareholder, I have and will continue to have for some time a substantial personal and financial stake in the future success of Byrna Technologies Inc., and I remain 100% committed to the future success of the company. At the same time, the board and I are conducting a process to identify my successor. I am pleased to report that we have made good progress, and as soon as we have something to announce, you will hear it directly from me. I want to emphasize that any future transition, when it occurs, will be smooth and seamless as I will do whatever is necessary to ensure the company's ongoing success. 2025 was a great year for the company, and I'm doing everything I can to make sure that we keep up the momentum and continue building on the strong foundation we created as we execute our plan and work to make Byrna Technologies Inc. the undisputed world leader in the less lethal space. With that, I am now prepared to take questions from our covering analysts. Thank you. The company will now be taking questions from sell-side analysts. Operator: Our first question today is coming from Jeremy Hamblin from Craig Hallum Capital. Your line is now live. Jeremy Hamblin: Thank you and congrats on really strong results and a great year in 2025. Turning to 2026, I thought I might start with the new CLXL launcher. Get a sense for the price point that you're expecting, increased shot capability, and see the demand for that. But also just understand how does the margin profile for the CLXL compare to, let's say, the CL and your other launcher products? Bryan Ganz: That's a great question, Jeremy. And thank you very much for your kind remarks. The CLXL has about a five-eighths of an inch extension on it that allows it to accept a 12-gram CO2, which is much more readily available and also provides for greater shot capacity. It also accepts a seven plus one round magazine. That magazine will fit in any CL. So existing owners can buy this seven plus one magazine, and we think that there will be a strong aftermarket demand. In fact, I think most CL owners will probably buy at least one seven plus one round magazine. With this seven plus one round magazine and the 12-gram CO2, you would be able to quickly fire off 15 rounds with two magazines. It will also, because it has a barrel five-eighths of an inch longer, propel the projectile at 20 feet per second faster. This will give the projectile more force than the current CL. So for a launcher that has a five-eighths of an inch extension on the end of the barrel, you know, all you're paying for is the boost adapter, the slightly longer barrel, which is measured in pennies, and we're creating a seven plus one magazine rather than the five-round magazine. As a result, there is not a significant cost difference between these two launchers. We plan to introduce this at $579.99, so $30 more than the current CL. As such, the margins will be essentially identical to the current CL, but it is a strong value proposition for the consumer because if they were to buy the Boost and the Extra Magazine separately, that would be an $80 increase. Jeremy Hamblin: Understood. Okay. And then in terms of other new products that you're launching this year, with the connected devices, can you give us a sense for how you're expecting to price the connected device products and what you expect the kind of the cost uptake of that initiative to be and whether or not the potential to look at acquisition candidates is more or less related to connected devices or some other area of interest? Bryan Ganz: Yes. First, let me just say that we're really not at the stage where we can talk about the pricing of these products. We are certainly looking at products where maybe we give away the product for free if there is subscription-based revenue attached to it. That's premature. In terms of the build versus buy model, I mean, that's something that companies deal with all the time. We have a history of buying. We bought Fox Labs. We wanted to get into the pepper spray business. We bought Mission Less Lethal when we wanted to get into the long gun segment of the market. But we have not made any decisions on build versus buy. We are moving down the development path of these launchers internally, but, you know, if the right strategic opportunity came up, we would certainly consider that. Jeremy Hamblin: Got it. And then just last one for me. You mentioned really strong reorder rates here at the start of Q1. You guys are in the last month of the quarter, and it sounds like you're expecting some pretty solid growth here in the quarter. Typically, there's a seasonality at play in which Q1 is not nearly as strong as Q4. Can we assume that that's likely to be the case again despite the clear increase in the number of retail doors that you're going to be selling through? Bryan Ganz: Yes. Q1 is clearly a very soft quarter as people are kind of spent from Christmas. And you're absolutely right. We will have a Q1 that, while well above last year's Q1, is well below Q4. So it will come in, you know, between Q4 and, you know, below Q4 and above last year's Q1. Jeremy Hamblin: Great. Thanks for taking my questions. I'll hop out of the queue. Bryan Ganz: Thanks so much, Jeremy. Operator: Thank you. Next question is coming from Jeff Van Sinderen from B. Riley Securities. Your line is now live. Jeff Van Sinderen: Hi, good morning everyone and let me add my congratulations. I guess if we could maybe just kind of expand on, I know you gave us some comments on Q1, but you also gave some comments on gross margin. Maybe just any more color you can give us on what you expect for gross margin trend over the next couple of quarters? And then what do you think is a good range to contemplate for revenue growth for 2026? And then how would you expect EBITDA margins to develop this year considering gross margin expansion and OpEx leverage? I know there's a lot there to unpack, but... Bryan Ganz: Yes. You know what, since this is such a difficult question, I'm going to hand it over to Laurilee and let her answer it. Laurilee Kearnes: Hi, Jeff. Let's start with the gross margin. So I think last quarter, we talked about that we expected our gross margin near the end of 2026 to get up to the 63% to 65% range. And I think we're still looking at that range. Obviously, we'll kind of incrementally grow that throughout the year. We ended the fourth quarter around 60%. So we expect to see that kind of continually grow. Obviously, the price increase helps us, and then the channel mix is built into some of that. So we know we have the channel mix kind of as a headwind against us, the price increase is a tailwind. But then obviously overcoming some of these manufacturing inefficiencies that we had here last year are helping us. So I think we're still expecting the same range with an increase throughout the year. As far as, I mean, we're not giving revenue guidance. So I'll just say we're not doing that. We do expect to stay in growth mode. We expect, as we've said all along, as we increase our revenue, we expect to expand our EBITDA margins. We continually look for that positive leverage. So you saw this year, right? I mean, our adjusted EBITDA is growing at a faster pace than our revenue is growing, and that's what we want to continue to see going forward and that we plan to see. Bryan Ganz: Yeah. And just, I mean, as Laurilee said, we're not giving guidance. The one little bit of guidance I will give is that, as I said, if you look at our growth rates and adjusted EBITDA margins, we're well above forty. We suspect, project that they'll be well above 40 this year as well. Jeff Van Sinderen: Okay. That's helpful. Appreciate that. And then is there anything more you could tell us about the modular product plans? And then also, is there a recurring component that might be associated with the CAM products that you're introducing? Bryan Ganz: First off, the modular product we are extraordinarily excited about. Let me just say that our 0.61 caliber Byrna CL has been extremely popular, and the popularity is growing. Although it is not our, it is not the majority of our launchers in units, it is in terms of dollars. And if you look at the locations where you can test fire the launcher, the CL is by far our biggest seller. So when people have a chance to actually hold it and fire it, the CL is extremely important. What we've demonstrated is that we can go to a narrower launcher with a 0.61 caliber round and still be extremely effective. The reason 0.68 caliber is so popular is this industry started with the conversion of paintball guns. But honestly, 0.61 caliber makes much more sense. It allows us to create a concealable launcher and still have sufficient stopping power and payload to take down an assailant. Our goal is to come up with a range of the entire range based on our 0.61 caliber platform. And what we've been working on for the last year or so is a launcher where we... Operator: Ladies and gentlemen, do not disconnect. We are reconnecting the speaker line now. Bryan Ganz: Ladies and gentlemen, reconnecting the speaker line. Please proceed. Okay. I'm sorry, didn't realize that the line had cut out. Jeff, where did I lose you? Where did you lose me? Jeff Van Sinderen: Sure. No, you were speaking about the range of products based on the 0.61 caliber platform and then you cut off. Bryan Ganz: Yeah. So look. What I said is Laurilee and the accounting team are very excited about it because with a single chassis, we will have far fewer components. A lot of these components will be able to be used across the entire platform. So we will have a much simpler inventory, smaller inventory, and the cost, both the BOM, the bill of materials, and the time it takes to build the launcher will be significantly lower. So we expect to be able to see significant savings in the cost of these launchers and significant reduction in the inventory that we need to carry. As I said, the first fireable prototype version is being built this week. I expect to fire it with the team next week. I'm sure it will go through a number of iterations, but we are very confident that we'll be able to release this launcher before the end of 2026. And then I think, you know, in relatively rapid succession, we would come up with the midpoint and high end of the market. But our first goal is to come out with something that's less expensive so that we can address price point into the market while maintaining or frankly improving margins. Jeff Van Sinderen: Did you say somehow I thought you said something about a 40% reduction in cost to manufacture? Or did I miss that? Bryan Ganz: No, you got that absolutely correct. So far, the BOM that we have today is 40% less than the BOM for our current launchers, which are all relatively similar. So, yeah, it's a significant savings. We don't know the exact savings in labor, but we know that it's a much simpler design to build. So we expect to see both a savings in labor and an improvement in first pass yield. And the improvement in first pass yield will result in one, better quality, but two, more efficiency in terms of producing the launchers. There'll be fewer launchers that have to go through a rework. Jeff Van Sinderen: Great to hear. Thanks for taking my questions. I'll take the rest offline. Bryan Ganz: Thank you. Operator: Thank you. Next question is coming from Matt Koranda from ROTH Capital Partners. Your line is now live. Matt Koranda: Hey, guys. Good morning. Several have been asked, but I guess maybe we'll focus on the retail expansion for a moment here. It just sounds like you're focused on both deepening relationships with existing chain stores that you have, but you also mentioned another, I think, 500 locations. Some coming in Texas. Just wanted to hear a little bit about how you think about the growth in that channel between existing and new partners and how that translates to growth this year? Laurilee Kearnes: Yeah. Hi, Matt. So I think that we're expecting both. We're expecting both this expansion with more chain stores, but also really deepening the chain stores that we have. So as we said, we started the year at just over 200 chain stores. We ended at 900. So halfway, you know, the first half of the year, we didn't have most of those stores last year. So we'll see expansion with that. I think, you know, also working with all these retail partners with the new products, getting kind of product and inventory optimized, and making sure that they have the support that they need, whether that be retail stands, you know, whatever information that they need to continue to help with the sell-throughs. So I think we've got both of those factors going in 2026. Matt Koranda: Okay. Alright. Makes sense. Wanted to hear a little bit more about the rollout of the camera or connected product that you mentioned and have discussed a little bit. Sounds like potentially midyear is sort of the timing. Do you need to acquire anything to launch midyear? Or can you do this organically entirely? Then also, I'd I guess, maybe, Bryan, if you could talk about how this could open up incremental advertising channels for you. I know that you're limited in sort of the channels that you can advertise the launchers on, but would the connected device open up a new channel for you? Bryan Ganz: First, with regard to the cameras, this is something we've been working on for some period of time. This, of course, will not be built in-house. This is something that we have been commissioning with a third-party vendor specifically designed for the Byrna Technologies Inc. As I said, there are cameras available today that work with firearms, but they're much bulkier, bigger, bulkier, and much, much more expensive. Again, I feel strongly that this will come out either late Q2, you know, May or sometime June, July. This will not be a connected device. This will be just a camera where you can record something and download it if you want to use it. So we have much greater visibility on that. With regard to connected devices, this is a more complicated area. This is an area that we've not been involved in. You know, it's the technology is new for us. And although we've made great progress, and I'm hopeful that we'll see this as a contribution for 2026, it's premature for us to put a date on when we would be able to release that device. Now, having said that, you're absolutely right. Both the camera and any device or frankly, any accessory, we can advertise everywhere. So, you know, I'm sure you've all heard the commercial for Life Alert. I've fallen. I can't get up. So these type of devices or cameras we can advertise, you know, in places we could not advertise the Byrna Technologies Inc. And I think that it is really important as we look for creative ways to get the word out that we can find new products that will expand our advertising. The other thing that's somewhat interesting about it is that it will allow us to go after the market for consumers that might not buy a weapon and get them into the ecosystem. So, you know, we're hopeful that if we could provide something to somebody that wants a panic button, then you know, maybe down the road, we could sell them a Byrna Technologies Inc. So, yeah, it's something that the team is working on. It's an important strategy for us, but it's premature for us to put a particular date as to when it's gonna come out. Matt Koranda: Okay. Maybe just last one, on the modular launcher. Just wanted to hear a little bit about how that slots in with the existing assortment. It sounds like there's probably a lower price point one that could kind of fill out the existing assortment. Could you also manufacture the SDLE and CL on that exit, like, on that chassis on that platform? Is that how we should be thinking about it? Is it may replace the existing assortment over time, or is it really just an entirely new platform? Bryan Ganz: It's both. I think that there are going to be certain customers that want the 0.68 caliber launchers. The rounds have 27% more payload, you know, just as you see that, you know, although nine millimeter is the most popular handgun, there are still people that want a 44 or 45. So we would not have any plans to discontinue these launchers. But we do believe that they will be, you know, alongside the launchers. There will be a launcher that's 0.61 caliber that is priced at relatively the same level as the SD. There'll be a launcher that is 0.61 caliber that'll be priced relatively similar to the LE. And then ultimately, we'll have to make a decision on the CL because that's already a 0.61 caliber. That is potentially the only launcher where the new platform may be the next gen of the launcher. That said, the CL just came out recently. It's extremely popular. So I think that this still has, you know, a couple year run ahead of it before we would replace it. Matt Koranda: Okay. Very clear. Appreciate it. Bryan Ganz: But we do think that these things will augment it. They'll be incremental to our existing line. Operator: Thank you. Our next question is coming from Jon Hickman from Ladenburg Thalmann. Your line is now live. Jon Hickman: Hey, can you hear me okay? Bryan Ganz: We can, Jon. Jon Hickman: Oh, hi. So congratulations. Nice quarter. Nice year. Bryan Ganz: Thank you. Jon Hickman: Can you elaborate a little bit more on this? Most of my questions have all been answered, of course. But talk about the movie a little bit. When do you expect this to come out? Do you have a working title? Is it direct to TV? Or... Bryan Ganz: Okay. So with regards to the movie, it is expected to come out later this year. That said, we're not that interested in the success of the film itself. We are more interested in the advertising capabilities it provides to us. Now we do have 1.9 million email subscribers and we will certainly, you know, push them to see the movie. The goal would be for it to be released in a small, maybe 400 theaters, but primarily on one of the streaming services. But honestly, Jon, we're not really involved in that. That's the producer of the film. What we have is the BTS, the behind-the-scenes rights. So whenever they're filming a scene that involves the Byrna Technologies Inc., we have our own people there. And they're taking video of these stars using the Byrna Technologies Inc. We then get an opportunity to interview them, and those interviews will be on the movie site. So again, we'll be able to advertise, send people to the movie site where they'll hear about people using the Byrna Technologies Inc., their experience, their thoughts on less lethal. And there'll also be an ability to see the weapons that were used in the film and then to go to the Byrna Technologies Inc. website. So it is really more of an advertising platform for us. That said, I hope the movie does very, very well. Jon Hickman: Okay. Okay. Is there a title? Bryan Ganz: There's only a working title. And honestly, I can't share that. Jon Hickman: Okay. Okay. Well, the rest of my questions, I'll... Oh, one more. You said the... you repeated the 40% kind of gross margin or bill of gross margin improvement. But you said something about... Oh. Hello? Bryan Ganz: Never mind. Jon Hickman: Yep. So... Bryan Ganz: Sorry. That's... Jon Hickman: Yeah. I'll just take the rest of my questions offline. Bryan Ganz: Okay? Jon Hickman: Okay. Thanks, Jon. Operator: Good. Right. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Mr. Ganz for any further or closing comments. Bryan Ganz: Yes. I just want to thank everyone. We really appreciate your continued interest in Byrna Technologies Inc. And again, I want to thank our investors, our customers, our vendors, our partners, and very importantly, our employees. This journey is only possible because of their tremendous support and their firm belief in our mission of saving lives. So thank you very much. Operator: Thank you for joining us today for Byrna Technologies Inc.'s fiscal fourth quarter and full year 2025 conference call. You may now disconnect.
Operator: Greetings, and welcome to the Maximus, Inc. Fiscal 2026 First Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Francis, VP of Investor Relations. Thank you. You may begin. James Francis: Good morning, and thanks for joining us. With me today is Bruce Caswell, President and CEO, and David Mutryn, CFO. I'd like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially as a result of risks we face, including those discussed in Item 1A of our most recent Forms 10-Q and 10-K. I encourage you to review the information contained in our recent filings with the SEC and our earnings press release. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances except as required by law. Today's presentation also contains non-GAAP financial information. For a reconciliation of the non-GAAP measures presented, please see the company's most recent Forms 10-Q and 10-Ks. And with that, I'll hand the call over to Bruce. Bruce Caswell: Thanks, James, and good morning. Our ability to deliver consistent performance is evidenced in our first quarter results and enables us to raise earnings guidance and narrow our revenue guidance for the full fiscal year 2026. Maximus, Inc. operates in a resilient sector of government spend, and the delivery of essential services in a high-quality and efficient manner is a hallmark of our business. The performance and outcomes-based nature of our portfolio has aligned well with administration priorities and has historically operated largely unaffected through temporary shutdowns. The strength of that foundation enabled us to expand to support new customers, as with the US Air Force, and to focus on the pursuit of opportunities ahead that we see both in our federal and state markets. Most currently, that's Medicaid and SNAP on the state side. And I'll share how those are tracking. Finally, I'll update you on our continued strategic evolution as a trusted provider of technology-driven solutions and services to our government customers. This strategy includes expanding our use of automation, including in some instances AI, to augment how work is done, enhance citizen satisfaction, and improve financial performance. Enabling reinvestment to support our customers and drive shareholder value. Our first quarter results reflect virtually no direct impact to our contract portfolio from the shutdown last fall. Historically, a significant majority of our programs are deemed essential when a temporary shutdown occurs, resulting in the ability to maintain our P&L forecast. However, two secondary impacts tend to be slower payments from customers, which David will touch on, and temporary delays in award decisions. Both of these dynamics occurred, so let's go through the awards and pipeline metrics now. For 2026, signed awards totaled $246 million of total contract value. In addition, at December 31, we had a balance of $699 million worth of contracts that have been awarded but not yet signed. These awards translate into a book-to-bill ratio of approximately 0.5 times using our standard reporting for the trailing twelve-month period. The lower TTM book-to-bill ratio was impacted by very light award activity in our just completed first quarter, which had a quarterly book-to-bill ratio of 0.2 times. The awards in the quarter comprised primarily several smaller recompete wins for the US services business, which we typically have on a rolling basis. The government shutdown had a direct impact on our US federal award activity, which has also been noted recently by others in our industry. We view it as a timing dynamic and not a structural change, and we anticipate award activity will pick up across the three remaining quarters of this fiscal year. Our fiscal 2026 guidance assumes virtually no contribution from new work and that subsequent award activity likely fuels our fiscal year 2027 and beyond. Turning to our pipeline of sales opportunities, we had $59.1 billion at December 31 compared to $51.3 billion reported at September 30. The current pipeline is comprised of approximately $3.8 billion in proposals pending, $2.4 billion in proposals in preparation, and $52.9 billion in opportunities we are tracking. The share of new work in the total pipeline is 59%. Two elements of our pipeline are noteworthy. First, our reporting is beginning to include a small number of potential opportunities in Medicaid and SNAP related to the working families tax cut or WFTC legislation. We had messaged on prior calls and noted that the September 30 pipeline did not yet include such opportunities. While not a major driver of the pipeline increase, this quarter, discussions with certain states are progressing such that we're adding specific opportunities that we believe represent actionable paths to support implementation of the new legislation. I'll touch on that momentarily. Second, proposals pending or submitted and proposals that we are currently preparing total a combined $6.2 billion of total contract value. This is a 55% increase from the combined figure of $4 billion one year ago, which we believe is an indicator that positive pressure is building to both secure our normal course recompetes as well as enable future new work awards that contribute to our long-term organic growth target. Let's go to updates on the current challenges facing state customers, starting with the majority of whom expanded Medicaid and will soon be required to conduct twice-yearly eligibility determinations for their expansion populations. Cumulatively, the expansion population nationwide is one quarter of the total Medicaid population. We're fortunate to have strong working relationships through existing contracts with many of the expansion states for whom we already perform eligibility support services. We continue to see more frequent eligibility support driving up engagement with Medicaid beneficiaries. As we've noted previously, more frequent engagement is the principal driver of volumes on many of our state contracts. In other words, activity levels per beneficiary, not absolute enrollment, are the key drivers for many contracts. Where practicable, anticipate states will leverage existing contracts and establish program infrastructure to meet the legislative requirement for semiannual eligibility determinations, which begins next January 1. Another new requirement for states that I've spoken to previously and also pertains to the Medicaid expansion population is community engagement, also known as work requirements. Also effective 01/01/2027, this will compel states to implement new compliance processes and expand overall program administration. Community engagement comprises employment, education, and training, and volunteering for those beneficiaries not qualifying for an exemption. For years, Maximus, Inc. has supported programs designed for employment as an end goal in adjacent programs like TANF and SNAP. We believe our ability to not only determine compliance with work requirements but to also connect beneficiaries to local job opportunities builds on capabilities we have developed in these adjacent programs and further differentiates Maximus, Inc. Presently, we're working closely with current and prospective state customers on paths to modify program operations and leverage our technology investments while delivering a high-quality customer experience. To that end, in a January 29 press release, CMS announced Maximus, Inc. as one of 10 companies with existing Medicaid eligibility and enrollment contracts with states that have voluntarily pledged to help states successfully prepare for and implement Medicaid community engagement requirements. Anticipate making digital tools and resources such as our community engagement tracking tool and job boards available to existing state Medicaid clients at reduced costs through this investment. I'm pleased to see pipeline opportunities that anticipate both RFP-based procurements and contract amendments to begin implementation activities in the coming months. Let's turn to the SNAP program, touching on a couple of high points as reminders. SNAP represents an emerging opportunity for Maximus, Inc. as it is a program that has traditionally been administered by states and counties themselves. SNAP has a smaller administrative funding component, which historically has been shared by states and the federal government on a fifty-fifty basis, as well as a larger benefit funding component, the food assistance itself, which is 100% federally funded. Beginning in government fiscal year 2028, if a state has a payment error rate greater than 6%, which an estimated 43 states including DC do, they're required to begin contributing to the benefit in a manner correlated to their error rate. States may either use their FY '25 or FY '26 error rate for calculation of their share of food costs, making actions this year potentially consequential for many to reduce their payment error rates. Finally, under the WFTC Act, beginning in government fiscal year 2027, all states will be responsible for 75% of the administrative funding for SNAP. Put together, it's expected to highly incentivize states to work swiftly to reduce, if needed, and maintain their error rate at or below 6%. Last week, we announced the launch of our accuracy assistant tool, that is purpose-built to help states reduce their SNAP payment error rate. Using predictive analytics and intelligent automation to help detect data inconsistencies and flag potential errors before they occur and become costly. We are proud to offer this AI-powered solution that's designed to help provide states with real-time error prevention and reporting to support continuous improvement. Our accuracy assistant tool has the capability to integrate into existing state data environments, making it an attractive option as states consider costs of implementation and timelines. We anticipate states will prioritize tools such as accuracy assistant in the near term to help drive error root cause analysis while considering longer-term process redesign, technology, and operating models to deliver consistent, higher quality determinations. With our decades of experience delivering outcomes for our customers, we believe Maximus, Inc. is well equipped to support both near and longer-term state objectives. Moving to what is clearly becoming a game changer in the government services arena, Maximus, Inc.'s strategic expansion of automation, including the use of AI, is impacting the way we work, the technology solutions we offer our customers, and the delivery of customer outcomes in the public experience or PX through the programs we administer. I'll highlight a few recent examples. Recently unseated a well-established incumbent, scoring 98% of available technical points on a bid in our outside the US segment. The scope of which includes the technology platform to support the determination of government compensation based on clinical evidence accompanying claim submissions. Our solution represented an evolution of our AI-powered intelligent document processing tool in current production in our US business. Overall, the bid scored nearly 97% out of the 100% scoring criteria. This win demonstrates our ability to leverage AI-driven technology capabilities that are designed to help meet customer demand across our business while derisking delivery through component modularity and standardized deployment models. Our AI solutions and capabilities consist of a combination of in-house development, especially in areas where our proprietary process knowledge and data provide the most value, and carefully chosen partnerships with leading providers for more standardized use cases such as employee self-service. We're now demonstrating practical applications of AgenTik AI tools within clearly defined and controlled environments. We believe that these tools, recognized for their goal-oriented behavior, adaptability, and context awareness, have the potential to deliver greater business value. As I've mentioned before, within our business, we're acting as customer zero from which we develop capabilities and experience then demonstrate for our customers. Our data shows that staff at all levels and departments quickly adopting AI tools and participating in training. In fact, in some cases, our frontline employees are the most active, underscoring the human-centered transformation that blends advanced technology with cultural and operational change. With positive proof points already achieved, we're excited to deploy the next wave of capabilities through which we can show the art of the possible to our customers. Continuing on AI, I'd like to highlight another program where we implemented an AI-based solution to significantly streamline the processing of payment-related disputes. Our solution automated data extraction and validation of electronic records followed by empirical non-subjective evaluation against state laws. This approach has led to 45% of disputes being resolved autonomously and significantly increased throughput capacity for our customer. We also measured material improvements to financial performance on the program on a year-over-year basis, thereby enabling further technical investment on behalf of our government customers. Finally, as further evidence of our evolution as a trusted provider of increasingly AI-driven solutions to our government customers, I'm pleased to announce that Maximus, Inc. was very recently selected as the single awardee of the US General Services or GSA blanket purchase agreement or BPA to support the agency's government experience contact center or GXCC services transformation, which is still subject to the regulatory protest period. Previously known as the GSA public experience portfolio, GXCC supports the channels, including telephone, email, and web chat that help the public navigate government programs and services and information. As described in the solicitation, the BPA performance period is up to five years, including options, and has no maximum orders or ceiling amount. As included in the solicitation, the GSA anticipates awarding five within two months of this award. And this BPA can support new customer agency programs under their own call orders. I'll close today with the exciting news that Maximus, Inc. just won a spot on the Forbes list of America's best employers for 2026. This is our second year being recognized for this annual award, which is conducted through an independent survey. The full award list and corresponding details are scheduled for announcement by Forbes next week on February 10. We are honored to be recognized and appreciate all of our employees that contribute to the trust placed in us by our customers. And with that, I'll turn the call over to David. David Mutryn: Thanks, Bruce, and good morning. We're pleased to start fiscal year 2026 with solid first quarter results that show the business is tracking to our expectations. We had no material income statement impact from the government shutdown last fall. Guidance today reflects improvement to our full-year earnings outlook, and we are narrowing the range of our revenue guidance. During the quarter, we completed the divestiture of our child support business within the US services segment, which comprised approximately $25 million of annual revenue and a gain of approximately $9 million was recognized. While a longtime business of Maximus, Inc., we concluded that it was neither meeting our financial expectations for growth and profitability nor was a core offering as we've evolved to pursue higher value services in the state market. We are committed to disciplined evaluation of all areas of the business on an ongoing basis and have a desire to free up organizational capacity to focus on more attractive opportunities for Maximus, Inc. in the future. Turning to quarterly results. I'll begin with framing them as broadly in line with our expectations when we provided fiscal year 2026 guidance on the November earnings call. For 2026, Maximus, Inc. reported revenue of $1.35 billion, representing a 4.1% decline over the prior year period. Of that, roughly 1.5% was related to the outside the US segment divestiture that occurred near the end of the first quarter of last year. Most of the balance was organic movements. The US Federal Services segment posted positive organic growth, which was offset by the US services and outside the US segments. On the bottom line, adjusted EBITDA margin was 12.7% and adjusted EPS was $1.85 for the quarter, which compares to 11.2% and $1.61, respectively, for the prior year period. I should mention that divestiture-related activity, which is not reflected in our adjusted metrics, drove a year-over-year improvement in our GAAP earnings. The prior year period contained $38 million of charges for the outside the US divestiture, while this current period included a gain of $9 million for the small divestiture in the US services segment. Beyond that, our year-over-year improvement was driven by the performance of the US Federal Services segment. I'll also note that results today are consistent with our expectations of a slightly lower first quarter adjusted EPS compared to the remaining quarters of fiscal year 2026. Turning to the segments. Revenue for the US Federal Services segment increased 0.8% to $787 million as compared to the prior year period, and all growth was organic. As a reminder, revenue for the prior year period in this segment benefited from unexpected volume growth and natural disaster support, which we did not forecast to recur at the same level. The operating income margin for this segment in the first quarter was 16.5%, as compared to 12.7% in the prior year period. This quarter's segment margin reflects the wider adoption of technology initiatives that enhance the productivity of our staff across multiple program areas within US federal services. We anticipate the durability of this benefit through fiscal year 2026, and we've increased the guidance for this segment's full-year margin. Into the US services segment, revenue decreased to $415 million as compared to the prior year period revenue of $452 million. Contraction in this segment was anticipated and stems from a number of programs that are experiencing lower volumes or demand for engagement compared to prior years. We continue to believe there is a strong opportunity for Maximus, Inc. to assist state customers with emerging requirements in their Medicaid and SNAP programs. The segment's operating income margin for the first quarter was 7.1%, compared to 9% for the prior year period. This quarter's lower margin follows a similar pattern to last fiscal year, where the Q1 margin was depressed, and we contemplated this dynamic in fiscal year 2026 guidance. In recent years, the need to have more resources for the open enrollment period temporarily increases costs beyond the incremental revenue contribution. As I'll touch on shortly, the full-year margin guidance for this segment reflects an improvement to the bottom end of the range. Turning to the outside the US segment, revenue decreased to $143 million as compared to the prior year period revenue of $170 million. A majority of this delta, about $19 million, was attributable to the divestiture of the Australian and South Korean businesses near the end of the prior year period. The remainder of the decrease stemmed from lower volumes on several programs and was partially offset by a small currency benefit. The segment realized an operating loss of $1.4 million compared to an operating profit of $8.1 million in the prior period. The leaner segment following the divestitures has prioritized business development investments. Meanwhile, the corresponding revenue contributions tied to new work opportunities have shifted out, also affecting full-year margin guidance for this segment. In prior periods, we have spoken to margin stability in this segment, and we do not view this quarter as changing our belief around a healthier segment. Our goal over the longer term remains to drive further margin improvement by building scale in our present geographies. Turning to cash flow items. Cash used in operating activities was a net outflow of $244 million, and free cash flow was a net outflow of $251 million for the quarter. These first-quarter cash outflows reflected expected seasonality around the timing of cash payments in the business, as well as temporary delays of collections in our US Federal Services segment, a result of administrative delays on one of our programs and, to a lesser extent, some lingering delays from the government shutdown. These delays drove a step-up of our days sales outstanding or DSO to seventy-eight days for this quarter. We anticipate the DSO will remain temporarily elevated at March 31, and then normalize in the latter half of this fiscal year. Our free cash flow guidance is unchanged and is still expected to range between $450 million and $500 million. We ended the first quarter with total debt of $1.58 billion, resulting in a consolidated net total leverage ratio of 1.8 times. The increase to the leverage ratio from 1.5 times at September 30 resulted from near-term borrowing needs amidst the cash flow dynamics in Q1. We remain below our stated target leverage ratio range of two to three times. As a reminder, this ratio is our debt net of allowed cash, to consolidated EBITDA for the last twelve months as calculated in accordance with our credit agreement. Finally, absent any M&A activity or share repurchases, which we don't explicitly forecast, we would continue to expect to finish fiscal year 2026 at or below one point zero times. Speaking more broadly about capital allocation, our first priority is organic investment. We run a disciplined process to evaluate and fund initiatives, where we consistently deploy capital to refresh technology, build capacity, and design more effective ways for our customers to accomplish their missions. From there, our priorities have not changed from what we've articulated on prior calls. We continue to seek acquisitions that can accelerate future organic growth, under a disciplined evaluation framework with a bias towards the federal market. I'll finish with updated guidance for fiscal year 2026. We're raising earnings guidance, narrowing revenue guidance, and maintaining free cash flow guidance. We started fiscal year 2026 with strong visibility, and our first-quarter results naturally strengthen our view of today's updated guidance. Starting with revenue, both ends of the range are reduced by $25 million to remove the approximate impact of the divested business. This means the bottom end of our revised fiscal year 2026 guidance is $5.2 billion of revenue. We are adjusting the top end of the range by an additional $50 million to account for delays in our already modest in-year new work revenue assumption. This brings the top end of our range to $5.35 billion and provides us excellent visibility to revenue guidance. Our full-year adjusted EBITDA margin guidance for year 2026 is now approximately 14%, which is a 30 basis point improvement from prior guidance. Our adjusted EPS guidance increases by 10¢ and is now expected to range between $8.05 and $8.35 per share. At the midpoint of $8.20, this reflects year-over-year earnings growth of more than 11%. There are corresponding updates to our full-year operating margin assumptions by segment. We expect the US Federal Services margin to range between 16.5% and 17%, a 100 basis point improvement from prior guidance. We expect our 10.5% to 11% range, which is bringing up the bottom end from prior guidance. For outside the US, we believe the segment will be profitable this year with an estimated full-year margin of 13%. Other updated assumptions include expected interest expense of roughly $75 million, and we anticipate our full-year tax rate to range between 24.5% and 25.5%. In conclusion, we're pleased with how fiscal year 2026 has come into focus. We believe the updated guidance reflects a solid line of sight on our current portfolio of programs and highlights the durability of the essential services we provide to government. Further, we are excited by the opportunities for the business as we are seeing building demand for a tech-enabled partner to implement government imperatives. This supports our conviction on the organic revenue growth potential of Maximus, Inc. as we take prudent steps now to prepare for growth in fiscal year 2027 and beyond. And with that, we will open the line for Q&A. Operator? Operator: Thank you. We will now be conducting a question and answer session. Our first questions will come from the line of Charlie Strauzer with CJS Securities. Please proceed with your questions. Charlie Strauzer: Hi, good morning. Thanks for taking my question. Good morning, Charlie. Yes, absolutely. Quick question, kind of broader picture kind of question. When you look at your revenue guidance, roughly how much of that is in hand versus having to be which versus new work? David Mutryn: Yes, Charlie, it's David. Thanks. Yes, as Bruce mentioned in the script, there's virtually no new work remaining forecast. Even entering the year, as we said, it was already modest. Our initial guidance coming into the year had about 3% of not yet new work in the midpoint of the guidance. So with the narrowing of the revenue range, that's very small now. Charlie Strauzer: Makes sense. Thank you very much. And this same same with you, David, for a few minutes. If we could just get a little bit more color on the segment revenue guidance and your thoughts behind some of the drivers that or potentially impediments to achieving the stated goals. David Mutryn: Yeah. We feel confident in our guidance range. For, you know, US services, revenue was down more in the first quarter. That was expected in line with our forecast. We don't believe that that's a run rate that will continue. In fact, we expect the year-over-year comparison should improve for US services over the remaining quarters of the year. And actually, by the end of the year, by Q4, we believe year-over-year organic growth will resume. For US services. I'd point out for federal some of the things I mentioned in the script related to natural disaster support and the surge revenue will make for some tough comps in the federal segment for the rest of the year. So there's a little color by segment. Charlie Strauzer: Got it. That's great. And then Bruce, you mentioned the new award. Kind of AI-related from the GAO. Perhaps, you know, give us some examples of the type of programs that you could be awarded in that. Bruce Caswell: Sure. That blanket award? Sure. And I just I do want to clarify that it's the GSA, General Services. But the still early days, first of all, it's really up to the client in terms of the type of task orders that might come through the contract. But to give you a couple a little bit more color, both on the platform and on the types of programs, the underlying platform that we bid on that is our TXM platform that we've talked about I think, extensively on prior calls, but also certainly through our marketing activities. And, TXM is a cloud-based platform that brings together a multichannel contact center environment. So it's not just voice with natural language processing. And with AI that can obviously assist with that, but also, web chat but also intelligent document processing. And more and more these days, document processing takes many forms. It could be people, taking images of and submitting paper documents, but also responding through digital channels and applications and so forth. Having information pushed to them that they then respond to. So to give you a use case, think of like the Food and Drug Administration where somebody needs to report a food product or something that they bought that they think might be contaminated, or to which they maybe had an adverse reaction. They may begin the call by calling in and, just providing that basic information, and the system may then push to them a request, for example, for an image of the barcode of the food product. And it may ask where the food product was purchased. And depending on the recipient's or the vent the caller's response, there may be multiple stores of that type in the area where they're calling from and it'll further be able to use mapping capabilities to say, well, which store actually was it? So there's a great deal of intelligence that you can build into the consumer interaction to make it very, very seamless. But the real power that we see in this is that often contact centers are the front lines for understanding broader issues that are happening, neither public health issues or maybe you know, issues related to food product safety. So the front lines for the FDA or even the front lines for the CDC could be contact centers where you start seeing calls surging in certain areas of the country related to an event. It's the analytics capability and the data analysis that you can do on top of this platform that is, in many ways, its most powerful asset in terms of helping agencies achieve their mission. So I, you know, I can talk about some of its attributes being, you know, cloud-based and modular and flexible and scalable and so forth. But I'm glad you asked the question the way you did because it's really that use case that brings it to life. We're excited to get going. It's a very recent award. But like we said, we are excited to support the GSA as they work to implement programs that are important to them, like related to government procurement information centers and so forth, but also to give other agencies and departments the ability to take advantage of this great vehicle. Hope that helps. Charlie Strauzer: Yes. Very helpful. Thank you on that. And then stay with you, Bruce. Could talk a little bit more about SNAP and obviously, early days there too. And know, in your kinda early conversations with state customers, what's the kind of receptivity been towards the new offering you talked about recently? Bruce Caswell: To address it directly, the receptivity to our Accuracy Assistant has been really positive. It's a great tool. It's a tool quite frankly, think states have really needed because it allows you first of all to kind of to mine the datasets of existing cases and understand what the root causes are that could be driving error rates up in the first place. Sometimes those root causes are there are just fundamental inaccuracies between the data that an applicant is providing and data that could be available through third-party data sources that you want to check against. And that might be just because, you know, the data is stale or the individual is reporting the data in a different manner than, has been reported through other electronic means. Can also have inaccuracies that are related to, just the training of individuals collecting the information. I know that I struggle with, you know, semi-monthly versus biweekly income. Which is which right that kind of thing. So the accuracy assistant tool helps first of all by learning and then it can be used real-time as cases are coming in and being processed. Processed to identify cases that have the attributes that could lead to an error if is not taken. It then allows the worker and that worker could be a state or county worker or it could be a Maximus, Inc. employee to intercede and collect further information from the beneficiary before you put inaccurate data into the database against which a rules engine runs that might make an inaccurate determination. It's important to, recall too that error rate at state level both the positive errors and the negative errors in the sense that if you're underpaying someone, that's as much an error as if you're overpaying someone. So it's the collective score that a state has that has to be below 6%. So we're excited to get going on that. Would say one other thing, and that's we'd expect the initial conversations with states, to lead to interest in the tool and the licensing and deployment and implementation operation of the tool. And then on top of that, that's the near-term kind of effect. But in the longer term what you really want to do is have a conversation of how do we look at the workflow, business process, what fundamentally has led us to the state that we're in, honestly. And figure out how to redesign that and instrument that business process differently. So we think that there's a almost a consultative that could lead to business process services opportunities in the medium to longer term with the SNAP population with these states. And like I said in my prepared remarks, time is of the essence because it's measurement period that we're in right now, FY '26, that's going to determine the component of benefit funding that states are going to have to provide in federal government fiscal year 2028 beginning in that year. David Mutryn: Maybe I'll just add a little, Charlie, since we're on it. We're often asked about you know, trying to size the opportunity and the timing. So I can just comment a little bit about that. We we had shared last year and and really for the combination of emerging needs for Medicaid and SNAP with a multitude of assumptions, we estimated that potential needs by states for for both Medicaid and SNAP all combined could create a high single to low double-digit organic growth opportunity for US services and we continue to believe that this is a reasonable estimate for the ultimate revenue run rate from this work once it's fully ramped. And as far as timing goes, we'd we'd expect if new work would layer in over fiscal year 2027, and into fiscal year 2028. So fiscal year '28 at some point, could be kind of the full run rate of the new normal under these requirements. Charlie Strauzer: Great. Very helpful there. And then just shifting gears to the VA contracts, any update there into the timing? David Mutryn: Sure. Go ahead, David. David Mutryn: So our current contracts have a period of performance through 12/31/2026. So not impactful in any way to this year's guidance. Presumably, RFP and everything will come out between now and then. We remain confident in our performance under the current contracts. And that remains to be the timing. Bruce Caswell: I might just add one thing, Charlie, and that's that, back in Q2 of last year, talked about some of the investments that we've been making in the program from a technology standpoint. So we don't want you to have the impression that we're kind of just waiting for the rebid to come out. Actually have been very, very busy with technology investments that can improve the veteran experience, reinvesting back into that program for government to make it a better veteran experience, enable us to have the capacity that we believe will be required under the rebid while maintaining high-quality levels. So there's a lot going on behind the scenes this year and this summer. As we implement new technology, and we're very excited about that work that's ongoing. Charlie Strauzer: Great. Thank you. That's very helpful. Thanks for taking my questions. Operator: Sure. Thank you. Thank you. Operator, back to you. Operator: Thank you. Our next questions come from the line of Brian Gesuale with Raymond James. Please proceed with your questions. Brian Gesuale: I wanted to dig into the want to dig into the Pac Deck stuff. It looks like the volumes, the completed volumes were down 11% sequentially organizationally there. You talked about there not being impact from the shutdown. Did you see any monthly change in those volumes that you ran through your system from October through December? David Mutryn: Thanks, Brian. It's David. Without seeing the data right in front of me, there's presumably some seasonal impact to consider with December with the holidays and things. So I'm not sure if that would be something you consider. I think broadly speaking, our view of the volumes hasn't changed much over the past few quarters. There was certainly a surge period last year where the vendors collectively were processing more that were coming in, and that was an intentional kind of deliberate search by the customer there. So we've continued to see some moderation when you look at 26 versus 25. But still strong underlying demand. So we see cases that are inbound for the whole system continue to kind of slowly grow, which shows underlying strong demand. Brian Gesuale: It was my understanding that the VA was working a lot of surge overtime to get those cases to you. So during the shutdown, that overtime and that rate of pushing those cases to the vendor community didn't slow down at all. It just seems like that would maybe be nonmission critical to run overtime to push these cases and maybe there would be a little bit of a disruption in the calendar fourth quarter where even October volumes might have been as light as the December volumes? David Mutryn: We didn't see any meaningful impact. I mean, the real surge period was earlier in 'twenty five. See both in our results, but also in the overall caseload of the vendors. Brian Gesuale: Okay. Fantastic. For your guidance for the year, what are you viewing the packed volumes off of this run rate that you had in the first quarter? David Mutryn: The short answer is pretty steady. For the remainder of the fiscal year from the first quarter. Brian Gesuale: Okay, great. Moving over maybe to the US Service business. Can you explain some of the lower volumes guess maybe how do we think about the lower population of beneficiaries on Medicaid impacting those numbers presumably incremental call volume on exchanges as premiums were you know, going all over the place. Maybe just help us understand how that impacted things in the quarter. David Mutryn: I don't think there was really a precise impact from those in the quarter. There was no kind of single driver to the revenue change year over year. There was a number of program. You know, all in all, we continue to have a portfolio, especially on the Medicaid side, which is highly transaction-driven. So we do view the net impact if the additional requirements result in a lower total membership, we think it's still in that positive because of the additional transactions that will need to take place to accomplish that. Bruce Caswell: You know, Brian, I might just sorry, go ahead. And then I'll add a little. Brian Gesuale: Yes. Go ahead, Bruce. Bruce Caswell: No, please. I think as you're thinking about the future years, for Medicaid too, there's a dynamic that I don't think we've called out succinctly before that we wanted to make sure we were clear on. That is, the Medicaid, community engagement requirements for the expansion population are as you know effective 01/01/2027 but we likely will see activity in the '26 '27 as there's a lot of outreach activities that states have to engage in to that eligible population. And so they're sending letters, they're making phone calls and so forth saying, ready for this. This is gonna be a new requirement for you and so forth. That activity is something I think where states are still working through what portion of the population they actually have to directly reach out to. In some cases, the state might say, well, if I can, through data matching, preliminarily determine that a certain cohort of this expansion population doesn't actually, qualify for the work requirement because they have certain conditions that meet exemption requirements. I'm not even gonna bother reaching out to them. But that's ground that hasn't been covered yet. And I think lawyers are talking about, well, do you just reach out to everybody? And then take it from there. So you'll see a bit of you know, kind of volatility in that as that shakes out. And I think CMS's guidance to states and the activities around as, you know, their recent announcement and so forth supporting states will help bring some clarity to that. The that work requirement or community engagement requirement is a real thing as of January 1 with even some activities preceding that. The dynamic that we want to also focus on, though, is the redetermination. When you think about it the requirement for semi-annual redeterminations doesn't happen until January 1 and that means that the activity won't happen until July. Because you could have a new you know somebody who's newly determined eligible on 01/01/2027 you're not gonna need to redetermine their eligibility till July of that year. But I think there's been some thinking that you see this like major surge in redetermination activity starting in January. Not really the case. It's the cohorts that start rippling through mid-year. That's why David made the point earlier that '27 is a building and you get the full run rate benefit of these activities in '28. Hope that helps. Brian Gesuale: Yeah. That's really helpful color. I appreciate that. On US Services, what's the drivers for so I'm just trying to determine how transitory these lower volumes are on the programs? Maybe you can give some specific programs or broader plots of that where we're seeing the lower volume. How transitory that is and then what would drive improvements in both the revenue run rate and the margin outlook as we go forward, right? Because presumably, I think your margins will need to see a significant recovery to hit the full-year bogey that you've put out in the US Services segment? David Mutryn: Yes. I'll start with the margins. So as I said in the prepared remarks, there's an element of seasonality in the portfolio. US services that's a little more pointed than it has been historically. But what you saw last year as well with the first quarter being the lower margin for US Services. And really, it's really driven by a couple of contracts, which caused this dynamic where profitability is down in the first quarter, but then higher in the remaining 03/2001 results, I would also frame as in line with our expectations on both the top and bottom line for US Services. So that it's a little more structural with our contracts than any trend. Brian Gesuale: Can US Services grow for the year? David Mutryn: We as I said in the first question, we expect likely not for the full year, but we expect it to turn to positive organic growth by Q4. Brian Gesuale: Okay. And then maybe just a real quick one and I'll jump out of the queue on the federal services. Can you remind me the magnitude of the FEMA kind of nonrecurring element that kind of pops in? And I think, maybe just remind us what month that's the most pronounced as well or what quarter rather? We look at comping out that business in federal? David Mutryn: Yes. As context, last year was in the $100 million range, about 2%. Of our revenue, just the natural disaster support and it's typically the first February, kind of the hurricane season, and aftermath but it was it spread a little more last year. So it's hard to predict, but typically, it'd be hurricane season that that drives that demand. Brian Gesuale: Okay. Great. Thanks for taking my questions. David Mutryn: Sure. Thank you, Thanks, Brian. Operator, back to you. Operator: Thank you so much, everyone. This does now conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And enjoy the rest of your day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Corporation Third Quarter Fiscal Year 2026 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions on how to ask a question will be given at that time. If you should require assistance during the call, please press 0. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Karina Vanderkins. Please go ahead. Karina Vanderkins: Good morning, and thank you for joining Ralph Lauren Corporation's Third Quarter Fiscal 2026 Conference Call. With me today are Patrice Louvet, the company's President and Chief Executive Officer, and Justin Picicci, Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to one per caller. During today's call, our financial performance will be discussed on a constant currency adjusted basis. Our reported results, including foreign currency, can be found in this morning's press release. We will also be making some forward-looking statements within the meaning of the federal securities laws, including our financial outlook. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our results, you should refer to this morning's earnings release and to our SEC filings that can be found on our Investor Relations website. With that, I will turn the call over to Patrice. Thank you, Corey. Patrice Louvet: Good morning, everyone, and thank you for joining today's call. We delivered strong third quarter results and progress on our Next Great Chapter Drive plan this holiday. A season defined by warmth, joy, and a spirit of giving, Ralph Lauren Corporation's core values dream of a better life, time well spent with family, quality, and authenticity, enabled us to connect deeply with consumers around the world. Across generations, cultures, and markets, people are stepping into our lifestyle and the iconic way of dressing. This powerful engagement with consumers is also translating to strong financial results. In our most important quarter of the year, we exceeded our commitments on both the top and bottom line. With broad-based performance across geographies, channels, and product categories. Full price sell-throughs were meaningfully better than we expected this holiday. As our brand experiences and products resonated around the world. This strong demand enabled us to continue driving our long-term elevation journey with improved quality of sales and gross margin expansion in each region. More than offsetting the impact of higher US tariffs as we began to flow through more product under the new rates. Our performance was also balanced across our retail and wholesale channels this holiday. Reflecting our growing brand desirability and pricing power globally. This drove healthy high single-digit comp growth along with double-digit growth in wholesale. And underpinning this momentum are our enablers that continue to support our performance. Our talented and passionate teams working tirelessly to execute on Ralph's vision, our commitment to operational agility, and a powerful balance sheet as we continue to navigate an uncertain global environment. And our focus on harnessing advanced technology, AI, and analytics to better serve our consumers and drive greater efficiencies in our business. In short, the three-year Next Great Chapter Drive strategic plan we presented in September is off to a strong start. And our multiple drivers of growth across regions, channels, consumer cohorts, and the breadth of our lifestyle product offering are delivering. Let me take you through a few highlights from the quarter across the three strategic pillars of the plan. As a reminder, these include first, elevate and energize our lifestyle brand; second, drive the core and expand for more; and third, win in key cities with our consumer ecosystem. Starting with our efforts to elevate and energize our lifestyle brand. For nearly sixty years, Ralph has inspired people to step into their own dream of a better life. From the cozy elegance of a Ralph Lauren Christmas to the optimism and adrenaline of the Olympics, we sit at the heart of culture. And over the holiday season, our teams continued to reinforce our place in culture bringing our unique form of cinematic storytelling to life across markets and platforms. Transporting both new and existing consumers into our world. Key highlights from the third quarter included first, our holiday 25 mountain living and timeless gifting campaigns. Translating the magic and easy elegance of Ralph Lauren Corporation around the world. We brought this to life this season through our immersive pop-up experiences in London, Los Angeles, Tokyo, Munich, and Seoul. Creating winter wonderlands as only Ralph can. Featuring Ralph's coffee, special guest performances, family photos, hand-painted denim jackets and candles, and even our own Christmas tree farm. Along with a range of other activations, including our AI-powered store windows, featuring our Polo Bear and digital campaigns, our holiday campaigns drove a combined 2.9 billion global impressions. Next, we continue to reinforce our position as one of the leading luxury apparel brands in the world of sports. During the quarter, we unveiled our Team USA uniforms for the Milan Cortina Winter Olympics with special celebrations in New York City and in Milan, with Vogue and GQ Italia. We're excited to feature inspiring stories that highlight the athlete's dedication and perseverance to reach one of the greatest events on the world stage. I encourage you to check out all the looks starting with tomorrow's opening ceremony. In the world of car racing, Lando Norris, our Polo Red fragrance ambassador, won the 2025 Formula One World Drivers' Championship. And we renewed our long-standing partnership as an official sponsor of US Open Tennis Championships, one of the most electric events of the year in tennis. In Asia, we continued to build our elevated brand awareness and affinity through our very rough documentary events in Hong Kong and Singapore. Featuring celebrities and friends of the brand. Our Polo Originals campaign in Tokyo showcased Ralph Lauren Corporation's leadership in everyday luxury styling. Uniquely blending Japanese refinement with American heritage dressing. And finally, we outfitted an exciting group of actors and artists including Jennifer Aniston, Rose Byrne, Emily Blunt, Chase Infinity, Jesse Buckley, and more for the Elle Women in Hollywood celebration. Together, these global activations are driving strong sustainable growth in new customer acquisition and retention. In the third quarter, we added 2.1 million new consumers to our DTC businesses, on top of last year's 1.9 million record results. Driven by digital, and full price store customers. We were encouraged by the strong momentum across generations led by younger next-generation consumers, women, and VICs. And we increased our social media followers by high single digits to more than 68 million. Led by Instagram, TikTok, Douyin, and LINE. This rolling thunder approach to activations enabled by our strong data and analytics capabilities, gives us confidence to continue our brand momentum as we look ahead. Moving to our second key initiative, drive the core and expand for more. Ralph and our creative teams continue to deliver on his vision through timeless, high-quality products and distinctive styling that tell a story of a life well-lived. Independent of any single fashion trend or cycle, this philosophy is embedded in how we drive our core products, as much as it is in our high potential and complementary lifestyle category. Starting with our core, which represents more than 70% of our business, Core product sales grew low double digits this quarter. Driven by strength in our cotton cable knits, jersey, wool cashmere, and flag sweaters. All perfect for gifting. Oxford and linen shirts, rugby and quarter zip knit tops, and our iconic polo camps. Our holiday campaigns also drove healthy full price demand in our core children's programs. Led by our elevated sweaters and mid-weight down jackets and knit and fleece sets. Our high potential categories, including women's apparel, outerwear, and handbags, continue to be accelerators for our business. Together, these categories increased high teens outpacing total company growth in the quarter. Women's sweaters were a standout. Ranging from our hero cable knit in cotton wool and cashmere to our beloved Polo Bears and newer Havzip and Polo cables. Our outerwear offering showcased our expanded range of ifications, from the sporty functionality of our Polo puffers in candy shop colors to more sophisticated options like our tailored wool coats and cable knit bomber jackets. Momentum in our handbag business continued to be driven by our foundational collection Polo ID and Polo Play, in core leather, seasonal suedes, and western details. Along with our women's collection, Ralph and Ricky bags. Special releases this quarter included Polo Ralph Lauren and Topa, the fourth collaboration in our groundbreaking artist in residence program, focused on empowering and celebrating artisans within the communities that have historically inspired our designs. Our Team USA collection ahead of this month's Milan Cortina Olympic Games honoring the city's creative spirit while staying true to the enduring style that defines Ralph Lauren Corporation. In our annual Pink Pony collection, supporting Ralph Lauren Corporation's longstanding commitment to cancer care and research. We will continue to leverage the unparalleled breadth of our lifestyle product offering to connect with consumers. Turning to our third key initiative, win in key cities with our consumer ecosystem. We continue to expand our consumer ecosystems to deepen our presence in our top 30 cities around the world. We are also laying the groundwork for long-term sustainable growth in our next 20 cities. Across each of these ecosystems, we're establishing a cohesive, consistently elevated experience to allow consumers to engage with and step into the Ralph Lauren Corporation lifestyle. Within DTC, which comprises the majority of our business, we delivered another quarter of healthy comp growth across regions. Global comps increased high single digits, on top of more than 12% growth last year led by our Ralph Lauren Corporation stores and digital commerce. We were also excited to launch our Ralph Lauren Corporation TikTok shop in the US this quarter. Becoming the first luxury fashion brand with an always-on presence on the platform. The shop features a curated assortment including core polo bestsellers and seasonal refreshes. Tailored to this platform's next-gen audience, including younger male shoppers. By region, Asia once again led our growth, with sales up more than 20%, driven by all key markets, China grew more than 30% this quarter, ahead of our outlook, as we continue to strengthen and grow our elevated brand across the market. Our China performance was supported by our Holiday and Very Ralph campaigns, continued expansion on Douyin, and another outstanding Singles' Day with high quality, double-digit revenue growth and strong new customer acquisition around the event. Europe and North America also delivered high-quality growth this quarter, on top of last year's strong compares. As we continue to reinforce our presence in our top cities, we opened 32 new owned and partner stores globally. New store highlights this quarter included Chengdu IFC Mall in China, Stratford and Bishopsgate in London, New Delhi, Abu Dhabi, and Chatswood Chase in Sydney. And finally, touching on our enablers. Our business continues to be supported by our five key enablers. Recent highlights include first, as part of our focus on delivering advanced technology, AI, and analytics, ask Ralph, the AI-powered digital shopping assistant we launched in September, is providing us with powerful insights as AI drives accelerated shifts in consumer behavior. Customers are moving beyond traditional search toward rich natural language product conversations, with styling and outfit discovery accounting for more than 50% of our total engagement. In addition to driving more personalized experiences for our customers, Asperov is also becoming an important resource for high-quality first-party data. Second, our teams and our culture drive our performance. We're proud to be named one of America's Best Companies by Forbes. And finally, it was an honor for all of us when Ralph was named the CFDA's 2025 American Womenswear Designer of the Year. It is the second time Ralph has received this award and he is the only designer to win all of the CFDA's top honors. This is a testament to our exciting women's momentum and to our brand's enduring relevance. Congrats to Ralph and our creative team. In closing, Ralph and I are proud of our team's progress and execution through the first March of this fiscal year. Including through the important holiday season. Even as we continue to navigate an uncertain global macro and geopolitical environment, we remain focused on what we can control what's ahead for Ralph Lauren Corporation. Creating value through our powerful brand, that is as relevant today with Gen Z as it is with our Silver Spenders, a relentless focus on driving our core while also accelerating our high potential category opportunities meaningful geographic white space, which we are developing with a thoughtful approach to our top cities, a proven ability to execute with creativity, agility, and operating discipline. And before I hand it over to Justin, we'd like to extend a warm welcome to our newest board member, Cesar Conde. Cesar brings rich experience from the world of modern media, particularly with international expansion and broadening brand reach to more diverse global audiences. We're excited to have him join us. With that, I'll hand it over to Justin, and I'll join him at the end to answer your questions. Justin Picicci: Thanks, Patrice. And good morning, everyone. This holiday quarter reinforced our strong execution against our Next Great Chapter Drive strategy. Results were ahead of our expectations, with a healthy balance of revenue growth, and accelerated quality of sales to deliver margin expansion ahead of plan. We continued to advance meaningfully on our long-term elevation journey, with double-digit AUR growth on better than expected full price sales. And solid new customer acquisition across all regions. At the same time, we further invested in our key strategic priorities to enable sustainable, longer-term growth and value creation. And we achieved all of this while continuing to strengthen our balance sheet and cash flows. With approximately $650 million in free cash flows, and $500 million in returns to shareholders this year to date. Our performance gives us increased confidence in our trajectory. And as a result, we raised our expectations for fiscal 2026. Reflecting our strong execution through the first three quarters and a modestly improved outlook for the balance of the year. Let me walk you through our financial highlights from the third quarter which, as a reminder, are provided on a constant currency basis. Total company third quarter revenue growth of 10% was above our mid-single-digit outlook, even as we lapped exceptionally strong holiday performance last year. Asia led our performance, increasing 22% followed by North America up 8% and Europe up 4%. Total company retail comps increased 9%, with balanced growth across our own digital business and brick-and-mortar channels. Total digital ecosystem sales, including our own sites and wholesale digital accounts, grew mid-teens reflecting growth across all regions led by Asia. Total company adjusted gross margin expanded 140 basis points to 69.8%. The increase was driven by AUR growth, favorable mix shift, toward our full price businesses, and lower cotton costs. Which more than offset the anticipated increase in US tariffs flowing through the cost of goods sold. Along with higher labor and non-cotton material costs. AUR grew 18% in the third quarter. Well ahead of our plan, and supported by strong full price selling trends and reduced discounting, modest targeted pricing, and favorable channel and product mix. Across all three regions, outsized full price consumer demand early in the season enabled us to pull back even more on planned holiday promotions this quarter. We now expect high single to low double-digit AUR growth in the fourth quarter with the flexibility to further reduce discounting based on selling trends. Adjusted operating expenses grew 9% a 50 basis point decline as a percentage of sales to last year. Reflecting leverage even as we increased marketing investments to support our expanded holiday and localized key city activations. Marketing was 8% of third quarter sales. Compared to 7.1% last year. With revenue growth exceeding our initial expectations for this year, and strong returns on our brand activations, we are taking up our full-year marketing outlook to a range of 7.5% to 8%, in line with our long-term expectations. Our adjusted operating margin expanded 200 basis points to 20.7%. And operating profit increased 21%. Both ahead of plan. Moving to segment performance, and starting with North America, third quarter revenue grew 8%, above our expectations, with strong performance across both our DTC and wholesale businesses. Our direct-to-consumer business increased 7% with significant quality of sales gains across all channels, driven by greater full price selling and lower discounts. In North America retail, third quarter comps were up 7%, led once again by our Ralph Lauren Corporation stores. Digital comps also grew 7%, supported by our full funnel marketing activations, better in-stock positions on key products, and improved site experience. In North America wholesale, revenue increased 11%, driven by stronger than expected reorders, outperformance in digital wholesale and our top premium and luxury doors, and timing of off-price sales. While we remain encouraged by our sellout trends, our outlook continues to assume a decline in fourth quarter North America wholesale revenues. This is primarily driven by a planned strategic reduction in off-price sales, the timing of certain spring shipments out of Q4 and into '7, and our ongoing wholesale door exits and broader consolidation in the channel. Moving to Europe. Third quarter revenue increased 4% in line with our expectations on very strong prior year compares. Representing 20% growth on a two-year stack. By market, our performance was led by Germany, The UK, Italy, and Spain. Strong and sustained brand momentum across the region enabled a further pullback in seasonal promotions versus our initial plans. Driving higher quality of sales in the quarter. This was in contrast to a highly promotional competitive environment across markets. Underlying demand for Europe remained in line with our full-year outlook at the high end of mid-single-digit growth. Europe retail comps were up slightly on top of an outsized 17% increase last year. Healthy comps in our full price Ralph Lauren Corporation stores and digital sites were largely offset by softer outlet trends as we pulled back promotions and lapped the strong double-digit compares from the 2nd Half Of Last Fiscal Year. Our Europe digital ecosystem increased low double digits, led by wholesale digital performance. Europe wholesale increased 8% above our plan. Driven by higher than expected reorders. We still expect Q4 to be the most negatively impacted quarter of the year as we strategically pull forward wholesale receipts earlier in the fiscal year. As previously discussed. Turning to Asia. Quarter revenue increased 22% with retail comp growth up 20%. Our teams delivered growth across every market in the region, reflecting disciplined execution, strong full price demand, and high-impact brand engagement. From our Very Ralph premieres to our Polo Originals and regional holiday activations. Once again, China led our growth, with sales up more than 30% to last year. Driven by comps and new customer recruitment. With strong performance during key events like Golden Week and Singles' Day and continued growth on Douyin. Sales in Japan increased double digits driven by ongoing strength in full price sales, enabling further discount reductions throughout the quarter. Asia digital ecosystem sales increased strong double digits in the third quarter. We continue to expand our presence on Chinese social platforms. As well as scale our own digital sites in China, Japan, and Korea. Moving to the balance sheet. Our strong balance sheet and cash flow generation provide a solid foundation for executing our long-term strategy. Providing flexibility amid uncertainty, enabling continued investment in strategic growth, and delivering value to our shareholders. We ended the period with $2.3 billion in cash and short-term investments. And $1.2 billion in total debt. Third quarter net inventory increased 10% in constant currency, in line with revenue growth. Our inventories remain well-positioned to meet consumer demand as we close out the holiday season and begin transitioning to spring. Looking ahead, our outlook remains based on our best assessment of the current operating environment, geopolitical backdrop, and macroeconomic trends. This includes tariffs and other inflationary pressures, supply chain disruptions, and foreign currency fluctuations, among other considerations. For fiscal 2026, we now expect constant currency revenues to increase high single to low double digits, up from 5% to 7% previously. Foreign currency is still expected to benefit revenue growth by about 200 to 250 basis points this year. With our strong third quarter results, we now expect full-year North America revenues to grow at the high end of mid-single digits. Versus our prior outlook of a slight year-over-year increase. We continue to expect Q4 revenue growth to moderate on a sequential basis, reflecting our planned strategic reductions in off-price wholesale, and later timing of spring receipts. While the consumer has proven more resilient than we initially anticipated this year, we remain somewhat cautious on the North American operating environment. Due in part to further consolidation across the broader wholesale channel including recent developments at Saks. At the same time, we continue to strategically shift our business toward full price DTC. And grow in our top premium and luxury department store doors. Importantly, our net exposure to Saks this year is minimal, reflecting our disciplined and proactive management of the account. We continue to expect Europe to grow at the high end of mid-single digits with the first half of the year benefiting from planned wholesale timing shifts followed by the negative impact of those shifts, along with more challenging compares, the second half. Despite the timing shifts, we still expect healthy underlying growth in Europe, in line with our long-term plan. And we now anticipate Asia to grow mid-teens up from our prior outlook of a high single to low double-digit increase. Now expect full-year operating margin to expand approximately 100 to 140 basis points in constant currency. Compared to our prior guidance of 60 to 80 basis points. Driven by a more balanced contribution of margin expansion and expense leverage. Gross margin now expected to expand about 40 to 80 basis points for the full year. With further growth in AUR and favorable cotton and full price channel mix more than offsetting the expected sequentially increasing pressure from U.S. Tariffs. Foreign currency is anticipated to benefit gross and operating margins by about twenty and fifty basis points, respectively, in fiscal 2026. For the fourth quarter, we expect constant currency revenues to increase approximately mid-single digits. This growth reflects continued strong demand more than offsetting a planned pull forward of receipts to earlier in the fiscal year. As well as a strategic reduction of off-price sales during the quarter. As previously discussed. Foreign currency is expected to benefit revenues by approximately 200 to 300 basis points in the quarter. We continue to expect a decline in fourth-quarter gross and operating margins this year. Due to a combination of higher tariffs, timing of marketing campaigns, including the Olympics and our Milan fashion show, and previously discussed timing shifts. All within one of our smaller revenue quarters with Q4 primarily serving as a transitional period between seasons. We continue to expect tariffs to be a meaningful gross margin headwind through the first half of next fiscal year. Until we begin to lap the higher cost base. Despite the increased near-term input costs, we still expect gross margin expansion in each year of our drive plan. With more meaningful tariff mitigation over time. We expect fourth-quarter operating margin to contract approximately 80 to 120 basis points in constant currency. Largely driven by a similar level of gross margin contraction. Operating expenses expected to be roughly flat to last year as a percentage of sales, due to the timing of marketing investments as planned. Foreign currency is expected to benefit gross and operating margins by about fifty and one hundred basis points, respectively, in the fourth quarter. We expect both our fourth quarter and full-year tax rate to be in the range of 19% to 21%. Our CapEx outlook of approximately 4% to 5% of sales continues to reflect our investments in sustainable long-term growth. And the infrastructure required to support it. This includes investments in digital and AI capabilities, brand-enhancing new stores and renovations, and our multiyear next-generation transformation initiative. Encompassing integrated business planning, enhanced logistics capabilities, and the move to a single globally unified ERP platform. In closing, our strong third-quarter performance underscores the enduring power of our brand, and its deep authentic connection with consumers around the world. Ralph's vision of inspiring the dream of a better life is more relevant than ever resonating across generations and cultures and transcending fashion trends. As we continue to navigate a volatile broader operating environment, with agility, we remain confident in our ability to deliver sustainable long-term growth supported by the strength of our iconic brand and our multiple diversified drivers of growth. Across geographies, categories, and channels. With that, let's open up the call for your questions. Operator: Thank you. Ladies and gentlemen, if you wish to ask a question, you will hear a tone indicating you have been placed in queue. You may remove yourself from the queue at any time by pressing star two. If you are using a speakerphone, please pick up the handset before pressing the numbers. We ask that you limit yourself to one question per caller. Once again, if you have a question, please press star one at this time. The first question comes from Matthew Boss with JPMorgan. Your line is open. Matthew Boss: Thanks and congrats on another nice quarter. Patrice Louvet: Thank you, Matt. Matthew Boss: So Patrice, you cited record levels of new customer acquisition this quarter and continued global brand strength. As you increase the marketing budget, how are you and the team thinking about sustaining longer-term brand momentum? And then Justin, could you elaborate on the drivers of your raised outlook for the fourth quarter? And specifically, trends that you're seeing today on the ground in North America and Europe maybe post-holiday? Patrice Louvet: Alright. Good morning, Matt. Thank you for your question. So you heard us say it before. Ralph is really much more a movie director. Think Martin Scorsese or Steven Spielberg than he is a traditional designer. And he and his talented creative design team invite really people into a cinematic world. Right? It's not just through products like our cashmere sweaters or our polo shirts. But really through cultural moments and experiences that transcend trends. That we attract and retain consumers into our brand. So, yes, we had a great holiday. But we think beyond the moment in time, listen. Whether that's quiet luxury or Ralph Lauren Corporation Christmas or you know, quarter zip sweaters or anything else, we're not reliant on these trends. Now that said, they rarely happen by chance. Right? They reflect the work our teams deliver to weave our brand into the fabric of culture around the world. Ultimately, we've transformed our approach to marketing over the past few years. Now it's always on, in our key cities with a rolling thunder of activations. So moving past this holiday, you can see it now. Right? We just finished our Milan's fashion show men's fashion show with very strong feedback. I'd say even well beyond our expectations. Tomorrow, we have our biggest fashion show, which is the opening ceremony of the Winter Olympic Games. Expected to be viewed by more than 2 billion people. And then next Tuesday, we have our women's collection show here in New York, and that's just part of that drumbeat of marketing activations. And we have stronger confidence than ever in our marketing ROI. Which has enabled us to take up our main investments meaningfully over many years and even this quarter relative to last year as you just heard Justin mention. So listen. The results are clear. They're healthy. They're durable. And we're fundamentally shifting our consumer base toward a higher value consumer over time think more full price, skewing younger, and more women. Now this isn't just about marketing. Alright? Our consumers stay with us because we're consistently delivering what only Ralph Lauren Corporation can. The cinematic storytelling that we pair AI-powered insights, a broad, timeless, product portfolio offering superior value, and our elevated go-to-market experiences across both digital and brick-and-mortar. And it's the consistent execution across all aspects of our business, that has led to 50% of our customers staying with us over ten years and 25% for over twenty years. So together, this is what's reinforcing our luxury equity. And our value proposition. And it's reflected in the way our brand is resonating broadly across generations across geographies, channels, and cultures. Not just today or for a trend cycle, but for a lifetime. Justin Picicci: And then on the outlook for Q4 we saw continued broad-based global momentum across regions and channels beyond our brand and our business through and coming out of holiday. So we took up our Q4 outlook based on this continued momentum, notably in North America, where despite a pretty volatile choppy operating environment, continue to drive solid, high-quality, balanced growth across channels this past quarter. Asia also, really strong momentum behind our businesses across markets. In that region. Now we do expect some moderation in Q4 growth versus we're coming off of, and that's driven by, the timing of wholesale receipts and in North America and Europe and a strategic reduction of sales in the off-price channel, as I mentioned in my prepared remarks. But underlying demand remains healthy. And our core consumer continues to be resilient. And we expect a healthy, solid underlying growth trend for Q4 as reflected in that mid-single-digit guide and as we head into the spring selling season in earnest. Operator: Thank you. Next question, please. Thank you. Our next question comes from Jay Sole with UBS. Your line is open. Jay Sole: Justin, your 18 AUR growth this quarter was well ahead of your guidance of up high single digits. Could you just walk us through the drivers of your AUR increase? You starting to see any price resistance from consumers at these levels? And also, you could describe where the company is in terms of full price selling today and maybe what the ultimate opportunity is long term? Thank you. Justin Picicci: Sure. Good morning, Jay. Thanks for the question. So look, we're really encouraged by the consistency of our execution and the results we've been delivering over really an extended period of time under this Next Great Chapter strategy. AUR growth is one important output of that long-term brand elevation strategy. So it's not the only driver of our revenue growth. That we talked before. Our growth will continue to be driven by a combination of new customer acquisitions, Patrice just talked, targeted unit growth, and AUR expansion. And specifically on AUR, this quarter builds on more than eight years of consistent AUR growth. Right? And our drivers remain durable, and we still have meaningful runway ahead of us in each of our regions. And these drivers include our investments in brand elevation and marketing to support full price customer acquisition and retention, favorable geo and channel mix with Asia and full price DTC continuing to lead our growth. An increasingly elevated product mix, and we enhance, you know, our offering. We scale our potential categories. Reduced promotional activity as we leverage analytics to be more precise in our offers. And targeted pricing. Focused on delivering really compelling customer value. Now this fiscal year, strong full price demand enabled us to pull back on promos even more than we initially planned. Across all regions, including in the third quarter. And that reduction in discounting, that was the primary driver of that AUR growth coming in at high teens for the quarter ahead of the original expectation of up high single digits. You know, all of our other durable AUR drivers, they contributed about equally, I would say, to our growth. And importantly, we experienced price resistance from our core customers. So we continue to monitor our value proposition very, very closely. And our value perception and NPS scores have both progressively increased over time in tandem with AUR. And we're encouraged by the solid comp growth we're delivering and the share gains we're seeing across markets alongside this AUR expansion. Our focus remains on driving sustainable top-line growth while continuing to strengthen our quality of sales. It's very much an end for us. It's not an either or an or. It's all part of our longer-term plan to continue to elevate our brand, and invest in our future all while delivering healthy growth and margin expansion. And on the full price business point, full price continues to lead our business performance, and that's true really across markets, across channels, across product categories. When you think about the share of our customer base, you know, as we add more and more new consumers to And you heard Patrice talk about the 2.1 million this quarter. They're more and more skewing towards full price. So that percentage of our total customer base continues to increase over time. And you see that, not only in the customer info, but in our KPIs and our quality of sales metrics. Operator: Thank you, Julie. Next question, please. Laurent Vasilescu: Thank you. Our next question comes from Laurent Vasilescu with BNP Paribas. Your line is open. Laurent Vasilescu: I wanted to ask about Europe. Justin, I think you called out better performance from full price stores versus outlets. As the offset. Can you maybe quantify the spread for the audience to get to the comp? And then bigger picture for the year, I think you called out Europe is guided to be up high end of mid singles. Just wanna confirm that for the audience that's on a CC basis. And if so, that implies Europe could be flattish for 4Q. So I'm just curious to know if that's driven by conservatism or Patrice, is there anything that you wanna call out for the audience on what you're seeing in Europe for this quarter? Thank you very much. Thanks, Bhavan. Justin Picicci: So our underlying growth in Europe seems to be healthy and strong. That's what we've been delivering from the region for the past several years. In both Q3 and fiscal 'twenty-six, our call for fiscal twenty-six, they're coming in where we expected them. Right, with that full-year outlook up at the high end of mid-single digits in line with our plan and longer-term growth outlook for Europe. We're happy with the underlying growth that we're seeing in Europe. But overall, if you look at it, from a long-term basis, we've been pretty consistent in delivering solid, high-quality growth, especially if you normalize out some of the one-time things like COVID and timing shifts. Our strategy is working, and it's a great example of elevated execution and brand positioning across all channels throughout the region, strong high-quality partnerships, solid new customer acquisition. Point, Laurent, the full price business is leading our growth. That continues to be a trend, which in Q3, it provided us with really the strategic opportunity to lean a bit more into enhancing our quality of sales. Pull back on discounts, still deliver comp growth, you see come through those quality of sales in the AUR. The gross margins. And we still delivered comp growth despite being up versus a very strong baseline in the prior. Right? We're up mid-teen high teens in the prior year. Right? This was really also an investment to drive durable growth beyond this quarter. So, you know, there's been a little noise. Timing shifts have been a bit more challenging to get a beat on the underlying from quarter to quarter. And that's why we specifically provided that full-year trend in our latest guide. Continues to be steady, healthy, high-quality top-line growth in that mid-single-digit range, which we feel really good about. We still feel like that's the right normalized level of growth looking ahead. We're well on track to deliver that. And for Q4, you know, I would say our outlook for Europe is slightly up. But, again, the underlying growth trend bit more normalized in that mid-single-digit range because you do have some of those timing shifts that are pressuring that top-line trend. Patrice Louvet: Yeah. I would add, Laurent. I mean, Justin's right. There's noise in the numbers because of time year out. But a few things to call out. First of all, core consumer is resilient. Continues to be healthy and resilient. Across the European market. And we saw particular strength this time in Germany and UK, our largest markets, but also good strength in Southern Europe as well. Second piece is the brand momentum continues to be strong. And we see that across the key metrics, whether that's NPS, whether that's how we're continuing to bring in new consumers into the company and into the brand over the quarter, And then third, just reiterating Justin's point, we were very choiceful in terms of interventions for Europe in Q3. We felt really good about the progress in our full price stores. We have very strong digital performance that quarter. We have very healthy wholesale performance, and that allowed us to pull back on our promotional activity activities further than expected in Aldis very deliberately because, listen, we're playing the long game. Right? And to Jay's earlier question on full price selling and others, that's where we're moving towards. Right? And so when we see opportunities pull back on promotional activity, we will take advantage of it. In the context of a business that is quite healthy, that we're very excited about, and it's got good momentum. Operator: Thank you. Next question. Thank you. Our next question comes from Michael Binetti with Evercore ISI. Your line is open. Michael Binetti: Hey, guys. Thanks for taking our question here. I wanted maybe follow that a little bit. Justin, it sounds like in Europe, the decision was made in the outlets to pull back a little bit. I think you said there was an investment to drive durable growth going forward after this quarter. Can we interpret that to mean that the intervention in the outlets in Europe was F3Q only? Or does that do you think that want to keep doing that in the fourth quarter? Or is that do you think that starts to improve? And then I guess backing up a little bit, the total company operating margin is really strong here, and that was despite your dropping a little bit. I was surprised to see Europe segment margins down a bit given the explanation. That we pulled back on promotions in the outlets. Can you just help us understand the Europe margin a little better and if you expect that to remain a headwind for a few quarters? Or how will that roll forward? Justin Picicci: Sure, Michael. Thanks for the questions. On the last part first, Europe, we increased our marketing investment in Europe. In the quarter, so that's what's pressuring the bottom line. And, again, that's been a focus of ours. We've seen really strong, healthy returns out of our marketing. We've talked about how we've been picking up the rate at Investor Day. We talked about the seven and a half to eight and a half trend. We took up our marketing rate guide for this year to that 7.5 to 8 range. Seeing really nice returns again, not just short term, but both short and longer-term returns. So that's what you're seeing pressure the margin. In terms of sort of the way to think about the quality of sales investments, in Europe, and, really, this applies beyond Europe. Right? This is sort of our brand elevation strategy philosophy. You know? On a continuous elevation journey. Right? Our focus remains on driving sustainable top-line growth while continuing to strengthen our quality of sales. And you think about sort of the strong full price selling that we saw in Q3, it gave us that strategic choice to lean in more right, notably in the outlet channel and all over the world. Right, not just in one region. So know, when you think about going forward, we're gonna continue the right things for the health of our long-term brand of business while delivering, or in this case, overdelivering, on our results in the short term. We've got many quality of sales levers to lean into. One of them is, obviously, refining our promotions and discounts. And as we get sharper with our customer information and segmentation, our analytics, we could be more precise and targeted one to one with that communication, you're gonna see us continue to refine our discounts and our promotions across all of our regions as we move forward. And there's runway for that refinement in all regions, not only North America, but in all regions to some extent. Patrice Louvet: And if I could just provide a little more color, Michael, on Justin's comment relative to increased marketing in Europe, which we're very excited to do. Europe has a number of key cities that are not fully activated from a market standpoint. And the work we're doing with our teams on the ground is to expand our activation across cities. So that's where that incremental marketing is going. We're seeing really good returns. So we expect to continue to drive that as our team executes with excellence on the ground, but, of course, in the context of the broader financial targets that we want to deliver. Operator: Next question, please. Thank you. Our next question comes from Adrienne Yeh with Barclays. Your line is open. Adrienne Yeh: Good morning, and let me add my congratulations very nicely. Nice into the quarter, the holiday, I see it quarter. My question is on the Ask Ralph, the implementation of AgenTik AI. What have you learned kind of the early learnings in this is the first holiday that we've really seen that really come to the forefront. Learn from this holiday, and how quickly can you deploy those changes? And then, Justin, can you talk about whether the benefit to cotton and possibly freight perhaps in the quarter as input costs are contemplated obviously in the fourth quarter, but how should think about that going into the early part of fiscal 'twenty-seven? Thank you very much. Patrice Louvet: Thank you for your questions. Listen. We were pleased to be a leader in this space with the launch of Asprov, the AI guy, Asprov. It's early days, but we have very encouraging early readings, and we're deriving learnings on how consumers interact with natural language search. Right? This is a meaningful change. And, also, this provides us with incredible access to high-quality first-party data, right, which is ultimately the gold when it comes to marketing moving forward. So we're seeing consumers engage across many different fronts and questions. As they're looking for advice on how to style themselves for different occasions, for different weathers, and so on. We're going to expand and add new features right now, you will have noticed we don't have our full brand portfolio on it yet. We're going to be adding that shortly. We're also looking further integrated into our overall digital ecosystem. Right now, it's only available on the app. The US. You're gonna see us expand that. We're also gonna integrate voice. And filing based on images provided by users, which we don't have yet. So it's an incredible platform as a starting point with, right now, I would say, a learning experimentation phase that's very promising. And this is a space where we wanna continue to lead. And to some extent, if you fast forward think this is the precursor of our consumer agent. Mean, today, it's primarily a styling agent. But I think as you evolve and look ahead, you can see how Ashcroft can become really the consumer agent for the customer base that we engage with. And then, obviously, in parallel, right, there's also this whole development in the area of agenetic shopping and we're tapped into that and learning about that as well to make sure that we are set up to meet the consumer where they wanna engage with us and how they wanna shop with us. Justin Picicci: And on the margin question, so taking a step back for Q3, our biggest driver for gross margin was indeed our AUR increase driven by that promo pullback. But we did see favorable cotton tailwinds and favorable freight modestly in the quarter that benefited our gross margin. Now on the cotton side, we're still tracking to deliver that 175 bps benefit that we've called out over the two-year period, fiscal twenty-five and twenty-six. You are seeing that impact moderate as we move through fiscal twenty-six as we expected. On the freight side, a little bit of favorability in the quarter, but for the fiscal, which would be roughly neutral. I think as you think about those two input costs, you know, I think looking forward, I think, you know, we're expecting a relatively neutral outlook. Operator: Next question, please. Thank you. Our next question comes from Blake Anderson with Jefferies LLC. Your line is open. Blake Anderson: Hi, guys. Congrats on the nice holiday. Wanted to ask on Q4 as well, just kind of on the margin outlook there. So I know you said the contraction on the operating margin side is mainly tariffs. I think gross margin. You just mentioned cost inflation. Just curious why you wouldn't be able to offset that with the continued AUR growth for Q4? Any other conservatism or factors we should be considering? And then as we as you think about, the ability to mitigate tariffs, next year, I think you said you're looking to be able to do that. Do we think about mitigating those tariffs in the '4 outlook from our original implied guidance. Justin Picicci: And, you know, while tariffs have remained largely unchanged, we've been able to mitigate the related cost inflation better than we expected. And we obviously exceeded our expectation in Q3 with that higher price selling and AUR outperformance, which drove our gross margin beat and more than offset the tower flow through the cost of goods sold, which ramped up in the third quarter as we anticipated. We still expect Q4 to be the most impacted quarter this fiscal year, in terms of year-over-year gross margin pressure, and that's consistent with our plan case. Right? It's a combination of the reciprocal tariffs, and the timing shifts we made to accelerate receipts earlier in the fiscal year during the pause periods and this in one of our smaller sort of revenue quarters of the year, the transitional quarter between seasons. And as I mentioned, the benefit from cotton cost also moderates and it's worth noting we are up against a very, very strong gross margin baseline in Q4 of last year. But even with that year one tariff pressure, right, we're now expecting 40 to 80 bps of gross margin expansion this fiscal year. And we've also taken up our Q4 AUR guide to the high single to low double-digit range. Beyond this fiscal year, we still expect to expand gross margin and mitigate the cost inflation. And you'll start to see our broader mitigating actions take shape country of origin shifts, optimization, merchandising actions, You'll start to see those all come into play as we move through fiscal twenty-seven. Operator: Thank you. Next question, please. Thank you. Our next question comes from Ike Boruchow with Wells Fargo. Your line is open. Ike Boruchow: Justin. I just wanted to quickly clarify based on the margin guide for Q4. Are you essentially SG and A flat, so grosses or effectively flat, up 20% to down 20%? Just let me know if I'm looking at that right. And then you mentioned headwinds to start next year, but up for the annual as you commented relative to your algo. Are there any quarters where grosses should be negative? I'm just kind of curious the magnitude of the margin pressure from tariffs in the first half, if it's large enough to actually put, to plan the gross margins, down to start in the first half before inflecting? Thanks. Justin Picicci: Yeah. So when you think about Q4, really, what you're seeing there is you're seeing from a gross margin perspective, you're seeing the pressure from what I've already just outlined, sort of the peak tariffs in this transitional quarter and the timing of some of the receipt flow through. That's really the pressure there. And we always expect that to be the most pressured quarter for this fiscal year. I think as we move forward, you think about sort of the tariff sort of ramp up and ramp down period, you know, we know we do start to lap that higher cost base. We get into sort of the, you know, mid fiscal '27. That being said, you know, it's fair to say that Q4 is really where we expect the peak pressure. And you can see sort of that pressure come through in the gross margin, which is pressuring the bottom line. As well. Still feel really good about the year we're delivering, both on the top and bottom line. Obviously, we just raised both our outlooks. Operator: Thank you. Next question. Justin Picicci: Thank you. Operator: Our final question comes from Brooke Roach with Goldman Sachs. Your line is open. Brooke Roach: Good morning, Patrice and Justin. Thank you for taking our question. With your updated operating margin guidance for fiscal twenty-six of 100 to 140 basis points, you're quickly achieving your twenty-eight Investor Day targeted operating margin expansion. Do you see further operating margin expansion opportunity for the balance of the plan? And if so, can you outline the opportunity and the core drivers that we should be considering? Justin Picicci: Thanks very much, Brooke. Listen, we feel really good about how we're tracking to deliver year one of the long-range plan that we shared back in September. At our Investor Day. Our three-year plan is off to a strong start. And, you know, we're not guiding beyond Q4 of this fiscal year today. But we feel good about the broad-based momentum and the strength behind our brand and our business around the world. It's the healthy, sustainable growth that we see across markets, categories, channels. I think that we do expect to continue to balance margin expansion with making strategic investments to drive longer-term growth in each year of our three-year long-term plan. Beyond year one. Right? Our lens is long-term. And we're building for the long term. And we wanna deliver attractive, consistent performance on the top and bottom line. Our approach outlined at our September Investor Day has not changed. And more to come again when we chat in May. Patrice Louvet: Alright. Very good. Well, thank you all for your questions. Thank you for joining today. And we look forward to reconnecting now late May to share our fourth quarter and fiscal year-end results. We're really pleased with where we are three quarters in. Look forward to engaging with you at the end of next quarter. Until then, take care, and have a great day. Operator: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may disconnect now.
Operator: Thank you for your continued patience. Your meeting will begin shortly. A member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. Please standby. Your meeting is about to begin. Thank you for standing by, and welcome to NetScout Systems, Inc. Third Quarter Fiscal Year 2026 Financial Results Conference Call. At this time, all parties are in a listen-only mode. A question and answer session will follow the management team's prepared remarks. As a reminder, this call is being recorded. If you require operator assistance at any time, please press 0. I would now like to turn the call over to Scott Dressel, NetScout's VP of Corporate Finance. Scott, please go ahead. Scott Dressel: Thank you, operator, and good morning, everyone. Welcome to NetScout Systems, Inc.'s third quarter fiscal year 2026 Conference Call for the period ended December 31, 2025. Joining me today are Anil Singhal, NetScout's President and Chief Executive Officer, and Tony Piazza, NetScout's Executive Vice President and Chief Financial Officer. Please note that a slide presentation accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www.netscout.com, including the IR landing page and the quarterly results page. As discussed in detail on slide number three, today's conference call will include certain forward-looking statements about NetScout Systems, Inc.'s views on expected results of future performance and business strategy. These statements speak only as of today's date and involve risks, uncertainties, and assumptions that may cause actual results to differ materially, including, but not limited to, those described in the company's most recent annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission. As discussed in detail on slide number four, today's conference call will also include discussion of certain non-GAAP financial measures that the company believes to be useful for investors. While the slide presentation includes both GAAP and non-GAAP results, other than revenue and balance sheet information, which are presented in accordance with GAAP, we will focus our discussion on non-GAAP financial information. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations of all non-GAAP metrics to the nearest GAAP measures are provided in the appendix of the slide presentation, in today's financial results press release, and on our website. I will now turn the call over to Anil for his prepared remarks. Anil? Anil Singhal: Thank you, Scott, and good morning, everyone. Thank you for joining us today. Our third quarter fiscal year 2026 revenue and earnings results were ahead of expectations. These results were enhanced by certain product orders and service renewals that had been anticipated for the fourth quarter as customers used their remaining calendar year budgets. Year-end budget acceleration supported solid year-over-year results for the first nine months of our fiscal year, driven by growth across both our cybersecurity and service assurance offerings. Given our year-to-date performance, including the acceleration of certain orders, and our current pipeline, we are raising the midpoint of our top and bottom line outlook for fiscal year 2026. Let's turn to slide number six for a brief recap of our financial performance for the third quarter and the first nine months of fiscal year 2026. For the third quarter, total revenue was approximately $200.151 million, ahead of expectations and in line with the same period last fiscal year. Diluted earnings per share totaled $1, an increase of approximately 6% year over year. For the first nine months ended December 31, 2025, revenue was approximately $656 million, an increase of approximately 6% year over year, driven by solid growth in both our cybersecurity and service assurance offerings, which included the previously mentioned acceleration of certain logs. We expanded both our gross and operating margins during the first nine months of the fiscal year and delivered diluted earnings per share of $1.96, up approximately 15% from $1.70 for the year-ago period. Now let's turn to slide number seven for some perspective on our business and some market insights. Starting with our service assurance offering, revenue in the first nine months of the fiscal year increased approximately 5% year over year, driven by growth in the enterprise customer vertical, with strong contribution from both federal and non-federal government-related spending. Within our service assurance offerings, our enterprise customers continue to advance their digital information initiatives focused on AI, advancement, and observability at the edge. And we continue to innovate in those areas. Our recently released Omnice AI Center and AI Streamer work together as an AI ops solution to analyze, convert, and stream high-fidelity network packet data into actionable intelligence. It captures traffic across complex environments while the streamer processes this data for real-time visibility. The result is reduced risk and faster troubleshooting for IT and security systems. In January, the upcoming launch of the Ingenious Edge Sensor 795, which uses patented ASI technology and synthetic test analysis to generate the net for smart data that enables continuous observability across modern enterprise environments. This launch reflects the expansion of our capabilities with remote site observability, next-generation Wi-Fi, and digital experience mapping with expanded healthcare support and digital experience monitoring. Among our service provider customers in the service assurance area, we continue to see measured investment in 5G-related initiatives as they balance that investment with monetization opportunities. As we have discussed in the past, some of the newer opportunities related to fixed wireless and the potential for 5G network slicing could potentially be real revenue drivers and cost savers for communication service providers. Network slicing services are scaling rapidly as 5G standalone adoption starts to accelerate, and we believe NetScout Systems, Inc. is well-positioned to support this advancement. In January, we announced how NetScout Systems, Inc.'s 5G observability solutions give communication service providers end-to-end visibility into 5G standalone network slices that support high-performance services like immersive gaming, large-scale live sporting events, and mission-critical applications like remote surgery. Moving to our cybersecurity offering, revenue in the first nine months of the fiscal year increased 9% year over year, driven by growth in both our enterprise and service provider customer verticals. Organizations continue to invest in this area in response to a dynamic and complex cyber threat landscape, which, as we discussed last quarter, is explained in our latest on evolving distributed denial of service attack landscape and how these attacks can destabilize critical infrastructure. This threat landscape continues to evolve rapidly, and we believe our adaptive DDoS and Omnicex Cyber Intelligence solutions are well-suited to the growing security needs of our customers. In fact, in December, NetScout Systems, Inc.'s Omnice Cyber Intelligence with Omni Cyber Stream was named a 2025 cybersecurity award winner by Security Today in the network security category. This recognition reflects the platform's strong market relevance and advanced capabilities such as scalable deep packet inspection, real-time and historical analytics, and seamless integration to help security teams detect, investigate, and respond to digital threats. Additionally, in January, Frost and Sullivan named NetScout Systems, Inc. in its 2025 Global Company of the Year in the global network monitoring industry. Recognition of our outstanding achievements in real-time visibility, performance assurance, and cyber-resilient network intelligence. The award cited NetScout Systems, Inc.'s leadership in delivering measurable results as well as our record of innovations across complex, hybrid cloud, and enterprise environments. We are honored by these and look forward to showcasing network innovative solutions at upcoming industry events, including Mobile World Conference in early March and RSA Conference later that month. Moving on to customer wins, our service assurance and cybersecurity solutions continue to gain traction with customers seeking to enhance their visibility, observability, AI, and cybersecurity capabilities. A few highlights for the third quarter include a mid-7 figure order into our service assurance area from a new customer within the insurance industry. This customer engaged with us after their previous provider fell short in delivering a comprehensive, scalable visibility solution as the customer's needs expanded to include greater cloud and AI functionality. They also sought to consolidate multiple tools in favor of a single simplified platform. Overall, this engagement reflects a broader market trend. Organizations are prioritizing unified solutions built on high-quality data over fragmented tools that lack adaptability and scalability. Another service assurance win in the third quarter was a low 7-figure deal with an existing customer that is a large electric utility. They are focused on capacity expansion and using AI to improve safety and better monitor infrastructure health. This order included our AI streamer, which transforms high-fidelity packet-derived metadata into actionable intelligence. Customers are increasingly turning to NetScout Systems, Inc. to support their AI initiatives, recognizing that our high-quality smart data is an important component for successful AI and machine learning outcomes. In the cybersecurity area, we continue to see positive momentum. For example, we secured two additional mid to high 7-figure deals in Europe with existing customers. One is using our Omnice Cyber Intelligence for forensic analysis, regulatory compliance, and threat analysis, along with our adaptive DDoS products to upgrade and expand their DDoS protection. The second is upgrading to our adaptive DDoS for its advanced capability, performance, and reporting features. In all, these developments reflect our success in executing our long-term growth strategy as well as our strong position in the industry. With that, let's move to slide number eight to review our outlook. Looking ahead to the final quarter of our fiscal year, we remain focused on execution as we pursue our key objectives of delivering product innovation, achieving a return to annual revenue growth, and enhancing our margins through disciplined cost management. We continue to successfully navigate a complex and dynamic macroenvironment, including tariff-related and AI-driven supply chain dynamics. Our software-driven model helps insulate us from some of that variability, though it could influence the timing and size of certain customer orders. That said, based on our performance over the first nine months and the strength of our pipeline, we are raising the midpoint of our top and bottom line outlook for fiscal year 2026 while staying mindful of these external factors. Tony will provide more details on our outlook in his remarks. As always, we remain committed to helping customers meet the performance, availability, and security demands of today's digital landscape by leveraging the power of NetScout Systems, Inc.'s AI-ready data platform. We look forward to sharing our progress with you after we complete the final quarter of our fiscal year. With that, I will turn the call over to Tony. Tony Piazza: Thank you, Anil, and good morning, everyone. Thank you for joining us. I'll start by walking you through the key financial metrics for both the third quarter and the first nine months of our fiscal year 2026. After that, I'll share some additional commentary on our outlook for the full fiscal year. As a reminder, other than revenue and balance sheet information, are on a GAAP basis, this review focuses on our non-GAAP results. All reconciliations with our GAAP results appear in the presentation appendix. I will note the nature of any such comparisons accordingly. Also, all comparisons are on a year-over-year basis unless otherwise noted. Slide number 10 details the results for the third quarter and first nine months of our fiscal year 2026. Focusing on the quarterly performance, total revenue for the third quarter was $250.7 million, which was relatively consistent with the same period last year at $152 million and ahead of our outlook provided last quarter. This outcome reflects the impact of timing-related shifts in customer purchasing behavior. As we noted last quarter, we had originally expected certain orders to land in the third quarter. However, a number of those were received earlier than anticipated in the second quarter. Similarly, in Q3, we observed some orders that we expected for Q4 being pulled forward as customers leveraged their remaining calendar year-end budgets. In some cases, this included service contract renewals, including backdated maintenance components. While this dynamic provides short-term support to revenue this quarter, it's important to note that it can also create unevenness across reporting periods. We monitor and manage such changes closely, and we remain guardedly optimistic given the dynamic macro environment and the potential for variability in buying patterns as customers continue to manage their budgets conservatively. Product revenue totaled $121.7 million, compared with $128.2 million last year, primarily due to the timing of certain orders between quarters. Service revenue increased 4.1% to $129 million, reflecting both underlying growth and favorable timing of service renewal orders, some of which included backdated maintenance components as well as treatment of certain enterprise license agreements. Gross profit margin was 82.8% in the third quarter, consistent with the same period in the prior year. Quarterly operating expenses decreased 1.1% year over year to $117.6 million. The decrease reflects the previously disclosed benefit associated with shifting our annual Engage User and Technology Summit out of the third quarter, where it occurred last year, to our second quarter in this fiscal year. This benefit was partially offset by an increase in employee-related costs. Our operating margin increased to 35.9% compared to 35.6% in the same period last year. We delivered diluted earnings per share of $1, an increase of 6.4% year over year. This improvement reflects, in part, the absence of a negative impact in the prior year period related to a foreign investment that we sold earlier in this fiscal year. This created a favorable year-over-year comparison for the third quarter, but the impact is not expected to have a material effect on our full-year results. Let's turn to slide 11, where I'll walk you through the key revenue trends by product lines and customer verticals. As a reminder, revenue presented is on a GAAP basis, and all comparisons continue to be on a year-over-year basis. For the first nine months of fiscal year 2026, service assurance revenue increased by 4.8%, and cybersecurity revenue grew by 9%. During the same period, our service assurance product line accounted for approximately 64% of our total revenue, and our cybersecurity product line accounted for the remaining 36%. Turning to our customer verticals, for the first nine months of fiscal year 2026, our enterprise customer vertical revenue grew 9.4%, while our service provider customer vertical revenue grew 2.2%. During the same period, our enterprise customer vertical accounted for approximately 58% of our total revenue, while our service provider customer vertical accounted for the remaining 42%. Additionally, one customer and one channel partner each accounted for approximately 10% of our total revenue during the third quarter, with no customer accounting for more than 10% of our revenue for the first nine months of the fiscal year. Turning to slide 12, this shows our revenue mix between the US and international markets. For the first nine months of fiscal year 2026, the US represented 57% of revenue, and international represented 43%. Slide 13 shows some key balance sheet items along with our free cash flow for the period. We ended the third quarter of 2026 with $586.2 million in cash, cash equivalents, short and long-term marketable securities, and investments, representing an increase of $93.7 million since the end of fiscal year 2025. Free cash flow for the quarter was $59.4 million. From a debt perspective, we had no outstanding balance on our $600 million revolving credit facility, which expires in October 2029. We currently have capacity under our share repurchase authorization and, subject to market conditions, intend to be active in the market during the remainder of fiscal year 2026 and into fiscal year 2027. To briefly recap other balance sheet items, accounts receivable net was $234.6 million, representing an increase of $70.9 million since March 31, 2025. Days sales outstanding at the end of the third quarter of 2026 was 82 days compared with 75 days in the same period in the prior year. The change in DSO in the third quarter reflects the timing and composition of bookings. Let's move to slide 14 for our outlook. I will focus my remarks on our revenue and non-GAAP earnings per share targets for fiscal year 2026. We are raising the midpoint of our fiscal year 2026 top and bottom line outlook ranges. This outlook reflects our solid execution, the continued demand for our solutions, and the resilience of our business model. Revenue is now expected to be in the range of $835 million to $870 million, representing a 3.6% year-over-year growth at the midpoint. Although we are not guiding to a specific number within the range, to provide a little color, performance around the midpoint reflects our current directional view based on what we've noted today, while the broader range captures the timing-related factors Anil mentioned earlier. This compares to our prior outlook of $830 million to $870 million. Non-GAAP earnings per diluted share is now expected to be within the range of $2.37 to $2.45 compared to the previous range of $2.35 to $2.45. A reconciliation between our GAAP and non-GAAP numbers is included in our earnings release. The full-year effective tax rate is to remain at approximately 20%, and we are assuming approximately 73 to 74 million weighted average diluted shares outstanding, reflecting our repurchase activities for the first nine months of the fiscal year. That concludes my formal review of our financial results. Before we transition to Q&A, please note that we will be on the road over the coming months meeting with investors and look forward to continuing our dialogue. With that, let's open it up for questions. Anil Singhal: Operator? Operator: Thank you. At this time, if you would like to ask a question, please press 1 on your telephone keypad. If you wish to remove yourself from the queue, press 2. In the interest of time, we ask that you limit yourself to one question and one follow-up. Our first question is from Simran Biswal with RBC Capital Markets. Your line is open. Simran Biswal: Hey, guys. This is Simran on for Matt Hedberg. Thanks for taking our questions, and congrats on the quarter. I guess to start, so can I Q3 performance was good relative to expectations, realizing that the quarter benefited from some deal pull-in? And it sounds like you guys are seeing healthy demand trends, but can you comment on if some of those demand signals are actually improving? Anil Singhal: Well, we talked about the demand being similar or improving. But we also are cautious about some of the supply chain challenges which could delay the timing of the orders because even though we are a software company, they have to run our software on servers. And if there are delays in procuring the servers, which we don't control, then that could delay the software procurement process also. But in terms of demand for both our current solution and future offering and interest in AI-based solutions, user for data for those use cases, I think it's equal or better than versus maybe six months ago. Tony Piazza: Yeah. I would just comment that it's really about timing versus demand because demand remains strong. We have a robust pipeline. And so we've benefited from acceleration, and it's just a matter of timing in some of these deals given the dynamic environment and some of the factors that Anil had mentioned. Operator: Okay. Got it. That makes sense. And then as a follow-up, could you quantify the pull-ins this quarter? And does your Q4 guide assume any additional deal pull-ins? Tony Piazza: So the pull-ins were, say, approximately $15 million. A combination of product revenue and service revenue would impact both. And right now, what we've given that range, timing, again, is really the factor, and although we're not guiding to a particular number, what we see right now is something around the midpoint, and so it doesn't factor in a lot of pull-ins or anything at this point. Operator: Okay. Great. Thanks, guys. We'll take our next question from Erik Suppiger with B. Riley Securities. Your line is open. Erik Suppiger: Yes. Thanks for taking the question. Congrats on a solid quarter. Thank you. First off, can you walk through just how the budgets work where customers were pulling orders from the March quarter into December because I don't typically think of pulling budgets from one calendar year into another calendar year the way they do maybe from Q4 of the calendar year into Q3. But then secondly, can you talk a little bit about the use case that is driving the service assurance business? It seems like your enterprise business was strong. And could you just provide some detail about what kind of maybe AI use cases are driving the service assurance uptick that you saw? Anil Singhal: Good. Thanks, Erik. So I think, first of all, it's always interesting because many of our customers are not on the same fiscal year as we are. And that has left our budget for them even though it's a quarter three for us, it's a quarter four for them. And sometimes, it takes time for the budget to set in in the new fiscal year. So if they have a demand and they want to use up all the budget they can. And that's what happens typically all the time. This time, we saw even in Q2, because of the federal fiscal year ends at that time. Now coming back to service assurance, at some point, we might start separating some of the revenue, but it's too small right now. But if you look at there are two use cases of our data in the service assurance market. One is the traditional service triage. Somebody says, you know, I have an IT issue and why don't you use NetScout Systems, Inc.'s product to troubleshoot? And so our smart data, which is our differentiator, we have over 100 patents in that area, which converts in real-time packet data or conversation data to telemetry that was not benefiting the use case outside of our own applications because they didn't have the ability to consume that. And in the future, even agentic AI can take advantage of that. So AI use cases simply mean that you can use the slightly enhanced data which is used only by our own application in service assurance, can now be mixed with other use cases for companies like Splunk or, as I mentioned, the Genetic AI. And so now IT people and other businesses can use it for similar data for other purposes. And that's our AI use case. So now we are not just limited to the use case of the application NetScout Systems, Inc. had developed, which is the ingenious one, but can also be used for AI-related use cases, which is a big variety of those. Erik Suppiger: Can you quick comment on how much that was a contributor in the quarter? Anil Singhal: I don't know in the quarter, but maybe for the nine months, it was about $15 million. Yeah. Erik Suppiger: Very good. Thank you. Anil Singhal: Yep. Operator: We'll take our next question from Kevin Liu with K. Liu and Company. Your line is open. Kevin Liu: Hi, good morning, guys, and let me add my congrats as well here. Maybe starting with your service provider business. Obviously, there are various competitive dynamics, and they're all kind of impacting both wireless folks and the traditional cable on the so a little differently. So just wondering, you know, what you're seeing in terms of kind of their appetite to spend, whether there's any sort of difference between kind of the two sides of the coin there. Anil Singhal: Alright. So there is no they may have their own competitive dynamic between the carriers. There is no dynamic versus NetScout Systems, Inc. I mean, most of the players are privatized companies. They're much smaller than us, and in some sense, they're struggling for budgets and things like that. Yeah. We do have price pressures from them. And so when there is RFP, we have to deal with the next best player. And, usually, the competition is pricing, which sometimes affects our deal size. What is happening on the service provider side is, especially in the US, there have been big layoffs. And at some of the many companies, and despite some of the monetization opportunities of 5G slicing, there's constant pressure certainly in the service assurance area. But we are hoping there'll be less pressure even for these people in the cybersecurity and AI area. But our AI initiative is in its very early stage. So we think that the service assurance portion of the service provider will continue to be challenging next year also. But it'll be more than made up by good or better environment in DDoS. And definitely in the new areas of AI is all upside. Kevin Liu: Understood. Appreciate the color there. And just wanted to parse out, you know, some of the impacts to you guys on the supply chain, specifically around component costs and availability. I know you guys ship more of it software only nowadays, but just wondering, you know, how you're feeling about your ability to maintain kind of your product gross margins given the cost environment. And then to your point on the kind of shortages potentially impacting timing, are your customers starting to order product from you with longer lead times and you'll you guys will carry more backlog? Or how are they responding to kind of the current shortages? Anil Singhal: So lead time for NetScout Systems, Inc., very few people buy our appliance-based product with hardware comes from us, and we have enough supply there to deal with that. But we sell less and less of those nowadays. So the lead times of the hardware, buy directly from the server vendors like Dell and all those, those are really impacted, they might impact the timing of software orders also. And so far, we have not seen a big impact related to that, but moving forward, they could be tied together, and we might see some delayed orders. As it comes to margins, since we are not shipping the hardware, the increased cost for the servers which they use to run our software doesn't really impact our margins. It affects the timing and timing of the orders, definitely timing for deployment. But it doesn't affect the margin. Tariff impact has been very small, but yes, that impacts some margin only for short-term deals when a customer says I have allocated only so much money for the hardware, and so we may have to discount the software slightly, and it may have a small impact on the margin, but we have not seen much so far. Tony Piazza: And I would just echo what Anil says. It's really more about does it affect our customers' timing and behavior versus our direct cost because the majority of our revenue is in services and software. And so in our cost of sales, the direct material cost isn't that significant. And so yeah, any implications on that can be managed or mitigated through either price increases, working with our vendors on absorption, or if we had to absorb something ourselves. So we don't see the cost element as material to us. Kevin Liu: Understood. Thanks for taking the questions. Scott Dressel: Thank you. Operator: And this does conclude the question and answer portion of today's call. And this does conclude the NetScout Systems, Inc. Third Quarter Fiscal Year 2026 Financial Results Conference Call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the STERIS plc Third Quarter 2026 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touch-tone phone. And to withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Ms. Julie Winter, Vice President of Investor Relations. Please go ahead, ma'am. Julie Winter: Thank you, Teck, and good morning, everyone. Speaking on today's call will be Karen Burton, our Senior Vice President and CFO, and Daniel A. Carestio, our President and CEO. Karen Burton: And I do have a few words to caution before we open for comments. This webcast contains time-sensitive information that is only as of today. Any redistribution, retransmission, or rebroadcast of this call without the express written consent of STERIS is strictly prohibited. Some of the statements made during this review may be considered forward-looking statements. Many important factors could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, those risk factors described in STERIS' securities filings. The company does not undertake to update or revise any forward-looking statements as a result of new information or future events or developments. STERIS' SEC filings are available through the company and on our website. In addition, on today's call, non-GAAP financial measures, including adjusted earnings per diluted share, adjusted operating income, constant currency organic revenue growth, and free cash flow will be used. Additional information regarding these measures, including definitions, is available in our press release as well as reconciliations between GAAP and non-GAAP financial measures. Non-GAAP financial measures are presented during this call with the intent of providing greater transparency to supplemental financial information used by management and the board of directors in their financial analysis and operational decision-making. With those cautions, I will hand the call over to Karen. Julie Winter: Thank you, Julie, and good morning, everyone. It is my pleasure to be with you this morning to review the highlights of our third-quarter performance from continuing operations. For the third quarter, total as-reported revenue grew 9%. Constant currency organic revenue grew 8% in the quarter, driven by volume as well as 200 basis points of price. Gross margin for the quarter declined 70 basis points compared with the prior year to 43.9%. Positive price and productivity, primarily driven by volume, were more than offset by increased tariffs and inflation. EBIT margin decreased 40 basis points to 22.9% of revenue compared with last year, mainly driven by the decline in gross margin, which was somewhat mitigated by operating expense discipline. The adjusted effective tax rate in the quarter was 24.2%, a small decline from 24.5% in the third quarter of last year. The year-over-year decrease was driven primarily by changes in geographic mix. Adjusted net income from continuing operations in the quarter was $249.4 million. Earnings per diluted share from continuing operations were $2.53, a 9% increase over the prior year. Capital expenditures for the first nine months of fiscal 2026 totaled $278.8 million, and depreciation and amortization totaled $363.1 million. We ended the quarter with $1.9 billion in total debt. Gross debt to EBITDA at quarter-end was approximately 1.2. Free cash flow for the first nine months of fiscal 2026 was $7.368 billion, with year-over-year improvement driven primarily by an increase in earnings and lower capital spending. With that, I will now turn the call over to Dan for his remarks. Daniel A. Carestio: Thanks, Karen, and good morning, everyone. Thank you for joining us to hear more about our third-quarter performance. Karen covered the quarter at a high level, so I will add some commentary on our segments. Starting with healthcare, constant currency organic revenue grew 8% for the third quarter with growth across all categories. Service continued its streak of outperformance, growing 11% in the third quarter. Consumables also performed well with growth of 8%. Healthcare capital equipment revenue increased 7% for the quarter, with backlog remaining over $400 million. Orders were down 1% year-to-date against difficult comparisons to last year. EBIT margins for Healthcare in the quarter decreased 100 basis points to 24.3% as volume pricing and restructuring program benefits were more than offset by increased tariffs and inflation. Turning to AST, constant currency organic revenue grew 8% for the quarter, with 9% growth in services and 103% growth in capital equipment revenue. Services benefited from stable medical device volumes, bioprocessing demand, and currency. EBIT margins for AST were 45.1%, up 30 basis points from the third quarter of last year, as the additional pricing and volume were more than able to offset increases in labor and energy and the unfavorable mix impact from strong capital growth. Constant currency organic revenue increased 5% for Life Sciences in the quarter, driven by 11% growth in consumables. Capital equipment also performed well with 7% growth in backlog holding over $100 million. Margins declined 20 basis points as volume and price were more than offset by tariffs and inflation. From an earnings perspective, we grew the bottom line 9% in the quarter to $2.53 per diluted share. Included in that number is approximately $16 million of pretax tariff impact, which primarily impacted our healthcare segment. Turning to our outlook for fiscal 2026, as noted in the press release, we are maintaining our outlook for the year. This includes approximately 8% to 9% as-reported revenue growth and constant currency organic revenue growth of 7% to 8%. Our earnings outlook of $10 to $10.15 to $10.30 is also being maintained. Although with $10 million more in anticipated tariffs, the higher end of that range is less likely. Free cash flow is expected to be $850 million, and CapEx remains unchanged at $375 million. We are pleased with our performance year-to-date, delivering constant currency organic revenue growth of high single digits and double digits earnings per share despite the tariff headwinds. That concludes our prepared remarks for the call. Chuck, would you please give the instructions and we can begin the Q&A. Operator: Will do. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. 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. And our first question for today will come from Brett Adam Fishbin with KeyBanc. Please go ahead. Brett Adam Fishbin: Good morning. Thank you very much for taking the questions. Just was hoping maybe at a high level, company-wide, you could just touch on how you're thinking about fourth-quarter constant currency growth. Just thinking about you're kind of tracking a little bit above the high end of the 7% to 8% FY '26 range and maintain 7% to 8% for the year. Just kind of wondering if there's any incremental concerns or temporary items impacting April. Or maybe if, you know, it sets up as we should be thinking about at the higher end or potential upside? Karen Burton: Thanks, Brett. As we look at the fourth quarter and as we said last quarter, we do have a bit of a slowdown in the second half. So and that would be my caution on getting too excited about the fourth quarter. So that is why we're holding that 7% to 8% constant currency. Last year's fourth quarter was a solid quarter, so it's a tough comparison as well. Particularly in AST where we had a really strong capital equipment fourth quarter, which is not expected this year. Julie Winter: Brett, this is Julie. Just to add on healthcare too, we've been saying all year we don't expect healthcare services to stay in the teens. We slowed a little bit to 11% in the third quarter. We would expect continued slowing in that business in the fourth quarter. Brett Adam Fishbin: Alright. Perfect. And then maybe just one more from me. I was just interested to hear maybe a little bit more about what you're seeing around capital equipment backlog activity in both segments. You know, I think the healthcare backlog is, you know, showing stability, you know, kind of in that in the same range it's been the last couple of quarters, but seeing some pretty strong growth out of the life sciences backlog. So just any thoughts on kind of what's going on there would be appreciated. Thanks again. Daniel A. Carestio: Yeah, Brett. This is Dan. You know, the life sciences one is easy because that's just a recovery comparison to where we were a little over a year ago when pharma wasn't spending as much. And, you know, we started booking strong orders Q3 last year, and that's continued it continues today and as those continue to flush out. You know, we're just in a much better spot from a macro perspective than we were, you know, a little over a year ago. So that's positive. On the healthcare side, you know, we've had strong orders all year. I mean, we're down 1% versus prior year, which was a blowout year in terms of order intake. So we have not felt any meaningful slowdown as it relates to capital spending. I go back to what I've said many times is a lot of times our products are treated almost as a utility. They're needed for capacity. They're essential in the hospital. And if the procedures continue to grow at some nominal rate, or location changes, that capacity has to be put in place as it relates to sterilization, disinfection, etcetera. So we've been fairly resilient whereas I know maybe some others have seen some capital slowdown. Operator: The next question will come from Mac Etoch with Stephens. Please go ahead. Mac Etoch: Hey, good morning, and thank you for taking my questions as well. Maybe just a follow-up on Brett's capital equipment question, life sciences. I'd just like to know how you would characterize the current conditions in that end market and how conversations with customers are evolving around US onshoring and capacity expansions. Daniel A. Carestio: Thanks. I'd say in general, Mac, any time there's juxtaposition of manufacturing locations, we tend to benefit on the capital side of things because they're putting in new capacity. Clearly, there's been some pretty big announcements in the last few months in North Carolina and Pennsylvania and other states that have got commitments to build large new processing capacity and fortunately for us, a lot of that capacity is aseptic manufacturing type products, which tends to be our sweet spot. So it's definitely a positive macro for us right now. I think the more important thing is that despite some of the pricing pressures in pharma, and some of the regulatory changes that may be coming there, nonetheless, they seem to be in a much better spot than they were a year and a half ago when there was some confusion. So, all in all, it's been a positive for us. Mac Etoch: Appreciate that. And then, you know, obviously, the $10 million increase in tariff-related costs, that popped up on the press release, I'd just like to, you know, potentially get an update on your mitigation efforts and you know, get your sense of how you will be able to maybe offset a majority of these costs in FY '27 if that's possible. Karen Burton: Sure. Yeah. There's a wide variety of mitigation efforts going on and we are optimistic about our ability to continue to absorb those as we go forward and fully as we move forward. They range from shifting product movement, supplier negotiations, alternative suppliers. Honestly, the hardest work and the biggest part is looking for other cost reductions and an ability to offset those costs with productivity improvements. Efficiencies in our facilities and across the offices. Back office as well. Julie Winter: Hey, Mac. This is Julie. Just to add on the third quarter, the $10 million for the year is mainly driven by metals. And we see an uptick in metals with more capital equipment sales. So the mix shift to capital has a direct impact on the tariff exposure for this year. Operator: The next question will come from Michael Polark with Wolfe Research. Please go ahead. Michael Polark: Good morning. Thank you. I'll stay on tariffs, and then I want to shift to AST. So just on tariffs, can you remind the $55 million that's now in the guidance, is that six months, just December and March, was there an impact in the September quarter as well? And I ask just because I'm trying to understand, like, how much we'll need to annualize. Karen Burton: We were $16 million in the third quarter, Mike, and we would expect that to step up a little bit in the fourth. The $55 million is an annual run rate for fiscal '26 and we have been incurring tariffs every quarter. Operator: It seems that Mr. Polark has disconnected. Our next question will come from Patrick Wood with Morgan Stanley. Please go ahead. Patrick Wood: Hi, guys. Two kind of both on the, like, macro regulatory side. You know, CMS had two different proposals. That was obviously the PPE sort of onshoring, some of the API stuff on the drug side. Curious if you think that would have any effect to supply chain shifts and if that could affect you guys in a positive way. And then the other one was, like, another CMS proposal. They're obviously getting rid of for a lot of surgeries, the inpatient-only list. They did that obviously for musculoskeletal, but they're doing it for some of the soft tissue surgeries and things. Is there a chance that that pulls more procedures into the ASC? And do you view that ASC shift as a good thing or a bad thing for you guys? Daniel A. Carestio: Yeah, sure, Patrick. This is Dan. Nice to hear from you. I would say that the ASC shift has generally been a positive for us. There's new capacity demands. There's also a higher degree of clinical support that those facilities need than maybe large acute care facilities in terms of sterilization disinfection. And that's something that STERIS is uniquely positioned to provide, and we've been able to do that quite well. In terms of the PPE shift, I have not yet seen any material commitments of major manufacturing moving to the US at this point that would have an impact on us. I mean, that would largely be an AST play, right, in terms of PPE that needs that sterile drape and gown type stuff. But I've read about it, but I haven't seen any impact from it at this point. And in terms of your question on the API relocation, I have not seen an impact on that yet either. Patrick Wood: That's helpful. And then just very quickly as a follow-up. You know, we had chatted before about potentially, I don't know, Todd, for what you can and can't say, but a bit more of a commercial push in EMEA across some of your product lines on the sterilization side. Is that still something, you know, a more integrated model and competing a little bit more aggressively in EMEA? Is that still something that's on the cards? Daniel A. Carestio: Absolutely. Yes. That's something we're committed to. We've made a lot of structural changes in EMEA in terms of how we're going to approach go-to-market. It's going to take a while to get that fully formulated and executed. It's a long process. But we're confident in the direction that we're heading. Operator: Awesome. Excellent. The next question will come from Mike Matson with Needham and Company. Please go ahead. Mike Matson: Yes. So I wanted to follow-up on Mike Polark's question on the tariff exposure in '26. I think maybe what he was trying to get at was, like, what's the incremental exposure in '27. I know you probably can't give us a dollar amount. You're not giving guidance, but if you've been paying tariffs for basically all four quarters of '26, does that imply that kind of any incremental tariff impact in '27 will be small? You know, less than a quarter worth effectively or? Karen Burton: I think that's a logical approach. You know, obviously, the tariffs did fluctuate during the year, especially in the first half of our year as rates settled in. And we're seeing it come through and reflected in the different mix, but I don't think it's reasonable to say that it wouldn't be more than another quarter's worth. Kinda level. These time current tariffs. Yeah. I understand. Mike Matson: Yeah. Appreciate that clarification. Karen Burton: What's in place right now. Mike Matson: Yep. Okay. And then just, you know, your leverage ratio is at just over one times. It's been I think it's been a few years since you've done an acquisition. So it used to be a pretty big part of the STERIS story. So maybe why haven't you been doing more deals and, you know, what's the outlook? It's, you know, do you have a pipeline of things that you're looking at? Can we expect to see, you know, more in the next few years? Daniel A. Carestio: Well, we've been active on smaller sort of bolt-on product acquisitions and some channel acquisitions over the last couple of years. You know, doing major transformative M&A is not easy. That's something that we feel we're good at and we have the muscle for. We're good at integration. But we also have a very disciplined approach at what meets our financial criteria and where we add value from a customer perspective. So we're looking, but at this point, we've kissed a lot of frogs, and not a lot of them have turned out to be princesses. Mike Matson: Okay. That's a good way to call it. Thank you. Operator: The next question will come from Jason M. Bednar with Piper Sandler. Please go ahead. Jason M. Bednar: I got to follow the frog to some comment here. I'm going to start with cash flow guidance here. You left that unchanged. But look, based on where you're at for the first nine months, that target just looks like a way out. So I guess why not bump that higher? I get that changing revenue. I get that changing the EPS guide. But are there any cash flow fluctuations you're anticipating at year-end that keep you from clearing that guidance bar? Karen Burton: Hi, Jason. Yeah, I think it's you're right. We are very confident with that guidance. A lot of times in the fourth quarter, timing really matters. So we've got a heavy capital quarter. Some of that activity will shift into next year in terms of cash collections. So it's a little bit harder to predict in the fourth quarter, especially since it is winter and weather can play a part. So a little bit of conservatism there. Jason M. Bednar: Okay. Alright. Fair enough. And then for a follow-up, I did want to peek a little bit ahead to fiscal '27. You know, so you're look, you're sitting on a healthy backlog. That's no secret. The AST momentum is obvious for you and the broader market. The street's only modeling 6% growth for next year. Is there a reason you wouldn't be able to maintain your typical 7% to 11% growth algorithm beyond fiscal '26? I know a lot of asked about here today about tariffs and kind of the impact on tariffs in fiscal '27. But any other considerations we should have in mind, whether it's top line or margin related? Daniel A. Carestio: I mean, obviously, we're in the throes of our planning period right now. But I would say in a general sense, the macros don't look negative to us right now. You know? And when obviously, next quarter, we're gonna give you guys some solid guidance of where we think we're going to land in fiscal '27. But at this point, I don't see a lot of downside or anything materially changing the market today. Jason M. Bednar: Yeah. Perfect. Thanks. Operator: And the next question is a follow-up from Michael Polark with Wolfe. Please go ahead. Michael Polark: Can you hear me? Daniel A. Carestio: Yes. Yes. Now. Michael Polark: I'm so sorry. I what happened earlier, I know. It just dropped in took me a bit to get back to you. So my follow-up yeah. My follow-up is gonna be on AST services. If somebody asked this, you answered it, I missed it. But just in the quarter, in constant FX, AST services line up 6%. The prior two quarters was up 10% constant FX. If I make some assumptions on the math. So can we just get a little extra color on kind of how you've seen the fiscal year play out in AST, you know, why the December quarter might have been a little bit below the prior two and, you know, what's a what's a good way to think about constant FX, AST services growth in this current March quarter? Thank you. Daniel A. Carestio: Sure. Yes. What I would say is, Mike, we kind of had a strange start to the quarter. We don't get in and talk about months sequentially, but October was really weak. And then it got better in November, and then we had a really strong December. So and there's nothing I can point to. There wasn't anything uniquely geographic, wasn't any customer subsegment that we look at that was off. It was just a general softness in the volumes that we're seeing across the global network that seemed to have had righted itself by December. Michael Polark: If I can just follow-up there, then I'll cede. The any for several quarters now, we've been asking about just the tariff impact, customers changing order flows. As part of their tariff mitigation? Any fresh view as to whether that could explain some of this kind of quarter to quarter to quarter movement. Daniel A. Carestio: There was speculation, and this is somewhat anecdotal, but we have heard from some customers they built ahead of tariffs a bit. And got product into different locations. I can't say definitively that was a material impact on the volumes. And maybe that's why there was some slight inventory adjustment that we saw in the fall. But we haven't seen any movements that have impacted us negatively because we're well-positioned all around the globe to work with our customers for sterilization. Michael Polark: Thank you, Dan. And I'm sorry again about the statute earlier. Daniel A. Carestio: No issue. Operator: This concludes our question and answer session. I would like to turn the conference back over to Ms. Julie Winter for any closing remarks. Please go ahead. Julie Winter: Thank you, everyone, for taking the time to join us this morning to hear more about our performance in the quarter, and we look forward to seeing many of you on the road in March. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, this is the operator. Today's FMC Corporation conference call is scheduled to begin momentarily. If you should experience difficulties during today's call, please signal a conference specialist by pressing the star key followed by zero. If you would like to be placed in a Q&A queue, please press the star key. Your lines will be placed on music hold until the conference begins. Good morning, and welcome to the Fourth Quarter 2025 Earnings Call for the FMC Corporation. This event is being recorded, and all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's prepared remarks, there will be an opportunity to ask questions. To be placed in the Q&A queue, please press the star key. I would now like to turn the conference over to Mr. Curt Brooks, Director of Investor Relations for FMC Corporation. Please go ahead. Curt Brooks: Good morning, and welcome to FMC Corporation's fourth quarter earnings call. Joining me today to provide today's prepared remarks are Pierre Brondeau, Chairman, Chief Executive Officer and President, and Andrew Sandifer, Executive Vice President and Chief Financial Officer. After their comments, we will take questions. Our earnings release and today's slide presentation are available on the FMC Investor Relations website, and the prepared remarks from today's discussion will be made available after the call. Let me remind you that today's presentation and discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including, but not limited to, those factors identified in our earnings release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's understanding. Actual results may vary based on these risks and uncertainties. Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, free cash flow, organic revenue growth, and revenue excluding India, all of which are non-GAAP financial measures. Please note that as used in today's discussion, CTPR means chlorantraniliprole, Earnings means adjusted earnings, and EBITDA means adjusted EBITDA. A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our website. With that, I will now turn the call over to Pierre. Pierre Brondeau: Thanks, Curt, and good morning, everyone. Last night, FMC announced fourth quarter and full year 2025 results, as well as our 2026 priorities. Importantly, we also announced that our board of directors has authorized exploring strategic options, including but not limited to potential sale of the company, to strengthen our business and position ourselves for success. We are laser-focused on executing operational priorities in 2026. Those include strengthening the balance sheet, improving the competitiveness of our core portfolio, managing a post-patent Rynaxypyr strategy, and driving growth of new active ingredients. In parallel, the company is working to evaluate the best path forward for the benefit of the business and to maximize shareholder value. Accordingly, the board of directors has decided that a formal proactive process to evaluate strategic options makes sense to undertake at this time. The strategic review is at a preliminary stage. We have retained financial and legal advisers to assist us with this process. This strategic review does not impact the process underway to sell our India commercial business. As we look ahead, we are committed to positioning FMC for long-term success, and that starts with working toward our 2026 priorities as laid out on slide four. To strengthen our balance sheet, we are targeting paying down over $1 billion of debt through asset sales and licensing agreements. This includes the sale of our India commercial business, which continues to progress with binding bids expected to be received in the second quarter. In addition, we are in active discussions regarding licensing agreements, which include upfront payments. Increasing the competitiveness of our off-patent portfolio product remains a top priority. Our goal is to lower the cost of our non-diamide products to more effectively compete against generics. 2025 sales of this core product, excluding Rynaxypyr, were approximately $2.2 billion. Nearly $1 billion of these sales came from products manufactured in high-cost facilities. We expect to lower the manufacturing cost of these products by at least 35% by 2027. This is a complex process that will require re-registration for most products, as well as a buildup of inventory in advance of the transition. As a result, we will be limited in our ability to adapt our manufacturing mix to the changing needs of our customers. We believe this reduced flexibility will act as a sales headwind in 2026, as has been reflected in our forward guidance. In addition, we are executing a post-patent strategy for Rynaxypyr. 2025 sales were just over $800 million and in line with our expectations. Beginning in 2026, there will be generic offerings of CTPR in all markets. As CTPR becomes more widely available through generics, resistance is likely to increase. For example, we are seeing pest resistance in rice crops in China and Japan. Our advanced formulations and mixtures are designed to address this challenge. As the owner of the original molecule, we have years of historical proprietary data, which benefits our development of formulations and mixtures to combat resistance. For more basic formulations of Rynaxypyr, our plan remains to lower price and grow volume by capturing market share from older classes of insecticides. We are already observing success with this strategy in a number of countries. We anticipate branded Rynaxypyr earnings in 2026 to be in line with prior years as higher volume, particularly for more advanced offerings, and lower costs offset lower prices. Finally, we are committed to the continued sales growth of our four new active ingredients. We are only in the early stages of sales for four new molecules, but we are already seeing solid growth. Sales have increased from approximately $130 million in 2024 to approximately $200 million in 2025. Sales are almost entirely driven by fluindapyr and isoflex. The Durex received emergency registration in two countries, which resulted in modest sales in 2025. While sales of new active ingredients grew 54% in 2025, they were below our expectations of $250 million. This was mainly due to impacts from later-than-expected registration for isoflex in Great Britain. We estimate 2026 sales for new active ingredients to be between $300 million and $400 million. These actives are in high demand, with three of them offering a new mode of action. We still expect sales of the four actives to exceed $2 billion by 2035. We believe executing these priorities positions us to enter 2027 with a stronger balance sheet, a more competitive portfolio, and growing sales of higher-margin differentiated products. A 2026 full-year guidance is provided on slide five. We are expecting full-year sales of $3.6 billion to $3.8 billion, down 5% at the midpoint versus the prior year. Price is expected to be a mid-single-digit headwind driven by Rynaxypyr, which is consistent with a post-patent strategy. The removal of India is expected to be a 2% full-year headwind that will only impact the first half. Excluding India, we expect volume to be modestly higher, driven by new actives and branded Rynaxypyr. Full-year adjusted EBITDA is expected to be between $670 million to $730 million. As you can see on slide six, the main headwind versus prior is in our legacy portfolio due to competitiveness. Rynaxypyr overall is expected to decline, driven by diamide partner sales. It is important to note that branded Rynaxypyr earnings are expected to be in line with the prior year as we implement our strategy. Tariffs are expected to be a $20 million headwind, nearly all of which will impact first-quarter results. We expect a positive impact from a growth portfolio with particularly strong contributions from new active ingredients. Our first-quarter sales guidance outlined on slide seven is $725 million to $775 million, 5% lower than the prior year. Price is expected to be lower by mid-single-digit, which is consistent with our expectation for all quarters this year. The removal of India represents an additional 5% headwind. We do expect some volume growth as modest increases across most regions are largely offset by a few significant factors. There have been a large number of generic CTPR offerings announced, particularly in the US and Brazil, as the last of our patents expired at year-end. Distributors and retailers have been reluctant to fully stock Rynaxypyr until they better understand the quality, availability, and grower response to these generic offerings. We believe generic entry is also impacting our diamide partners, from whom we are expecting lower orders in the first quarter. Finally, planned registration losses in Europe will impact volume growth. We expect adjusted EBITDA to be between $45 million and $50 million, which is 58% lower than the prior year and represents about half of the total EBITDA network headwind we expect for the year. Expected EBITDA reduction is largely due to lower price as well as cost factors that are unique to Q1. For example, manufacturing costs are unfavorable prior in the first quarter, but as the year progresses, manufacturing costs are forecasted to become favorable. In addition, the full-year $20 million tariff charges are recorded almost entirely in Q1. EBITDA margin in the first quarter is expected to be around 7%. This abnormally low margin is caused by the combination of lower sales on which to absorb relatively flat fixed costs and the unique cost headwinds I just noted. We expect this margin profile to be unique to Q1, with subsequent quarter margins returning to more normal levels as a result of higher sales and favorable manufacturing costs. I will now turn the call over to Andrew. Andrew Sandifer: Thanks, Pierre. I'll start this morning with a brief overview of our fourth-quarter results. Let me note that you can find a more detailed description of our fourth-quarter and full-year 2025 results on slides 12 through 18 of today's presentation. During the fourth quarter, we continued to operate in challenging market conditions, including intense competition from generics and weaker grower margins. These conditions affected the timing of purchases and product mix for crop protection. We delivered adjusted EBITDA and adjusted EPS near our guidance midpoints, but sales came in below our guidance range. We reported $1.08 billion in Q4 sales, a decline of 11% year-over-year or 5% on a like-for-like basis, excluding India. Price declined 6%, driven by lower Rynaxypyr and strong market competition, particularly in Latin America, which led to pricing headwinds for our core portfolio of products. Volumes were weaker than anticipated, declining 1% due to high competitive pressure. Fourth-quarter adjusted EBITDA was $280 million, a decline of 17% versus the prior year quarter, down 8% on a like-for-like basis, excluding India from the prior year. Lower price and volume were partially offset by lower costs and FX. Adjusted earnings per share for the quarter was $1.20, a 33% decline due to lower adjusted EBITDA and higher interest. Moving on to free cash flow and the balance sheet. We reported GAAP cash from operations at $657 million for the fourth quarter, up $230 million versus the prior year period. The increase was driven by a release of working capital, particularly from receivables. This led to free cash flow of $623 million for the quarter. We ended 2025 with cash from operations of negative $6 million, which included $103 million of cash restructuring spending. 2025 free cash flow was negative $165 million. We ended the fourth quarter with net debt of approximately $3.5 billion, down over $550 million from the third quarter due to strong free cash flow. Net debt to trailing twelve-month EBITDA was 4.1 times at year-end, while covenant leverage was 4.6 times. As a reminder, our covenant limit is six times through 2026, and then steps down to five and a half times at year-end. Turning to slide eight and the cash flow outlook for 2026. Free cash flow for 2026 is expected to be in the range of negative $65 million to positive $65 million, or breakeven at the midpoint, including an expected $130 million in restructuring spending. Lower EBITDA, higher restructuring spending, and modestly higher capital expense are expected to be offset by the liquidation of India working capital, lower cash taxes, and improved working capital performance in the ongoing business. Despite breakeven for free cash flow and lower EBITDA, with the successful execution of our debt paydown plan, we expect to end 2026 with a reduction in net leverage of approximately one-half turn. We would then expect leverage to further improve in subsequent years with higher free cash flow from growing EBITDA and reduced restructuring spending. With that, I'll hand the call back to Pierre. Pierre Brondeau: As we look ahead, the key driver of our growth and what differentiates us from the majority of other crop chemical providers is our R&D pipeline of new active ingredients. This pipeline is a result of years of dedicated work by our research and development teams. It represents a significant competitive advantage for FMC. On slide nine, we have provided base sales expectations using the current targeted crops. But we believe there is substantial upside to sales through application on additional crops. Fluindapyr fungicide has been registered and launched in all major countries where we intend to sell, including the US and Brazil. Going forward, the focus will be on expanding sales through continued grower education. For 2026 in particular, due to a full growing season of sales in Great Britain following a delayed registration in 2025. Further growth is expected in 2027 following product registration in the EU. We remain on track to receive these important registrations. We recently received approval for the active ingredient. Last week, the IDLECs active is the first new mode of action herbicide in over thirty years. We are confident that this herbicide can be useful in other crops like sugarcane, and expect meaningful contribution from Godelix beginning in 2027. Finally, rimisoxafen is expected to begin receiving registration in 2028. Renisuxaffin is the first herbicide ever to be classified as a dual mode of action. It is primarily targeted with Palmer Amaranth, which is now resistant to eight herbicide classes. This preemergent herbicide will offer corn and soybean growers a new solution to an increasingly challenging problem. In addition to these four molecules, we have two more active ingredients in development. While we expect sales of these two actives to begin during the early 2030s, their contribution is not included in the $2 billion of expected 2035 sales listed in the slide. The growth of these active ingredients is an important part of our key dynamics for 2027 and 2028, which are outlined on slide 10. In addition to accelerating the growth of new actives, it is important for us to also stabilize our core portfolio by executing a Rynaxypyr post-patent strategy and by improving the competitiveness of our legacy core. We expect margins to improve with SG&A and R&D spend growing much more slowly than top-line sales. The combination of these actions is expected to result in EBITDA growth in the mid-teens percent in both 2027 and 2028. In closing, we are committed to positioning FMC for long-term success. Teams across the company are focused on executing our operational priorities with the same dedication and innovation that has always defined FMC. At the same time, we are undertaking a process to explore strategic alternatives. We believe that pursuing both paths simultaneously best positions us to maximize value for shareholders. With that, we're ready to take your questions. Operator: Thank you. We will now begin the Q&A session. If you are using a speakerphone, please pick up your handset before pressing the keys. Please limit yourself to one question. If you have additional questions, you can jump back in the queue. To withdraw from the queue, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Josh Spector from UBS. Josh, your line is now open. Please go ahead. Lucas Beaumont: Hi. Good morning. This is Lucas Beaumont on for Josh. So, I mean, just firstly, like, I mean, you're targeting $700 million in EBITDA this year. I guess, just given the volatility that we've seen in the portfolio the past couple years, wondering if you could kind of just help us think about the different relative contributions there that are coming from the products in the portfolio. So, I mean, we have the key kind of product groups, you know, for Rynaxypyr and Cyazypyr, your new product sales, biologicals, the legacy core. It's like off-patent. So, I mean, it seems like potentially you're implying maybe $400 million on legacy, $80 to $90 million on each of, like, Rynaxypyr, Cyazypyr, and the growth buckets, and then about $40 million on biologicals. I mean, I know you guys talk about the sales a lot, but there's been a lot of volatility in there, the pricing and the earnings outlook. I mean, anything you'd kind of share to help sort of understand the components would be great. Thanks. Andrew Sandifer: Hey. It's Andrew. I'll take the first crack at this one. Look. Yeah. We don't break out profitability by product line. I think when we think about what's going on in the business this year, certainly, you know, profitability of the core portfolio, the non-Rynaxypyr core portfolio is a big contributor. It's a big part of the portfolio, and we've given those dimensions previously. It's, you know, about half of the sales of the company. So it's obviously a big contributor to profitability. The Rynaxypyr, as Pierre stated in prepared comments, you know, we're expecting the branded Rynaxypyr business to deliver earnings that are essentially flat year on year. We do see a decline in the partner sales portion of the Rynaxypyr business, both in price as our continued efforts to improve cost for Rynaxypyr are shared with our partners through the cost-plus pricing contract mechanism, as well as lower volumes. Again, as Pierre mentioned in his prepared comments. For the rest of the portfolio, we will see increasing contribution from the growth portfolio from all three elements of the growth portfolio, both at sales and in profitability, with, you know, contributions from Cyazypyr, certainly from the new AIs, as we have meaningful growth from the year before, and from Plant Health. Pierre Brondeau: Just to answer at a high level around the volatility and our level of confidence. I think we have a very high level of confidence in our total growth portfolio. The four new actives, plant health, and Cyazypyr. We also have a high level of confidence in our ability to keep earnings flat from 2025 for branded Rynaxypyr, and we're already seeing how this is going to be deployed. The two places really which are challenging performance are very well identified. The first one is the core portfolio. We know that we do have about a billion dollars of production, which is not cost-competitive, and for which we are being challenged to grow and losing market share. That's the number one contributor, and that's where we have a high level of focus. The number two is sales to a diamide partner. We had to lower the Rynaxypyr cost. We had no way around that. And on top of that, I believe a partner must be challenged also with Rynaxypyr sales with less volume. So those are the two factors today which are creating the most headwind in 2026 and which are being addressed to go away in 2027. Lucas Beaumont: Great. Thanks. I mean, I guess just following on from that then, I mean, you called out that you think you're gonna be able to drive kind of mid-teens EBITDA growth into '27 and '28. So maybe you could kind of just talk us through how you see the drivers to achieve that sort of off this year's base. And I guess what's giving you the confidence there that you can deliver on that given the challenging environment we've seen in the past couple of years? Thanks. Pierre Brondeau: I think if you look into the question was a bit hard to follow, but if you look today at the 2026 challenges, they are very clearly identified in two buckets. Going into 2027, we know and we have confidence in a growth portfolio. It's been the growth of those products that we stable for the last two years. So the two factors we really do have to and then we'll continue. There is no reason for that not to continue to provide growth, and that's where most of the growth is going to come in 2027. It's a continuation of what's been happening in the last two or three years. Where we have been underperforming is, as I said, the core portfolio excluding Rynaxypyr. This one is only an issue of manufacturing cost. Our products are good, our network is good. Customers are confident. We are just not competitive at the price level. We are correcting that. We are completely redoing our manufacturing footprint in high-cost countries, and this is well on its way. The number two is the Rynaxypyr partner contract. We are getting close to a limit to how much we can decrease the cost of Rynaxypyr, to the end of this price reduction, which is going to reduce the impact it will have on pricing to a partner, and in addition, the size of those contracts is becoming smaller and smaller. So the impact in '27 is going to be very minor. So delivering a 15% EBITDA growth in 2027 has to be done by a continuation of what we have done over the last two years on the growth platform, which we are confident we can do, and really get a core product competitive from a manufacturing standpoint, which we expect to do by 2027. Operator: Thank you. Our next question comes from Aleksey Yefremov from KeyCorp. Aleksey Yefremov: Thanks, and good morning, everyone. Just wanted to follow up on the sale of the entire company. Have you had any discussions so far, any interest? And was this prompted by any inbound inquiries? Pierre Brondeau: No. What we've done, Aleksey, is a normal process. We worked with our board, and we presented to the board a business plan, which I have described, and that business plan includes a billion dollars of reduction of our debt. That is part of the base plan, which also includes improving the competitiveness of the core portfolio, Rynaxypyr strategy, and the growth of actives. That's the base plan, which leads to a $700 million EBITDA target. Once we present that to the board, we also discussed if there is a way to increase shareholder return, is there a way to maybe improve the growth of the sales of new active ingredients and speed up the development process of the actives we have in development currently. And should we think about having our company operating under a different ownership, which could be beneficial to shareholders and which could be beneficial to the performance of our portfolio. So that discussion with the board led us to say we need to pursue two paths. Path number one, the plan I presented to you, path number two, an entire sale of the company. And for this, we are getting structured. We've hired advisers, bank and legal, and the process is being put in place right now. Operator: Thank you. Our next question comes from Christopher Parkinson from Wolfe Research. Your line is now open, Christopher. Please go ahead. Harris Fine: Great. Thank you. This is Harris Fine on for Chris. Thanks for taking my question. I guess following up on the last one, looking out to 2027 and 2028, it still looks like you're confident in building some momentum. Can you just talk about the thought process around the timing of initiating a strategic review and any more color about how you're weighing a full sale versus an asset sale license agreement, what those different structures might look like? Thank you. Pierre Brondeau: Yes. So the $1 billion of debt reduction, which is the sale of India, which is taking place, we are waiting for binding offers right now. The licensing of one of our new molecules, as well as other assets we have identified, this is going on with the basic plan. That is independent from the sale of the entire company. That's the base operating plan. On the side, there's another path, which is mostly focused on the entire sale of the company. And this is for the reason I said before, shareholder return as well as potentially giving more potential for the company to appear in a better way. So the process of partial divestiture versus full divestiture are separate. One is taking place with the base plan, the other one is a separate process we are currently undertaking right now. Operator: Thank you. Our next question comes from Vincent Andrews from Morgan Stanley. Your line is now open. Please go ahead. Vincent Andrews: I wanted to follow up on the strategic alternatives in a couple of ways. First, Pierre, could you just clarify, is it only possible to do a licensing deal or sell the entire company? Or is it possible that somebody could buy the new molecules in the pipeline, somebody else could buy the diamides, somebody else could buy the balance of the business? Or other types of permutations, or are there limitations just in terms of the way that the company is set up from a manufacturing perspective that make it too difficult to do something like that? Pierre Brondeau: So I, you know, I believe the company is set up in a way where multiple things could be happening. I would never say and never close any option which would be beneficial to the company in the way we operate and which would be beneficial to shareholders. But from a probability level today, I think the two highest probabilities we have in front of us, one is the base plan, which includes a licensing, a sale of assets, and the sale of India. The other one is the full sale of the company. There could be things in between, but right now, they are not part of the way we are thinking about the company. Obviously, if people come with interesting ideas about things we could do, we would listen. But right now, we are focusing on two paths as the principal actions we are taking. Operator: Thank you. Our next question comes from Joel Jackson from BMO Capital Markets. Your line is now open. Please go ahead. Joel Jackson: Good morning. Pierre and team, I'm just trying to reconcile some of the guidance that you're giving, some of the different product buckets in '26. There was kind of a prior question on this earlier, but I just want to focus on revenue. And I'm looking also, of course, at the good, you know, nuanced guidance you gave last year for all the product buckets going out for a few years. So if I understand, I mean, you've said what you'll think the new AIs will do, the growth portfolio in '26, but there's some for the product buckets. Like, I think you're saying Rynaxypyr sales will be down this year, partnered and non-partnered. So that's the first question. Then the rest of the portfolio, non-Rynaxypyr and core, would also be down this year. Then in growth, would Cyazypyr be down in '26 for sales? Then would be roughly flat to up for the plant health? Like, can you just those other buckets, so Rynaxypyr, non-core Rynaxypyr, Cyazypyr, and Plant Health, talk about how you see '26 versus '25 specifically, individually. Sorry. Thanks. Andrew Sandifer: Hey, Joel. It's Andrew. I'm gonna take the first crack at this, and Pierre will chime in with some additional comments. When we think about the sort of the core versus the growth portfolio in big strokes for revenue, for Rynaxypyr, as Pierre mentioned, we're expecting flat earnings from the branded business. Revenue could be slightly down, but it's not a tremendous difference. Where you have the shrink year on year in the Rynaxypyr business is in partner sales. That's both from price, from the cost-plus pricing mechanism, and from volume with the partners. For our legacy core, all the remaining core products, we are expecting a slight contraction drop year on year. That's pricing and volume. Right? So overall, the core portfolio is down year on year from 2026 versus 2025. When we look at the growth portfolio, we have growth in all aspects of the growth portfolio, led by the four new active ingredients that are growing strongly. Right? And, again, you know, Pierre walked through it in detail on the slide. Some very, very good momentum with fluindapyr, having been registered in all the core countries and with accelerating growth of Isoflex, particularly with having a full selling season in Great Britain this year. You know, Plant Health also grows. So all three pieces of the core portfolio are growing in '26, but it's really differentially impacted by the new active ingredients. Pierre Brondeau: It's important to note, the growth portfolio, there is no part of the growth portfolio, including branded Cyazypyr, the four active ingredients, and plant health, all of them are growing. Rynaxypyr, the strategy is focused on earnings, and we do expect branded Rynaxypyr earnings to be flat versus 2025. And then where we have a contraction, it's in partner sales for Rynaxypyr and the core portfolio. Operator: Thank you. Our next question comes from Edlain Rodriguez from Mizuho. Thank you. Good morning. Pierre, just one quick one for me. Like, how confident are you that you have a good sense of the challenges facing the company? Because, again, things keep popping up here and there. So, yeah, I mean, your confidence level that you have, you know, you know exactly what the challenges are. And looking one, two years out, that you have that you see a path out of this trunk, and you have a solution to fix it. Pierre Brondeau: It's a valid and good question. I'm gonna answer that in a very straight manner. I think we've done a lot since I've been back in the company. There is one part which I missed. It is the risk we had to see the core portfolio outside of Rynaxypyr being as challenged as it's been by generics. And if you look at the performance of the company, we pretty much perform as expected in every aspect, except the core portfolio outside of Rynaxypyr. The problem is that it's a big part of the company. It's $2.2 billion. So just shrinking on this part of the company by 34% is a significant impact. I was not anticipating that the downturn would last that long and that there would be that amount of competitiveness in that part of the portfolio, especially in places like Latin America. I would have to do it again, I would have started the restructuring of the manufacturing footprint earlier. It is what it is. But if you look today at the portfolio of the company, the entire growth portfolio, the three parts, are in great shape and performing exactly as we're expecting. The Rynaxypyr branded strategy is clearly in place. We have one thing to fix. It's the core portfolio. We know how to do it. It's ongoing. The plan is in place. And it started. So why am I so confident? It's because the number of things we have to fix is limited. It's one thing. The rest is in place. The problem is this thing we have to fix, we better fix it because it's big. But it's not that complicated to know what we have to do. Operator: Thank you. Our next question comes from Frank Mitsch from Punermion Research. Frank Mitsch: Thank you. Good morning. Pierre, I would assume that you're thinking 2026 is a bottom for the company. And so I'm just curious as in terms of the timing of the sale of the company. I mean, it would seem like you're, you know, you're having these discussions at the bottom of the cycle, which might not be, you know, the best value for shareholders at this particular point in time. Can you just address the timing and why not wait until your restructuring program yields tangible results? Pierre Brondeau: Thank you. Thanks, Frank. Yes. I think we do have a base plan which allows us to go through 2026, which I expect at this point is at the bottom of the cycle for the company. And I also believe that getting through 2026, the way we are doing it, will create growth starting in 2027 and 2028. That's the base plan. We need to execute on reducing our debts. And this process, we need to bring in a billion dollars into the company. Like any plan, you always have to weigh the risks and the certainty you have to deliver it. We are pretty confident about this plan and believe it will take us to the right place in 2027. That being said, we have a board, and this board has the responsibility to look for shareholders and how to get the best from the portfolio we have in the company. So when you think about that as an operator, clearly focused on 2026, will be the bottom of the company and should allow us to go back to growth in '27. Working with the board, we also believe it is important to always look at a double path. A parallel path will allow benefit for the shareholders and potentially thinking about doing more things with a portfolio of the company that we can do alone. You know, when you take money to restructure a company, like we're doing, it is money you don't spend in accelerating the growth of your new active ingredients, including the one in research. So the question we have to ask ourselves is, would this company operate better, grow faster, under a different ownership which will have maybe more flexibility financially than FMC has today. So, having both plans valid, it is not like not selling the company would be a disaster because we don't have a plan to go through '26. I think the '26 plan is robust and will put us in a good place in '27. But the alternative could be highly beneficial for shareholders and would allow the company potentially to operate better and faster. That's why the two processes are being followed in parallel. Operator: Thank you. Our next question comes from Kevin McCarthy from Vertical Research Partners. Your line is now open. Please go ahead. Matt Het: Hi. This is Matt Het. We're on for Kevin McCarthy. Could you provide an update on your upcoming debt maturities and covenant obligations? What's your plan for the next tranches of debt that are coming due? Andrew Sandifer: Sure. Thanks, Matt. It's Andrew. I'll take that one. Look, we have $500 million bonds maturing in October. Obviously, our attempt is to refinance them in advance of their maturity. You know, fallback, we can absorb that into the existing revolving capacity. Our intent is to replace them with new financing well in advance of that. We're in discussions with our financial advisers on the best form that we might pursue to do that. But, you know, certainly, our intent is to refinance those here in the first half. When we look at our overall debt levels, you know, as Pierre has made very, very clear, you know, we are intensely focused on reducing the total debt of the company. We have a plan to reduce that debt by a billion dollars this year through a mix of asset sales, licensing agreements, etc. We have very strong confidence in that plan. Very advanced discussions on the sale of the India business. Discussions underway on licensing and on other asset disposals that we're not at liberty to go into any further detail at the moment, but good progress in all of those dimensions. So that's an important part of getting the company on a much stronger footing by 2026. During 2026, we will obviously have to manage closely our debt levels and our working capital. We recently renegotiated our revolving credit facility to get much higher covenants. You know, that amendment was finalized in early December. We asked for a very high covenant, six times, to allow us the flexibility to work through the things that we need to do in 2026. And that will require us, given the seasonality of our EBITDA outlook, you know, with a very light first quarter and then building through the year, to manage the traditional working capital build very carefully. And the team is laser-focused on managing inflows and outflows of cash in the company to keep debt within those covenants. So I think we have a good plan to address the upcoming maturity. I think we have a good plan to continue managing within the existing covenants. But we are looking at all kinds of financing options and how we might put the company on better footing faster. Right? And that is something that will be very active discussions over the next particularly the first half of this year. Again, you know, to directly address the maturity, but also just to make sure that as we're paying down debt, we have the right overall capital structure for the company. Operator: Thank you. Our next question comes from Mike Harrison from Seaport Research Partners. Your line is now open. Please go ahead. Mike Harrison: Hi. Good morning. Was hoping, Pierre, that you could talk a little bit more about the new products coming in at $200 million rather than the $250 million you expected. It seems like that's a fairly large shortfall that just be related to a registration delay in the UK. And I guess maybe looking forward, can you discuss some of the factors that might drive that new product revenue toward the higher end or lower end of the $300 million to $400 million range that you've given for 2026. Pierre Brondeau: Yes. First, for the $50 million shortfall, your comment is correct. It is not all. The delay in registration for Isoflex is a big part of this shortfall, but you also know that our sales in Brazil, especially the direct sales to growers, fell short of what we were expecting. It was still, for a new market penetration, what I would consider a success, but not as successful as we were expecting. And part of those sales we didn't do were including fluindapyr. So the majority of the shortfall is the registration delay. And there is an additional shortfall in fluindapyr because of direct sales being a bit lower than what we were expecting. Now the range of $300 million to $400 million seems to be wide. What would drive us toward the higher end is mostly registrations. The speed at which we get registration, how much of them we add, not for fluindapyr, but for Isoflex. There are places where we have, for example, exceptions to registration, which have been requested by our customers. We don't know if they will be granted or not. So there is a registration aspect which moves a lot in terms of timing. It doesn't change the fundamentals when you go two, three years down the road. But on a short period of time, six months could matter. Operator: Thank you. Our next question comes from Matt DeYoe from Bank of America. Salvatore Tiano: Yes. Thank you very much. This is Salvatore Tiano filling in for Matt. Sorry. I just want to go back to Rynaxypyr and trying to understand a couple of things. Number one, based on the flowchart you mentioned that the decline this year on Rynaxypyr will be from your partner sales. I'm reading that waterfall chart correctly, it looks like it's kind of a $50 million EBITDA. And last I remember, the idea was partner sales for Rynaxypyr were $200 million. So that's in terms of revenue, not even earnings. So that implies a massive, massive reduction in margin. So are these numbers correct? And why are the earnings on that small bucket declining as much? And the second is, you know, I get that the branded Rynaxypyr earnings target of being flat year on year. But can you talk a little bit about the top line for branded Rynaxypyr mainly? What gives you confidence that the volumes will be flat given the competition? And also, what is your assumption on price? Especially since we noticed that you started lowering the price in Q4 as mentioned in some of the slides. Right? Thank you very much. Andrew Sandifer: Alright. So good morning, Sal. It's Andrew. I'll start this off, and Pierre will take the second part of this. I think, look, for Rynaxypyr, in particular, as we think about the partner sales, you know, we're looking at a reduction in volume and price. And when we look at the slide, let's be clear. We are intentionally not giving those numbers. We gave you a dimensional view of the drivers. So I would not I'm not gonna comment directly on estimates that people might try to infer from that slide. What we're trying to give you is a directional sense of the major drivers and what's happening with EBITDA this year. So certainly, volume and price are impacts on the partner sales for Rynaxypyr. And reduce both sales and profitability year on year for that piece of business. For the branded Rynaxypyr business, we have a combination of factors at play. We are reducing price, particularly on less differentiated solo formulations that directly compete with low-cost generic entries. We're also seeing a mix shift where we're putting much more emphasis on our advanced formulations, mixtures, and high concentration product offerings. The combination of that mix shift, volume gains as we're increasing penetration of Rynaxypyr more broadly, not just into the existing markets, and a significantly lower cost. Right? We've continued to have cost reduction from 2024 to 2025 to 2026, allowing us to deliver relatively flat profitability of branded Rynaxypyr year over year. You know, at the top line, it's a similar kind of story, and it's, again, that combination of volume and price and volume including the mix shifts. Pierre, do you want to add some things to the dialogue for Rynaxypyr, Pierre? Pierre Brondeau: Yep. The only thing I would add is you cannot make a straight calculation of lower price, higher volume, where do we land in profitability? Because you have a change in the mix which is enormous with the work we are doing. I'll give you an example. I believe for Rynaxypyr in 2026, 50% of our sales will shift to advanced formulation. So it is not at all the same portfolio in 2026 that we would have in 2025. And it's 50% advanced formulation command a higher price. So there is no price decrease for those formulations. That's why we have to be very careful that it is not the price will be lower, the cost will be lower, and we'll have to increase the volume to compensate for the lower price. There is a very large part of the portfolio which doesn't see lower price. And as I said before, it's at least 50% in 2026. Operator: Thank you. This now concludes the FMC Corporation conference call. Thank you all for attending. You may now disconnect.
Operator: Good day, and welcome to the Core Laboratories Fourth Quarter and Fiscal Year 2025 Earnings Webcast and Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star and then 2. Please note this event is being recorded. I would now like to turn the conference over to Lawrence V. Bruno, Chairman and CEO. Please go ahead. Lawrence V. Bruno: Good morning in The Americas. Good afternoon in Europe, Africa, and The Middle East. And good evening in Asia Pacific. We would like to welcome all of our shareholders, analysts, and most importantly, our employees to Core Laboratories Fourth Quarter 2025 earnings call. This morning, I am joined by Christopher Scott Hill, Core's Chief Financial Officer, and Gwendolyn Y. Gresham, Core's Senior Vice President and Head of Investor Relations. The call will be divided into six segments. Gwen will start by making remarks regarding forward-looking statements. We will then have some opening comments, including a high-level review of important factors in Core's Q4 performance. In addition, we will review Core's strategies and the three financial tenets that Core Lab employs to build long-term shareholder value. Chris will then give a detailed financial overview and have additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the company's outlook and guidance. I will then review Core's two operating segments, detailing our progress and discussing the continued successful introduction and deployment of Core Lab's technologies as well as highlighting some of Core's operations major projects worldwide. Then we will open the phones for a Q&A session. I will now turn the call over to Gwen for remarks on forward-looking statements. Thank you, Larry. Gwendolyn Y. Gresham: Before we start the conference this morning, I will mention that some of our statements that we make during the call may include projections, estimates, and other forward-looking information. This would include any discussion of the company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from our forward-looking statements. These risks and uncertainties are discussed in our most recent annual report on Form 10-K as well as other reports and registration statements filed by us with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Our comments also include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our fourth quarter results. Those non-GAAP measures can also be found on our website. With that, I will pass the discussion back to Larry. Lawrence V. Bruno: Thanks, Gwen. Moving now to some high-level comments about our fourth quarter and full year 2025 results. Core continued to execute its strategic plan of technology investments, targeted to both solve client problems and capitalize on core technical and geographic opportunities. Fourth quarter 2025 revenue was up 3% compared to 2025. Full year revenue for the company increased slightly compared to 2024. Fourth quarter performance was driven by strong international demand for Core's proprietary technologies, which helped offset a seasonally soft US land market. Looking at reservoir description, fourth quarter revenue was up 5% compared to 2025, and up 6% from Q4 of last year, reflecting the continued demand for rock and fluid analysis across the company's global laboratory network. Demand for laboratory services tied to the assay of crude oil and derived products was negatively impacted by ongoing geopolitical conflicts and evolving sanctions, which were further expanded during Q4. These geopolitical tensions, along with supply-demand balance concerns, contributed to commodity price volatility during the quarter. Despite these headwinds, fourth quarter operating margins in Reservoir Description, ex items, remained strong at 14%, expanding sequentially by 60 basis points. The company's 2025 performance reflects Core's continued focus on operational efficiency and strong utilization across Core Lab's international laboratory network. In production enhancement, fourth quarter revenue was relatively flat compared to Q3, but meaningfully higher year over year, up over 8%. Ex items, fourth quarter 2025 operating margins in Production Enhancement were 7%, down from 11% in Q3 but up from 4% in 2024. Sequential results were negatively impacted by a provision for a potentially uncollectible receivable in Asia Pacific. This was partially offset by continued strong demand for Core Laboratories' proprietary completion diagnostic services across both onshore and offshore markets. Turning now to some fourth quarter highlights regarding capital allocation. The company continued its long-standing commitment to shareholder returns, during the quarter, returning free cash to our shareholders through our quarterly dividend, and by repurchasing more than 3,633,000 shares of company stock representing a value of $5,700,000. For the full year, repurchased 1,200,000 shares at a value of $15,500,000. Q4 marked the fifth consecutive quarter of share buybacks. Core intends to continue to use free cash to fund our quarterly dividend, pursue growth opportunities, and improve shareholder value through opportunistic share repurchases. As Core Lab celebrates its ninetieth anniversary, of its asset-light business model, the company's long-term success continues to reflect the strength of its global technology leadership, and Core's unmatched client focus. These strengths, combined with disciplined capital deployment, continue to drive long-term value creation for our shareholders. Looking ahead, Core will continue to execute on key strategic objectives by one, introducing new product and service offerings in key geographic markets, two, running a lean and focused organization, and three, holding to our commitments to return excess free cash to our shareholders while maintaining a strong balance sheet. The interests of our shareholders, clients, and employees will always be well served by Core Lab's resilient culture, which emphasizes innovation, the application of technology to de-risk our clients' decisions and solve their complex problems, along with dedicated client service. I will talk more about some of our latest innovations in the operational review section of this call. How to review Core Lab's strategies and the financial tenets that have guided the company's shareholder value creation through our more than thirty-year history as a publicly traded company. While we continue to pursue growth opportunities, the company will remain focused on its three long-standing, long-term financial tenets: those being to maximize free cash flow, maximize return on invested capital, and returning excess free cash to our shareholders. I will now turn it over to Chris for the detailed financial review. Christopher Scott Hill: Thanks, Larry. Before we review the financial performance for the quarter, guidance we gave on our last call and past calls, specifically excluded the impact of any FX gains or losses and assumed an effective tax rate of 25%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. The comparison periods for the 2025 and 2024 also include items that were discussed in those calls and highlighted in our earnings release for those periods. These items have also been excluded from our discussion of the financial results today. You can find a summary of those items in the tables attached to our press release for the fourth quarter and full year of 2025. So now looking at the income statement, revenue was $138,300,000 in the fourth quarter, up 3% compared to the prior quarter. Year over year revenue also increased 7%. The sequential improvement was primarily associated with increased demand for our reservoir rock and fluid analysis as well as completion diagnostic services in The US and several international regions. For the full year 2025, revenue was $526,500,000, up slightly year over year again driven by growth in our service revenue, however, substantially offset by a decline in U.S. Onshore completion activity and associated product sales. Of this revenue, service revenue, which is more international, was $107,000,000 for the quarter, up 6% sequentially and 11% year over year. Sequentially, we continue to see growth for our reservoir rock and fluid analysis service in The U.S. and several international regions, as well as demand for our completion diagnostic services in The US. Year over year, the increase was driven by growth in our reservoir rock and fluid analysis as well as our completion diagnostic services. For the full year of 2025, service revenue was $399,400,000 and was up 3% compared to $388,200,000 in 2024. Product sales, which is more equally tied to North America and activity, were $31,300,000 for the quarter, which is down 6% from last quarter and down 4% year over year. Our international product sales are typically larger bulk orders and can vary from one quarter to another and were down in the fourth quarter when compared to the third quarter. Additionally, U.S. Onshore completion activity continued to decline sequentially. Looking at year over year, the decrease in product sales was primarily driven by lower completion activity in The U.S. Onshore market. For the full year of 2025, product sales were $127,100,000, down 6% from $135,600,000 in 2024. Which again is primarily associated with lower levels of completion activity in The US. Moving on to cost of services. Ex items for the quarter was 75% of service revenue, which increased slightly from 74% in the prior quarter but improved from 76% in the same quarter in the prior year. Sequential increase was primarily due to increased labor costs and pass-through revenue during the quarter. The year over year improvement in cost of services was due to improved cost on a higher level of revenue in 2025. As discussed in our previous calls, the service side of our business has been more impacted by the geopolitical conflicts and associated sanctions. The volatility in crude oil prices and more recently, expanded sanctions continue to cause disruptions to the trading maritime movement of crude oil and derived products. And the associated crude assay laboratory services we provide. The company will continue to manage its cost structure as effectively as we can through these temporary disruptions in certain regions. Full year 2025 cost of services ex items, was 76% of service revenue compared to 77% in 2024. Cost of sales ex items in the fourth quarter was 94% of revenue compared to 88% last quarter and 90% in the fourth quarter of last year. The sequential increase was due to higher absorption of fixed costs on a slightly lower revenue base in the quarter and a higher level of bad debt expense. As we continue to focus on cost efficiencies, anticipate the manufacturing absorption rate in future quarters to be in line with projected product sales. For full year 2025, cost of sales ex item was approximately 89% of sales revenue compared to 88% in 2024. G and A ex items for the quarter was $10,600,000, down slightly from $10,700,000 in the prior quarter. Full year 2025 G and A ex items was $41,900,000 compared to $38,400,000 in 2024. For 2026, we expect G and A, ex items, to be approximately $42,000,000 to $45,000,000. It is also important to note that 100% of our corporate G and A expenses are allocated and absorbed into the financial performance of the reported segments. Depreciation and amortization for the quarter was $3,700,000 and increased slightly compared to $3,600,000 in the last quarter but remained relatively flat compared to the same quarter last year. EBIT ex items for the quarter was $15,700,000, down from $16,600,000 last quarter and yielding an EBIT margin of over 11%. Year over year EBIT ex items for the fourth quarter was flat compared to the fourth quarter of last year. Our EBIT for the quarter on a GAAP basis was $15,800,000. Full year 2025 EBIT ex items, was $58,700,000, down 10% from $65,300,000 in 2024. On a GAAP basis, EBIT was $56,500,000 for 2025 compared to $58,600,000 in 2024. Interest expense of $2,600,000 for the fourth quarter decreased slightly when compared to the prior quarter and comparable to the fourth quarter of last year. For the full year, interest expense was $10,600,000 in 2025, and was down from $12,400,000 in 2024. The decrease in interest expense for 2025 is primarily attributable to lower average borrowings on the credit facility. In January 2026, we funded the retirement of our $202,145,000,000 senior notes by drawing $50,000,000 against a term loan under our credit facility. The interest rate on our term loan is variable and tied to the SOFR, which will be approximately 200 basis points higher than the fixed rate on the retired notes, which was a little over 4%. As such, we expect a slight increase in our interest expense starting with 2026. Income tax expense at an effective tax rate of 25% and ex items was $3,300,000 for the quarter. On a GAAP basis, we recorded a tax expense of $6,000,000 for the quarter. For the full year 2025, income tax expense on a GAAP basis was $13,400,000, an effective tax rate of 29%. While the effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe, and the impact of items discrete to each quarter, we project the company's effective tax rate will be approximately 25% for 2026. Net income, ex items, for the quarter was $9,700,000, down 5% sequentially and down 7% from the same quarter last year. On a GAAP basis, we had net income of $7,100,000 for the quarter. For the full year 2025, net income ex items was $35,400,000, down 15% from $41,600,000 in 2024. GAAP net income for the full year 2025 was $31,800,000. Earnings per diluted share, ex items, was $0.21 for the quarter, compared to $0.22 in both the prior quarter and the fourth quarter of last year. On a GAAP basis, EPS was $0.15 for 2025. Full year 2025 earnings per diluted share ex items, was $0.75 and down 14% from 2024. And on a GAAP basis, EPS for the full year 2025 was $0.68. Turning to the balance sheet. Receivables were $113,500,000 and increased approximately $3,300,000 from the prior quarter. Our DSOs improved in the fourth quarter to sixty-nine days from seventy-one days last quarter. Inventory at December 31, 2025 was $54,500,000, down $3,700,000 from last quarter end. Inventory turns for the quarter improved to 2.1 from 2 in the prior quarter. Our team will continue to focus on managing our inventory with anticipation inventory turns will improve over time. And now to the liability side of the balance sheet. Our long-term debt was $113,000,000 as of 12/31/2025. And considering cash of $22,800,000, net debt was $90,200,000. During 2025, net debt was reduced by $18,700,000 from the end of last year. Additionally, our leverage ratio continued to improve throughout 2025 and ended the year at 1.09. Since announcing the company's commitment and focus on reducing debt in 2019, we have reduced net debt by $205,800,000 or 70%. At 12/31/2025, our debt was comprised of $110,000,000 in senior notes, and $3,000,000 outstanding under our bank credit facility. However, as I stated earlier, on 01/12/2026, we made a single draw of $50,000,000 on a term loan under our credit facility and repaid the 2021 senior notes which had a principal amount of $45,000,000. Lawrence V. Bruno: Looking at cash flow, Christopher Scott Hill: for 2025, cash flow from operating activities was approximately $8,100,000 and after paying $2,900,000 of CapEx for operations, our free cash flow for the quarter was $5,100,000. As discussed in prior quarters, the capital expenditures associated with rebuilding our UK facility which was damaged by fire in February 2024, are covered by the company's property and casualty insurance and have been excluded from the calculation of free cash flow. For the full year, capital expenditures for operations, excluding the CapEx associated with rebuilding the UK facility was $11,200,000. Looking ahead to 2026, we will continue to manage investment and working capital and continue our strict capital discipline and asset-light business model with capital expenditures primarily targeted at growth opportunities. Excluding the CapEx associated with rebuilding the UK facility, we expect capital expenditures in 2026 to be in the range of $15,000,000 to $18,000,000. Core Lab's operational leverage continues to provide the ability to grow revenue and profitability with minimal capital requirements. Capital expenditures for operations have historically ranged from 2% to 4% of revenue even during periods of significant growth. That same level of laboratory infrastructure, intellectual property, and leverage exists in the business today. We believe evaluating a company's ability to generate free cash flow and free cash flow yield is an important metric for shareholders when comparing and projecting a company's financial results, particularly for those shareholders who utilize discount cash flow models to assess valuations. We will now turn it over to Gwen for an update on our guidance and outlook. Gwendolyn Y. Gresham: Thank you, Chris. Turning to Core Lab's outlook for the first quarter of 2026. The IEA, the EIA, and OPEC plus forecast global crude oil demand growth of approximately 900,000 to 1,400,000 barrels per day in 2026. A slight increase from their previous forecast. As discussed in our third quarter 2025 release, the IEA published a report in September 2025 which noted accelerating natural decline rates in existing producing fields which pose a significant risk to long-term supply. This analysis underpins the need for sustained investment in oil and gas development to maintain energy security and market stability. In The US, oil production growth is moderating as capital discipline, maturing shale plays, and natural decline rates increasingly offset efficiency gains. As efficiency gains become less impactful, activity levels must increase to maintain or expand US land production. These factors support the ongoing demand for oilfield services and Core Lab is seeing operators prioritize production sustainment, well optimization, and recovery enhancement. International markets continue to exhibit resilient activity levels of a multiyear offshore development and long-cycle investments across key global basins. The company's reservoir description and production enhancement technologies are well positioned to support these ongoing investments. In the near term, tariff pressures and OPEC plus production policy decisions continue to contribute to market volatility and softer commodity prices. Despite these headwinds, longer-term crude oil demand fundamentals remain strong. Core Lab maintains a constructive multiyear outlook and continues to see steady activity across committed long-cycle projects, including deepwater development in the South Atlantic margin, North and West Africa, Norway, The Middle East, and select Asia Pacific markets. Revenue realization from these projects remains partially dependent on the geologic success rates achieved by Core's clients. Short-cycle activities, particularly in The US onshore environment, will remain sensitive to changes in commodity prices. Geopolitical conflict, and associated sanctions, evolving trade and tariff dynamics, and commodity price volatility, continue to create uncertainty in demand for Core Lab's products and services. Core also expects seasonal patterns to result in the typical sequential decline in activity during the first quarter of 2026. Severe weather events in North America caused freezing conditions in early January that disrupted both reservoir description and production enhancement client activities and Core Lab operations. In addition, adverse weather in Europe and the Mediterranean Sea also suspended client crude assay work and damaged one of Core Lab's facilities. While client operations have begun to recover, these weather-related disruptions have created additional revenue and margin headwinds for the first quarter. Turning to The U.S. for 2026, Core Lab anticipates US land completion activity will be down compared to 2025. However, the company projects completion activity to improve from current levels. Growth in demand for Core's diagnostic services and technological innovations in the company's prior energetic systems may partially offset softer US onshore activity during the year. To date, tariffs have not had a significant impact on Core's Reservoir Description segment. However, for production enhancement operations, certain imported raw materials are subject to tariffs. While tariffs are increasing supply costs and affecting margins, the company continues to take steps to mitigate their impact. In summary, reservoir description's first quarter 2026 revenue is projected to range from $82,000,000 to $86,000,000 with operating income of $6,800,000 to $8,200,000. Production Enhancement's first quarter 2026 revenue is estimated to range from $42,000,000 to $44,000,000 with operating income of $2,800,000 to $3,800,000. Core's full company first quarter 2026 revenue is projected to range from $124,000,000 to $130,000,000 with operating income of $9,700,000 to $12,200,000, yielding operating margins of approximately 9%. EPS for 2026 is expected to be $0.11 to $0.15. The company's first quarter 2026 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. The first quarter guidance also reflects a higher interest rate related to a term loan drawn upon on 01/12/2026 in the amount of $50,000,000. The term loan was used to repay the 2021 senior notes series A in the amount of $45,000,000. This term loan is subject to a variable interest rate in line with our revolving credit facility which is approximately 200 basis points higher than the fixed rate debt that was retired. Our first quarter guidance assumes an effective tax rate of 25%. With that said, I will turn the call back over to Larry. Lawrence V. Bruno: Thanks, Gwen. First, I would like to thank our global team of employees for providing innovative solutions, integrity, and exceptional service to our clients. As we celebrate our ninetieth year, the company's granite anniversary, our staff's collective expertise and their dedication to servicing our clients continues to be the foundation of the company's success. Looking at the macro, even as global energy markets work through near-term economic headwinds, and volatile commodity prices, the IEA, EIA, and OPEC all continue to forecast growth in global crude oil demand. These agencies are now projecting demand growth to range between 0.9 and 1.4 million barrels per day for 2026 compared to 2025. A slight increase from their prior guidance. In addition to the forecasted growth in demand, new production will need to be brought online to offset the natural decline from existing producing fields. Combined, these trends will require continued investment in the long-term development of new onshore and offshore crude oil fields. US tight oil production has been by far the largest component of non-OPEC oil production growth since 2010. However, the most recent EIA short-term energy outlook for US oil production projects approximately 13,600,000 barrels of crude oil production per day in 2026, essentially flat to 2025. With little or no year-over-year growth. This forecast reinforces the view that incremental US production growth is flattening. Continued growth in global oil demand combined with the constrained incremental US oil production growth supports the thesis that the balance of future supply growth must increasingly rely on discoveries and field developments outside the Continental US. Of particular note, during the fourth quarter, the IEA continued to pivot from earlier projections on the need for investment in new oil and gas production. The most recent IEA forecast shows oil demand rising to 113,000,000 barrels per day by 2050, using its current policy scenario. As highlighted in the IEA's September 2025 analysis, global field-by-field data show that the natural decline in existing producing fields is accelerating and has become a dominant long-term supply risk. The IEA estimates that absent reinvestment, global oil production would decline by approximately 8% per year due to natural field depletion. As a result, the majority of upstream capital spending globally is now required to just offset decline, not to meet incremental demand growth. The IEA also noted that nearly 90% of upstream investment since 2019 has gone towards sustaining existing production rather than expanding supply. The IEA now states that significant annual investment in oil and gas resource development will be required for many years to come and to ensure energy security and market stability. The US Energy Information Agency's reference case forecast shows even higher crude oil demand by 2050 rising to approximately 120,000,000 barrels per day suggesting even more investment in new oil production will be required. In summary, the current forecast suggests a multiyear cycle in which U.S. Onshore production growth slows and future growth in global supply will be driven by capital investment in international, conventional fields and unconventional opportunities in The Middle East, all trends that support increasing demand for Core Lab services across the globe, particularly for reservoir description. Core's reservoir description and production enhancement technologies are directly aligned with the investment imperatives required to find and develop new oil and gas fields and to improve recovery from existing fields. Now let's review the fourth quarter performance of our two business segments. Turning first to reservoir description. For 2025, revenue came in at $92,300,000, up over 5% compared to Q3. Operating income for Reservoir Description, ex items, was $12,700,000, up from $11,600,000 in Q3, yielding operating margins of 14%. With incremental margins of 27%. Incremental margins were negatively impacted by three factors, enhanced geopolitical sanctions enacted during Q4, pass-through revenue on a collaborative analytical program that was conducted with another oilfield service company, and increased labor costs. While demand for reservoir description lab services remained strong in several regions across our global network, ongoing international geopolitical sanctions, along with conflicts, along with sanctions, that were enacted in 2025 and which were further expanded in Q4 of last year continue to produce headwinds that negatively impact demand for laboratory services tied to the trade and transportation of crude oil and derived products. Now for some operational highlights from reservoir description. In 2025, Core Lab advanced multiple high-value projects across South America reflecting the company's expanding regional footprint and the growing demand for integrated reservoir characterization services. In Colombia, Core was engaged by a client to conduct an advanced geomechanics and reservoir characterization study within the Palagua field in the Middle Magdalena Valley. The project focused on improving reservoir performance across multiple vertical wells in a complex low resistivity contrast reservoir. The study addressed critical subsurface challenges including mitigating sand production risks associated with planned water flooding operations enhanced oil recovery. By integrating existing core and petrophysical data with well logs, along with the newly acquired geomechanical laboratory measurements, Core Lab's multidisciplinary team delivered core-calibrated models that provided actionable insights to optimize completions and enable a more efficient waterflood program. Also in South America and leveraging Core's expanding in-country capabilities in Brazil following the recent acquisition of Solentec, Core conducted laboratory services in support of a major carbon capture and storage initiative in the region. For this project, an ethanol producer is working to reduce CO2 emissions. Approximately 100 meters of core from an injector well were evaluated with Core's Nitro Digital Rock Tomography technology, which quickly delivered interactive three-dimensional visualizations of the strata along with petrophysical insights into the rock properties. The program also evaluated steel rock and geomechanical attributes of the rocks and determined how CO2 would react with both the rocks and the pore fluids. This work is ongoing, and the company's full array of analytical services are being employed reinforcing Core Lab's role enabling energy transition projects. Moving now to production enhancement, where Core Lab's technologies continue to help our clients optimize their well completions and improve production. Revenue for Production Enhancement for Q4 came in at $46,000,000, up over 8% year over year. Fourth quarter operating income for production enhancement, ex items, was $3,000,000, yielding operating margins of 7%, down from 11% in Q3, but up from 4% in 2024. Margins were negatively impacted by a provision for a potentially uncollectible receivable in Asia Pacific. There are no further receivables at risk with this contract. Margins were also impacted by raw material costs that have risen due to tariffs. In The US, diagnostic services benefited from strong demand as complex US land completion designs like trimmer fracs and extended lateral length horizontal wells become more and more common. Now for some operational highlights from production enhancement, In 2025, Core Lab supported a plug and abandonment operation for a national oil company in The Middle East. Through the deployment of its proprietary pulverizer system. The operation used a tubing conveyed perforating to support a multi-zone well abandonment program. During the operation, approximately 100 feet of Corelabs Pulverizer were deployed to rubblize the annular cement as a prelude to a perf wash job the placement of a permanent cement barrier. Following this the successful deployment of pulverizer and the installation of the cement barrier, a second deployment of an additional 100 feet of polarizer was executed uphold. In both of these intervals, the polarizer system provided a reliable alternative to conventional section milling plug in abandonment applications that would have been much more time consuming and expensive. Core Lab is proud to announce that the company's polarizer system received the 2025 offshore well intervention global award for plug and abandonment innovation presented by the offshore network an independent and globally respected industry forum. The award highlights Pulverizer's technical merit successful field application, its role in advancing plug and abandonment operations. Commercial adoption continues to expand with multiple international polarizer deployments scheduled for early 2026. Also in the fourth quarter, multiple US unconventional operators engaged Core Lab to employ diagnostic technologies to evaluate emerging plugless completion designs on their land wells. Plugless completion designs are aimed at reducing cost and improving operational efficiency. Core deployed its proprietary SPECTRASTIM proppant tracer diagnostics to assess diverter based stage isolation and to verify stimulation effectiveness across the multiple stage laterals. Core Lab's diagnostic technology delivered clear insight in the proppant placement and confirmed that these test cases, Plugless Systems successfully stimulated the stages. Lawrence V. Bruno: Moreover, these results demonstrate that Core's SpectraStim technology provides operators with a reliable, cost-efficient method to evaluate new completion designs. Additional diagnostically evaluated wells will be needed to determine the range of applications that are suitable for plugless completions. We appreciate your participation. That concludes our operational review. Dave will now open the phone for questions. Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are 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 and then 2. Our first question comes from Don Crist with Johnson Rice. Please go ahead. Don Crist: Morning, Dawn. Morning, guys. Lawrence V. Bruno: Good morning. Hopefully, you all are doing well this morning. Yeah. Fine, Don. Don Crist: Larry, the first question for me and I know it has gotten a lot of headlines recently, but maybe it has calmed down in the last week or two, is on Venezuela. I know it is going to take a lot to go back in there for these operators, but from Core's perspective, I would assume that you all have a long history there and could benefit if operators are looking to expand presence there. Any comments around Venezuela? Lawrence V. Bruno: Yeah, Don. Good question. And it is a common question that is coming up in meetings. So yeah. So it turns out Venezuela was the first international company that Core Lab ventured into some, and we were there for nearly sixty years. And so a lot of experience dealing with very challenging reservoirs in the Orinoco Belt, the heavy oil belt. And also our headquarters at the time were in Maracaibo. Our predecessors, I think, made a good call a number of years back when the red shirt showed up and looked like a challenging environment, and we left Venezuela and moved into Colombia. So what we do have is a fair amount of legacy data that we could monetize if there was interest in it. From people wanting to get back in and get up to speed on rock and fluid properties. I think for the near term, the bigger advantage is going to be for metal-heavy companies, not Core Lab. And so if you are a wellhead company, if you are into patching pipe, if you are into fixing leaks and environmental remediation, probably going to be where the first dollars are made down there. We would probably follow operators into the country. And we have mobile lab capabilities that we can deploy. And we can be present, in a yard with some power. That we can set up to do rock and fluid analysis or the basics at least in-country, and we can do that quickly. When the need arises. And then over time, we will look at the landscape and see if it makes sense to have a presence back in Venezuela. But I think that is a question that is several quarters at least away from having to be addressed. Don Crist: Yeah. I would agree with that comment. It is probably more of a 27 story than a 26 story, but just wanted to get, you know, your kind of expectation on it. So you know, we are hearing a lot of moving over to The Middle East, of commentary about rigs going back to work in Saudi and then good conversations in you know, Algeria and Turkey and other places on the unconventional side. I know it has been a couple of quarters since you put out a broader update on your Middle East facility that was built during COVID and kind of had a slow start. But do you have capabilities there to expand rapidly, or would you have to put more CapEx into that facility if you know, Algeria kicked off in a big way in, you know, later 2627, or Turkey or any of these other kind of areas picked up. Lawrence V. Bruno: Yeah. So let us bifurcate a little bit the Middle East and North Africa. So in 2025, we announced that we expanded our lab capabilities in Saudi Arabia to bring the full suite of analytical technologies that had been developed in our US operation for unconventionals, and we put that into the Middle East. And if you read our earnings release there, we were quickly rewarded for that investment. Large expedited project with some very nice returns on that. I think the what I how I would describe and I only have we only have one really great client, Saudi Arabia, We did not see the pullback in activity that some of the more drilling-focused companies did. We have ongoing great engagement with Aramco. They are a great client for us and have been for decades. And so throughout The Middle East, we have got opportunities, lab in Qatar, a nice flow of work from there. Oman, Abu Dhabi, and Kuwait. And we are in position with permanent facilities in all those locations. In North Africa, we recently held a technology conference to address opportunities across North Africa, from Algeria, Libya, Tunisia, and into Egypt, And we see opportunities developing there. There is a great need for people to assess damaged and underdeveloped fields that have been, I will call it, wilting under years of neglect. And so there are opportunities for us there. There are unconventional opportunities emerging. In that region that we have we will have a lot to say about. We currently operate or would service that out of our facility for rock and fluid analysis. On reservoir evaluation. And, again, if we have to put in some mobile lab operations to facilitate that, we are ready to roll. Don Crist: I appreciate all that color. And I guess one for Chris. You know, obviously, you shifted around some of the debt as you paid off the notes and put it on the revolver. Can you just kind of frame how you are thinking about future cash flows, free cash flow, and you know, paying off that revolver debt that has a higher interest rate versus share buybacks and just kind of your thoughts around that. Christopher Scott Hill: Sure. It did. Moving it into this term loan under the credit facility out of the private placement notes does give us more flexibility with that. There is no, you know, penalty to pay down that early. There are some required pay downs. I think it is $2,500,000 a year if my memory serves me right. So we will be paying it down as far as our use of free cash flow, we still think the stock is undervalued. You have seen us shift over the last five quarters. On using some of that towards share repurchases versus paying down the debt. And so I do not see that changing. You know, we are going to be opportunistic with the share buyback. So we see a dip in the market. We might get more aggressive. But I see it as a mix between continuing to make sure the leverage ratio kind of stays where we are comfortable but also using it to buy back shares. Lawrence V. Bruno: And, Don, I might add to that. Appreciate all the Donna, there is a quarter of a point click in our favor. We get the leverage ratio proximity to where we are. below one and we are you would see we are it is within it is within close That looks like a smart place to try to get to. As we can. But in the meantime, I think if you look at how we have been allocating capital between debt reduction and share buybacks, that is probably a good optics on where we are going. For the near term. Don Crist: All about those basis points. I get I appreciate all the color, guys. I will turn it back. Thanks. You, Don. Appreciate it. Operator: And the next question comes from Josh Jain with Daniel Energy Partners. Please go ahead. Josh Jain: Hey, Josh. Lawrence V. Bruno: Hello, Jarry. Good morning. Wanted to start with something you mentioned in the release and then also on the call, you talked about an increase in regional study sales on Africa and Brazil. Highlighting the renewed industry interest in exploration activity. And I feel like there were numerous large operators over the last couple of quarters who have highlighted the need for exploration activity international and offshore moving forward. So do you see this sort of as the beginning of demand accelerating as we move through this year? And into next year? Or, or do you think it was just you know, a little a small uptick in Q4? Just how do you see this all playing out? Lawrence V. Bruno: No. Josh, it is clearly a trend. And I have talked about this a little bit We think the trend has already started. And last year, we would have seen, I would say, markedly better performance in reservoir description. If we had not had so many operators come up with dry holes. So in other words, committed work to Core Lab, nice stack of work coming up for us, and a series of geologic failures, if you will, by the operators that resulted in no cores, no fluids. And so, we see that trend continuing. We have got a nice portfolio of project commitments in front of us. And I think, people are getting further along in their commitment to these larger projects and at larger evaluations. We do have core coming in. We have folks on location, in a number of places over the last, quarter. Or two and today. We do see an increase in FIDs around the world. That are all I would say, they are not indications. They are facts. That are showing that an international wave is coming. People recognize that the growth in US production is flattening. And look, there are opportunities in that. We are engaged with I will call it, mechanical improvements in a production enhancement that might help improve US production. And also, thermodynamic lab testing for ways to get those extra molecules out of the ground. We have got experiments going on in the lab for clients. So we are going to work on trying to improve recovery in The US. But for the longer term, the trend is clearly in the direction of more international exploration, and the bigger structures that can move the needle in terms of reserve replacement, which is a term we have been waiting to come back into the vernacular in the industry. Is going to be offshore opportunities. And so the sale of off the shelf and ongoing studies that we are able to provide allow people to quickly get up to speed on the geologic variables they are going to encounter as they drill in these, offshore environments, whether it is the South Atlantic margin or, offshore Africa. Or Asia Pacific. Josh Jain: Thanks for all that. And maybe we could just move to the oh, go ahead. Lawrence V. Bruno: Nope. We did not have anything. Oh, Josh Jain: oh, sorry about that. Maybe just to move to The US you highlighted the onshore environment and how it is obviously a little bit more sensitive to change in commodity prices. Could you talk to what those are? So if we sort of break out of this you know, flat to flat to down commodity price range that we have seen over the last couple of months, what it ultimately would take from a commodity price standpoint to sort of materially change the activity outlook in, in The US. Christopher Scott Hill: Yeah. I think, Josh, that is probably a better question for some of our operators. Lawrence V. Bruno: I think if I was if I was in their shoes, I would be looking for some stability in the commodity price. And, you know, you see eight, 10% swings, you know, $56 bouncing around here. And, look, a lot of the companies have different hedging strategies. And all that that impact their plans. I think it is best to defer to them on that But if you look at actions as an indication of their thinking, rig counts down, frac spreads down, And so would say it is still an environment that they are and, also, there has been consolidation in the industry. That is also impacting activity. Levels as those kind of sort themselves through. I would hate to put a price on it because I think it varies by company. Our objective is to use our product to help them get more oil and gas out of the ground. As cheaply as possible. And then where there are opportunities like enhanced oil recovery and unconventionals to do the lab testing that give them techniques that they can try to increase the recoverable on these unconventional wells from high single digits eight, nine, 10%. If we can help them get that to 12, 13%, by some laboratory proven techniques then that will be good for us and good for our clients. Josh Jain: Thanks for that. And then if I could just squeeze one more. I am not sure if you explicitly called out the tariff impact in 2025. Know you highlighted it in Q4 as sort of a headwind. But so if you did call it out, I apologize for missing it, but maybe you could talk about the impact in 2025 so that we could think about what the potential tailwind is, you know, moving forward in the event that things settled out a bit. Thanks. Christopher Scott Hill: Sure. Josh, this is Chris. So I think, you know, in 2025, it started to become more impactful. As we got into, I would say, the latter part of the third quarter and then the fourth quarter because we had previously purchased supplies. You know, think of raw materials for the products, but then also the chemical tracers for the service side. We had supplies that kind of lasted through partway through the third quarter. So those are all imported products. They all attract tariffs. Some are higher than others. So I think the impact in Q4 is you are going to see that repeat going forward unless there is a change in know, the tariffs that are being applied right now. So it is probably somewhere in the range of, you know, two to 3¢ each quarter. And it is primarily the production enhancement group but also some things in reservoir description, but not as impactful for that group. Lawrence V. Bruno: And, Josh, I would add to that. Thank you. I will turn it back. Yeah. I would add to that that we are always trying to mitigate this. And so, for example, on the chemicals used for diagnostics, we traditionally had brought those into The US, mixed up cocktails, of our proprietary blends of these chemicals to be used as tracers and then ship them out as we needed to various other regions on the world. Well, if we can ship those directly to the other regions and our expanding footprint like the lab we put into Abu Dhabi, for example, for tracer diagnostics. If we could ship those right to Abu Dhabi, going forward, we will bypass some of the tariff, call it complications that are presented to us in making up our proprietary tracer. So it is an impact for us. I would say it is hard part is planning. But steel costs have gone up. Energetic powders have gone up. Chemical tracers and lab supplies, have gone up. We are but we are working hard to mitigate that through our procurement process and how we let us call it, draw the arrows on where things come from and where they go. Josh Jain: Understood. Thank you for taking the questions. Gwendolyn Y. Gresham: Thanks, Josh. Operator: This concludes our question and answer session. I would like to turn the conference back over to Lawrence V. Bruno for any closing remarks. Lawrence V. Bruno: Okay. We will wrap up here. In summary, Core's operational leadership continues to position the company for improving client activity levels in the coming quarters and years. We have never been better operationally or technologically positioned to help our global client base optimize their reservoirs and to address their evolving needs. We remain uniquely focused and are the most technologically advanced, client-focused reservoir optimization company in the oilfield service sector. The company will remain focused on maximizing free cash, returns on invested capital. In addition to our quarterly dividend, we will bring value to our shareholders via growth opportunities driven by both the introduction of problem-solving technologies and new market penetration. In the near term, Core will continue to use free cash to repurchase shares, maintain a strong balance sheet while always investing in growth opportunities and evaluating various methods to increase shareholder value. So in closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab. Executive management team, the board of Core Laboratories give a special thanks to our worldwide employees that have made these results possible. We are proud to be associated with their continuing achievements. So thanks for spending time with us, and we look forward to our next update. Goodbye for now. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to The Hershey Company Fourth Quarter 2025 Question and Answer Session. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, Anoori Naughton, Vice President of Investor Relations for The Hershey Company. Thank you. You may begin. Good morning, everyone. Anoori Naughton: Thank you for joining us today for The Hershey Company's Fourth Quarter 2025 Earnings Q&A Session. I hope everyone has had the chance to read our press release and listen to our prerecorded management remarks, both of which are available on our website. In addition, we have posted a transcript of the prerecorded remarks. At the conclusion of today's live Q&A session, we will also post a transcript and audio replay of this call. Please note that during today's Q&A session, we may make forward-looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding future operations and financial performance. Actual results could differ materially from those projected. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. Finally, please note that we may refer to certain non-GAAP financial measures that we believe provide useful information for investors. This information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations for the GAAP results are included in this morning's press release. Joining me today are Hershey's President and CEO, Kirk Tanner, and Hershey's Senior Vice President and CFO, Steven Voskuil. I will now invite Kirk to begin with a brief introduction. Kirk Tanner: Hey, good morning, everyone. Thank you for joining us. Kirk Tanner: Before we get to questions, I just want to recognize our team and what they accomplished in 2025. Through skillful execution, we strengthened our market position, we invested for the future, and we closed out the year with real momentum, all while navigating serious headwinds like cocoa inflation and macro volatility. Heading into 2026, I am confident. Our portfolio is resilient. We're looking at 4% to 5% net sales growth and meaningful earnings recovery. That gives us runway to invest in innovation, brand building, and execution to drive growth. And we are going after it. Thanks for attending the call today, and we're ready to take your questions. Operator: Thank you. As a reminder, it's star one to join the question queue. To allow for as many questions as possible, we ask that you each keep to one question. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question. Andrew Lazar: Great. Thanks so much. Good morning, everybody. Morning. Good morning, Andrew. Hi. Maybe to start, I appreciate, obviously, the chocolate category is typically not one that is a pass-through category. And that, you know, Hershey and others are still hedged well above where current spot rates are for cocoa at this point. But I guess just given the precipitous recent decline in the commodity, is there a risk maybe this time around that we could see some price deflation at some point? By either Hershey or competitors to sort of better match, you know, go forward cocoa costs? And how do you account for that sort of possibility in the guidance? Kirk Tanner: Yes. Thank you for the question. Look, our competitors in the category are as sophisticated and large like ourselves, and they likely have coverage for more certainty in their business. And private label remains small here in the US. That's kind of the first point. But there's a big conversation around how we think about pricing and the price of cocoa, etcetera. I'd like to make a few points here. So first, we don't take pricing lightly, and we've been very patient and played the long game when cocoa markets surged to balance consumer needs. Our actions that we've taken are anchored in consumer insights, and the brands remain affordable and accessible. 75% of our portfolio is still under $4. The pricing we took in '25, I think this is important, does not fully cover our cocoa cost inflation in 2026. So we're on a recovery path while also adding significant fuel to our growth with investments in marketing, innovation, R&D, really to keep that momentum on the top line going and keeping the category exciting for consumers and keep that growth moving into '26 and beyond '26, into '27 and '28. And then recently, you know, pricing on our snacks business, I think we're in really good shape. We had 18% growth on our snack business in Q4 on, excuse me, on double-digit volume growth. Let me get a drink. Sorry, Andrew. Andrew Lazar: No. No. Take your time. Take your time. Kirk Tanner: Yeah. So maybe... Andrew Lazar: Yep. Yeah. That's, you know, kind of in a broad... Kirk Tanner: Broad response to what we see in the market. Certainly, the deflationary momentum on cocoa takes future pricing pressure down. That's how I think about it. Andrew Lazar: Got it. No. It's helpful. And then just a follow-up, I guess, regarding elasticity, it's great to see that it's thus far coming in more favorably than you anticipated. I guess I'm curious to what maybe do you owe this better outcome, you know, and is the company building in some flexibility in the plan? Should elasticity increase as we've seen maybe in some other markets for some other players? Thanks so much. Kirk Tanner: Yes, let me start and I'll kick it over to Steve so that I think his voice might be stronger. Anyway, look, we're encouraged for what we've seen so far. So, you know, we announced pricing in July. We started taking pricing mid-September, and so we've gotten information and, you know, that it's informed and, you know, our information is informed on what we're seeing right now, and we're encouraged by what we're seeing right now. Yeah. And I would say, you know, elasticities don't stay static. It fluctuates over time. While we're experiencing elasticities right now that's favorable to our original outlook, you know, we continue to plan for around 0.8 to account for these fluctuations as there's still some price pack changes to roll in. There are still some channels rolling shelf tags through. So it's gonna take a little bit longer, I think, for everything to fully adjust. Of course, our goal is to do better than that. So the strong activation calendar that we have, some of the investment that we have, you know, our goal is to do better, but the guide, you know, allows for some of that upside to flow through. Andrew Lazar: Thanks so much. See you in March. Kirk Tanner: You bet. Thanks, Andrew. Operator: Thank you. Our next question comes from the line of Megan Klapp with Morgan Stanley. Hi, good morning. Thanks so much. I'll maybe start with a question for Steve. To give Kirk maybe give you a little bit of a break. So another question on cocoa, but more related to the margin framework. So I think in the prepared remarks, you talked about... Steven Voskuil: Stable rates across the broader commodity input basket, just... Megan Klapp: Just given the precipitous decline we've seen in cocoa, how should we think about cocoa within the framework? Were you able to kind of capture any benefit from what we've seen over the last month, or is this really a tailwind as we think about '27? And what I'm really just trying to get at is, you know, I think you're implying 41% gross margins in '26, obviously, a really nice recovery from '25, but still well below, you know, where you've been historically. So, you know, based on where cocoa's gone, is it kind of reasonable to expect continued progress kind of back towards those historical gross margin levels in '27? Kirk Tanner: Thanks. Sure. Yes. Happy to take it. Hey. We're glad to see that the cocoa financial markets finally begun to reflect some of the fundamentals that we've been describing really for the last eighteen months. You know, as we look out, we continue to anticipate a larger supply surplus in '25 and '26. Driven by supply expansion and some of those new origins we've talked about. As well as the contraction in global demand. So I'd say we're optimistic as we look to the future. That said, you know, there's market volatility still as prices are trying to find that new equilibrium. And I think we still believe that new equilibrium is likely to be above what we've seen in historic levels. Our hedging program has in great shape for 2026. And we're hedged above current market levels. So if you kind of extend current market levels flat, you know, that would suggest that we still have some upside for further deflation in 2027. So we'll talk more about that as we get more 2027 and '28 perspective at the conference. But, you know, as we look ahead, we see more possibility for upside there in the future. Megan Klapp: Okay. Great. And maybe kind of a related question. A lot of discussion in the prepared remarks about the increased brand investment you're doing in 2026. Including a double-digit increase in advertising. So as you look out to '27, how should we think about kind of the durability of the increased brand investments you're making in '26? And as you mentioned, as gross margins hopefully kind of continue to expand as cocoa deflates, how do you think about kind of the need or desire for incremental reinvestment, you know, beyond what you're doing in '26? Kirk Tanner: That are gonna lay a foundation for not just '26, but '27 and beyond while still delivering great growth. In the present. You know, we're really focused on fueling demand creation through things like scaling some investments in R&D and innovation, brand building, the retail sales team, and the technology around that. That sets the portfolio up and really focuses on household penetration expansion and capturing new consumers, recapturing some of our lapsed consumers. So the investments are a mix of things they're gonna deliver today. But also things that are laying a foundation, multiyear foundation. And, again, as we look to '27, '27's also gonna be a year like '26 of driving growth, but also margin recovery. So, you know, that balance will be present in '27 just like it is in '26. Yeah. We'll go in greater detail at our investor conference in March. Really unpack this brand building, our investments in R&D. You know, the solution here is to have sustainable long-term top-line growth, and those capabilities and investments that we make are really important, and we'll unpack that in March. Megan Klapp: Great. Thanks so much. Looking forward to it. Operator: Thank you. Our next question comes from the line of Peter Galbo with Bank of America. Please proceed with your question. Peter Galbo: Hey, good morning, guys. Thanks for the question. Good morning. Steve, I actually was hoping maybe we could unpack the quarter a little bit. You had some pretty nice upside in the gross margin, I think, even relative to your own expectations to the tune of, like, 150 basis points plus. I know you outlined maybe some of that in the prepared remarks of the buckets, but maybe you could just give us a little bit more detail on the upside in the quarter between kind of tariff cost saving, volume deleverage, where those kind of buckets stood? Steven Voskuil: Sure. Yes. You're right. We had a few 100 basis points of better performance in gross margin than we expected in the fourth quarter. There are a couple of things in there. Obviously, volumes were strong, so we got a little bit more leverage. But probably the single biggest piece was tariffs. Now think about tariffs in two ways. Tariffs on our products, which we have high visibility to, and talk about that as, you know, some of that's still sitting in inventory to come out in Q1. But we also pay tariffs on some of our suppliers' items. And that was an area where we had we anticipated paying more tariffs on some of our suppliers' materials than we ended up paying in the fourth quarter. And that was one of the, I'll say, surprise to the upside or the positive for the quarter. Offsetting that, we had a little bit of LIFO headwinds, inventory reval headwinds, but that was the biggest piece for the upside. Peter Galbo: Got it. Okay. Thanks for that. And Kirk, you know, the prepared remarks had a notable on kind of Hershey and Reese's, you know, having a true campaign for the first time in eight years. I was commenting to Anoori this morning. Like, I've seen the Team USA ad. It's a great ad copy. But just, like, the impetus kind of for why now, you know, why this, why now on both those brands, again, given it's been some time would be helpful. Thanks very much. Kirk Tanner: Yeah. Thanks for that question. Yeah. This is the year of Hershey. We're investing in Reese's as well. But when you look at the campaign, it's your happy place with Hershey's. That really builds on the connection and love that consumers have for the brand. And staying relevant with consumers on big brands is so important to fuel our growth. We've got a full year planned on both Reese's and Hershey. You'll see innovation on both. There's big innovation coming out on Hershey. And then, of course, we have the movie celebrating Milton Hershey and really the great American story, success story of The Hershey Company. Coming out in the fall. So it really is an action-packed year that really celebrates these two big brands, and that drives growth for us. Peter Galbo: Great. Thanks very much. Operator: Thank you. Our next question comes from the line of Peter Grom with UBS. Please proceed with your question. Peter Grom: Great. Thank you. Good morning, everyone. I wanted to ask on the '26 guidance. And understanding a lot has changed over the last few months as it relates to cocoa, tariffs, the last But I kind of wanted to bridge from the expectation last quarter of being on algorithms maybe being a little bit above that post tariffs to now kind of expecting 30% to 35% earnings growth. And I ask that more in context of trying to understand the degree of cushion or flexibility in the guidance just given the expectation for such strong growth. Kirk Tanner: Yeah. Let me address just the momentum on the top line, and let Steve talk about the EPS portion. But if you think about what's different between now and, you know, when we talked last is the momentum in the business, and it's across the portfolio. So we've got real strength in our CMG business. We continue to see that. And then fundamentally, how we're investing in our brands delivering innovation, that gives us the confidence on the top line. And then our salty portfolio has been really, you know, has got a lot of tailwinds. It's really positioned with consumers in the right places. Again, we saw 18% growth organic growth in quarter four in our salty business, and that's double-digit volume growth. So we see real health there. And the combination of our salty and sweet portfolio gives us the confidence to deliver the top line, which also, of course, helps our earnings. So that's different. Then on EPS, Steve can talk kind of through the levers there. Steven Voskuil: Sure. You know, we're in a it's a good spot to be in for a change where we have, you know, two of our biggest risks, cocoa, and tariffs, fully understood, you know, at least up to the moment. For the year. So that's a good place to start. On top of that, you know, since we last talked, we've got a better view. We get the new data every day on the elasticities. We feel better about what we're seeing. We haven't, as we said earlier, unbuilt all that potential upside into the plan, but we believe we've got a good, balanced outlook on elasticities. We've got strong operating plans with Kirk. Kirk and I have been through in detail in the last few months and we're excited about those. And at the same time, we're balancing that with, you know, understanding the headwinds from the macros and making sure that we've got a balanced view of how those could play out for the year. As we think about the gives and takes that we sometimes focus on, you know, what's in our control, and what's outside our control, you know, in our control, as we said earlier, we want to do better on elasticities, and we've got strong programming and brand engagement to do that. We've got investments in innovation, media, in-store activation. And then, you know, the ability, which we've done a great job of delivering on productivity and cost savings. So get very high confidence in that set of controllables. But there are things out of our control, you know, macro headwinds, which, again, I believe we got a prudent outlook for. Competitive response. Again, we're not seeing anything today that's causing concern, but these are the things that we will certainly keep an eye on. I think a key as we think about the 2026 guide is that, you know, we have flexibility to respond to what's gonna change and challenge. And so we've done a good job of being agile in '25, and we will do the same in 2026. Peter Grom: Great. And then maybe just a follow-up on salty. There was a competitor this week that talked about, you know, affordability, price reductions, that they're seeing expanded shelf space. Distribution. I know that there's some subcategory differences but just curious how you see that playing out the category and maybe any implications for your business as well. Kirk Tanner: Yeah. Our salty business has got a lot of momentum like we talked about. 18% double-digit growth for the full year and really healthy volume growth. Customers reward space on performance and velocity. That's fundamental of the category management. And so we are as well. We're expanding with our customers, and customers need our growth. If you think about the category, the salty category was relatively flat last year. We grew double digits. So we provided a lot of growth in the category. And we'll continue to do that with our customers. And we'll be rewarded with space gains and additions including, you know, support for the innovation that we bring out on our salty business. So I feel really good about the fundamentals of where we are with our salty business and that momentum will continue. Peter Grom: Great. Thank you so much. I'll pass it on. Anoori Naughton: Thank you. Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question. David Palmer: Going to hit I want to hit on that line of questioning you heard earlier. You know, people right now are gonna be wrestling with how to think about earnings into '27, which is ridiculously early. I know. But, you know, people are gonna clearly be imagining, you know, $10 or more in earnings in '27 just thinking through where cocoa is today and likely it could be in the 4 thousands for that upcoming year just based on how you might be hedging this year into that year. Just wondering, like, things that wouldn't maybe not make we don't wanna get ahead of ourselves in terms of flow through, things that could hold back that flow through to get to those types of numbers, you know, price elasticity moving over 0.8, I would imagine, would be one. But other wish list types of reinvestments, any thoughts on that would be helpful, and I have a follow-up. Kirk Tanner: Sure. As we said, we'll unpack this more in the Investor Day. You know, I agree with you. I think we all agree the external factors that as we look out seem to be improving. Cocoa, one of those. You know, we'd agree that today if you were to snap a chalk line, you'd probably say that looks like a potential tailwind for 2027. But it's still volatile. It still hasn't found its new normal. And, you know, we continue to watch it. On the other side, you know, we are gonna, as we said earlier, continue to make investments in the portfolio and products that are gonna set us up for, you know, multiyear performance. And so we feel good about what we have in the 2026 plan. Some of those are gonna carry over into '27. We are always gonna balance the margin and the growth. So, you know, don't think about that investment as taking away that margin recovery, but it's a balancing factor. To make sure we enable long-term growth. And then as we talked about earlier, you know, we're gonna watch those macros very closely. You know, we'll get more data on SNAP. You know, we've got a lot of data coming in on GLP ones just like many of you do. We have a team of people who does nothing but study and analyze these macros to understand the impact on our business. And so we have built in what we believe is the best information today into that guide. But that'll be a place we'll watch, as it develops over the course of this year and we get more data. David Palmer: Thanks for that. And just, I know I wanna front run your Investor Day, but, you know, Kirk, you obviously have been in the CPG space for a while. You have fresh eyes on this business. You obviously have a chance to have a say in the plan for '26 and '27. You know, in terms of how we should think about the type of growth activations and the things that you're doing, the levers that we will see more of perhaps than that we've seen in the recent past. Any thoughts on that? Just tease the Analyst Day a bit. Thanks. Kirk Tanner: Yeah. Let's tease it out. But, hey. Look. First of all, we'd love to see you all on March 31 in New York. We're excited to share that. I'm excited to share the plan. So, you know, 2026 is really the first chapter of our next generation of growth. And it really and what we'll kind of share with you is the portfolio that we're building, the look. We have a terrific portfolio today. We'll continue to invest in that portfolio, and we're gonna double down on our strengths. And those strengths will fuel that top-line growth while we return earnings to our shareholders. And we'll bring that to life in, you know, at the investment Day. And we'll be very articulate about what investments we're making, what capabilities, and what outcomes we expect. But you'll see that really come to life. We're really excited to share that with you. Anoori Naughton: Thank you. Leah Jordan: Thank you. Our next question comes from the line of Leah Jordan with Goldman Sachs. Please proceed with your question. Good morning. Thank you for taking my question. There just seems to be a lot of attention and excitement about the innovation and activation plans in a lot of your commentary today. So seeing if you could provide more color on the plans you have for the coming year, key timing we should think about then I think, ultimately, how do you think about growth in innovation versus core for the coming year? Thank you. Kirk Tanner: Yeah. I think it's a balance. You know, we just talked about some of the investments we're making on Hershey's and Reese's. I think that, you know, quality core growth is really important. And there's innovation in those places as well. But innovation is so important to the category. And we've had some really good innovation as of late. Reese's Oreo has been a really nice tailwind for us, and that continues through most of this year where we have, you know, two-thirds of the year will have, you know, that being a real positive to us. And then we have a pipeline of innovation that, you know, we're launching across our sweets and chocolate portfolio. That we're excited. Plus, we have really good innovation on our salty business. And so innovation on our Hershey brand, Dots brand, Skinny Pop, Jolly Rancher, you'll see all that innovation. We'll share all that innovation, and our upcoming investor day, but it is robust. And then if you think about '27 and beyond, it's important that we have a pipeline of innovation that continues through '27. And that's why we're making continued investments in R&D so that we can be at, you know, come to the market faster with the most relevant consumer-facing ideas, and we'll share that pipeline as well. Leah Jordan: Okay. Great. We'll look forward to that. I think for my follow-up, I just wanted to go back to the gross margin discussion. Specifically around this year and the cadence. You for the color on the 400 basis points we should expect for the full year a little bit of pressure in 1Q and improve thereafter. But any more color on the puts and takes we should think about in the magnitude of that improvement as we go through each quarter? Kirk Tanner: Thank you. Steven Voskuil: Sure. You bet. I could take that one. As we kind of look through the flow of the quarters, we're gonna see, you know, the first half is gonna be or excuse me. Q1 will be the strongest from a top line. Standpoint. We're going to carry the momentum out of the fourth quarter feel really good about our visibility in the first quarter on the top line. But margin and earnings are gonna be remain under pressure because we still are gonna have higher cost in mid-store inventory. We're still going to have tariffs in that inventory. So we'll see margin and earnings pressured in Q1. As we go to Q2, the top line growth's gonna moderate slightly. But you're gonna see an inflection from a gross margin standpoint. And we expect to see, you know, double-digit EPS growth for the balance of the year. From there. Of course, we know we got tougher comps in the second half, but we factored that in as we think about this flow. So think about momentum carrying through the first half on the top line. Second quarter inflection from a profitability standpoint. And then, you know, we'd expect to see our brand investment up double digits across the quarters, and this reflects, you know, some of those investments we talked about earlier. Leah Jordan: That's very helpful. Thank you. Steven Voskuil: You bet. Anoori Naughton: Thank you. Our next question comes from the line of Max Andrew Gumport with BNP Paribas. Please proceed with your question. Max Andrew Gumport: Hey, thanks for the question. Clearly, elasticity so far has been encouraging. And I'm not expressing my own view here, but one that I hear from some investors. I think there's a narrative out there that once you get through this pricing cycle, you'll be unable to grow your chocolate volumes for several years. It, you know, similar to what we're seeing other packaged food categories currently. I realize we're, you know, we're a long way away from that point in time, but I'm just curious what pushback you'd offer to that narrative and if there's any historical presence you're focused on. Thank you. Kirk Tanner: Yeah. Let me break it down. Look. You know, we like where we're at with the really the big categories across our confection business and our salty business. The confection category has been very resilient over time, and it remains resilient. It is an emotional category that consumers look for. And if you think about where the growth is right now in retail, it really is around functional and emotional brands. And so that gives you confidence to see that continue to grow. And if you just look historically, it's been a very resilient category, so really good category. On the salty side of the business, I think it's really important to be in the right places in the category. Permissible, better for you. Portion control, those are areas that continue to leverage growth. Consumers are willing to pay for that. That's where the growth is, and that's where our brands are positioned in the category. Give you a couple examples. Skinny Pop is doing exceptionally well. It's a real relevant. Popcorn's very relevant. In with consumers today and will be long term as we see, you know, those consumer trends and what they're looking for. Dot pretzels really shows how you can reinvent a category and drive growth. DOTS is now the number one pretzel in the category and it is about tying into the relevance what consumers are looking for. That, of course, you're going to hear more about kind of the long term at and I'm really plugging this investor day, so I hope you're all I hope you're all coming. But we'll walk through kind of the long-term plan and how we see the categories and how we see the sustainability of that over the long-term horizon. And I think we'll have an opportunity there too to talk about how we can play offense on some of the some of the categories that are gonna see more growth. So we know sweets, better for you, premium. Some of the functional products that we're gonna talk about. I think we're gonna have a really story about what how they can lean into the volume story as well. Max Andrew Gumport: Great. Thank you. And then in Europe, I realize you don't have much of a chocolate presence, but it's a market where we an interesting corollary. Because in Europe, we saw chocolate pricing get taken earlier in a sizable way. And elasticities were quite encouraging as you're seeing in the US currently for your own chocolate business. But in the '25, we started to see price elasticity ramp up meaningfully in Europe ahead of where the industry expected them to be. So I'm sure you're studying consumer behavior over there. Even if you don't have much of a presence. I'm curious what your learnings are that you've taken, and if there's any factors you're seeing that make me consumer in Europe how they approach chocolate, different from the US consumer. Thanks very much. Kirk Tanner: Yeah. Yeah. Thanks for that question. Yes. And we are definitely studying that. Look. We've taken a very patient approach as we've, you know, the impact of cocoa and the pricing. So we've taken a very patient approach through the lens of the consumer. The categories, though, in the US look very different than Europe. There's more brand differentiation. So you look at the brands across the portfolio. There's a lot high level of differentiation. There's a variety across the portfolio, and the top players have higher market share. Europe has a concentration of chocolate tablet bars, and private label. But there is a very distinguished difference between the brands in the US and the role of each of those brands play in the confection category. So there is a big difference. And the category skews premium. In Europe, and it's screwed it, you know, skews mainstream in the US. Relative affordability is still a key component of the category. Again, you know, we mentioned that 75% of our portfolio is under $4, very accessible to consumers. Anoori Naughton: Thank you. Our next question comes from the line of James Salera with Stephens Inc. Please proceed with your question. James Salera: Hi, Steve. Good morning. Thanks for taking our question. Good morning. I wanted to ask a little bit around SNAP. As, you know, we roll into '26, there's some incremental rule changes, I think, both on work requirements and some states restricting what you can buy with SNAP dollars. Just walk us through, I guess, first, the overall percentage of your portfolio that is exposed to SNAP dollars and maybe how you're thinking about those changes in 2026 since you're all relatively new to the program? Kirk Tanner: Yeah. Thanks, Jim. The SNAP let me just give you what we know on SNAP, and the is how we're seeing it. Look, our early assessment in the states where waivers are in place is still pretty noisy. It's been just since January, and we're looking at winter storm implications. And, really, the difference across retailers is they implement it. We've been proactively spending time with customers and consumers in these states to get ahead of the choices they're making. And we are readying our strategies to deliver for them. We have factored the SNAP waiver adoption into our outlook. And we'll continue to monitor that and provide updates over the course of the year. So to date, only two states have implemented SNAP waivers for candy. Of the 12 states, that have waivers approved. So in total, throughout the course of the year, there'll be 12 states that are impacted, two states so far. We'll gather those insights, again, it's pretty early days, but it I would tell you it's a manageable headwind, and it's contemplated in our outlook. James Salera: Great. And then shifting gears a little bit, you called out the, you know, 10 different cultural and seasonal events this year to boost engagement. Are you able to quantify how much of an incremental uplift we should see from kind of that more filled calendar relative to, you know, what, like, a normalized year would be? Kirk Tanner: Yeah. I think it looks if you kind of look at our outlook, it's reflected in that outlook. Like it continues to make our top line robust. And because some of the kind of the background on this is we have excellence in executing seasons. So we gained share across the seasons last year. But what makes it so great is we have these consumer love brands coupled with great execution in the marketplace with our retail sales team. This gave us insight. It's like we have the opportunity to be a part of more cultural moments and the Olympics starting this weekend is really the first of those. But we'll show up for NCAA final four, then we'll show up in the summer celebrating 250-year anniversary of our country. Our brands are expected by consumers to show up in these big cultural moments, and connecting our brands to these cultural moments gives us the license to have more activity throughout the year in these cultural moments in addition to seasons. And it has this almost always-on approach where you can see our brands, salty and our sweet brands together in the marketplace celebrating these moments. And kind of that's the background of that. James Salera: Right. I appreciate the color. I'll hop back in the queue. Thank you. Anoori Naughton: Our next question comes from the line of Thomas Palmer with JPMorgan. Thomas Palmer: Good morning. Thanks for the questions. Discussed you discussed plans for double-digit A&C increases. And then, lest I missed it, your answer to Andrew suggests that your pricing plans some of which have not rolled out, still hold. I did want to ask on promotions. How do you consider the possibility of stepped-up promotions later this year? Maybe balancing the optionality of promotions versus allocating towards marketing dollars? Kirk Tanner: Yeah. So let me ask let me answer the advertising and the investment we're making there. So we got great programming around building our big brands. Like we talked about, Hershey and Reese's, plus we have these programs, these cultural tempo moments that we will support throughout the course of the year. It is a balance of delivering pull and push. So you think about that demand creation, we're very cognizant and we have great return on these investments to deliver that. That delivers the top line. And then from an execution standpoint, I would tell you that the category remains very rational from a pricing standpoint. We'll continue to leverage promotion to drive excitement with consumers and deliver that right price point for them. We'll, you know, be in concert with the execution across our seasons in these 10 pull moments throughout the year. But I would expect overall very rational category. Yep. And I would just say, on the first part of your question, you know, just to be clear, all the pricing's been sold in, so that's not a risk. There's nothing else. Pricing wise, that's gonna drop. Thomas Palmer: Thanks for that. The prepared remarks, there was a comment about expected low single-digit sales growth for international. I wondered if maybe you could provide some color on expectations in the other two segments. And then also, there was a comment about profit recovery for international, and I wondered to what extent that might reflect incremental pricing actions because they were relatively modest as we look at 2025? Steven Voskuil: Thank you. Kirk Tanner: Sure. I can take maybe the segment piece first. So and just to share a couple headlines. So organic sales growth, on the confection segment around 3%. Salty snacks, mid-single digits. International, down low single digits. So that's the organic top line. From an EBIT standpoint, we've got all double-digit across the segments. Year over year. So that's kind of the highlights on the segments. On international, you know, we've taken a lot of price this year. And, you know, that's part of what we're seeing in terms of some of the volume impact from that. We play in the premium part of the market. We've got cocoa-intensive products. And so we've been in some cases stronger on pricing in order to make sure we're setting up a good strong future P&L. We've been very thoughtful about trying to focus on the markets where we believe we have the best case to win. And making some choices on go-to-market to, you know, that, again, are thinking about the future and the profitability. Despite the challenges, we've had some wins in the international market. We'll talk about some of those and how we're expanding on those when we get to March. But we do have a mix of sort of recovering for cocoa. Pricing, and then also optimizing the portfolio itself to make sure that as we look to the future, you know, we're investing behind our big brand like Reese and also our core markets with a streamlined route to market. Kirk Tanner: Yeah. Let me add on a couple things on international. Look. I'm really bullish on the opportunity that we have internationally. I look at our track record right now just from how we're performing in the markets. Our key markets, and we're gaining share gaining share across Canada, Mexico, Brazil, The UK. I think those are really important proof points that we have the opportunity to do that. We're gonna bring a focused strategy on our international business in March that really articulates how we're gonna make investments and why we have a right to win in these markets. But more to come. Thomas Palmer: Thank you. Anoori Naughton: Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question. Michael Lavery: Thank you. Good morning. Good morning. Want to come back to guidance. I know you laid out some of the flexibility or ways that, you know, you're trying to allow for risks and capture those. But curious not to get too greedy if there's expectations where you can point to potential upside and maybe also specifically how to think about buybacks. I know you said there weren't any in the last quarter, but you mentioned the authorization that remains. Are any of those included in the outlook for 2026? Steven Voskuil: Sure. So I'll come on to buybacks. On the upside, we touched on some of these already. I mean, if elasticities were to hold in the sort of space they're in now, that would be a potential upside. Even the macros, although, you know, our outlook is to expect the macros like SNAP and GLP one to have a growing impact across the quarters, which I think is reasonable. If that is slower or less impact, I think that's upside to what we've tried to prudently build into the outlook. Things like the performance on innovation, media, all these in-store activations tent poles that we've talked about. Again, our goal is to execute all those to try to beat the plan, but those would be potential upsides. And then, you know, as always, we want to exceed our productivity and cost savings goals. So we've got what I think are good challenging objectives there to go get, but our supply chain teams are fantastic, and they're gonna go hard against trying to beat those. So I think those are all the kind of things we would point to. When I look at it in total, I feel like we look at the guide, you know, it's balanced. We're trying to recognize there are upsides and opportunities to beat in some areas, but also, you know, there are still some unknowns. That we want to make sure we can contend with. And that's where the agility piece comes in. On buybacks, you know, what I'll just maybe just say our capital allocation strategy is kind of resetting back to normal. A little bit. And so, you know, without some of the pressure, cash pressure in particular on tariffs and cocoa. And so, you know, as you can tell from the guide, you know, our focus in job one is to make sure we're funding the business and driving good, smart, long-term investment in the organic business, you know, maintaining a posture of agility relative to inorganic growth opportunities, you know, we're integrating LessRevo. That's going very well. We're gonna continue to look for those sort of opportunistic places. You see CapEx kind of normalizing again. Back into the space where it should be. You see us focused on, you know, working capital efficiency like we are every year driving savings. Dividend returning to growth, which is very important to us. And I'm pleased to see that. And we feel good about leverage and where we're at and the trajectory on leverage. So all that kind of comes then down to the repurchase and as we've said in the past, you know, share repurchase is a great way to put tension in the capital allocation equation. Right? We're not gonna warehouse the shareholders' money if we can't wisely invest it the future, we're gonna give it back. And so that conversation is now back on the table because we're gonna have strong cash flow. We've got great investments supporting the business. And as the year progresses and we get a little bit more perspective on, on some of these, macros and everything else, we'll reintroduce that conversation. Michael Lavery: No. That's great color. Thanks. And it sounds like you might be having an Investor Day soon, but and I'm sure you'll get into this in, obviously, much more detail. But as you lay out some of the investment opportunities and the reinvestments you're making this year, just at a high level, maybe can you give us a sense of how much we should expect a near-term impact versus longer-term and how that kind of fits into your thinking? Kirk Tanner: Yes. I'm to punt the details of that site to the Investor Day. What I would say is all of these investments have something to do for us now and are going to things to do for us for the future. You can imagine investments in R&D. You know, the near term on R&D investment may not be as big as we're gonna see in '27 and '28. But even so, we'll get some early insights from that. And so we'll unpack that more, but you know, think of these as multiyear investments, but they do have benefits even as we get to especially the back end of this year. Yeah. Let me just add. You know, these investments are all about driving growth. Top-line growth, sustainable growth, modernizing our portfolio. So those are fundamentally what's backing this growth is to fuel and keep heat on our brands with consumers, launch innovations that are relevant, and do the R&D so that we can continue to modernize our portfolio for the future, and staying relevant is so important. So it really is about fueling growth. Michael Lavery: Okay. Great. Thanks so much. Anoori Naughton: Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question. Alexia Howard: Good morning, everyone. We start with can I start with the price elasticity in international market? Versus the US? Do you have views on why the trends seem to be worse in the international markets and why they're better over here at the moment? Kirk Tanner: Yeah. Excuse me. Yeah. Let me take that question. You know, we discussed a little bit. There's a big difference between the two categories for, you know, for starters. The category in the US is highly unique. The category is very differentiated. Across the portfolio. There's a lot of runway by brand across the landscape in our big confection category in the US versus a high chocolate tablet bar market in Europe along with the private, you know, the impact of private label. So you think about affordability also as a real big lever and the category is affordable. It skews mainstream, you know, our portfolio is still mostly under $4. That, I think, is a really big difference. But the resiliency has been really positive for the category here in the US and, you know, what we've seen so far, we're encouraged by. I would say, you know, specific to our portfolio in international and the elasticities keeping in mind, we are premium market positioning. So we see some more elasticity there. We're relatively limited in scale in some regions and, you know, not a market leader. So those are factors with our portfolio in that drive higher elasticity. Alexia Howard: Great. Thank you very much. I'll pass it on. Anoori Naughton: Thank you. Our next question comes from the line of Matt Smith with Stifel. Please proceed with your question. Matt Smith: Hi. Good morning. Steve, you called out an increase in both marketing and operating costs through the year. It sounds like marketing up double digits is fairly evenly phased. But is there anything you need to call out on the operating costs? And with operating costs growing in line with sales, is this a level of investment that you as you exit 2026 allows some future leverage from SG&A? Thank you. Steven Voskuil: Sure. So I think across the quarters, would guide to probably gonna be pretty even. There are gonna be some. And, again, I'll go back to things like R&D that will try, excuse me, build a little bit more in the back half. And we'll unpack that more when we get to Investor Day too. But I think overall, it should be up across the quarters. With respect to leverage in '27 and beyond, again, I'll go back and say, while we're investing in some of these investments, our multiyear investments to set up, you know, a future of growth, we are also aware of the margin recovery story that we need to continue in 2027. So, you know, we have always two things going on at once. You know, we're looking to make smart long-term investments in the business, but at the same time, we want to fuel that investment with productivity and savings. And so we kind of say, hey. We're investing for demand creation. But we want to drive demand fulfillment efficiency. As well. And so and we're very good at that, and so we're gonna continue to drive supply chain efficiencies. We're gonna drive efficiencies between the lines, like we've done with the transfer transformation work. And continue to drive there too. So our goal is over time, we are gonna see leverage across all of those lines. Matt Smith: Thank you. Looking forward to seeing you in March, and I'll pass it on. Anoori Naughton: Thank you. Our next question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question. Robert Moskow: Hi. I had a question about, like, just trying to understand how you forecast all of these macro factors at once. Like, you know, you have the SNAP cuts from a federal level. You have the waivers at state level. You have the GLPs, and then you have, you know, elasticity from higher pricing. And I think you've done a really good job of keeping things pretty conservative on the elasticity assumption. But it the models that your team is working on, Steve, like, can they can they figure out the cumulative impact of all these things at once? It sounds just like a lot to put into models that probably don't have a lot of historical precedence for that. Steven Voskuil: Yeah. I mean, it is it's a challenge for sure. You know, in each one, I mean, we've said this before, you know, we've got we've got a small team on each of these, really trying to deep. And in the case, as Kirk said, in the case of SNAP, we have people on the ground working retailers to understand exactly how this is working out on shelf, what retailers are doing, what we're doing. And so, you know, we're trying to get firsthand information to build into these models. And then at the same time, we do try to run scenarios. And to come up with a risk-balanced view across these macros to try to come up with an assumption for the outlook. And, you know, I know we'll be wrong. You know, I don't, you know, we've tried to be prudent and balanced in the way we look for and project these out. But, taking the best information that we have. You know, we get smarter. Every month that goes by, we'll have more data. And I expect that some of these programs, excuse me, some of these things like SNAP, more states get involved. GLP one's adoption gets easier. You know, we're trying to predict different ways it could play out. And then, again, how our portfolio can play offense against some of those challenges. Robert Moskow: Okay. And that was kind of my follow-up. You said that you're working with retailers in a couple of states where the waivers are happening. Like, can you be more specific on what playing offense means? Like, what kind of things can you do? Kirk Tanner: Sure. You want me to take that one? Yeah. I can jump in? I like playing offense, so this is good. Exactly. Right. Yeah. I mean, it's a lot of it has to do with, yeah, when you work with customers, affordable price, you know, affordability, still remains a really important part and driving other channels too. So you know, we have a big convenience business driving our immediate consumption business, driving availability of those top SKUs are critically important. But I just go back to how do we drive the insights around the affordable price of a price points, unique packages, those are solutions, with our customers. Again, two states out of the 12 states have been implemented. It's early days. We'll continue to, you know, discuss this as we get greater insights. And we'll talk about the tools that we're leveraging to, you know, curtail this headwind? Robert Moskow: Very good. Thank you. Anoori Naughton: Thank you. Our next question comes from the line of Scott Marks with Jefferies. Please proceed with your question. Scott Marks: Hey, good morning. Thanks so much for taking my questions. Two questions from me. The first one is on cocoa. I think previously you had said that you were hedged for '26. Above the rates you had locked in for '25. But that you also had some flexible hedging structures. So given the comments today around stable commodity basket, should we assume that means that your cocoa cost in '26 is actually in line with that of '25? Steven Voskuil: Thanks. So yep, so cocoa is up just a little versus 2025. And what we said before is it's hedged above current market levels. So it's not hedged materially above '25, just hedged above where cocoa's trading right now. We when we just like we did last year, you know, we've got a variety of hedging structures. And some of those structures allow us to participate in downside. So even in '26, we have a little opportunity. It's not like it was last year to participate in downside. But there's still a little bit there that if cocoa continues to decline, we'll have some potential. And then, of course, as we look to '27, you know, placing hedges today would mean that we'd have deflation between '27 and '26. So we're watching that space. And, again, we've got a very structured hedging policy to take advantage of that. Scott Marks: Understood. Thanks for that. And then second question, you know, today, there's obviously a lot of discussion around focusing with innovation and media behind some of the largest brands. And I think over the past maybe year, year and a half, there was maybe a little more emphasis on supporting some of the smaller brands within the chocolate portfolio as well. So wondering if you can just kind of share how you're thinking about some of those tail brands and how we should be thinking about investment in those going forward? Thanks. Kirk Tanner: Yeah. This is really about, you know, world-class portfolio management. And we announced, obviously, Hershey's and Reese's big investment across those. That gives us a lot of momentum in the business and that drives a lot of growth. We do have a beautiful portfolio across our confection and salty brands, and there are other tools that we're leveraging to grow those brands. So we are paying attention to the entire portfolio and we're clear about each brand and the role it plays in our portfolio so that we can get to the consumers in a more targeted way. So it is a balance of both. It's not a trade-off between our large brands and our smaller brands that have lots of potential. We're investing across our portfolio that's very deliberate about the opportunity each brand and the role it plays in our portfolio. Yeah. We'd like some of those small brands to become the next billion-dollar brands. And, leveraging, we're gonna continue to leverage nonworking media to support new brands and occasions as well. Scott Marks: Thanks very much. We'll pass it on. Anoori Naughton: Our next question comes from the line of Christopher Carey with Wells Fargo Securities. Please proceed with your question. Christopher Carey: Hi. Good morning, everyone. I just wanted to ask one follow-up on cocoa. Just as you think about 2027, how aggressive can you be about hedging the current drop? And if I heard it correctly, did I hear that you don't need to take pricing in 2027? That's how you're viewing current levels right now? And then I have a follow-up. Thanks. Steven Voskuil: So there's a couple things in there. We're not gonna get specific about 2027 hedging. But we, you know, we will be very thoughtful. We have a program that gives us some structure in how we attack that. And but that's probably all we're gonna share relative to that. Relative to pricing, I think, you know, where cocoa is trading today, looking ahead to '27, it probably takes some pressure off pricing in the near term. You know, we've taken price. We're gonna execute. And activate against that. You know, in a broader sense, you know, pricing is part of a long-term strategy, but it's only one part. You know, we have mix and innovation and, you know, other ways to drive value pack price pack architecture. And so in the long term, you know, we look at all those things. The mix. It's just we happen to be in a case more recently because of cocoa. To have to rely more on price. Christopher Carey: Okay. Great. And then one quick follow-up would just be you think about volume, obviously, margins are recovering nicely. Do you have a view on where you want volumes to be as we look out over the next eighteen months? And when you think volumes can get back to kind of flattish to positive? Thanks. Kirk Tanner: Yeah. I think Kirk kinda touched on this earlier. You know, as we get we're gonna be digesting the price increase in 2026, activating against it. As we get further out and we look to, you know, 2027 and beyond, you know, our goal is to get back to a more balanced mix of price and volume. And we know we've got parts in the portfolio that even with some of the macro headwinds, are set up for volume growth. You know, sweets, better for you, premiums, the function products. And that's not to say we can't get volume at the core. Just to say that even if you look at the macro, macros, there are places where our portfolio can play stronger from a volume standpoint. So this is something we'll also unpack more when we're together in March as we look out past '26. But, you know, recovering volume. You know, we've got equipment ready to go to make more candy, and so we're anxious to be able to deploy it against volume. Kirk Tanner: Yeah. Let me just add a just a couple things. Yeah. Volume unit growth of occasion growth is really important to us. And we'll build on that and that we've got plans, of course, in '27 and '28 that we'll share. But it really is coming down to delivering that consumer occasion and driving growth in that. This morning about investing in your protein portfolio. And it's been six years since the acquisition of OneBar. So I imagine Hershey's gained some decent understanding of the category by now. How do you think about participating in protein as a theme? I mean, to what extent do you view protein as sort of a hedge to retain consumers gravitating to healthier snacks? And I guess especially since we've seen numerous cases already of snacking flavors, you know, applied successfully in the protein space. Yeah. I think that's really a good question, really relevant for what we're talking about. Investing in our protein business, we have a really strong outlook for our protein business this year. We've invested in a lot of R&D around protein and fiber and things that our consumers are looking for. I look at the total snacking universe, and functional snacking is a reality. And we have to participate in that space, and we are. And we really like what we're building with one and fulfill. And we'll continue to add resources against that and see the growth coming through. Yeah. That is an area that we'll focus and build on. For the future. Christopher Carey: And then maybe to follow-up on that, Kirk, just considering how Hershey built a salty snacks portfolio through M&A, I guess what's the feasibility or interest level to use balance sheet to expand similarly in protein? I mean, does your interest level rise to build a portfolio of brands and subcategories, or should we just think about future protein efforts really just anchored more to the one bar brand? Kirk Tanner: Yeah. It's a big white space, and there's so much traction from consumers. I think you have to really be open to two. I mean, right? Growing organically, we see lots of potential for the brands that we have, but we're also open for those opportunities that build our portfolio. So I would say we're open for that approach. But you know, the first thing, the things that we can control right now are let's grow these businesses, let's innovate in these spaces, let's get thriving brands, and then we'll be open for opportunities in the future. Anoori Naughton: Thank you. Our next question comes from the line of Bingqing Zhu with Rothschild and Company, Redburn. Please proceed with your question. Bingqing Zhu: Hi. Good morning. Thanks for taking my question. My first one is trying to follow-up on the volume question. Because your 2020 guidance, 2.5%, 3.5% organic sales and 10% pricing, that embedded quite meaningful volume mix decline. I appreciate that still early in the year and the elasticity is favorable so far. But how much volume decline are you comp for those? Absorbing before you would reconsider pricing and maybe lean more towards promotion and price adjustment to support the volume. So and then I have a follow-up, please. Thank you. Steven Voskuil: Sure. I mean, volume impact of the pricing that we have taken is embedded in the guide. Sam. So, you know, we accept that. We don't like it. We want as we said several times, you know, we want more volume growth. When we're together in March, we're gonna talk more about that. But the volume impact of elasticity that we have inside the plan has been factored in. In our plan, between marketing dollars, promotion dollars, investments, we believe we have the agility inside the plan to be able to deploy to protect sensitive areas and respond if we see a concern. You know, as we sit here today, as Kirk said, the market's been rational. You know, the competitive our kind of competitive environment is stable. So we don't have any particular pockets of concern. Elasticities are as expected. And so if not a little better, and so but we're ready inside the plan to respond if we need to. Bingqing Zhu: Okay. Thank you. Then I have a follow on pricing. So in the prepared remarks, you mentioned pricing to be 10% in 2026. If I recall, correctly, I think a few quarters back in Q2 when you announced the price increase that you expect to be mid-teens in '26. So that's a bit lower than what you previously guided. Can you provide more color on that, please? Does that mean you maybe roll back some pricing in your original plans? Or what does that mean? Thank you. Steven Voskuil: Yeah. We haven't rolled back any pricing. It may be just a misunderstanding of, you know, if we're talking by segment or we're talking overall company. Pricing increase, that might be where the misunderstanding is. But we've realized that the pricing that we had announced earlier in 2025 as we said earlier, the more recently announced pricing is already in the market. So from a pricing standpoint, everything is on track. Nothing's been rolled back. And, you know, we're all in execution mode. Bingqing Zhu: That's it. Thank you. Operator: Thank you. Ladies and gentlemen, that concludes the question and answer session. I'll turn the floor back to management for any final comments. Anoori Naughton: Thank you all for your questions, and we look forward to catching up with you over the coming days and weeks. Kirk Tanner: Yeah, thank you very much. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to the Green Plains Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. Following the company's prepared remarks, instructions will be provided for Q&A. I will now turn the call over to your host, Bill Yackel, Vice President and Treasurer. Will, please go ahead. Bill Yackel: Welcome to the Green Plains Inc. Fourth Quarter 2025 Earnings Call. Joining me on today's call will be Chris Ossowski, President and Chief Executive Officer; Anne Reese, Chief Financial Officer; Emre Havasi, Senior Vice President of Trading and Commercial Operations; as well as the entire leadership team. There is a slide presentation available, and you can find it on the investor page under the events and presentations link on our website. During this call, we will be making forward-looking statements which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions, that are subject to risks and uncertainties. Actual results can materially differ because of factors discussed in today's press release, and the comments made during this conference call and in the Risk Factors section of our Form 10-Ks, Form 10-Q, other reports, and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. I'd like to thank you all for joining. It's my pleasure to hand the call over to our President and CEO, Chris Ossowski. Chris Ossowski: Thank you, Will, and good morning, everyone. As we close out 2025, a year marked by both challenges and meaningful achievements, I want to start by thanking our employees for their dedication, our board for their confidence, and our shareholders for their continued support. Our teams delivered strong operational execution across the fleet while maintaining an exceptional safety record. As always, safety remains the center of everything we do. Nothing we accomplish matters unless we send people home safely every day. For the year, four of our plants reached historical production volumes and seven plants achieved record ethanol yields. At the same time, protein and corn oil yields continue to increase across our fleet. These results reflect a culture of continuous improvement, measuring everything, learning quickly, and applying the lessons learned. During the fourth quarter, our operations teams continued to demonstrate the potential of our platform. Our fleet once again generated volumes above their original stated capacities. As we committed during a previous earnings call, we updated our maximum production volumes which is a clear reflection of the team's progress. Our new stated production capacity for our plants, excluding Fairmont, have been increased to 730 million gallons per year, an increase of 10% over the previously stated capacity. We've increased the Central City and Wood River facilities to 120 million gallons per year each, we adjusted Mount Vernon to 110, Madison to 100, and Shenandoah to 80 million gallons. Finally, we moved Otter Tail and Superior both to 70 million gallons each and increased York from 50 up to 60 million gallons. At Madison, we remain limited by state regulations, we're currently working with the state of Illinois to increase the permitted production levels. Q4 was highlighted by the start-up of our CO2 compression equipment at our three Nebraska plants where carbon capture is now fully operational. As we previously shared, CO2 from all three Nebraska plants is being sequestered in Wyoming and the impact is lowering CI scores for our plants and generating cash flow. Financially, the focus on operational excellence and our efforts to remove costs from the business have resulted in considerably stronger results compared to last year. Q4 adjusted EBITDA of $49.1 million is an improvement of more than $67 million compared to 2024. We continued to realize the benefits of the 45Z clean fuel production tax credit which generated $27.7 million in the quarter net of discounts and we received our first payment for the transfer of credits. Although we have not yet announced a tax credit agreement for the sale of our 2026 credits, we are encouraged by the interest we've received and expect to have something to announce soon. Although it's early in the year, there's plenty to be excited about as we enter 2026. As we mentioned in earlier calls, the opportunity around carbon alone is expected to generate at least $188 million of adjusted EBITDA during the year subject to actual production volumes and carbon intensity factors. That figure reflects the contribution of the 45Z production tax credit involuntary credits at our Nebraska facilities that are sequestering CO2 as well as approximately $38 million of net 45Z benefits from our plants outside of Nebraska all of which are producing low carbon ethanol qualifying for 45Z. It's easy to get caught up in the opportunities around carbon. Let's not forget about ethanol. Export demand remains strong, and we're coming off a record-breaking corn crop. From a policy standpoint, strong administration and bipartisan support across several fronts RVOs, SREs, and the push for year-round E15 can help strengthen biofuel markets and support American farmers. The release of treasury's proposed 45C clean fuel production credit regulations provides long-awaited clarity for the industry, recognition of CI improvements from on-farm practices, and T1 big beautiful bill improvements such as the removal of the indirect land use change penalties and clarification of the qualified sale definition. We view this as a constructive step that should support our decarbonization program, strengthen domestic feedstock markets, and create a favorable debt backdrop for our low CI platform. The continued strong production from our network of plants will allow us to capitalize on these tailwinds. Finally, I'd like to introduce two new faces to the Green Plains senior leadership team. Anne Reese and Ryan Loneman. Ryan is leading our legal function and will serve as a key adviser on governance, regulatory, and strategic transactions while Anne leads our finance and accounting organization, and is already providing insightful leadership in our tax credit monetization efforts and has brought a tremendous amount of industry experience to the role. With that, I'll hand it over to Anne to review the financial results. Anne Reese: Thanks, Chris, and good morning, everyone. I'm extremely excited to be a member of the Green Plains team, and I've been so warmly welcomed by everyone over the past four weeks. 2026 is looking to be a positive year for Green Plains and the ethanol industry. But first, let's talk about the fourth quarter of 2025. For the 2025, we reported net income attributable to Green Plains of $11.9 million, or 17¢ per diluted share versus Q4 2024's net loss of $54.9 million, or negative 86¢ per diluted share. Adjusted for $3.6 million of restructuring and noncash charges primarily related to accelerated stock compensation. And inclusive of the production tax credit benefits Q4 2025 adjusted EBITDA ended at $49.1 million compared to a negative $18.2 million in 2024. These year-over-year improvements reflect the successful execution of operational, and cost discipline and the beginning stages of our carbonization monetization strategy. During the fourth quarter, we refinanced the majority of our 2027 convertible notes through a new $200 million convertible note due in 2030. We used $30 million from that transaction to repurchase approximately 2.9 million shares of stock. Outside of the $60 million of 2027 convertible notes that remain outstanding, that we anticipate retiring with cash at maturity. We now have no near-term debt maturities and have the runway to focus on execution. Revenue for the quarter was $428.8 million down 26.6% year over year. Our Q4 revenue was lower due to the impact of the Obion plant sale, idling our Fairmont facility in January, and discontinuing ethanol marketing for a third party, all of which naturally reduced the gallons we had to sell. SG&A totaled $22.9 million, which is $2.8 million lower than the prior year Q4. We continue to keep a sharp focus on expenses in the business and we can see that reflected in the significant cost reductions compared to last year. We expect a consolidated SG&A run rate in the low $90 million range for 2026 an improvement of more than $25 million compared to 2024. Q4 2025 depreciation and amortization finished at $23.5 million compared to $21.5 million in 2024. Depreciation is expected to increase modestly in Q1 as we take ownership and begin depreciating the remaining carbon compression equipment. Interest expense was $6.1 million during the fourth quarter. A decrease of $1.6 million compared to 2024. We expect $30 million to $35 million of interest expense during 2026. In the fourth quarter, we had an income tax benefit of $2.8285 million. Similar to last quarter, our 45B clean fuel production tax credits are currently recorded under ASC 740 as a deferred tax asset and then adjusted with a valuation allowance to recognize the likelihood of monetization. We've included the production tax credits and adjusted EBITDA to match our view that these are operating results of our production assets. In December 2025, the Financial Accounting Standards Board issued ASU 2025-10. Accounting for government grants received by business entities. The standard is effective after December 2028, but it does permit early adoption. The company will consider the impact of early adoption in the force 2026 which would adjust the presentation of the 45Z tax credits within the financial At the end of the quarter, our federal net operating loss balance of $260.2 million will provide future tax efficiency. Our normalized tax rate going forward is expected to remain in the 23-24% range. Our consolidated liquidity at quarter end included $230.1 million in cash, equivalents, and restricted cash, $325 million in working capital revolver availability, which is primarily designated for financing commodity inventories and receivables within our business. Capital expenditures in Q4 were $5.3 million. For 2026, we expect sustaining capital expenditures for maintenance, safety, and regulatory spending to total $15 to $25 million. Our York compression equipment passed its final performance testing during the fourth quarter and the associated liability has moved into the debt portion of the balance sheet. The compression equipment liabilities for Central City and Wood River remain in a separate line item as of December 31. But that liability was moved into long-term debt in January. Inclusive of the carbon equipment liabilities, our total debt balance is approximately $504 million. With that, I'll turn the call over to Emre for a commercial update. Emre Havasi: Thanks, Anne. In the fourth quarter, ethanol margins remained resilient. Thanks to industry fundamentals. That were much better than in 2024. The ethanol inverse did not break until late November. The industry was slow to build stocks coming out of fall maintenance, thanks to both solid domestic blending and strong export demand. Ethanol margins remain well positioned due to a record corn crop that could help keep feedstock prices in check. As we mentioned on our last call, we were partially hedged heading into Q4. And those positions paid off as ethanol softened later in the quarter. The 2026 is shaping up to be stronger than the same period of last year. And consistent with our disciplined risk management approach. We have a significant portion of our Q1 production margin locked in. Industry ethanol production has been higher compared to last year, but we expect supportive demand both domestically and internationally. Ethanol exports set a record last year and we expect export demand to increase again in 2026. Domestically, E15 adoption continues to increase slowly and it remains a massive opportunity for the industry. We are thankful to our local, state, federal representatives who continue to advance E15 and advocate for American agriculture. Corn oil markets remained steady during the quarter values that contribute nicely to our gross margin. Although protein pricing continued to be under pressure, corn costs remained low and overall, see relatively solid margins going forward. With that, I would like to hand the call back over to Chris. Chris Ossowski: Thanks, Emre. 2025 was a year of change, and our team has thrived while confronting challenges. The plants are producing more than what was previously thought possible, Our carbon project and the resulting earnings are being delivered. The balance sheet has been transformed and derisked. It was a year defined by focus, safety, reliability, a commitment to doing things the right way every time. Which is exactly the mindset we're carrying into 2026. As we enter an exciting time for the company, our attention is focused to capital allocation and delivering value for our shareholders. We are concentrating efforts towards five strategic priorities, which include improving energy efficiency, and CI reduction projects, evaluating carbon sequestration opportunities for plants, currently not on a pipeline, specifically how we capture carbonate plants before Summit comes online, as well as for our plants that are not committed to a pipeline. Debottlenecking or expanding opportunities at our facilities, which are currently being engineered, increasing on-site grain storage and receiving speed capabilities, and finally, balancing capital structure and returning capital to shareholders. We look forward to putting this plan into action. Several efficiency and CI reduction projects are already underway and could be completed within the year. We are also completing FEL or front-end loading engineering on several larger energy reduction opportunities. It's important to note that these projects reduce energy consumption which inherently lowers our OpEx making our plants more competitive. Before adding on the returns from 45Z. This fully aligns with our strategy of being a low-cost, low-carbon biofuels producer. We're also evaluating and expect to expand our on-site grain storage and receiving capabilities. When we think about prioritizing the efficiency of the base ethanol plant, adding additional storage will help us draw more farmer bushels and capitalize on new crop harvest opportunities lowering feedstock costs, reducing operational risks. In keeping with our disciplined data-driven approach, every project will compete for capital and must support our low-cost, low-carbon strategy. In closing, I'm incredibly proud of what our team has accomplished in 2025, I'm confident in the direction we're headed. We remain focused on delivering the decarbonization program driving operational excellence, and maintaining a disciplined hedging strategy. We look forward to carrying this momentum into 2026 and remain committed to building confidence and trust as we deliver value for our shareholders. With that, operator, we will now take your questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to withdraw your question, simply press 1 again. We kindly ask everyone to limit themselves to one question and one follow-up to accommodate all questions. Pooran Sharma: Thank you. Our first question comes from the line of Pooran Sharma with Stephens. Please go ahead. Good morning. And, congrats on the results this morning, and I appreciate the questions here. I just maybe wanted to start off by asking about something you said in your prepared comments. You mentioned you're starting to see interest for counterparties around the 2026 45Z credits at this point. I was just wondering how that engagement has influenced the range of potential pricing or structures versus what you saw in 2025? Chris Ossowski: Well, thanks for the question, Pooran, and, yeah, appreciate the feedback on the results. We are actively marketing these credits and, we feel, you know, confident in the strength of our platform's ability to deliver credits going forward. And I think in the near future, we'll be in a position to share more on the details around execution of the sale process. Pooran Sharma: Okay. Appreciate that. Wanted to maybe get a sense of you know, you mentioned I think, in the release that there was some upside here to the 188 total carbon I think you mentioned, you know, there's some CI reduction projects. In the mix. But just one was wondering if you could just tease that out with a little bit more granularity. What do you think how much more do you think that opportunity can get to? And what are some of the projects that you're working on specifically? Chris Ossowski: Yeah. And I appreciate the follow-up. So we have numerous plant efficiency projects, which is, say, in terms of total capital in the $5 to $10 million range of spend. That have very fast returns inclusive of 45Z you know, things that are paying for themselves within a two-year time period or even less in some cases. Focused around the Nebraska locations. But we're also evaluating opportunities for, you know, larger investments that could lower the energy consumption in plants. That lower our OpEx, specifically electrical and natural gas consumption. They'll help drive, returns just beyond 45Z. In terms of magnitude, I don't really have a specific range, to share. But, we're confident in the numbers we've provided so far. And there is potential upside. But we are working to optimize the carbon capture equipment that is running right now. All five compressors right now are online. Capturing more than 90% of the CO2 that we're producing. So we feel very, very strongly about the numbers we provided so far. And as soon as we start rolling out, some of these projects, we'll communicate more on expected returns and potential upside. Operator: Our next question comes from the line of Salvator Tiano with Bank of America. Salvator Tiano: Hey. Good morning. Hey, Kim. I'm calling for Salvator. Can you clarify why your 4Q cash flow from operations before working capital was around $16 million much lower than EBITDA? And conversely, it appears you had a massive working capital tailwind for 4Q in the year, What drove that, and what does that mean for 2026 net working cap? Thank you. Will Yackel: Sure. Thank you for the question. This is Will. So Q4, as we said in our prepared remarks, we had a nice uplift from carbon earnings. We haven't taken full receipt of cash. We did take a small portion, $14 million, as we previously released. But we'll receive the rest of that cash in Q1. That's going to be one of the deltas The second piece, you know, in talking about working capital is we did accelerate our receivables and our inventory as previously discussed. From the ECO transaction. And along with building farmer payments during the quarter That helped generate some cash for us from a working capital standpoint in the quarter. Salvator Tiano: Thank you. And as a quick follow-up, how should we think of 1Q ethanol EBITDA margin was suggesting segment EBITDA for Green Plains. Is that what you're seeing in the market? And what about 2Q outlook so far? Emre Havasi: Thanks for the question, Salvator. It is we're, of course, seasonally this is the low point usually of the year, but we're much better in much better shape as an industry and also our company. Compared to last year. You know, when you look at different components of that EBITDA margin, mean, already talked about our operational efficiency. Our plants are running well. Our yields are up. So we're putting out really good production volumes to the market. In terms of market fundamentals, the different components of our consolidated crush margins are holding up very nicely. You know, corn continues to be relatively inexpensive due to that large crop, and that got confirmed Corn oil prices are significantly better than a year ago. And, you know, simple crush margins, which is just the corn futures and ethanol financials, they're also holding up relatively well. Again, reflecting some seasonally lower volumes, but overall, when you look at consolidated crush, they are much better than last year. And, again, if you combine that with our operational efficiency, we're confident to show a very good number for Q1, especially when you compare it to a year prior. Operator: Our next question comes from the line of Kristen Owen with Oppenheimer. Please go ahead. Kristen Owen: So I wanted to start with the $188 million of carbon expected here in 2026. If I look back a couple of quarters, that number was closer to $150 million So I'm wondering if you could help us bridge how we got much better than that, how much of that came from the expanded capacity on your existing footprint, maybe some of the changes that you've made in the operations over the last couple of quarters? And then my follow-up is related to that, just the monetization of those credits. What we should be thinking about in terms of discount to face values, sort of what you're seeing in the marketplace. And, Anne, would love your feedback on that just given your background. Thank you. Chris Ossowski: Yeah. Thanks, Kristen. And maybe I'll start. In terms of the $188 million, you know, that number has moved a little bit, but it's really built around $150 million coming from the three Nebraska locations, inclusive of voluntary credits, which are probably in the $15 to $20 million range out of that $150 million. And then the additional $38 million coming from the other facilities, that number changed as a result of the Obion plant sale So in simple terms, it's 380 million gallons of capacity with five CI points being reduced. And that's how we're looking at that. And that's also subject to, you know, the plants have to run have to maintain our yields. We have to maintain the energy efficiency in the locations. Our compression equipment has to continue to operate at a high utilization rate, which is getting there right now and has been ramping up over the duration of the fourth quarter to get to these levels. And then, Anne, if you want to comment on the tax credits. Anne Reese: Sure. So the tax credits, you know, there has been a lot of interest around it. It continues. And now with the 45Z proposed guidance coming out this week, that's incredibly helpful. You know, a number of factors that go into the pricing around it. So you know, when you're talking to the counterparties, their interest is around debating around whether you have insurance or not. It's around what the strength of your balance sheet is. It's how many how long of credits you're looking to sell. And whether or not, you know, you qualify for PWA and have a good compliance program around all of it. We feel very confident in all of those factors. In our compliance program, and, you know, we've had very fruitful discussions with counterparties and like we said, we expect to be able to announce something in the near future. Operator: Our next question comes from the line of Eric Stine with Craig Hallum. Please go ahead. Eric Stine: Maybe just sticking on the carbon side, just to clarify. So you gave talking about projects or energy efficiency projects at other locations and talked about $5 million to $10 million TRIPS. Is that just to be clear, I mean, that's separate above and beyond the $15 million to $25 million in CapEx that you gave for maintenance. And then also, is that 5 to 10 per plant? 5 to 10 in total? Just give us some clarity on that. That'd be helpful. Chris Ossowski: Sure. Appreciate the question. And, yeah, in terms of our plant network, we talk about sustaining capital being around that $20 million range. We said we said or $20 million target. That's just to maintain the existing assets' health, and we're gonna ensure as a first priority, assets' priority, that, we take care of our plants and they're capable of running at high utilization rates and yields. Yeah. $5 to $10 million of efficiency projects is on top of that. For the company is what we have, you know, in our queue. And then, you know, we're also, like I mentioned, looking at grain storage opportunities for increasing capacity and receiving speed at locations, and that is yet to be determined, when and where and how much. Eric Stine: Got it. Understood. And maybe my follow-up, just you know, on the 45Z, obviously, a nice contribution here. I mean, how should we think about I know you've got the new accounting guidance that is coming on for 2028, but something you need to factor in. I mean, how do you think about the linearity of recognizing those in 2026 you know, just as we think about that from a modeling perspective above and beyond, obviously, our judgment on ethanol markets. Anne Reese: Yeah. You know, as we mentioned, you know, we feel like we'll have something feel strongly we'll have something here to announce in the near future that will help you with that modeling aspect. And you know, with the accounting guidance opportunity that we have to adopt early, In Q1. You know, that'll be we appreciate that guidance. We feel like it is reflective of how we have always felt like the tax credit should be accounted for. And, you know, we'll have more to share with that and with you guys in Q1 on that. Operator: Our next question comes from the line of Craig Irwin with Roth Capital. Please go ahead. Craig Irwin: Good morning. Thanks for taking my questions. So first thing I wanted to ask about, is really CI score You know, there were some estimates, shared last year And, just the way you gave us the 188 with the five-point reduction, I assume across the entire platform this year, I guess we're gonna start with a mark. So can you share with us what the CI was on the platform? Exiting 2025? And maybe if you can talk about you know, what's possibly achievable over the course of '26? Can we exceed that five-point assumption in the 188? And, you know, what's feasible with the higher level of capital spending on the platform over the next couple of years? Anne Reese: Yeah. Thanks for your question. You know, it's the way the guidance reads, right, is you have we have to have a below at 50 score be able to capture the CI. And all of our facilities starting in 2026 with the removal of the eye lock. Penalty. Do qualify for that. And then, obviously, right, with our Nebraska facilities that are capturing carbon, it's well below that 50 mark. Additionally, you know, with the guidance coming out this week, you know, we got a little bit of a surprise, I would say, with the addition of the on-farming practices. Now qualifying for a reduction in CI. So, you know, we'll be sharpening our pencils and taking a look at that and seeing what additional benefit that that provides to us. But we you know, as the 188 was calculated, that was with the assumption of the full cost of a normal corn. And this will reduce it And so we'll anything will be an upside with looking at the on-farming So we're excited about that opportunity, and we'll be working towards coming up with a calculation for that here in the next quarter. Craig Irwin: Okay. Just as a follow-up in that in my second question, do you care to take a stab at what those on-farm practices could mean as far as an on Green Plains CI? And then my second question is, can you please remind us on the payment terms for the third-party financing on carbon sequestration equipment and capital. That's been invested. Anne Reese: Yeah. So with the on-farming practices, you know, we'll have to calculate that. There's a number of components that includes, you know, how many bushels we're buying directly from producers. Versus commercial. Spaces, which you know, majority of our facilities are know, that's a majority of the corn that we buy is directly from the farmers. So we have a lot of optimism around being able to capture some of that value. What that actually looks like at the moment, you know, more to more to come on that. But we do feel like there is value there to capture. And, Will, I don't know if you want to talk about Will Yackel: Yeah. With respect to the compression liabilities, you know, once we take ownership, which we've now taken ownership of all three facilities, at our Nebraska plants, Like Anne mentioned, that does flip it into the balance sheet debt category. And from now on, we will have monthly payments to pay down the PNI on those facilities. Really just works like an amortizing loan similar to a mortgage. So you'll see those reflected in our interest expense and debt repayments on the cash flow going forward. Operator: Our next question comes from the line of Andrew Strelzik with BMO Capital Markets. Andrew Strelzik: Hey. Thanks for taking the question. I was Obviously, the company's made a lot of progress from an execution, cost, operations perspective. In relatively short order. I guess, I'm curious how you're thinking about those opportunities going forward. Do you feel like you've executed against most of that at this point, or where do you see the biggest opportunities to continue to get better from an execution and cost perspective? Chris Ossowski: Yeah. Thanks for the question. Andrew. And just a couple of data points I'd like to share. Starting on the operational excellence front, you know, our plants are, as a whole, are running at a 3¢ decrease in total OpEx year over year from 2024 to 2025. So we're seeing the fruits of that labor coming to fruition. At the same time, there's still a few more pennies that we have to go after in 2026. And some of that is, you know, continued, performance of management in plants. But then also some of the capital projects that we mentioned earlier in the prepared remarks. Getting implemented in locations where we have higher electrical costs. And can take advantage of what is currently, you know, very low natural gas prices or historically low prices. So we feel very positive about that. And then, you know, further investments in our infrastructure to reduce the cost of raw materials. So we talked about grain storage, for us is a very exciting opportunity. To help us increase that percentage of farmer originated bushels that lower our total cost, but then also potentially have a positive impact on CI score. Andrew Strelzik: Okay. Great. And then you mentioned in the prepared remarks E15 or the potential for E15. I guess, you know, how do you see the market's readiness for E15 adoption from an infrastructure perspective? And I guess, you know, kinda how are you thinking about the regulatory environment for here given some of the headlines in recent weeks? Thanks. Emre Havasi: Yeah. Of course, a little bit of a disappointment. Right, that it didn't make it into the bill last week. But there is a coalition growing. There is I think long term or we think long term, there is absolutely a need for that. We have to, as a country, generate more demand domestically, not just rely on export markets. I think there's plenty of support for that. In terms of just overall policy, and we're confident that it will be allowed year-long at one point. There are some hurdles, that we have to overcome, but it is long term we believe, a necessary step, and the outlook is positive. Positive. Now in terms of infrastructure, there are a couple of components that may go hand to hand. One is there's plenty of infrastructure out there. But you know, they would have to switch. The gas station would have to switch between different grades. At one point, and it goes hand in hand with consumer. Acceptance. Of the product. So I think the more certainty the industry has, the supply chain can adjust to it. We don't think it's going to have a major impact in '26, but after that, it can very nicely increase domestic blending demand which, again, we believe is a necessary long-term step for US ag and energy. Operator: Once again, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from the line of Matthew Blair with TPH. Please go ahead. Matthew Blair: Great. Thank you, and good morning, everyone. Congrats on the strong results. Had a question on your outlook for capital allocation in 2026. And thanks for the CapEx guide. But these 45Z credits coming in, how much debt reduction should we pencil in for 2026? And do you anticipate getting to a point where you could do, like, regular quarterly share repurchases this year? Thank you. Chris Ossowski: Yeah. Thanks for the question, Matthew. And while we're not really in a position to provide guidance on that, let's say, capital allocation at the moment, We're effectively evaluating each opportunity that we have for free cash flow and where we can put the cash in the best position to provide value for shareholders whether it's you know, first and foremost, improving the efficiency of our plants, for not only capitalizing on 45Z, but for the base OpEx cost of plant operations going forward. Looking at opportunities to debottleneck or expand capacity, where we have room to grow in the pipeline. For carbon. So we've actually sized compression stations and piping for our Wood River and Central City plants to be able to push more gas through the pipeline. And then also, like, talked about the storage opportunities for raw materials. But then finally, looking at opportunities for debt reduction or managing, share repurchase as an alternative option. But we do have a healthy list of opportunities to grow and improve the performance of the business. That have quite attractive returns at the moment. Matthew Blair: Okay. Sounds good. And then for my follow-up, it looks like the DOE data last week showed U.S. Ethanol production really coming down. I think it dropped about 15%. Week over week, which I guess that was maybe due to either weather issues or the spike in natural gas. So apologies if I missed it, but did you provide a Q1 utilization target And also, you know, any thoughts on natural gas impact on your op costs in Q1? Is that something that you regularly hedge, natural gas? Or could that be pushing off costs up a little bit in the first quarter? Emre Havasi: Yeah. This is Emre. Thanks for the question. Yes. We were fully hedged on Natgas. We had minor operational hiccups due to the weather, so it's a domino effect. Right? So it's weather impacting both plant performance just the low temperature. Right? And things freezing up. As well as net gas supply and natural gas cost. So some plants decide because you know, they can't cover variable cost that shouldn't levels. If they are not hedged, they might slow down, shut down for a few days. And others would have maybe some mechanical problems. But from our perspective, yes, we've also experienced some impact on our production But in terms of nat gas, we were fully hedged and we did not feel an impact from a margin perspective. Operator: At this time, we have no further questions. I will now turn the call back over to Chris Ossowski for closing remarks. Chris Ossowski: Well, thank you for your participation in today's call and your interest in Green Plains. If you have additional questions for us, please reach out, and we look forward to connecting. Have a great day. Operator: This concludes today's conference call. You may now disconnect your line. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the UGI Corporation Q1 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Tameka Morris, Vice President of Investor Relations in ESG. Please go ahead. Tameka Morris: Good morning, everyone. Thank you for joining our fiscal 2026 first quarter earnings call. With me today are Robert C. Flexon, President and CEO, and Sean P. O'Brien, CFO. On today's call, we will review our first quarter financial results and key business highlights before concluding with a question and answer session. Before we begin, let me remind you that our comments today include certain forward-looking statements, which management believes to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict. Please read our earnings release and our annual report for an extensive list of factors that could affect results. We assume no duty to update or revise forward-looking statements to reflect events or circumstances that are different from expectations. We will also describe our business using certain non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available within our presentation. And now I'll turn the call over to Robert C. Flexon. Robert C. Flexon: Thanks, Tameka. And good morning. Yesterday, we announced fiscal 2026 first quarter total reportable segments EBIT of $441 million, up 5% over the prior year period, which is in line with our expectation. Our natural gas businesses produced strong results driven by robust gas demand and the impact of the 2025 gas base rate case at our Pennsylvania utility. In our global LPG businesses, we capitalized on favorable weather in certain U.S. regions and more than offset the impact of the previously announced divestitures through effective margin management and disciplined cost control. Throughout the company, we continue to advance operational excellence, safety, and cultural transformation. Establishing the framework that will position UGI Corporation to further unlock intrinsic value. We are seeing early benefits from these efforts with improved safety metrics, better operational efficiency at AmeriGas, and continued strength in our natural gas businesses. In parallel, we are also positioning the company for the future through strong capital discipline with our LPG portfolio optimization substantially complete and our natural gas infrastructure well situated to capture growing demand in Pennsylvania. I'll turn to the next slide. Safety remains foundational to everything we do. And I believe this to be a leading indicator of a well-run company. Across the enterprise, we saw year-over-year improvement in our safety metrics and specifically at AmeriGas a 45% reduction in recordable incidents and 60% less lost time injuries compared to the prior year period. The operational transformation at AmeriGas continues to yield improved metrics. For instance, we've seen a reduction in our zero fill rates and average miles driven to serve customers. All while delivering slightly higher retail volumes than last year. We've also experienced a reduction in customer service call volumes and continued improvement in our customer satisfaction metrics. AmeriGas now has an A-minus ranking from the Better Business Bureau. And this quarter, we achieved the highest net promoter score since we launched the current methodology in 2023. Reflecting better processes and the progress being made to create efficient operations and optimal customer service. Taken together, our progress is delivering results and we are pleased that Moody's upgraded AmeriGas' outlook to positive from negative this quarter. Further validating the operational and financial improvements that are underway. At UGI International, our previously announced portfolio rationalization efforts are now substantially complete. Since fiscal 2025, we'd entered into agreements to divest LPG operations in seven European countries which represented approximately 5% of UGI International's EBIT in the prior year. These divestitures, which in total will generate approximately $215 million in cash proceeds, support our objective to strengthen the corporation's balance sheet. Importantly, this action allows us to sharpen our focus on the markets where we have the strongest competitive positions and growth opportunities to create value for our stakeholders. Within our natural gas business, our teams continue to execute well in the midst of cold weather temperatures. Maintaining reliable service while investing in the system. In aggregate, during the quarter, we deployed $225 million of capital with 73% going to our regulated utilities businesses primarily for infrastructure replacement and system betterment. At UGI Energy Services, our new Carlisle LNG storage and vaporization facility is now operational. Backed by a long-term contract with our utility segment, this investment strengthens our integrated natural gas platform and allows us to meet growing demand in the region. Lastly, subsequent to the quarter, we filed a gas base rate case for UGI Utilities and Mountaineer Gas Company requesting an overall distribution rate increase of approximately $99 million and $27 million respectively. Both rate cases support UGI's continued investment in over $500 million of system and technology upgrades as we prioritize safe and reliable natural gas service for our customers. While we continue to invest in our infrastructure, our teams work towards keeping natural gas service affordable. As an example, over the next three years, we will contribute $3 million to the UGI Utilities Operations Share Energy Fund which assists low and moderate-income customers with paying their heating bills. This funding for operational share is a donation from UGI and is not included in the company's rates. And with that, I'll turn the call over to Sean who will walk you through our financial results for the quarter. Sean P. O'Brien: Thanks, Bob, and good morning, everyone. For the fiscal 2026 first quarter, UGI delivered total reportable segment EBIT of $441 million, up $21 million over the prior year. Higher gas base rates in Pennsylvania, colder weather, and increased unit margins at UGI International were the primary drivers of this increase. Which was partially offset by higher operating and administrative expenses in our domestic segments and the effect of the previously announced LPG divestitures. Next, adjusted diluted EPS was $1.26 for the quarter, in comparison to $1.37 in the prior year. This anticipated decline reflects the absence of investment tax credits realized last year, higher interest expense, and lost earnings from the divestitures in Hawaii, Italy, and Austria. Partially offset by the strong segment level performance. Turning to the drivers of each segment's results. The utilities delivered EBIT of $157 million, up $16 million over the prior year. Gas utility service territories experienced temperatures that were approximately 21% colder than the prior year, and this drove a 16% increase in core market volumes. We also saw sustained customer additions, with over 3,500 residential, commercial, and industrial heating customers added during the quarter. Total margin increased $28 million primarily due to higher gas base rates that went into effect in Pennsylvania at the October 2025. While the colder weather contributed incremental margin, our weather normalization mechanism worked as designed. Mitigating a significant portion of the weather impact and providing bill stability for our customers. Operating and administrative expenses increased $9 million reflecting higher personnel and maintenance expenses. Next, Midstream and Marketing reported EBIT of $88 million in comparison to the $95 million in the prior year. While temperatures were 18% colder than the prior year period, which provided some incremental margin benefit, this was largely offset by pipeline rate increases, which we expect to recover over time starting in this fiscal year. Operating and administrative expenses increased $6 million primarily due to higher personnel-related expenses and additional plans placed in service at the end of the last fiscal year. Turning to the global LPG businesses. UGI International reported EBIT of $124 million, up $14 million over the prior year period, largely due to continued operating efficiencies within the business which also offset a decline due to divestitures. Retail LPG volumes were lower than the prior year due to reduced volume from crop drying campaigns, the divestiture of our LPG businesses in Italy and Austria, and continued structural conservation. Total margin increased $20 million primarily due to effective margin management and favorable foreign currency translation effects partially offset by the lower retail volumes. Operating and administrative expenses were comparable on a year-over-year basis. As benefits from the divestitures previously mentioned as well as lower distribution and maintenance expenses were fully offset by unfavorable foreign currency translation effects. At AmeriGas, the business reported EBIT of $72 million, down $2 million versus the prior year period. Total retail LPG volume was up 1 million gallons, due to the effects of colder weather in the East which was partially offset by warmer weather in the West and the divestiture of our Hawaii operations. In addition, there was an improvement in net customer attrition on a year-over-year basis. Stemming from the operational transformation taking place in the business. In aggregate for the business, total margin was up $2 million as higher LPG unit margins were partially offset by lower fee income. Operating and administrative expenses increased $8 million largely due to continued investment in customer-facing initiatives to drive retention and improve the customer's experience and this led to higher personnel-related and advertising expenses. Moving to liquidity. At the end of the quarter, UGI had available liquidity of $1.6 billion, up $100 million over the prior year. Inclusive of cash and cash equivalents and available borrowing capacity on our revolving credit facilities. We continue to make progress on our balance sheet objectives. On the credit front, we were pleased that Moody's upgraded AmeriGas Partners' outlook to positive. While affirming the B1 corporate family rating. This reflects the progress we're making in stabilizing and improving the business. And we remain focused on reducing leverage to achieve our long-term target of sub 4.5 times. Through a combination of debt reduction, and EBIT growth. Now I'll turn the call over to Bob for his closing remarks. Robert C. Flexon: Thanks, Sean. UGI delivered a solid first quarter reflecting the continued execution of our strategic priorities. Total reportable segment EBIT increased by 5% year over year driven by strength in our natural gas businesses and disciplined margin management in our global LPG operations. At AmeriGas, we're making tangible progress. Safety incidents are down significantly, operational metrics are improving, and volume retention levels have largely stabilized. We remain focused on the crucial work ahead particularly during these winter months as our businesses work to meet the season's strong demand. We will continue to advance operational excellence and safety across our businesses, maintain disciplined capital allocation, and position our natural gas infrastructure to capture growth opportunities. I want to thank our employees for their dedication to safely serving our customers. And with that, I'll turn the call over to the operator for questions. Operator: Certainly. Telephone and wait for your name to be announced. To withdraw your question, please press 11 on your telephone. Our first question will be coming from Gabriel Philip Moreen of Mizuho. Your line is open. Gabriel Philip Moreen: Hey, good morning team. Just wanted to ask a couple questions. Wanted to ask, I guess, first of all, in terms of the recent extreme winter weather, we've been having, which certainly seems like it has the potential to benefit some of your segments. So maybe if I can just ask about how you think AmeriGas has been performing through that extreme weather in terms of deliveries and ability, I think, in margins and the like. Then also, maybe if I can pivot to marketing and the extent to which some of the volatility in natural gas prices may have benefited that business or not? Robert C. Flexon: Good morning, Gabe. Thanks for the question. On AmeriGas, I've talked about the past years in our preparation for this winter. We want to see a certainly a substantially improved performance from AmeriGas. And when I think about our ultimate goals, I want it to be about 60% improved this winter and then 100% by the time we get to next winter. And we've seen a lot of good data points on that. We've had record safety in AmeriGas. We've had fewer recordable injuries within AmeriGas than in the history of the company. Highest net promoter scores from customers, so we're seeing promoter scores in January significantly higher than where they were last January, and a lot fewer calls to customer service center. That said, we're seeing stress in the system in certain locations that have had extreme weather, and it's not so much the cold temperatures. It's conditions of the roads that really impact delivery and getting the propane to the right places. So in January, we saw warmer weather, nothing too exciting, and suddenly that really changed by about January. So now we're seeing significant demand. We've got drivers out there working long hours. We've got propane into the right places. So we're out there doing what we need to be doing. I'm sure that there's going to be areas when we look back that we know where we could perform better, but there's no question that the system is seeing very strong demand. Given the size of our footprint, we're able to take resources in the West, which have been experiencing a warm winter, and redeploy them to the East. So we've done a lot to make sure we've had the right resources in the area. Sean P. O'Brien: Hey, Gabe. Maybe to round out the a couple of the other divisions. I'll remind you, obviously, our utilities were in areas that saw mainly it's the customers that are really benefiting from the weather trackers. And then as you I think you mentioned our midstream marketing business, just a couple of thoughts there, weather definitely benefits that business typically. But at some point, the capacity that that business has is there for the utility. So when you see longer periods of extended weather, of cold weather, the utility will need some of that capacity. But Joe and his team I think, are doing a terrific job of taking advantage, obviously, of the environment, but also making sure that the utility has the gas that it needs. Gabriel Philip Moreen: Great. Thanks, Sean. I appreciate that, and then Bob as well. If I can pivot to the utility segment and in light of, I think, the Governor and Pennsylvania's comments earlier this week in his, I think, budget address around affordability and whatnot. Addressed some of that in your comments, Bob, but can you talk about the decision to come back for a rate case in Pennsylvania? I think relatively quickly relative to your historical cadence, and also are you asking for anything structurally here in the rate case I know you've got weather normal like, but anything around trackers and the like? Don't just leave it do it leave it at that. Robert C. Flexon: Nothing extraordinary or unusual in there, Gabe. I would say that we as a company, from the very first day that I walked in the door, I've been talking with Hans Bell, our president of the utility, about affordability and really managing our OpEx. And part of what we're doing at AmeriGas, we're also doing throughout the company is driving efficiency as far as, you know, as much as we possibly can. And to the extent that we are more efficient, particularly on OpEx, that's a direct benefit to the customer bill. So we've been focusing on affordability long before people started talking about affordability. So the CapEx is more of what we've been doing in the past around infrastructure. So it's just keeping it safe in Pennsylvania and where we stand on the affordability ladder. We're below a lot of the other utilities in the state. We'll continue to focus keenly on that. Gabriel Philip Moreen: Thanks, Bob. If I could just sneak one more in around the commentary on being well positioned for increasing natural gas demand in PA and where things stand on I think, the NDAs you've mentioned in last couple quarters, how those are progressing and potential timing? Robert C. Flexon: Everything's progressing as they should. I mean, we can't move faster than the power providers or the data centers, but we're engaged in a significant number of discussions. We've got a small group that have kind of moved to the next level. I'm hoping that we'll be able to announce something during this fiscal year. But there's a lot of discussion out there. And then also, I think most recently with the directions from the White House and the 13 state governors around emergency procurement of more power just is even an added benefit on top of that the data center, what was progressing anyway. So we're in a discussion with a number of power providers and we'll continue to engage in all that. Again, like I said, I hope that we'll be able to announce some things during the course of this fiscal year. Gabriel Philip Moreen: Thanks, Bob. Appreciate it. Operator: And as a reminder to ask a question, please press 11 on your telephone. Our next question will be coming from Paul Andrew Zimbardo of Jefferies. Your line is open, Paul. Paul Andrew Zimbardo: Thank you. Good morning, Paul. I was gonna ask, I saw the press release yesterday that you're bringing Sid on board, creating that chief strategic officer role. Just curious kinda why now, what are the mandates, talk a lot about growth in there, but just if you could give some color on why create that role at this time. Robert C. Flexon: Sure, Paul. Thanks for the question. And know, one of the things that I worked up with the management team when I got here was four critical stands that we're taking out of the company. One of the stands that we've defined is building a sustainable future. And when I think about my first, whatever, fourteen, fifteen months here, focus relentlessly on day-to-day operations, putting the discipline and the skill set within the organization of strong business processes, putting quality into the system, getting rid of rework and things of that nature. And we are going to continue to do that. And that's because 99.9% of our employees have an impact on that every single day. This is the time though as we really have been building that set and building that, if you want, the muscle to do that within the company. Need to start looking I wanna start looking more to the medium term and longer term. So when I wanna live true to that span of building a sustainable future that we're looking what's the right portfolio for the company? Are there opportunities extrinsically for this company? How do we think about products? How do we think about maybe some of the issues from an environmental standpoint that could impact us at some point in the future, regulatory, things of that nature. So it's kind of lifting my head up a little bit and seeing what's a little bit further down the road for the company. So I think it's kind of the natural growth of what we wanna do as part of the company and building for that future. Sid and I have worked together in the past. He's very skilled, understands the energy industry very well. And I think he's gonna bring a lot of value to us when we start looking for long what are our longer-term objectives for the company, for the portfolio. For opportunity? So it's kind of, to me, just a natural evolution, but I will continue to spend the vast majority of my time on focusing on making sure when we have winters like this that we can be the best we possibly can be to keep all of our customers safe and warm. So that's kind of the background, Paul. It's just kind of where I feel time for a little bit further looks down the road. Paul Andrew Zimbardo: Okay. I appreciate that. Glad to have him back. One other smaller one if I can. Just on the midstream business, you had a comment about margin was comparable year over year, and you said there was a lag in recovery of a pipeline. Transportation cost. Just if you could quantify what that is and should that create a tailwind in the rest of the fiscal year? Thank you. Sean P. O'Brien: Yeah, Paul. That increase is a rate increase on our FERC pipelines that we incurred. I think we anticipated it. So if you were to look at our budget, you would have seen that in there. But there is a timing line to it, so we will recover that. I think we indicated starting this year. I don't know that we'll get it all back in fiscal 2026, but we'll get, I think, a significant portion of it back in fiscal 2026. Paul Andrew Zimbardo: Okay. Is there any way to kinda frame it roughly in terms of size? Sean P. O'Brien: I think it was somewhere in the $5 million range. Paul Andrew Zimbardo: Okay. Okay. Great. Thank you very much, team. Robert C. Flexon: Thanks, Paul. Thanks, Paul. Operator: And I would now like to turn the conference back to Bob for closing remarks. Again, I would like to turn the call back to Bob for closing remarks. Robert C. Flexon: Great. Thank you. So when I look at the first quarter, I feel we've got off to a very good start of the year. We've got year-over-year growth. Even when I consider the divestitures. Our leading indicators around AmeriGas are all in the right direction, safety net promoter scores. Where it all shakes out when it settles down, but, we're in the midst of it. Right now, and it's exciting times for us. But I appreciate the calls and the interest, and I look forward to providing more updates. Thank you everyone for dialing in. And this concludes today's program. Thank you for participating. You may now disconnect.
Operator: Hello. My name is Donna, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Ralliant Corporation's Fourth Quarter and Full Year 2025 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Mr. Nathan McCurren, Vice President of Relations. Mr. McCurren, you may begin your conference. Nathan McCurren: Thank you, Donna. Good morning, everyone. And thank you for joining Ralliant's fourth quarter and full year 2025 earnings call. I'm Nathan McCurren, Vice President of Investor Relations. Today, we'll walk through our results, highlight key operational progress, and provide our outlook for the first quarter and full year 2026. I'm joined today by Tamara Newcombe, our President and Chief Executive Officer, and Neill Reynolds, our Chief Financial Officer. Our earnings release issued yesterday and today's presentation can be accessed on the Investor section of our website at ralliant.com. Please note that we'll be discussing certain non-GAAP financial measures on today's call. A reconciliation of these items to U.S. GAAP can be found in the appendix to our presentation. During today's call, and unless otherwise stated, we will be comparing our fourth quarter 2025 results to the same period in 2024. During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements we make today. Information regarding these risks and uncertainties is available in our information statement filed with the SEC on 05/28/2025, our quarterly report on Form 10-Q filed with the SEC on 11/06/2025, and our annual report on Form 10-K for the year ended 12/31/2025 to be filed later with the SEC. With that, I'd like to turn the call over to Tamara Newcombe. Tamara Newcombe: Thank you, Nathan. Good morning, everyone. Thank you for joining us for Ralliant's fourth quarter and full year 2025 earnings call. Before we get into the numbers, I want to take a moment to recognize our teams for the incredible work they have done to establish Ralliant as a standalone public company and position us well for the future. That progress sets the stage for today's discussion. I'll start with a high-level overview of our financial performance, share how we're building on our momentum, and discuss where we're investing for growth. I'll then turn it over to Neill to walk through the details of our results and outlook before I come back to close and, of course, open it up for questions. Let's turn to the key takeaways from the quarter on Slide five. 2025 was a pivotal year. We sharpened our long-term strategy, ramped innovation across the portfolio, and strengthened our culture to inspire growth and execution. In the fourth quarter, we exceeded our revenue guidance with stable to improving trends across most of our end markets. Adjusted EBITDA and adjusted EPS were both at or above the high end of our guidance ranges. Another clear demonstration of our operating discipline. We delivered strong free cash flow with a conversion above our long-term target. As we look ahead to 2026, we are well-positioned with secular growth drivers, a healthy balance sheet to create long-term value, and clear strategic priorities guiding where we invest. Drilling down into our Q4 financial results on Slide six. Revenue was $555 million, a 1% improvement year over year. Consistent with our expectations to start the year, we showed sequential improvement every quarter with 5% sequential growth in Q4. The Sensors and Safety Systems segment grew year over year across all end markets. A record quarter of revenue in our Defense and Space end market was driven by replenishment of missile programs. The utilities market continues to benefit from secular tailwinds and a multi-year CapEx cycle focused on energy grid expansion. Industrial manufacturing, while uneven, is improving as customers gain more confidence in their markets. In Test and Measurement, revenue sequentially improved again this quarter. Improvement was led by communications for data centers, defense, and research. Diversified Electronics has shown early signs of broad-based improvement with health signals from our distributor network. And our semiconductor revenue remains variable, dependent on customer-specific exposure. Adjusted EBITDA margin of 20.8% and adjusted EPS of $0.69 reflect revenue slightly above expectations and disciplined operational execution. We also generated robust free cash flow, finishing the year at a 117% conversion rate. We continue to have a healthy balance sheet with net leverage of 1.9 times adjusted EBITDA, in line with our target leverage range. Next, turning to Slide seven. The chart shows our revenue growth improvement over the course of the year. Let me discuss that by region. North America has trended positively with improvement across nearly all end markets. Western Europe saw notable improvement, particularly in Test and Measurement, returning to year-over-year growth in the fourth quarter. China macro leading indicators have shown signs of recovery, but we expect continued pressure from export controls in an uncertain environment. Rest of World was our best-performing region in the year, with outsized growth in Q4, primarily driven by customer wins in Korea, the Middle East, and Africa. This sequential revenue improvement is fueled by secular tailwinds in several of our core markets. On Slide eight, I will outline our 2025 end market mix and revenue growth. The final column reiterates the market growth expectations we shared at our June Investor Day. I'll start with the Sensors and Safety Systems segment, which is approximately 60% of our overall business. Industrial manufacturing is our largest end market, where millions of precision sensors are embedded in critical customer workflows and solutions. Despite uneven conditions, we saw selective areas of strength during the year, led by North America. We expect a gradual global recovery consistent with our Investor Day expectations. The defense and space market is poised to outperform long-term growth expectations this year. We are well-positioned to win future contracts as a key supplier on critical missile defense programs. The utilities market is supported by durable infrastructure investment in grid modernization and reliability, reinforcing growth above our long-term expectations. Shifting now to the Test and Measurement segment, which is about 40% of our revenue. Our largest end market is diversified electronics, representing approximately half the segment, and it is showing broad-based stabilization. Early indicators include improving quote activity and healthy distributor inventory levels, which we expect to further develop in 2026. The communications market has continued to improve sequentially as customers increase investment in our new high-performance oscilloscope platform and probing technologies that support research, data center, and aerospace and defense applications. Global semiconductor customer spending, while improving primarily in AI-related applications, remains uneven. In 2025, results benefited from a large customer project that completed its production cycle in the third quarter and is not expected to repeat this year. Excluding that dynamic, we are seeing pockets of improvement in the semiconductor market as we enter the year. To win across these end markets, we are committed to our profitable growth strategy, which I will cover on Slide nine. There are three pillars to our strategy. First, operating discipline through RBS everywhere. The Ralliant Business System is the foundation of how we run the company. It makes work visible, creates shared language, and reinforces accountability. We are enhancing our RBS toolkit with AI to accelerate learning and execution. Second, our stronghold position. We continue to deepen our leadership positions in target markets where we have an expansive customer installed base and longstanding loyalty. Third, is winning growth vectors. We are expanding our presence in attractive markets such as defense, energy, and electronics to contribute to higher long-term growth across the portfolio. Slide 10 highlights our competitive differentiation and how we are partnering with our customers across these winning growth vectors. In the defense technologies growth vector, PACSCI EMC achieved record revenue in the fourth quarter with continued backlog build, highlighting the strong demand in defense programs where we are an embedded supplier. Using RBS augmented by AI, we are reducing turnaround times on customer proposals, strengthening our supply chain, and automating and expanding our production. In the grid modernization growth sector, Qualitrol was selected by one of the world's largest cloud providers as a global standard to make its data center assets more reliable, visible, and resilient. This reflects both the capability of our technology and the growing need for deeper visibility into the health of critical assets. Our condition-based monitoring solutions combine sensors, data aggregators, monitoring software, and analytics into a fully integrated solution that enables customers to detect and manage early warning signals before affecting operations. In the power electronics growth sector, Tektronix has partnered with an AI robotics company that brings humanoids to life. This requires the validation of electronics that turn intelligence into motion, helping AI to move from software algorithms into real-time control of motors, actuators, and sensors. In effect, translating digital intelligence into precise physical action where performance, safety, and reliability are essential. These customer wins demonstrate that our technology innovation and RBS are clear differentiators to expand our presence in our winning growth factors. On Slide 11, I'll share our investments that support our profitable growth strategy. As we shared at our last Investor Day and have since reiterated, our top capital allocation priority is organic investment to enhance our long-term growth. We mentioned last quarter that we expect CapEx to be 2% to 3% of revenue in 2026, up from about 2% historically as we invest in more growth CapEx. We've also taken growth investment into account in our incremental EBITDA margins that Neill will discuss shortly. This investment is focused on commercial, innovation, and manufacturing. First, I'll begin with commercial execution. Our competitive advantage is rooted in decades of domain expertise with over 90,000 customers. To better serve and reach these customers, we are investing in sales resources and augmenting with AI and a digital platform. Second, we are investing in innovation acceleration to shorten development cycle times, increasing the velocity of new products. We're deploying platform architectures that enable faster product refresh cycles and serve adjacent applications with less engineering investment. We are also innovating with new business models that have the potential to expand customer lifetime value. Third, we're investing in manufacturing agility. Following multiyear outsized growth with our defense and utilities customers, we've begun to selectively expand our footprint to increase capacity while we continue to leverage RBS to drive productivity in our existing footprint. Next, I'll turn it over to Neill to go over our financial results and provide guidance and insights on Q1 and the full year of 2026. Neill Reynolds: Thank you, Tammy. Good morning, everyone. Please turn to Slide 13. During Q4, we generated $555 million in revenue, up 1% year over year and flat on an organic basis. Healthy demand across the Sensors and Safety Systems segment, coupled with enterprise-wide pricing actions, mostly offset by lower Test and Measurement volume. Before I go through the remainder of the results, I want to briefly address the $1.4 billion noncash goodwill impairment that we recorded during the fourth quarter in connection with our annual goodwill impairment testing. As previously discussed, the EA Electroautomatique business was acquired in January 2024 as part of Fortive, has experienced electric vehicle demand headwinds and is now trending below previous expectations. As a reminder, EA was purchased for €1.6 billion or the equivalent of approximately $1.7 billion at that time. When you consider FX movement, since the time of the acquisition, the carrying value for EA included in the Test and Measurement segment was approximately $1.8 billion immediately prior to the impairment. Due to the slower than anticipated progression, and recent reduction in industry forecasts of future EV adoption, we revised our long-term revenue and operating profit expectations lower as part of our annual long-range planning process, which is leveraged in our standard goodwill impairment testing actions. The noncash charge has been excluded from the adjusted results presented in the press release and presentation published yesterday, which I will now discuss. Adjusted EBITDA margin in the fourth quarter was 20.8%. As expected, this was a year-over-year decline due to lower Test and Measurement volume and a step up in operating expenses, primarily related to standalone public company costs and higher employee costs such as healthcare. Sequentially, adjusted EBITDA margin increased 40 basis points driven by higher revenue and our cost savings program, partially offset by an increase in operating expenses. Our cost savings program is on track to achieve $9 million to $11 million run rate of annualized savings by 2026. In the fourth quarter, we delivered $1 million of savings, or an approximate $4 million annual run rate. Adjusted diluted EPS was $0.69, a 15% sequential increase driven mostly by operating leverage on higher revenue and lower than expected tax expenses. This was a year-over-year decline as expected, driven by lower adjusted EBITDA and an increase in interest expense which was not incurred prior to separation. Our free cash flow for the quarter was $92 million, driven by disciplined capital expenditures and net working capital management, leading to a conversion rate of 117% over the trailing twelve months, which remains above our long-term target of greater than 95%. On Slides fourteen and fifteen, I'll provide more color on our segment performance and end market trends. In Sensors and Safety Systems, Q4 revenue grew by 6% year over year and 3% sequentially. All end markets within the segment had mid-single-digit or better revenue growth. Defense and Space revenue increased 5% year over year, driven by robust demand and an increase in shipments while backlog continues to grow. Utilities grew 6% year over year, driven by secular growth and grid modernization and expansion driven by electrification and data center demand. Industrial manufacturing was up 6% year over year as we continue to see pockets of growth. We're seeing ongoing positive activity in North America, and saw improvement in Western Europe throughout the year. Adjusted EBITDA margin for Sensors and Safety Systems was 28%, a 280 basis point step down primarily due to higher employee costs. Turning now to Test and Measurement. Revenue for T&M was $217 million, a decline of 6% year over year. Sequentially, revenue grew 7%. Diversified electronics, which represents roughly half of T&M, declined year over year primarily due to more cautious customer CapEx spending in 2025. However, we saw revenue stabilize and start to gradually improve, leading to 10% sequential growth in the quarter. Communications grew 29% year over year, and 36% sequentially. In semi, as Tammy mentioned, we have worked through backlog on a product line related to a large customer project which we do not expect to repeat in 2026. Our Broadly and Semi orders have been stable to improving throughout the year. Test and Measurement adjusted EBITDA margin grew 200 basis points sequentially, with strong incremental margins and disciplined cost management. Year over year, adjusted EBITDA margin declined by 310 basis points, due to lower volume and higher employee costs. Turning to our balance sheet and cash flow highlights on Slide 16. We ended the quarter with $319 million in cash and cash equivalents, net of payments supportive of $34 million related to the separation. Despite these cash obligations, we kept our net leverage at 1.9 times adjusted EBITDA. Before turning to guidance, I want to remind everyone of our capital allocation priorities on Slide 17. Our top priority remains organic reinvestment. As Tammy mentioned, we are focused on investing in commercial, innovation, and manufacturing. Our next priority is returning capital to shareholders. Last week, our Board of Directors authorized our next quarterly cash dividend of $0.05 per share. We also have a $200 million share repurchase authorization fully remaining. We continue to actively monitor the M&A landscape and build our funnel of potential tuck-in acquisitions. We are committed to balancing these capital allocation priorities against our target cash balances and our long-term leverage target of 1.5 to two times adjusted EBITDA. And now turning to our outlook for the first quarter and full year 2026 on Slide 18. For the first quarter of 2026, we expect revenue of $508 million to $522 million or 5% to 8% year over year growth, including about two percentage points of FX favorability. The sequential step down from Q4 is in line with typical seasonality. As a reminder, Q4 is typically our highest revenue quarter, while Q1 is typically our lowest revenue quarter each year. We expect adjusted EBITDA margin of 17% to 18%. This step down year over year is mostly due to higher operating expenses and investments in our growth strategy, partially offset by the benefit of operating leverage on higher revenue. Sequentially, this represents a 330 basis point decline at the midpoint driven by the seasonal step down in revenue, a small increase in costs, and incentive compensation resets to target levels. As well as the initiation of organic investments. I'll note that our tariff assumptions are based on policy announcements as of January 30. With current policies, we expect to continue to fully offset the cost of known tariffs throughout the year. Adjusted EPS is expected to be $0.46 to $0.52 per share in the quarter. For the full year, we expect revenue of $2.1 billion to $2.2 billion, adjusted EBITDA margin of 18% to 20%, and adjusted EPS of $2.22 to $2.42 per share. I will note that we have included tables in the appendix of our presentation that show full year 2025 results for your comparison. This revenue range represents year over year growth of 2% to 6%, on track with our long-term organic revenue growth target of approximately 3%. Consistent with typical seasonality, we expect to see sequential quarterly increases in revenue throughout the year. Adjusted EBITDA margin of 18% to 20% reflects a 50 to 250 basis point decline year over year on a reported basis. Following the spin, we have had structural changes to our operating costs. Given the mid-year timing of our spin last year, I want to give a little color to help with year over year comparisons for modeling purposes. In 2025, we had a ramp in operating expenses. As we have discussed, these are now included in our run rate, and as such, we will be lapping lower pre-spin costs through 2026. This equates to an approximately 250 basis point year over year headwind for the full year of 2026. Excluding this headwind, we expect a 40% to 45% incremental adjusted EBITDA margin in 2026 on a like-for-like basis. This is above our long-term target of 30% to 35% incremental margin and is driven by strong operating leverage on revenue growth and continuing to ramp our cost savings program. I will note this includes the investment in our growth strategy that Tammy walked you through. We expect to continue to generate strong free cash flow, with conversion remaining over 95% on a trailing twelve-month basis throughout the year, inclusive of CapEx at 2% to 3% of revenue. With that, I'll turn it back to Tammy to reinforce our key takeaways for the quarter. Tamara Newcombe: Thank you, Neill. Let me wrap our prepared remarks on Slide 20. 2025 was a pivotal year as we became a standalone public company and charted our course for outperformance. From the announcement of our separation in September 2024, to creating our leadership team and Board of Directors, to fulfilling our public company commitments. The team has stayed focused on ensuring we meet our customers' needs and create shareholder value. We completed our separation earlier than anticipated and immediately launched a focused cost savings program aimed at offsetting post-spin dis-synergies. We established a quarterly dividend, and our Board authorized $200 million share repurchases, reinforcing our commitment to returning capital to shareholders. During this time, we delivered on our financial commitments despite a year with a dynamic macro backdrop. We set guidance as a public company and delivered our first two quarters as a standalone enterprise with all metrics at or above the high end of our guidance ranges. We have confidence as we enter the year with the separation behind us, strong secular tailwinds at our back, and strategic clarity on growth investments. As I wrap, a big shout out to our approximately 7,000 employees around the globe for their ownership and grit to win as one team. Operator, please open the line for questions. Operator: Thank you. The floor is now open for questions. Our first question is coming from Julian Mitchell of Barclays. Please go ahead. Julian Mitchell: Hi, good morning. Maybe wonder if you could flesh out the segment cost growth and how you see that playing out? Thank you very much. And what the main focus points are? Tamara Newcombe: Thank you very much, Julian. I'll address your question in the context of the targets that we set at SPIN, which was our Investor Day in June, as well as our growth strategy. And to start, we remain confident in the targets that we shared at Investor Day, and just as a reminder, through cycle, we talked about revenue growth of 3% to 5%. 3% of that organic. And then low twenties to mid-twenties on adjusted EBITDA. That remains our target. And this year, our first capital allocation priority was around executing our growth strategy and investing in that organic growth. So as you heard in the prepared remarks, we're fueling some of that across innovation, manufacturing, and commercial. And then as I look out on the horizon and the annual guidance that we gave, we gave a range of year over year growth. And if you think about the mid of that range, about our sensors and safety systems a little bit on the higher end of that range. And, they have the stronger adjusted EBITDA margins. Also, where we're gonna do most of the growth investments, and then think about our test and measurement a little below that expectation, which puts them in the, you know, we talked about test and measurement mid-teens. To the low twenties from an adjusted EBITDA. It would put them in the low end of that range. So that's what we're seeing over the next twelve months. Wanted to give that guidance to everyone. Julian Mitchell: That's very helpful. Thanks very much. And just try and understand how much reinvestment or top up is sort of contemplated here. You have the step up to stand up costs you talked about in midyear. Now we have this step up on the segment costs. Maybe just flesh out kind of what you learned and why we're hearing about this now. Neill Reynolds: Yes. So thanks, Julian. This is Neill. A couple of things on that. So if you go back and see kind of where we landed, obviously, we've only spun two quarters ago. We're gaining more experience, running the company. And that's actually one of the reasons we wanted to give the full year guide, to everyone here to help with modeling purposes to really kind of catch that investment as we start to look forward. As you think about the investment, more geared towards sensors and safety systems, where we think about higher growth rates over time, thinking about utilities, thinking about defense, and areas where we feel we've got really nice tailwinds. So we'll continue to invest in those. And look to increase the growth rates and I think, you know, get very nice returns on that. Narrowing that down to be a bit more specific, baked into that guidance for six is about at a company level, you know, about 50 to 100 basis points of reinvestment back into the business and that's incorporated into the margin numbers that we talked about. Operator: Thank you. The next question is coming from Deane Dray of RBC Capital Markets. Please go ahead. Deane Dray: Thank you. Good morning, everyone. Good morning. I was hoping to get some clarification on this 250 basis points headwind. How does that spread across the quarters? Is it front-end loaded or should we be expecting does that get spread evenly across the year? Neill Reynolds: Yes. So great question. I'll hit that. So I think if you look at the cost structure of the business, there's obviously a lot of puts and takes. Number of days in the quarter can change things in terms of what we see. Obviously, you can see a little bit of lumpiness there. I think what we're trying to say here is previously, back in the 2Q call, we talked about a run rate to leverage about $170 million a quarter. What we're saying now is that's about $175 million a quarter. So that gets you closer to $700 million or so of OpEx for the year. When you think about 2025 then as we move into 2026, I would only think about a modest increase as we're thinking about some of the reinvestment. We obviously leverage RBS everywhere. The teams are working on productivity programs related to operating expenses and our cost of sales on a regular basis. So wouldn't see it stepping up much further from here. But I think that's I think the $1.75 a quarter which gets you closer to the $700 million that includes our corporate stand-up costs as well. That's a better I think jump-off point as to how we think about leaving 25 and going to 26 and that that would that would translate to the 250 bps. Deane Dray: Got it. And then just in terms of putting the impairment in context, I mean, that's a sizable write-off for the investment in EA. Can you just take us through any other implications in the business? Are there other test and measurement businesses vulnerable here? It's just the magnitude of the write-off was really surprising given how recently the business had been acquired. Neill Reynolds: Yes. And this is Neill. We went through this in the prepared remarks. So this was primarily related to EA. I wouldn't read into other parts of test and measurement as a kind of a general statement. So, you know, looking at the write-down, we obviously spun two quarters ago, as I mentioned earlier. We've had some time to evaluate the strategy, evaluate the business. We've been working through that, obviously, and we saw some of the areas we've refined and we're looking forward in terms of advancing forward 2026. But what changed recently there was we saw the reduction in the EV subsidies in the US. I think to a certain extent that also translated some pretty significant write-downs with some large OEMs as it relates to EVs. And that just triggered us to reevaluate our own forecast. As we went through our forecast, as we went through our strategy, and we went through the, you know, the impairment procedures, towards the end of the year which we do every year it just became clear that we needed to take an impairment and execute that write-down. Tamara Newcombe: Yeah. Deane, the business fits nicely, folds nicely into the T&M business. It's still a best-in-class technology, measurement technology, got a standout engineering team. An advanced manufacturing facility that we're taking advantage of. And expect the business at the new levels to be additive to 2026 for us. And, nothing else in the test and measurement portfolio that would be that would that we'd have any other issues with. Operator: Thank you. The next question is coming from Ian Zaffino of Oppenheimer. Please go ahead. Ian Zaffino: Can you try to get a little bit more color on T&M and how to think about it throughout the year? We're seeing sequential growth kind of still down year over year, but maybe give us color on what to expect over the next few quarters or so from that? And maybe you could do it by, maybe call it, subcategory, whether, you know, it's Europe or communications or diversified electronics, Just any kind of color you could give there would be certainly helpful. Thank you. Tamara Newcombe: Yes. Thank you very much, Ian. And the test and measurement you saw, it's 40% of our overall business, that segment. You saw Q4 down 6%. But what's positive in there is if you look at diversified electronics, that's about 50% of that segment. And we do testing for electronics so a lift in semiconductor globally. Will help the diversified electronics space. Predominantly, our go-to-market there is through our distribution partners. And we've seen sequential improvement in that business, about a 10% improvement quarter over quarter as we're coming into this year. So the positive part is our partners are seeing good quote activity. We're also very normalized inventory levels, and we're seeing good point of sale. So that's a really good signal for us in this business that a diversified electronics, is 50%, is strong. The next piece of the business which you saw just communications. We know those customers. We're working with those customers every single day. Predominantly your aerospace and defense customers, your hyperscalers. And great growth in Q4. I think it was up 29%. This is also where the new products that were launched by Tektronix in Q4 play. They take some time. These are very high-end expensive instruments, so you go through a pretty long sales cycle here. But we start to see traction in North America in that business. Third piece of the business, it's the smallest piece of the business, but you get nine, 10%. It's our it's the pure semiconductor players. And in that business, we're lapping a large customer project so we'll have some headwinds this year. Although, underlying, you know, semiconductor is doing well. Ian Zaffino: Okay. Thank you. And then, you know, maybe you could talk a little bit about how to expect how we should think about or how you're thinking about M&A going forward? And I know you just kind of just write down, but and I think you're focused more internally. But how are you of kind of M&A this year and anything you want to add to or we just kind of going to sit back for right now? Thanks. Tamara Newcombe: Yeah. Ian, you know, M&A is very tied to how we think about our innovation. We've got a really nice RBS process around looking at markets and doing market work. So we are continually active in markets that are adjacent or tuck-ins that will fold nicely into our business. So we continue doing all the work. As we said, and we remain confident in our strategy around tuck-ins. And the first we're looking is where we're seeing growth, those structural markets that we expect to grow for the next five, seven years. Neill Reynolds: And let me just add to that. I think, from a capital allocation perspective, as we think about the we talked about organic we talked about returning cash to shareholders, talked about the tuck-in M&A and Tammy talked about, but first and foremost, we're gonna be disciplined, you know, capital allocators, you know, as we think about this going forward. So we're taking like anything we wanna be disciplined, we wanna have drive excellence in terms of how we manage this. And that's really what we're focused on right now ensuring that we find the right targets and as that time comes. We get the right returns on them as well. Ian Zaffino: Okay, great. Thank you very much for the color. Operator: Our next question is coming from Joseph Giordano of TD Cowen. Please go ahead. Joseph Giordano: Hi, good morning. This is Chris on for Joe. Can you comment on order activity in the quarter for Test and Measurement and how orders trended sequentially? Maybe also the book to bill for the segment and overall? Tamara Newcombe: Yes. Thank you very much, Chris. We like the positive signals that we're seeing in the test and measurement business. Think about a one-to-one book to bill in the products piece of that business. We monitor sales funnels. So our direct sellers spend a lot of time with semiconductor customers and those large communications customers that are predominantly aerospace and defense. And we've seen sales funnels build. We need to see that convert into orders, to see the momentum continue throughout the quarters. We've also seen strength in our distribution partners. And that's 50% of the overall T&M business how we get scale and reach to every single place around the globe that's involved in electronics design. And our partners are giving us good signals. Our partners are saying quoting activity is up. They've got normalized inventory levels, and we should see that continue, you know, need to see that continue. Joseph Giordano: Great. And could you help us better understand the level and the nature of the corporate costs embedded in the guidance and the fiscal outlook? Specifically, how large the level of the corporate costs and the cadence as we move through the year? And should we expect that to scale with volume? Or are they largely fixed at this point? Thank you. Neill Reynolds: Yes. So, first of me just take you back to, we talked about some of the costs as we ramp throughout the year. I think the last update we gave was kind of ramping up to about $170 million a quarter in 2025, which is inclusive of corporate costs annually of $50 million to $55 million. And I think the corporate costs in totality, I think, have kind of landed where we kind of anticipated last year. Although I would say other costs as relates to segment, we have plus 7,000 employees around the world. You know, how we have health insurance and other things that support them. There's business insurance and other items that support them. I think it's really talking about getting a hold on those things that are embedded into the segments that support the operating teams that are out there right now. As we think about OpEx going into next year, like I said, I think the jump-off point is kind of think about it on a run rate basis at $175 a quarter. I think that will come up a little bit. Modestly, maybe $700 million to $720 million something along those lines as you get into the guidance range into next year. Just a modest step up as we look into '26. But as you look at the framework for our margins into next year, think Tammy hit on it earlier. I think it's the you if you at the two segments between test and measurement and you look sensors and safety systems. You know, right now, test and measurement with that you know, growth maybe just below the midpoint of the overall revenue guidance. Is at the low end of our longer-term range at that kind of mid-teens to low 20s with the lower end of that range and as we get more volume in there that's really the way to try margin as we think about executing in 2026 and beyond. Nathan McCurren: And Chris maybe this is Nathan referring I just wanted to jump in and add quickly Neil talking $175 million of adjusted OpEx. So just to be clear, that excludes amortization. And so we averaged about $175 million in the second half of the year, which is what we're saying is really more of the kind of run rate entering 2026. Operator: Thank you. Our next question is coming from Piyush Avasthy of Citi. Please go ahead. Piyush Avasthy: Good morning, guys. Morning. Maybe, like, one clarification on margin performance in sensor and Safety segment in 4Q. I think revenues were up sequentially from 3Q to 4Q, but margins came down. Can you elaborate a bit on that? Like if there is a different mix in the quarter, like is there any competitive or cost pressure or anything that was unique to the quarter? Or is it just like higher investments? And I think I maybe I missed it, but like can you also frame how you're thinking of margin in '26 for the segment in the construction of your 15% to 20% margin? Tamara Newcombe: Thank you very much, Piyush. If you look at Q4, I called out our defense and space business, specifically PACSCI EMC. Had a record revenue quarter in Q4, and that growth which is the real positive, comes at a different margin profile. Neill Reynolds: And then if you look out into yeah. And it did sorry. Have a question? Piyush Avasthy: No. Go ahead. Neill Reynolds: I think the so so this construct, as you think about going out into 2026, so we talked about 2% to 6% growth overall think about 2026 that's the measurement being maybe just below the midpoint of that. But sensors and safety systems being above the midpoint. So solid growth here to and utilities going into next year. And then the margin structure we've talked about long-term targets of kind high twenties as you go into 2026 for sensors and safety systems. We're also seeing a lot of strength in defense, as Tammy mentioned, which is at lower margins than the segment average. It'll mix that down a little bit. Add a little bit of the organic investment by mid to high 20s is kind of the framework we're thinking about now. But we also see some really nice you know, growth tailwind in that business. Piyush Avasthy: Gotcha. Helpful. And based on your 1Q and full-year guidance, can you comment on your for your major regions? Like which regions would you say would have you have more visibility or confidence and seems easier comps? Like, the board, especially in Europe, but any incremental color on the demand trends from a geographic perspective? I think growth in 4Q was primarily driven by Western Europe while North America was a little flattish. So maybe anything to call out there? Tamara Newcombe: Yeah. Thanks. Piyush. North America and Europe make up 65% of our overall business. And as we've talked about, we have strong secular tailwinds in the defense and utility space. So expecting that to continue into 2026 and certainly banked into the guidance that we gave. Rest of the world, I think it's a sign. We're a very global company. And we have opportunities across the globe that pop up in different regions. Predominantly in our test and measurement in our utility space. That's been a pretty good mid-single-digit grower for us. And then there's China. And we talked about China as we went through our investor day, the place that historically, we had seen a lot of growth in the electronics space. And we've resized that and have lowered our expectations. I will say we've seen some green shoots in the sensors and industrial space there where we have a really strong local for local strategy. We've seen strength in the utilities end market in China. But generally, that's where we have lower expectations baked into our guide for the year. Piyush Avasthy: I appreciate all the color guys and good luck. Operator: Thank you. Our next question is coming from Kevin Wilson of Truist Securities. Please go ahead. Kevin Wilson: Hey, good morning. Thanks for the time. In QUALETROL, I'm wondering if you could expand on that award with the large cloud provider that you mentioned I think you mentioned initial orders received in the fourth quarter. I wonder, is this kind of customer win the first of its kind for Qualitrol, which typically sells more to the utilities and OEs? And should we expect more from Qualitrol specific to data centers over and above the general transmission infrastructure Qualitrol sells into. Tamara Newcombe: Yes. Thank you very much for the question, Kevin. Very good observation. So traditionally, the Qualitrol team and customer has been two-part. One is directly into the utilities who manage their own health systems monitoring systems. And into transformer OEMs who sell a full solution into some utilities. So this is a third area that is ramping in their business, which is the hyperscalers that are directly building out their own grid infrastructure for data centers. So, yes, this is a new customer space the win that we shared. something we've seen coming for a couple of quarters here. And wanted to highlight that. Kevin Wilson: Thanks. That's helpful. And then maybe sticking on that slide, the Tektronix AI robotics highlight, I thought was also interesting. Particularly as it's on the validation side. Any more color on that engagement? And then maybe broadly, how do you view the market share opportunity in validation for Tektronix? Maybe if you could provide an update on the customer adoption of the new product and platform introductions in that workflow that you announced? Last quarter? Thank you. Tamara Newcombe: Okay, Kevin. There's a lot to unpack in that one. Apologies. Let me start with I think the win as we spoke of as a customer, it's a broader statement to AI moving into the edge and all of the electronics I mean, we're seeing this in our own lives. Electronics are popping up in industries that never had electronics before. And that's good for test and measurement when you're an electronic test and measurement company. So that's a signal of more to come as whether it's robotics, or other electronics going to new end markets. The platform that you're speaking of, the MP 5,000 platform that Tektronix launched in Q4. It's the first time that Tektronix has a purpose-built solution for automated testing. This platform is one that has been well received. We also it will take some time to ramp because it's a new go-to-market for us with system integrators that tend to build the test systems in the validation space. We have a small share in that space today. Just they take our bench instruments and kind of pull them into validation. We're expecting this to be a nice growth opportunity for us as we go throughout the year and get the adoption on that space. So it is some greenfields for Tektronix, and so far, really nice feedback from customers. Kevin Wilson: That's great. Thanks, Tammy. Operator: Thank you. The next question is coming from Rob Jamieson of Vertical Research Partners. Please go ahead. Rob Jamieson: Hey, thanks for taking my questions. Just wanted to follow-up on Deane's question here on EA. A lot of these EV headwinds and everything were at least on the CapEx side, being flagged earlier in the year or even when the new administration came in. So I'm just trying to kind of understand when you went through that process. The revised expectations, let's you know, how much was of that was the actual reduction in the industry forecast versus EA specific execution or competitive issues? You know, like, what's the competitive landscape in high power, like, load and supply test? And, you know, have you seen you know, any of EA's differentiation holding or eroding? Neill Reynolds: Yes. So in terms of the timing as you called out, I think what's changed, over the last couple of quarters is, I think, the change in the EV subsidies. And I think that's translated into other large auto OEMs taking write-downs as well. So I think as we look at that, backdrop as end customers for EVs start to make those types of changes as it relates to not just the overall industry backdrop but also the change in the subsidies. It just became more clear as we went through our evaluation that a write-down, you know, that a write-down was needed. Tamara Newcombe: The customers many of the customers you can imagine in that space, the many of the write-downs are our customers. That had ongoing projects or promises of projects that then, you know, instantly disappear. So the opportunity in automotive is smaller. However, the technology is applicable to other energy storage spaces, which is where we're directing the EA business now. Rob Jamieson: Okay. No, thank you for that. And then I guess, you mentioned data center on the test and measurement side as well. In communication. Can you give us a little bit more on exactly what you're doing in data center, whether that's power or the signal side? And then also, what's the size within communication for data centers? Is it I mean, assume it's a relatively small piece of that. I guess same question on defense and government, that was called out as being strong communication. But you know, of that bucket, like, how big are those three areas? Tamara Newcombe: Yeah. If you're speaking or I'll frame it directly in T&M. So let's stay in T&M because we do have a large defense business in the Sensors and Safety Systems segment. But within T&M, we talk about yeah. When we talk about communications, I'd say 70, 80% of that is aerospace and defense. The other piece of that is directly to hyperscale. But the AI data center, I talk about it as almost a second derivative to raising the tide for all electronics. Because there's people testing all of the pieces that go into the data center. Not only the communications, but the compute, the memory, the storage, and that's part of the ecosystem that ends up in a data center that certainly provides additional electronic test and measurement opportunity for us. Rob Jamieson: Okay, great. Thank you. Operator: Our next question is coming from Scott Graham of Seaport Research Partners. Please go ahead. Scott Graham: Hi, good morning. Thanks for taking my question. I'm just hoping for additional color on the projected margin decline in '26. I know you're investing in growth vectors. I know EA is part of that. But the delta does suggest underinvestment from prior. And I guess I'm just wondering which businesses are you investing in most? Again, I understand the growth factors, but which businesses maybe do you need to kind of get to a baseline to support their growth because of what appears to be prior underinvestment? Tamara Newcombe: Yeah. We and if you look at the annual guide, we had a range on the adjusted EBITDA, 18% to 20%. In that range? And do you think about the Sensors and Safety Systems towards that, that will contribute to the higher ends and test and measurement at the volume in our guide would be more towards the low end part of that. The investments across commercial manufacturing, innovation. I'll start with the most obvious which is manufacturing. We've had tremendous growth in defense and utilities over several year period. We're starting to plant the seeds to expand our manufacturing footprint. In this particular year, those investments will be in increased shifts, RBS productivity in the footprint we have, but starting to stand up second lines in buy equipment so that by '27 and '28, we expand that capacity. So that that's squarely in the sensors and safety systems as well as where we're fueling some of those sales resources. We talked about, to get after the growth and to extend our reach. Now the people part of that will be smaller because we're augmenting that with AI and with digital. And then, last is platforms. And we've had some recent launches from our Qualitrol business around arc detection, leveraging AI to get more intelligence to those operators who have to keep the electric grid up. We're gonna fuel that with some platform investments. In innovation. So predominantly, in the sensors and safety systems, where you're gonna see those growth investments. Scott Graham: Very good. Thank you for that. Diversified electronics down 13%. I know you indicated that's up 10% sequentially. And maybe you could just tease out how much of that up 10% is seasonal. And maybe a comment on January for the company. Tamara Newcombe: Through, higher quoting activity, which are all good signals in the diversified electronic space. Scott Graham: And so the sequential, the 10 sequentially that was not seasonal you? You think? Tamara Newcombe: There is definitely some seasonal piece to the test and measurement business, but the 10% sequential it's a broader sequential. It's improved as we've gone throughout the year. The 10 and Measurement, like the overall business, has sequentially improved every quarter since Q1. Now that business tends to have a step down in Q1, which we factored into our guide. But I still think the signs there are very good. Operator: Thank you. Our next question is coming from Chris Schneider of Morgan Stanley. Please go ahead. Chris Schneider: Thank you. And I apologize, I joined a little bit late. But I'm not sure if this question has been asked. I understand, obviously, that there's margin headwinds into 2026. But I guess when we specifically look at the Q4 to Q1 kind of sequential progression, I think at the midpoint you guys are guiding it down about 330 basis points, which seems steeper than normal. So is that sequential is that is that all just the higher investment that you guys are making in sensors and Safety? Is it some of the mix headwinds that are continuing in sensor and safety? Just kind of why is that stepping down so sharply? Thank you. Neill Reynolds: Yeah, Chris. Great question. This is Neill. So let me take a shot at that. So as you look at the transition from one Q sorry, four Q into one Q. We've discussed previously, and I think we laid this out last quarter, that we anticipated from a guide, I think, give you 20% to 21% EBITDA for the company going out of Q4, about a to 300 basis point decline going into Q1. So that would get us close to 18%. We're guiding just a little bit below that. So I think that what we have here is maybe a little lower, but consistent with how we talk about it in terms of seasonality in the business. As it relates to why is it a bit higher, I think from a just a natural perspective, it's going down a bit. We're also seeing a few things like, you know, compensation true-ups as you get into the, you know, start of the year. We are gonna see a small initiation. Some of these organic investments. So I would think about that outside of Q1 for the most part. But healthcare costs being a little bit inflationary. So I think outside of the kind of mid of what we thought about, there's a couple of pieces that are driving a slight increase versus what we had said, but I think, otherwise more or less in line. Chris Schneider: Thank you. I appreciate that. And then on some of the investments that you guys are making into the businesses, when do you think that will have a positive impact on top line? Is there some of that benefit that's included in the '20 sales guide? Or do you think those benefits will more so pay off in '27 and beyond? Thank you. Tamara Newcombe: Yeah. We have embedded the goodness those investments into the guide for 2026. And there's always room to overdrive, especially on sales resources if they can come online faster. But predominantly, that investment will be in 2027, will pay off in 2027. Operator: Thank you. Ladies and gentlemen, this brings us to the end of the question and answer session. I'd like to turn the floor back over to Ms. Newcombe for closing comments. Tamara Newcombe: Thank you for your questions and for being with us today. I'd like to wrap up the call with a few closing remarks. While public for only a short time, over the last several years, we've undertaken deliberate actions to create a sustained streamlined portfolio with world-class leaders. One of our greatest strengths is the passion and commitment of our employees, to win as one team. We're executing against our growth strategy by leveraging RBF to compete across businesses stronghold positions and in secular high growth vectors. Expect the RBS to continue to serve as a competitive advantage enabling customer innovation and operating efficiencies. Ultimately enabling us to perform with financial discipline. Our teams have demonstrated operating rigor with the ability to profitably evolve our portfolio and deliver in any environment. We are resolute in our commitment to supporting our customers, inspiring employees, and delivering for our shareholders. Thank you for joining us today. I hope you have a great one. Operator: Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
Operator: Hello. Good morning, and welcome, everyone, to the CEMEX Fourth Quarter 2025 Conference Call and Webcast. My name is Becky, and I will be your operator for today. [Operator Instructions] And now I will turn the conference over to Lucy Rodriguez, Chief Communications Officer. Please proceed. Lucy Rodriguez: Good morning, and thank you for joining us for our fourth quarter 2025 conference call and webcast. We hope this call finds you well. I am joined today by Jaime Muguiro, our CEO; and by Maher Al-Haffar, our CFO. We will start our call with a review of our fourth quarter and full year results, followed by an update on the progress made so far on our strategic plan as well as our expectations and guidance for 2026. And then we will be happy to take your questions. We will host our CEMEX Day on February 26, where we will be providing additional details on our value creation strategy and medium-term financial targets. There will be a live video webcast available. And now I will hand the call over to Jaime. Jaime Dominguez: Thanks, Lucy, and good day to everyone. From a results perspective, my first year as CEO has been marked by sharp contrasts as we embarked on our transformation process. As expected, our first half performance was challenged by headwinds in Mexico related to the first year of a new government administration and a weaker peso, coupled with soft demand conditions in the U.S. In contrast, the significant second half improvement was predicated on Mexico's recovery as well as early results from our ambitious and disciplined transformation announced in the second quarter. As I assume my role as CEO in April, we moved quickly to introduce a multiyear strategic plan that included significant self-help measures designed to address the challenging market conditions. I want to recognize our teams across the organization. 2025 was a demanding year of transformation for our company, one that required discipline, resilience and a strong execution mindset at every level. Our people delivered on operational excellence, maintained a strong focus on safety and customers and executed important structural changes while continuing to run the business day-to-day. These results reflect their commitment and professionalism, and I want to thank them for their hard work and dedication. Under Project Cutting Edge, our cost efficiency program, we fully realized our 2025 EBITDA recurring savings target of $200 million, leading to improved margins in all markets in the back half of the year. Importantly, this effort should continue to reap substantial benefits in 2026 and beyond. Our free cash flow from operations reached $1.4 billion in 2025 with a 46% conversion rate adjusting for one-off items such as severance and discontinued operations. We continue progressing on our portfolio rebalancing and growth strategy. We divested most of our operations in Panama while investing in targeted businesses in the U.S. The consolidation of Couch Aggregates materially strengthened our aggregates position in the Southeast. We will continue seeking potential divestments in noncore markets to expand our presence primarily in the U.S. through disciplined capital allocation with a clear focus on aggregates and adjacent businesses such as mortars, stuccos, renders and plasters. In decarbonization, our consolidated gross CO2 emissions declined 2% in 2025, mainly driven by further reduction in clinker factor. Our operations in Europe continued to lead the way, having reached the Cement Europe Association's 2030 gross CO2 emissions reduction targets 5 years ahead of schedule. But it was not just Europe, notably, our operations in Mexico and South, Central America and the Caribbean profitably achieved record clinker factor levels in 2025. Finally, we're making important strides on our commitment to deliver enhanced shareholder returns. In our upcoming General Shareholders' Meeting in late March, our Board of Directors will propose an annual cash dividend close to 40% higher than the one announced in 2025. Complementing our cash dividend and subject to annual approval by shareholders and other formalities, we will activate usage of our buyback program with the intent to buy back up to $500 million in shares over the next 3 years. I am proud of what we have accomplished so far and expect even better results in 2026, supported by improved market demand, operating leverage available to us in most markets and continued cost and efficiency measures. In our CEMEX Day on February 26, we will dive into more detail on what you should expect from us in future years. With momentum building in the second half on recovery in Mexico and solid results from EMEA, full year consolidated sales and EBITDA rebounded. Indeed, fourth quarter sales and EBITDA increased by a double-digit rate, supported by project cutting-edge savings in Mexico. EBITDA margin was stable for the full year, again with a significant expansion in the second half as cost efficiencies began to materialize. All regions reported flat to improved EBITDA margin in 2025. I am most proud of our performance in free cash flow from operations, a key metric of our transformation. Excluding one-offs from severance payments and discontinued operations, free cash flow from operations grew by 50% to $1.4 billion. With a goal to achieve 50% conversion rate of EBITDA to operational free cash flow, we achieved 46% in 2025 after adjusting for one-off cash expenses. After incorporating growth CapEx, intangible assets and other expenses, total adjusted free cash flow increased by more than $550 million in 2025 compared to prior year. These achievements underscore our focus on the levers we can control to ultimately deliver more cash to shareholders. For 2026, you should expect additional improvements on these metrics as we make further progress on our strategic initiatives. Finally, we recognized $538 million in goodwill impairment and asset write-down in 2025. Adjusting for this effect, net income would have increased by 41% to $1.5 billion. Consolidated cement and aggregates volumes in the fourth quarter grew by 1% and 2%, respectively. The continued growth in EMEA cement volumes more than offset volume performance in the U.S. and the slight decline in Mexico. Demand conditions in Mexico improved with average daily sales for our 3 core products growing on a sequential basis. Double-digit growth in aggregates volumes in the U.S. reflects the consolidation of Couch Aggregates. As construction activity is expected to increase in all of our regions, we anticipate a better demand outlook in 2026. With our focus on operational efficiency as well as available capacity, we are well positioned to capitalize on the strong operating leverage in our business as volumes begin to recover. Consolidated cement, ready-mix and aggregates prices increased by a low single digit in 2025, with positive performance in most markets. In Mexico, despite adverse demand conditions and in South, Central America and the Caribbean region, prices rose mid-single digits in 2025. As demand is expected to improve in all regions in 2026, we aim to continue recovering input cost inflation throughout our portfolio and see particular strength in Continental Europe. The carbon border adjustment mechanism, along with the gradual phaseout of free CO2 allowances under the EU ETS should support favorable pricing dynamics as the industry looks to recover the rising carbon emission costs. Full year EBITDA performance was mainly explained by project cutting edge, cost efficiencies and higher prices. Despite ongoing cost inflation, we were able to reduce our total cost base by close to $100 million. Consolidated margins were supported by margin expansion of close to 2 percentage points in both Mexico and EMEA. Significant FX headwinds in the first half were almost fully offset by a reversal in the second half. In our Urbanization Solutions portfolio, higher EBITDA in the admixtures business in EMEA partially compensated for soft performance in Mexico and the U.S. 2025 marked a year of profound transformation for CEMEX, centered on achieving operational excellence and delivering shareholder return. To that end, we defined a set of strategic priorities focused on enhancing profitability, increasing free cash flow conversion, improving operational efficiency and ensuring returns above our cost of capital in every asset we manage. As I explained earlier, in 2025, we made significant progress on our plan. First, we expanded our cost reduction program, Project Cutting Edge to recurring savings of $400 million by 2027. Importantly, half of this amount is related to overhead actions already taken in 2025. These actions should deliver additional savings of $125 million in 2026. The $200 million savings realized in 2025 drove a decline in cost of goods sold and operating expenses as a percentage of sales in most regions with higher EBITDA margin across our portfolio. We introduced EBIT, free cash flow conversion and a spread of ROIC over WACC as new performance metrics for our operations. We also advanced on the implementation of operating initiatives such as improvement in kiln efficiency in the U.S. and the optimization of fuel mix in Mexico. These efforts drove a 17% increase in EBITDA in the second half and a 25% jump in EBIT, a key metric of our transformation. With regard to free cash flow, we adjusted our maintenance CapEx spend and reviewed all projects under our growth CapEx pipeline. We conducted a detailed evaluation of every asset in our portfolio, defining a clear action plan for those underperforming assets. This plan is expected to positively contribute to our results in the future. And we also revamped our variable compensation plan effective January to reflect these new metrics and to better align with long-term value creation and shareholder return. I am confident that as we continue working on our strategic plan, we will identify additional opportunities to further support margins while aiming to increase free cash flow conversion and return on capital. And now back to you, Lucy. Lucy Rodriguez: Thank you, Jaime. We are encouraged by the volume recovery in the second half in Mexico as well as the contribution from our cost and efficiency initiatives. Sales growth accelerated in the quarter, marking the first quarter of year-over-year growth since the election in Mexico in 2024. EBITDA increased by 20% like-to-like and margin expanded by an impressive 5 percentage points. Importantly, EBITDA also increased sequentially, contrary to historical seasonality patterns, further underscoring our recovery trend. Demand conditions in Mexico continued to improve with average daily cement sales increasing by 8% sequentially, again outperforming historical seasonality patterns. As anticipated, public spending on social programs and infrastructure is beginning to gain momentum, albeit from a low base. Rural road projects in which we typically have a large participation rate as well as other programs show early signs of increased activity, benefiting bagged cement volumes. In infrastructure, while conditions are still soft, we began construction works on projects such as the Quer�taro to Irapuato rail line, along with the continuation of the AIFA Airport to Pachuca line with other projects expected in the near term. In addition, we see increased activity in projects related to the 2026 World Cup in Mexico City, Monterrey and Guadalajara. The social housing program with the goal of constructing 1.8 million units through 2030 is also beginning to pick up speed. In the fourth quarter, while off a small base, we doubled our participation in projects under construction to 58,000 units. Additionally, we have also seen an important pickup in projects under negotiation for the program, currently 105,000 units. Last year, prices for our 3 core products increased by mid-single digits. For 2026, we will continue with our strategy to at least recover input cost inflation. In that effort, we recently announced a 10% price increase in cement and ready-mix effective January. Our transformation program is leading to a more agile and efficient organization in Mexico. As Jaime mentioned, last year, we achieved important cost savings in the country, driving material increases in our cement and ready-mix margins despite the challenging market backdrop. As demand conditions improve, operating leverage, along with cost initiatives should support further margin expansion. In 2026, we expect that volume recovery, pricing and cost savings will be important drivers of growth. Our U.S. operations posted a record fourth quarter EBITDA with margin near record highs, underscoring the resilience of our business in challenging market conditions. Performance was driven by project cutting edge, facilitating higher operating efficiency, along with the consolidation of Couch Aggregates. Demand continues to reflect strength in infrastructure with some bright spots in the industrial sector, offset by continued softness in residential. The 10% increase in aggregate volumes was driven by investments coming online in fourth quarter as well as the effect of Couch Aggregates. With three consecutive years of cement volume declines, we have seen increased competitive pressure in select markets in our footprint, explaining the slight decline in sequential cement prices. In aggregates, prices rose 4% in the year on a mix-adjusted basis. Adjusting for the Couch acquisition, sequential prices in aggregates remained flat in the fourth quarter. The expansion in quarterly margin was primarily due to Project Cutting Edge, where we saw a material reduction in cost of goods sold as a percentage of sales. The slight decline in full year margin is largely explained by disruptions from difficult weather conditions in the first half. As Jaime mentioned, our efforts to improve cement kiln efficiency as part of Project Cutting Edge continued to pay off with domestic production expanding by 500,000 tons last year. This increase in domestic production replaced lower-margin imports, leading to relevant EBITDA margin expansion. We expect domestic productivity to further increase in 2026. Our aggregates business continues to grow through both organic and inorganic means. The 39% contribution of the aggregates business to U.S. EBITDA is almost equal to that of cement. We continue to focus on initiatives to drive additional efficiencies in our aggregate operations as well as expand our reserve base. Examples include the recent consolidation of Couch Aggregates, along with expansion projects in Florida and Arizona, which will come online later this year. These additions support volume guidance of mid-single-digit increase for aggregates in 2026. We will be drilling down in more detail on the drivers of our U.S. aggregates business at our Analyst Day in late February. Looking ahead, we expect infrastructure to drive demand as IIJA transportation projects continue to roll out. About 50% of funds under IIJA have been spent with peak spending levels expected this year. We are encouraged by the December release of highway awards, the strongest on record with most markets reporting positive momentum. The industrial and commercial sector continues to benefit from data centers, energy investments and chip manufacturing facilities in our markets. While single-family residential remains soft, we see demographic tailwinds boosting demand over the medium term as affordability and market sentiment improve. With a better demand outlook for 2026, we have announced mid-single-digit price increases in cement, ready-mix and aggregates in several markets, aiming to at least recover input cost inflation. It is important to highlight that as in the case of Mexico, operational leverage once volumes recover, should lead to higher profitability. In the EMEA region, EBITDA and EBITDA margin achieved records in 2025, led by higher volumes and prices as well as cost efficiencies under Project Cutting Edge. Pro forma for a number of one-off adjustments in the fourth quarter, EBITDA in EMEA grew by a double-digit rate with margin expansion of 1 percentage point, supported by positive performance in both Europe and Middle East and Africa. Demand conditions continued with a positive trend with cement and ready-mix volumes growing by 7% and 3%, respectively, and by a mid-single-digit rate for the year. Full year cement and ready-mix prices in EMEA increased by low single digits. On a sequential basis, cement price variation in fourth quarter is mainly explained by a geographic mix effect. In Europe, despite difficult weather conditions, we posted high single-digit growth in cement volumes. Performance was primarily related to infrastructure projects in Eastern Europe and sustained housing activity and infrastructure investment in Spain. On a sequential basis, prices in Europe were stable in the fourth quarter. Price dynamics for full year 2025 are explained by geographic mix and limited competitive pressure in specific markets. Going forward, construction activity in Europe is expected to be supported by infrastructure investment backed by EU funding, the German infrastructure bill providing some tailwinds along with the gradual recovery in the residential sector. In the Middle East and Africa, cement and ready-mix volumes in the fourth quarter expanded by 11% and 9%, respectively. Construction activity across these markets is recovering on the back of housing and nonresidential projects with Egypt also benefiting from large-scale infrastructure projects and the start of mega tourism development. Our operations in Europe remain at the forefront of our decarbonization efforts, reaching a level of 507 kilograms of CO2 gross emissions on a per ton of cement equivalent basis in 2025, representing a 19% reduction versus 2020. This level is already surpassing Cement Europe Association's 2030 emissions target for cement production, further reinforcing our position as an industry leader. The implementation of the carbon border adjustment mechanism in Continental Europe, along with the gradual phaseout of free EU ETS allowances this year should be supportive of cement pricing in 2026 and beyond. Our operations in South Central America and the Caribbean delivered full year EBITDA growth in 2025 for the third consecutive year, driven by pricing discipline and continued benefits from Project Cutting Edge. Fourth quarter EBITDA performance reflects the impact of Hurricane Melissa in Jamaica as well as increased maintenance in Colombia and Trinidad and Tobago. In Colombia, cement volumes continued to recover, growing 7% in the quarter, driven by the informal sector with bagged cement benefiting from stabilizing macroeconomic conditions. Jamaica posted record full year EBITDA with cement volumes growing by 7%, driven by tourism and self-construction. The completion of our kiln de-bottlenecking in third quarter 2025 should allow us to profitably substitute imports with local production to meet rising domestic demand and better serve export markets. Sequential pricing for cement and ready-mix in the region is relatively stable with variation explained by geographic mix. We remain optimistic about the medium-term outlook for the region, where improved consumer sentiment and formal construction are expected to drive demand. And now, I will pass the call to Maher to review our financial developments. Maher Al-Haffar: Thank you, Lucy, and good day to everyone. We are pleased with our performance in 2025 with our Project Cutting Edge program delivering important cost savings, primarily in the second half of the year, boosting our EBITDA growth, as Jaime outlined. Our full year free cash flow from operations was $1.2 billion, an increase of 15% versus 2024 on a reported basis. This growth is explained by an important reduction in taxes, interest expense and maintenance CapEx. Adjusting for the extraordinary payment of a fine in Spain in 2024, cash taxes declined by $170 million in 2025. Our interest expense in 2025, including coupons on our subordinated perpetual notes was $160 million lower than last year. This improvement was driven by lower average debt, lower base rates and the refinancing of one of our subordinated notes. In line with our normal seasonality, we saw a divestment of $529 million from working capital during the quarter, resulting in a marginal $16 million investment for the full year. Working capital days for 2025 stood at negative 11 days, an improvement of 4 days versus 2024. Excluding severance payments and discontinued operations, our free cash flow in 2025 reached $1.4 billion with a conversion rate of 46%, highlighting our free cash flow generation potential going forward. The initial benefits from our efforts to optimize our cost base under Project Cutting Edge are visible in our results, and we expect incremental benefits in 2026 and beyond. Energy costs on a per ton of cement basis declined by 12% for the full year, driven by lower fuel and power prices and a continued improvement in clinker factor and thermal efficiency. In the fourth quarter, cost of goods sold as a percentage of sales were 44 basis points lower year-over-year, while operating expenses as a percentage of sales were 62 basis points lower despite recognizing a one-off true-up provision related to variable compensation. Net income variation in the quarter is mainly explained by goodwill impairment and an asset write-down amounting to $493 million. For the full year, net income increased by 2% as the gain from the sale of our operations in the Dominican Republic, a favorable FX effect and lower financial expense offset the impact of higher income tax and impairments. As I have mentioned in prior occasions, our steady-state net total financial leverage target is between 1.5 to 2x. This ratio includes our net debt plus $2 billion of subordinated perpetual notes. At the end of 2025, this ratio stood at 2.26x. We aim to reach and maintain a solid BBB rating to further improve our risk profile, bolster our growth potential and maximize value creation for our shareholders. With a significantly improved leverage position, a high level of confidence in our transformation plan and our new more balanced and disciplined capital allocation framework prioritizing shareholders, we believe 2026 is the moment to begin to move on shareholder return. In this context, the Board of Directors will be proposing to our General Shareholders Meeting scheduled for late March, an annual cash dividend of $180 million. Subject to shareholder approval, this would represent an almost 40% increase in our dividends versus the prior year and represent an important advance in our progressive dividend program. The notice and agenda for the general shareholders' meeting, including information on the dividend proposal will be published tomorrow. Complementing our cash dividend and subject to annual approval by our shareholders and other formalities, we will activate usage of our buyback program with the intent to buy back up to $500 million in shares over the next 3 years. Importantly, as approved in last year's General Shareholders Meeting, we still have an outstanding approval for share buybacks of up to $500 million available to us through late March of this year. Execution will depend on business performance and free cash flow generation, cash needs and overall market conditions. You should expect gradual improvement in shareholder return as free cash flow continues to grow in subsequent years. And now back to you, Jaime. Jaime Dominguez: Thank you, Maher. While we are pleased with our results and achievements in 2025, there is still much more work to be done as part of our transformation. For 2026, we anticipate a more favorable demand environment as construction activity continues to recover in most of our markets. In particular, we expect material contributions from Mexico and EMEA. We also expect a tailwind of $165 million in incremental savings under Project Cutting Edge, including $125 million related to overhead actions already taken in 2025. Finally, completed projects in our growth portfolio should generate $80 million in incremental EBITDA this year, half of which relies on volume recovery. Based on this, we're guiding to a high single-digit rate growth in EBITDA in 2026. Due to the relevant exposure to Mexico in our EBITDA, our guidance is subject to FX fluctuations. In the past, we assumed a current FX rate for the peso in our guidance. However, with the recent appreciation in the peso, we opted to use an FX estimate of a range of between MXN 18.25 to MXN 18.50 per dollar. Beginning this year, we are providing guidance for investments in intangible assets. Our flat guidance reflects the purchase of additional aggregates reserves and mining rights in 2026. All in, maintenance CapEx and growth investments, including growth CapEx and intangible assets are anticipated to result in a positive contribution to free cash flow of about $195 million in 2026 versus the prior year. We expect these savings, coupled with high single-digit EBITDA growth and a favorable comparison to $183 million in severance payments in 2025 should lead to incremental free cash flow and enhanced conversion rate, making progress towards our 50% target. Let me emphasize that I remain laser focused on operational excellence and shareholder return and we'll continue working relentlessly on improving the variables we can control. We have the right strategy and more importantly, the right team to continue delivering on our key priorities. And while we expect a better operating environment in 2026, much of our projected growth is still driven by self-help measures. And now back to you, Lucy. Lucy Rodriguez: Before we go into our Q&A session, I would like to remind you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate and could change in the future due to a variety of factors. In addition, unless the context indicates otherwise, all references to pricing initiatives, price increases or decreases refer to our prices for our products. And now we will be happy to take your questions. [Operator Instructions] The first question comes from Gordon Lee from BTG Pactual. Gordon? Gordon Lee: Just a quick question, Jaime, and you sort of mentioned this as an important driver in Europe and passing in your prepared remarks. But I was wondering if you could comment, you could share with us your view of some of the reports that we've seen from Europe suggesting that the EU will actually weaken or soften its ETS targets for this year and going forward. That's obviously had an impact on the sector stock prices globally. But I was wondering what your view is of those reports? And how do you think if this were to happen, it would impact your outlook for prices and profitability in Europe for CEMEX? Jaime Dominguez: Gordon, thanks for the question. Although, as you know very well, that change -- potential change was not confirmed. The likelihood of it happening, right, is reasonable. But if it happens and when it happens, it's not going to change our pricing strategy in Europe. In the very short term, we are confident that on our mid-single-digit price increases targets for '26, '27, '28. If that regulation comes to place, it will flatten out the price increase curve, but it will not negate the need for industry mid-single-digit to high single-digit price increases over time. And at worst, it might just reduce by 1 percentage point, the need of price increases in the long term on a compounded annual growth rate basis. So I don't think it will be too material at all. The other thing that I see very positive, Gordon, is that it gives us time to continue our profitable decarbonization in Europe. We will continue using our traditional levers, particularly reducing clinker factor as fast as they can because we will continue reducing our CEMEX carbon cost curve, widening the gap between importers, some European cement players and us. And that will give us a competitive advantage. And by doing that, we might even positively influence the next benchmark in the next phase, which will widen the gap between our CO2 footprint and our cost curve and that of importers. And that's good. So -- and the final point is free cash flow, right, by postponing the target for 5 years, if that is what is -- it ends up happening, we're going to preserve more cash, and we will have more visibility on future CO2 prices, which will derisk capital allocation for more demanding decarbonization levers. So I hope that I have answered the question, Gordon. Lucy Rodriguez: And the next question comes from Adrian Huerta from JPMorgan. Adrian? Okay. So why don't we go on to the next question then. And the next question comes from Ben Theurer from Barclays. Ben? Benjamin Theurer: Congrats on a good 2025, and let's move on to another good 2026. Quick one on your guidance. So you're kind of like assuming a low single-digit volume growth, as you pointed out within your slide deck. And from a pricing, it feels like another low single digits. So that would take us to something like a mid-single-digit sales growth. But obviously, additional savings from Project Cutting Edge. You talked about the operating leverage that you get from the better volume. Just wanted to understand and if you could elaborate more on the assumptions behind just the high single-digit EBITDA growth on a year-over-year basis? And what are the upside, downside risks you're seeing within that framework? Jaime Dominguez: Ben, thank you so much for the question. What I can tell you is that I see more upsides than downsides. The first one is because of the FX. As you heard our comments, we decided to use a range of MXN 18.25 to MXN 18.50. So if the FX stays stronger, please note that for every peso of appreciation, right, we can increase EBITDA by around $75 million to $80 million. And the other aspect is that as part of our transformation and focus on operating excellence, we will continue to work on firming up new savings -- recurring savings. So that -- I'm very confident about our guidance, and there could be some upside potential. So thanks for the question, Ben. Lucy Rodriguez: Okay. I'm going to come back to Adrian Huerta from JPMorgan and see if he is online. Adrian, can you hear us? Okay. I'm going to move on then to the next question, which is via the webcast and is coming from Arnaud Pinatel from On Field. What are the one-offs mentioned for Europe in Q4? And could you quantify them? Jaime Dominguez: Yes. Arnaud, how are you doing? Good morning. Had we excluded the one-offs, the EMEA margin would have been higher by 0.9 percentage points. And the one-offs were related to a few write-offs, the fact that in 4Q '24, we were giving an electricity reimbursement. And then we had a variation on the variable compensation provision at a consolidated level, but also affecting EMEA and Europe. This means that while in 2024, we reduced variable compensation provisions in the fourth quarter, in 2025 fourth quarter, we increased the provision. And there was a delta, and that affected Europe and it affected CEMEX fourth quarter margin at a consolidated level. And at a consolidated level, that effect was around 0.6 percentage points. Lucy Rodriguez: Okay. Thank you very much, Jaime. And I think we are going to take Adrian Huerta's question now by the webcast. So the question is the following. Just thinking about potential sources for additional free cash flow going forward coming from reduced expenses or CapEx. In the case of intangible investments, you are guiding to flat this year, but mentioned that some of this is due to mining rights. Will this type of investment on mining rights continue for a few years? What other items within intangibles were reduced? Other expenses that could be reduced going forward? Jaime Dominguez: Adrian, thank you for the question. First, on intangibles, we have our process and IT investments. And then depending on how we procure, we acquire reserves, if those are mineral rights, that will be accounted under these intangibles. However, if we're acquiring purchasing reserves, not rights, it will be under strategic CapEx. Please note that we will continue reducing both strategic CapEx and intangibles. That's our plan for 2026 and is our plan for 2027 and beyond. It's part of our change in our capital allocation, and we will elaborate more about that during CEMEX Day. Nevertheless, when looking at 2026, we are already reducing IT investments by $61 million, which is a significant reduction from where we were in '25 and more so where we were in 2024. Do expect further reductions in 2027. Thanks for your question, Adrian. Lucy Rodriguez: The next question comes from Alejandra Obregon from Morgan Stanley. Ale? Alejandra Obregon: Jaime, I have one for you. I think -- I mean, you've been close to a year in the role, and you've not only driven this very strong operational turnaround, but you've also reshaped the narrative and how the company tells the story. So I was just wondering if we can reflect on that first year, where do you think we could be underappreciating of the opportunities and risks of what you found? So meaning what are the biggest upsides that you found? And what are some of the challenges that you're facing now that you're -- I mean, you've been for a while in the job that will take you to the -- take CEMEX to the next chapter and to the long-term North Star. Like what are we missing? And what do you think are the upside and downside risks more -- I mean, beyond 2026? Jaime Dominguez: Alejandra, thank you so much for the question. That's a great question that I'm very excited about it, and we will definitely elaborate a lot of it during the CEMEX Day. What I can anticipate to you is this, first opportunity and foremost is enhancing our shareholder returns. As we continue improving free cash flow conversion, right, we put at the center of our capital allocation strategy, the shareholders, that will lead to significant opportunity. The second thing is I continue to see as part of our transformation, further structural recurring savings on one hand, because we're not done yet, and we're working on it. And second, because we will responsibly deploy technology, including AI, right, to expand margins. And there are some use cases that look promising that could also boost margins and productivity. The other opportunity is to accelerate profitably our decarbonization in Europe to widen the gap of our cost carbon curve and therefore, CO2 footprint and that of importers and other European cement players. Not everybody is moving as fast as we or other leaders in the industry. And that will give us a competitive advantage in Europe, combined with resilient, mid-single-digit to high single-digit pricing expected for Europe. The other big opportunity is boosting free cash flow by reducing interest expenses, not only growth CapEx and intangibles. And that's a great opportunity. I also see bolt-ons M&A for the time being, first in the U.S. as an opportunity, but I recognize that, that could also be a challenge. I'm excited about gaining more exposure to infrastructure in the U.S., I also see opportunities to further rebalance our portfolio, not only between emerging and developed, but also unprofitable and profitable businesses. But I'll elaborate more about that in the CEMEX Day. Finally, challenges, the new normal, right, the geopolitical aspects that are out of our control and that make swings as we manage the business. That's why we will continue relentlessly focusing on the things that we control. So I hope that I have answered the question, Alejandra, but I look forward to seeing you in New York, and we will elaborate more about your question. Thanks, Alejandra. Lucy Rodriguez: The next question comes from Anne Milne from Bank of America. Anne Milne: So my question is really dedicated to Maher -- or directed to Maher. This year, almost -- most of your debt stack could either be -- is either maturing or callable with maybe 1 or 2 exceptions. You have, as you outlined in your press release, the bank facilities coming due. You have the EUR 400 million that's due. You have -- you can call the '29s at par, you can call the '30s and '31s above par, plus you have the perp that's also callable this year, the 5 and 8. You also talked about reducing your leverage and paying dividends. Could you talk about what your refinancing plans are? How much of this will get paid down? How much will you extend and what you're thinking in terms of the capital structure? Maher Al-Haffar: Yes. Thank you very much, Anne. Of course, as we said, we continue to aspire to a 1.5 to 2x net leverage level for the company through the cycle. which we believe that will take us into a solid BBB rating, which we think is very important for ourselves. So obviously, we will continue to use some of our free cash flow to further reduce debt, although priorities now are to return cash to shareholders, as we mentioned and also to focus on growth through M&A bolt-on transactions. Having said that, we do have exactly a number of opportunities for liability management. Number one, the subordinated notes actually come for reset in early September. The spread is -- the reset spread is 464 basis points over treasuries, which would make them prohibitively expensive. So that's one opportunity that we would like to address. As you know, we are also working on a transaction in the bank market that may come to the market in the next 2 or 3 -- couple of months, I will say, that may address some of the euro funding that we have that is callable already. And also, you're aware that we're in the market with a MXN 5 billion to MXN 7.5 billion CBORs, in the Mexican market, 5-year floating paper that is already publicly in the market, and we're expecting closing that transaction sometime in the middle of February, February 16, 17 and funding it. So there's a number of things that are happening that should give us the opportunity to do liability management in addition to, like we said, there are some bonds that are callable at an attractive -- already at a decent call rate -- call price. So we're looking -- we're constantly looking at NPV positive opportunities. And to the extent that happens, we will do that. We are guiding flat interest expense for the year, but there could be certainly a positive upside to that as a consequence of these transactions. Now having said this, and we are comparing ourselves to our peers, and we certainly would like to extend our average life, and we would like to create an even longer runway to future maturities. So we will be taking these opportunities to recalibrate our debt stack accordingly. I hope that answers your question. Anne Milne: Yes. On the subordinated perps, are you likely to replace them to get that equity treatment or that's under evaluation? Maher Al-Haffar: I can't say it is under valuation. It is under valuation. Lucy Rodriguez: The next question comes via the webcast and is coming from Paul Roger from BNP Paribas. Your U.S. cement prices were a little softer than the industry last year. Is that because you are quite coastal? Was there a particular region under pressure? And what's the pricing outlook for U.S. cement this year? Jaime Dominguez: Paul, thanks for the question. Last year, we did see some soft demand and some more difficult competitive dynamics in a few markets. One was Houston. The other one was Northern Cal and then some markets around the mid-South, particularly Atlanta. I saw some softening of cement prices in inland markets as well. And that could be because there might be some excess capacity. As demand begins to recover as expected, right, that will begin to balance out, and that should support pricing going forward. For us, for '26, we have announced $8 per short ton across all our markets, except Houston and effective April 1st. Thanks, Paul, for your question. Lucy Rodriguez: Great. And the next question comes from Marcelo Furlan from Ita�. Marcelo? Marcelo Palhares: Question is related to capital allocation. So you guys mentioned the divestment made to $25 million in other months in support. So I'd like to understand... Lucy Rodriguez: Marcelo, Marcelo, I'm sorry, Marcelo... Jaime Dominguez: We cannot understand... Lucy Rodriguez: Yes, we're having a difficult time understanding you. I don't know if you can either submit by the -- yes, let's try now. Go ahead. Marcelo Palhares: Is it better now? Lucy Rodriguez: I think it's a little better. Let's try. Marcelo, we are here. Yes, okay, go ahead. Marcelo Palhares: Okay. Let me try again. So my question is related to capital allocation. So I just would like to know what we expect in terms of further divestments for 2026? And also, you guys mentioned that 2025 was marked by the aggregates business, which is actually working with 40% of total EBITDA in the U.S. So I just would like to understand if you guys, you know, looking for further divestments, what is the company's goal in terms of EBITDA contribution from the aggregate business in U.S. market. So that's pretty much it, guys. Hope you guys... Lucy Rodriguez: Okay. Let me -- Marcelo, let me rephrase because I think we're having a difficult time. But I think your question is what would you expect from potential divestments in 2026? And what would that potentially mean for reinvesting in the U.S. aggregate space moving from the current 39% of EBITDA. And so I think the question really, Jaime, is around potential divestments, use of proceeds of those divestments and what it might mean for our U.S. aggregate presence. Marcelo Palhares: Yes, that's it. Jaime Dominguez: Okay, Marcelo. Okay. Great. Thanks, Lucy, because I was struggling to follow up Marcelo's question. Yes, we are working on some divestments. And we are planning to use profits if and when we complete those divestments to invest them responsibly and accretively in the U.S. first. And we are prioritizing aggregates, bolt-ons, followed by mortars, renders, plasters because those businesses have great synergies. Why upstream? Because those businesses consume our admixtures, our cementitious materials, our sand. Also, they enjoy the same customer base, and there are some synergies in distribution and supply chain. So that's the space we're thinking in the U.S. And if you think about our M&A, we will do that very disciplined, right? We approved a new framework, right? And we will pursue only acquisitions provided that it's accretive to shareholders. Otherwise, we won't do them. And that's part of the new capital allocation and scheme, our strategy, and we will elaborate much more of that during CEMEX Day. So Marcelo, thanks for your question. Lucy Rodriguez: And maybe if I could just complement that, we are seeing a benefit from some of the investments that we've made in U.S. aggregates already. I would just note that we are guiding to a mid-single-digit increase in volumes for 2026 and a significant piece of that is coming from the inorganic side. Okay. The next question comes from Daniel Rojas from Bank of America. Daniel? Daniel Rojas Vielman: My question is on Claudia Sheinbaum recently announced investment plan. It may be too early, but I was curious maybe you have had some contact with the government to get these projects up and running as quickly as possible and that we might see some upside to volumes in the back half of 2026. Jaime Dominguez: Daniel, thanks for your question. We began to see progress in the fourth quarter of last year. Things are happening. As you saw, the average daily cement sales grew sequentially by 8%, and that is because we are beginning to enjoy incremental new social housing projects as part of the President's social housing efforts. We are beginning to see as well Caminos Rurales that is intensive with bagged cement, and that's also happening. And we are beginning to supply some important infrastructure railroad and highway projects, as Lucy highlighted in her remarks. So yes, things are happening and all those projects are already part of our guidance for CEMEX Mexico volumes. So thanks for the question, Daniel. Lucy Rodriguez: The next question comes from Jorel Guilloty from Goldman Sachs. Jorel? Wilfredo Jorel Guilloty: So you mentioned that infrastructure and social housing are key drivers for Mexico volumes in 2026. However, I wanted to understand how you're thinking about potential changes in volumes contingent on USMCA outcomes. In other words, if we have a USMCA review completion this year, what could this potentially mean for volumes? If USMCA review goes to 2027, what could this mean? Jaime Dominguez: Okay. So we have not incorporated to our volume guidance for Mexico a very positive outcome from the negotiation of the free trade agreement. Should that happen, then we do see upside to volumes, which I guess, will materialize in 2027 and beyond. When talking to investors, they're waiting. And we will see many manufacturing industrial projects resuming as soon as the clouds around the negotiation settle down. I think that is the uncertainty of what might happen, what is affecting that segment of the market. In our guidance for '26, we haven't included any driver from the USMCA negotiation. So I see that as an upside risk to volumes. But it will take time for those projects to hit the ground and break ground, right? So I guess that we might get some late this year if it happens, but much more in '27. Thanks for the question. Lucy Rodriguez: We have time for one last question, and it is coming from Francisco Suarez from Scotiabank. Paco? Francisco Suarez: Congrats on the wonderful milestones achieved so far, looking forward for the next ones. My question relates with your overall guidance in energy cost per ton that you expect to increase this year. And it kind of struck me to see that because we already see a favorable outlook on oil and petcoke costs. But can you elaborate a little bit more if this is driven more by electricity costs or perhaps even more importantly, how these pressures in energy costs are unfolding geographically and where those pressures are higher and where those pressures are lower, that might be very helpful. Jaime Dominguez: Francisco, thanks for your question. Yes, your reading is correct. In our guidance, we're expecting fuels to go down fuel cost. It is electricity where we see the increase, and that's what's supporting our guidance. And this is happening in 2 markets, Mexico and the U.S. Most of the increase, I'll say, around 65% of it is in Mexico. And that is because in '25, there was a one-off incentive to migrate to the wholesale market, which we will not have in 2026. And then the rest is in the U.S. where some utility companies that supply us, but based on their fuel cost and their mix of generation are announcing some cost increases as well. So those are the 2 markets where we see that increase in electricity. Fuels is down. Lucy Rodriguez: We appreciate you joining us today for our fourth quarter and full year 2025 results. We hope you'll take the time to join us for our CEMEX Day video webcast on February 26th as well as for our first quarter 2026 earnings call on April 23rd. If you have any additional questions, please feel free to reach out to the Investor Relations team. Many thanks. Operator: Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.
Operator: Please stand by. Welcome, ladies and gentlemen, to the Embecta Corp.'s Fiscal First Quarter 2026 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Please note that this conference call is being recorded and a replay will be available on the company's website following the call. I would now like to hand the conference call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Mr. Khandelwal, please go ahead. Pravesh Khandelwal: Thank you, operator. Good morning, everyone, and welcome to Embecta's fiscal first quarter 2026 Earnings Conference Call. The press release and slides to accompany today's call and webcast replay details are available on the Investor Relations section of the company's website at www.embecta.com. With me today are Devdatt Kurdikar, Embecta's President and Chief Executive Officer, and Jake Elguicze, our Chief Financial Officer. Before we begin, I would like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides, including those referenced on slide two of today's conference call presentation. Such statements are, in fact, forward-looking in nature and subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today, as well as our filings with the SEC, which can be accessed on our website. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation, which are also included in the Investors section of our website www.embecta.com. Our agenda for today's call is as follows. Dev will begin with an overview of Embecta's fiscal first quarter 2026 performance and discuss progress across our strategic priorities. Jake will then review the financial results for the first quarter and share our updated thoughts for fiscal year 2026. Following these updates, we will open the call for questions. With that said, I would now like to turn the call over to our CEO, Devdatt Kurdikar. Devdatt Kurdikar: Good morning and thank you for taking the time to join us. Over the past year, and particularly since we reported our fiscal year 2025 results, we have continued to make meaningful progress executing our strategic roadmap we outlined at our Investor Day last year. As a reminder, that roadmap is built around a phased approach consisting of standing up the organization, seeding growth, and ultimately transforming the company into a broad-based medical supplies company which serves chronic care patients and drug delivery partners. The stand-up phase was focused on becoming a fully independent company by building our own systems, supply chain, and commercial capabilities while keeping the base business stable. Fiscal year 2025 largely marked the completion of that phase with the operationalization of our own ERP, distribution, and shared services infrastructure allowing for the complete migration of our revenue into our systems and the successful exit of all TSAs and LSAs. I am pleased to say that we were able to complete the stand-up phase and all the associated complex initiatives while keeping our constant currency revenue stable. That work behind us, we are now firmly in the seed growth phase. This is where the company's focus is now. This phase's goals focus on staying competitive in the core, selectively expanding the portfolio in areas that leverage our existing strengths, and building financial flexibility through disciplined capital allocation. The priorities in this phase are intended to position Embecta over time as a broader medical supplies company and a drug delivery partner, building on our foundation as a leader in global insulin delivery. One important element of strengthening the core has been our brand transition. This initiative is not a change to the product or product names. It is a change to packaging and branding that establishes Embecta as an independent company in the minds of patients, healthcare professionals, and channel partners. We have taken a disciplined phased approach. As of today, more than 95% of US and Canadian has transitioned to the Embecta brand. With North America largely complete, we have been executing the next phase globally. Transitions are underway in select international markets and we expect most regions to be substantially complete by the end of calendar year 2026. We continue to demonstrate a strong commitment to ensuring broad and preferred access to our products for patients, particularly within the Medicare Part D channel, which remains an important and growing segment of the payer market serving senior citizens who represent a high percentage of people living with diabetes. Effective January 2026, we contracted with an additional Medicare Part D payer for exclusive access to our product. In addition, we renewed our advantage formulary access with the top three Medicare Part D payers that we had existing relationships with. Collectively, these actions further strengthen our business, supporting stable access and share, and enhancing the long-term competitiveness of our portfolio. Another key area of focus in the seed growth phase is portfolio expansion through market-appropriate pen needles and syringes. Our approach here is intentional. We are leveraging what we already do well to address segments where there is meaningful demand, but where our share today remains relatively low. Since fiscal year 2025, we have moved from concept to execution. Product designs for these market-appropriate offerings have been finalized. Production equipment has been installed, and manufacturing validation is now underway. With this foundation in place, we are progressing towards expected regulatory submissions and eventually commercial launches supported by go-to-market strategies informed by more than a century of experience in insulin delivery. We have also continued to advance our GLP-1 strategy, which we view as an extension of our core capabilities rather than a departure from them. Today, we are collaborating with more than 30 pharmaceutical partners across various stages of the sales cycle, primarily focused on co-packaging our pen needles with generic GLP-1 therapies. More than one-third of these partners have already selected us as a supplier and have either executed contracts or are in contract negotiations, reflecting tangible progress beyond early-stage discussions. Several partners have signed agreements and placed purchase orders, and our pen needles are included in multiple partner-managed regulatory submissions. While we do not control the timing of regulatory approvals or launches, we remain operationally ready to support our partners as programs advance. Looking ahead, our partners are anticipating initial generic GLP-1 launches in markets such as Canada, Brazil, China, and India, beginning in calendar year 2026, with additional emerging markets expected to follow over time. This expectation is consistent with the recent public news report indicating that regulatory approvals for generic injectable semaglutide have been granted to some companies in India, with multiple manufacturers preparing for commercial launches following patent expirations in March 2026. In parallel, we are expanding the availability of consumer-friendly Embecta-branded small pack configurations in Canada and select European markets. These formats are designed for out-of-pocket customers, including many GLP-1 users, and allow us to participate in the category using existing manufacturing and commercial infrastructure. Recently, there has been a significant amount of news related to the development and launch of oral GLP-1 therapies. It should be noted that the launch of oral GLP-1s was expected and explicitly included in our assumptions underlying the estimated $100 million-plus opportunity we had discussed at our Analyst and Investor Day in May 2025. While it is early in the adoption of oral GLP-1s, we continue to believe in the opportunity as previously outlined. Importantly, we expect to support this incremental volume within our existing manufacturing footprint and without significant incremental capital investment. We also expect this to support attractive margin flow through over time. Beyond generics, we are also engaged in early-stage discussions with several branded pharmaceutical companies around co-packaging opportunities for drugs in development. While these discussions are in early stages, they represent potential beyond the opportunity we shared at our Investor Day last May. Finally, we remain focused on increasing financial flexibility. Following the significant deleveraging achieved through fiscal year 2025, we continue to focus on free cash flow generation and disciplined capital allocation to create strategic optionality as we progress through the seed growth phase. In summary, while fiscal year 2025 marked the completion of our stand-up phase, Embecta today is focused on execution, portfolio expansion, and positioning the company for durable long-term growth. With that context, let me now review our revenue performance for the first quarter. During 2026, Embecta generated approximately $261 million in revenue, reflecting a 0.3% decline year-over-year on an as-reported basis or a 2% decline on an adjusted constant currency basis. These results were largely in line with our expectations, driven by performance within our international business. Within the US, revenue for the quarter totaled approximately $131 million, reflecting a year-over-year decline of 7.6% on an adjusted constant currency basis. The decline was driven by a combination of lower pricing as well as lower volumes reflecting channel dynamics. This was somewhat offset by order timing. Turning to our international business, revenue for the first quarter totaled approximately $130 million, representing an increase of 8.4% on a reported basis and an increase of 4.6% on an adjusted constant currency basis. This performance was driven by strength across EMEA and Latin America. While China remained a headwind in the quarter, the results there were largely in line with our expectations. As we have discussed previously, we continue to expect the recovery in China to be more fiscal second-half weighted, given ongoing market dynamics and the broader geopolitical and trade environment. Meanwhile, from a product family perspective during the quarter, adjusted constant currency pen needle revenue declined approximately 4.4%, syringe revenue grew by approximately 5.3%, safety product revenue grew approximately 7.3%, and contract manufacturing revenue declined approximately 16.7%. The year-over-year decline in pen needle revenue was primarily driven by the same factors that impacted our US and China results. This was partially offset by growth within EMEA and Latin America. Turning to our syringe products, revenue increased year-over-year driven by improved performance within Latin America, EMEA, and Asia, which more than offset the ongoing declines in the US. As we have previously discussed, US syringe revenues continue to be impacted by long-term shifts in diabetes treatment towards insulin pens, and this trend remains consistent with our expectations. Moving to our safety products, delivered solid growth in the quarter, driven by gains within the US and EMEA. Finally, contract manufacturing revenue that we generate through the manufacturing and sales of non-diabetes products back to Becton Dickinson declined, as expected, due to the continued insourcing of these products by BD. Before I turn the call over to Jake, I'd like to briefly touch upon our financial guidance for the year. Today, we reaffirmed our previously provided financial guidance ranges. However, we now expect to be closer to the lower end of those guidance ranges driven by incremental US pricing headwinds. Somewhat offsetting this incremental pressure within the US is an improved outlook for our international business. With that, let me turn the call over to Jake. Jake Elguicze: Thank you, Dev. Good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta's first quarter financial performance at the gross profit line. GAAP gross profit and margin for 2026 totaled $161.7 million and 61.9% respectively. This compared to $151.7 million and 60% in the prior year period. While on an adjusted basis, our Q1 2026 adjusted gross profit and margin totaled $163.5 million and 62.6%. This compared to $164.2 million and 62.7% in the prior year period. The slight year-over-year decline in adjusted gross profit and margin was primarily driven by the unfavorable year-over-year pricing dynamics that Dev mentioned earlier and mix. These headwinds were partially offset by manufacturing cost improvement programs and lower manufacturing functional costs. Turning to GAAP operating income and margin, during 2026, they were $83.3 million and 31.9%. This compared to $28.7 million and 11% in the prior year period. While on an adjusted basis, our Q1 2026 adjusted operating income and margin totaled $79.3 million and 30.4%. This compared to $80.5 million and 30.7% in the prior year period. The small year-over-year decrease in adjusted operating income is primarily due to the decline in adjusted gross profit that I just mentioned coupled with an increase in R&D expenses that is associated with a variety of projects underway at the company including the development of market-appropriate pen needles and syringes, the development of a pen injector, as well as project costs associated with becoming cannula independent. This was partially offset by lower year-over-year SG&A expenses due to the restructuring initiative we announced mid last fiscal year. Turning to the bottom line, GAAP net income and earnings per diluted share were $44.1 million and $0.74 during 2026, as compared to zero in the prior year period. While on an adjusted basis, during 2026, net income and earnings per share were $42.3 million and $0.71 as compared to $38.3 million and $0.65 in the prior year period. The increase in year-over-year adjusted net income and diluted earnings per share is primarily due to a reduction in interest expense as well as a lower year-over-year adjusted tax rate driven by tax planning activities. This was partially offset by the adjusted operating profit drivers I just discussed. Turning to the balance sheet and cash flow, during 2026, we generated approximately $17 million in free cash flow. Additionally, we repaid approximately $38 million of outstanding debt and further reduced our last twelve months net leverage level to approximately 2.8 times, as defined under our credit facility agreement compared to our covenant requirement of below 4.75 times. That completes my prepared remarks on our first quarter 2026. Next, I would like to discuss our 2026 financial guidance and certain underlying assumptions. Beginning with revenue, on an adjusted constant currency basis, we are reaffirming our previously provided guidance range which called for revenue to be flat to down 2% as compared to 2025 levels. Turning to our thoughts on FX, we are reaffirming our previously provided guidance which called for foreign currency to be a tailwind of approximately 1.2% during 2026. Likewise, we are reaffirming our previously provided guidance associated with the Italian payback measure of an estimated 0.1% year-over-year headwind. On a combined basis, our as-reported revenue guidance continues to call for a range of between negative 0.9% to positive 1.1%, resulting in a revenue guide of between $1.071 billion and $1.093 billion. As Dev previously mentioned, we currently expect that we'll be closer to the lower end of that range. Turning to adjusted operating margin and adjusted diluted earnings per share, we are also reaffirming those previously provided guidance ranges of between 29-30% for adjusted operating margin and for between $2.80 and $3 in terms of adjusted EPS. Like my comments regarding our expectations concerning revenue, we currently expect to be closer to the lower end of those ranges because of the incremental headwinds we are now anticipating within the US during the first half of the year. Turning to the balance sheet and cash flow, we continue to expect that during 2026, we will repay approximately $150 million in debt and that we will generate between $180 million and $200 million in free cash flow, although closer to the low end of that range. And finally, before I turn the call over to the operator, I'd like to highlight some considerations regarding the cadence of quarterly revenue expectations during 2026. Moving forward, we may not provide any further commentary concerning the quarterly cadence of revenue on an ongoing basis. During fiscal year 2025, we generated approximately 48% of our adjusted revenue dollars during the first half of the year, and approximately 52% of our adjusted revenue dollars during the second half of the year. During fiscal year 2026, we previously expected a similar cadence of revenue performance. Currently, we expect to generate approximately 46% of our adjusted revenue dollars during the first half of the year and approximately 54% of our adjusted revenue dollars during the second half of the year. As compared to our initial expectations, the lower expected revenue in the first half is driven by customer mix, competitive intensity, and channel dynamics within our US business. Meanwhile, we now expect the second half of the year to be better than previously expected due to a continuation of the strength of performance internationally. That completes my prepared remarks. And at this time, I would like to turn the call over to the operator for questions. Operator? Operator: Thank you. If your question has been answered and you'd like to remove yourself from the queue, please press 11 again. Marie Thibault: Our first question comes from Marie Thibault with BTIG. Your line is open. Sam Huang: Hi, good morning. This is Sam on for Marie. Thanks for taking the questions here. Devdatt Kurdikar and Jake Elguicze, maybe I can start on the quarter and maybe more of a deeper dive in terms of the dynamics we saw, whether it's distributor ordering, maybe what you're seeing in that US business, the pricing impact that you're now calling out. Volumes? And then also maybe a piece on China in terms of the recovery in the back half that you're expecting? Devdatt Kurdikar: Hey. Good morning, Sam. Good to speak with you this morning. So on the US, you know, we saw a year-over-year decline excluding CMA of about 7.4% and it was really driven by two factors: lower pricing and lower volume. But the lower volume was really channel dynamics and some contractual dynamics. On the pricing front, probably the single largest factor was a different customer and product mix than we had experienced in the same quarter last year. That impacted sort of our net pricing. And on the volume side, we had channel dynamics that were partially offset by advanced purchase ahead of a price increase that we took on January 1. That's really what was driving the US results. On China, as you remember, China last year was a significant step down for us in '25 versus '24. As we navigated through the broader trade environment and geopolitical dynamics, we put some initiatives in place in that business, reorganizing our Salesforce, introducing a new pen needle over there that can go head to head with some of the local branded companies. And those initiatives are gaining traction. In this quarter, Q1, our performance in China was in line with our expectations for the quarter. Now certainly, as we go through the year, we are anticipating some recovery in the second half of the year. For the first half of the year, China will be a headwind as we look at our year-over-year performance. And then for the second half of the year, maybe less so. Anything you'd like to add? Jake Elguicze: Yeah. Sam, I think if you just zoom out for a second, I think if you recall, I think our initial guidance for the first quarter revenue called for us to generate approximately 24% of our full-year as-reported revenue dollars during the first quarter. That would have equated to a range of somewhere between $257 million and $262 million. So the quarter largely played out as we expected, coming in closer to the higher end of that previously provided revenue range. I think, importantly, volumes continue to be positive, particularly outside of the US. Volume strength in EMEA and Latin America really actually exceeded our internal expectations. To Devdatt Kurdikar's point, I think, really, the item that was a slight incremental headwind as compared to our initial guide was some of the pricing dynamics that occurred because of just the slightly different customer mix, if you will, and sort of as compared to our original thoughts. But absent that, the quarter played out from a revenue standpoint as well as the rest of the P&L really pretty much largely as we expected. Sam Huang: Yeah. Very helpful. Appreciate the details, guys. Maybe just a quick follow-up. Devdatt Kurdikar, you mentioned the new oral GLP-1s that are starting to roll out at this point. Obviously, there's a place for injectables also. So maybe you can lay out what gives you or why injectables still have a place in this broader market with new orals now in place? Thanks. Devdatt Kurdikar: Absolutely, Sam. We remain super excited about the GLP-1 opportunity. Clearly, we've been following the development in the oral GLP-1 space. And I do want to note that the launches in calendar year 2026 were expected, and we had included assumptions for them when we calculated the $100 million-plus revenue opportunity. Based on the data we have, injectables have a better weight loss profile than orals. Certainly, according to the market research reports we've read and some press reports, it appears, and obviously, this is early days, that the potential use cases for orals are for patients who might have an aversion to needles, maybe in geographies where there is limited cold storage and transport facilities, and then finally, maybe as maintenance therapy for people who want to get off injectables. It appears, again, that based on the early read on the prescriptions for the oral so far, that most of the patients who are using orals are new to the therapy. So it sort of points to market expansion. So this is all in line with what we had assumed. I also want to point out that, certainly for the major drug companies that are in the GLP-1 space, we look at their pipelines, and most of the drugs that are in development in their pipelines themselves are all injectable drugs. And look, more recently, there has been some more incremental positive traction for us in the GLP-1 opportunity. We read with interest that Zepbound in the US was an auto-injector, has gotten approval for a QuickPen. Obviously, if that drug gets delivered via pen, patients are going to need pen needles. We have a strong position in the US, so certainly we'll do our best to capitalize on the opportunity. So for all those reasons, in spite of some of the recent press on oral GLPs, we remain very, very confident in the GLP-1 opportunity for us. Sam Huang: Makes sense. Thanks so much for taking the questions. Operator: Thank you. And our next question comes from Travis Steed with Bank of America Securities. Your line is open. Gracia Leydon Mahoney: Hey. This is Gracia on for Travis. I wanted to follow-up maybe on the strength in the international this quarter. You called out EMEA and Latin America. Just kind of wanted to see specifically any more color on what improved versus Outlook three months ago and gives you the confidence and visibility there that that strength continued throughout the rest of the year. Devdatt Kurdikar: Yeah. Look. In two words, it's just superior execution. I think particularly in Latin America, our team over there is driving growth. They have won a new customer over. That's a large customer that's driving growth as well. So really, it's not one single factor, Gracia. I would point to just good execution by our team in those regions. Gracia Leydon Mahoney: Great. And then maybe just one follow-up on the pricing headwind. Any way to sort of quantify that incremental headwind that you're seeing and maybe what's baked in on the top end and low end of the guide in regards to that now since those dynamics have changed around? Jake Elguicze: Sure, Gracia. This is Jake. I think, in our prepared remarks, we talked about how we think that we're going to be closer to the lower end of the revenue guidance range due to the incremental pricing headwinds. And if you recall, the original guidance that we had on the high end and the low end called for our manufacturing revenue year-over-year to be down about 50 basis points. That's really unchanged right now in terms of the current guide. From a volume standpoint, the high end of the guide called for volumes to be down about 50 basis points. The low end of the guide previously called for volumes to be down about 150 basis points. Net right now, we actually think that volumes year-over-year, I think, importantly, are coming in a little bit stronger there. And right now, the current guide calls for volumes to sort of be flattish year-over-year. And in large part, I would say, relative stability in terms of the US market for the full year. And in terms of international, an improved outlook internationally as compared to the original guide. So I think volumes remaining stable now as compared to, say, previously at the mid we would have called for about a 1% headwind. In terms of new products, the low end of the guide previously called for sort of flattish contribution from new products. The high end of the guide called for about 1% growth year-over-year coming from new products. And right now, I think the current guide calls for positive contribution of about 50 basis points. So, essentially, right now, sort of the new product contribution being around 50 basis points sort of offsetting those contract manufacturing headwinds of about 50 basis points, the core volumes being relatively flattish, and right now, just given some of the more recent pricing dynamics impacting the US business, that's really what's causing us now to be closer to the lower end of our current guidance range. As compared to previously when we initially provided guidance, we thought that pricing was largely going to be flat year-over-year. Gracia Leydon Mahoney: Great. Thank you. Operator: Our next question comes from Ryan Schiller with Wolfe Research. Your line is open. Ryan Schiller: Good morning. Thank you for taking my question. I want to click on the auto-injector project. Can you give us an idea of how long something like this takes and when this might put dollars on the board? And any comments on TAM or market sizing would be much appreciated. Devdatt Kurdikar: Yeah. Ryan, first off, you know, it's the pen injector project that we started. Look, we are in the early phases. I strongly believe we have the R&D capabilities, the manufacturing capabilities, certainly to develop the product. And given the relationships we've established now with the generic drug companies, we certainly have the channel now to present that product. It's way too early for me to talk about timing and market sizing, but certainly as the project develops and evolves, we'll certainly be speaking more about that. Ryan Schiller: Thank you. And then just one more for me on the GLP-1 opportunity. So you said this has a $100 million revenue by 2033 at the Investor Day. The guide seems to include roughly $10 million for 2026. Can you put any finer points on what the penetration curve might look like to reach that $100 million of revenue? Devdatt Kurdikar: Yeah. So maybe just to sort of remind everybody what was included in that $100 million. Right? So what we did when we calculated that is, obviously, we had an estimate for the number of patients on GLP-1s. We reduced that by an estimate for how many patients would be on oral, even though the current indications, while early days, are that orals are expanding the market rather than pulling patients away from injectables. We only looked at obesity and diabetes indications. We did not factor in other indications that we know pharma companies are pursuing. We factored in only reimbursement as was available then, almost a year ago. Clearly, reimbursement has expanded. Prices have come down. And then finally, in the assumptions that we made, we assumed that the delivery format that was in place then would remain sort of static. Particularly in the US, Mounjaro and Zepbound pens would continue to be available only in injector all through this period. But as I noted earlier, we read with interest that Lilly does have FDA approval for their QuickPen. And I believe has commented that they expect to be launching this in the coming weeks or so. So all of these are potential upsides to the $100 million. In addition, we recently started discussions with branded pharma companies for drugs in development where they may need a pen needle for their drugs. That's not included in their estimate as well. So all these reasons give us confidence that the $100 million-plus opportunity is still real. And over the past nine months since we spoke about it publicly, our confidence has only increased. With respect to timing, most of the timing is going to be driven by patent expirations. So in 2026, we and our partners continue to expect that China, India, Brazil, Canada might see generic launches. I mentioned in my remarks that in India, a couple of companies have already gotten approval and have talked publicly about launching generic semaglutide in 2026. Canada is still expected to get approval sometime this year. In China, our companies are working with local Chinese companies that are interested in launching generic GLP-1s. So I would say that the ramp-up to that $100 million-plus is going to be driven largely by patent expirations. Because certainly, the majority of companies that want to launch generic semaglutide in any region of the world are in discussions with us, either at the corporate level or with our local team. Ryan Schiller: Thank you. Operator: This concludes our question and answer session. I'd like to turn the call back over to Devdatt Kurdikar for closing remarks. Devdatt Kurdikar: As we close the call, I want to thank my colleagues across Embecta for their continued focus and execution. We are operating in an environment marked by heightened competition and an evolving geopolitical and trade backdrop, and the team continues to respond with discipline and resilience. As we move through fiscal year 2026, our priorities remain clear. We are focused on our goals of strengthening our core franchise, advancing our targeted growth initiatives, and maintaining strong profitability and cash flow to support the strategic commitments we outlined at our Analyst and Investor Day. Thank you for joining us today and for your continued interest in Embecta. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: While sites are on hold, we appreciate your patience and ask that you please continue to stand by. Please standby. Your meeting is about to begin. Good day, and welcome to this Tapestry, Inc. conference call. Today's call is being recorded. Later, you will have the opportunity to ask questions during the question and answer session. To register to ask a question at any time, please press 1 on your telephone keypad. At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations, Christina Colone. Christina Colone: Good morning. Thank you for joining us. With me today to discuss our second quarter results as well as our strategies and outlook are Joanne Crevoiserat, Tapestry's Chief Executive Officer, and Scott Roe, Tapestry's Chief Financial Officer and Chief Operating Officer. Before we begin, we must point out this conference call will involve certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes projections for our business in the current or future quarters or fiscal years. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to our annual report on Form 10-K, the press release we issued this morning, and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance. Non-GAAP financial measures are included in our comments today in our presentation slides. For a full reconciliation to corresponding GAAP financial information, please visit our website www.tapestry.com/investors, and then view the earnings release and the presentation posted today. Now let me outline the speakers and topics for this conference call. Joanne will begin with highlights for Tapestry and our brand. Scott will continue with our financial results, capital priorities, and our outlook going forward. Following that, we will hold a question and answer session where we will be joined by Todd Kahn, CEO and Brand President of Coach. After Q&A, Joanne will conclude with brief closing remarks. I'd now like to turn it over to Joanne Crevoiserat, Tapestry's CEO. Joanne Crevoiserat: Good morning. Thank you, Christina, and welcome, everyone. Our second quarter outperformance demonstrates the compounding impact of our Amplify strategies. During the key holiday period, we delivered pro forma revenue growth of 18%, expanded adjusted operating margin by 390 basis points, and grew earnings per share by 34% versus prior year, each exceeding our expectations. These standout results, combined with the momentum in our business, enabled us to confidently increase our outlook for the year, reinforcing that our advantages are structural and sustainable and underscoring our commitment to driving durable growth and value creation. I want to recognize our exceptional global teams. Their passion, creativity, and disciplined execution made these results possible. Now turning to the strategic actions from the quarter, actions that are delivering results today while advancing our long-term growth ambition. First, we built emotional connections with consumers, acquiring over 3.7 million new customers globally in the quarter, driven by a strategic focus on Gen Z. This continues to be central to our healthy top-line growth as engaging consumers earlier in their purchase journey enhances repeat purchasing and lifetime value over time. We also drove growth with our existing customer base, demonstrating broad-based strength. These dynamics reinforce a durable competitive advantage, our ability to consistently attract and retain new generations of consumers to our brands. Next, we delivered fashion innovation and product excellence led by Coach, where desire and demand for the brand are strong. And we're winning in our core with our leather goods offering leading our growth driven by higher AUR and unit volume. The combination of craftsmanship, creativity, and value we offer to consumers at scale continues to be a clear competitive and structural advantage of our business and brand. And we powered global growth through compelling experiences, delivering double-digit gains in North America, Greater China, and Europe, significantly outpacing the industry and growing market share in each of these regions. Our direct-to-consumer model keeps us close to our customers, allowing a deeper understanding of their needs and enabling more relevant brand building. Which together with the agility of our teams, sharpens execution and fuels growth. This was evident again this quarter as we achieved double-digit growth in stores and online at strong and increasing profitability. Overall, we delivered record quarterly results, with a business that is strong, differentiated, and well-positioned for the future. Now moving to our results by brand. Turning to 25% and margins expanding. Growth accelerated from the first quarter on a one and two-year basis, with several key indicators reinforcing the strength of the brand and the durability of its growth. Customer acquisition once again drove top-line gains, welcoming 2.9 million new customers to the brand this quarter, rising meaningfully over the prior year, led by continued growth with our target Gen Z consumer. Our relevance with Gen Z is influencing all other generations, and we're driving healthy gains from existing customers, reflecting broad and increasing brand desire and reach. Growth was led by our core leather goods assortment, where we have deep expertise and clear differentiation with broad-based strength and no single family accounting for more than 10% of sales. Within leather goods, growth was well diversified, with both average unit retail and unit volumes increasing at mid-teens rates, demonstrating multiple drivers of sustainable growth in the core. And momentum remains strong across key geographies, including North America up 27%, Greater China rising 37%, and Europe increasing 26%, highlighting the global resonance of the brand and the effectiveness of our regional strategies. With a large total addressable market of nearly 2 billion consumers, including 275 million at the point of market entry, we have under 1% share and meaningful opportunity ahead. Coach continues to benefit from its expressive luxury positioning, combining 85 years of heritage, craftsmanship, creativity, and value to build enduring customer relationships and support sustained growth. Now to discuss our second quarter results in more detail. Our creative teams are delivering compelling innovation to consumers through a blend of magic and logic that are the hallmarks of our brand. Our icons continued to lead consistent with our strategy. In particular, the Tabby franchise, the New York family, including the Brooklyn and Empire, and Terry, Juliet, and Laurel, outperformed. Driven by accelerated Gen Z customer recruitment. By animating our proven hero silhouette, through new colorways, materials such as crystals, and sizes, we built on our leadership in our core category and delighted our consumers during the key holiday season. Importantly, Coach's accelerated growth in leather goods highlights the enduring values of the brand and the value we offer in the luxury market. Looking forward, we have a strong product pipeline that we believe supports gains in both AUR and units, reinforcing the diversified drivers in place to support healthy and sustained growth while never compromising the value proposition we offer to consumers, a key structural advantage. Next, turning to footwear. We delivered high single-digit growth in the quarter fueled by sneakers with the continued success of the SoHo family. Building on our footwear assortment that is designed with the timeless Gen Z consumer in mind, we also successfully launched the Margo family, featuring sandals and slingbacks. Footwear remains a long-term growth opportunity for Coach given our brand strength, low share of the market, and the category's relevance to our target consumer. Touching on marketing, the compounding benefits of our strategic brand investments were evident during the quarter, with a clear focus on long-term demand creation. We increased marketing spend by approximately 40% versus the prior year, with a continued shift toward top-of-funnel brand building to support sustained customer acquisition. This sustained investment in fueling brand desire supported accelerating customer acquisition during the quarter, even as we meaningfully reduced promotional messaging during the most discount-driven period of the year, demonstrating both our commitment to the strategy and its effectiveness. Importantly, we continue to prioritize building emotional connections with Gen Z consumers globally through the Gift for New Adventures campaign. A new holiday campaign positioning the brand as the ultimate destination for gifts that spark confidence and self-expression in the year ahead. The campaign featured a diverse global cast, including Oscar-nominated actor Elle Fanning, actors Charles Melton and Koki, and K-pop rapper Soyeon. Building cultural relevance and reach across key markets. In addition, to support growth acceleration in China, we launched a collaboration with Clot, a leading Chinese streetwear and lifestyle brand. The partnership bridges heritage and street sensibility, fusing Coach's expressive spirit with Clot's disruptive approach to daily wear. Reinterpreting iconic Coach silhouettes through a China-specific streetwear lens. Collectively, these actions reflect a disciplined, long-term approach to brand building at scale. Deepening cultural relevance, accelerating consumer acquisition at the point of market entry, and reinforcing a growing brand moat around consumer understanding and sustainable demand creation. And finally, we are strengthening brand desire through distinctive, immersive retail experiences that elevate how consumers engage with Coach. We continue to bring expressive luxury to life through unique store formats, including our newly remodeled stores in Ginza, Yorkdale, Macau, and the Mall Of Dubai. These locations reinforce brand desirability while providing valuable insights that will inform our future store investments and expansion. Our Coach Coffee Concepts at Jersey Gardens and Woodbury Commons also continue to perform ahead of expectations, resonating especially well with younger consumers. In closing, Coach continues to deliver standout results. Guided by a clear brand vision and a deep focus on the consumer. Our teams are operating with purpose and discipline. Translating insights into meaningful action and impact. Importantly, this performance reinforces our conviction that Coach will be a $10 billion brand over time, with best-in-class margins, and an unwavering commitment to what makes the brand iconic, valued, and loved by consumers around the world. Now moving to Kate Spade. Our results for the quarter matched expectations from strategy to financial outcomes. In the second quarter, revenue declined 14%, reflecting in part deliberate actions to reset the brand through a pullback in promotional activity. At the same time, we made incremental investments to advance the turnaround underway, remaining focused on strengthening the brand's foundation for long-term growth. Once again, where we placed our focus in investments, we drove progress as tracked against the leading KPIs we've previously outlined. We saw a lift in brand consideration with our holiday marketing campaign and delivered an improvement in Gen Z acquisition trends driven by handbags. While still early in the turnaround, the improvement in these KPIs are signs that we are executing our strategies and they're beginning to take hold. To touch on our results of the quarter in more detail, our first strategic priority is to fuel Brand Heat through our uplifting luxury positioning to become top of mind and relevant with the Gen Z Connector, our target customer. In the quarter, we stood behind our Spark Something Beautiful campaign featuring influential Gen Z celebrities. We updated the campaign with a holiday twist to make it festive while reinforcing a cohesive message over time. This campaign drove an improvement in purchase intent among Gen Z consumers, reinforcing our investment in brand building. Next, we advanced our strategy to build handbag blockbusters, with a consumer-informed assortment that is more relevant and focused. During the quarter, we made important progress. Our handbag blockbusters, the Duo, Kayla, Margo, and 454, outperformed the balance of the offering. With higher AUR and strong Gen Z acquisition. This is another example of how our strategic focus is translating into early positive signs in the business. And as we've discussed, we've also brought more focus to the assortment, reducing handbag styles by 40% this holiday, allowing us to stand behind our big ideas with clarity and intention, while supporting a reduction in promotional activity, an increase in full-price selling, and handbag AUR growth. These actions are consistent with our commitment to building a healthier brand. Finally, touching on our third strategic pillar to maximize compelling omnichannel consumer experiences. A critical part of this work involves removing deselection barriers, with cohesive messaging that elevates the brand and builds desire. As part of this work, we tested updates to the visual experience and merchandising in 10 locations. These stores experienced a lift in conversion and ADT and outperformed the balance of the chain. We plan to bring this format to additional locations in North America by fiscal year-end. Overall, we are strengthening the fundamentals at Kate Spade to drive sustainable, profitable growth. This is a unique brand with heritage, distinctive positioning, and meaningful long-term opportunities. With disciplined execution, the benefit of continued learnings from Coach's success, and Tapestry's brand-building capabilities, we're acting with focus to realize the brand's full and significant potential. In closing, Tapestry achieved another record quarter and we raised our outlook for the year, showcasing the power of our Amplify Growth Agenda and that our structural advantages are enduring. As we move forward, we do so with momentum and confidence. We have the strategy, capabilities, and team in place to drive growth and value creation for years to come. I'll now turn it over to Scott. Scott Roe: Thanks, Joanne, and good morning, everyone. In Q2, we outperformed expectations across revenue, operating income, and earnings, delivering record sales and EPS. In the quarter, on an adjusted basis, we achieved pro forma revenue growth of 18% led by 25% growth at Coach. We expanded operating margin by 390 basis points, and we delivered earnings per share of $2.69, an increase of 34% versus last year. Turning to the details of the second quarter. I'll begin with a discussion of revenue trends on a pro forma constant currency basis. Sales increased 18% compared to the prior year and outperformed our expectations. These results reflect strong global momentum. By region, North America sales increased 17% compared to the prior year, ahead of plan and led by 27% growth at Coach, driving share gains. Importantly, we did this while expanding both gross and operating margins in the region. In Europe, revenue grew 22% above last year, driven by strength in our direct business and reflecting market share gains in the region. Strong new customer acquisition, particularly among Gen Z, and increased local consumer spending continued to fuel our momentum. Given our market positioning and low penetration, we see significant opportunities for further growth in this large and attractive market. In Greater China, revenue outperformed our expectations, increasing 34% driven by broad-based growth across channels and continued market share gains. Digital was a notable contributor with Coach ranking as a top-performing brand over the 11 period. Our results reflect the impact of our steadfast strategies and investments and we are well-positioned to drive sustained momentum in this key region. In other Asia, revenue increased 12% led by growth primarily in Australia and South Korea. And in Japan, sales declined 6% as expected, driven by an intentional pullback in promotions. Now touching on revenue by channel for the quarter. We delivered gains across channels fueled by direct-to-consumer growth of 17% compared to the prior year. This included an increase in digital of approximately 20% and a mid-teens percentage increase in global brick-and-mortar sales, with all channels at strong and increasing profitability. Moving down the P&L, we continue to drive healthy margin expansion versus the prior year, delivering a second-quarter gross margin of 75.5%, a 110 basis points above prior year. This was driven by operational expansion of approximately 250 basis points as well as a benefit from the divestiture of Stuart Weitzman of 50 basis points. These benefits fully offset a negative tariff and duty impact of 190 basis points which included approximately 140 basis point impact on Coach's gross margin and a 520 basis point impact on Kate Spade's gross margin. Overall, our strong gross margin remains a core element of our value creation model supported by our agile supply chain, which delivers craftsmanship at scale, a core competitive advantage of 8% and leveraged by 270 basis points, reflecting our focused approach to reinvest in the business, notably in marketing, which represents 11% of sales, while maintaining strong operational discipline. So taken together, operating margin expanded 390 basis points in the quarter, driving profit expansion of 31% over the prior year which was ahead of expectations. And our second-quarter EPS of $2.69 grew 34% over the prior year, also exceeding our guidance. Now turning to shareholder returns. Starting with our dividend, our board of directors declared a quarterly cash dividend of 40¢ per common share representing $81 million in dividend payments for the quarter. Additionally, during the second quarter, we spent $400 million to repurchase approximately 3.6 million shares for a total of $900 million or approximately 8.3 million shares repurchased at an average stock price of $109 year to date. In fiscal 2026, we now expect to return $1.5 billion or 100% of expected adjusted free cash flow to shareholders through dividends and share repurchases. This includes over $300 million in dividend payments for an annual rate of $1.60 per share as well as $1.2 billion in share repurchases which is an increase from our prior outlook of $1 billion. Our significant return of capital to shareholders is a testament to our strong organic business and robust cash flow generation and underscores our confidence in the future. And now before turning to the details of our balance sheet and cash flows, I'd like to reiterate our capital allocation priorities. Which are unchanged. We have two foundational commitments. First, to invest in our brands and business to support long-term sustainable growth. And to return capital to shareholders via our dividend, with the goal over time to increase the dividend at least in line with earnings growth. Beyond these two foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. This includes the opportunity for share repurchase activity under our previously announced $3 billion share repurchase authorization. And finally, utilizing our rigorous Fourier Lens framework, we consistently evaluate opportunities for strategic portfolio management. Importantly, and as previously communicated, before moving forward with any acquisition, we will ensure Coach remains strong and Kate Spade has returned to sustainable top-line growth. These clear capital allocation priorities are underpinned by our firm commitment to a solid investment-grade rating and maintaining our long-term gross leverage target of below 2.5 times. Now turning to the details of our balance sheet and cash flows. We ended the quarter with nearly $1.1 billion in cash and investments, and total borrowings of $2.4 billion. Together, this represents a net debt of $1.3 billion. At quarter-end, our gross debt to adjusted EBITDA leverage ratio was 1.2 times, more than a full turn below our long-term target. Adjusted free cash flow for the quarter was an inflow of $1 billion and CapEx and cloud computing costs were $54 million. Inventory levels at quarter-end were 4% below prior year on a reported basis and up mid-single digits excluding the impact of Stuart Weitzman. As we enter the second half of the fiscal year, our inventory continues to be current and well-positioned globally and by brand. For fiscal 2026, we continue to expect inventory levels to be down modestly year over year on a reported basis. Now moving to our guidance for fiscal 2026 which is provided on a non-GAAP basis and excludes the impact of Stuart Weitzman from fiscal 2026 expectations. With the critical holiday period behind us, we are raising our full-year guidance incorporating our Q2 outperformance and a stronger second-half outlook. Now turning to the details. For the fiscal year, we expect revenue of over $7.75 billion representing pro forma growth of approximately 15% on a nominal basis or 14% constant currency with FX planned to be a 70 basis point tailwind. Touching on sales details by region at constant currency on a pro forma basis, In North America, we now expect revenue to increase low double digits, In Europe, we expect growth in the area of 20%. In Greater China, we now expect to achieve over 25% growth versus the prior year, In Japan, we're forecasting a high single-digit decline And in other Asia, we now anticipate low double-digit gains. And by brand, this guidance incorporates high teens percentage growth at Coach. At Kate Spade, we continue to embed a high single-digit decline in revenue for the year with sequential improvement planned for the second half. In addition, our outlook assumes operating margin expansion of approximately 180 basis points. We now anticipate gross margin to increase in the area of 20 basis points, a meaningful improvement from our prior outlook and completely mitigating the impact of tariffs. This assumes operational gross margin expansion of roughly 180 basis points due primarily to improvements in AUR. Further, we expect to realize a 60 basis point structural to gross margin from the disposition of Stuart Weitzman. These planned margin drivers are now expected to fully offset a nearly 200 basis point headwind from incremental tariff and duties as well as an FX headwind of 20 basis points. On SG&A, we expect leverage of roughly 160 basis points favorable to our prior outlook. This reflects our diligent expense control, partially offset by ongoing growth-focused investments. To this end, we expect marketing as a percentage of sales to increase around 130 basis points versus last year, approaching 12% of revenue. We also realized a 20 basis point benefit to expenses from the sale of Stuart Weitzman. Pour some texture on operating profit by brand, we anticipate Coach will expand its operating margin even with tariff pressure and continued brand investments. At Kate Spade, we continue to expect a modest profit loss given the outsized tariff impacts and brand investments as previously mentioned. Moving to below the line expectations for the year, net interest expense is expected to be approximately $65 million. The tax rate is expected to be approximately 17%, and our weighted average diluted share count for the year is forecasted to be 211 million shares which includes the expectation for $1.2 billion in share repurchases. Taken together, we now expect EPS to be $6.40 to $6.45 representing growth over 25% compared to last year and well ahead of our prior outlook, of $5.45 to $5.60. Moving on, we anticipate adjusted free cash flow in the area of $1.5 billion. And finally, we expect CapEx and cloud computing costs to be in the area of $200 million. We anticipate about 60% of the spend related to store openings, renovations, and relocations, with the balance primarily related to our ongoing IT and digital investment. Touching on the shaping of the back half of the year, for context, we raised our second-half outlook based on the momentum in the business. Expect total pro forma revenue to increase at a low double-digit rate in the back half which represents over 20% growth on a two-year stack basis in line with the first half. This embeds mid-teens growth versus prior year at Coach in the second half or over 30% growth on a two-year stack basis consistent with the first half. At Kate Spade, we're continuing to incorporate a mid to high single-digit decline in the second half compared to the prior year. For Q3 specifically, our sales trends today remain strong, and support the higher outlook we've given today. And from a modeling standpoint, we've incorporated a total sales increase in the area of percent on a pro forma constant currency basis. FX is planned to be more than a 150 basis point benefit to nominal sales, By brand, Coach has planned up high teens on a constant currency basis versus prior year, while Kate Spade is expected to decline high single digits. Turning to operating margin for the quarter. We expect expansion in the area of 70 basis points over 150 basis points of SG&A leverage offsetting a decline in gross margin due entirely to tariff-related headwinds. Q3 EPS is forecasted to be approximately $1.25 an increase of over 20%, including a tax rate of roughly 14%. So in closing, we delivered another record-breaking quarter highlighted by strong top and bottom-line growth. From this position of strength, we raised our outlook for the year. A clear reflection of our proven strategies and our disciplined and consistent execution. Moving forward, our business is strong. And we have competitive and structural advantages to fuel durable growth and sustainable value creation for years to come. I'd now like to open it up for your questions. Operator: Thank you. If you'd like to ask a question, press 1 on your keypad. To leave the queue at any time, press 2. Once again, that is 1 to ask a question. And we'll pause for just a moment to allow everyone a chance to join the queue. Operator: Thank you. Our first question comes from Matthew Boss of JPMorgan. Please go ahead. Your line is open. Matthew Boss: Thanks, and congrats on a great quarter and the morning's material beat and raise. Joanne Crevoiserat: Thanks, Matt. Matthew Boss: So your fiscal 2026 earnings guide of $6.40 to $6.45, it's 15% or 80¢ higher than your forecast just three months back. Roughly 22% operating margin that's roughly two years ahead of your Investor Day timeline. So Joanne, what are you seeing today that gives you confidence in this delivery? And what do you see as the path to continued or ongoing revenue and margin drivers from here? Joanne Crevoiserat: Well, thanks, Matt, and good morning. This was truly a standout quarter, but it reflects the power of our strategies, our brands, and our business model. The results we're delivering reflect our systemic approach to building our brands and our business for healthy and sustainable growth. And our efforts, as you can see, are compounding. These are outcomes of the work we've been doing methodically over years. It starts with deeply understanding our consumer and then bringing the magic or in Tapestry fashion, bringing the magic and the logic together to deliver compelling product and experiences to consumers. And then investing to scale our efforts. And that's driving customer acquisition, which is strong around the world. That's what's driving our business today. And not only are we delivering healthy growth, with expanding operating margins, as you pointed out, we're also increasing our marketing investments that are driving new customer acquisition both today, but also for the future. So what gives us confidence in the future is that our strategies and our execution are working. And we outlined at our Investor Day last September, we have a massive TAM. With low share, and we're applying these disciplines around the world. We see a tremendous opportunity into the future to drive consistent and durable growth. In this momentum we have, we're confident in our capabilities and our brands and our team. And the financial outcomes are evident in our second-quarter results. But I'll turn it to Scott to unpack what that means for our outlook. Scott Roe: Yeah. Thanks, Joanna. Thanks for the question, Matt. You know, I would just say this is a moment we prepared for. So we've been known for operational discipline for quite a while, but what you see in the results in Q2 and in the outlook for the year is a new gear up growth. And when you add growth on top of this operational what you have is a really powerful machine. Just a few highlights I would point out. So thanks for the recap. 80¢ EPS increase. That's 15% over the prior guide, and 50 of that is the beat in Q2, but importantly, we also took up the second half. By 30¢. And that's really based on the top line. Right? So we took again, the beat in Q2 on the top line. And increased the second half. So now at 14% constant currency growth for the year, we've got a balance on a two-year stack first half versus second half. Based on the confidence we see in the future. And not only are we incorporating double-digit top-line growth, and operating margin with the investments in marketing that we mentioned. But also importantly, in this outlook, we're increasing our gross margin guide. So that means we've fully mitigated the impacts of tariffs this year based on the actions that we've taken and the strong AUR gains. Lastly, when you put all that earnings and gross together, it's a cash machine. So $1.5 billion. That's $200 million better than we guided last quarter. We're returning all of that $200 million, 100% of our free cash flow back to you, the shareholders, via additional repurchases. And I think that just speaks to the strength of the model and, frankly, our confidence in the future. But here's the best part. We're not done. You asked about the future. Think of this new guide, fiscal 2026, as the base the rebaseline for growth going forward. We've established mid-single-digit revenue and double-digit earnings EPS as our baseline. That's our floor. And with that, we see expanding gross margins and operating margins from here. Why? Global opportunities led by international that's accretive to margins. Gross margin expansion driven by AUR and AUC. SG&A leverage based on the growth we see discipline while we're investing back in marketing. So this new gear of growth with operational discipline from our standpoint yields exceptional TSR as you look forward. Matthew Boss: Congrats again. Best of luck. Joanne Crevoiserat: Thanks, Matt. Scott Roe: Thanks, Matt. Operator: Thank you. We'll now move on to Brooke Roach with Goldman Sachs. Your line is now open. Brooke Roach: Good morning, Scott and Joanne. Thank you for taking our question. What gives you confidence that the Coach brand can sustain its strong growth momentum in North America? Particularly as you begin to cycle very tough comparisons. Joanne Crevoiserat: Yeah. Maybe I'll let Todd jump in. Todd Kahn: Hey. I'm happy to take this question. I'm very confident in our growth momentum. In North America and all over the world. And my confidence is grounded in facts and experience. I appreciate that there was some concern about our ability to comp the double-digit growth in the quarter. But not only did we comp the comp in the most critical holiday period, we did it the right and sustainable way. Lower promotions, exceptional margins, and a 40% increase in marketing. Which is primarily designed to create desirability for the brand in the future, not simply in the quarter. We were able to achieve these results because of the exceptional talent and passion of the seasoned Coach teams around the world. Every day, they drive the business are focused on our consumers. It is their efforts that will deliver our $10 billion ambition in the future at best-in-class margins. Now let me turn let's look at what I call our confidence performance indicators or CPI. First, we introduced at our Investor Day, and Joanne mentioned earlier, we look at the TAM very differently. It's not just about swapping dollars from other brands. But the number of consumers we can bring into Coach and the category. And we're clearly doing that. When you examine the TAM through that lens, in North America, our market share is single digits. And globally, it's below 1%. Second, our focus on acquisition. Particularly with Gen Z, and soon Gen Alpha. Not only are we winning with them, but they provide our brand with a heat halo that positively affects all other ages. So when we talk about gaining 2.9 million consumers in the quarter, the highest in our history, If we simply hold retention rates, it will have a compounding benefit in the future. Third, our growth is overwhelmingly coming from our core category. Women's leather goods. That said, it is extremely balanced across family and brand codes. That can be built on and amplified. With no single family accounting for more than 10% of our sales. Four, AUR and units equally contributed to the quarter. Our AUR today is where the brand was fifteen years ago. And five to 10x below traditional European luxury. That said, we are clear-eyed in our sweet spot of the 2 to $500 price point to ensure we can continue to attract young consumers. On unit, we have significant runway. We are still below our pre-pandemic levels, 20% globally and 25% in North America. So to wrap it all up, our CPIs are strong. And gives us the confidence that we will deliver long-term healthy growth into the future. Brooke Roach: Great. Thanks so much. Operator: Thank you. We'll now move on to Ike Boruchow with Wells Fargo Securities. Your line is now open. Ike Boruchow: Hey, everyone. Congrats on my end as well. Maybe for Scott, two regional questions. First, China, 5% plus from low double. Pretty impressive. Can you elaborate on the strength and outperformance you're seeing in that region? Is it share? Is it category? Is it both? Then I wanted to also ask, even though, you know, you didn't raise it, Europe holding at 20%, it's still pretty impressive. And there's actually several brands that have been reporting that have been talking down Europe a little bit. Given what they've been seeing recently. Can you just comment on what you're seeing in the European market how you're bucking the trend and just how you're kind of viewing the macro in that region? Thanks. Joanne Crevoiserat: Hey, Ike. It's Joanne. Maybe I'll jump in here. And talk about strategically how we're thinking about international. As we talked about in our investor day, our international markets represent considerable opportunity for us. And I think what you're seeing around the world is the global resonance of our brand. And the effectiveness of our regional execution. We have teams on the ground, and we're building capabilities. So to your point, we did accelerate in China in the quarter. China continues to represent long-term opportunity for our brand. We performed well ahead of our expectations, but we're also well outpacing the industry in China. So I'll pause there for a second and say what is driving our growth and our share gains, significant share gains in the market? Is new customer acquisition, which is being led by Gen Z. So a consistent theme around the world. We are seeing growth across channels in China. Digital led the growth, which means we're meeting our customer where they are on the ground. And to your point, our updated guidance, we do expect over 25% growth for this year. We are growing share. But again, it continues to represent a significant long-term opportunity for us. And I'll touch on Europe, but then I'm going to toss it to Todd to give you a little bit of color of how we bring this to life because I think that's important. Europe is a consistent story. Right? We have an opportunity to grow penetration in Europe. It's low penetration for us today, and we see long-term opportunity to continue to build our penetration in Europe. And we're taking the same strategies of doing diligent and disciplined brand building in attracting a local consumer that's who's driving our growth, and it's a young consumer again. And, you know, the tactics and execution on the ground in each of these regions has been, at a very high level, getting to know their customers, and then, as I say, bringing that magic and logic together to deliver compelling product and experiences. But maybe, Todd, you can add a little color on how that's coming to life. Todd Kahn: Thanks, Joanne. Let's go around the world in sixty seconds. But first, China, as Joanne said, first, let's remember, we're building on an incredible base. We've been there for over two decades. We have hundreds of stores. We are very close to the Chinese consumer. We integrate our marketing campaigns to make sure they're responsive to the Chinese consumer need. And I do think what continues to resonate is the idea that our value and values cut through. And then our relevancy most recently, we did a collaboration with Clot, a very cool streetwear brand in China. That reinforced all of those attributes of Coach. So we feel very good. You'll see us re-up more marketing in China in a very targeted city approach, not you know, not global across all of China. But very tactical. And we measure it, and we see it work. And then it gives us the confidence to put more money in. In Europe, it's such a fun and terrific story. Our team in Europe is doing a sensational job. When you really look at Europe, we talk about Europe, but, realistically, we're in England. And a little bit elsewhere. So the opportunity to continue to expand France is gonna be our next big push. And there, we're doing things in such so many right ways. We see a big wholesale opportunity. So you know, I think you know from Joanne Scott, and myself, we don't like key money, and we don't like buying temples for real estate. So we love the approach of going into youthful neighborhoods, where the stores can make money, and or wholesale and digital. And that approach is winning. And, again, what is so important, the consumer sees the value. Of our offering. And, ultimately, I think it'll allow us to grow for many years in more and more countries in Europe. Ike Boruchow: Thanks, guys. Operator: Thank you. We'll now move on to Rick Patel with Raymond James. Your line is now open. Rick Patel: Thank you. Good morning, and I'll add my congrats as well. Can you provide a little more detail around AUR and the opportunities going forward how do we think about the benefit from pricing? And is there anything to flag in terms of sales mix towards larger bags? Certain quality materials that could be a swing factor, for AUR moving forward? Joanne Crevoiserat: I'll just hit the top of the wave but let Todd talk about what's really driving AUR growth at Coach. But AUR, at TAP is about driving healthy growth. And we are driving healthy growth. We're driving AUR growth, in the quarter, We've been doing that consistently, and it's a function of brand heat and the investments we're making in our brands, the innovation we're delivering, and the quality that we deliver, I think the value proposition of our brands is unmatched in the marketplace. So AUR for us is not just a reaction to cost. It really is thoughtful about how we deliver a strong value proposition to consumers. And at the end of the day, AUR is a math equation. It's how the consumer votes. Right? AUR is the average unit retail of where they're placing their dollars. And we continue to stay close to consumers. To make sure we understand and leverage those insights into the product and experiences we're delivering, and we're seeing our customers respond. New customers are coming in at higher AURs, so we're driving healthy growth. And we got a great innovation pipeline to keep it going. But Todd, do you want to touch on that? Todd Kahn: Sure. Thank you. Again, all the things that Joanne said are so relevant. And but when you go down one more level, first, let's talk about our sweet spot, the 2 to $500 range. That's a lot of range. To continue to take price where it makes sense. We also are constantly animating product. And that animation we do it in a way that the consumer sees the value. And that's how we get it. This is not a march up to just increase AURs on this like for like 10%, 10%, 10%, which we've seen other people do, and we know what happens there. So our task is to really always reflect back on value. We also benefit from mix. Mix is a big driver here. You've heard me talk about our one coach strategy. Bringing collection product into outlet stores raises AURs. We also are seeing a really interesting phenomenon, which is our customer, they may come in by a Terry as their first back. Their next bag is often a higher AUR bag because they've had such a great experience with Coach, they are aspiring to be even better. And that is so powerful for us. But there's two things that are important truths that I want to make sure everybody realizes. One, we are not gonna compromise our value to drive AUR. We will always ensure that the value of the product is there. Similarly, we're not gonna artificially drive units through promotion. That balance is how we achieve optimal results consistently over many quarters and years. Rick Patel: Thank you very much. Operator: Thank you. We'll move now to Adrienne Yih with Barclays. Your line is now open. Adrienne Yih: Great. Thank you very much. Huge congratulations. Really powerful. It really, kind of the message that's coming through here very clearly is that the model itself, and the ten, fifteen years of discipline is actually remote. And so, Joanne, with that, having said that, it seems like you've always been sort of forward on your forward foot in terms of what's coming next and where to invest. From an IT perspective, how are you harnessing sort of the power of AI? How much of the CapEx IT is in these AI foundational investments? And how quickly can you see sort of some of the demand side payback, not necessarily the cost side efficiency? And then for Todd, the Kitslock I saw was back in stock in January. And then you mentioned that no product families are more than 10% really, I guess my question is, what's coming for newness this year, and how do you instill this culture of innovation right, without letting any of these particular franchises get bigger than 10%. Lot of times, we kinda get risk-averse when we're doing a little bit too well. So just you know, what have you instilled in the entire you know, creative organization that allows you to unleash that creativity. Thank you. Joanne Crevoiserat: Thanks, Adrienne. Great question on AI. I assumed that I was gonna get a question on AI today. So I would say this is something that, as you mentioned, it's a competitive advantage for Tapestry. We are a direct-to-consumer business. We have a lot of data. And we've been working on harnessing that data. And leveraging tools. So we're already applying AI tools across the value chain from product development, as you know, to inventory management, to pricing, to marketing, AI tools are embedded. And what we've been focused on at Tapestry is putting the tools in the hands of the decision-makers in our organization, which is so critically important. And that is where I think that is the moat, to have our teams understand, trust it, and leverage those tools and those insights to make better decisions at Tapestry. And you're right. It does drive efficiency. But it's also driving growth. And we've invested for many years in these capabilities. In fact, we have a patented data fabric. So this is not new to Tapestry. I do think it's a competitive advantage. What that does is it positions us well to adopt new technology. And our teams are insatiably curious. They're testing and learning with these tools. And it is driving more efficiency. But also driving creativity. And I'll give you just a couple of quick examples. We have designers that are leveraging AI. They'll do a sketch. So there is still a human and a need for design eye. They do a sketch. But what AI helps is they can iterate on that sketch. They can do color multipliers. They can make design tweaks much faster than we could in the past. So the speed in the process of design inception and the idea through getting samples and working it through our process, increases. And when speed increases in our supply chain, and that product development timeline, that leads to better outcomes for our consumers and drives our growth. We're also using it in marketing to harness consumer insights and ideate on content creation based on those insights. Again, human in the loop. That human creativity and translation of the insights to creative content is important, but these AI engines are helping us speed up the process of creating AIs, do some testing, learn faster, and that speed is paying off in content creation as well. These tools are new, and our teams are aggressively testing and learning, and we'll see where it takes us. But we are well-positioned, to continue to drive with AI tools and with data. Scott Roe: Fantastic. Maybe just a quick build, Adrienne, too. You asked about the investments. So of our $200 million of CapEx, we said over half of that was related to our stores. And the remainder is in technology. That's not a real big number in a company that our size. It's because of what Joanne said. A lot of that tech debt is behind us. And we have the foundation. So on it's more of a change management philosophy opportunity for us as opposed to a big investment challenge in terms of adopting AI. Sorry, Todd. Go over to you. Todd Kahn: No worries. You know, one of the most pleasurable aspects of my job is to sit with Stuart our creative director, our merchant, and see what's coming. And the last night, I did a walkthrough for future product. It's just so good. You'll see it some of it next week. At our runway show, which is where we push the envelope, new ideas, new innovation, comes about. And what I love and what you've seen over the last probably almost dozen shows is the commercial aspect of our shows. Taking down ideas from runway and making them big commercial ideas is how we're winning on product. And a steward and the merchant are incredibly focused on making sure it's relevant to a timeless Gen Z consumer while at the same time putting it through the lens of is it coach? We don't just chase trends. Quite honestly, our team creates trends. And they're doing that with this consumer in mind. And this is the essence of what we've been saying probably twenty-five years now balancing logic and magic. It's really good. If you like the kiss lock, you're gonna love some of the new sizes that's coming in. Probably saying more than Stuart wanted wants me to say at this point, but it's really good. Adrienne Yih: Fantastic. Congrats again. Todd Kahn: Thank you. Operator: Thank you. We'll move now to Bob Drbul with BTIG. Line is now open. Bob Drbul: Hi. Good morning. Think this is for Todd, but generally, are you seeing any signs of demand slowdown in some of your signature styles like Tabby and Brooklyn? Especially as you know, if there's competitor silhouettes that have been launched and you know, can you just talk a little more about your innovation? Do you think that it's strong enough to drive incremental growth from where we are? Todd Kahn: Yeah. Thanks. Thanks, Bob. That's a good follow-up question to the one I just got. You know, it's really interesting. Some of you have followed us for a long time. There was a period of time where maybe one silhouette or one colorway was pervasive. That's not the case today. Today, we are so well balanced, and was interesting we were hindsight literally earlier this week with our merchants and global buyers on the results of the last quarter. And we were looking at the future buys for the balance of this year and into next year. And we honed in on Tabby, the New York family, and Terry, I looked at the team. A little mischievously, and I said, TNT equals explosive growth. That's where we are. That's what you'll see. These are icons that will continue to fuel what we're doing. Bob Drbul: Thank you. Operator: Thank you. We'll now move on to Dana Telsey with Telsey Advisory Group. Your line is now open. Miss Telsey, your line is now open. Please proceed with your question. We'll move on to Mark Altschwager with Baird. Your line is now open. Mark Altschwager: Great. Thank you for taking the question. Congrats on the amazing results here. Scott, just on gross margin, can you talk about what's driving the outperformance on the operational side? And how you're thinking about the opportunity there in the back half of the year? The guidance seems to incorporate maybe a bit of conservatism there given the first half results but trying to better understand, some of the puts and takes and the timing. Thank you. Scott Roe: Yeah. Sure. Thanks for the question, Mark. Operational improvements as we call them are really driving the gross margin outperformance. So what does that mean? AUR is the biggest part of that. Also, we do have mitigating actions in the supply chain. Frankly, most of those start to accelerate as we get into next year. There are some mitigating actions related to tariffs that we see this year, but the lion's share of that next year. And maybe I'll just give you a little bit of shaping. But before I do, let's not bury the lead. We just took up our outlook for gross margin year over year this year, fully offsetting the impact of tariffs on a full-year basis. And as we've said since Liberation Day, right, there's gonna be quarter by quarter timing that's gonna be a little noisy and mess and we see that both in the guide for this year and as we think about going forward. And the reason for that is we at the time that the tariffs were imposed, you have inventory on hand, which needs to sell through, and then the tariff goods as they come in, it takes a while for them to sell through. So we'll see the majority of that tariff impact a little bit into next year, and then you start to comp for this year start to hit in the second half, specifically in Q3 and Q4. those impacts. And then, again, compounding AUR gains along with some of the mitigating actions which accelerate next year. So all those things together give us the confidence this year give a full-year guide of an increase in gross margin and also have the confidence to say next year, even off that base, we have confidence that we'll be able to continue to increase our gross margins as we look at fiscal 2027 and beyond. Mark Altschwager: Thank you. Operator: Thank you. We'll now move on to Michael Binetti with Evercore ISI. Line is now open. Michael Binetti: Hey. Thanks, guys. Thanks. Let me add my congrats on this. Just I'm just curious on the units versus AUR. There was a lot of quarters in a row where the total growth at Coach looked exactly like AUR growth in the mid-teens. And then last quarter, saw the unit contribution looks like increased to about mid-singles, and now we're here in the mid-teens. Can you just talk to us a little bit about what's driven that acceleration and what you see is durable there. And then, I guess, Scott, looking out at the long-term model, you know, earlier someone mentioned you're getting close to your earnings guidance for '28. And the year is 2026 right now. I think '28 was guided to about $4.2 billion in SG&A. You'll get close this year, but SG&A is now guided to about 54% of revenues. Do we should we still think about SG&A at 55% of revenues on a higher base than '28? Or as we move to this new revenue level, is there potential to show better leverage in the out years versus the plan? Scott Roe: Yeah. Do you want me to start with the sec yeah. I'll take the exciting part first, Todd, and then I'll give you the more pedestrian part. Just kidding, of course. So, yeah, you know, Michael, I'm not we're not gonna give new guidance right now as you can imagine. I appreciate your recognition that we are we are moving ahead. And I just point you back to one thing that I would I hope is evident now is we found a new gear of growth. Right? And as you think about how you think about Tapestry, how you think about this model, we've definitely moved into a higher echelon of growth. We talked about mid-single digits. Being our floor, and we're certainly moving or performing ahead of that. What it means for the future, I think you should take confidence we're not gonna I'm not gonna get into giving specifics. As it relates to SG&A, I will say this. As we continue to grow with the operational discipline we have in this organization, we would expect to continue to leverage in all non-growth enhancing parts of the P&L. So there will be leverage as you think about going forward with the accelerated growth, We also have said consistently we intend to keep investing back into the business and specifically in marketing. So do I expect leverage over time? Yes. In terms of what that looks like, we'll give you shaping as we get to the end of this year and look into next year. Todd Kahn: Yeah. And so when we look at unit growth, you know, in handbags, they were both mid-teens. And we feel very good about that. Again, it goes back to this customer acquisition. Engine that we're driving. So that's driving unit. We're not churning units on promotion. And that creates much more sustainable long-term growth for us. That's why I pointed out that unit count from FY '19 is still materially down. So if you think about the math for a minute, 2.3 million new 2.9 million new customers in a quarter. Again, retention rates. One of the things we've talked about I'm giving you conservative guidance that the retention rates stay the same. We're seeing with the younger customers, they actually are coming back a little bit more frequently. So that is good news. But even if you take the conservative retention rate, as we keep acquiring more and more customers, and they maintain the retention rate, our unit count will go up. Then you take opportunities like that's one of the things we like about footwear. The frequency of footwear purchases is higher than handbags. So if we get them in through a handbag, they like footwear, Our productivity in our stores go up. Our unit count goes up. And overall connectivity with our customer and the brand is sustainable for a long period of time. So we got a lot of room to go on unit. But remember the two truisms I said. We're not gonna drive artificially units through promotions. We're gonna keep playing our game successfully over time, and I think that's how we'll win. Michael Binetti: Alright, guys. Love it. Thank you so much, and congrats again, Encore. Scott Roe: Thank you. Thanks, Michael. Operator: Thank you. That concludes our Q&A. I will now turn it over to Joanne Crevoiserat for some concluding remarks. Joanne Crevoiserat: Thanks, Leo. As we shared this morning, our ALPHA outperformance reflects the power of Tapestry, the result of deliberate strategies and disciplined execution over time that are driving our growth today and position us for the future. And I especially want to thank our exceptional global teams. This performance is yours, and it reflects the creativity and passion you bring for our customers every day. With strong fundamentals and momentum, we're moving forward with confidence. And we're focused on delivering sustainable growth and long-term shareholder value. Thank you for your interest in Tapestry and for joining us today. This concludes Tapestry's earnings conference call. Operator: We thank you for your participation.
Patricia Bueno: Good morning, and thank you for joining us for BBVA's fourth quarter results presentation. As every quarter, I'm pleased to be joined by our CEO, Onur Genc; and the Group CFO, Luisa Gomez Bravo. We will begin with Onur reviewing the group's performance and key strategic developments during the year, followed by Luisa, who will walk you through business unit results. After their remarks, we will open the call to take your questions. With that, I now turn the call over to Onur. Onur Genç: Thank you. Thank you, Patricia. Good morning to everyone. Welcome, and thank you for joining BBVA's 2025 Full Year Results Audio Webcast. I will start with Page 3 right away. So I'm happy to say that in 2025, we achieved outstanding results across critical dimensions, value creation, as you see on the page, growth, profitability, strategic execution and shareholder remuneration. First, I would like to highlight the excellent value creation achieved during the year, which is rooted in our outstanding profit evolution. Despite falling interest rates in our core markets, we still managed to increase our net attributable profit, which reached a record EUR 10.5 billion, 4.5% higher than last year in current euros. Secondly, as we have emphasized in previous results presentations, BBVA offers a unique combination of profitability and growth, which was further reinforced in 2025. Our loan portfolio increased by an exceptional 16.2% at constant euros and 11.7% in current euros, an exceptional figure, while our return on tangible equity remained at industry-leading 19.3%. Third, in the page, we are advancing consistently in the execution of our strategy. First of all, we are transforming the bank with a radical customer perspective, leveraging the power of AI and innovation and also growing the bank, especially in areas where we believe we have an opportunity of superior return. And finally, all of this is enabling us to significantly increase distributions to our shareholders with a regular payout of EUR 5.2 billion from 2025 results, while at the same time, our CET1 ratio remains comfortably above our target. As you can see on the page, the regular payout against 2025 results will be paid entirely in cash through a total cash dividend of EUR 0.92 per share, being the highest cash dividend ever by BBVA. And additionally, we continue with the execution of the first EUR 1.5 billion tranche of the extraordinary share buyback program amounting to EUR 4 billion. These are the key highlights that I will expand in the following pages. But as you see, in my humble view, 2025 has been a remarkable year for BBVA, and we are on track to achieve our ambitious 2025-2028 long-term goals. Moving to Slide #4. On the left-hand side, our tangible book value per share plus dividends continued to show an excellent performance with a growth rate of 12.8% at face value. But it is worth highlighting, however, here the number, excluding the impact of share buybacks, that is 15.2%. As you all know, through the share buyback programs launched in 2025, the EUR 993 million already executed and the existing tranche of EUR 1.5 billion currently in execution, we have been buying our shares at higher value than the book value, which then leads to some negative impact on tangible book value per share creation. On the right-hand side of the page, you can see the very positive evolution of our net attributable profit, which continues its upward trend, reaching a new record, as we discussed, exceeding EUR 10.5 billion, again, despite the negative impact of falling interest rates in our core markets, especially in Spain and Mexico. At the same time, our earnings per share, it reached EUR 1.78, representing a 5.8% year-over-year increase. And if you look into a larger time frame, a compounded annual growth rate of 26% in the last 5 years. Slide #5, I want to underscore the truly unique positioning of BBVA within the European banking sectors, combining growth and profitability at the same time. You have seen this page before in other presentations of ours, but the situation has improved even further in our view in 2025. But the page -- just to explain the page, on the x-axis, we show the return on tangible equity as a profitability metric. While on the y-axis, we present loan growth in current euros for equal footing of all large European players. And as an indicator of future value creation, in our view, because growth and profitability, those are the 2 core dimensions of future value, BBVA clearly stands out, positioned in the top right quadrant, by far the highest loan growth in current euros and best profitability metrics among our peers. On return on tangible equity, as the measure of profitability, we should also underscore the fact that this number is partially negatively influenced by the excess capital that we have held throughout the year because at the denominator of this ratio, as you all know, it's the average equity throughout the year. Moving to Page #6, new customer acquisition. As we have reiterated consistently, again, we put this page also in every single analyst presentation, expanding our customer base is a key driver of healthy and profitable growth. In 2025, we reached a new record in customer acquisitions with 11.5 million gross new customers. Maintaining this space year after year is particularly remarkable in our view because we are already one of the largest banks in the markets in which we operate, and it's always a smaller pool to look for new clients. But despite that, a record number in 2025. And the value of this growth -- on the right-hand side of the page, there are 2 factoids there, but they're very important in our view. The value of this growth becomes clear when we look at the monetization of new clients over time. For example, in Spain, revenue per customer increases by 3.7x between the first and the fifth year of that relationship. And in Mexico, it's very important this number, 75% of the new credit cards sold in 2025 are to the customers acquired in the last 5 years. With such focus on cross-sell in place, we believe our future business in the coming years is already hatched with the customer acquisition activity over the past few years. Moving to Page #7. All the great results of the past few pages are due to our relentless focus on executing our strategy. You all know our new strategic plan. Our new strategic plan announced in 2025 has outlined a few critical priorities to sustain and improve our delivery. The plan foresees the continued need for the transformation of our business. That transformation, in our view, has to start with the customer, which we call radical customer perspective. Putting ourselves in the shoes of our customers, we are adopting a radical approach to understand and analyze every single customer interaction with the bank so that we act on these insights to improve customer service and eliminate frictions, eliminate frictions with agility and empathy. And this is reinforcing our NPS leading positions in most of our geographies and is leading to a significant reduction of negative experiences with our customers related to events like fraud, claims or service waiting times, improving, obviously, quality of service across geographies, as you see on the left-hand side of the page. As part of this new wave of transformation, we also have started to maximize the potential of AI and innovation within BBVA. We will pursue this across 8 initiatives listed there in the page, including our digital adviser, the Blue, the AI assistant for bankers and injecting efficiency and effectiveness in different processes across the bank in different areas like the software development. In addition, AI is increasingly being embedded across our organization. Our 127,000 employees all around the world, they have now access to OpenAI and Gemini. We are still at the early innings on this, but we are already starting to see the positive impact from all of our AI work, and we will update you on this further in the coming quarters. On Page 8, as part of our strategic plan also, you see certain businesses that we have prioritized to grow faster than average. We have achieved that superior growth in 2025 in all selected areas, enterprises, sustainability and capital-light businesses. On the left-hand side of the page, you see the levers through which we grow our enterprise business, cross-border, a natural lever for a global bank like us to serve our multinational enterprise clients beyond their home geography and sustainability also mainly on the enterprise side, a strategic priority for us to accompany our clients in their transition, all yielding excellent results in 2025, again, as you see in the growth rates. And if you can compare those growth rates with the rest of the bank, which is on the right-hand side. But in the middle and the right-hand side of the page also, you see the prioritized capital-light fee-generating businesses, again, displaying excellent growth performance in insurance, in payments, in wealth management, where again, we grew much better than the average of the bank in all of those areas. Slide #9. From this slide on, I'm going to walk you through the financials, but let me not -- and also to save time, let me not spend too much time on this page as it is a summary of the following pages. So let's jump into Page #10. In the annual P&L, a similar story as in the recent years, but I would like to highlight the very strong performance of core revenues, which drove gross income growth to 16.3% year-over-year in constant euros with 13.9% in NII growth and 14.6% in fee income. I mean this solid growth in gross income, together with positive jaws, as you see on the page, contained impairment charges, it resulted again in the record net attributable profit of EUR 10.5 billion. Slide 11, the P&L for the fourth quarter. Again, I will not stop long here, but just to remark on the strong quarterly performance with a net attributable profit above EUR 2.5 billion once again, despite some negative one-offs like a tax code change in Turkey at the final days of the year. You might have seen it on Christmas Day actually. The continued and accelerating delivery at the core revenue lines, net interest income and fee income is worth highlighting again on this page. Core revenue, especially in Spain, in Mexico, is behaving exceptionally well. Then talking about that maybe on Page #12, talking about Spain and Mexico, our 2 core geographies. First of all, before the countries at the group level, on the left-hand side of the page, one of the clear highlights of the quarter was the growth in activity. Loan growth maintained an excellent pace, increasing 16.2% year-over-year, which is translating into that strong net interest income performance. And then talking about the countries within that, in Spain, loan growth further accelerated to 8% year-over-year, while Mexico maintained a solid 7.5% year-over-year growth. In the case of Mexico, excluding the impact of the U.S. dollar affecting the value of our U.S. dollar-denominated loan book in Mexico, if you isolate for that impact, loan growth would have reached 9.9%, fully in line with our 2025 guidance. And on the right-hand side of the page also, you see how all of this is supported by strong loan growth and proactive price management in a declining rate environment, how we translated this into growth in core revenues in both Spain and Mexico year-over-year, but also look into the quarterly evolution with an acceleration in the last quarter if you annualize those quarterly figures. Moving now to Slide #13, again, talking about growth. Our strong activity growth is not only due to the overall industry growth, but also due to our clear outperformance versus competitors. As shown on the page, we have been gaining loan market share in all of our markets in the past few years. And in 2025, specifically, we continued that trend in practically all of our markets, again, with meaningful gains across the board. We have to be careful here. Market share by itself is not an isolated goal for the bank as the underlying growth has to be profitable. We are not here for the sake of growth. But as we monitor and manage the profitability of any granted loan in any country of the bank, we take pride in the consistent track record of market share gains across the board. Moving to Slide #14 on costs. I would first highlight that once again and in line with our DNA, we closed the year with positive jaws with gross income growing by 16%, clearly outpacing the growth in costs. And as a result, on the right-hand side of the page, our efficiency ratio continues to be one of the best among the European peers, and it improved to 38.8%. Again, picking up some speed. Slide #15, the evolution of our asset quality. It remains in line with our expectations, even in a context of strong activity growth in our most profitable segments. And starting on the left-hand side, at the bottom of the page, our cost of risk stands at 139 basis points year-to-date, improving versus 2024 and delivering a better performance versus guidance in most of the countries. At the same time, on the bottom right-hand side, both our nonperforming loan ratio and coverage ratio, they continue to improve year-over-year and quarter-over-quarter. Slide #16 on capital. Quarter-over-quarter evolution clearly illustrates both the underlying growth dynamics of the business that I just talked to you about and the one-off timing effects at year-end. First, results remain at the core driver of capital generation. Strong earnings contributed 64 basis points to CET1, then with the accrual of the dividends and AT1 coupons deducting 34 basis points. Then RWAs, turning to RWAs, activity-driven growth implied an impact of around 57 basis points. Overall, we saw a higher pace of RWA consumption compared with previous quarters. Again, this reflects very strong and exceptional business dynamics across all geographies with an acceleration in the loan portfolio growth, explaining the majority of the increase in RWAs. In addition, the thing that I mentioned about the fourth quarter exceptional number, the quarter includes also the year-end operational risk calculation which in the context of higher revenues and higher activity also came slightly higher than usual. Importantly, this capital consumption for the right reason, as it is driven by profitable growth, we would like to underscore this. I mean it's 57 basis points, much higher than usual because we have grown much higher than usual, and that's good as long as the growth is a profitable growth. And on that one, again, we remain highly disciplined in the use of capital as it is a scarce resource. I shared with you before, we have developed this concept of micro capital management framework, which ensures that at the most granular level, at the level of every single loan, again, I'm repeating, but it's important, granted at any part of the world, capital is deployed profitably above the respective cost of equity in that respective market. In the page, other impacts, marginally positive, adding around 4 basis points as negative market-related impacts were more than offset by the positive credit in OCI from hyperinflationary countries and higher minority interests. Regulatory impacts, we have basically advanced this a few -- I think, 2 quarters ago, but we added 56 basis points, somewhat above the original expectations that we shared with you during the -- again, July presentation, I think it was. These effects are technical in nature and mainly reflect the reversion of some portfolios to standard and to foundation in Spain and in Mexico. As a result, CET1 reached 13.75% in December 2025 before capital distributions. Then you deduct the EUR 4 billion of extraordinary share buyback program, a clear demonstration of our commitment to shareholder returns and to get back to our capital target, but this reduced the CET1 by 105 basis points, taking us to 12.70%. Slide 17 on shareholder distributions. In line with our payout policy, I'm very pleased to announce that the proposal to be submitted to the governing bodies contemplates a total regular distribution of EUR 5.2 billion for 2025, equivalent to a 50% payout, the upper end of our distribution policy. The distribution will be fully paid in cash, amounting to EUR 0.92 per share, which represents a 31% increase versus the 2024 cash dividend, and this implies a final dividend of EUR 0.60 per share to be paid in April 2026, complementing the EUR 0.32 per share that we have distributed back in November. In short, I mean, by far, the highest dividend of our history. And in addition, we continue to execute the extraordinary share buyback program, EUR 4 billion announced last December, of which the first tranche of EUR 1.5 billion is already being executed, again, as a share buyback program. Then Page #19. As you know, in the second quarter of 2025 in July, we set our ambitious financial goals for the 2025-2028 period. We are completely in track of those numbers. We are still in the first year of the program, but as compared to the numbers we had in the plan for 2025, we are performing in line with our original expectations and some better, but overall in line with our original expectations in all of the metrics that you see on the page. And with this, I pass over to Luisa for the business areas. Maria Gomez Bravo: Thank you very much, Onur, and good morning, everyone. Let's start with Spain, which has delivered outstanding results in 2025. Net profit grew at a double-digit number, reaching EUR 4.1 billion for the year, driven by strong business dynamics with loans up 8% year-on-year, more than offsetting some margin pressure in a declining rate environment. This was further supported by robust fees, contained costs and improving asset quality trends. The fourth quarter was particularly solid with net profit exceeding the EUR 1 billion mark. Looking to quarterly dynamics, net interest income remained highly resilient, supported by continued commercial momentum. Loan growth remained very solid, supported by strong new production, up 9% quarter-on-quarter. Loan balances evolved positively across the board, with particularly strength in consumer and across the enterprise segments. This translated into further market share gains in the most profitable segments. To highlight the evolution in the enterprise segment, where we have successfully closed the gap with the overall loan market share, gaining 60 basis points of market share in the year. Robust fee income driven by sustained growth in asset management and insurance fees, along with the recognition in the quarter of asset management success fees. On costs, expenses remained well contained, growing by 1.9% if we exclude the positive one-off related to VAT calculations recorded in the second quarter. The quarterly increase mainly reflects year-end adjustments of variable compensation accrual according to the strong performance in the year. Overall, efficiency remained best-in-class with cost-to-income ratio at 33.1%. Finally, we continue to see positive trends in asset quality. The NPL ratio declined, coverage increased and the cost of risk improved to 34 basis points, in line with guidance. Turning to Mexico. 2025 was a remarkable year for Mexico with a very strong performance despite a challenging macro environment. On a full year basis, earnings were supported by robust core revenue growth, up by 8% year-over-year, driven by strong activity momentum outpacing peers, leading to continued market share gains. Total market share reached 25.6%, increasing by close to 30 basis points over the year, while total deposit market share also increased by close to 70 basis points. Looking into the fourth quarter, net profit reached EUR 1.4 billion, up close to 5% quarter-on-quarter, supported by very solid activity dynamics. Loan book growth accelerated in the final quarter, increasing by 4%, excluding the FX impact, with sound performance both in the Retail and Enterprise segments. Total deposits grew by 5.4% quarter-on-quarter, outpacing loan growth, driven by strong inflows in retail deposits, particularly the band deposits. Cost of deposits declined further in the quarter, supported by lower interest rates and an improved deposit mix. All in, this translated into strong gross income growth of close to 6% quarter-on-quarter. Turning to costs. The increase in expenses during the quarter as in Spain and by the way, in the other geographies as well, mainly reflects year-end adjustments in the variable compensation accrual. Efficiency levels remain outstanding with a cost-to-income ratio stable at 30% in the year and in line with guidance. Finally, asset quality remains solid with a flattish NPL ratio in the year, higher coverage levels and broadly stable cost of risk. Moving now to Turkey. The franchise delivered a net profit of EUR 805 million in the year, representing a significant improvement compared to 2024. The improvement in earnings is mainly supported by a strong increase in net interest income, underpinned by higher activity levels and a significant recovery in the TL customer spread in Turkish lira in the context of declining interest rates. Fee income remained robust, supported by growing activity. In addition, the negative impact from hyperinflation adjustment continued to decline, reflecting the ongoing disinflation process in the country. Cost of risk stood at 194 basis points in 2025, reflecting still elevated provisioning needs in the retail portfolios following a long period of negative real interest rates. Finally, the effective tax rate increased significantly in the fourth quarter by the full year impact of the recently announced tax code change, which Onur already mentioned and weighed on guaranteed BBVA earnings at the end of the year. Let's turn now to South America. The region delivered a strong performance in 2025. Net profit reached EUR 726 million, growing by 14.3% year-on-year, mainly supported by earnings improvement in both Peru and Colombia as well as lower negative impact of hyperinflation adjustment in Argentina as this inflation process continues. Core revenues dynamics were very positive in Peru and Colombia, growing at mid-single digit year-on-year in current euros, supported by solid loan growth and wider spreads. Net interest income in the year is affected by Argentina, reflecting a lower contribution from the securities portfolio and some compression in customer spread over the year despite the recovery observed in the fourth quarter. Robust fee income across the region, supported by the rollout of new initiatives aimed at reinforcing fee generation and improving efficiency, the cost-to-income ratio improved to 43.9% in 2025. Turning to asset quality. Trends continue to improve in Peru and Colombia, while in Argentina, provisioning requirements in the retail portfolio remained high, leading to adjustments in the risk appetite for this segment. Overall, risk indicators improved across the region with the NPL ratio declining to 4%, coverage increasing to above 90% and the cost of risk improving to 250 basis points. All in all, South America continues to show increasingly positive dynamics, reinforcing our confidence in the region's outlook going forward. Going now to rest of business. In 2025, rest of business delivered strong net profit of EUR 627 million compared to EUR 485 million in 2024. The strong performance was driven by solid activity across geographies. Loan growth remained healthy with important contributions in corporate lending, transactional banking, project finance. Funding dynamics were also positive across the board. The strong momentum translated into robust revenue growth. Net interest income increased by 15.9% year-over-year, supported by higher volumes and disciplined price management. Fee income also showed remarkable growth with positive trends across countries, driven by both investment banking and global transactional banking. On cost, expense evolution reflects the rollout of our strategic growth plans, including continued investments to reinforce our capabilities and growth plans going forward. Risk metrics remain very solid. Cost of risk stood at 16 basis points in 2025, broadly stable year-on-year. Overall, rest of the business continues to show very positive momentum. Back to you, Onur. Onur Genç: Thank you. Thank you, Luisa. Let me finish with the takeaways and the outlook and the guidance, but we have a commitment to you that we always finish by the hour. So on the takeaways, let me not go through all the bullet points that we have on Page #26. In short, I do think we have had one of our best years ever in 2025. Then guidance, Page #27, completely aligned with the midterm goals of our strategic plan. We are expecting strong business momentum to continue, solid loan growth across the board, supporting net interest income and overall revenue growth. On expenses, we maintain our clear commitment to cost discipline. The expected evolution in Spain and Corporate Center is impacted by some -- as you remember, in the second quarter, there were some VAT-related topics there, some base effects. But if you exclude the base effects, completely in line with our also original plan. Cost of risk is expected to remain broadly aligned with the 2025 levels. And overall, as a result of all of this, our expectation across the different business units, it translates into a group return on tangible equity goal of around 20%, better than 2025 is our expectation and the cost-to-income ratio of below 40%. And finally, on Page 28, to deliver on our ambitious long-term objectives and the 2026 guidance that I just talked to you about, we will continue to focus and execute on our strategic priorities. We again announced them at the beginning of 2025. We will devote time in 2026 to further discussing these strategic priorities with you through a series of what we call BBVA strategic talks and obviously, with the involvement of our senior management. These sessions would include country and certain business deep dives, and we are going to start them in March 10 with Mexico and the Enterprises segment. With this, I conclude the presentation. Now I give the floor to Patricia for the Q&A. We are at 9:58 in Spain, so 2 minutes. Perfect. We are right on time. Patricia Bueno: Thank you. Thank you very much, Onur and Luisa. We are ready to start the Q&A session. So operator, please, the first question. Operator: [Operator Instructions] And the first question is from Maks Mishyn with JB Capital. Maksym Mishyn: Two questions from me, please. The first is on Spain. You target mid- to high single-digit growth in -- above mid-single-digit growth in loans, and you grew 8% in 2025, but the NII guidance is low to mid-single digit. Can you walk us through the key assumptions there on rates? And then the second is on Mexico. Looking at sector data, and please correct me if I'm wrong, but it looks like the gap in deposit costs you had historically is reducing. You also seem to be growing faster in term deposits. Can you please discuss competition in deposits? And how do you see your customer spread evolving in the coming quarters? Onur Genç: Thank you, Maks. On Spain, our Euribor expectation that we have, for example, Euribor 12 months is basically flat, but the average spreads that we would be having average 2025, average 2026 shows a slight decline. As a result, you see a different guidance between the activity growth and also the overall NII and revenue growth. That's the core reason. But the Euribor levels, we do think today, we are at 2.22%, 12-month Euribor. It's going to be around these levels. The average that we expect for the year is at 2.25%. On Mexico, the deposit pricing, we discuss this every quarter. I mean our Mexican peso funding is at 2.5% at the end of November for comparison reasons. In the backup, you also see the end of December. But comparison, the markets authority announces these numbers. When our competitors, they are at 4.11% -- 2.5% for us, 4.11% for the industry. We maintain that very positive gap with the rest in terms of cost of funding and deposits, going back to the same dynamics that we repeat every quarter here, but they are important. We are in transactional deposits. I did mention this to you before, but I would repeat it, given our very high market share in payrolls, 1/3 of our deposits, 1/3 is in this bucket of EUR 0 to EUR 30,000, the lowest bucket. And the average of that bucket, 1/3 is in that bucket, EUR 0 to EUR 30,000. And the average of that bucket is EUR 790. So we have millions of customers and their transactional relationship is with BBVA. That's the best insurance policy against any cost of funding challenges or deposit challenges. You have seen that our loan-to-deposit ratio is basically flat throughout the year also in Mexico. I did mention to you in the last call that we would be a bit more aggressive in deposits now that the prices are lower. We didn't want to be very aggressive in deposits, and we have chosen to do wholesale funding when interest rates were very high because we didn't want to trigger that market too much. But now that the interest rates are at relatively low levels, we are also gaining market share in the last quarter, and it's mainly coming from the Enterprise segment, which is then leading to those dynamics. But overall, we feel very comfortable with our deposit positioning and cost of funding positioning in Mexico. Maria Gomez Bravo: Just to add on to Onur's comment also on the rate side in Mexico. We do expect Banxico to continue to lower rates this year. So we're expecting Banxico rates to be at around 6.5% around mid of the year. So that is also implying somewhat compression of spreads in 2026 in Mexico on average versus also 2025, just as in Spain. Onur Genç: And when we announced our long-term strategic plan, we said that the core driver of the strategic plan numbers that we announced again in July was the fact that the rates would stabilize. And once rates stabilize, the activity growth will translate into bottom line, right away into profits. And that stabilization has already happened in Spain and is very close to be happening, finalizing in Mexico. Patricia Bueno: Next question please. Operator: Next question is from Francisco Riquel from Alantra. Francisco Riquel: I have two questions. First one is, Spain customer spread fell 50 basis points in '25. Local peers are reporting falls of just 20, 30 bps. You're growing faster in loans, 8%, however. So how can you reassure that market share gains are not coming at the expense of profitability? And if you can comment on customer spread dynamics that we should expect in '26 and '27. And my second question is on capital generation. Net profit, well, results in '25 and '26 guidance is in line with expectations, but you are getting there more capital intensive that I thought in view of the negative organic generation in Q4. So I wonder if you can update on the strategic -- on the goals of the '28 plans in terms of the -- do you feel that the EUR 45 billion of CET1 generation is still achievable? How much through SRTs? And the mix, how much do you plan to devote between growth and distributions that you guided at the time? Onur Genç: Thank you, Paco. Luisa, do you want to take the first one, customer spread dynamics? Maria Gomez Bravo: Yes. I think the customer spread dynamics have been quite positive in the quarter, to be honest. I think that -- first of all, I think that we need to also remember that the repricing of our mortgage loan portfolio is faster than our peers. We repriced 2/3 of our mortgage book every 6 months and 1/3 every year. So this pricing dynamics, obviously, you see it feeding into the loan yields quarter-on-quarter. And in the cost of deposits, this quarter, we had a slight uptick of 2 basis points of cost of funds, and this was driven primarily by a mix effect because in the quarter, we gained market share in transactional banking deposits in the corporate side, and that's what affected a little bit the cost of deposits. Going forward, as we mentioned, we think that we will see quarter-on-quarter pretty stable customer spreads in the first half of the year and perhaps slightly picking up at the end of the year depending on that Euribor rate performance that Onur mentioned. So all in all, I think that we are quite comfortable with the evolution of the spreads going forward. And going to profitability, I think that our profitability, as you can see by the dynamics of core revenues in BBVA this year in Spain, which have been quite positive with over 3% year-on-year in NII and over 3% year-on-year in fees compared to our peers, I think, showcase the profitability outlook of our growth. Onur Genç: Just to add on this one, Paco. On Page 38, you see the customer spreads, average customer spreads by geography in the appendix. The average spread has declined by 41 basis points, just to be very precise on the figure. And that 41 basis points, as you mentioned, is slightly higher than the competition. For a good reason, if you look into the growth of our lending book, you would see that we are growing very profitably, to be fair, but still at a different margin or a different spread level versus retail in the Enterprise segment. We are growing very nicely in the Enterprise segment. That has an implication. Obviously, the mix effect comes into that play. But that 41 basis points, again, is excellent in our view. And finally, I would say that the final spread that you see in Spain at the end of the -- in the fourth quarter, but at the end of the quarter as well, 280, we expect that number to remain -- we have touched bottom basically in short. We expect that number not to go any further down. Slight maybe changes, but not too much. From here on, if the rate policy evolves as we are expecting, it's going to be going up. Then the second question, the broader question on the growth being capital intensive and the implications of that. You were asking implications of that in terms of goals. We do have our, again, midterm strategic plan and the associated figures. There are 2 numbers there that are very important to us and that are very easy to remember. EUR 48 billion profits and EUR 36 billion capital distribution back to our shareholders, okay? Those 2 numbers. And then there are many others underneath, but I am giving you the 2 figures that is like -- I put them into a post note and I put them next to my bed so that I look into them when I wake up in the morning. They are important numbers. I mean we have a very solid competent team. If things happen that are beyond our control and if it doesn't happen, fine. But at the moment, we are completely on track to reach those figures. The thing that you mentioned, be growing in capital-intensive areas, as long as it's above your cost of equity, that growth, we love it. We want to do more of it because we are going to be creating capital more than our cost of equity. The thing that you mentioned might create a bit more different dynamics in terms of some of the buckets underneath the capital flow. But at the moment, it's completely in line with our plan. But if it continues like this, meaning we grow a lot in, as you say, capital-heavy areas, then we have an opportunity to do more SRTs, for example. I'll give you the growth dynamics here because you mentioned it's capital intensive. If you look into the quarter-over-quarter growth, you see that in Spain in the quarter, we grew 2.5% in loans when the average annual growth was 8%. So if you annualize the quarterly growth, we have grown much more in the fourth quarter versus the rest of the year. If you look into Mexico, the fourth quarter number growth is 3.7%, then the overall annual growth was 7.5%. Again, if you annualize Mexico, 3.7%, it was a much stronger quarterly growth than the previous quarters. And rest of business -- as also Luisa explained, rest of business is basically CIB business. We also delivered amazing growth in that area. All of this growth, again, is happening above cost of equity. If we grow like this, again, we will have a higher pool, for example, to do more SRTs. There will be different dimensions. But in short, coming back to your simple question, we are fully committed, and we are completely on track of our midterm goals. Patricia Bueno: Next question, please. Operator: Next question is from Benjamin Toms from RBC. Benjamin Toms: The first one is on costs. At a group level, costs grew 10.5% in 2025, above weighted average inflation of 9.6%. I roughly calculate the weighted average inflation is expected to be 7% in 2026. Is that 7% roughly in line with your expectations? And is 7% the right way to think about group cost growth for this year? I appreciate you have a cost-to-income ratio. And secondly, one of the reasons that Mexico is a great geography to operate in is because the population is young and underbanked. From a strategic point of view, I'm interested that when we're talking about new entrants coming to the market, and coming to a market like Mexico and disturbing the status quo, does that young and underbanked population actually represent a disadvantage? I imagine younger customers are less sticky. And if your parents never had a bank account, you'll have no brand aspiration or allegiance. Basically, conceptually, do you think that it's easier for a new entrant to come to a market like Mexico relative to a market like Spain? Onur Genç: Perfect. On costs, Luisa, do you want to take? Maria Gomez Bravo: Yes. Well, I think on costs, what we see is that this year, the performance on cost has been basically affected as well by the VAT one-offs in Spain and Corporate Center, in line in Mexico, and Turkey affected by inflation and rest of business in line with our expectations according to our investment plan. So all in all, I think, as I mentioned, very much with what we expected. Going forward, I think the guidance is very clear that we continue and remain investing in our footprint. Spain and -- guidance for Spain and the Corporate Center is affected by the one-offs on the base case. I think that in both cases, if you strip out the one-offs, we will be growing in Spain around circa between 3% and 4% on the average of the both years, which is in line with the growth that we see for Spain. And in Mexico, again, very consistent growth in Mexico, a market where we continue to believe that investment gives a lot of return going forward. So I think that the group costs this year are going to be, in that sense, higher than inflation because of these one-off trends and the continued investments in the growth franchises that we see in the group. As you mentioned, profitability is very relevant for us. And as long as we see cost-to-income trends performing the way that we expect below 40% for the group in 2026 and with our midterm goals going into the 35% aim, which is what we still stand by, I think we're perfectly fine investing in our footprint at these return levels. Onur Genç: And on your second question, Benjamin, which is a very good question. Our experience in banking, Benjamin, is that different segments of the society and population, young, mid-age, old or different segments, whatever metric and whatever dimension that you pick as a segmentation dimension, they really don't care whether it's the neobank or the incumbent bank and so on. What they care about is the service. They want to get the best from their bank. Very simple concept, but very important. Different segments prioritize different areas of service. As you say, the young segment, for example, the digital experience has to be really good because that's the piece that they care about. But if that digital experience is being provided by an incumbent bank versus a neobank, they don't care about that tag, about that label. They go for the service. In that context, our claim, and there are many numbers that we can take offline and feed you with, but there are many numbers that tell us that our digital experience in Mexico is amazing because as compared to those neobanks as well, we do this constant. I'm personally involved in those exercises. We look into what do they have in digital experiences, what do we have? Do we have a gap? If it's positive, perfect. We further build on that. If it's negative, we close that gap right away. If we do that, why would the young segment prefer a certain bank versus another? In that context, I mean, again, the numbers speak for themselves. Those neobanks that you are mentioning, and some of them have been there for many years now. There are newcomers, but there are also very entrenched now players in Mexico on the neobank side. They have been there for quite a long time. But despite that, we have 4.7 million new customer acquisition in Mexico in 2025, 4.7 million. A good part of them are very young customers. 81% of this acquisition are done through pure digital channels. So they don't go to a branch, they don't go anywhere, and they basically become a customer through pure end-to-end digital channels, which is one of our core competitive advantages in Mexico and beyond. That's why we are providing that service to them. That's why we are getting those numbers. On top, we have certain things that, in our view, neobanks cannot replicate that easily. We can do what they do because of the digital channel. We are really focused on that. But the things that we have, our infrastructure in the country. Mexico is still a very cash-heavy country. More than 90% of the population says they deal with cash on a daily basis. We have, by far, the largest ATM infrastructure. We have the branch network, if the customer needs it for a problem -- for the young segment, it's only for problem areas, but it does happen. They care about that infrastructure as well. And also, even if you are young, if you are working in a place, we do have a relationship with your company so that your payroll comes to BBVA, which is not very easy for, again, neobanks to replicate. In short, I think the numbers are very clear that we see that challenge, but we are matching that challenge, and we are going to compete really hard. Patricia Bueno: Next question please. Operator: Next question is from Cecilia Romero with Barclays. Cecilia Romero Reyes: The first one is on Spain. Spain volumes are strong and you're gaining market share in SME and corporates while deliberately giving up share in mortgages. Is this pushing the cost of deposits up as you compete for clients, clients that you're not gaining through mortgages? You mentioned before on risk-weighted asset growth was larger than expected in this quarter. Can you clarify whether any large SRT transactions have slipped into Q1 and how we should think about risk-weighted asset growth and further SRT benefits for next year? My final question, the final dividend was entirely in cash. Is this structural going forward? Or are you planning to keep flexibility to do a final dividend in 2026 with a share buyback component? Onur Genç: Perfect. SRTs, the architect and the leader of SRTs is Luisa, so I'll leave it to you on the second one. On the first one, the cost of deposits may be going up, if I understood you correctly, Cecilia, because we are less aggressive on mortgages, does it have an implication on deposits? Was that the question? But the deposit, you would see it in the numbers as well. Again, in the appendix, you will see it. Our loan-to-deposit ratio in Spain is now 87%, 87%. So we do have so much liquidity and so much deposits that the tension that you might be implying that would be coming from not having that mortgage relationship with customer and hence, lower deposits is not there at all because we do have, again, abundant deposit space. SRTs, Luisa? Maria Gomez Bravo: Yes. So on the SRTs, we generated 35 basis points of capital this year. In 2025, it was around EUR 11 billion of RWA release. We did front-load the deals in the year where they were more biased. We did like 23 basis points in the first half. We do see that the trend in the market is for deals to concentrate at the end of the year. And so we planned our SRTs in a different way. We expect this year to be able to deliver more or less in line with the guidance that we gave last year of around 30 to 40 basis points and pretty much in a similar fashion. We are also expecting to start doing some deals in some of our other core geographies such as Mexico and also potentially Turkey. We're working on those type of deals as well in order to try and mobilize the balance sheet further. So in that context, we do expect RWA growth to be below the loan growth as we complete our SRT planning going ahead. Onur Genç: Okay. On the first answer that I gave on deposits in Spain, Patricia here is alerting me that I didn't give a proper answer. But I do think what I said was critical, which is the 87% is the number to look into. But she's also highlighting a very good number, which is one of the clear reasons of our deposits are growing in Spain is also the retail franchise that we are building. Last year, we continued to acquire, I go back to the same topic, but it's very important, 1 million new customers in Spain, 1 million new customers. Excluding the neobanks, we are #1 among incumbent banks in terms of customer acquisition. That brings a lot of deposits as well. Patricia, I added your point as well. So I think you should be happy. Then the dividend topic, you said, I think, Cecilia, that 2026, can there be share buyback instead of cash. Of course. Of course, as we have done in the past, I mean, this year, it's 50% full in cash because we are running a share buyback program already. There is an ongoing extraordinary share buyback program running in parallel. That's why we said, okay, let's go with cash on the other side. You might remember, 2024, 2023, we did a piece of the payout -- regular payout in share buyback, EUR 40 million last year in cash and EUR 10 million in share buyback, if you remember. So we have that flexibility in our payout policy as we have announced to the market. We typically tend to pay a good part of the regular payout in cash because we do think it's important the cash dividends continue for our shareholders in a nice way. So a good part of that will always be coming in cash dividends, but there is the possibility and the flexibility, obviously, to do the 2026 regular payout, also some of it in share buyback. Patricia Bueno: Next question please. Operator: Next question is from Alvaro Serrano from Morgan Stanley. Alvaro de Tejada: Can I ask a couple of questions around the guidance in -- first of all, in Mexico and then I have got one on cost in Spain. In Mexico, the mid- to high single-digit NII growth, if I look at the momentum you had in 2025, it was very good. And sort of in the second half of the year, you had 3% sequential growth in NII in pesos and the mid-single-digit -- sort of mid- to high single-digit NII growth implies very modest sequential growth over the fourth quarter base. And you're not going to get -- Luisa, you mentioned 50 basis points rate cut that you're putting in. Can you -- are you being conservative? Is there anything to -- I don't want to go to the cliche of the deposit competition, but is there anything we're missing? Are you being conservative? Just if you could qualify that guidance a bit, that would be very helpful. And then on Spain, even -- the cost income is 33%, which is obviously very good. That goes without saying. But if I think about the 2026, you're discussing low to mid-single-digit sort of NII fees and expenses underlying around 4%, I think, Luisa, you said. Is that -- I'm just thinking that doesn't imply -- potentially implies negative jaws or stable jaws. How are you thinking about costs from here on given this good starting point in cost income? Should we expect a bit more investment, maybe some negative jaws at some point? Is this the best you can do, which is very good. I don't mean in a bad way, 33% is obviously best-in-class. Onur Genç: Okay. So maybe take the second one, Luisa. On the first one, Alvaro, congratulations because in that chart of outlook and guidance, there are many bullet points on the page. The one that we discussed extensively and we said, are we being too conservative on this number or on this line was the one that you picked. But I mean you know our style. That page, again, is very important to us. When we say a number that we want to deliver, we deliver. And maybe a bit on the conservative side, that number, we are very positive in Mexico, very positive. I mean, if we have delivered what we delivered in 2005 (sic) [ 2025 ], despite all the complexities of the year in Mexico, in 2026, based on what we also see at the beginning of the year, we are quite positive. But we put a number and we always deliver and maybe that's one of the reasons why you have that guidance in there. Luisa, on the cost? Maria Gomez Bravo: Yes. Well, on the cost side, I think that with the current guidance and in this year, we do expect some slight negative jaws in Spain if factoring for that circa 4% on average for the last 2 years. But that would still leave us with a very positive cost-to-income ratio for the year in Spain as we guided for. And again, we continue to, by the way, invest a lot in efficiency and productivity by no means are we standing still, where actually part of the investments and the growth in investments and expenses are to achieve further productivity gains throughout the year in '27 and '28 primarily. So we are very committed to ensuring that we have a very good solid cost discipline in Spain and the rest of the geographies, but Spain is, I think, a poster child of cost discipline in the past, and we will continue to do so throughout the year and going forward. So yes, slightly negative jaws this year, but again, very positive growth for Spain going forward in results, I mean... Onur Genç: And Luisa, maybe we also quantify EBIT. I mean in terms of the number that you see on the page for 2025, Alvaro, you see that the costs in Spain have decreased by 0.7%, decreased. It was because of that one-off that Luisa also mentioned in previous calls and also today, this VAT one-off. If you exclude that one-off, the growth in 2025 would have been around 3% and the guidance for next year would have been around that as well. So it's not any different. It's the base effect mainly affecting that figure. And we are going to be in the first quarter running an efficiency initiative, a voluntary efficiency initiative in Spain, and that might have a little impact on that number also, especially in the first quarter. But the guidance is there in that sense, mainly because of the base effect. Patricia Bueno: Next question, please. Operator: Next question is from Marta Sanchez Romero with JPMorgan. Marta Sánchez Romero: My first question is a follow-up on cost. We've seen some slippage in the Corporate Center. Is there space to do something more ambitious in terms of restructurings? It's been a number of years since you did anything meaningful in terms of early retirements. Could we see some capital allocated there? My second question is also on capital allocation. Some may say that your buyback, your current extraordinary buyback was somewhat stingy. And at the current execution pace, you will be done and dusted by July. Is there a chance that you reload that buyback? Or we are not going to see anything in terms of capital returns beyond the interim dividend this year in 2026? And just a quick question on the rest of business. So your loan book there is growing like a weed, EUR 16 billion this year, almost EUR 30 billion over the past 2 years. We're seeing market investors a bit jittery about underwriting generally, private markets, et cetera. Can you give us some sense of the quality of your underwriting, what you're doing? Onur Genç: Perfect. Maybe last one, you take Luisa, if you like. On the first question, Marta, thank you for the questions. On the Corporate Center, as I just mentioned to Alvaro's question, in Spain and in Corporate Center, we don't want to -- it's not a restructuring program at all. It's something that we do in an ongoing basis. But in the first quarter of this year, we will have an efficiency initiative, as we call it, which is a voluntary initiative for some of our colleagues to benefit from if they want. It's a targeted voluntary initiative that we would be doing. But I would highlight to you that if you go back to the Corporate Center expenses in the last 5 years, 5 years, you would see that those expenses are always growing less than inflation, always. And except the one-offs, and we can talk about the one-offs, but it has been a commitment that we have had -- even in these calls, we have voiced those commitments, and we are on track with those commitments. The buyback strategy, and you're saying we wouldn't -- should we expect something more or less or nothing? We have been very clear, very vocal and I do think we have built the credibility around this fully. We do have this commitment that we have a capital target of 11.5% to 12%, that we will distribute all the excess capital above 12%. Our commitment on that is full. If you look into our capital number and the evolution of the capital, you would see that we would have excess capital. So obviously, you should expect something more, when the time comes we will announce it, additional extraordinary distribution back to our shareholders. Then rest of the business, Luisa? Maria Gomez Bravo: Yes. No, I think that the growth that we are seeing is a strong growth, but this is on the back of plans that have been developed over quite a number of years already and that have gained momentum now. So these are very thought-out plans that basically are trying to gear and leverage the global footprint that we have. We put our clients in connection to our emerging markets, and we're doing business with large corporates that are growing the strategy in traditional corporate banking with that growth of 21% that we saw in the year-end cross-border business. I think that in terms of underwriting criteria, we are quite conservative as in the rest of the group. And 40% of our business is booked in the U.S., and we are, I think, overall very focused in growth in corporates. That's where we're seeing the main growth, Marta, we're not seeing growth in other types of -- I mean, we're seeing growth, but not as relevant growth as in the corporate book. Again, corporate banking, transactional banking, regional banking model across the footprint is what we are focusing on developing. Onur Genç: I would double down on this comment, and I'm glad that Luisa has picked up on that dimension. It's on Page 8 of the presentation on the left-hand side at the top, it says enterprise cross-border. Our growth in rest of the business in general, but our growth in CIB is based on a model that we want to accompany our clients wherever they are. We have this global footprint. Many of our clients do exist in our footprint with different subsidiaries and so on. It's more trade finance, multinational client, corporate banking focused growth that we are after. And in that one, you see the evolution in that page on Page 8 that the growth is coming from there, from those clients. It's basically a cross-sell to our clients that we have in Spain. For example, we have a business in Mexico, we go after that. Our big clients in Spain who have a business in the U.S., we go after that. That's the focus of our growth in CIB. Maria Gomez Bravo: And the capital allocation that we do in these clients in the rest of business and -- we see that profitability going into our subsidiaries in Mexico, in Latin America, in Spain. So that capital that gets allocated there have the profitability driven by the growth that you're seeing in our business in fees and margins across the group. Patricia Bueno: Next question, please. Operator: Next question is from Carlos Peixoto from CaixaBank. Carlos Peixoto: So the first one would be a bit on the medium-term targets. So basically, the 42% -- sorry, 22% return on tangible equity average that you had guided to for 2025-'28, considering that 2025 was slightly below 20%. This year, you're guiding towards 20%. So this basically means that over the coming years, the average ROTE would actually have to be around 22% or more, whether you stick to that or you see some downside? And the same rationale more or less would apply to net profit or areas to -- looking at what is implied in the guidance this year, it seems as though in 2027 and in 2028, you need to have post a net profit above EUR 13 million to fulfill those goals. What will be the drivers for the improvement in the net profit? Then the second question would actually be on Mexico. Just the cost of risk guidance of 340 basis points implies a small deterioration vis-a-vis 2025. Are you just being cautious on this? Or do you see here any kind of concern? Is it related with loan mix? Just trying to understand a bit there, the rationale. Onur Genç: Very good. Thank you, Carlos. Maybe on the cost of risk, Luisa, you help me out. On the first one, the long-term -- midterm goals, Carlos, what I can confirm to you or let me say it first in a very clear way. We are fully committed, and we are still on track, as we have highlighted on Page 18 of the presentation to those goals. But you are asking a very fair and a very good question, saying that you did 19.3% in 2025, how come you can get to 22%. You have to look into the plan. And in the plan, the only thing I can guarantee you or I can tell you is the year for 2025, what we had in the plan, we delivered above that. The 2026, our guidance that we are giving to you, we are going to -- if we deliver the guidance, we are going to be delivering above what we have in the plan. So in the third and fourth year, it's obviously a bit better years than the first 2. And you're asking this is related to profits as well. What is the driver of that? I do think we talked about this in the past, but it's a very important -- relatively simple, but very important dynamic as we have talked to you about. We are growing very nicely in our core geographies, especially in Spain, everywhere, but in Spain and Mexico as well. That activity growth -- in 2025 and at the beginning of 2026 also, that activity growth is being consumed by the decline in the customer spreads. Why? Because in those 2 geographies, we are very rate sensitive. When rates come down, we lose in customer spread. So we grew very nicely in 2025, and this compensated the negative coming from the customer spread decline. Starting from 2026, our expectation, again, it's based on a macro assumption that the rates will not go down any further in Europe and in Spain and Mexico, it's going to go down to 6.5%. Today, we are at 7%, but then stay at 6.5%. If those assumptions are correct, if that those macro assumptions are delivered, the driver of the better profits in the coming years is the fact that the activity growth will not be anymore consuming the decline in the customer spreads and will be flowing directly to the bottom line. With those assumptions, again, our midterm goals we are on track, and we feel very comfortable with the numbers that we have put forward some time ago. On the Mexico cost of risk, Luisa? Maria Gomez Bravo: Yes. Well, I think as you mentioned, it's more driven by a mix effect. As you know, we have been growing in the past years, our retail portfolios faster than our wholesale portfolios. This year, our retail portfolio has grown close to 12%. Our wholesale portfolio is growing at 3% at the end of the year, factored by the U.S. dollar also depreciation. But in general, that mix effect is driving that guidance in terms of cost of risk. Remember that we're growing 14% credit cards, 14% consumer loans, 14% SMEs. So it's a mix effect. The underlying quality trends are supportive, and we don't see any issues other than the mix effect feeding into that cost of risk guidance for Mexico this year. Patricia Bueno: Next question please. Operator: The next question is from Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: Sofie from Goldman Sachs. So my first question would be on AI and tech. You guided for below 40% cost-to-income ratio in '26 and around 35% in 2028. But how do you think about kind of AI and the kind of cost-to-income ratio in the longer term? How much cost reduction do you expect AI potentially could help BBVA? And then my second question would be on Turkey. Revenues are strong, but net income was a little bit lower than expected. Also guidance for 2026 is slightly lower than expected by consensus. How should we think about the kind of upside risk to Turkey, but also Argentina from potentially exiting hyperinflation in 2028 and what that could mean for BBVA? Onur Genç: Very good. Thank you, Sofie. In the AI, we are still at the early innings. So we don't know exactly how the efficiency savings that we see, and they are really promising. And we are quite positive on what we have been seeing in the areas that we are applying it at the moment. But we need time. We need time to measure and see the direct impact and so on. But in the plan, we have given you this 35% in 2028 with the idea that in 2027, 2028, there will be some efficiency savings coming from AI that will be reflected into the figures. But exactly AI or other things, we haven't disclosed it. We haven't broken it down. And I think it is too early to quantify it at the moment. But we do have that intention to have some efficiency savings in those 2 years due to the programs that we are executing at the moment. On Turkey, how should we evaluate the upside risk, as you say? First of all, on the 2025 figure also you asked about -- you said that it came a bit lower than planned than the consensus. Actually, that's the miss consensus versus the group numbers in Turkey for 2 reasons. Number one, and as I mentioned, there was a change in the tax code. I'm not sure whether you all have followed it, but there was a change in the tax code in the final days of December, which has created around EUR 50 million, EUR 42 million to be precise, impact in the tax number that has created a bit of a dent in again, final days. And then the impairments are coming a bit higher in Turkey. Because in Turkey, the minimum wage increase happens only once in a year at the beginning of the year. And towards the end of the year, basically, the minimum wage is not adjusted, but inflation is there. And you see a bit higher inflows in retail, in credit cards and the consumer lending books. That's what we have seen. I mean the vintages, when we look into the vintages, we see nothing extraordinary, nothing different than what we expect. By the way, what we have seen in 2025 is more or less in line with the guidance that we have given to you. So given the vintages are already stabilizing, are already improving actually, maybe in the first quarter or so, similar to fourth quarter numbers, you would see some provisioning. But beyond that, we are not worried about the provisioning levels. You were asking in general about the upside, both Argentina and Turkey as well. On that one, what we can tell you, as you also look into the guidance, I need to highlight that thing in the guidance page, there's a footnote to the Turkish guidance, which is based on inflation, interest rates and depreciation of the currency. Those 3 things drive the guidance. We do think we have some fair assumptions in the footnote. As a result, we are guiding accordingly. But Sofie, your question of, do we have upside in those 2 countries? In our view, yes. But it depends on whether the countries improve on inflation and interest rates come down or not. If in Turkey, for example, inflation improves and interest rates come down, we do have a very high upside. If that happens, we have -- at some point, we have raised it in these calls as well. I mean, the fair value that we should have in Turkey is more than EUR 2 billion in profits. Today, we are less than EUR 1 billion. That upside is there, but it depends on the macro evolution of the country. Finally, you asked about also hyperinflation. As you know, the rule there is relatively clear. It's not the only rule. It's not sufficient. But if the last 3-year inflation cumulative number is less than 100, you get out of hyperinflation. That's why in our strategic plan, we put in 2028 for 2 countries get out of hyperinflation. But again, it depends on the macro evolution of those geographies. Patricia Bueno: Next question please. Operator: Next question is from Andrea Filtri with Mediobanca. Andrea Filtri: And sorry for drilling down on capital and its implications, but they are just one number answers. First, how much capital generation can you absorb if you push volume growth further? How much was the op risk revision in Q4 impacting your risk-weighted assets? And you refer repeatedly to internal cost of equity reference your Northern Star for new loan generation. Can you share with us the cost of equity you're applying to your networks in Spain and Mexico for the different loan categories, please? Finally, digital euro. Given the geopolitical evolutions, do you agree that the digital euro is likely to be a reality at this point? And how are you preparing to deal with this and turn it to your advantage? Onur Genç: Thank you, Andrea. Very specific questions. I appreciate all the questions. And I'm going to be very specific to you, too. In the volume growth and capital generation, the thing I can guide you or tell you is that we still expect in the coming years that every year, this year, we created 31 basis points pure organic capital generation even after growth, after regulation, after growth, after any other extraordinary thing, we created 31 basis points. In the capital plan, we expect every year to create 30 to 40 basis points. The operational risk. In the fourth quarter, operational risk consumption was 16 basis points. Typically, it's 4 to 5 basis points in a quarter. We do this calculation, as you know, at the end of the year. So fourth quarter always has an adjustment that the number was 16 basis points for operational risk in the final quarter of the year. Cost of equity of the bank for different franchises, we never disclose it. Thank you for asking the question. Digital euro, it has pros and cons. It has to be done in a proper way in our view. I do think for the sovereignty topic that many people talk about, it can be helpful. There is a pro there. We see that angle. We see that point and appreciate it, but it has to be done in the proper way, in our view. And there are certain dimensions that we hope that we can continue to dialogue with the regulators and the politicians on this topic, given the fact that we are pushing private solutions as the banking sector in Europe, you might have seen this, the solution of [indiscernible], the Spain, Italy and Portugal, we are now in the same umbrella. We just concluded an agreement with EPI, which is basically Netherlands, Belgium, Germany and so on. So all of these countries, we will have already a private solution developed. We hope that in the digital euro discussions that politicians and supervisors and regulators understand the complexity, the costs and everything else required for the payment solution to be developed. In that context, we hope that the existing private solutions are integrated into that dialogue and discussion. Patricia Bueno: Next question, please. Operator: Next question is from Ignacio Cerezo from UBS. Ignacio Cerezo Olmos: I've got three. The first one is on distribution and capital. If you can confirm that this is the year where the CET1 goes much closer to the 12% threshold or that's going to be a multiyear process? The second one is in Mexico, we're seeing a significant slowdown of remittances in the country. Does that have any impact in terms of deposit growth and asset quality, you think? And then third, if you can give us a few numbers in terms of balance sheet and P&L for the 2 digital banks in Italy and Germany, how have they been evolving basically in 2025? Onur Genç: Very good. I'll do it very quick, if that's okay, Luisa. This Is -- I mean, I mentioned multiple times, but our commitment to go back to the upper end of our capital target is absolute. In that sense, you should expect this year also that we get close to 12% as well, exactly, which implies that extraordinary distributions in the year. In the remittances question, Ignacio. We have also reported this back to authorities also in Mexico because there are channels that are not fully captured in our view in that number. So there's a 5% decline in remittances, but you don't see that in many other geographies where there is a remittance flow between U.S. and Honduras and Guatemala and so on. You don't see that in other countries and only in Mexico because we do think it doesn't fully capture the figure. So the reliability of that number, we have some doubts. But we do think that including those informal channels that are not included in the figure, the number has not come down actually. But in any case, we are quite positive for the Mexican franchise and Mexican economy better than 2025, we do think next year, and the remittances is an important part of this. Even in the official numbers that are being published, you will see a pickup in RV in 2026. The balance sheet and P&L of digital banks. We started reporting this to you as if you can see in the rest of business line item. Rest of business is basically CIB beyond the geographies that we report a geographical account, so U.S., U.K. and so on, all in there, plus the digital banks. You do see that in that page of 24 customer funds, the digital bank deposits is EUR 12.2 billion at the moment. It's basically roughly a bit more than half coming from Italy and the other part coming from Germany. We will continue to report on the balance sheet numbers. As you would see in this page, you will keep seeing the update in the figure. The P&L numbers will be published when we see the maturity of those businesses. At the moment, we are not publishing them separately. Patricia Bueno: Next question, please. Operator: Next question is from Borja Ramirez with Citi. Borja Ramirez Segura: I have two. Firstly, on Mexico, I understand that recent macro indicators show improving GDP growth trends. So I would like to ask if you could provide some details. And then also you're gearing to the appreciation in the Mexican peso versus the euro in recent weeks. I think it's around 4% appreciation. And then my second question would be on Spain NII. If I take your Q4 NII for Spain and I analyze and I add a bit of growth, I get towards the upper end of your guidance for NII. So it seems your guidance is conservative for Spain. And also, I saw that you had a very strong deposit growth in Spain, which -- so it seems you're gaining market share there. So I think it's also thanks to your stronger digital capabilities. So if you could kindly provide some details, please? Onur Genç: Thank you, Borja, for the questions. Maybe Spain question, you take Luisa. On the Mexican side, again, I mentioned the overall positivity that we have for 2026 for Mexico, but you're asking about the depreciation effect. In the plan that we have and in the guidance that we have, we are basically expecting a depreciation of Mexican peso versus euro, depreciation. In the first days of the year, it's the other way around, which is amazing news for us, which is very good news, which is a positive upside potential. But we live with this currency topic day in and day out everywhere. We wouldn't jump into conclusions too quickly. If it turns out to be as such, perfect. But again, our plan basically foresees a depreciation of the Mexican currency versus euro. On the Spain NII number, we have to pick up some speed as well. Maria Gomez Bravo: Yes. I mean, I think on the Spain NII number, as we mentioned before, we expect activity growth to feed into NII with average customer spreads slightly lower than last year, but stable from quarter-on-quarter numbers, and with a positive contribution -- continued positive contribution from the ALCO portfolios because we did increase ALCO portfolios in the end of the quarter by EUR 3 billion, and that should be also supportive to NII dynamics, which are all embedded into our guidance. And with deposit growth, I think it's primarily a strong growth in the fourth quarter, driven by demand deposits. Obviously, seasonal effects go into play in the retail side with Christmas salary bonus and so on and so forth, public sector, but also a strong growth, again, as I mentioned before, in Global Transactional banking with specific clients that have supported that growth in the quarter. And we hope to see that going into next year as well on the back of, again, that growth of almost 1 million clients retail, that also will help support deposit dynamics going forward. Deposit dynamics in the market overall are going to be also quite supportive as well. Patricia Bueno: Next question, please. Operator: The next question is from Britta Schmidt with Autonomous Research. Britta Schmidt: I've got three fairly quick ones. Could you remind us what the cost-income ratio in 2025 would have been excluding the one-offs? And maybe comment on how much of the expected cost growth this year above inflation is, let's say, upfront investment versus ongoing cost drivers? The second one would be on macro assumptions in Turkey. The rate and inflation assumptions do look a little bit of conservative. Maybe you can expand on why that is and perhaps also give us a bit of a sensitivity of the fee income to lower rates? And then thirdly, just on capital, your SREP benefits from the fact that there's no countercyclical or systemic buffer in Mexico primarily. How do you think about the simplification suggestions that the ECB has put forward with changing potentially how they think about releasable buffers? I mean is that a potential risk to your SREP requirements in the long term? Onur Genç: Very good. The cost-to-income number, Luisa? Maria Gomez Bravo: In the group, it would have been 39.3%, excluding the VAT topic from the 38.8% published in 2025. Onur Genç: And the Spain number would be rather than 33%, 34%. Maria Gomez Bravo: 34%. Onur Genç: Yes. On Turkey, I didn't get the full question. Turkey, are we conservative? Patricia Bueno: On the macro assumptions. Onur Genç: On the macro assumptions, we have to see -- maybe we are taking it a bit with a grain of salt, Britta really, because in 2025, if you go back to our first quarter 2025 presentation, we were expecting better macro in Turkey in 2025, but the rates didn't come down as much and inflation didn't come down as much. And you have seen the number in January. The inflation came 4.84%, monthly inflation. So we want to be a bit on the safe side to be fair. But the macro assumption that we put into the guidance is in the footnote of that page. If you believe those macro assumptions would be better, perfect, you will have a better number in Turkey. If you believe it's going to be worse, it's going to be a slightly worse number. The sensitivity is also more or less clear. Every 1% inflation has a EUR 15 million to EUR 20 million impact on net attributable profit. Every 1% interest rate has a EUR 40 million impact on the P&L. And every 1% additional depreciation has, again, another EUR 20 million impact on the number. That sensitivity is relatively clear. There are some overlaps. So you have to -- it's not directly, but not that far away from what I just talked to you about. If you have other macro assumptions, then the number would change. Then the simplification topic, Britta, it will take 2 hours to discuss this really because we spent a lot of time thinking about this. At the moment, I think the proposals are still not clear or not finalized, we wouldn't want to comment on them until we see something more certain and more clear on the page. Patricia Bueno: Next question please. Operator: Next question is from Hugo Cruz with KBW. Hugo Moniz Marques Da Cruz: So two questions. One on Mexico, perhaps you already gave the detail, but if you could remind us what guidance you expect for loan spreads and deposit spreads to evolve during the year? And I think you gave a comment of ALCO should support the NII in Mexico. So what are the assumptions there? It's more like the size of ALCO? Or is it repricing? So if you could give a bit more detail. And then the second question is, you said that buybacks are starting to slow down your tangible book value per share growth. So related to that, I was curious if you think buybacks still have a return above your cost of equity. And basically, I was wondering if it makes sense at some point to stop the buybacks because organic growth or M&A could have a better return. Onur Genç: Very good, Hugo. Mexico question, Luisa. Maria Gomez Bravo: Yes. On Mexico, well, we don't give guidance on specific customer spreads. What we've mentioned is that our guidance for NII is going to be mid- to high single digits. And we mentioned that we expect a compression of average spreads in the market this year versus last year, reflecting the strong decrease in rates in 2025, which is around 300 basis points in the reference rate and also in the slide as well. So that's what we mentioned in Mexico. With regards to the ALCO book in Mexico, what we have primarily been doing is extending durations. We did some exchanges of short-term bonds for long-term bonds in the quarter. And we have extended that duration. The book is right now at EUR 16.8 billion. It's grown around EUR 1.2 billion, pretty stable in the year. And again, the most relevant effect has been that extension of durations with yields at around 8.6%. Onur Genç: Very good. On the share buyback question, Hugo, maybe it's a repetition of some of the things that I always say and I also partially said today. But in terms of principles, very clear, we are value focused. Any capital action that we do, it looks into the return of that capital deployment for our shareholders and compare that also to other alternative uses of that capital. So you mentioned, for example, the negative impact on tangible book value per share number. So because of that, maybe no, that's not how we look into it. We look into it from a value perspective. If we create value for our shareholders, then it's still a good investment of that capital. That is why we always look into the intrinsic value of the share, not the tangible book value per share. So it might have a negative impact on the tangible book value per share, but that's not a criteria for the bank to decide on these. You have to look into the intrinsic value. It is true that given the appreciation of the share price, the attractiveness of share buyback has come down. But in our view, as compared to the intrinsic value, still there's value. That's why the program continues. And then also, I would once again highlight that our commitment to returning the excess capital above 12% is full. So when the time comes, when the capital distribution decisions are due, we will look into the situation, compare that with the intrinsic value, get the feedback of investors in general and decide. Then we have to wrap up, no. We have to leave in 5 minutes, okay? Patricia Bueno: So we have to leave it here. No, we can continue. So next question, please. Operator: Next question is from [indiscernible]. Unknown Analyst: I have just three questions, please, all on Turkey. Can I just clarify one thing? The EUR 40 million you mentioned on the sensitivity to lower rates, is that excluding the hyperinflation adjustment? Or is that including the hyperinflation adjustment? I just want to make sure I understand, so is the impact 4% or 2% in general. Second question, clearly, we're running positive real rates now in the region, and we will get an uptick in NPLs. But I just want to try and understand the relative effect of both in your PBT. So I suppose the NII impact is obviously much more sensitive given the fact the country is delivered -- delevered by 50 points of GDP over the last 5 years and household loans are only 9% of GDP. So I just want to try and understand, like obviously, a lot of it is credit cards, just in terms of the relative effect of both, that real rate policy. And lastly, kind of more a strategic question. Can you chat about what you would need to see to buy out the minorities in Garanti as soon as you can? I mean, surely, it's a perfect opportunity now to buy the balance given an enormous return on invested capital that would be delivered to BBVA shareholders, assuming that the Turkish real rate policy persists, which obviously you do expect in your presentation. And so I just want to try and understand how you're thinking about the buyout of the minorities. Onur Genç: Very good, very quickly because we don't have time. The number that I gave is including the hyperinflation adjustment, meaning it's the perspective of BBVA looking into it from here, consolidated in a hyperinflationary accounting included way. The cost of risk, again, just to pick up some time. [indiscernible], it's in the guidance. We are expecting around 200 basis points of cost of risk in 2026, which is more or less in line with 2025. No more deterioration, not much deterioration in the first quarter. In the first half, what we have seen in the fourth quarter might continue a bit, but vintages have improved. That's why you have the guidance of around 200 basis points. About the minority shares, we are happy with what we have. We have no plans at the moment. We have no plans to change that shareholding structure that we have there. So we will -- again, we continue with what we have. Patricia Bueno: Next question please. Operator: Next question is from [indiscernible] from Jefferies. Unknown Analyst: I just had a follow-up regarding some of your previous comments about the fact that in 2025, you delivered better than what you had budgeted for at H1 '25 in the strategic plan. And I just wanted to make sure that I get that right, and that is a comment regarding profits rather than the return on tangible equity. I think at that point, you were guiding for '25 ROTE to be around 20%. That came in slightly lower. Is the reason behind that slight miss the excess of equity that you've been operating on versus what you were expecting back then? And then also, if '25 profits came in better, '26 is expected to come in better as well. Why shouldn't we see some upside to your previous EUR 48 billion guidance for profits cumulatively? And then if I just can ask a more thematic one as well. Just a few days ago, you joined the banking consortium to develop an euro-backed stablecoin. Could you please tell us what are your intentions and ambitions there and how you think about tokenized money more broadly in the coming years? Onur Genç: Very good. Thank you, [indiscernible]. Again, we are too late, so I'm going to go very quickly, apologies. And if you want to follow up with us, we are always open to the follow-up. But on the 2025 plan versus reality, as you exactly said, we delivered above plan in profits, but the average equity in the denominator of the return on tangible equity has been relatively high because we only started the share buyback programs because we have our commitment to go back to 12% all the time when we have excess. We started those share buybacks later in the year due to the Sabadell transaction and the fact that we weren't doing share buybacks throughout that process. But you're right, it was a beat on the profits. Then 2026, given what you see, shouldn't we update EUR 48 billion, [indiscernible], we are too early in the game. We are only in the first year. I do think EUR 48 billion is a very good number, and we are on track to deliver that figure. Then the stablecoin consortium. We do think it's a technological topic that needs to be watched very closely. There are certain use cases in our view that would benefit from those developments. And we are an innovation-focused bank. We always led the drive in digitalization now in AI and stablecoins is part of that dynamic as well. That's why we wanted to be part of a consortium to work through this and to basically stay up to date on all the developments around that. And then the final question we can take. Patricia Bueno: This is the final question. Next question, please. Operator: Next question is from Fernando Gil de Santivanes from Intesa Sanpaolo. Fernando Gil de Santivañes d´Ornellas: Very quick one. What has changed over the FX hedges in the Mexican peso? Because I'm seeing higher volatility expected in this presentation versus the previous one? Onur Genç: The RWA is -- very quickly Fernando. The RWAs has come down because, as you know, again, we have done this regulatory -- you have seen it in the capital chart. We went to standard in some portfolios, and we went to foundation in some other portfolios, which has led us into the -- and then the equity, the sensitivity. Patricia Bueno: Yes, on hedges. Sensitivity to currency as we have reduced the capital, the sensitivity to hedges. Onur Genç: Very good. So you have the answer from Patricia. And if you want to follow up with her, she is always available for all of you. Apologies for this because we have an immediate program right after this in the same room with the press. Thank you so much for the questions. For any follow-ups, the team is happy to help you out. Patricia Bueno: Absolutely. We are at your disposal for any further questions or clarifications. Thank you very much. Onur Genç: Bye-bye. Maria Gomez Bravo: Thank you.
Unknown Executive: [Interpreted] It's now time to begin the Sony Group Corporation Earnings Announcement. I am [ Ishii ] from the Corporate Communications Department, and I will be your moderator today. Today, Lin Tao, Corporate Executive Officer and CFO, will present the FY 2025 third quarter results and full year forecast, followed by a Q&A session. The entire session is expected to last 65 minutes. To ensure our international audience can hear the presentation in Ms. Tao's own words, the English language earnings presentation will be delivered via a prerecorded video. Lin Tao: Today, I will explain the content shown here. Sales of continuing operations in FY '25 Q3 increased 1% compared to the same quarter of the previous fiscal year to JPY 3,713.7 billion, and operating income increased 22% to JPY 515 billion. Both were record highs for the third quarter. Net income increased 11% to JPY 377.3 billion. The financial results by segment are shown here. We upwardly revised our full year sales forecast from the previous forecast 3% to JPY 12,300 billion, operating income 8% to JPY 1,540 billion and net income 8% to JPY 1,130 billion. We increased our forecast for operating cash flow 9% to JPY 1,630 billion. The forecast for each segment is shown here. Now I will turn to an overview of each business. First is the G&NS segment. FY '25 Q3 sales decreased 4% year-on-year, primarily due to lower hardware unit sales. Operating income increased 19% year-on-year, primarily due to the positive impact of foreign exchange rates and the impact of increased sales and network services and first-party software, setting a record for the third quarter in this segment. We upwardly revised our FY '25 sales forecast 4% from the previous forecast to JPY 4,630 billion and our operating income forecast 2% to JPY 510 billion. User engagement trended well during the quarter with the number of monthly active users across all of the PlayStation in December increasing 2% compared to the last December to a record high of 132 million accounts, and total play time for the quarter increased 0.4% year-on-year. Although conditions in the console hardware market during year-end selling season were more challenging than expected, we were able to steadily expand our PS5 installed base in line with our original plan and exceeded 92 million units on a cumulative selling basis. While PS5 hardware unit sales have decreased moderately in latter half of the console cycle, software revenue from the PlayStation Store reached a record high during the quarter, primarily driven by the contribution of major third-party franchise titles and new hit releases. PlayStation Plus significantly contributed to the results of the quarter as the shift to higher tiers of the service continued. As for securing a supply of memory, we are already in a position to secure the minimum quantity necessary to manage the year-end selling season of next fiscal year. Going forward, we intend to further negotiate with various suppliers to secure enough supply to meet the demand of our customers. Given the stage of our console cycle, our hardware sales strategy can be adjusted flexibly, and we intend to minimize the impact of the increased memory cost on this segment going forward by prioritizing monetization of the installed base to date and striving to further expand our software and network service revenue. In the Studio business, Ghost of Yotei, a tentpole title we released in October, exceeded the sales of the previous title in the same period of time and significantly contributed to the financial results of the quarter. Our established live service titles like Helldivers 2 and MLB The Show also contributed stable recurring revenue. We expect that Marathon, which is scheduled to be released on March 5, will be enjoyed by many users, thanks to Bungie having strengthened the gaming experience. Next fiscal year, we plan to release new titles such as Saros and Marvel's Wolverine, and we intend to enhance our effort to increase the revenue of our Studio business. Next is Music segment, primarily due to an increase in live events, sales and streaming revenue in Recorded Music, FY '25 Q3 sales increased 13% year-on-year. Operating income increased 9%, reaching a record high for the third quarter, excluding onetime items. On a U.S. dollar basis, streaming revenues for the quarter increased 5% year-on-year in Recorded Music and 13% in Music Publishing. We upwardly revised our sales forecast 4% from the previous forecast to JPY 2,050 billion and our operating income forecast 16% to JPY 445 billion. We incorporated a remeasurement gain of approximately JPY 45 billion from the acquisition of an additional equity interest in Peanuts Holdings and the forecast for operating income. SMG artists delivered hits during the quarter and the sales of SMG continued to increase by double digits year-on-year, like in the previous quarter. Rosalia new album Lux reached #1 globally in its first week on Spotify and Peso Pluma's collaborative album Dinastia as one of the most streamed on Spotify. These global successes and global hit artists are the result of SMG's strategic focus on discovering local artists and supporting their musical endeavors. Many SMG artists and songwriters received accolades and nominations at the 68th Annual Grammy Awards held in the U.S. earlier this month, with Bad Bunny winning Album of the Year for Debi Tirar Mas Fotos as Beyonce did last year. In Visual Media and Platform, the theatrical release of Demon Slayer: Kimetsu No Yaiba The Movie: Infinity Castle, which has exceeded JPY 100 billion in global box office revenue, continued to contribute and the mobile game Fate/Grand Order, which celebrated its 10th anniversary in July 2025, contributed more to our results than expected. Next is the Picture segment. FY '25 Q3 sales decreased 11% year-on-year and operating income decreased 9%, primarily because the same quarter of the previous fiscal year benefited from the contribution of the blockbuster film, Venom: The Last Dance and licensing revenue from other theatrical released films. Our forecast is unchanged from the previous forecast. In January, SPE signed a new Pay-1 licensing agreement with Netflix. Through this agreement, Netflix will stream on a global basis SPE's future theatrical films and the Pay-1 window, the initial window within long TV licensing period that follows the theatrical and home entertainment periods. This agreement is an industry-first global licensing deal that will enable SPE to secure an even more stable revenue base during the period of the deal. Furthermore, the signing of this agreement is proof of SPE's excellent production capabilities and the power of its appealing IP. As an independent production company, we will continue to pursue other licensing opportunities with a wide range of distribution partners beyond the Pay-1 window. Now I will explain our additional investment in Peanuts IP, which we announced in December as an initiative that spans our music and picture segments. Through this transaction, Sony will gain ownership of 80% of Peanuts worldwide, which owns the rights and manages the business of Peanuts IP, one of the world's leading evergreen IPs. While closely collaborating with the family of Mr. Schulz, the creator of Peanuts, which owns the remaining 20%, we aim to further grow the scale of the business and further increase the value of the brand over the long term by leveraging the strength of the Sony Group. Specifically, we aim to enhance SMEJ's music, video and event business by leveraging Peanuts IP and collaborating with SMEJ's artists and content. Furthermore, by utilizing SPE's production capabilities and distribution network, we aim to make Peanuts IP more accessible to a wider audience and share its charm with people all over the world. The transaction is expected to close during the current fiscal year, subject to certain closing conditions, including regulatory approvals by the relevant authorities. Next is the ET&S segment. FY '25 Q3 sales decreased 7% year-on-year and operating income decreased 23% year-on-year, primarily due to the impact of lower sales, partially offset by an improvement in operating expenses. Our full year forecast remains unchanged from the previous forecast. Despite a continued decline in sales in China due to reduced government subsidies and weakness in the overall market during the shopping season for Singles Day, demand in the global interchangeable lens camera market during the quarter remained strong year-on-year, mainly in Asia. The Alpha 7 Mark 5 released in December has been selling well as a new product for the volume zone of the full-frame mirrorless single-lens reflex camera market, and we expect it will continue to contribute to sales in the fourth quarter ending March 31, 2026. Regarding the impact of the situation in the market for memory, we are almost in a position to secure the quantity we need through the year-end selling season for next fiscal year. We will continue to monitor the situation while working to minimize the impact on profitability. On January 20, Sony signed an MOU with TCL aimed at forming a strategic partnership in the home entertainment field. In the MOU, both companies agreed that a joint venture between the 2 companies would operate Sony's home entertainment business, and we are negotiating the details with the intention of executing a definitive agreement by the end of March. By leveraging Sony's high definition and high fidelity technology, brand strength and operational management capability while utilizing TCL's advanced display technology, cost competitiveness and vertical supply chain strength, the joint venture aims to further strengthen the competitiveness of this business and realize sustainable growth. Last is the I&SS segment. FY '25 Q3 sales increased 21% year-on-year and operating income increased 35%, both of which were record highs for the third quarter for the segment. These are primarily due to an increase in sales volume and unit prices of mobile image sensors. We upwardly revised our sales forecast 5% to JPY 2,080 billion and operating income forecast 13% to JPY 350 billion, primarily driven by the increase in sales volume and sensors for mobile devices and the impact of foreign exchange rates. Mobile image sensor sales during the quarter increased significantly year-on-year due to a gradual recovery in the smartphone market, strong shipments for new products from our major customer and higher die-sized sensor. Because recent orders are stable, we believe that the supply chain concerns we mentioned at the previous earnings announcement have receded, and we have upwardly revised our annual shipment forecast for mobile image sensors. Going forward, we think that the impact of the situation in the memory market will become more apparent, mainly in the form of fewer smartphone made primarily for the low-end market. Since Sony's image sensors are primarily for the high-end market, at this time, we think the impact will be relatively small. We will continue to monitor the situation while keeping in close contact with our customers. In addition, we are continuing to take action to address low-margin business, as we mentioned at the previous earnings announcement. As a part of that, we have incorporated additional expenses for resource and asset optimization of the relevant business in our forecast for FY '25 Q4. We will continue to focus on improving our business portfolio and raise our profitability. To summarize, the G&NS, Music and I&SS segment achieved record high operating income and are driving the profit growth of the Sony Group overall this quarter. We believe that the structural profitability of the group is further improving. Given the continued uncertain business environment, we plan to carefully manage our business and consistently produce results as we approach the fiscal year-end. We intend to take actions this fiscal year to get off to a good start next fiscal year. As for shareholders' returns, today, we increased the maximum of our share repurchase facility established in November 2025 from JPY 100 billion to JPY 150 billion. This concludes my remarks. Unknown Executive: [Interpreted] That was Ms. Tao. Following the presentation, we will have a Q&A session for the media at 4:20 p.m. and for investors and analysts at 4:45 p.m. Each Q&A session is scheduled to last approximately 20 minutes. [Operator Instructions] Please wait. The session will resume shortly. Thank you for waiting. We'll start the Q&A session. First, we will introduce you today's speakers. Chief Financial Officer, CFO, Corporate Executive Officer, Lin Tao; Senior Vice President in charge of Accounting, Hirotoshi Korenaga; Senior Vice President in charge of Corporate Planning and Control, Naoya Horii. We'll take questions from the media. [Operator Instructions] The first question is from Toyo Keizai, Umegaki. Hayato Umegaki: [Interpreted] Yes. I'm Umegaki from Toyo Keizai. Can you hear me? Unknown Executive: [Interpreted] Yes. Hayato Umegaki: [Interpreted] All right. So I'd like to ask 2 questions. The first question is about Marathon, and it's going to be released on March 5, I understand. And it has been delayed. And what kind of considerations did you have until you decided to have this? And well, in the past, there were cases that has been stop short, but what kind of a learning do you have? And for the live service game and what is the strategic significance of having that? And this kind of a platform, I think, but to have quite a number of platforms, what is the significance for the group to have such platforms? Unknown Executive: [Interpreted] Yes. Thank you for your question. And as for the Marathon, well, it has the user tests and then from the users has feedback for Marathon, and in the game, so what was a good point and not good point and such kind of a feedback we had taken into consideration and we had modified. And this time around, so after the modification, we are very confident to release it on March 5. And live service, the games significance you asked, but here, what is most important for us is that the live service is a recurring revenue. And recurring revenue means that the hit driven. And if it comes a hit, then for a year, it can bring revenue. If not become a hit, then no revenue. So it's such not the volatility high studio, but it's going to give us a constant amount of revenue every year. So that's the merit of having a hit live service. But -- well, it's not that we want to have -- so to many of them, it's not what we want to have. So the idea is that so-called AAA and live service game would become integrated into a portfolio management style. That's it for me. Unknown Attendee: [Interpreted] And the second question is about your stock price. And you had announced your earnings results, and it was a JPY 3 plus, but it's almost flat. So that the market valuation is quite severe, I think. And the stock performance is not good because the memory had risen. But it's rather Sony Group, it seems that there has been a harsher view on the Sony Group. So what do you see as a CEO? And you have announced the share buyback, but the market capitalization, in order to raise the market capitalization, if you have any continuous way to keep that going up? Unknown Executive: [Interpreted] All right. Thank you for your question. And about the stock price, so we had several information revisions, but it's not performing well. So I think you have various thoughts about that. But one thing is that memory, there are concerns for the memory supply. And as an industry, yes, that is one concern. And the other is the entertainment stock, generally speaking, is because the capital AI-related would go to the AI related. So I think that's why. And then for us, what we can do is that as a business, we will look at the fundamentals to make it even stronger. And the profitability, we would improve so that the portfolio can be optimized. And for us, Sony, long-term strategy, we believe in that so that we would implement that, so that the business performance can be improved and such measures would be communicated, messaged to the stock market so that the stock market would value our approach, and we are going to put our efforts into it. That's all for me. Unknown Attendee: [Interpreted] The AI... Unknown Executive: [Interpreted] Excuse me, but that's the end of your 2 questions. Next question [indiscernible] from Nikkei, please. Unknown Attendee: [Interpreted] I also have 2 questions. First, about ET&S structural reform. Today, you have mentioned that the TV business, you're going to move to a joint venture with TCL. And you talked about synergies. So separating the TV business, what's the intent of that? And Home Entertainment, what's the scope? I'm sure that the details are being still discussed. So to the extent possible, can you describe the range that this covers? And also, smartphone also positioned as a structural reform business. And you have hit to explain that they will be continued. Has there not been any change to that status? Is an option to collaborate with external source? Unknown Executive: [Interpreted] Thank you. For the smartphone, we don't have such plans. So with TCL, we have a strategic partnership for Home Entertainment. So this is about the review of portfolio, and we are constantly doing that to deal with the changing business environment. So optimizing that is the management mission. So Sony has assets that we have accumulated over many years, and we're combining that with the strength of TCL. And so Home Entertainment business, including TV, can grow more through this partnership. That is the background to this partnership. And what the scope of what business to be covered, Horii will explain. Naoya Horii: [Interpreted] Thank you for the question. So this strategic partnership, the scope of that, as you point out, it's TV. and home audio, those are the areas that we assume will be included. As you point out, the details are still being discussed. So at the appropriate timing, we would like to communicate to you. At this point of time, TV and home audio will be included in the scope. Unknown Attendee: [Interpreted] Thank you. Second question about the game business. So this was mentioned in the previous question. So with the surging memory price, so you have secured the supply until the next year-end campaign. So you maybe have secured supply, but will there be impact of the rising prices? For example, PS5, any price increases or the successor, the timing that it will be introduced? And what will be the impact to the next fiscal year? Can you give us your assumptions, please? Unknown Executive: [Interpreted] So PS5 next fiscal year and onwards, what would be the impact there. So for the business results for next fiscal year, we would like to inform you at the appropriate time. But our thinking is what we'd like to share with you. That is PS5 since launch, it's in the sixth year. So 92 million unit installed base on a sell-in basis, we already have established. So we have been able to develop a very robust ecosystem. And this fiscal year as well, the majority of the sales is software content and network service. And these areas, next fiscal year onwards, are going to continue to make significant contributions, and that will be the part that will not be impacted by the memory price. Now as for the new PlayStation hardware sales due to cost increases, there will be some impact. However, it's in the latter part of the life cycle. So that means that in terms of hardware sales, it's been expected all along that it will gradually decline or slow down. So there are several or a wide range of choices or options that we can take. So that's our basic thinking there. Unknown Executive: [Interpreted] Moving on to the next question. So I'm very sorry. Please ask both of your questions at the beginning. [ Yomiuri Newspaper, Nakayama-san ], please. Unknown Attendee: [Interpreted] So this is Nakayama from Yomiuri. Do you hear me? So I have two questions. Number one, about music. The streaming revenue growth rate, this -- so do you think the music streaming service will continue to do well? We would like to hear your prospects. And about I&SS, the image sensor for mobile, do you have any background on the increase in the unit price of image sensors for mobile? Unknown Executive: [Interpreted] About -- I will answer the question on the music business first. The music market, we see will continue to grow in the mid- to long term. Of course, the extent of growth will differ due to the timing, but we believe there will be a constant growth of -- to about 5 to middle to latter single digit. And there are 2 drivers to this. First is DSP that is a platform that we offer service on. The ARPU or ARPU is going up, and also the number of users going up. So the average revenue per user and the number of users going up is driving the growth. The second point about I&SS semiconductor, Horii will answer. Naoya Horii: [Interpreted] The sensor -- so this is the background of increase in the selling price of mobile sensors. As you know, in smartphone products, there is -- the camera feature is a main reason for increase in price. So the smartphone manufacturers are working to increase the camera resolutions as well as the camera features. The image sensors that we provide to the manufacturers, we want to increase the size as well as increase the resolution and add new features. So large-scale image sensors as well as increased performance is leading to higher price, and that is really contributing to our results this year. That's all. Thank you. Unknown Executive: [Interpreted] All right. So we take another question. [indiscernible] [ Yamamoto-san ], please. Unknown Attendee: [Interpreted] Yes. My name is Yamamoto. So let me ask questions. So about the structural reform and TCL, so we have the strategic alliance, but the display to have the higher resolution. And Home Entertainment, I think though you have the high resolution, I think it is contributing to the technology and also the common kind of R&D. Do you separate the 2, the technology and the common R&D base in order to have the next phase of development? So about the strategic alliance, would you tell us your direction or your strategy? Unknown Executive: [Interpreted] Yes. Thank you for the question. So first, so we have the basic agreement. And for the technology and for what kind of assets can we have through the joint venture to have the definitive contract, so we are in discussion in order to aim for the final agreement. So if it is confirmed, then we would tell you when it is confirmed. Unknown Executive: [Interpreted] Running short on time. So the next one will be the last question. Shino-san of Asahi Shimbun, please. Shino-san, do you hear? Well, then, we'll move on to the next person from [ Mainichi Shimbun, Shino-san ], please. Unknown Attendee: [Interpreted] This is Shino from Mainichi Shimbun. Earlier, you talked about the PlayStation 5 life cycle that you're entering the latter half of the life cycle. But last November, you talked about the Japanese dedicated model for PlayStation, a relatively cheap, lower price model for the Japanese market. So what's the reason for introducing this kind of model in the latter part of the life cycle? And what will be the impact to the financial results? Has there been impact from introducing this new model? Unknown Executive: [Interpreted] So the Japan model introduction, well, that was to enhance the presence of PlayStation in the Japanese market. It's one part of that effort. Compared with the global model, it was more reasonably priced. And so publishers and users appreciated that more affordable price. And after launch, in terms of sell-through, it has created an uplift. Now this was not a special model just for that seasonal effort. But for the mid- to long term for the Japanese market, we think that this had a strategic significance. So we want many users to buy this so that publishers will make great games. So we think in that regard, this will have a mid- to long-term impact. Unknown Executive: [Interpreted] Now it's time to conclude the Q&A session for the media. So the Q&A session for investors and analysts will start from 4:45. Thank you for waiting. We will now begin the Q&A session for investors and analysts. I am [ Kondo ] from the IR Department, and I will be your moderator. The speakers will be the same 3 individuals as in the media session. We will now start the Q&A session. [Operator Instructions] JPMorgan, Ayada-san, please. Junya Ayada: [Interpreted] I'm Ayada from JPMorgan. I have 2 questions. The first question is about gaming. The play time and so what do you think about the status of play time and spending in the holiday season? Active users have gone up 2%, but play time is flat and software network revenue is going up. But thinking about the price up, I think in terms of value or volume, it's more or less flat. So it seems like it's dwindling a little bit. Is it because of the economic cycle, business cycle or console cycle? Or is this impact from the title lineup? Or are people using time for things other than game. So we would like your take on that. Your second question, so this might be an abstract question. The impact of AI to the entertainment industry, how should we see that? For music production and game development, already 90% of creators use AI, so -- based on the data. So by the creators using AI, if there's more content, that would be a very positive effect on platforms such as PlayStation and Crunchyroll or if users use more of their casual -- more time in casual content using AI, would that be negative? So I think the repercussions will be different, whether it's music, anime games or video production. So please share your view. Unknown Executive: [Interpreted] Thank you for the question. About the engagement of games in the holiday season, I think this is transitioning quite well. Of course, the play time, I think there are many factors influencing the play time. But I think the biggest factor, I think, is whether there are hit games. Up until now, the games, maybe the large-scale games, which everyone has been playing up until now, the engagement has gone down. And instead, the players are playing new games. As a platform, we see a momentum. But depending on the game title, how that is played and the play time will be different. Towards the next fiscal year, the large-scale titles will be launched. So I'm very optimistic about this. And about how we see AI, as you say, music, game and animation, how AI is used or the positioning of AI is different. There is high affinity between AI and game and animation. In the long term, I think it's a very positive thing that there will be more content. But there would be impact in many areas, especially how you develop and produce. So this process from idea to game, I think, would be changing. But it's still early in the day to say what the impact would be and what would be the impact on the cost. So at this point of time, it's difficult to really say. But what we can say right now is to use a lot of AI. So we promote using AI, especially in game production. And if that disrupts the existing process, we should be the one disrupting rather than the one being disrupted. That's all. Thank you. Unknown Executive: [Interpreted] Thank you. All right. So next question from BofA Securities, Mr. Hirakawa. Mikio Hirakawa: [Interpreted] Yes. BofA Securities. My name is Hirakawa. So first question is -- well, it's a rather abstract question, but this is the second year of the midterm business plan, but the operating profit growth is like 10% average as you go. And then this year, it has progressed very smoothly. And the concern from the market is that the next year, the profit level because of the memory or the untransparent price movements, then it might not be so smooth. Then what I want to ask you here is now in the midterm business plan, so what kind of certainty do you have? And what kind of risk factors do you have in achieving or what kind of upside do you have? So if you can allude to that is the first question. And the second question is about what you have said. So image sensor, I&SS, so what I have heard is the high end is so ASP rise and the volume expansion, you can have both. So that, I think, was the main thing that you wanted to message to us. Unknown Executive: [Interpreted] Okay. Thank you for the question. And about the midterm plan, so the second year and the year are going on quite smoothly. Yes, that is the feeling we have. About the memory price surge, and we can understand the concern from the market about this. And this earnings results for the next year, I think we can go into this more deeper. But basically speaking, we would have the momentum very strong here and the memory cost rise. So we have to manage that, and that's the kind of a direction we have and the profitability, of course, we have in mind. And for the attainment of the midterm plan, how certain we are or how confident we are? So it depends on each business segment, but this is a game and Sony Pictures. So next year's software lineup is quite good. So for those segments, I think we have quite a positive kind of outlook. And for the detail, I don't think I can go into here. So when the earnings results for the 2025 fiscal year, I can maybe tell you more about it. And the ESP and the semiconductor and the volume, okay. For this question, I would like to ask Horii-san to answer. Naoya Horii: [Interpreted] All right. Thank you for the question. So in the speech, we have said that this year, what we have seen this year, okay, and what we are seeing SP and the volume also, we have momentum. So for next year, it's like a launch pad, let's say, that it's in a good position. So I think we can say that we are in a positive position. And having said that, in the semiconductor business, there's other businesses like game or [indiscernible] and -- so memory market condition effect. And let's say, the selection or the options range is different is what I feel. So the final product manufacturers, well, so what kind of measures would they be taking because of this memory market condition? And we would like to have a close contact communication with the customers so that we can have a good understanding of each of the customers we have, and that's procedure we take. But I think we are rather in a passive mode concerning this because of this kind of a characteristic business. And for next year, I think we have a good launch pad in place. And that's exactly what you have pointed out. Unknown Executive: [Interpreted] Next, from Mizuho Securities, Nakane-san. please. Yasuo Nakane: [Interpreted] Two questions. First, so expanding the share buyback. So before you used it up, the facility is being expanded. I think this is the first time you're doing that. You have higher cash flow. Stock price is low. I think those are the backgrounds. So talk about what discussions you had in the Board meeting, and what's the message of expanding this facility in addition to what's in the release? That's the first question. Second, about the Home Entertainment separation. So from development, design, manufacture, that part, I think it's easy to separate cleanly. But for sales, you have the common platform and domestic and overseas, I think it's still quite a huge size. I understand that the details are still to be worked out. But for the next fiscal year in terms of sales, how is it going to be handled? And on the ET&S side, inclusive of structural reform, is there a possibility of some adjustments to be made? Give us some clues, please. Unknown Executive: [Interpreted] Thank you for the questions. First, about increasing the facility to repurchase shares. So as you say, the business results and the cash flow is better than anticipated. So we want to increase our returns based on that. But in terms of the window, that is up until middle of May. So JPY 50 billion increase is what we've decided on this time. So the company's momentum of earnings and the fundamentals, we are confident about that. That is the message that we would like you to take from this increase in the facility. About the ET&S, for next fiscal year, basically, ET&S will continue to operate. It will have its budget in the same way, and we will communicate in that way. For the joint venture, it's to start from April of fiscal '27. So in terms of the additional structural reform for the portfolio, it's always dynamic. So looking at the business situation, it's our job to optimize that. It's one of our main missions. As of now, nothing has been decided yet. That's all. Unknown Executive: [Interpreted] SMBC Nikko Securities, Katsura-san, please. Ryosuke Katsura: [Interpreted] So I'm Katsura from SMBC Nikko Securities. I have 2 questions on game and semiconductor. About the gaming question, this quarter, how we see the profit. The third quarter, so the -- compared to the real profitability of second and third quarter -- first and second quarters, I think the third quarter profit has gone down. This is about the domestic version of hardware and you did also promotion activity. And also the procurement side, there has been -- maybe you purchased memory in order to secure the inventory. So the landing of the third quarter and also the full year, so the postponement of first-party title might be a negative factor. So these numbers seemed a little bit low. So maybe you have included some of the countermeasures towards the next term. And the second point is I&SS. You said you will be taking measures in the fourth quarter. So if you can say, we would like you to share us the scale of this measure. So my question is about your plan towards the next year. Unknown Executive: [Interpreted] Thank you for the question. About the third quarter profitability for gaming going down compared to the first and second quarter. So there was -- the main reason was the end of the year sale promotion of the hardware. In addition to the Japan domestic model, we did global promotion. and that led to many users purchasing the console. And that -- due to that, the profit went down in the third quarter, but this will contribute to the mid- to long-term lifetime value. And towards the end of the fiscal year, as of now, the inventory, we do not have any plans to do anything extraordinary on the inventory. I&SS, we have factored in a part of that into the fourth quarter. Horii will respond. Naoya Horii: [Interpreted] So as we have explained, the business balance within I&SS segment and some of the assets depreciation amortization done in acceleration. So this type of treatment is currently being processed. And about the scale, about JPY 20 billion, so this onetime cost of JPY 20 billion will be factored into the fourth quarter. Unknown Executive: [Interpreted] All right. So we have not much remaining time. So the next question is going to be the last. [Operator Instructions] [ Munakata from Goldman Sachs ]. Unknown Analyst: [Interpreted] Yes. My name is Munakata from Goldman Sachs. I think you have been saying about the generative AI. I'd like to ask a question about that. And so last week, so Project Genie was announced. And basically speaking, so generative AI, I think there's opportunity and also a threat. So in the stock market, so the generative AI, so the creation might be done by that so that a very interesting game can be made in an instance. So that I think a threat is more strong here. But in the game creation, so there has been some comments that to have it in a positive manner. But with the generative AI becoming -- developing, so what is the strength of your game studios and game development? What is your strength in that? So I appreciate you to ask -- to answer this question. Unknown Executive: [Interpreted] Well, but the generative AI, so in very various ways, there are trials going on and now is in a test stage, I think. And there are very interesting things that's happening. But before -- I think it's before the commercialization. And as for game, it's not just game, but -- so AI, I think it can be in a toolbox that there's a very strong tool in the toolbox. That's kind of a feeling we have against AI. So tool itself, it's not going to be a business. So I think we need the sensitivity of artists and the tool to integrate in order to have another business chance or to have entertainment. So that's the kind of understanding we have. In that sense, AI, I don't think it's a threat. But -- so that the creators can use AI fast way. And then we are going to help them make it the commercial product. So I think that's a Sony's mission. Thank you. Unknown Executive: [Interpreted] With that, we would like to conclude the earnings announcement of Sony Group. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Greetings, and welcome to the Kulicke and Soffa First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Joe Elgindy, Senior Director, Investor Relations. Thank you, sir. You may begin. Joseph Elgindy: Thank you. Welcome, everyone, to Kulicke and Soffa's Fiscal First Quarter 2026 Conference Call. Lester Wong, Interim Chief Executive Officer and Chief Financial Officer, also joins me on today's call. Non-GAAP financial measures referenced today should be considered in addition to, not as a substitute for or in isolation from our GAAP financial information. GAAP to non-GAAP reconciliation tables are included within our latest earnings release and earnings presentation, both are available at investor.kns.com along with prepared remarks for today's call. In addition to historical statements, today's discussion contains forward-looking statements regarding our future performance and outlook. These statements are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties that may cause actual results to differ materially. For a complete discussion of the risks associated with Kulicke and Soffa that could affect our future results and financial condition, please refer to our latest Form 10-K and upcoming SEC filings for additional information. With that said, I will now turn the call over to Lester Wong for the business market and financial overview. Please go ahead, Lester. Lester Wong: Thank you, Joe. Good morning, everyone. We are pleased to report that demand is improving at a faster and stronger pace than previously expected. Customer sentiment has strengthened meaningfully, and utilization across our most significant markets and regions remain favorable. While residual headwinds in the automotive market may persist near term, general semiconductor and memory markets continue to demonstrate robust demand, supported by broadening technology improvements and renewed production activity across multiple regions. Turning to recent business results. We continue to see improving order activity with additional visibility through fiscal 2026, which is supported by favorable utilization trends in general semiconductor and memory end markets. Separately, demand for our portfolio of advanced packaging solutions, including our Fluxless thermocompression bonding tools remains robust, and we continue to anticipate a strong growth year for our advanced packaging opportunities. For the first fiscal quarter, we generated revenue and earnings above expectations and remain focused on ramping production to support strong customer demand, in addition to driving parallel technological transitions within advanced packaging, advanced dispense and power semiconductor. Dynamics within the high-volume general semiconductor and memory end markets remain favorable, while we also experienced a slight sequential revenue improvement within the automotive and industrial end markets. In the first fiscal quarter, general semiconductor revenue increased by 27% sequentially and over 90% from the same period last year, driven by both technology and capacity needs of our customers. Across our portfolio of solutions, all reportable segments recognized sequential increases within general semiconductor this past quarter. We estimate utilization levels remain over 80% for this key end market. Turning to memory. After a 60% increase last quarter, demand sequentially declined due to product and customer mix. While the concentration of memory customers can create demand variability quarter-to-quarter, we have observed ball bonding utilization rates, which exceed 85% for the memory market, up from the mid-70% range last year. This indicates a healthy capacity environment for our NAND assembly solutions. While AI-related workloads are driving capacity tightness across the memory market, they are also driving new packaging solutions for cost-effective stacked DRAM, in addition to emerging requirements for high-bandwidth flash or HBF. I will provide a brief update to our memory opportunities shortly. Within automotive and industrial, we experienced a 15% sequential revenue improvement in the December quarter, although continue to anticipate industry headwinds to linger through fiscal 2026. Despite these near-term headwinds, we remain positive on long-term automotive and industrial trends, anticipate semiconductor content per vehicle supported by ADAS requirement to double over the coming 10 years. We also remain well positioned to continue benefiting from gradual long-term share growth in battery and plug-in hybrids as we deliver new power semiconductor technology and capacity requirements. Lastly, aftermarket products and services increased by 14% from the same period last year, reflecting increased production activity and improved utilization across our high-volume installed base. We are optimistic about fiscal 2026 based on current demand levels and utilization level improvements and remain focused on ramping production to meet high-volume demand. Also, our traction within advanced packaging, advanced dispense and across power semiconductor opportunities continue to be encouraging. Within advanced packaging, transition of both vertical wire and thermocompression remain on track. We continue to anticipate that the advanced solutions segment will strongly grow this year as advanced TCB capacity is in demand throughout our customer base. Over the years, we have created a competitive portfolio of TCB solutions supporting a wide range of leading-edge logic applications, and are pleased to also extend our footprint into high-bandwidth memory, which is extremely important for AI as HBMs provide fast, high-performance memory, which AI accelerators need to efficiently process massive amount of data. In this regard, we are pleased to have shipped our first HBM system to a large memory customer during the December quarter. We continue to anticipate Fluxless thermocompression remain a strong alternative to hybrid bonding for the next-generation HBM needs. Our other DRAM opportunity stems from vertical wire, which provides a high potential alternative for cost-effective bandwidth through die stacking. We have already seen positive customer feedback on a vertical wire solutions and continue to anticipate strong sequential growth in both TCB and vertical wire over the coming years. Advanced dispense also continue to progress as planned. We introduced our latest ACELON dispense system in November at Productronica. Feedback from customers has been positive, with multiple customers engaged. We continue to prepare several systems to support this initial customer interest. Last, within power semiconductor, we have market-leading solutions and continue to expand our portfolio. In support of growing power efficiency requirements across automotive, mobility and data centers, power semiconductor applications are rapidly evolving. This transition is demanding more efficient materials, more complex assembly techniques and more capable equipment solutions, which we are well positioned to support. Over the past 3 years, we have navigated a challenging demand period for our core products while we invest in several areas to expand our market access. As we now move beyond this period of soft core market demand, we are optimistic and remain well positioned to capitalize on a wide set of opportunities across our served markets. With that said, I will now provide a brief financial update. My remarks today will refer to GAAP results, unless noted. We delivered revenue above guidance, continue to execute on close customer engagements and maintain an ongoing focus on cost control. Gross margins came in at 49.6%, and we delivered $0.32 of GAAP earnings and $0.44 of non-GAAP earnings. Gross margins improved sequentially due to customer and product mix as well as revenue recognized from systems which were previously expensed. This was largely related to prior impairment charges as well as previously expensed R&D systems. Total operating expense came in at $81.1 million on a GAAP basis and $74.2 million on a non-GAAP basis. We continue to remain focused on operational efficiency, while we support a growing set of opportunities. Tax expense came in at $5.7 million, and we continue to anticipate our effective tax rate will remain above 20% over the near term. Over the coming quarters, general semiconductor and memory end markets are expected to continue driving strong demand for our solutions. For the March quarter, we expect revenue to increase by 15% sequentially to $230 million with gross margin of 49%. Non-GAAP operating expenses are expected to be $73 million, with GAAP earnings per share targeted to be $0.53, and our non-GAAP earnings per share of $0.67. Looking ahead, we continue to focus on ramping production as we continue to execute multiple growth strategies across key markets. As mentioned last quarter, this is an interesting time at the company. We're either a dominant incumbent leader or are aggressively taking share in all key markets we serve. We look forward to ongoing execution and progress in advanced packaging, advanced dispense and power semiconductor opportunities as we prepare for broadening core market recovery. In closing, we remain focused on executing our strategic priorities, are confident in our capabilities and technology leadership and look forward to demonstrating our operational leverage over the coming quarters. This concludes our prepared comments. Operator, please open the call for questions. Operator: [Operator Instructions] Our first question comes from Charles Shi with Needham & Company. Yu Shi: Lester, maybe the first one, it looks like you are indeed entering an up cycle here based on your results, based on your guidance for next quarter. Can you help us characterize what do you see for the remainder of the fiscal or calendar year, whichever you feel more comfortable at this point? What do you see for the remainder of the year in terms of overall demand, overall top line growth? Lester Wong: Charles, thanks for the question. So I think we're getting better visibility into the remainder of our FY '26 based on the very high utilization rates as well as our discussions with customers. I was just in Taiwan and China in the last couple of weeks talking to customers. We think Q3 definitely will be sequentially better than Q2. I think the second half of FY '26 should be about 15% to 20% better than the first half. Yu Shi: That's great color. Then regarding some of the new opportunities you mentioned, I believe somewhere in the prepared remarks, you talked about high-bandwidth flash, but you didn't really provide more details than that. Just a little bit of context why I asked this question because I thought the high-bandwidth flash is a TSV microbump-based technology. But it sounds like you're alluding to, maybe it's not quite more of a TCB driver, maybe it's a vertical wire driver. So mind if you elaborate a little bit because it wasn't clear how HBF is going to benefit or create opportunity for K&S. Lester Wong: Sure, Charles. Actually, it is a TCB play, not for vertical wire. As you know, HBF is designed to merge NAND level capacity with HBM class performance, right? And the potential benefit is obviously unlocking bottlenecks and AI workloads, right? So HBF targets to match HBM bandwidth to 8 to 16x capacity. At this point, HBF is still in early stages. We anticipate multiple packaging technologies can be used to assemble these packages, including TCB. So right now, we're currently exploring this technology with a few customers. So it is going to be our TCB, probably APTURA that will be used for HBF. Yu Shi: Okay. So you do have a TCB tool, which you just shipped to one of the top 3 memory customers. But yes, so it sounds like that is for HBM qualification. So what would be the next milestone like for TCB and HBF, like do you expect to ship another tool? Is that the milestone that we should be all looking forward to? Lester Wong: Sorry, Charles, you mean the next milestone for HBM or HBF? HBM, right? Yu Shi: High-bandwidth flash, sorry. I meant high-bandwidth flash. Lester Wong: Okay. So I think the milestone, like I said, right now, we're in early stages of discussing with some customers. I think probably the next milestone would be probably shipping a system or -- probably shipping a system before a PO, so at this point. Yu Shi: Okay. So a system should -- okay. The next milestone is another qualification system shipment. Okay, got it. Operator: Our next question comes from Krish Sankar with Cowen. Sreekrishnan Sankarnarayanan: Congrats on the results and guidance, kind of interesting to see the cyclical recovery here in play. I just kind of wanted to just clarify, you said second half -- fiscal second half weighted by 15% to 20%. Is that just conservative? Because I would say that if you try to strip it down by quarter, it seems like the growth rates slowed sequentially to high single digits versus low double digits the last 2 quarters. But I would think that it should be better than that given a cyclical uplift. So is this more conservatism or of the fact that this is the visibility you have today, things could end up being better than expected? Lester Wong: So thanks, Krish. I mean that's the visibility we have today, right? Again, while visibility is better, as I said, and utilization rate is very high at 85% over -- close to 90% in China, there is still a lot of uncertainty in terms of some of the macros, right, things we've been talking over the last couple of quarters. But at this point, we think -- from all my discussion customers, it's getting much more solid. So 15% and 20% is what we see at this point. There could be potential upside on top of that. But for now, I think 15% to 20%. Sreekrishnan Sankarnarayanan: Fair enough. Fair enough. And then just to follow up on the strong growth here for advanced packaging. I'm just curious, is there a way to quantify how much did your TCB plus FTC revenues would be? Is it close to $100 million this fiscal year? And also on the FTC side, have you been -- has your plasma solution been qualified at the bigger foundry or not yet? Lester Wong: So are you saying have our FTC been qualified at the foundry? Sreekrishnan Sankarnarayanan: The plasma solution, not the formic acid. Lester Wong: Right now, we're working on the qualification for the plasma. As we mentioned, the formic acid has already been qualified. It's in high-volume production. Again, I don't want to speak specifically about individual customers, but we're working very closely with the customer on that. I think for our TCB, we obviously, as you know, Krish, we started with IDM in the U.S. and we've moved on to foundry. Now we're also seeing quite a lot of demand from OSAT. We have 120 TCBs in the field, and half of those are Fluxless. So we feel pretty good about our TCB system. We think it's best-in-class. It's got great material handling capabilities, which allow for customers to do different processes. So I think -- we definitely think both plasma and formic acid, we're best-in-class on FTC. Sreekrishnan Sankarnarayanan: And let's just say, any kind of qualification on TCB revenues for this fiscal year? Lester Wong: Well, I think for this year, for TCB, it will be over $100 million. Operator: [Operator Instructions] Our next question comes from Craig Ellis with B. Riley Securities. Craig Ellis: Lester, congratulations on the nice execution. I wanted to start just by going back to the thread that Charles was on with high-bandwidth flash. The question though is, as you engage with multiple customers on high-bandwidth flash, what's their expectation for when this can commercialize? Obviously, new standards have to go through JEDEC, but on the other hand, you've probably got NVIDIA pushing really hard, and they've been very successful at accelerated technology adoption. So when are these customers thinking this can come out in volume? Lester Wong: Well, Craig, as I said, I think it's early days yet for the technology. As you put it, I think it's -- it will take a while for [ quotations ]. There's a lot of different standards talking about. I think this will probably be more of a CY '27 play. Craig Ellis: Got it. And then going back to your comments on the initial shipment to a customer for high-bandwidth memory, can you just walk through the time line for when we go from that tool, which looks like an evaluation order, to volume production? Can that happen in fiscal '26 or is volume production really fiscal '27? Lester Wong: I think volume production will be in fiscal '27. I think right now, we've shipped the system to their facility in the U.S. It's undergoing qualification. I think the next milestone will probably be hopefully another system being shipped. There may be POs within FY '26, but I think actual production would be more FY '27. Craig Ellis: Okay. And we'll look for progress on that. Lastly for me, vertical wire, since this is something that could work in low-power DRAM and mobile-related applications, typically the early technology adopter releases product in the third quarter of the calendar year. Do you think we can hit that in the second half of 2026? Or is this something that really goes up in significant volume in the second half of '27? Or do you see initial adoption coming out of the Android community and when would that be? Lester Wong: I think there will be more -- it's gaining traction, but I think this is more -- maybe the latter half of FY '26, there'll be some. But I think they'll actually expand much more in FY '27. We're currently working with 8 customers in Korea, China and the U.S. on this. So again, we pioneered the technology of vertical wire, so we're pretty excited about it. This, in addition to the HBM system that we shipped to the leading memory maker, is our sort of play into DRAM. Craig, as you know, our memory business has been traditionally very heavily into NAND, which is still growing, as I said. But I think this is, again, more opportunities for us in memory and because we think memory actually is going to be pretty robust going forward. Operator: Our next question comes from Dave Duley with Steelhead Securities. David Duley: It's nice to see the recovery in the business. One of the comments I think you made in your slide deck is you're seeing the data center revenues increase in the general semi bucket. I was just wondering if you could talk a little bit about what those applications are, because it's really interesting that you're seeing a significant recovery when the outlook for PCs and handsets are actually down sequentially in units in '26. Lester Wong: Thanks, Dave. Great question. As I said earlier, over the last couple of weeks, I personally had a lot of conversation with customers in Taiwan and China. And data center is basically the central driver for this cycle. So we support data center in many ways. We have a very strong AP portfolio. It's a best-in-class for chiplet and heterogeneous logic applications. We've actually been taking share in leading-edge logic for data centers over the last couple of years already. And we're already in production for some of the most advanced heterogeneous logic applications. We're also positioning ourselves for future growth. We're in the process of expanding our facility here in Singapore to increase our Fluxless thermocompression production capacity by 3x. So in addition to AP, we also support data center, memory and general semiconductor solutions. So many applications in data center like general infrastructure, networking, communication, power and storage, it relies on more high-volume traditional assembly technologies like ball bonder, basically, our core products. And for memory, as I think I said earlier in response to Craig's question, we're mostly in NAND, even though we're moving into DRAM. And we're seeing actually a lot of enterprise SSD being increasingly used in data centers now, and that also help drive our memory business. And that's another way we play in the data center. David Duley: Okay. Could you just remind us what the utilization rates are in your key regions? I think you mentioned one in your commentary, but if you could just kind of run down the key regions for us, that would be great. Lester Wong: Sure. China is over 90%. It's been in the high 80s and 90s for a while now. We see it continuing. The rest of Asia is around 80%, which has come up now. Southeast Asia, which was a laggard, is now coming back. It's still only in the 70%, but it's been increasing over the last couple of quarters. And then North America is also over 80%. And North America and Europe, we look at it together, it's about 80%. So almost everybody is near 80% and China is at 90%. David Duley: Okay. And then the gross margins during the March quarter -- or excuse me, the December quarter were close to 50%, and you mentioned that there was some benefit from some previously written-off inventory. But then I think you guided gross margins to almost the same level again in the March quarter. So could you just talk about gross margins throughout calendar 2026 as we grow the revenue and what your expectations are there? Lester Wong: Sure, Dave. I think for the rest of FY '26, gross margin should be around 49% to 50%. I think what we're seeing now in our core business ball bonder is that there's a lot more demand for our high-performance ball bonders, which is much better margins, much better than our LED, for example. So a lot in high-performance bonders. Second thing is obviously, increase in volume helps with absorption, which helps the gross margin. And finally, we've always been very focused on cost control, and we'll continue to do that even during a ramp. David Duley: Can we expect gross margins to continue to go higher as revenue ramps? Lester Wong: Well, like I said, it's going to be around 40% to 50%, which is always been our target is 50%. Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Joe Elgindy for closing comments. Joseph Elgindy: Thank you, Maria, and thank you all for joining today's call. As always, please feel free to follow up directly with any additional questions. This concludes today's call. Have a wonderful day, everyone. Operator: You may disconnect your lines at this time. Thank you for your participation.
Bent Oustad: Good morning, and welcome to Fabege's Year-end Report 2025. My name is Bent Oustad, I'm the CEO of Fabege, and I'm lucky to have with me the experienced CFO, Asa Bergstrom, here today. We run through the report, quite well-known structure on the report today. And just to start with Fabege in brief, we are a modern -- we have a modern portfolio, we focus on Stockholm. We own, we develop and we manage our properties, we focus on attractive working places and good living in superb locations in Stockholm. And as you all know, Sweden is the capital of growth region in the Nordics. If you distribute the rental value of SEK 4.3 billion to different segments, office stands for 84% of the portfolio. That's office in a broader definition, including also education. Industry logistics, 4%; retail, 4%; hotel 4% and other segments, 4%. If you allocate square meters into the same segments, office is 72% and industry and logistics up to 9%, the others more or less the same. And the market value of the portfolio, SEK 78.5 billion, 37% to the inner city, and that also explains the differences from the rental value of the square meters because a lot of the properties are in central locations in Stockholm, and there the rents per square meter are quite substantially higher than rest of the city. Solna stands for 48%; Hammarby Sjöstad, 10%; and Flemingsberg, 4%. If we try to summarize the fourth quarter '25, rental income came in at SEK 899 million, up 4.4% from last year. Profit from property management ended at SEK 371 million, up 11% and the surplus ratio was 75% for the quarter. And as we have commented on the report, quite lucky with the weather at least at the end of the year. So that's why we had a quite good surplus ratio. Profit from residential development came out at SEK 35 million in the quarter, 23% margin. Shouldn't expect that high margin going forward, but close to 20% is something you can count on. Value changes -- net value changes of SEK 711 million downwards and earnings before tax then came in at SEK 293 million. Net lettings for the quarter was SEK 33 million, ending the total year at plus SEK 36 million. And we see increased activity in the leasing market. I will get a bit back to that later on. Large projects entered the management portfolio during the quarter, also coming back to that and large refurbishments are ongoing. That's how we try to secure also future value creation for the total portfolio. The quarter has proven our quality and our capability to capitalize on Birger Bostad's business model. We are then converting our residential land bank into shareholder return, and we will have more reporting on that also going forward. The last point, north on the summary slide is the Board has requested or has proposed a dividend per share of SEK 2.20 per share. So with that, hand over to you, Asa. Åsa Bergström: Thank you, Bent. Yes, I'll go through the income statement. Rental income, as you can see here, amounted to almost SEK 3.5 billion, a little uptick from last year. We had a negative impact in the identical portfolio of minus 3.2%, mainly due to the negative net lettings of the previous year. We also sold one property that impacted on the negative side. But on the other hand, we have several projects that have been finalized during the year and that are now producing income for us. Property expenses, a little bit higher than last year. We have an uptick in property tax. But as Bent also said, there were lower winter-related costs, very good, both beginning of the year and end of the year. And thus, we had a surplus ratio in property management of 74%. This year, we also had a positive impact from Birger Bostad's residential development. They have finalized just over 100 apartments during the year and produced an income of SEK 280 million and a result of plus SEK 55 million, which is included in the gross profit, as you can see here. Net interest expense was slightly lower than last year. We have borrowed roughly the same amount during the year, but the average interest rate has come down from SEK 2.98 to SEK 2.82 during the year. The share in profits in associated companies increased. The majority of this or all of it roughly is related to our share in Arenabolaget. There was a one-off included in this figure of SEK 63 million, where we have taken down the value of the shares that we have in Arenabolaget. So that's SEK 63 million of the SEK 130 million is more one item -- one-off item. So all in all, profit from property management increased by roughly 5.5% to SEK 1.4 billion. The impairment development properties relates to the Bostad future project --future potential projects. And the realized changes in value is related to the sale of Ynglingen in the first quarter. So that's the same figure as in the first quarter. Unrealized values came at SEK 1.7 billion for the full year. I will come back to that a little. And then changes in the derivatives were positive in the fourth quarter, but all in all, over the year, a little negative number. And so we have a result before tax of minus SEK 508 million and then a positive tax impact, SEK 160 million, of which SEK 128 million relates to the sale of Ynglingen in the first quarter. We have externally valued roughly 50% of the portfolio this quarter, and the property value came at SEK 78.5 billion, as you can see here. There's been a shift upwards in the average yield from 4.55% in the first quarter to 4.59% in the fourth quarter. And this next slide is -- gives a little bit more transparency to unrealized value changes over the year. We can say that during the first half year, the negative value changes were mainly related to increased yield and lower expected cash flows, longer vacancy periods expected from the external valuers and also a write-down of building rights, mainly in Flemingsberg. In the second half of the year, we saw increased yield requirements in suburb location, a little decrease actually in the most central CBD location. And we also took a write-down on the building rights in Flemingsberg since the land allocation agreement with Huddinge has expired at year-end. But what you can also see in this slide is that actually the projects have contributed on the positive side in all the 3 first quarters. Key ratios, we landed at SEK 119 per share and an EPRA NRV of SEK 145 per share. Total return of the properties after the write-downs amounted to plus 1.1%. The surplus ratio, as I mentioned before, 74%. Equity ratio and loan-to-value ratio remains on the strong side. And as you can see here, the debt ratio has actually improved as well as the interest coverage ratio. So we feel that we are still in a strong position going forward. Financing has been on the positive side all over the year, maybe getting even more positive during the second half of the year. We see continued strong access to financing, both from banks and from the capital markets. We have some ongoing refinancing with banks that will hopefully be finalized during the first quarter. We have done some refinancing for maturities in 2026 already. We did bond issues of SEK 850 million during January, short of 3 years. And as you can see here on margins of 89 and 84 basis points. Those are maturing in November 2028. And we still have the undrawn facilities of SEK 6 billion, which provides safety, security going forward. There has not been any change in fixed rates. As I said, the average interest rate cost has come down during the year. Approximately 47% of the portfolio is fixed and with an interest rate fixation of 1.5 year. And if we include the callable swap, it increases to 2.1 years. So we have some safety for increasing rents or increasing interest rates should that happen, although it seems that the opposite now is more likely at least in the near-term. This is also a new slide that we just wanted to show that how rental income and results have developed over the last 10 years. And you can see that rental income and gross profit from property management has increased while the profit from property management, including interest rate -- interest cost is more variable depending on the level of the market interest rates. The surplus ratio is fairly stable. We still have the target to reach 75%. And what this figure shows most apparently is the occupancy rate, which has come down, and we will come back to that a little later. Also finally from me, a few words on sustainability. We keep working very hard in order to reduce energy consumption. We're now very well below the target of maximum of 70 kilowatt hours per square meter with the outcome, which was in 2025, only 65 kilowatt also, of course, due to very mild winter conditions over the year. But nevertheless, a target and a result which we are very proud to present. And we also achieved the goal to reduce CO2 by 35% in comparison with 2018. And finally, the Fabege share is again confirmed green by Nasdaq Stockholm, which I believe is also a good sign for all the work that we are doing on the sustainability side. So that's it for me. And back to you, Bent. Bent Oustad: Thank you. The work done in the sustainability department is very important for us, and it reduces our costs, so keep up the surface ratio for the company very well. If you look at the occupancy rate, it has fallen down to -- or increased up to 14%, as I said, that's driven by the 2 previous projects, Ackordet 1 and Påsen 1 that has now been transformed into the management portfolio, increasing the vacancy. And as the one of you that's really following us, you know that some tenants are moving into Ackordet this spring, for instance, Atea moving from Kista to our property. So it will start to increase again. We also have improvement portfolio, not part of the occupancy rate. There, we have a total of 156,000 square meters, of which 127,000 square meters is left. That's future potential projects for us and are on short-term lease contracts without any right to possession when it expires. If we go a little bit more into the net lettings and the renegotiations for the whole year, the net lettings came in at plus SEK 36 million. It's new lettings of SEK 236 million and terminations of SEK 200 million. That's in our historical view on the lower side for us. And it also shows that we have a year without any major new lease agreement signing. So that's a goal for 2026. The renegotiations in total SEK 618 million, decline in rents of 0.3% with SEK 2 million down for the whole year as a whole. That also shows more stability in the leasing market. And bear in mind, SEK 316 million of maturities in '26 and onwards has now already been renegotiated and are part of these figures. So the tenants are forward-looking. That's great news for us. If we dive a little bit deeper into the renegotiations, I said SEK 618 million. You can divide that into SEK 341 million extended on unchanged terms and SEK 277 million with a 0.7% decline, so total SEK 618 million. As said, they are dominated by several small and medium, large tenants. We don't have any of the really large one this year. And for the total 2025, we only have 6 tenants with a yearly base rent above SEK 10 million a year. And actually, 2 of these 6 were concluded in Q4, both with an unchanged rent level and one in Arenastaden and one in the City portfolio. So that shows also for us, even though there are a small number of renegotiations that it's stabilizing in our view. If we distribute the new leases above SEK 10 million, 45% are in the office, 35% in the education and 20% in the hotel. And if you take all the renegotiations per area, 72% are in the inner city, 25% in Solna, 2 in Hammarby and 1 in Flemingsberg, just to give you a little bit more flavor on the figures. So rental development for the existing leases and existing contracts we have put in place. So it's definitely not a forecast, but that's what we have secured so far. And as we see, all numbers a little bit better than last quarter, and that's kind of more or less reflected by the positive net lease in the last quarter. I really like this heading stable customers. What we are talking about is high-quality customers with long lease contracts. And just to remind you, we have in total around 700 customers in our portfolio. It's a lot and it's an important work for us. If you look on the right side, the 10 largest tenants, they stand for 30% of the total rent. And the 10 largest tenants have a WAULT of 10 -- 9.2 years. So it's very, very good as a base for the whole company. And if we go further into it, the 25 largest customers have close to 50% of the total rent, meaning 670 customers more or less stand for 50% of the rent. So that also takes down the big risk of many of those customers. They are more or less flexible customers also when it comes to better market conditions and to adjust the portfolio to what the larger tenants also would like to rent on us. In total, the average lease contract length is 5.1 years. And we're very happy to welcome 2 new tenants on the top 10 board during 2025. The subcontract is the second largest one and Alfa Laval are in place #9 there. It's very nice to see. Also, we've seen in several quarters some questions about the parking business. We have increased our parking business. We have specialized personnel taking care of that for us in our company. We have total 12,500 parking spaces approximately, can be [ 501, ] I'm not quite sure, of which 2,700 have a separate charging station for electrical vehicles. And we see that as a key factor for some of the larger customers we have. It's important for them to have access to parking spots. We see increased demand for day-to-day permits instead of monthly agreements, and that also increased the flexibility in the portfolio for us as a company. It's easier to book spots up to 120%, maybe 130% when you have day-to-day permits instead of monthly reservations. So in total for 2025, approximately SEK 210 million in parking revenues. So if we look a little bit at the completed projects, I think they are well known for most of you. But in May, Alfa Laval took occupancy in the premises -- in their premises in Flemingsberg, very nice property. And in September and November, Saab took occupancy in Nöten 4 in Solna Strand, also a nice property, even though I'm not allowed to go into that property yet. So I haven't seen it from the inside, but it's -- as I said Ackordet 1 and Påsen 1 tenants have gradually moved in during the last quarter as well and some more tenants will move in during spring 2026, and that's also the reason why the vacancy in the management portfolio have increased slightly this last quarter. If we look at the ongoing projects, we have the Farao, Kairo. We have also talked about that earlier. For me, Arenastaden as a whole is a sweet spot. This is the sweet spot in the sweet spot, 20 meters from the metro station. We have Board approval for investments up to SEK 630 million. We have dismantled the existing buildings, and we are doing ground and foundation work and also preparation for construction works these days. And so why are we doing this right now? This was more or less decided 10 years ago when we entered Arenastaden. So now Solna municipality are doing their last work on all the roads, the infrastructure in this area. And then to be cost efficient for us, we do this work on the plots at the same time. So being ready for that. It's an interesting spot for -- and we have a lot of interest in that spot. But as of today, we haven't concluded any leases on it so far. We also have Ormträsket 10, the Wenner-Gren Center, investments approved for up to SEK 609 million. Rental value in this part will be approximately SEK 58 million, and it's pre-let 20%. That's a little bit down from last quarter and it's due to when we started the construction work there or the refurbishment, we had to move out all the tenants to other buildings we have in the neighborhood. Some of them are very satisfied in the new locations. They have signed new leases there instead of going back to this one. And some of them have even found other premises in our portfolio, other places in Stockholm. So right now, it's 20% let. We are starting the marketing towards end of second quarter 2026 on this building and it will enter the market 1 year from now or between first and second quarter 2026. Each floor plan is 400 square meters, so it's a little bit early for us to be in the market already. But we see good interest. We have also completed and have some ongoing projects in Birger Bostad of a residential company. Haga Norra, the block 5 up there is processing according to plan. It's in total 288 units. Completed in 2025, we had Brf Alma, which is a cooperative apartments. 23 out of 20 are sold as we have 2 showroom apartments there, and they are not for sale yet. And we have one that's not sold at Fabege. We also finalized 78 rental apartments in Q4. That's what's reported in the numbers in Q4 and to be completed in 2026, 50 owner-occupied apartments, of which 44 are sold when we wrote this yesterday. And today, it's 45 actually. So possession of this will be during Q1 this year. And we are coming with Brf Mathilda and Ingetora also later on in 2026, in total, 137 apartments, of which 35 are sold and on the marketing during last Sunday, and more than 17 interested parties showed up. So it's looking good for us. We also have the preparations underway for projects to start in the next phase in Haga Norra. So it's block 4 and block 3, totally 132 cooperative apartments in the block 4 and 260 rental apartments and senior housing plus a preschool actually in the block 3. When it comes to the senior housing, the preschool and also grocery store, we have signed LOIs on those units already, but they have not signed contracts and not part of the net lease at this time. Remaining investment in that one is SEK 860 million, completion in '28 and '29. And with that, we complete the residential buildings in Haga Norra. If you look at our building rights, commercial building rights of 550 million square meters, approximately 60% legal binding of those, and it has a book value of SEK 7,000 per square meter. That's a little bit down from earlier quarters. And as Asa mentioned, we have not -- or it's been a termination of the land allocation in Flemingsberg. We haven't agreed on the terms with Huddinge mun. But we have ongoing negotiations, have a positive tone. So we will report to the market when things changes. And we have 500,000 square meters of residential building rights in addition in our portfolio. So the last land allocation that we received is the Sveaplan. It was legally binding in January 2026. So preliminary possession date around mid-April 2026 and the building rights approximately 8,800 square meter gross floor area also taking into account the floor plans underground. Purchase price is SEK 208 million, should be index-linked and start to be close to SEK 230 million and a planned move in during 2029 on this property. And that more or less completes our -- one of our core areas in Sveaplan going forward. We will have 55,000 square meters of gross leasable area in that area, having ground floor activities, including food and beverage, having high-class conference centers, parking and other services to be a center for our portfolio that can have some extra services going forward. Project opportunities in the near-term, as I mentioned, Farao, Kairo with commercial units coming in addition of approximately 500 apartments. And in Phase 1, we have 185 apartments there. We see apartments in this area is more or less bought or let by the larger tenants in this area. So it's very, very popular. And that's really give us a well-functioning urban area. So that's good for us. Haga Norra, as I said, already produced 519 units, in production 187 and decided to produce another 390 units already with LOIs on a lot of them. We have the Västra Kungsholmen, Tegelterassen is 36,000 square meter office, partly demolition has started in January 2026, not -- and we don't have any lease contract in place, but the interest and the pipeline is quite good, quite promising. So there's a big ambition for 2026. And we have the Solna Business Park, the Parkhuset is a land allocation for 22,000. That's in the purple line on the screen here. And we have Yrket next to it with 320,000 residential units and 2,200 square meter premises, more or less ground floor activities there. The last one, we already own and have in our books 60% of the land plot, but 40% is a land allocation from the municipality. So if we try to summarize our main short-term priorities, we are working every day, every night, every second to decrease vacancy in our portfolio. We have to continue to be the preferred partner for our customers. It's so good for me as a new CEO to come into this company and meeting a lot of the larger tenants and everyone talking good about the Fabege employees. It's very, very nice to hear. We have always to be available, accessible and be solution orientated. And in my view, we are that, and that's what I hear. So it's very good. We have to secure value creation in ongoing projects. We have to analyze value creation in our land bank to be very exact about that going forward, that both in the commercial and the residential land bank. And we have to continue to be active in the financing markets, which started well already first day in January, that looks good. And as a company, we always have to search for opportunities, and we are searching for opportunities to build the company and not to do a single transaction. So with that, I conclude our presentation and maybe you have some questions for us. You were so shocked about the presentation. Albin Sandberg: Thank you very much for that. And also my name is Albin Sandberg, I'm representing SB 1 Markets as a sell-side analyst, and I will be moderating this Q&A and all of you will have the opportunity to ask questions as well. So I want to start with you, Bent, I mean, obviously, you provided us and the market with an update a few weeks before Christmas about your first thinking and so on. Now you've been through a Q4 results. And I just wonder if there's anything that has come across your mind that either better or worse with the company compared to that you thought initially. I mean you were always on the board before. And maybe also you're a Norwegian and now we're coming to Sweden. Any cultural differences that you have encountered so far? Bent Oustad: Definitely some cultural differences. It is on the good side. You see Stockholm as a city is much more vibrant. It's much more happening here. You see also in the papers, you see on the stock exchange. Things are happening, you are taking all the opportunities, and that's something also we have to grab in this market that we are right now. On the very, very positive side is to be around meeting all of our employees, see how they are burning for Fabege, really want Fabege to do well. That's important for us. They are the one that always meet the customers first. So that's a good sign. On the negative side, we have some vacant space, and I've been around visiting most of the vacant spaces. I can't believe that we don't have tenants for them. So they are very nice, superb locations. So that's what we have to achieve going forward. Albin Sandberg: Yes. Now obviously, the numbers that we're seeing that you're reporting today on the one hand, positive net letting. On the other hand, a little bit higher vacancy, which I understand is a bit of mix, and you're also saying that key focus is to reduce these kind of vacancies. But from a broader market perspective, in this cycle where we are now? Do you think that it's the same as previous cycles? So once we get the economy running, demand should pick up? Or is there anything else because of work-from-home habits, AI and so forth that would sort of impact this, let's say, potential recovery differently than what we've used in the past? What do you see? Bent Oustad: I'm not sure if it's that much actually. But now the vacancy in total in Stockholm, the biggest Stockholm is quite high. So that's why it will take a little bit longer time. But if you look at the pipeline, look at the leases being out there, the competition, I think the pipeline is growing only the 2 months I've been on board. So that's positive. What kind of tenants are growing, you see within the defense industry, you see within municipalities tenant or link tenant, they are growing. You see some tech investors are growing more or less -- I think you take some more opportunities in Sweden than I saw in my -- in Norway at that time. So I think more is happening here, and this is more or less the capital of Scandinavia. Someone is talking about Copenhagen, but I think more will happen here. So I'm quite positive about that. When it comes to all the other things you are mentioning, and I hear that all the time, all talent, if you need talent, you have to be in CBD. I don't think it's like that. I've been in my company now in Fabege, talented people all over, but maybe in my view, we are more or less in the center. It's very nearby. Nice locations. And I think what we are searching as a young employee today is you want to be where things happen. You want to be in the office that you can be creative, that you meet your older colleagues, you want to grow within the company, you want to be motivated. And that's up to us as landlords are, are the premises good enough? And if I hear someone, no, I have to stay home to be efficient. Okay. So then you have to really have to move because that's a landlord's responsibility to give you the right location, give you the right premises. Albin Sandberg: And the positive net letting that you managed now in Q4, can you say anything about were these negotiations that have been going on for a long time that finally made it? And also, given the high vacancy rate we're seeing in the Stockholm office market, do you need to offer extra rental rebates or something like that in order to sign these leases? Bent Oustad: It's on the both sides actually. As I said, this time, it was no major leases. So the leases we took now are not being going on for so long time. But we had ambitions of higher numbers, but someone came in early January instead of this, and -- but it can be both ways. So this time, it was not -- that was not the reason. On the other side, the lease -- the period to conclude the leases are getting longer and longer. This is much longer than I'm used to. But still, I see they are getting concluded. We listen about all possible leases in the media or 2 years before they are really concluded on the larger ones. So things happening in the market, quite positive. But as I said now during the presentation, the signs in our numbers are there for real, but it's not a lot of them. It's only SEK 36 million in total in positive net lease. So if it really recovers, should be much higher. And definitely, we don't have any new major new leases during the whole year and that we have to step up the gas. Albin Sandberg: And I know that in the past, you referred to an annual net letting target. I don't know if that's still valid or if you have one, what would that be for 2026? Bent Oustad: It's SEK 50 million in net lease. We need that. And we have some extras in new leases. But in the management portfolio... Albin Sandberg: And you were referring to your tenant list saying you were very happy with that. And still, there are some that account for a little bit more. Are there any specific one that you are already now working with and so on in order to make sure that they stay or anything that we should watch out for here in the near-term? Bent Oustad: We are always working with our tenants. So we try to keep all of them. We try to have them grow. And if they don't want to grow or they may be as we have been done in a little downturn in generally, they have to adapt their business to the reality. And if they can't increase the prices, they have to look on the cost side. And if it's possible, among other things, they also try to reduce some of the space. So we think we have high-quality tenants, and we are working with them every day. 24 hours a day, and that's our main priority as a landlord. Albin Sandberg: Yes. And out of these, let's say, 14% of vacancy that you have now, what would you say is a normal level for vacancy in the Fabege's portfolio across the cycle level? Bent Oustad: Across the cycle. It's always difficult to be 100%. So -- but we should be high in the 90s actually, mid-90s, 95% maybe. Albin Sandberg: Yes. Bent Oustad: That's a goal, and it's absolutely reachable. Albin Sandberg: Yes. Do you want to say any target year for that number? Bent Oustad: In my head, it's only 1 year ahead, but they have to be a little bit realistic. So we need some time. And as I said, to conclude a lease it takes some time. And for them to move in, it also takes time. So the larger tenants, they are planning 5 to 10 years ahead. So bear that in mind. Albin Sandberg: And are you in a situation now where some of these vacancies are close to structural, you believe that you're looking into alternative use for some of these assets that you have? Bent Oustad: Not yet. But if you think we only have pure office, then it can be some alternatives. But within the education sector, within the health sector, et cetera, things are growing. Albin Sandberg: Yes. And I also wonder a little bit about your potential to start new projects. Obviously, you are very much focused on getting the vacancy numbers down. And you have your balance sheet where I guess your LTV is well below target, but you still have a debt ratio that is a little bit high. So how do you envision the development CapEx going forward here, 2026 specifically maybe? Bent Oustad: As we went through some of the projects, larger projects we have now. And I think the CapEx for 2026 would be around SEK 2 billion, but it's a little bit on the way to go down. But some of the CapEx are also for the residentials, and that's more or less a sale. So that will be -- and in a future sale. So when you see the result from the residential, the cash flow is much better, of course, comes that. But going forward, if you are a potential tenant, we always have space. We always have potential projects. We're talking about the portfolio of 150,000 square meter that's now running on shorter leases. That's also potential projects going forward. But in the meantime, they run on shorter lease lengths, et cetera. Albin Sandberg: So a new potential commercial project starts this year, 2026, that would require a tenant in place, would you say? Or could you imagine starting anything on speculative grounds? Bent Oustad: We can start on the speculative grounds. The balance sheet, we are not worried about that, but we'd like to have tenants in place before we start any larger at least. Albin Sandberg: Yes. And then on the property valuation side was negative in Q3, was negative now again in Q4. If you just could clarify a little bit what was happening in your own assumption and maybe in the discussion with the valuers, anything that struck your mind in one way or another delta-wise? I'm just wondering what happened and that needed you to take down values again in Q4 [indiscernible] are we reaching the real trough here now? Do you think you can see the numbers in red -- sorry, in black for '26? Åsa Bergström: I hope so. But it also depends on what's happening on the market. And specifically in this quarter, the expected indexation or inflation for next year was taken down by the valuers from 2% to 1.5%. So that has a negative impact. We also saw increasing yields in the suburb locations, still coming from the deal Vasakronan did, and there has not been any other deals in this kind of suburb locations. So that has had maybe too much of an impact, I believe. And then we have -- because the land allocation -- the agreement with Huddinge regarding the land allocation in Flemingsberg was terminated by the year-end, which made us take down the values for, you can say, overvalue -- extra value that we had allocated to those building rights that we don't, we are not at least sure that we will have them anymore. But as Bent said, also, there are ongoing discussions with Huddinge. So that might change in the coming months. So I think no major changes, but small changes that had this impact. Albin Sandberg: And just to be clear, the 1.5% indexation that's for 2026. Åsa Bergström: Correct. Yes. And then onwards, it's still 2%. Albin Sandberg: And then also, I mean, obviously, the financing market continues to be strong is my feel. And as a CFO, I guess you can confirm that your interest rate duration is a little bit on the low end, in my view, at least. Do you -- are you happy with it? Or are you have any plans to extend it or what would it mean for you? Åsa Bergström: I mean, yes, we are -- as it is right now, we are quite happy with it. But of course, we are monitoring long-term interest rates and the levels of them in order to be ready to act when we find it more favorable than it is right now. We have some older swaps that will mature during this year, also next year, that will increase rents, increase interest rates costs going forward. But we also see when we are renegotiating both banks and refinancing bonds this year, margins are substantially lower today than they were when these were signed before approximately, say, 3 to 4 years ago. So there are ups and downs, and I'm quite confident about more or less sideways development of the average interest rate this year. Albin Sandberg: Compared to this outgoing rate as of Q4. Åsa Bergström: Yes. Albin Sandberg: Yes. That's clear. And I think the discussion about share buybacks is a topic for a lot of Swedish property companies trading at a discount to NAV. You have carried out buybacks in the past. And my understanding is that you have referred maybe a little bit to your underlying cash flow and the debt ratio in order not to continue buybacks. Is that correct understanding? And is that still valid? Or are you considering buybacks maybe ahead of investment starts? Bent Oustad: We are always considering everything. But when it comes to the capital structure, that's the main priority. We have also the dividend policy more or less as a base for how the Board is thinking these days. And Asa and I, we are not deciding, this is a discussion in the Board, how should the capital structure be? And it's part of that discussion actually. Albin Sandberg: Okay. So you don't rule out share buybacks for 2026. Bent Oustad: We never rule out anything actually. But as I said, the priority is the dividend policy we have in place. And after that, we look at the cash flow and the key metrics for the company. Albin Sandberg: Yes. And then I have one last question before I hand over to the telephone conference and also questions on the web. But now Bent, you obviously have a bit of connection, I must say, with the main owner in Fabege. You used to be the Head of -- CEO of Norwegian Property. Would a merger between Fabege and Norwegian Property make sense in your view? Bent Oustad: Never say never. I'm not spending too much time on that actually. But in my view, at least the 2 of us, we are synergies. We don't need 2 CFOs or 2 CEOs. On the other side, we have better financing here in Sweden. So that's also a synergy. But beyond that, I'm not sure about the synergies. Albin Sandberg: Great. Thank you very much. Okay. And with that, we open up for the telephone conference, and you can also send questions via online, and we will see if we can take them here. But operator, please go ahead. Operator: [Operator Instructions] The next question comes from John Vuong from Van Lanschot Kempen. John Vuong: You mentioned that lettings in Q4 was skewed to SMEs. Looking at your leasing discussions, are they also skewed the same way? And do you expect new lettings to gain momentum over '26? Bent Oustad: It's a little bit difficult to hear. Åsa Bergström: Yes. Bent Oustad: Can you please repeat the question? As the line wasn't that good here, actually. I'm sorry. John Vuong: Yes. Just on your leasing discussions. Do you see the same skew towards small and medium-sized companies? Bent Oustad: Going forward, I think that's more or less the bread and butter for us in Fabege. We -- as I mentioned, we have 670 customers/tenants in our portfolio. And we are always looking for smaller and larger tenants. That's part of our portfolio. We have some very large tenants. The top 10 stands for 30% and they take more time, take longer time, but they are also in the market. There are companies growing. There are different segments growing. So we have this mix. It's actually not a clear view of what's happening forward. So if you just look at Solna, Solna Business Park in that area. We had a large contract with Saab. Our neighbor had a large contract with [ Svenska Kraftnät ] and the social government has also moved to this area, large tenants. So large tenants are in the market. And unfortunately, we didn't have too much succeed in 2025, but that's top of the agenda going forward. John Vuong: Okay. Clear. And just how well is your current vacancy position to capture this demand? Do you still need to spend some CapEx to reposition these assets? Bent Oustad: It's very different. But a lot of the vacancies are very, very nice. So more or less the CapEx will be maybe to do something at the entrance just if it's a single-tenant building converting to a multi-tenant, we have to look a little bit to the entrance for the whole building to be for a multi-tenant building. But we have the examples at Stjärntorget 1 where Telia is the main tenant, approximately 8,200 to 8,300 square meters are now rented out to 2 new tenants in that building during '25. So things are moving. John Vuong: Clear. And sorry, just on the near-term project opportunities, what returns do you see and how does it stack up against your cost of capital? Bent Oustad: And cost of capital are in the -- around 10% is the cost of capital. And as you see, we haven't really succeeded in the last years. But as I tried to summarize, to really look into the value creation in the land bank and in the projects is a top priority. Operator: The next question comes from Jan Ihrfelt from Kepler Cheuvreux. Jan Ihrfelt: I have a couple of questions here. The first one regards, if you look at the central administration on a year basis, it's up 14%. Are there any extraordinary costs in that increase? Åsa Bergström: Sorry, it seems to be a very bad line here. I couldn't understand your question. Jan Ihrfelt: I'll try to repeat it, maybe taking it a little bit slower. Your central administration costs are up 14% year-on-year for the full year. And are there any costs that are there though be of extraordinary character. Åsa Bergström: Last year, we in -- sorry, in 2024, we didn't make any provision for the profit sharing foundation in Fabege. And this year, there is a provision for that, and that pretty much explains the whole difference. Jan Ihrfelt: Okay. And then the question on the NOI margin, you have a target of 75%. How comfortable are you of reaching that already in 2026? Åsa Bergström: It's definitely a goal to reach it in 2026. I think if we are a little bit more successful in the letting business, adding more rental income to the P&L, we will soon be there. So it's more related to income side than cost side actually. Jan Ihrfelt: Okay. And then maybe if you could comment or make any kind of guidance for your associated companies, i.e., the Arenabolaget for 2026. Do you have any figure there? Bent Oustad: Except for the write-down of SEK 63 million that we took in 2025, this is in line with what we have communicated before. And as it looks now, it will be the same for 2026. So roughly around SEK 70 million negative. Jan Ihrfelt: Okay. Then a question on -- maybe a clarification. Your net letting target for this year, was it SEK 50 million in the management portfolio? Åsa Bergström: For 2026, yes. Jan Ihrfelt: Yes. Okay. And then a final question from my side is, if you look at the chart where the rental income in the coming quarters. And if you zoom into to the first quarter, that figure has increased SEK 10 million from the Q3 report. Is that the indexation effect? Åsa Bergström: Indexation is very low. It's an impact from positive net letting that has that. Jan Ihrfelt: Okay. So hardly any increase from the indexation? Åsa Bergström: I think indexation is roughly in total, SEK 25 million over 2026, the full year. So of course, it has a little impact. Jan Ihrfelt: Including the [indiscernible] Åsa Bergström: Yes. Operator: The next question comes from Lars Norrby from SEB. Lars Norrby: First, a simple question on the headline, the CEO statement is the same as in the Q3 report, I note. Does this mean that your view on the market is very much the same? Or is it looking slightly better now or the opposite? Bent Oustad: I haven't concentrated about the former CEO's view there. This is my view, and it's the view as of today. And I'm quite positive actually, but it's better to try to show you some results before we are too optimistic, but it looks better and better in my view. Lars Norrby: And then my second and final question. You did not do many transactions during '25, if I remember correctly, just one centrally located property. If you would sell something in 2026, would you focus on selling something centrally located or rather in Solna, Arenastaden? And for that matter, are you looking at divesting residential building rights? Bent Oustad: We are always looking at opportunities. But in my view, with the balance sheet we have, we do transactions when the markets are favorable for us. I don't see the market is very favorable to sell assets these days, but that can change quite fast. And we also see the transaction market in the CBD being better, even though it's a low volume. So -- but we are looking into that. When it comes to residentials, we will try to develop the residentials at least in our core areas ourselves. We still own some residential land banks outside Stockholm, and that could be possible sales going forward, but nothing is concluded as of today. Åsa Bergström: Just to complement, we did some -- we sold some building rights for SEK 200 million on the Western part of Stockholm City, Western Kungsholmen. And those will be vacated probably in April or May in 2026. So the agreement was signed. They still remain in our balance, but they will be vacated in the spring. Operator: [Operator Instructions] The next question comes from [ James Cattell ] from Green Street. Unknown Analyst: When it comes to your land rights and the decision to sell or develop your land rights, what's the required rate of return that you would need to develop a piece of land rather than selling it? Bent Oustad: That's also a little bit different. If it's in the core area, then we are more -- we don't have that high development margin. But it's above other. But we'll try to achieve 15%. It's difficult these days, to be very honest. And when it comes to residential, as I mentioned, they are a little bit higher. Unknown Analyst: And that figure, is that levered or unlevered return? Bent Oustad: Leverage to return, equity return. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Albin Sandberg: Yes. So we have a few questions left. I think we can make it within the 11. From Fredrik [indiscernible] at ABG. One question is, are the 2 remaining floors in Haga Norra leased now, even though tenants have not yet moved in? If so, when are tenants moving in? Åsa Bergström: There is one tenant moving in, in April this year, and there's still some remaining space to be let. Albin Sandberg: Yes. And the other question refers to the JV, Fredrik, unless you got the question before -- answered before, please reach out to management, but I think we -- you guided for SEK 70 million for this year. And then from Mihail Tonchev from Kempen Investment Management. Would you consider rationalizing your location and perhaps tightening the portfolio segments via capital recycling? Or are you fully convinced of all your location for the longer-term? Bent Oustad: We are always looking at all kind of opportunities. But at the time being, nothing is decided with that. And I've been on board for 2 months. It's a little bit early to conclude on all those kind of questions. Albin Sandberg: And I think the final questions has been answered. So I think we'll leave there. Bent Oustad: Okay. Then we close the call and thank you for participating. We look forward to the next quarter and see you back in 3 months. Åsa Bergström: Thank you.
Johan Andersson: Good morning, everyone, and welcome to the presentation of Saab's Fourth Quarter and Full Year Report for 2025. My name is Johan Andersson, responsible for Investor Relations, and I will be the moderator here today. With me here in Stockholm, I have our CEO, Micael Johansson; and our CFO, Anna Wijkander. Micael and Anna will present the report, and then thereafter, we will conclude with a Q&A session. [Operator Instructions]. So with that, a warm welcome, and I'll leave it over to you, Micael. Micael Johansson: Thank you, Johan, and also a warm welcome from my side, and thank you for joining us today. I will start by jumping right into sort of the perspective of last year, looking at how we met sort of our guidance and our growth perspective. So we ended up with almost SEK 80 billion in organic growth, SEK 79.1%, which was excellent, 25% organic growth. And then also had a very good development on our operating income, of course, growth 37%. And the cash flow was extremely good in the quarter, the last quarter last year. So we ended up all in all, at 5.3%. So we had an extremely good year last year. meeting all our expectations. And it is, of course, based on very good sort of delivery capabilities and how we actually performed in delivering to our customers over the year and showing that our capacity investments that we have comes into play. Going forward and looking at some highlights, obviously, looking at the extremely high order intake in Q4, but also over the year, we see a high customer demand in the market, and there's very many initiatives that we're working, of course. And the product contracts continue to grow, but also we have a strong interest on the sort of bigger platform side, and that's why the balance of the large orders towards the medium-sized orders and the smaller orders have changed a bit. So we still see, of course, volatility in the geopolitical tensions around the world, as you all know. And -- but I would say what's dominating the growth right now from our perspective is still that the European nations and the pillar of NATO, the European pillar of NATO has to sort of expand the capabilities, also quite clearly stated by the U.S. that we have to take responsibility for our own continent when it comes to the threat environment. So that is driving, of course, lots of spendings in Europe, but not only to look forward to future growth. And that drives mainly the growth for us, I would say. So we have a record order bookings, as I've said, and a very high backlog of SEK 275 billion. Now a big thing that happened during the quarter, of course, was the selection by Poland for the A26 submarines, and that is extremely important to us, and we really appreciate that. And it will be good for our security policy between the countries, the Baltic Sea protection, of course, and a close collaboration between Sweden and Poland, but also between industries between Sweden and Poland. Now we are diligently working that contract, of course, it's not a contract yet, but I really look forward to finalizing that contract sort of during this year. And then, of course, we have shown that we are capable in extending our capacity and expanding that. We -- all the time, we get new capacity expansions in play to support our growth. But there's still much more to do, of course, both when it comes to facilities and factories that will come into play. We have a U.S. factory that will be up and running late this year, and we also have an Indian factory as examples, coming into play next year. So those are a few highlights. Coming back to the market position and looking at what I tried to sort of describe on a very high level that the mix of the product side of Saab, the portfolio, we are very well positioned in the marketplace, I would say. And I'm really grateful that we have a portfolio consisting of both sort of products, but also platforms and also being able to integrate systems together. So of course, looking at last year, a few very important parts of contracts that happened was, of course, the Gripen to Colombia, EUR 3.1 billion that we are now executing, of course, according to plan. And then we have the GlobalEye that came in very late last year, which was really a good win, of course, the 2 GlobalEyes to France. And then the contract in Q4 also on the A26 submarines for Sweden, the extending capabilities that added to that contract. But also things like the electronic warfare capacity for the German Eurofighter is a very important contract to us. And then as I said, product contracts on the missile side and the support weapon side is adding to an excellent sort of year for us when it comes to order intake. So order bookings of SEK 169 billion in 2025 and a really good outlook, I think, going forward also because of the market interest that we have. Coming back to the quarter -- last quarter then '25, the fourth quarter. Of course, we have all noticed a fantastic order intake of SEK 100 billion in the last quarter, which is then a mix of large contracts with many good product contracts as well. So an extreme increase, of course, from the SEK 17 billion we had in the Q4 of 2024, an extremely good quarter, highest ever, of course. But also the sales growth, 35% organic growth is really good, including also the EBIT growth of 50%. And then as I said, the volatility in the operational cash flow side is over the year is quite sort of big. So of course, we had an extremely good fourth quarter to generate SEK 5.3 billion over the year, SEK 6.3 billion. And as we've said all the time, we promised good operational positive cash flow. But over the year, it will vary a lot, of course. So this is absolutely the best quarter, I think, that Saab has ever generated, not only the best Q4, but the best quarter ever. So I'm really pleased with that, of course. A few comments on the different business areas then. For Aeronautics, the Colombia contract was really the big event, of course, another contract on the Gripen E. So now we have 3 countries, and we're increasing capacity to deliver all these Gripen E fighters. And we have a number of campaigns going forward also a big interest in the market. So this is an area that is now growing for us going forward. And we are also looking into the next-gen fighter capability. But I think in the beginning, we will work to complement a Gripen E fighter with a collaborative combat aircraft, sophisticated, you can call it a loyal wingman and autonomous systems. And that, I think, is the sort of the first thing that will happen in the future fighter sort of avenue that we're running. We have also the T-7 and the first one is now with Randolph Air Base. Now they are using it to start sort of creating the training for the pilots, but there's still many to deliver. And we're still we're still sort of affected by the under absorption that we have in the facilities in West Lafayette, Indiana, and that will be continuing for a couple of years more, I would say. So that is going to be a good business for us, but we need to ramp up the deliveries. And we have only delivered a few so far of the 350 that we have on contract. And then a very important thing that happened, of course, that we're working diligently to sort of organize a contract around this, and this is a government to government and industry-to-industry initiative, I would say, was from the letter of intent that was signed between Sweden and Ukraine regarding fighter capabilities going forward. So of course, we would like to see Ukraine flying the Gripens going forward. But we're working that, and we hope that the financing side of that will be sorted and also for us then to prepare for industrial collaboration, but also capacity increases. Dynamics still has a very strong demand in the market for their entire portfolio, I would say, from training simulation to Camouflage Net, but not the least from the missile and ground combat perspective. So we have had quite a few large missile and ground combat orders in the quarter. So they have an amazing order backlog of SEK 90 billion. And this is also an area where we have invested heavily to increase capacity to deliver to our customers. There are more to come into play, as I said in the beginning, in both India and the U.S., but we have also already taken some capacity increases into operations, I would say, and we are booming our expansion also in Sweden, of course. So this looks very good, and they had a growth of 50% quarter-to-quarter over the year. So that's an amazing result. Surveillance did have a very good quarter. I mentioned the GlobalEye from France from a market and order intake perspective, but also a strong demand when it comes to our EW equipment, our sensors, the Giraffe 1X, our fire control sites for the CV90s, but also other sensors, the weapon locating radars, Arthurs. And they are picking up on the project execution, and we see a substantial growth also here quarter-to-quarter of above 50%. And we have -- we just want to mention that we have now divested completely TransponderTech, which affected the EBIT of the operational income of Surveillance by SEK 336 million. But even without that, they did a 10% result during the quarter. So that was a very good step for Surveillance. Kockums was, of course, extremely happy and so am I on the selection by Poland. So now we are expanding capacity to build more submarines. And we have other segments, of course, in the underwater business, which is autonomous systems and a number of things in that area that has a high customer interest. And then, of course, we are working on the campaign to be part of the new Swedish frigates or Corvettes, but I don't know exactly when that decision will be made. We have a partnership with Babcock. And of course, that is something that we work diligently on the surface side going forward. But we have a growth -- very good growth also in Saab Kockums of 20% and good project execution. And of course, also the Swedish A26 contract was important here. So they are developing in a very good way as well. And lastly, we have Combitech, good momentum. Of course, the total defense perspective and how many things are happening in that area in Sweden now from an industry, from an agency perspective is supporting the growth of Combitech. The new agency, MCS, the Swedish and also on the civil aviation side, generates lots of business for Combitech, and they are good in this area, both from a cybersecurity perspective, but also how you set up resiliency in an organization. So that is, of course, the growth is driven by increased number of consultants, but they are growing in a very nice way, and they are now a SEK 5 billion entity within Saab, which is absolutely fantastic. And they're really important for Saab as well since they have a number of very important participations in our contracts within the Saab business areas as well. A couple of comments on the sustainability side. We have done a number of important things during the quarter. We have adopted formally now a human rights due diligence policy, supporting our responsible sales policy. This is something that generates a due diligence every time we do a contract with someone and sell something. We actually go through in detail that we are not affecting anything related to human rights or things that we shouldn't be involved in. That's very important to us. We have a good development on the share of women managers in the organization, which has increased now to 29%. And we have a higher ambition than that, of course, but we are growing all the time, which is absolutely fantastic. And we have done well also on the emission perspective, the environmental perspective. We have reduced our emissions 7% year-over-year, and we are on a good path supporting the scientific-based target initiatives targets that we have set that we have to be down 42% 2030, and we are now at 36% after 2025. So that's very good. And we are we have the ambition to be a market leader when it comes to -- in our segment when it comes to sustainability, which is not only environmental perspectives, of course. And we -- but we have been highly ranked within the CDP when it comes to climate and water. We're in the highest ranking of 4% of the companies right now, which I really -- I'm impressed and I'm really pleased with that development. So I think with that, I will hand over to Anna to go through the numbers in a little bit more detail. Anna Wijkander: Thank you, Micael, and good morning, everyone, from my side as well. Yes, it's clear that we have closed yet another successful year, and I will soon go into the details of the financials in the quarter. But before doing that, I would like to take the opportunity to show you some trends on what we have achieved so far. So let's start looking at our graphs and what we have achieved for the sales growth. You know we are growing the company substantially. And during the last 3 years, we have grown an average 24%. And what's so good to see is that we have had double-digit growth in all our business areas during this period. And that is achieved, of course, through our strong offering and our strong portfolio that we have, but also our operation and our ability to grow our operation. And an important factor to that is that we also have increased the number of employees by around 10,000 people, now adding up to the 28,000 employees that we are today. And we have a really strong company culture where we have a good focus on both delivering on our commitment, but also building the company in the future. The EBIT has also grown in this period by 33% compounded average growth rate. And that really shows that we are leveraging and scaling on our growth, growing more the EBIT more than we grow our sales growth in average. And we should remember that during this period, we have invested substantially both in R&D and in capacity investments. So over this period, we have doubled our R&D, and we have actually tripled our CapEx. Now look into the quarter then more in detail. We have increased the EBIT by 50% this quarter. I think one should remember that, that is an exceptionally strong quarter, and that is, of course, largely driven by our sales growth. And what's also visible in this slide is that we have a volatility when it comes between quarters that is really reflected here in this slide. This quarter, I want to highlight Dynamics. Here, the EBIT grew by 19%, although the margin is a bit lower compared to what it was last year in Q4, and that is primarily related to project mix within Dynamics when comparing year-over-year. But if you look at the trend for Dynamics, it's very strong for the year. The EBIT growth was 46% and the EBIT margin for the full year was 18.1%, an increase from last year as well. Also surveillance is worth mentioning this quarter with a growth in EBIT of 83%, and that was very much driven by high project execution and several deliveries in the fourth quarter. In addition to that, we had a positive effect when we received the order for the GlobalEye France contract in the last days of December since we, in that project had started some activities already when we got the letter of intent in the summer. I can also mention that we had this divestment of TransponderTech that is visible in the numbers of surveillance, but it's excluded here in the figures that you see for the EBIT for the quarter. For the full year then, the financial summary, we grow our sales with 24.1% reported organically 25.6% impacted by currency, so SEK 79 billion in sales. Good growth also in gross income and EBIT was growing 37%, and we ended up with 9.8% EBIT compared to 8.9% last year. That was mainly driven by Dynamics and Surveillance. Another thing to point out here in this slide is the financial net that improved substantially compared to last year. And here, we have a positive impact this year from the SEK appreciation, where the revaluation of our tender portfolio from currency hedge in the tender portfolio had a positive impact this year. Last year, it was negative. So that's why we have a big swing there in the financial net. Also good, the net income and the EPS grew by 51% over the year. We have talked about the cash flow. Micael talked about the cash flow. It was very strong in the fourth quarter, where we both had several deliveries and received a lot of customer milestone payments. And as we can see on the slide, we have the cash flow from operations now amount to SEK 12 billion approximately. And we have increased our investments. So they are now SEK 7.2 billion this year. If you compare to last year, they were SEK 4.8 billion. So all in all, we achieved a cash conversion this year of 68%, which is well above our midterm targets. And also our return on capital employed increased to 16.5% this year. So driven also by this strong cash flow, the net cash position has improved this quarter, and we're ending up the year with SEK 4 billion in net liquidity. So our balance sheet continues to be strong, and we have a cash and liquid investments amounting to SEK 18.7 billion. And adding to that, we have an unutilized revolving credit of SEK 6 billion as well. So following this strong financial performance -- financial position, the Board of Directors will propose to the Annual General Meeting that we increase our dividend by 20%, amounting to SEK 2.40 per share. So let's again zoom out a bit and look at some trends on what we have achieved so far, '23 to '27. Cumulative over these first 3 years, we have delivered cash flow before operation of SEK 26.4 billion. That is a strong enabler for us that we have been able to invest more in capacity expansions and which is important for our foundation, growing our company, as we know, investing in new capabilities, new facilities, new production sites and new products. And in total, over these years, we have had investments amounting to SEK 15.5 billion. And measuring of the period, we have achieved a cash conversion of 62% so far. and generated approximately SEK 11 billion in operational cash flow for our company. Another parameter that has strengthened this quarter is our backlog. We had a strong order intake this year, SEK 169 billion on the year and SEK 100 billion this fourth quarter. So we have built a substantial order backlog to deliver from going forward. And compared to last year, we have extended both the duration of the backlog for the years to come, but also increased the backlog for the closest years '26 and '27. So it's increased 29% for '26 and 46% '27. So this really gives us a good comfort for future growth and a good foundation for growing the company within the years to come. And finally, just look at the trend of the backlog that has been strong for -- the growth has been strong over the last years, amounts now to SEK 275 billion and corresponds to 3.5x our sales that we had 2025. So this is really supporting our long-term growth. So by that, I hand over to you again, Micael, to guide us through the midterm targets. Micael Johansson: Thank you so much, Anna. And yes, coming back then to our medium-term targets, I mean, one has to reflect a bit upon that this is our way of measuring progress over time, of course, and our best assessment of how this business will evolve over time. And we have performed really well. As you know, Anna mentioned, we have had 24% in average growth over the period of '23 to '25. And as I will show shortly, we are increasing our now target to 22% in average over the period of '23 to '27. We think we have a very strategically positioned portfolio, of course, that is fitting the market demand in a very good way. And now when we see the product offering growing and the contracting order intake on that side growing, in combination with better performance on the platform side, even though I recognize the fact that many of these sort of campaigns are not only about the great offering that we have, but also political decision. I think we have a very good position having both in our company. And we have shown now during the last few years that we are able to ramp up both from a sort of increasing our company in terms of great employees supporting us, and we have a very attractive company to come and work for, but also our capacity increases when it comes to production and getting a lot of the backlog sort of delivered to our customers, which is incredibly important. We will continue to invest and never compromise sort of anything that has to do with the future when it comes to R&D and new capabilities, embracing new technologies. and continue to expand capacity, of course. So we will continue to invest to make sure that we can meet this market demand. And now also going into the target upgrade that I will show you, we -- of course, as Anna showed just shortly before, we have a record order backlog of SEK 275 billion, which has now also increased in terms of how that is spread over the years. So all in all, this is a very good position that has led us to going from a previous target perspective of 18% average growth over the period '23 to '27. We have upgraded that now to 22%, quite a step for the full period up until '27, which implies then, of course, that we will generate roughly 20% average over the next 2 coming years, including '26 and '27. We continue to reiterate our targets of growing our EBIT more than the sales growth, and we also continue to reiterate our target of having a good cash conversion of more than 60% despite all the investments that we are doing now and going forward. So that's a good sort of sign of that things look very good going forward. And from that, I am pleased to take questions. Johan Andersson: Thank you, Micael and Anna, and let's go over to the Q&A session. [Operator Instructions] So please, operator, do we have the first question from the telephone conference? Operator: [Operator Instructions] The first question comes from the line of Daniel Djurberg, Handelsbanken. Daniel Djurberg: Congrats to the stellar performance. I would like to ask a little bit, you obviously have a great order visibility on both volume and mix for '26. And I was wondering if you could give -- share any more information about how to think on operational margin development in '26 based on this visibility perhaps on group level or possibly in some of the business areas. That would be grateful. Micael Johansson: Well, thank you. First of all, I mean, I think we -- as I said, we have a good market position. And we, of course, see a good trend in terms of growth on the product side. When I say product side, I mean, Giraffe 1X, the RBS 70, the support weapons side, training and simulation, you name it. It's lots of products that is growing in a very good way. But then there are sort of a number of campaigns that are quite big, and they are, of course, more difficult to sort of assess when they -- when the decisions will be made and how political they will become and all that. So I mean, an obvious one is that we must contract now Poland on the submarine side, which is roughly, as we've mentioned before, a SEK 30 billion type of contract. But that's sort of something everyone knows. Apart from that, of course, there are an assessment of the GlobalEye within NATO that will come to a decision hopefully now in the first 6 months of this year. But I can honestly not sort of predict completely how the mix will look like in the end of the year. But broadly speaking, we have quite a few campaigns that sort of can generate good order intake, supported by the continuous growth on the product side. I won't go into talking about operational margins and what have you more than that we continue to grow this top line and we continue to grow the EBIT more in terms of growth. And obviously, I think we are we are doing well on that side. The mix will define and there will be different mixes in different quarters exactly where we will be. But sort of that's the trend that we have right now. And this is something we are careful about also looking into the investments we have to do and the R&D efforts we have to sort of continue to perform really well in to be capable going forward. So you won't get sort of a specific number or a range or anything. You have to, unfortunately live with sort of the guidance that we've given on growth of EBIT, I think. Operator: The next question comes from the line of Ian Douglas-Pennant, UBS. Ian Douglas-Pennant: So on your medium-term guidance, so there's some language in the press release saying it's implied 20% growth expected in 2026 and 2027. Could you help us understand the phasing within that? I mean, I know you don't want to give 2026 guidance, but can you just help us roughly understand, presumably, there's more growth in '26 and '27. And then related to that, again, how much of that guidance is secured by orders you've already received and where any risk around that guidance? Micael Johansson: Well, as you saw, I mean, from what Anna showed on how the backlog is spread over the years, it's high numbers already in the backlog, both for '26 and '27. And then, of course, it's up to us to generate sales new orders. And that is sort of varying every year, but it gives us quite a confidence that we can reach sort of an average, as I said, 20% growth over this year and next year. And I won't sort of go into any sort of specifics on '26 versus '27 because then we go into guiding for both years simultaneously. And that we've decided not to do that. But take a look at the backlog, how it's spread and you can have a view of sort of what can we achieve in terms of sales new orders, which can be also looked upon in a retrospective perspective, of course. But that's where we are. So I won't divide '26 with '27 in a more sort of detailed way. This is where we are. And 20% average is good. Johan Andersson: Perfect. Thank you very much for your question, Ian. Do we have a next question from the telephone conference? Operator: The next question comes from the line of Tom Guinchard, Pareto. Tom Guinchard: A question on Surveillance margins here just looking into '26, '27, '28. You mentioned on the Capital Markets Day earlier last year that you had some unprofitable business that you're managing? And how much of that has been dealt with as of today and sort of margin potential there for surveillance going above the 10% EBIT margin line. Can you comment anything on that? Micael Johansson: Well, I think, I mean, as we're showing right now, surveillance should be a profitable business. I'm not going to guide in detail on that, but they should be on or above 10%. So that's sort of the business they have in the mix. And I would say that we have taken steps to sort of either mitigate loss-making business or sort of making sure that we have a sort of a crossroad decision on whether that business should be within surveillance or not. But we're not done yet. That will continue a bit this year to improve even further. So if you're asking, have we divested the loss-making business yet or sort of stopped sort of the losses completely? No, not yet. We're working it. And we'll tell you when we have done it completely. Tom Guinchard: Perfect. And just a quick follow-up on the T7. You said a couple of years ahead with negative numbers here and increasing cost. You said throughout '25 that costs actually accelerated for the T7 program. are we looking at '28, '29 or mid-'27 that you previously indicated? Micael Johansson: I think we're looking at '28, '29 actually. But with one sort of comment on that, this is based on the numbers we have now in our contract and how quickly the U.S. Air Force wants to receive sort of the aircraft going forward. This can change a bit depending on renegotiations between Boeing and the U.S. Air Force that will sort of flow down to us, and it can change from a margin perspective overall in terms of getting additional contract into the business. This has not happened yet. But as we speak, I mean, you have to think we have probably 25 to 30 aircraft in the pipeline in the factory right now. And it's just sort of to get the flow out of the customer that we need to achieve. And it's a bit sort of -- I can't be sort of exactly sure on which year we will now pass sort of going positive perfectly, but it's not this year, I would say, if I'm going to be honest, but Aeronautics as a whole will improve. But this is where we are on that program. It will be a good program to us. There will be many, many aircraft delivered to U.S. Air Force and others. So this is numbers that we're not used to on aircraft side. This is 1,000 aircraft and beyond that in the end. And we're just in the beginning having delivered a handful of aircraft. So yes, that's where we are. So it will be a good thing, but it unfortunately takes some time. Johan Andersson: Many thanks, Tom. Let's take 2 questions that we have received over the web here. One is around Canada in Gripen, and it was a lot of discussions and media around that for a couple of months ago. Are we seeing any progress? Or have we -- is that relation progressing? Micael Johansson: Well, Canada is, of course, looking into -- looking to a crossroad decision, I would say. There are 2 parts of Canada. One is campaigning to win a global business in Canada, and we're waiting for sort of that procurement to happen. That's a campaign. Then Canada is looking into, do we want to have sovereign capacity when it comes to aeronautics having more of a -- not to be too dependent on the U.S. by having a dual fleet, maybe both F-35 and the Gripen. And there, we are providing all detailed information that they need to understand what it would mean to Canada. How quickly would we do a technology transfer? How quickly can we build up a Gripen hub in Canada for manufacturing? And how would they be involved in the full export market perspective of the fighter business. We're providing that, and they're asking questions. We are providing that, but it's sort of a very high-level political decisions that they have to make. And exactly when they will make that decision, I don't know. But of course, we have intensive discussions around this, absolutely. Johan Andersson: Perfect. Many thanks, Micael. Another question on that is that we have seen media figures that you're ramping up the Gripen production capacity to around 2030 in the coming years. Are we progressing with that? Is that going according to plan? Micael Johansson: We are. We're taking many, many initiatives and investments to make that happen. And we already now have 3 contracts to deliver to Sweden, Brazil and Colombia. So that is going according to plan, and you will see more and more aircraft leaving the factory in Link�ping, but also in Brazil. And if we are successful in the market, maybe we'll build another hub somewhere. But right now, we're focusing on the Swedish and the Brazilian hub, of course, to expand that. And that is going according to plan. Johan Andersson: Perfect. Thank you very much. Operator, do we have any further questions on the telephone conference? Operator: The next question comes from the line of Carlos Iranzo Peris, Bank of America. Carlos Peris: On the GlobalEye, how should we think about the delivery time line of the 3 GlobalEyes to Sweden? Any chance you could put forward those 3 deliveries? And if you can share any time line to go to 4 per year on the GlobalEye? Micael Johansson: Well, on the GlobalEye contract to Sweden, I'm not sure we're going to say an exact delivery date on that, but it's not far away. We are working diligently on all 3 aircraft now. So Sweden quickly needs the capabilities. In the next couple of years, they will have it. And that's sort of what I can say about the Swedish contract. And then if the question was the pipeline on GlobalEye going forward, there are quite a few. I mentioned the NATO initiatives. We have provided information, a request for information from NSPA, the acquisition authority within NATO. And because there are 9 countries now, the partner countries that want to have a common -- use a common NATO capability. And I think we have a great offer there with a great schedule, and there is a gap here, so they need it. So that's an obvious one. The Nordic perspective, I think it's interesting how can the Nordic countries combine efforts in using an airborne early warning capability. It hasn't materialized yet. Sweden has contracted 3. Let's see if we can get the other countries involved in that. Then we have an interest. France actually contracted 2, but there is an option for 2 more in France. We have an interest from a couple of countries in the Middle East for this capability. So yes, there is a great interest for GlobalEye, and we're also increasing our capacity to deliver a number of aircraft per year also on that side. Johan Andersson: Perfect. Thank you, Micael. Sounds promising. Operator, do we have next? Operator: The next question comes from the line of Bj�rn Enarson, Danske Bank. Björn Enarson: A question on Dynamics and the capacity expansion that you are doing in India, also Sweden and United States. Are there any -- how would that impact the profitability like near term, midterm? Or are there anything that will distort the picture? Or will it be a good drop-through from day1? Micael Johansson: I think the mix of things will -- we haven't taken into account that, that will have sort of a moment effect somehow at a specific moment, an effect on our profitability. I think it will be a very automated setup in the U.S. and also to some extent in India. And then it more depends on the mix of how the contract looks like in our facilities there going forward. When the individual salt munition production comes into play in Grayling in Michigan, of course, it depends on volume rather than whether the facility is efficient and also combine that with Ground-Launched Small Diameter Bomb. It will be good contributions to capacity. We haven't sort of taken any assumptions on that it will affect profitability really. We will, of course, have some sort of learning curve in these facilities, but the Dynamics will still sort of have good numbers going forward in terms of the mix that we see. I wouldn't sort of connect a specific factory that comes into play to any effect on Dynamics as such. It's not on that level anyway, that it will affect us. Anna Wijkander: I think I can just add... Björn Enarson: Normal business basically. Anna Wijkander: And the capacity increases are really happening stepwise. It's not just a big boom. It's happening in different places and different steps gradually. Micael Johansson: Good. Thank you very much, Bj�rn. Operator, do we have another question from the telephone conference? Operator: The next question is from Afonso Rosario, Barclays. Afonso Osorio: Micael, can I just follow up on this backlog situation? Given the significant number as of today, can you tell us the average duration of the contracts that go beyond 2029? I'm just looking at this Slide 21, where you showed the phasing over the coming years, and it will be super helpful to have your views on the story beyond 2029. That would be great. Micael Johansson: Yes. Anna showed a slide on that, but it stretches, of course, until 2029, right? Yes. Okay. So well, I think it's a good spread over the years. I mean, already, if you look at '29, it's like after that, we have still like SEK 35 billion to SEK 40 billion in backlog to deliver. So it's a good spread, but it's also quite high level sort of during the first few years that has increased substantially from sort of the same position we had last year. So it looks good from a long-term perspective. I mean the big platform contracts are adding to the long-term perspective, while the product side of things is very much more short term, like sort of within 2 years. So when we get contracts on the platform side, submarines, GlobalEyes, Gripens, of course, that sort of extends our backlog over many years to come. And that's good for us. So that's why the balance is important. But then you can't predict in the same way exactly when you get more product contracts. You don't get 10-year contracts on Karlskoga ammunition, for example. That's not what we have. But the platform contracts are quite sort of beyond 5 years in terms of how they spread. So I can only say we have a very good market position, as I tried to say, and we are confident that the capacity increases that we're now taking into the operations will sort of give us a possibility to meet the market demand. And we don't see that sort of diminishing in any way as we speak. And as I said, difficult to say exactly when the bigger contracts will come into play and how political they will be. So this is the world we live in every day. But it's a good spread and a good backlog. Operator: The next question comes from Mikael Las�en, DNB Carnegie. Mikael Laséen: Okay. I have a question around the order backlog and the capacity situation. I'm wondering if you can say something about where you are most capacity constrained today and where are the 2, 3 concrete bottlenecks that you could fix in '26? And also comment on the CapEx coming couple of years. Micael Johansson: Well, when it comes to where are we most constrained, I mean, I would say if there's one thing that we work diligently now, it's maybe not our factories or capacity increases as a prime that we're worried about them being set up. It's the material supply, it's the supply chain that we work diligently. So we know that the ecosystem of companies we work with supports us in this growth journey. There are pain points there. That's sort of -- but I wouldn't point to any specific, we have certain issues on the missile side. We have certain issues on the ground combat side, but we also have issues on the sort of fighter side. So everything, if it's summarized, comes down to we have to be extremely diligent on making sure that we have a balance by sort of what kind of inventory level do we have to have to support our commitments and how can we assure that we have commitments from our supply chain to support us in this growth journey. I wouldn't point to any specific area where we have more problems or possibilities than any other areas, I would say. We're doing well, but I'm just saying that this is a huge ecosystem of companies in the supply chain at different tier levels that everyone uses. So it's not only us. So we also have to make sure that we are sort of proactive in how we work with our suppliers. So we get priority. Anna Wijkander: To add on the -- regarding your question regarding investment levels, I mean, we have increased investment substantially this year, and we see continued need for high investment levels going forward as well. So... Johan Andersson: Absolutely. Good. Let's take another one here from the... Micael Johansson: It won't be less than the 7.2% that you saw this year. That much I can say. But still with good sort of -- as you've seen good targets. Johan Andersson: Good. Another question here from the web. You were selected by Poland in quite fierce competition. Why do you believe you won there? What's your edge on the submarine side? Micael Johansson: Well, first of all, this is about sort of how do we, in this region make sure that we protect the Baltic Sea and create returns through acting in the Baltic Sea. And of course, the A26 is a fantastic conventional submarines with capabilities that are adapted to that environment. And then, of course, Poland and Sweden have -- both countries have naval capabilities that can work together in an interoperable way. And we can train together, of course, if we use the same submarines. So it's both a security policy perspective, defense and deterrence perspective, adding to the capability in the Baltic Sea. But then it's about that we have a great product as well. And on top of that, we want to establish industrial collaboration so we can have redundancy in capacity at both sides of the Baltic Sea. So it's a number of parameters, of course, that are really logical to sort of make this happen between Sweden and Poland and between Saab and Polish industry. So -- but in the sort of the foundation of everything is that we have a great product. Johan Andersson: For sure. Yes. Good. Another one, you talk a lot about innovation. Can you give 1 or 2 examples, either of something you just have released or something that's really keen about that's coming out? Micael Johansson: I hope that people understand what we did sort of during '25, during the summer, and we're continuing to do that to have an AI agent supporting a pilot in a fighter aircraft like the Gripen E is something quite unique and how much that can add to the work sort of load of a pilot in different types of emission. It's a fantastic innovative example of innovation example of what we quickly can achieve with existing air forces. But then, of course, as anyone else, we have innovative sort of R&D that has led to counter-UAS systems, for example, the local system, which is involving our C2 systems, our radars and our track. We're part of what was launched this week, Sweden and Denmark spending SEK 2.6 billion on counter-UAS systems for Ukraine. And of course, our C2 and sensors are part of that as well. And then we have SOM technology on the quadcopter level, so to say, that can do missions for the Army. And we're working sort of specific autonomous systems also in all domains. So we have many, many innovation initiatives that we are spending money on to embrace new technology and work with partners on. Johan Andersson: Great. Operator, do we have a final question on the teleconference? Operator: We have a follow-up question from Renato Rios, Inderes. Renato Rios: Congratulations to your team on a great quarter. So you keep growing a lot and you have increased your medium-term target for the revenue. In absolute terms, that means that you -- from an observant point of view, it's quite challenging in terms of absolute values that have to be delivered like volume-wise. And in the industry, it just -- it takes a bit to align capacity, sometimes it takes years and you have to build factories. So obviously, you are ahead of that because you are hiking your medium-term revenue targets. So based on that, could you give, I guess, as much context as you can on the capacity requirements to deliver the growth that you're expecting through 2027? I mean, is the capacity and the supply chain already fully or mostly aligned to deliver on that? And included in that answer, you could just -- it would be nice to hear you reflect out loud about the constraints that would make it difficult for Saab to deliver on the new targets. Micael Johansson: Well, it's, of course, impossible to say that this specific capacity in terms of a facility or a factory needs to come into play for us to deliver this portion of our backlog. It is not happening sort of like a one-off thing. It's happening gradually. And specifically in Sweden, when we invest heavily in the Karlskoga area, where we have 40 sort of construction projects ongoing, one by one, they come into play to support this backlog. Now we have capacity to do lots of the backlog. Our investments are also meant to take us even further, of course. It's not that we have -- everything we've talked about in terms of investment do not have to come into play fully for us to deliver this backlog. It's not that much connected on that level. We can do lots of this with the capacity we have, but we also need to have more going forward. That's our view of things. I don't know how to elaborate more on that. Of course, the factories we've talked about with that capacity, but they also need to be filled with new orders. So we have both in this. That's all I can say. I mean, we are taking a big responsibility from the demand perspective in the market to be proactive to provide capacity, which all politicians are saying that we have to because the growth will continue. So it's not 100% clear answer. But you can look upon, we have up until now, in certain areas, four, fivefolded our capacity compared to what we had like in '22 in terms of ammunition and sensor capability, it's a lot higher already. But we think more will be needed. And some of it is needed to sort of deliver on the customer commitments that we have in our backlog, but some of it will be devoted to future contracts. I don't know how to answer the question in a more detailed way. Johan Andersson: Operator, do we have any final questions on the telephone conference? Operator: The final question is from Ian Douglas-Pennant, UBS. Ian Douglas-Pennant: You mentioned that late in the quarter, you booked some GlobalEye milestones. Could you help us size that effect, please? Just -- I'm sure you're not going to give us an exact number, but just roughly how important was it in terms of driving the outperformance versus expectations in that division, please? Micael Johansson: Yes. In Surveillance, we did have an effect of recognizing revenue and profit from the contract we got in France, obviously, but it's not super substantial. I don't want to give an exact number to it. It would have been good numbers anyway, but there is some revenue recognition and profit recognition from that contract because we have been selected and we had agreed to start sort of our work to make sure we keep the schedules and that we did. And that we could, of course, recognize then when the contract was formally signed. But it was not so substantial, so that drives this fantastic quarter in any sense. Johan Andersson: And operator, I don't think we have any further questions in the telephone conference. Do we? Operator: There are no more questions at this time. Johan Andersson: Okay. But I think with that, we will conclude the presentation of the Q4 and the full year results from us here at Saab. Importantly, we will be on the road now for both here in Stockholm, Paris, London and Helsinki as well during the coming weeks here. So looking forward very much to see you out there, and then we report the Q1 then in April. So thank you very much for listening in today, and have a nice day.