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Magnus Ahlqvist: Good morning, and welcome, everyone. Andreas and I are proud to report strong results for Q4 and for the full year 2025. So let us go straight to some of the performance highlights. The organic growth in the quarter was 3%, and this was supported by 6% growth in Technology & Solutions. We had a good finish to the year in Technology & Solutions with 2% improvement sequentially. And the adjusted organic growth of the group -- and that means when you exclude the closedown of the SCIS business was 4%. And now to something important. The operating margin was 8% and 8.2% adjusted in the quarter, thanks to the strong delivery across the entire business. North America achieved a 10% operating margin in the quarter, and Europe delivered another quarter with more than 8%. And we have improved the operating margin now 20 quarters in a row and are delivering on the 8% target that we communicated 3.5 years ago. EPS real change, excluding IAC was also strong at 18% and we had continued strong delivery in terms of cash flow with operating cash flow of 88% for the full year and net debt to EBITDA ratio improved further to 2.1. And based on the stronger underlying performance, the dividend proposal is SEK 5.30, which represents an 18% increase. And looking at the future, we announced a very important milestone for our journey with the acquisition of Liferaft yesterday evening. And this is the leading provider of threat intelligence and I will provide more details regarding the strategic importance of Liferaft at the end of this presentation. So let's then shift to the performance in the business lines and segments. We delivered strong margin development in both business lines with 12.7% for Technology & Solutions, 6.6% of Services in the quarter. And there is growth, as I stated, in Technology & Solutions for 6%, so 2% improvement compared to the previous quarter. And the growth in Security Services was 1% and this growth is obviously negatively impacted by the SCIS business where we're closing down the government part of that business. So with that, let's move to the segment, and we are starting, as always, with North America where we're delivering a very strong set of results and a record 10% operating margin in the quarter. And if we start with a growth of 5%, this was driven by good portfolio development and price increases in the Guarding business and by good development in technology. The real sales growth in Technology & Solutions improved to 4% compared to lower growth in the previous quarter. And when looking at the profitability, strong leverage and cost control in Guarding, together with solid profitability in Technology and a recovery in the Pinkerton business all contributed to the record level operating margin. So all in all, a very strong performance, a record-breaking 10%, so well done by our North America team. We then move to Europe, where we are also very pleased with the development. The organic growth was 4% in the quarter, and the growth was supported by price increases including impact from the hyperinflation environment in Turkey and also by solid growth of Technology & Solutions, while active portfolio management in the Services business had a negative impact on growth. Sales growth in Technology & Solutions was 7%. But it's the profitability development that stands out with 110 basis points improvement to 8.1%. And the margin improvement was driven by both business lines, including positive impact from the business optimization program. The Security Services business was positively impacted by higher margin on new sales, active portfolio management and also the divestiture of the Airport Security business in France. We also recorded a solid improvement in the operating margin in the Technology & Solutions business line driven by good portfolio development and solid cost control. And as commented earlier, we expect the work we're addressing low-margin Guarding contracts to be completed during the first half of 2026. So all in all, solid development by our European team and also here an operating margin at a record level. Shifting then to be Ibero-America, where we are pleased to report good organic growth and decent margin improvement. The growth was 5%, and this was driven by high single digital growth in Technology & Solutions and prices increases in the Services business. But similar to Europe, there is a negative impact on the growth from active portfolio management, but we're making good progress here and driving good conversions to Technology & Solutions. And the real sales growth in Technology & Solutions was 7% in the quarter. The operating margin improved 20 basis points in the quarter, and the improvement was primarily driven by positive impact from active portfolio management in the Security Services business line. So to conclude, strong delivery in 2025 by our Ibero-America team. And looking then at the performance across the group, we are driving disciplined execution of our strategy, and I'm really pleased to see strong execution across all segments. And the client retention is solid at 90%. So with that, turn to the finance update and handing over to you, Andreas. Andreas Lindback: Thank you, Magnus. And first of all, if I sound different to normal, it is because I'm about to lose my voice, I apologize for that. We start with the income statement, where we had organic sales growth of 3% and improved the operating margin with 70 basis points to 8%. It is a strong quarter where we improved our operating income with 15% adjusted for currency. As we communicated in Q2, we have introduced 2 new KPIs, which are adjusting our organic growth and our operating margin for the government business to be closed down within SCIS. In the quarter, the adjusted organic growth was 4% and the adjusted operating margin was 8.2%. Looking below operating results, there are no material developments in amortization of acquisition-related intangibles nor in the acquisition-related costs. The items affecting comparability was SEK 78 million, and this was related to the ongoing European transformation and business optimization programs. And the full year cost for these programs was SEK 382 million, approximately in line with our previous guidance. We have executed the business optimization program in a good way where the annualized savings in Q4 are in line with the targeted SEK 200 million savings. The business optimization program is now closed. And in 2026, the only remaining program is related to the European transformation. And here, we estimate to have a full year 2026 program cost of SEK 225 million to SEK 250 million, a material reduction compared to the SEK 382 million related to the programs in 2025. In Q3, we took a SEK 1.5 billion cost in items affecting comparability related to the close-down of the government business within SCIS. The close-down is progressing according to plan and had limited impact on our operating result in Q4. We continue to expect the vast majority of the business to be closed down by the end of 2026, and we will also start to see an accelerated execution of the close-down during the first half year. Our finance net came in at SEK 383 million, a reduction of SEK 146 million compared to last year. And here, we continue to see a positive trend of reduced financing costs as interest rates and our debt levels are going down. For the full year 2026, we estimate the finance net to continue to reduce and land around SEK 1.6 billion to be compared to the SEK 1.8 billion for the full year 2025. Moving to tax. Here, we had a tax rate of 29.5% for the full year, slightly higher than our Q3 forecast of 29.2%. The full year tax rate was impacted by the SCIS close-down cost in Q3, where we estimate around half of the cost to be tax deductible over time. Adjusted for the close-down impact, the full year tax rate was 27.2%, and we expect the 2026 tax rate to be in the approximately same area. All in all, we have a strong quarter where we grow our FX adjusted EPS with 18%. And as we summarize 2025, we have improved our adjusted operating margin with 60 basis points to 7.7%, grown our operating result with 11% and grown our EPS with 18%. And at the same time, we also achieved our financial target of an operating margin of 8% in the second half year of 2025. The adjusted operating margin in the second half was 8.2%. We then move to cash flow, where our operating cash flow was solid at SEK 3.9 billion or 128% of operating income. The cash flow was supported by lower growth rates and the continued improved DSO, but also negatively impacted by the additional USD 44 million payroll in our U.S. Guarding business as we communicated in the third quarter. This negative impact is a timing impact only, which occurs every fifth to sixth year. The free cash flow landed at SEK 3 billion, supported then by the solid operating cash flow, reduced interest payments due to the lower interest rates and debt levels and positive tax timing impacts. Looking at the full year 2025, we delivered another year of record cash flow. The operating cash flow was more than SEK 10 billion or 88% of the result, supported by good working capital focus and lower growth rates. And we have now delivered operating cash flows above our financial targets of 70% to 80% over the last 2 years, a result of our strong focus to build a more qualitative business and also structurally improve our working capital over time. And this has, of course, also translated into stronger free cash flows, which creates increased flexibility and opportunity for us as we move into a new phase of our strategic journey. Our cash generation will also be positively impacted as our items affecting comparability continues to reduce as we go into 2026 and beyond. We then have a look at our net debt, which was SEK 31.3 billion at the end of the quarter. This is a reduction of SEK 2.1 billion compared to Q3, mainly supported by the strong free cash flow, but also by the strength in Swedish krona. In the quarter, we paid the second tranche of our dividend, and we had SEK 321 million of total IAC payments, whereof approximately SEK 160 million was related to the final payment for the U.S. government and Paragon settlement. We have now made all 3 payments related to this settlement and expect no further cash flow out related to the case. Looking at the right-hand side, our net debt to EBITDA reduced to 2.1. This is an 0.4x improvement compared to Q4 last year, where positive EBITDA development, good cash generation and the strength in Swedish krona have supported positively and we are well below our target net debt-to-EBITDA of less than 3x. Moving on to have a look at our financing and financial position, where we continue to have a strong balance sheet, remain with strong liquidity, and we have no financial covenants in our debt facilities. After a period of important refinancing focus, our main focus during the second half of 2025 has been to amortize debt, supported by the strong free cash flow generation. In the quarter, we repaid SEK 1.9 billion of debt and throughout 2025, we have amortized a total of SEK 3.3 billion. This continues to support our cost of financing going forward. And looking at the maturity chart, we have very limited refinancing needs throughout 2026. And as always, we remain committed to our investment-grade rating. So with that, I hand over back to you, Magnus. Magnus Ahlqvist: Many thanks, Andreas. So I'd like to share a few perspectives regarding our strategic development and the Liferaft acquisition before we open up the Q&A. First, we are proud of the fact that we are reaching our 8% target in the second half of 2025. Back in 2022, when we did the Stanley acquisition, we accelerated the work to change the profile of Securitas security company with the strongest technology and digital offering to our clients in combination with high-quality guarding services. And when looking back at last 4 years, we have been executing well. We are a sharper, more focused company today and operating at a different margin level. And as we're entering 2026, this also means that we can then start to retire this bridge that we have kept coming back to every quarter and over the last 3.5 years. Looking at the future, we're very excited about the acquisition of Liferaft. So when I look at the transformation of Securitas during the last 6, 7 years, we have kept a clear focus on investing in the core capabilities that we consider critical to winning in this industry and those are focused on presence, technology and data. In this context, we strengthened our guarding value proposition. We have improved the profitability of guarding. We've built a globally leading technology position and a more modern and digitally capable business. So we have strong pillars in our business today. But we've also worked to meet the increasing client demans for better understanding the risks and the threats facing their business. And over the past 5 years, we have developed in-house risk intelligence capabilities that we are providing to more and more customers. So all this is good, you might say, but what is then the importance of the Liferaft acquisition? Well, Liferaft is one of the leading SaaS-based threat intelligence providers focused on OSINT and that's open source intelligence. This is a very strong team with deep expertise in threat intelligence and they have been a partner and provider to Securitas for many years. And with Liferaft, we will be able to scale and leverage their capabilities across our client base and in the process strengthen our clients value proposition. When looking at the financials, the company is currently prioritizing rapid expansion and growing organically around 30% on an annual basis, but also then reinvesting very strong gross margins to accelerate organic growth. And given the increase in demand in this market, I fully support this approach. The acquisition is fully in line with our strategy to create a more scalable business model and becomes an important addition to accelerate growth in high-margin recurring monthly revenue. And as previously stated, the recurring monthly revenue for the group exceeds more than SEK 1 billion. So we are thrilled to welcome the Liferaft team when we are closing the transaction, joining forces to shape the future with more intelligence-led security. And the future is promising. With the transformation of Securitas, we're well positioned with a clearly differentiated client offering, well positioned for profitable growth. And we are operating in an attractive market, but also a growing market where we see steady increase in the demand for quality security. We have transformed and repositioned our client portfolio with a clear focus on segments with more sophisticated security needs and higher growth profile. And we partner with our clients for the long term and we see that our deeper engagement model, where we leverage our technology and digital capabilities, is generating high value for our clients and also for us. And the approach is working. So like Andreas and I have commented, we're executing well on our plans, 20 consecutive quarters of operating margin improvement and solid cash flow generation. We've had a clear focus on enhancing the quality of our business and margin improvement in recent years. But as more and more units reach the required profitability thresholds -- so from my perspective, that means for a good sustainable business, they also gained the right to shift focus to profitable growth. And with the business now in much better shape, we can shift emphasis towards commercial synergies and driving growth. And as stated many times, we do this with a clear focus on building a more scalable business. So we are confident and excited about our longer-term opportunities and we're looking forward to sharing more in the Capital Markets Day in June. So in conclusion, we are on the right path, well positioned for the next phase. So with that, we conclude the Q4 presentation and happy to open up the Q&A. Operator: [Operator Instructions] The next question comes from Francesco Nardinocchi from Goldman Sachs. Suhasini Varanasi: This is Suhasini from Goldman Sachs, actually. I just had a couple of questions please. So the -- if we think about your growth and margin expectations for the first half versus second half of this year, would it be fair to say that because of the impact of your underperforming contract exits that's going to be completed by first half this year, maybe the growth is a little more weighted to second half and similarly on margins. And I'm not sure I read but how much are you expecting to pay for the acquisition of Liferaft? And how is your M&A pipeline looking at this point in time? Magnus Ahlqvist: Yes. Thank you. So when you're looking at that, I think it's the right assumption that finalizing that work will have a negative impact in the near term from the active portfolio management. But that's why it's also so important and so positive that we are soon done with that work. And as I commented in the last couple of years, we were more quick in North America in terms of finalizing that work. So I think that is obviously something that we're looking forward to also in Europe. Then when you look at the growth in Q4, we had 6% growth in Technology & Solutions, and that's a clear improvement compared to the previous quarters. We have a strong offering. Solutions is more of a portfolio business. Technology part, there's also some variability with installations, but we see that we are on a good path. So I think that is the other part that I would just highlight because that part of the business, there is no impact from active portfolio management. Andreas Lindback: We have not disclosed the purchase price related to Liferaft simply due to commercial reasons that we're not doing that. But we have paid a fair market price for this type of business overall. So -- and there will be some details coming as we have closed the transaction as well. On the M&A pipeline side, as we have said, we are ramping up our focus on continued bolt-on acquisitions within Technology & Solutions and some targeted also acquisitions in the intelligence area. We made a few minor ones outside Liferaft, but we are still in ramp-up mode, I would say. So the pipeline is not -- there's not a huge pipeline at this point in time, but it's something that we are working towards improving. Operator: The next question comes Remi Grenu from Morgan Stanley. Remi Grenu: First, a quick question on the 2026 outlook. I guess, given you have achieved the 8% and the CMD is not before June, we are left a little bit in dark in term of margin development. So just trying to have your overview on 2026 margin development if we exclude any -- excluding the positive impact that the closure of SCIS is going to generate. But on an underlying basis with the portfolio of the company, do you believe that there is still potential for margin improvement from the current run rate at the end of 2025. So that would be the first question. The second one is on North America. The organic growth very suddenly accelerated in Q2 and it's been normalizing a little bit over the last 2 quarters. Just trying to understand the drivers of that sudden acceleration and what's happening since then? Why it is coming back down? Is it about like volume normalizing, lower pricing and also taking a step back on that market, what do you think is the structural level of organic growth in North America? And then the last one, you have come to the end of that strategic plan in 2025. Have you started to have a think about the new KPIs for management remuneration, variable remuneration and going into the next phase of the company, what do you think would be most relevant in terms of aligning the interest of shareholders with management? Magnus Ahlqvist: Very good. Thank you, Remi. So we don't provide guidance. But first of all, I think it's been really important for all of us internally and also externally that we are delivering on the 8% because it represents a very significant shift. When you're looking at 2026, driving good growth in Technology & Solutions will have a positive impact on margin. I could also expect some positive impact from active portfolio management work that we still have some of that work yet to be done. Business optimization program, we've commented as well. We successfully completed that in 2025, should also help and support. So generally speaking, I mean, we are -- and I spelled that out, I think back in 2022 is that 8% is important to achieve. We believe that now we have a really good opportunity to also be related to your third question, calibrate more precisely as well how we maximize the value creation because we've had very hard focus on improving the quality and the margin. But it's quite obvious to us as well that we get done with some of the structural work and the heavy lifting and cleaning. We're largely done with that now and that also means that we can then also start to shift focus on more profitable growth going forward. And I think that is something that we -- that is clearly on our minds. And it's also clearly something that we're also reflecting also in how we're calibrating some of the incentive programs as well so that we really gear those towards maximizing value for our shareholders. So I think those are the key points. North America, maybe briefly on your side, Andreas? Andreas Lindback: I can just follow up on the KPIs because there's also misunderstanding related to that up until now. We have both long-term incentive programs, and we have short-term incentive programs. It's right, as you say, that operating the margin has been a focus for the long-term incentive programs. But in the short-term incentive programs, which is a material part of total compensation, it is also about driving growth in the earnings as well. So I just want to highlight that. And then if you want to take the... Magnus Ahlqvist: Yes. No, that's an important point because if you look also at the operating result growth, really solid double-digit levels in 2025 in constant currency. And we are here, obviously, to drive that for change, but it's always going to be a balance as well. And we should also remember that operating margin improvement is also helping and accelerating also the operating result growth. So I think that's an important clarification about the programs that we've had up until now. When you look at North America, we feel good about our position. We feel good about the market in general. So I wouldn't -- and it's a little bit difficult to call out the specific growth numbers. This is something that in our industry, it is a little bit difficult to get a very clear understanding of how the total market is developing. But I would say that we are well positioned in terms of the segments where we are and also segments where there is, generally speaking, a higher emphasis on the quality, security is important, but there is also very healthy underlying growth. So I would say that we are well positioned, but it's difficult, Remi, to call out a very specific overall growth number. But I believe with the offering that we have, we should be able to grow at least with the market and preferably above market rate. And that is very much based on the strength of the offering but also that we are well positioned in terms of the segments that we serve. Operator: The next question comes from Andy Grobler from BNPP. Andrew Grobler: Just a couple from me, if I may. Firstly, just in Q4, in terms of the European growth, can you talk through the tailwinds from Turkey and also the headwinds from portfolio management, so sort of to get to the underlying numbers there? And then secondly on the longer-term perspective, Technology keeps evolving at pace as we can see from the stock market. I just wondered what you're seeing in your end markets? And if at this stage, there's any signs or you expect to see over time, price deflation within your monitoring activities and the extent to which that's possible. That would be really helpful. Andreas Lindback: Thank you. When it comes to the European growth rates in the fourth quarter, you can say more or less all the positive growth is coming from Turkey in essence. That's the first statement. So Turkey had an impact for sure. If you're then looking at the -- where we have volume growth was in Technology & Solutions in Europe and then there was a negative impact that we have not quantified related to the [ APM ] that is impacting the Security Services portfolio. So I think those are 3 pillars to bear in mind when looking at the European organic growth. Magnus Ahlqvist: And then, Andy, on the technology, I mean, what we call the technology business is essentially business where we drive or we design, we install systems and then we operate and serve those systems for our customers. So there's a couple of different components. But a big part of the value, I would say, when I look at the kind of 3 main areas of activity, installation, service maintenance and also monitoring is that, that work is quite tightly connected. So when we are doing a good integration and installation work, we're very well positioned to also provide the best type of service and maintenance. But more and more of what we are doing and what we're also interested in building is more the recurring revenue. And there, obviously, connected services, those are usually not just simple kind of monitoring lines, for example, it's usually part of a broader value proposition and there, I believe that we are in a good position based on the great strengths that we have built. And where also the deep integration of Stanley has really helped us because we have built genuinely good service capability and levels and also [ rich ] service offering to our clients as well. So I think that we are in good shape in that sense from a market perspective and also the offering that we bring. Andrew Grobler: Okay. And then just lastly, Andreas, thank you for all your help over the years and best of luck with whatever the future may bring. Andreas Lindback: Thank you. And likewise, Andy. Magnus Ahlqvist: I remember to say a special thank you to Andreas at the end of the call today as well. But I'm glad you comment that, Andy. Andreas has been a great partner all along here. Operator: The next question comes from Allen Wells from Jefferies. Allen Wells: A couple from me, please. Firstly, just following up from Remi's question on North America. Obviously, very mindful that active portfolio management has been a headwind to growth. And as that starts to end, you flagged in Europe in the first half, that should be a positive as you switch to that growth focus. But as Remi flagged, as we look at North America, the portfolio management has ended and growth has slowed sequentially from 2Q through to 4Q, the 5% we saw in 4Q. To what extent is that slowing in North America? Are you guys maybe holding back to focus on margin rather than kind of fully pushing the commercial engine in the business? And to what extent maybe is it just that it's a continued tough market that is still hard to drive growth? That would be the first question. Secondly, just like a bit of an update on the technology side. Obviously, growth improved sequentially 6% in the quarter, but it's still well below the 8% to 10% target. So I'd be keen just to understand of that 6%, how much is pricing, how much is volume and how you think about the outlook towards that 8% to 10%? And then third question, just on free cash flow. Just in the full year, obviously, a positive outcome overall, but there was a positive impact from working capital for the full year. Like I don't typically think of you guys as a positive net working capital business. So to what extent is that net working capital number sustainable and how should we think about potential unwind as we move through 2026 as well? Magnus Ahlqvist: Thank you, Allen. I think on the first question, we don't see any change in the trend in North America. I mean some variation there will be between the different quarters. We are well positioned. Like you highlighted, we've done with the active portfolio management, and it's obviously a dynamic market. But when you look at what we are winning and what we are losing, yes, we feel good. So no major issue or anything specific to read into that from my perspective. Andreas Lindback: When it comes to the Technology and Solutions growth, when we set the target of 8% to 10%, it's important to remember that was also including acquisitions. And there, we have done limited. We've been focusing on integrating and then also taking down our balance sheet, although it's something that we are looking at ramping up. So in that context, the 6% is a decent number. When you look into that 6% on the Technology side, it is definitely volumes mainly from that growth. If you're looking at the Solutions side, it's a combination of both volumes and price. So all in all, more volume than price when it comes to the 6%. So -- and it's also a decent number, we should say. When it comes to free cash flow, a couple of lenses here. I mean, we said in the last Capital Markets Day, yes, there will be a mix shift in the working capital with the technology business coming in. But we also said clearly that we are working on structurally improving our working capital, and that's really what we have been doing over the last couple of years, which is giving a positive result. So we have definitely structurally improved on the working capital side. And we also show that in the 88% cash flow this year, 84% last year. So it's also not just a temporary change. Then as you all know, we have seasonality in our cash flow, where our Q4 cash flow is stronger. And now the number is coming in somewhat below Q4 last year, but still at a very strong level. So going into Q1, yes, it will definitely be weaker from that standard seasonality that we're having. But the underlying trend, I think, is most important when it looks at the cash flow given we have volatility. And there, I hope you all see that we have elevated the cash flow, and we are now delivering above our financial targets 2 years in a row. Operator: The next question comes from Viktor Lindeberg from DNB Carnegie. Viktor Lindeberg: Two initially, if I may. And looking at the mounting down of CIS in 2026, if you could share some more details on the run rate and how it's sort of expected to progress and where we may be end of 2026 in terms of revenue? Are we all the way down to 0? Or is it only maybe halfway there? And second question is associated also to this, trying to trickle out the underlying cost base for the, call it, group other item or overhead line items here. So if you could share any guidance or thoughts on the underlying costs for the Securitas business, excluding CIS, that would be very much helpful. Andreas Lindback: Thank you. If we start then with the government business within SCIS closed down, as I mentioned here earlier as well, we have started to see some impact in the fourth quarter from the close-down on the top line, but it's not much. But you should expect to see an accelerated impact in the first 6 months from the close-down activities. And then if you're looking at your question there, where will it be at the end of 2026, we expect that most of it will for sure be done. The vast majority will be done by the end of 2026. So I hope that helps a little bit by understanding how we expect this to progress throughout the year. When it comes to other in our segment reporting, 3 components, as you know, our Africa, Middle East and Asia business. We have our SCIS business, and we have the group cost. The Africa, Middle East and Asia business continued to deliver strongly in the quarter comparing them to last year. The SCIS business was fairly stable when you look at the bottom line. And then on the group cost, it was higher than last year. And here, we have been running tight cost control throughout the year. But in the fourth quarter, we released some more project investments in the quarter. And that's the main reason and then some year-end reconciliation, but that's the main reason compared to last year. To understand the trend there, I would also very much look at the full year number. Viktor Lindeberg: Okay. That's very clear. And another question on the topic you have brought up Magnus in the CEO letter this quarter, you mentioned the run rate is about -- or at least USD 1 billion or looking at the [ SAS ] and recurring revenues. And I recall you mentioned 18 months ago a run rate of [ USD 1.25 billion ] per month. So just to understand, are we talking apples-to-apples here or what -- why dimensioning or maybe confusion from my side here? Magnus Ahlqvist: Thanks, Viktor. No, we're just keen also on highlighting that we have quite a significant number. I mean, we are clearly above that [ USD 1 billion ], but we will share a lot more detail in the Capital Markets Day in June because this is an important focus area also in terms of building a more scalable business. Viktor Lindeberg: Okay. So it has not deteriorated over the past 18 months. That's what you're saying? Andreas Lindback: No, no. We have seen growth in the business since then. Operator: [Operator Instructions] The next question comes from Johan Eliason from SB1 Markets. Johan Eliason: I just had a bit of a detailed follow-up on to Andreas. You mentioned that in 2026, you expect some SEK 225 million to SEK 250 million in items affecting comparability. Is that sort of including this 1% of revenue you are sort of reviewing right now? Or could there be some one-offs on top of this from this review? Andreas Lindback: Relevant question. The number that I mentioned is excluding any impact from strategic assessments, which obviously then could be both a positive or negative number, so to say. So excluding that, just for clarity. Operator: The next question comes from Nicole Manion from UBS. Nicole Manion: Just one quick follow-up question from me, please, on the Security Services margin. Obviously, that's now up more than 100 bps over the past couple of years. Just wondering if you can give us a sense of how much of the improvement there you've seen this year over the last year is portfolio management versus what's coming from price increases or any other drivers? Are we pretty close to peak margins in this side of the business as you get to the end of the portfolio pruning? Or are there other levers you think you can look at as you move into next year? Magnus Ahlqvist: Thank you. A couple of different drivers, Nicole. When you're looking at that margin improvement, new sales margins have been consistently very healthy, and that's a good indication that we have a good offering. Clients see the value in that offering. Active portfolio management is also there contributed. But I would also say that we've also been working to also run the business, leveraging the new platforms that we've invested in a more efficient way. So automation and also AI has also been helping us to also optimize how we run the operation. If you're looking at the services margin on a group level, I think that there is further opportunity to continuously improve that in the next couple of years. So I would not agree with the comment that this is kind of peak margin. We believe that driving the things that we have been driving, but also continuously strengthening the value proposition, we are in a good position to enhance the value essentially. Operator: There are no more questions at this time. So I hand the conference back to the President and CEO, Magnus Ahlqvist, for any closing comments. Magnus Ahlqvist: Thanks a lot, everyone, for your interest and a special thank you to you, Andreas. Highly respected and appreciated colleague. I also think with -- in the dialogue also with many of you have also been a really good asset. So just to say thank you. But obviously, then looking ahead as well, we are now at full speed in terms of the assessment and also seeing really good interest also for this position. So we will come back on that matter. But most important today, I think, is just to -- yes, for me to also express our appreciation from the entire team. Andreas Lindback: Thank you very much, Magnus. And thank you, everyone, on the call as well for really good collaboration in the last couple of years, highly appreciated. Magnus Ahlqvist: So I think with that, we wrap up the Q4 and 2025 presentation. Thanks a lot, everyone.
Operator: Good morning, and welcome to the KKR Real Estate Finance Trust Inc. Fourth Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jack Switala, please go ahead. Jack Switala: Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust Earnings Call for the Fourth Quarter of 2025. As the operator mentioned, this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem; our President and COO, Patrick Mattson; and our CFO, Kendra Decious. I'd like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release and in the supplementary presentation, both of which are available on the Investor Relations portion of our website. This call will also contain certain forward-looking statements, which do not guarantee future events or performance. Please refer to our most recently filed 10-K for cautionary factors related to these statements. Before I turn the call over to Matt, I'll quickly go through our results. For the fourth quarter of 2025, we reported a GAAP net loss of negative $32 million or negative $0.49 per share. Book value as of December 31 is $13.04. We reported distributable earnings of $14 million or $0.22 per share, and we paid a $0.25 cash dividend with respect to the fourth quarter. With that, I'd now like to turn the call over to Matt. Matthew Salem: Thanks, Jack. Good morning, everyone, and thank you for joining us today. Before reviewing our company results in more detail, I would like to highlight several key achievements for KREF in 2025. First, we made significant progress strengthening our liquidity position throughout 2025. In March, we closed a 7-year, $550 million Term Loan B, which we later upsized and repriced in September, increasing the outstanding balance to $650 million and reducing the coupon to SOFR+ 250 basis points. During the year, we also upsized our corporate revolver to $700 million, up from $610 million. Second, we closed on our first loan in Europe for KREF. We have been strategically building our real estate credit platform in the region over the last several years. This transaction along with subsequent European investments in the fourth quarter represents an important milestone in that effort and positions us to capitalize on relative value across the U.S. and Europe. These transactions also serve as a foundation for continued geographic diversification. During 2025, we continue to experience healthy repayment activity, which totaled $1.5 billion, consistent with 2024 levels. We offset this with $1.1 billion of new originations and today, we are operating at the high end of our leverage ratio and targeted portfolio size. More than 75% of our new originations during the year were concentrated in multifamily and industrial loans, sectors where we continue to see resilient fundamentals and attractive risk-adjusted returns. Multifamily remains our largest property type exposure. And given our significant exposure to Class A product, we continue to observe strong underlying performance across the portfolio. We remain focused on maintaining and selectively growing the portfolio within on-theme asset classes and top tier MSAs. Looking ahead, 2026 will be a year of transition for the company. Through execution of our business plans, we have positioned much of our REO portfolio for liquidity this year. Additionally, we are going to implement an aggressive resolution strategy for a significant portion of our watch list assets and select office assets. The overall goal is to compress the discount of our stock price to book value and more quickly unlock approximately $0.13 per share embedded in our REO assets. However, this strategy will also put additional pressure on earnings until we're able to fully execute the plan. As it relates to this approach, we will need to be balanced on a few assets. To that end, I want to touch briefly on our Mountain View asset. The market continues to improve meaningfully, and we remain engaged with tenants. If we were able to sign a lease in the near term, we believe the optimal strategy will be a monetization post 2026, given a number of factors, including anticipated CapEx and tenant improvement work. Finally, I want to comment on our dividend. The dividend is something the Board is actively evaluating as part of a broader capital allocation discussion, particularly as we work through a transitional year for the portfolio. Our priority is to make disciplined decisions that balance near-term earnings visibility and long-term shareholder value. With that, I'll turn it over to Patrick. W. Mattson: Thanks, Matt. Good morning, everyone. Looking at risk ratings. During the quarter, we downgraded the Cambridge Life Science and San Diego multifamily loans to risk rating 5. As a result of these developments, we recorded total incremental CECL provisions of $44 million during the quarter. Subsequent to quarter end, we entered into new modification discussions on our Boston Life Science loan, which is currently risk rated 3. And while the loan continues to make contractual monthly interest payments, we anticipate a ratings downgrade and CECL increase in the first quarter. New originations in the fourth quarter totaled $424 million, which surpassed repayments of $380 million. In 2026, we expect full year repayments of over $1.5 billion, exceeding repayment activity in each of the last 2 years. We'll continue to originate new loans while maintaining our target leverage range alongside other capital allocation strategies. Turning to financing and liquidity. We ended the year with near record levels of liquidity totaling over $880 million, including $85 million of cash on hand, another $74 million loan repayments held by the servicer as well as $700 million of undrawn capacity on the corporate revolver. Total financing capacity was $8.2 billion, including $3.5 billion of undrawn capacity. Leveraging our internal KKR Capital Markets team, we added to our non-mark-to-market capacity during the quarter and 74% of our financing remains non-mark-to-market. We remain well positioned with no final facility maturities until 2027 and the corporate debt due until 2030. The weighted average risk rating on the portfolio is 3.2. Our debt-to-equity ratio is 2.2x, and total leverage ratio is 3.9x, consistent with our target range. Finally, during the quarter, we repurchased over $9 million of common stock at a weighted average share price of $8.24 for the full year 2025, we repurchased $43 million of common stock at a weighted average share price of $9.35, which resulted in approximately $0.32 of accretion to book value per share over the course of the year. As of the end of the fourth quarter, we have approximately $47 million remaining under our current share buyback authorization plan. Our strong liquidity position provides meaningful flexibility in managing the portfolio, allowing us to thoughtfully allocate capital across a range of opportunities, including share repurchases and new originations. Overall, we remain well capitalized and focused on repositioning the loan portfolio for improved earnings. With that, we're happy to take your questions. Operator: [Operator Instructions] The first question comes from Tom Catherwood with BTIG. William Catherwood: Matt, you talked in your prepared remarks about accelerating resolutions on watch list and REO assets. If KREF executes on this plan, and the stock doesn't materially pull to par if there's just a structural discount for monoline commercial mortgage REITs. Are you willing to take an approach similar to what ARI announced last week and look to revamp your business totally? Matthew Salem: Tom, I appreciate you joining us, and thank you for the question. I guess a couple of things there before I have addressed the ARI transaction. I think, first of all, we made a lot of progress on the REO, which is kind of why we're at this point today. We feel like we're in a good position on much of that portfolio to be able to liquidate that over the course of this year. And then obviously, start to think about our Mountain View asset, getting a lease done there and being able to execute that business plan more fully post 2026. So I think we've made the right decisions in terms of just being patient, taking good real estate back, and now we're at the point where we either advance the business plan, liquidity has returned and we can get, obviously, some monetization activity there. The question you're asking, I think, is a good question, and it's kind of why I think we're putting a second phase of this plan in effect, which is let's just not deal with only the REO where we've had progress. Let's also deal with some of the watch list and maybe some other of our select office assets so that when we are through this portfolio strategy, we could show up with a relatively new origination portfolio. A lot of the REO has been cleaned out, and we don't have some of the exposures that the market is I think, focused on right now. So that's really the goal here. And my expectation is if we show up with a clean portfolio, a newer portfolio that the market will price it, I think the market is efficient and will recognize the steps that we've taken and the new portfolio that we've been able to create at that moment. But we'll have to evaluate that. Obviously, when we get to that moment in time, and there's a good amount of distance between now and then. So that's how I would say that. I have optimism that won't occur, that we will get recognized for the portfolio, we're going to create here. As it relates specifically to the ARI transaction, listen, I think it's an interesting transaction for sure. It definitely shows how the private markets value some of these portfolios compared to what the public markets do. But I don't want to draw any direct correlation to KREF. I think we've got our business plan. We've got our strategy, and we're really focused on implementing that. William Catherwood: Appreciate those thoughts, Matt. And maybe sticking with this kind of overhaul of the portfolio. When we get to the end of '26, what does success look like? I mean you mentioned Mountain View likely carrying on into '27. Is it all the REOs as of right now is resolved? Is it the watch list is fully resolved? Is it office has been reduced by 50%, some number out there. Like what does success look like internally? What are those targets by the end of '26. Matthew Salem: Yes. And I appreciate the question. I would say a couple of things. One, I think in our next call, I think we'll be able to really walk everyone through and articulate what the end goal is here. Certainly, when we're looking at it today, if you think about our watch list, which we highlight, I think, on Page 12 of our supplemental, I think the goal is to get through and monetize or liquidate the vast majority of that watch list. The reason I don't say all is because I think some of those life science assets, one, we're in the process of modifying and so we should get to a basis where we're comfortable moving forward on those or two, we just have to evaluate the liquidity in that particular sector. But certainly, when we think about the office on our watch list, we have one multideal on there, the multideal on there, like the goal is to move through those and then I think to your point, on office, I think we're going to have to start making a distinction on office because we are making new office loans that we think are really high quality, but there's certainly some of our legacy deals that we wouldn't put in that same that same bucket. And so I think the goal would be to, at the end of this year, be able to articulate, hey, we think from an office portfolio perspective, we've kind of liquidated everything that we see a problem on. We'll be able to identify any future issues that we may see. So create a lot of clarity there. On the REO, I don't expect much to change there as it relates to what we've talked about on the last couple of earnings calls. When you think about the buckets that we've put our REO in, which is I think listed on Page 25 of our supplemental if you want to follow along. We have a number of assets -- excuse me, Page 15. We have a number of assets that we put in the short-term bucket. The goal for those would be to liquidate over the course of this over the course of this year, either partially or fully. Obviously, some of these are selling units or selling lots. So I'm not sure we'll get through 100%, but we'll at least be making good headway there. Those assets are the West Hollywood, luxury condo, Portland, Oregon redevelopment, the Raleigh, North Carolina multifamily and the Philadelphia office. So those are all the short term, and we'll be able to give progress updates over the course of the year on those. Medium term, I'd put more in the Mountain View asset, which we've talked about, right, get a lease done on that. Again, that market is extremely healthy right now, and we are engaged with tenants in the market there. And then I put in this last category, the longer term, more of the life science, right? So we've got the Seattle asset, and we'll likely go to a title on our Boston loan that's on the watch list right now in the life science sector. So a little bit of background there, but same buckets, like vast majority coming out this year, and then if we can execute on Mountain View in the intermediate term, and we've largely cleaned it up with the exception of a couple of these life science deals, which we'll see, right? We were pretty patient on some of our office, and that's worked out very well, I'd say, just the market has come back. It's healthy. What we have in the portfolio from an REO perspective in life science is extremely high quality. So to the extent that market comes back, I understand it's under pressure today. But forever is a long time, and if those markets come back, certainly, we could benefit from that as well. Operator: The next question comes from Rick Shane with JPMorgan. Richard Shane: When we sort of run back at the envelope, we're looking at over $800 million of loans that are of assets that are either REO or on nonaccrual. We then -- there's the development in terms of migration, adding the new loan to the watch list this quarter. Is that going to be in nonaccrual as well? And are we could be in a situation where let's call it, 20% of the portfolio is under earning in 2026 or as a negative carry. W. Mattson: Rick, it's Patrick. I'll take that question. I think in terms of like specific numbers, I don't have sort of that bucket. I will say this, on things like the asset that we indicated will likely downgrade. That asset is paying its contractual interest. We expect in the near term that you will continue to pay contractual interest and so from an earnings standpoint, we're not seeing any degradation from that. What's driving it in the near term are some of the REO assets we talked about, and we'll give more color in terms of the timing of the resolution in the subsequent quarter, when we can get some of that back and when we can actually convert that into earnings assets. So clearly, we're being dragged down by some of those assets, but we do think there's a near-term opportunity to pull that forward. On some of these other assets that are on the watch list, and we can sort of -- you can kind of go through each of these, but in general, we're seeing contractual payments being made here. So it's certainly impacting us, we certainly think there's a lot of upside, as we've indicated before. We think there's around $0.13 from getting these REO assets back and converted into performing loan assets. But that's kind of what I would say on that. Richard Shane: Okay. And again, I assume, look you guys talked about dividend policy, and I heard what I would describe as sort of rational financial analysis as opposed to focused on market sentiment and just maintain a dividend for the sake of that, I'm assuming that, that is an indication that as we go through the year, you guys are going to be looking at all of this. And we should be thinking about our dividend very much in the empirical way as opposed to sort of some sort of gauge sentiment. Matthew Salem: Rick, it's Matt. I think that's a fair articulation of how we're thinking about it now, which as we kind of look through the course of the year, like I said, and we try to rebalance this portfolio, trying to understand the near-term impact of earnings there. Richard Shane: Matt, I think fair was a good adjective, but clear or straightforward probably wasn't a good adjective to describe my commentary, but thank you for answering the question. Operator: The next question comes from Jade Rahmani with KBW. Jade Rahmani: To touch on Tom's question and maybe the underlying issue is that the bid for assets or loans that KREF is originating seems to be stronger in the private credit market than the required yield that mortgage REIT investors require. So there could be an arbitrage there. As a result, perhaps management should pivot its focus to value creation as the top priority, which could include loan sales, share repurchase, unlocking potential gains in the portfolio if there are some such as Mountain View REO. And perhaps that would buy time to reposition the company rather than go with the strategy you've been undertaking which might still result in KREF trading at this very sharp discount to book value. Otherwise, accelerated dispositions could materialize the book value that the market ultimately is projecting, which clearly requires significant losses on the Life Science, in particular, but perhaps elsewhere in the portfolio. So just wanted to get your thoughts on that potential pivot and if you see that as something management might undertake. Matthew Salem: Thank you, Jade. Yes, it's Matt. Let me unpack that a little bit. I guess when I heard you go through the list of things that we could accomplish or strategies we could follow. I think we are doing most of those. Certainly, when we think about and I mentioned like watch list, select office assets, repositioning the portfolio, I think we would -- part of that will be loan sales, 100%. I think when we think about gains on the REO, unlocking those gains, completely agree. We should try to accelerate those as much as possible, which we're doing, and I think which our plan will incorporate. A lot of it comes back to -- when is the optimal time to sell, and we don't want to give money away, the market has certain expectations, when it buys an asset, when I think about something like Mountain View, well, even if we sign a lease, there are certain things that we'll have to do to get that tenant in and occupying et cetera, for the lease to go effective. So there are certain moments where we're going to create more value and liquidity that we have to be mindful of. And so we'll do that. The last piece, share repurchase, we've been repurchasing shares. So I think that certainly has been part of our strategy as well So I do think that we're evaluating everything possible. I think the last -- the last point that you might ask as a follow-up question, well, what about performing loans? Why not go and sell those? And certainly, we could add that and continue to evaluate a performing loan sale. But right now, I'd say we're focused on really getting the portfolio in a place where the public markets can trade us in the right way because all these portfolios, whether it's ours or some of our peers, we all have some legacy assets. And that's not to say that they're all going to become watch list or they all become losses, but perhaps they're just higher loan to value, right, than where we started, of course, values are down a lot in the real estate space. So maybe that's what the market is telling us. And as we reposition the portfolio and as the percent of newer loans on adjusted basis comes into that portfolio, then these stocks can compress. So I'm not convinced that this is again forever, like these stocks are always going to trade like this. We've just gone through probably one of the most challenging real estate environments, certainly in my career. And as we get through this, I expect the market will be rational and reprice these portfolios. Jade Rahmani: The eye of the storm seems to be life science. When you listen to Alexandria's earnings call, it's clear and they are best in class at this. They expect a very long timeline to turn around this sector, 5 years plus. And AI is also going to re havoc on this sector. So you talk about putting in place modifications to get basis to a point of comfort, the weighted average basis today is $830 a foot. Do you have in mind the range or some benchmark that you could provide, which we should think would be a reasonable basis to take this outsized risk beyond the investor horizon that people are contemplating? Matthew Salem: Yes. I think a couple of things on the life science sector. We understand and certainly follow it closely. We understand it could be a very long, a long road here. At the same time, I remember when we foreclosed on Mountain View, everybody in the market, including the most sophisticated brokers told us it was going to be 5 years before we could get anything done there. I'll take the under on that by a few years, and I'll take the over on the value creation that we make there. So things change. And as it relates to technology and AI and particularly as it applies to life science, I'm not convinced that's a negative for the life science sector. I think it could be actually quite a positive in terms of the development and need for development of new drugs and need for new lab space. So kind of we'll see how that plays to the system. I think we're eyes wide open, though, we need to get to a lower basis, and you've seen us doing that. I think we apply the same thing to our life science as we do to all the other modifications that we're doing, which is unless the sponsor is willing to make a significant capital commitment to delever us to a point where we feel comfortable, then usually, we'll either go to REO and sell it. But in the case of our -- some of the challenges that we're dealing with now and some of these downgrades recently, we do expect our sponsors to commit significant capital to pay us down. And in return, we'll likely have to do some type of hope note around that. But I don't want to talk specifics as we're in the middle of some of these negotiations right now. But in general, we've been bringing our basis down in a pretty significant way, again, not just through hope notes, but also through principal paydowns and borrowers coming out of pocket and recommitting to the assets. Operator: The next question comes from Gabe Poggi with Raymond James. Gabriel Poggi: I want to kind of piggyback on what's been asked already, but kind of go a different angle and how do you guys comment through the KKR lens as it pertains to just broad demand for one commercial real estate credit and then commercial real estate in general. Matt, to your point you just made, right, timing is in the eye of the beholder and can change in 5 years to a shorter term. But just what's the bigger KKR machine seeing as it pertains to global demand for domestic real estate, both on the credit side and the equity side. I think it will help us kind of get an angle as to the true value here or value creation probability if we take a little bit longer-term tact. Matthew Salem: Thanks, Gabe. I appreciate the question. So right, let's put our KKR hat on for a minute here. I would say that we are seeing increased allocation to both real estate credit as well as real estate equity. I think the sentiment has clearly shifted from a relative value perspective. A lot of institutional allocators of capital, I think we're looking at their overall portfolio and thinking about where those values have gone over the course of the last 5 years and seeing that real estate has been relatively stagnant. And so you're starting to see a shift back into that sector. Now I would say it's still predominantly in the opportunistic and value-add parts of the market within equity. So you haven't fully seen, so that core money come back in or that core plus money, although I could see early signs of it, but I'd say most of it is in that opportunistic value-add sector. So people are allocating velocity is starting to come back a little bit in the market. I think we've all seen that some sales starting to go through. When we think about our pipeline still predominantly refinance on the lending side, but it's -- there's more acquisitions that we're seeing, which means lots of capital is increasing funds returning capital, and that money typically gets recycled back in the fund. So that reset, I believe, is beginning to happen. On the real estate credit side, same comment true. We are seeing increased allocations to real estate credit. I think we've been in a little bit more favored piece of the market than equity for a while now as just allocations to private credit overall have been increasing over the course of the last handful of years. Now I think there is a very tangible relative value discussion happening around not just real estate credit, but asset-backed as well and particularly infrastructure also from a sense that how do people may be fully allocated to corporate credit, maybe corporate credit has other potential challenges in those portfolios. So how do I diversify away from that, but still be in a credit exposure, still get -- take advantage of the yield and the safety that credit offers in today's market. So we've seen certainly a pivot into real estate credit. The private funds are raising not just us, but other -- our peers as well, I think are raising a significant amount of capital in this space and my expectation is that will continue going forward here. Operator: [Operator Instructions] The next question comes from Chris Muller with Citizens. Christopher Muller: So we have a couple more rate cuts behind us now in futures are suggesting another 2 cuts this year. I guess the question is, have those cuts increased interest in your guys' REO assets at all? And I guess what I'm really trying to get at is, have those cuts narrowed the gap between buyers and sellers? Matthew Salem: Thanks, Chris. It's Matt. I do think that these rate cuts are helping liquidity in the market. I don't know if it specifically translates to the liquidity we're seeing, but it's certainly part of it. But I think overall, the sentiment for real estate right now is pretty positive. There hasn't really been a lack of buyers in the market. I think there's a lack of sellers personally. Sellers at a price, right, sellers at an opportunistic price, which is why we're seeing a lot of our activity more in the refinance part of the market than the acquisition part. Because you have owners of real estate that own a really good property. That property likely is performing fine from an occupancy and cash flow perspective outside of like small pockets where you have some oversupply, you may have a sponsor that owns it at a higher basis than they'd like given just value decline since rate hikes in 2021. And so we're seeing our sponsors really play that forward refinance by time where supply really drops off and they can raise rents and grow their equity value back. So that's the overall market. So as we think about selling our assets, particularly on our REO, I do expect there to be liquidity and unrelated to maybe the rate cuts, we're seeing more liquidity in the office sector, right? Some of those assets that we've taken back or on the watch list like didn't historically have a lot of liquidity, just given the uncertainty market there has found some stable ground, and you're starting to see real liquidity in that sector. Again, I'm not sure it's directly related to rate cuts. I think it's more about just time and seeing where leasing is shaking out and finding some stability in the overall occupancy and leasing market. Christopher Muller: Got it. That's very helpful. And that's a good segue into my next question on office. And you touched on this a little bit, Matt. But we haven't really seen many new office loans in recent years. So can you guys just talk about your view on that sector? And what makes an office loan attractive these days? Matthew Salem: Sure. I'd say our borrower is still high. Jade asked the AI question. Like certainly, we think there's potential volatility ahead as it relates to technology in real estate. So we need to continue to be mindful of that. The opportunity, I think, is on -- if you can lend on newer, high-quality assets, and especially for someone like KREF on stabilized cash flows like leased or mostly leased assets with long-term leases in place, that's really where we're seeing an attractive opportunity today. So you're not really taking a lot of leasing risk or reposition risk, you're going to have this stable cash flow in place, you're in a good market. You can see a lot of leasing demand and velocity within that market, and you're in one of the top buildings within that market. I think that's really where we're focused. And there's a substantial amount of data, I think, that can prove not only is there liquidity for in the capital markets for owning real estate like that, but there's also a lot of leasing demand as well. So it's kind of an interesting opportunity for us where we don't have to take a lot of repositioning risk. We can just lend on really high-quality real estate that's already leased. Christopher Muller: Got it. Very helpful. And if I could just squeeze one more quick one in. Should we expect originations to mostly be in line with repayments as you execute this more aggressive resolution strategy? Or could we see some net portfolio growth in the coming quarters? Matthew Salem: Yes. I would think about it as -- really need to look at it through 2 lens. One is repayments and recycling that capital, I think is the right to answer your question, yes, we'll how to recycle that capital into new loans. The second piece is just making sure we're staying within our targeted leverage ratio, right? Those are the 2 things that we're balancing. Christopher Muller: Got it. So REO sales may be the missing piece of that puzzle there? Matthew Salem: Yes. And as we liquidate REO, we'll be able to increase portfolio size. It would be the other piece of that as well, you're right. Operator: And we have a follow-up from Jade Rahmani with KBW. Jade Rahmani: On Mountain View, could you quantify how much dollars you expect to put in? And do you see a potential gain there? Matthew Salem: Jade, it's Matt. I don't think, we don't have a lease yet. I don't think we'd want to comment on potential CapEx, TI, et cetera, until we have a lease. At that point in time, when we have the final numbers, we can certainly go through that. The answer to your second part is everything we're seeing today, I'll comment again, we don't have a lease done. But everything we're seeing today would suggest that I think we've got significant value in that asset above where we're carrying it today. Jade Rahmani: Okay. That's good to know. And then office, there's a couple of 2021 and early 2022 vintage risk-free loans. I'm not sure if that's what you're referring to in your office comments, including Washington, D.C., Plano and Dallas. So just if you could comment on that. Matthew Salem: Yes. And I think we can take everybody through this again in more detail next quarter. I guess a couple of things. One, not all of our -- we're not worried about kind of like all of our office 3 rated loans, to be clear. Like you called out some of the Dallas assets, like I'd expect those assets are perfectly fine, and we have DC assets that are totally fine. So I expect to get -- we're going to get a fair amount of repayments in our office portfolio this year from that seasoned piece from the 2021 or earlier. So I wouldn't look at it as though we're looking at each particular asset. I think most of them are going to get repaid. To the extent we're not going to get repaid, we may just choose to note sale those or recut a deal with the borrower, et cetera, to make sure that we can get on a call and have that portfolio -- that piece of the portfolio reduced. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jack Switala for any closing remarks. Jack Switala: Well, great. Thanks, operator, and thanks, everyone, for joining us this morning. You can reach out to me or the team here with any questions. Take care. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by. My name is [ Jay ], and I will be your conference operator today. At this time, I would like to welcome everyone to the Chubb Limited Fourth Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Susan Spivak, Senior Vice President, Investor Relations. You may begin. Susan Spivak Bernstein: Thank you, and welcome to our December 31, 2025 Fourth Quarter and Year-end Earnings Conference Call. Our report today will contain forward-looking statements, including statements relating to company performance, pricing and business mix, growth opportunities and economic and market conditions, which are subject to risks and uncertainties, and actual results may differ materially. See our recent SEC filings, earnings release and financial supplement, which are all available on our website at investors.chubb.com for more information on factors that could affect these matters. We will also refer today to non-GAAP financial measures, reconciliations of which to the most direct comparable GAAP measures and related details are provided in our earnings press release and financial supplement. Now I'd like to introduce our speakers. First, we have Evan Greenberg, Chairman and Chief Executive Officer; followed by Peter Enns, our Chief Financial Officer. Then we'll take your questions. Also with us today to assist with your questions are several members of our management team. And now it's my pleasure to turn the call over to Evan. Evan G. Greenberg: Good morning. We had an outstanding quarter, which contributed to another record year, demonstrating both the resilience on the broadly diversified nature of our company. We delivered excellent full year results with strong contributions from virtually all of our businesses. We achieved record earnings for both the quarter and the year. For the quarter, very strong double-digit increases in underwriting and life income along with record investment income, led to core operating income of nearly $3 billion or $7.52 per share up about 22% and 25%, respectively. Total company net premiums grew almost 9% with P&C up 7.7% and life up about 17%. In fact, our company's published growth this quarter was faster than the average for the full year. In the quarter, our underwriting performance was simply outstanding. P&C underwriting income was $2.2 billion, up 40% with a record low combined ratio of 81.2%. Our published underwriting results were supported, of course, by low cats and prior period reserve development, but importantly, very strong current accident year performance from our businesses across the board, including from our agriculture division, where we are the #1 crop insurer in America. Agriculture's outstanding results benefited the quarter's underlying current accident year combined ratio of 80.4% which was nearly 2 points better than prior year and a record low. Importantly, however, excluding agriculture, the global P&C current accident year combined ratio, reflecting the strength of our businesses from around the globe was 80.9% almost a full point better than prior year and again, a record result. And we had an outstanding quarter on the investment side of our business. We generated record adjustment net investment income of $1.8 billion, up 7.3%. Our fixed income portfolio yield is 5.1% and our current new money rate averages slightly above that. Our invested asset now stands at $169 billion, up from $151 billion a year ago. The more important time frame to me to discuss though is the full year, and what a year we had. We printed record operating income just shy of $10 billion or $24.79 per share, up about 9% and 11%, respectively, over prior. For perspective, over the past 3 and 5 years, core operating income has grown 55% and over 200%. All 3 major sources of income for our company produced record results last year. P&C underwriting income of $6.5 billion was up 11.6% with a record low combined ratio for the year of 85.7%. Adjusted net investment income rose 9% to almost $7 billion, and life insurance income of $1.2 billion was up over 13%. Our record underwriting results and earnings were achieved in spite of full year cat losses that were, in fact, higher than prior year, substantially driven by the California wildfires in the first quarter. Though U.S. and worldwide hurricane and typhoon seasons were unusually light this year. Annual industry cat losses still approached $129 billion. By its nature, cat exposure is volatile. Frequency and severity of losses are alive and well. Fire, flood, cyclonic and earthquake are all perils that contributed to industry cat losses. For the year, we grew total company premiums over 6.5%, with P&C up about 5.5% and life up over 15%. Per share tangible book value, our most important measure of wealth creation grew 25.7% last year. Peter is going to have more to say about financial items. Again, our results for both the quarter and the year, top and bottom line, put a point on the broad-based, diversified nature of the company, by geography, by product, by commercial and consumer customer segment and distribution channel, it speaks to how well we are positioned both relatively and in absolute terms. Turning to growth pricing in the rate environment. P&C premium revenue again grew over 7.5% in the quarter, with consumer up almost 12% and commercial up over 6%. Our international P&C and U.S. agriculture business had a particularly strong growth quarter, with premiums up nearly 11% and over 45%, respectively. But we also had strong growth from our U.S. personal lines business and our commercial U.S. middle market and E&S businesses. In terms of the commercial P&C underwriting environment in the fourth quarter, as I said in the last few quarters, the market globally is in transition and growing incrementally more competitive quarter-by-quarter, particularly large account property admitted in E&S and upper middle market. Casualty pricing, overall, large account, E&S and middle market continues to firm in the areas that require rate. And in those that don't, price increases have slowed. Financial lines remained soft with some signs of firming in discrete classes. Let me give you some more color on the fourth quarter by division, and I'm going to begin with our international P&C business. Premiums in overseas general were up 10.8% or over 8% in constant dollar, a very good result. Premiums in our global retail, which operates in 53 countries and which is 90% of our overseas general division were up 12.5%. With consumer premiums, both A&H and personal lines up 18.7%. And commercial lines, up almost 7.5%. Latin America grew 14.7% with consumer up almost 18% and commercial up 10.5%. Asia grew 13%, with consumer up 25% and commercial flat and Europe grew over 7%. In our international retail commercial business, P&C rates were down 3.6% and financial lines rates were down almost 9%. Loss costs remained steady. Premiums in our London wholesale business, which is 10% of our international P&C were down about 1%. Given more competitive London open market conditions basically across the board, property, marine, aviation and professional lines. Turning to North America. Total P&C premiums were up over 6.5%. Agriculture, again, was up over 45%, predominantly due to the profit sharing formula with the government. Excluding agriculture, premiums were up 4.7% including more than 6% in personal lines and 4.3% in commercial, which is made up of middle market, small E&S and large account divisions. Breaking U.S. commercial growth down further, premiums in middle market and small commercial grew over 6%, with P&C up 7.5% and financial lines up 1.5%. New business for middle market and small was strong, up more than 17% versus prior year. Premiums in major accounts and specialty grew 3%. With major or large account business, up 0.5% in Westchester, our E&S company, up over 7.5%. Major account and for that matter, Westchester growth, was impacted by property, obviously. And in major, we wrote fewer one-off LPT transactions than we did prior year. Commercial pricing for property and casualty, excluding fin lines and comp was up 4.3%, with rates up 2.5% and exposure change of 1.8%. Property pricing was down 1.5% with rates down 4.6%, partially offset by exposure of 3.3%. Going a step further, property pricing was down over 13.5% in large account business and E&S and it was up 3.7% in middle market and small commercial. Casualty pricing in North America was up 8.5%, with rates up 7.6% and exposure up 0.8%. Financial lines pricing was down 1.5%, and comp middle market pricing was down just under 1%. Large account risk management pricing was up 6.5%. In North America commercial, again, there was no change to our selected loss cost trends. Premiums in North America, high net worth personal lines grew over 6%, and homeowners pricing was up over 8.5%. In our international life insurance business, which is fundamentally Asia, premiums were up almost 18% in constant dollar. And in North America, premiums in Chubb worksite benefits business were up over 16.5%. Our Life division produced $322 million of pretax income in the quarter, up just shy of 20%. So in summary, we had a great quarter and a great year, which again speaks to the broadly diversified and global nature of our company. We have many sources of opportunity on both the liability and asset side of the balance sheet. At the same time, we are continuing to invest to improve our competitive profile. While early, we're off to a good start in '26, and we're confident in our ability to generate for the year strong growth in operating earnings and double-digit growth in EPS and tangible book value through the 3 sources of income, P&C underwriting, investment income and life though cats and FX aside. I'll turn the call over to Peter, and then we're going to come back and take your questions. Peter Enns: Good morning. As you heard from Evan, we concluded the year with an outstanding quarter that produce full year earnings records and all-time highs on our balance sheet, including cash and invested assets exceeding $171 billion and book value of nearly $74 billion. Our exceptional results were supported by $4.2 billion of adjusted operating cash flows in the quarter and $13.9 billion for the year. We returned $1.5 billion of capital to shareholders which contributed to a total of $4.9 billion for the year or about half of our core operating income, including $3.4 billion in share repurchases at an average price of $282.57 per share and $1.5 billion in dividends. Book and tangible book value per share, excluding AOCI, grew 3.4% and 4.8%, respectively, for the quarter and 11% and 15.5%, respectively, for the year. Our core operating return on tangible equity and core operating ROE in the quarter were 23.5% and 15.9%. Pretax catastrophe losses were $365 million for the quarter, principally from weather-related events split 55% U.S. and 45% international and $2.9 billion for the year versus $2.4 billion in the prior year. Pretax prior period development in the quarter in our active companies was favorable $430 million, split 64% short tail lines and 36% long tail lines. Our corporate runoff portfolio had adverse development of $162 million primarily related to our asbestos review, which is completed each fourth quarter. Our paid-to-incurred ratio for the quarter and year was 105% and 91%, respectively Excluding cats, PPD and agriculture, our paid-to-incurred ratio for the quarter and year was 94% and 88%. Turning to investments. Our A-rated portfolio increased about $2.7 billion from the prior quarter and $18.1 billion from the prior year. The increase for the quarter and full year reflects strong operating cash flow and positive marks to market while the year also includes favorable FX, partially offset by shareholder distributions. Adjusted net investment income of $1.81 billion was at the top end of our previously guided range, primarily due to strong growth in the invested asset base. For the year, adjusted net investment income grew 9% to $6.9 billion, which included approximately $6 billion or 9% growth from our public fixed income portfolio and $940 million or 8.5% growth from our private investments. We expect adjusted net investment income in the first quarter of 2026 to be between $1.81 billion to $1.84 billion. Our core operating effective tax rate was 18.7% for the quarter and 19.4% for the year, which was slightly below our previously guided range. We expect our annual core operating effective tax rate for 2026 to be in the range of 19.5% to 20%. I'll now turn the call back over to Susan. Susan Spivak Bernstein: Thank you, Peter. At this point, we're happy to take your questions. Operator, please queue up the questions. Operator: [Operator Instructions] Your first question comes from the line of Brian Meredith of UBS. Brian Meredith: Evan, first question, just looking at the U.S. commercial lines, North American commercial lines business. Your underlying margins have been incredibly consistent and excellent results over the last several years. I'm just wondering, given the current pricing environment, do you think you can sustain those here in 2026? Evan G. Greenberg: Brian. I don't give forward guidance, as you know. And on one hand, you have clearly, lines of business where price is not keeping pace with loss cost. And the math naturally works in one direction. On the other hand, we have a very broad business and mix of business changes, mitigate on the other side. I'm very comfortable with the combined ratios we are publishing, and I do not prognosticate the future, but I do have confidence and underwriting income for this company, growth in underwriting income contributing to that growth in EPS. Brian Meredith: And then maybe -- that's terrific. And then maybe pivot over to the personal lines business. Once again, terrific combined ratios, there's been some press and some regulators talking about excess profit laws and implementing them. I'm just curious your thoughts on that and potential implications for Chubb and this profitability in that business? Evan G. Greenberg: Yes. Look, if you measure our personal lines business in the United States over any reasonable period of time, 3, 5, 10 years, it classically runs in the high 80s to up into the low 90s combined ratios, given -- and it bounces around given the nature of catastrophe losses, in particular. I'm very mindful and more than mindful sympathetic about the issue of affordability in the United States and -- but I would be careful when politicians think about that issue of affordability pointing to insurance as a culprit. We intermediate money. We don't print money. For job loss costs in homeowners are rising around 7.5% to 8% at the moment. Liability on one hand is a strong contributor to that. And we know liability costs in the U.S. overall rising inflation for the liability is roughly 9% -- 7% to 9% and that's multiples of CPI. That's a problem with litigation. That's not an insurance company problem. Secondly, and I think more important to homeowners, a large part of pricing is catastrophes. And those are measured over an extended period. As you know, you could have a 2-year period where you have huge outsized cats, and you lose money in that state. On the other hand, you could have a quiet period. And it looks like you made money. You measure it over an extended period. And for homeowners, admitted homeowners in particular, prices are filed and they get approved based upon technical actuarial. So I would be careful of politicizing the affordability question as you point to homeowners insurance or it's going to create ultimately an availability problem and that will exacerbate affordability. Operator: Your next question comes from the line of Bob Huang of Morgan Stanley. Jian Huang: I'm a sucker for overseas business so I'd like to ask a question on that. Clearly, the growth in Latin America and in Asia are very strong. And In Latin America, Mexico has been consistently called out as very much a favorable environment. Maybe can you give us a little bit of color outside of Mexico in Latin America in terms of -- what is the opportunity there? And what is the growth momentum there? Evan G. Greenberg: Yes. It's more in our consumer than in our commercial businesses. We have -- as I'm sure you know, Banco de Chile, largest bank in Chile is our long-term partner for distribution of consumer-based insurances as an example. Nubank is our partner in Brazil for digitally distributed insurance, consumer insurance. In Ecuador, we are partners with Banco Guayaquil, one of the biggest banks in Ecuador for distribution of the consumer insurances, you get the picture. And in Argentina, we have actually a very good business growing in both consumer and commercial. While commercial is good in Mexico and Brazil, to a degree in Chile and Colombia, it's the consumer businesses with multiple distributions, A&H specialty personal lines and automobile on both a direct-to-consumer through bank and other distribution digitally based direct-to-consumer and broker and agent driven our Mexico business predominantly is agent-driven growth. Though we are the exclusive insurance partner long term of Banamex and with the sale of Banamex right now from -- by Citigroup to a local Mexican management, I expect that's going to be another growth opportunity. So it's very broad-based. It's across a variety of countries, and we've been at it for years. Jian Huang: Really appreciate that. It sounds like a lot of opportunities without us worrying about pricing. Maybe the second point, staying on overseas, Asia business, clearly, another area of excitement but can you maybe give us a little bit of the competitive dynamics there, right? You made an acquisition there this year. Just curious about how we should think about an area where everyone is excited about it. And clearly, everyone wants a piece of that pie, so to speak. Evan G. Greenberg: Yes. First, I want to just -- so we stay grounded in reality. When you think about Asia, when you think about Latin America, Asia dwarfs Latin America in its size and scale and the opportunity. Both regions though are developing market and mature market regions. And they have that signature about them. So a certain volatility to economic and political growth. It's many, many countries in Asia, small micro markets and large markets. But there is a certain volatility in any period, one period to another that can occur. The trend line for both regions is up and Asia in particular. Growth this quarter in Asia, as you saw, came fundamentally from consumer lines, commercial lines was flat. That's mostly the large account business, Australia, Singapore base, Hong Kong a little bit where the environment more competitive. Our growth is in small and middle market commercial and in consumer lines, both agency and digitally and direct-to-consumer-oriented. Market by market, it is very hard to compete in that business for anybody to just come in and want a piece of that pie. It's a lot of countries every culture is different. They're economically different. They're small markets, many of them like Southeast Asia, but they add up in aggregate to be a big region, it's hard work, and you have to establish yourself, not with 1 office and 2 or 3 underwriters, you've got to have broad capability distributed through the country to be able to mine the opportunity of small and mid-market commercial and consumer. So it's years of hard yards to build local franchises in those operations. And then on top of it, the ability to bring your technology and bring your data and your insights to bear from what you have and the scale around the globe to help your competitive profile in those markets, that is another dimension. And that's what we're hard at work at and it shows results and I'm bullish on the long-term opportunity. Any one period of time notwithstanding. Operator: Your next question comes from the line of David Motemaden of Evercore ISI. David Motemaden: Evan, maybe just a follow-up on just on the overseas general insurance business and the consumer lines growth there has been robust, and it looks like that's continued over the last 3 quarters. Sounds like you feel good about the opportunity and sustaining that. I guess -- could you help us think through how that manifests through margins? Because it feels like that's margin accretive, at least over the last few quarters. But I know there are some moving pieces there with the consumer business, higher expense ratio, lower loss ratios. I'm hoping you can help me think through that. Evan G. Greenberg: Yes. I can't help you too much that you're left to your own -- we each have our hell and you're left with that one. We don't break out the margin by business. We don't break out overseas general consumer versus commercial margins. What I'm going to help you with is simply this. Our A&H -- it breaks down between A&H and auto and homeowners and specialty personal lines. Each has their own signature. And by the way, depending on the distribution channel, whether I'm doing it digitally or in a bank direct response, telemarketing, we're doing it through agency brokerage they have their own signature of acquisition costs and loss ratio. They're reasonably steady businesses. Auto not as steady, obviously, as A&H is. Our A&H is a large business that is -- that a lot of the risk is on the direct marketing side, and we have built capability over many years. We're the #1 -- when we say we're the #1 direct marketer in Asia, that's predominantly A&H business over non-life and life. It produces a reasonably steady and decent underwriting margin. Beyond that, I'm confident in our mix of business overall between large accounts, middle and small and our consumer businesses internationally that our margins are, how do I want to say it, they are -- they are not predictable because it's the risk business but they are decent, as you see, and we feel confident in them. David Motemaden: Got it. I appreciate that. And then maybe just... Evan G. Greenberg: I know you wanted more, but we just don't break it down that way. David Motemaden: I had to try. But I guess just maybe a bigger picture question. The December presentation showed about 150 basis points of combined ratio improvement from the digital transformation over the next 3 to 4 years? And I'm not asking for formal guidance here. But could you just share how you're thinking about the key drivers and execution priorities to deliver on that improvement even as the competition in some of the markets you operate in intensifies? Evan G. Greenberg: Yes. Most of it is on the expense side. It is in both OpEx and in cost of claims. It is -- there is some that is but it is more -- much more minority that is projected in loss ratio, but we're fact-based people. And so as we see no more that we can measure mathematically, we gain more confidence in that portion in the insight. And it is business by business, division by division. It's predominantly North America, U.K., Europe, and our larger markets of Asia and in Latin America. It is covering right now we're focused, in particular, on 9 or 10 very discrete projects that all the businesses are lined up on the business leaders, our technical team, around technology, data, AI, analytics and our operations. And we work it with those who are fully dedicated along with the disciplines and the business leaders to transformation and bringing it all together in how we transform a business in the 9 discrete projects across a variety of geographies. Here you go, and it will continue to evolve. Operator: Your next question comes from the line of Greg Peters of Raymond James. Charles Peters: Good morning. So I'm going to have 2 follow-up questions. One to the overseas operations. I guess I'm going to ask a question around foreign exchange and I realize this is probably going to spill over into geopolitical considerations as it relates to the growth of your operations. But I'm looking -- I've been watching the last several weeks, the yen go down relative to the U.S. dollar. And I understand you're matching your assets and liabilities in the same currency. But running a global enterprise, I'm just curious how you look at foreign exchange volatility as it relates to what you're managing the enterprise risk? Evan G. Greenberg: Yes. We do not hedge revenue or income. The only time we really hedge is remittances -- around remittances when they're large. Our assets and liabilities are matched in currency so they move together. Foreign exchange, if the U.S. dollar weakens relatively, that's a tailwind to us in terms of growth, and it obviously helps income in any business generating income. And then if the dollar strengthens, which has been its longer-term trend over a long period, we pay that price. And you can see it because we're transparent about it of what are we in constant dollar in terms of growth versus published. And so Greg, that is what it is. Right now, the prognostication is more towards the dollar at the moment, the dollar weakening as you look forward. But you know what, that sentiment bounces around and changes based upon financial conditions, economic and as you said, geopolitical. Charles Peters: Okay. And then I wanted to follow up on... Evan G. Greenberg: And by the way, that's why that is why I say that when we talk about any projection about Chubb future income or EPS growth, I do say cats and FX aside. We're in the risk business. It's not like we can control anything, but we have better control over most things and can forecast -- I can't forecast cats. I can't forecast FX, and I don't have control over them. And it doesn't speak to the intrinsic strength of the business. Charles Peters: Got it. I think you said in your -- the quote was macro conditions notwithstanding, when you talked about your outlook for growth. Evan G. Greenberg: I said it broadly. Charles Peters: Correct. Can I go back to the other comments around Agentic AI and digital infrastructure. And I guess I want to come at it from a different angle. The large brokers are talking about the build-out of this infrastructure as being a big opportunity. I think Marsh used 2,000 to 3,000 data centers being built over the next couple of years. And so I guess I wanted to approach it from a couple of different angles. How do you see that evolving and Chubb's participation in that? And I guess there's also an investment opportunity, too, that Chubb might be looking at. So I'm just looking for how you're looking at the different touch points of this emerging trend and how it's going to impact your organization? Evan G. Greenberg: Yes. On the insurance side, we're all over it. We've been writing data centers, and we -- globally, this is a global opportunity. And we're -- our capabilities are extremely broad. We're in a rare group when it comes to capability. Builder's risk, operations in terms of property. And we write the primary property. We do the engineering. We have large capacity we put at it. And others take shares behind us generally. We can do that on a global basis. Marine and all of the related exposures around that, surety, liability, professional lines when it comes to design of data centers. We are one of the few that writes insurance around the broad variety of exposures globally that those who are constructing data centers confront. We have recently, obviously, with all of the investment that is going into this and by the way, on the utility and energy side, we are a major writer and no one is building a major data center without the energy and utility dimension of this, and we can seamlessly transition to that in coverage as well. With all the investment that is going in our -- inside our organization, we have doubled down on how we are structured to bring all of the coverages, the services and engineering, the teams together to approach this globally were an important factor when Aon and Marsh and other major brokers are engaged in the creation and putting together in placement of data centers. The one thing I would say about this right now, there's a lot of projects announced, how much of this actually gets built and over what period of time remains a question. There are headwinds. There's headwinds around availability and affordability of energy to power data centers. And that is a rising and growing problem. How fast does that get addressed? And for each data center, it's a different answer depending on where they're located. There's more pushback on where data centers will be built. There is the question of labor. And is labor available for the construction of data center, supply and the supply chains and the cost of supply are questions that hang out there. So there's a lot announced. We're all focused on it. But I'd be careful not to be overly breathless about this. On the question on the invested asset side, some of -- this is a great technology that we are creating for economic and mankind purposes in so many great ways. There is trillions of dollars being poured in. I have no doubt that some of it is going to produce good returns. Some is going to produce more anemic returns and some may not prove to be money good both on the technology development side and on the infrastructure to support the technology, i.e., data centers, et cetera. As an investor, we are thoughtful and very cautious around this. I think there'll be a second act down the road that may be a very interesting investment opportunity, and I'll leave it at that. Operator: Your next question comes from the line of Ryan Tunis of Cantor Fitzgerald. Ryan Tunis: So Evan, I guess just a follow-up on that question from Greg. GDP growth has been -- I'm just trying to think about how economic growth maps to growth if you're looking for insurance growth opportunities. And obviously, a lot of the GDP growth we've seen has sort of come from this AI infrastructure build-out. As someone looking for growth opportunities in P&C, are you agnostic as to where the growth comes from? Or is -- would you actually prefer the GDP growth to be coming from more traditional means such as growth in employment. Evan G. Greenberg: Ryan, when GDP growth, if it's overly concentrated, it is more vulnerable. It is more -- it is potentially more volatile. Broader-based growth by definition, is more stable. And it creates more broad-based prosperity. That impacts both commercial and consumer. So just as a businessman, as a citizen, I would say that to you. When it comes to Chubb growing, if we can earn an adequate risk-adjusted return on the growth, I'll take it wherever it's coming from. That's why we're -- we're pursuing opportunities in multiple directions. Ryan Tunis: Got you. And then just a follow-up, not looking for guidance, but the acquisition and expense ratio in North America commercial. It's kind of an upticking, I think, because of mix in middle market. Is that a trend that we should continue to see? Or do you feel like these levels are sort of steady state? Evan G. Greenberg: Be careful with it. In the quarter, a part of it is because -- and an important part is because we wrote less one-off transactions this year in the fourth quarter, LPT business, which type business loss portfolio transfer, which has a very low acquisition ratio to it. Classically a little higher loss ratio. And that impacts it, and that bounces around quarter-to-quarter. You also have in North America commercial. Yes, middle and small growing faster than major. So that mix shift impacts it on one hand, but the relative size of each varies a little bit quarter-to-quarter. So you got a -- it's not just a straight line that way. But that trend in that direction, yes, is clear. And then E&S has been growing faster than major. And that is, by its nature, it's wholesale business as a higher acquisition ratio. Operator: Your next question comes from the line of Matthew Heimermann of Citi Research. Matthew Heimermann: First question would be, you had this comment with respect to more favorable January 1 conditions relative to expectations. I just -- I was curious what you meant by that, whether that was from a growth standpoint, from a pricing standpoint, geopolitical factors, just like to better understand what you meant. Evan G. Greenberg: Yes. It wasn't geopolitical. January 1, and don't overread it. January 1 is an important date for certain businesses, particularly large account business. It's a very important date in Europe and the U.K. very large percentage of the business, particularly it's large account oriented is on the continent and in the U.K. January 1. And so between the U.S. and Europe and the U.K. in particular, the large account business, it did better than we, it had a relatively good start because it did better than we had imagined ourselves. That's all. So it said it was a statement of confidence for that business that we're off to a good start. Matthew Heimermann: I appreciate it. I guess, with respect to -- one, I appreciate that you actually gave some targets on the investments you're making on the digital side. So thank you for that. I would be curious, though, when you think about the pace at which you're moving on that, how constrained are you at all, if at all, by other stakeholders' constituents, whether they be distributors, customers or service or technology providers? Evan G. Greenberg: Yes. And by the way, when we did this just that I want everyone understand, when I came out in December at the investor dinner to talk about this and to put this up, it's because I'm talking more long term and about intrinsic value creation and competitive profile of the company. This is not going to become something that -- and it's a long term, and I put it out there on multiple years. So it's not something that is going to start working its way into worksheets or I'm going to start giving quarterly updates of this or this or this. It's missing the whole point. And from time to time, I will give updates that provide a broader insight when someone is thinking about investing in job who is long-term investing. And to answer your question, the only place where a distribution partner constrains our ability to implement or to grow is really in our digital business with digital partners, where how fast given all of their priorities for growing their basic business. Will they pay attention in connectivity, data, analytics, et cetera, and make available for us to be able to do what we do well and that is interest and distribute through their pipeline to customers. It's the only place of significance that comes to mind. Operator: Your next question comes from the line of Tracy Benguigui of Wolfe Research. Tracy Benguigui: On asset allocation, you're targeting to raise private from 12% of your investments to 15% over the medium term. I recognize that Schedule BA type of assets, at least for the private equity piece, consumes a lot of risk-based capital. Are you expecting to make that up with diversification credit like as you grow your life business, should I think about those 2 pieces moving together? Evan G. Greenberg: No. Go ahead, Peter. That's a worksheet question. I think we ought to take off-line, but I'm going to let Peter... Peter Enns: Not specific to life. There is an allocation of PE that goes into life and in particular, the Asian markets. But it's relatively modest to the overall footprint and what we intend to grow. Evan G. Greenberg: They're not -- we did not look at them together in diversification. And by the way, we're very mindful both on a statutory and an S&P basis, how much capital each class of alternative draws and we have made statements about how it will be and is accretive to our ROE now and will be as we go forward. Tracy Benguigui: Okay. I love seeing actual quantified metrics with respect to your AI digital agenda. So my question is actually more on the cultural side. I kind of think of insurance tends to be a tribal culture. What is the reception from your underwriting and claims folks with respect to reinventing how they do business like the transformation piece? Evan G. Greenberg: Yes. It's very interesting, Tracy. The comment tribal. I think of every business in any industry, every company that is a good company and is well run. A hallmark of it is its culture. And culture is norms of behavior that all hold in common that they consider important and that forms culture. And when I look at Chubb part of our culture is an ability and a willingness to adapt, change to be earnest -- it's a meritocracy where you're rewarded for what you achieve. We're a highly disciplined organization. The things we intend to do are measurable. It's an organization and behavior that is about accountability. And that we take individual accountability. It's not about some committee. And when I add all that together, and it's a respectful culture. We respect each other. It's not management respecting employees. We're all employees. We're all colleagues and so when we have plans, and they are understood and explained, and we work through them. The vast majority in this organization work hard towards achieving it with an open mind, and we support each other. It is for many employees, the transformation and we didn't invent this. The digital transformation society is going through and how it's going to impact businesses in economic, Chubb has a great opportunity to be a leader and to be highly relevant, but all of us have to adapt. All of us have to learn skills. All of us have to be flexible. And the majority, I have so much confidence in my colleagues. The vast majority around the globe will put themselves into this. And that is a large part of what gives me confidence. Operator: Your next question comes from the line of Andrew Kligerman of TD Cowen. Andrew Kligerman: Evan, your commentary around financial lines and workers' comp pricing trends didn't sound that compelling. So it was interesting to me that financial lines net written premium was up 5.4%, workers' comp was up 3.6%, an acceleration from the prior quarters. So I'm wondering what you might be seeing there? Do you think this trend can continue where Chubb is growing in those lines? Evan G. Greenberg: Well, first of all, it bounces around quarter-to-quarter. But I'm going to turn it over to John Keogh to answer that question. John Keogh: Andrew, why don't we talk about the financial lines number. This one that I observed, I think you understand is, one, that's a global number. So we're offering financial lines in a number of markets around the globe, some of which are growing, some of which are shrinking. Financial lines also includes everything from public D&O to D&O for private companies, not for profits. It includes all sorts of professional lines. for different trade groups and industries. It's employment practices, it's fiduciary coverages, it's fidelity coverages, it's cyber coverages. So in that number, you're seeing, I think, speaks to the diversity of our business and financial lines and the areas there where we were purposely growing that business because we think we're getting paid adequately for that particular product in that particular market. And there are other places, unfortunately, where we're shrinking where a product in a particular market around the globe does not meeting our requirement. So that number is an aggregation of the diversity of those businesses. To your question in terms of trend, the one thing we did see in the fourth quarter in the financial lines is some green shoots in terms of some areas that do need rate. And I'd call out, particularly in North America, we saw for the first time in many quarters, a slight rate increase on our public D&O book. We saw in transaction liability, pricing terms and conditions, a lot more rational in the fourth quarter than we've seen in the last couple of years. And then employment practices in the U.S., we're pushing rate across the board because it needs it in that book of business. Evan G. Greenberg: In workers' comp, it was predominantly in middle market and small commercial that had a very good quarter. I'm comfortable because we don't write -- we're not a broad-based writer of all industries, all classes and comp. We've been and our signature for many years is we're selective within the industries and the states within which we write. This quarter was, in particular, a strong quarter. I don't believe it's such a trend, it was a bit opportunistic, but it was very good. Andrew Kligerman: Got it. And then just shifting over to another outstanding prior period development favorable $268 million. Curious about the casualty piece, commercial auto excess liability. How did that develop? And maybe a little color on accident years, if you could. Evan G. Greenberg: Yes. We're not going to -- we don't break down that way, as you know. And the prior period reserve development in long-tail lines came from the portfolios that we studied in the quarter. Every quarter, we study a different cohort of portfolios for annual deep dive review. We look provisionally every quarter in all portfolios, but we, in particular, react to those and especially long tail business, where it's part of a quarterly review. And so long tail in the cohorts we reviewed this quarter, they produced a favorable outcome. That's as far as I'm going to go. Operator: And that's all the time we have for our Q&A session. I will now turn the conference back over to Susan Spivak for closing remarks. Susan Spivak Bernstein: Thank you, everyone, for joining us today. If you have any follow-up questions, we will be around to take your call. Enjoy the day, and thank you again. Operator: This concludes today's conference call. You may now disconnect.
Operator: Hello, my name is Nikki, and I will be your conference operator this morning. At this time, I would like to welcome everyone to Veralto Corporation's Fourth Quarter 2025 Conference Call. [Operator Instructions] I will now turn the call over to Ryan Taylor, Vice President of Investor Relations. Mr. Taylor, you may begin your conference. Ryan Taylor: Good morning, everyone. Thanks for joining us on the call. With me today are Jennifer Honeycutt, our President and Chief Executive Officer; and Sameer Ralhan, our Senior Vice President and Chief Financial Officer. Today's call is simultaneously being webcast. A replay of the webcast will be available on the Investors section of our website later today under the heading Events and Presentations. A replay of this call will be available until February 18. Yesterday, we issued our fourth quarter and full year 2025 earnings news release, earnings presentation and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. In addition, we also issued our 2026 first quarter and full year guidance. These materials are available in the Investors section of our website, veralto.com, under the heading Quarterly Earnings. Reconciliations of all non-GAAP measures are also provided in the appendix of the webcast slides. Unless otherwise noted, all references to variances are on a year-over-year basis. During the call, we will make forward-looking statements within the meaning of the Federal Securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results may differ materially from our forward-looking statements. These forward-looking statements speak only as of the date that they are being made, ,and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I'll turn the call over to Jennifer. Jennifer Honeycutt: Thank you, Ryan, and thank you all for joining our call today. Our team finished 2025 with a strong fourth quarter, capping off an outstanding year for Veralto. I want to recognize our 17,000 associates worldwide for their rigorous VES driven execution that helps us serve customers improve operating efficiency and meet our financial commitments in 2025. Our success last year was underpinned by exceptional contributions and tireless efforts by our procurement, supply chain and factory operations teams. During the year, we replicated and regionalized more than a dozen production lines into existing locations to drive flexibility across our footprint and improve our ability to serve customers more efficiently. These moves in combination with targeted supply chain and strategic pricing actions enabled us to successfully navigate last year's dynamic macro environment while providing strong support to our customers. In 2025, we delivered mid-single-digit core sales growth, double-digit adjusted earnings per share growth and over $1 billion of free cash flow. As we closed out 2025, we established a $750 million share repurchase program and announced an 18% increase in our dividend. And at the outset of 2026, we completed the acquisition of In-Situ, expanding our world-class Water Analytics portfolio into fast-growing environmental water and hydrology markets. Going forward, we remain excited about numerous opportunities to create value for shareholders through strategic growth and disciplined capital allocation. Entering 2026, we are confident that the enduring need to safeguard the global supply of clean water and safe food will continue to underpin steady demand for our products and services across our key industrial, municipal and consumer packaged goods end markets. Combined with our durable business model and a rigorous deployment of VES, we expect to deliver yet another year of core sales growth and continued margin expansion with mid- to high single-digit adjusted earnings per share growth. Now turning to our 2025 full year financial results in detail. Total sales grew 6% year-over-year to $5.5 billion, an all-time high. We delivered 4.7% core sales growth with both segments growing near the company average. Incremental margins were within our long-term framework at about 30% despite headwinds from tariffs and growth investments in TraceGains. Adjusted operating profit margin expanded by 20 basis points year-over-year. And adjusted earnings per share was $3.90, up 10% year-over-year, marking our second consecutive year of double-digit EPS growth. And we generated over $1 billion of free cash flow, further strengthening our financial position. Overall, I'm very pleased with the gross margin expansion and robust free cash flow we delivered in 2025. Looking at core sales growth by geography and end market for the full year, growth throughout the enterprise was broad-based across key verticals and regions, as our commercial teams executed well leveraging our VES growth tools and strategic investments. In North America and Western Europe, which comprise about 70% of our total revenue, core sales grew 5.3% and 3.8%, respectively, in 2025. And core sales into high-growth markets grew 5.1% year-over-year. Taking a closer look, in North America, core sales growth exceeded 5% in both segments. In Water Quality, we continue to capitalize on broad-based demand for our chemical water treatment solutions, which delivered mid-single-digit core sales growth during 2025. From an industrial end market perspective, we saw the highest growth in chemical processing, power generation, mining and data centers. Our growth in these verticals was a function of solid demand, strong commercial execution and strategic new customer wins. North American sales of UV water treatment grew just under 10% last year, driven largely in support of our municipal customers' water reuse efforts. Both our water treatment and analytics businesses continued to benefit from increased industrial activity in North America. In PQI, core sales in North America grew 5.8% year-over-year in 2025 with mid-single-digit growth across both packaging and color, and marking and coding. In marking and coding, core sales of consumables and equipment both grew mid-single digits year-over-year, with equipment sales growth from both our inkjet and laser product lines. This reflects a combination of steady end market demand, differentiated new product launches and strategic market penetration across an ever-increasing number of substrates. In Western Europe, core sales grew 3.8% year-over-year, with Water Quality up 4% and PQI up 3.6%. Core sales growth in Water Quality was led by our water analytics team in Europe and reflects traction from our growth initiatives as well as improvements made to our commercial architecture in 2024. These changes contributed to rigorous lead generation, funnel management and VES catalyzed commercial execution. Notably, Water Quality's growth in Western Europe last year was across both municipal and industrial customers. And in PQI, core sales growth in Western Europe was across both marking and coding, and packaging and color. Growth in marking and coding was led by consumables and continuous inkjet printers. And in packaging and color, our core growth in Europe was highlighted by strategic growth within mid-tier consumer packaged goods customers. In high-growth markets, core sales increased 5.1% year-over-year in 2025, led by Latin America, India and the Middle East. In China, full year core sales grew modestly over the prior year, led by PQI. Overall, we delivered solid growth across all key regions while continuing to invest in our businesses for future value creation. Since the inception of Veralto, our core sales growth has accelerated approximately 200 basis points, and our adjusted operating margins have expanded by an average of 50 basis points per year. Over this 2-year period, we have grown adjusted EPS by approximately 11% annually, with free cash flow conversion above 100%. This financial performance highlights our durable growth and capital-light business model fortified by the Veralto Enterprise system. The acceleration in our core growth rate reflects strong commercial execution and traction from strategic initiatives, including targeted geographic growth, enhanced service offerings and new product innovation. From a geographic perspective, we invested in people and resources to capitalize on secular growth drivers in Latin America, India and the Middle East. Secular drivers in these markets, such as a growing middle class, increased scarcity of freshwater, rapid urbanization and expanding industrialization create a strong need for our products and services across both segments to test and treat water, and ensure packaged foods are safe to consume. We see the investment in these markets across both the public and private sectors. In 2025, Latin America, India and the Middle East were our 3 fastest-growing regions. And as it relates to enhancing our service offerings, we focused on expanding support across our global installed base, increasing the attachment rate of service contracts on new equipment sales, and expanding our consulting services to new project design, particularly with respect to water treatment systems for data centers. This focus drove strong service growth across both segments in 2025. As it relates to innovation, our increased investment in R&D, combined with a focus on new product opportunities that have the highest growth and most attractive returns have reinvigorated our innovation flywheel. Combined with our extensive direct-to-customer business model, these efforts have accelerated our development of fit-for-purpose solutions to enhance product quality, resolve critical pain points, and drive greater efficiency throughout customer operations. Over the past 12 to 18 months, we have begun to see the fruits of our R&D efforts across Veralto with several new product launches. A few notable new products that contributed to growth in 2025 include a new ammonia analyzer launched in water quality that simplifies operations, improves efficiency and reduces maintenance for customers. This product is used at various stages of the water cycle to monitor ammonia levels, maintain water quality and protect the health of aquatic environment. Additionally, we continue to expand the number of parameters customers can test using our most advanced and easiest-to-use testing technology, our single-use Chemkeys, which grew double digits year-over-year in 2025. In our PQI segment, our new UV laser marking and coding system met strong customer demand in 205. This new technology is helping customers transition to more sustainable, flexible film packaging solutions. And in our packaging and color software offering, we launched a new AI-enabled solution to help streamline and error-proof packaging print during the design phase. This helps brands accelerate go-to-market and reduce costly reprints and product recalls. Looking at 2026, we believe that the durability of the secular drivers across our key end markets will continue to underpin steady demand for our products and services. About 80% of our sales are tied to water, food and essential goods, and about 60% of our revenue is recurring. Of our recurring revenue, the majority is comprised of consumables that are critical to the daily operations of our customers where the cost of failure is high. In addition, our large global installed base of instrumentation and equipment drives a reoccurring need for replacement and upgrades each year, further fortifying our sales durability. Given these attributes and continued focus on our strategic growth initiatives, we guided to another year of steady core sales growth in 2026, and our third consecutive year of adjusted operating margin expansion with adjusted EPS growth in the mid- to high single digits. In conjunction with reigniting our innovation engine, we are improving the quality of our portfolio with a focus on accelerating our core sales growth rate and creating long-term value. At the outset of 2025, we divested AVT, a slower growth instrumentation product line within PQI. Meanwhile, our acquisition of TraceGains grew sales by more than 20% in our first full year of ownership. The combination of Esko and TraceGains is helping our CPG customers accelerate time to market for new products and connect digital workflows to drive efficiency. In our Water Quality segment, we acquired AQUAFIDES in the second quarter of last year. AQUAFIDES complements our Trojan UV business by providing low-flow UV water treatment solutions through an expanded footprint in Europe. And just a few weeks ago, we completed the acquisition of In-Situ, expanding our world-class water analytics portfolio in the fast-growing environmental water and hydrology markets. Based in Colorado, In-Situ is a global leader in water measurement and monitoring, offering easy-to-use sensors, sondes and data management solutions. Its differentiated technologies strengthen our position across the environmental water ecosystem and complements our OTT HydroMet portfolio. Over the past 3 years, In-Situ has averaged roughly 8% core sales growth. And in 2025, In-Situ delivered approximately $80 million in sales, with gross margins around 50%, and EBITDA margins in the mid-teens. The addition of In-Situ expands our presence in fast-growing environmental water and hydrology markets, and enhances our ability to help address freshwater challenges related to increasing water scarcity, severe weather events and water contamination. Greater visibility to the quantity and the quality of surface and groundwater enables municipalities, government agencies and industries to mitigate economic risk and ensure public safety. These customers are increasingly faced with a variety of issues, including not enough water, too much water, water in the wrong places, and changing water composition, which requires different treatment solutions. The combination of In-Situ and OTT products, along with support from our broader water analytics capabilities creates a significant opportunity to help customers efficiently monitor and analyze the quantity and quality of their freshwater sources. We now have a premier environmental water analytics portfolio with significant opportunities to accelerate growth through complementary channels, improve efficiency across our global footprint, and deliver greater value for customers and shareholders. This addition to our portfolio is squarely aligned to our purpose of safeguarding the world's most vital resources, and we are excited to publicly welcome the In-Situ team to Veralto. Going forward, we remain excited about numerous opportunities to create value for shareholders through strategic growth and disciplined capital allocation. Our pipeline of acquisition opportunities remains strong for both Water Quality and PQI. That concludes my opening remarks. And at this time, I'll turn the call over to Sameer to provide details on our fourth quarter results and 2026 guidance. Sameer Ralhan: Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the fourth quarter. Total sales grew 3.8% on a year-over-year basis to nearly $1.4 billion. Currency was a 250 basis point tailwind year-over-year, and divestitures, net of acquisitions, reduced sales by 30 basis points, primarily reflecting the AVT divestiture. Core sales grew 1.6%. Our core sales growth was primarily driven by price, which increased 2.3% year-over-year. Volumes were down modestly, a function of 3 fewer shipping days in the fourth quarter of 2025 versus the prior year. This impact was approximately 260 basis points. Underlying demand remains steady in both the segments. Recurring revenue grew mid-single digits year-over-year and comprised 59% of our total sales. Gross profit increased 3.4% year-over-year to $828 million. Gross profit margin was 59.3%. Adjusted operating profit increased 7% year-over-year, and adjusted operating profit margin improved by 80 basis points to 24.6%. The increase in Q4 profitability was across both our segments, driven by strong operating execution. Looking at EPS for Q4, adjusted earnings per share grew 9% year-over-year to $1.04 per share. In the fourth quarter, we generated free cash flow of $291 million, or 115% conversion of GAAP net income. I'll cover the segment results now, starting with Water Quality. Our Water Quality segment delivered $846 million in total sales, up 4.3% on a year-over-year basis. Currency was a 240 basis points tailwind. The acquisition of AQUAFIDES contributed 50 basis points of growth. Core sales grew 1.4% year-over-year, led by price, which increased 1.8%. Volumes decreased modestly due to 3 fewer shipping days. Underlying demand for our water analytics and water treatment solutions remained steady year-over-year. Adjusted operating profit increased 5.8% year-over-year to $219 million, and adjusted operating profit margin was 25.9%, up 40 basis points year-over-year. Looking at the full year, our Water Quality team delivered core sales growth of 4.7%, driven largely by volume. Core sales growth was equally driven by recurring revenue and instrumentation. Adjusted operating profit grew 9.4%, or $74 million, to $858 million. This resulted in 80 basis points of margin improvement. Overall, our Water Quality team executed well in 2025 and delivered outstanding financial performance, setting all-time highs in annual sales and adjusted operating profit. Moving to the next page. Total sales in our PQI segment grew 3% year-over-year to $550 million in the fourth quarter. Currency was a 280 basis points tailwind. Net divestitures reduced sales by 1.6% year-over-year. This was primarily due to the AVT divestiture, partially offset by a couple of small technology acquisitions. Core sales grew 1.8%, with price up 3%. Volume was down 1.2%, primarily due to the 3 fewer shipping days, which had an impact of approximately 260 basis points to volumes on a year-over-year basis. Underlying demand for our PQI products and services remained steady. PQI's adjusted operating profit was $146 million in the fourth quarter, up $13 million over the prior year period, resulting in adjusted operating profit margin of 26.5%. This represents a 160 basis point improvement over the prior year period. For the full year, PQI delivered 4.8% core sales growth, an adjusted operating profit margin of 26.5%. The full year margin reflects investments in TraceGains to drive continued strong double-digit growth as well as investments made to diversify our regional production. Overall, it was a very strong year for our PQI team that delivered all-time highs with nearly $2.2 billion in sales and adjusted operating profit of $578 million. Turning now to our balance sheet and cash flow. In Q4, we generated $311 million of cash from operations. We invested $20 million in capital expenditures. Free cash flow was $291 million in the quarter, or 115% conversion of GAAP net income. At the end of the fourth quarter, gross debt was $2.7 billion and cash on hand was $2 billion. Net debt was $642 million, resulting in net leverage of 0.5x. As Jennifer shared, early in the first quarter of 2026, we completed the acquisition of In-Situ. The deal was funded with cash on hand. The cash outflow in Q1 for this acquisition was $427 million, net of cash acquired. Even after this acquisition, we continue to have flexibility in how we deploy capital. To that point, in the fourth quarter, our Board of Directors approved an 18% increase in our quarterly dividend and authorized a $750 million share repurchase program. We have an attractive pipeline of opportunities in both Water Quality and PQI. We will remain disciplined in our approach as we continue to deploy capital to create long-term shareholder value. Over the long term, our bias remains to create long-term shareholder value through M&A. Turning now to our guidance for 2026, beginning with our expectations for the full year. We are targeting core sales growth in the low to mid-single-digit range on a year-over-year basis. Total sales growth, including the impact of completed acquisitions and FX, is projected in the mid- to high single-digit range. We are modeling a currency tailwind of 100 to 150 basis points. This assumes that FX rates as of December 31 prevail throughout the year. Acquisitions net of divestitures are expected to contribute 150 basis points of growth, primarily from the In-Situ acquisition. Moving to adjusted operating profit margin. We're targeting approximately 25 basis points of year-over-year improvement in 2026. This assumes 50 basis points of margin expansion in our core business, offset by about 25 basis points of dilution from the In-Situ acquisition. Our adjusted EPS guidance for the full year 2026 is in the range of $4.10 per share to $4.20 per share, or mid- to high single-digit growth over the prior year. We are targeting free cash flow conversion of approximately 100% of GAAP net income. This assumes CapEx in the range of 1% to 1.5% of sales, and a modest working capital investment to support our growth. Looking now at Q1, on a year-over-year basis, we are targeting core sales growth in the range of flat to up low single digits, and total sales growth, including the impact of completed acquisitions and FX in the range of mid- to high single digits. Currency translation is expected to be a year-over-year tailwind of approximately 3.5%. And acquisitions net of divestitures are expected to drive about 50 basis points of sales growth. As a reminder, our core sales growth in Q1 2025 was 7.8%, setting up a tough comparison for this year. Our Q1 2026 guidance implies a 2-year stack of about 4% to 5% core sales growth. We are targeting adjusted operating profit margin of approximately 24.5%, and adjusted EPS in the range of $0.97 per share to $1.01 per share. Additional details on the modeling assumptions supporting our full year and Q1 guidance are in the appendix of our earnings presentation. That concludes my prepared remarks. At this point, I'll turn the call back over to Jennifer. Jennifer Honeycutt: Thanks, Sameer. In summary, we capped off an outstanding 2025 with a strong fourth quarter. Given the essential need for our technology solutions, durable business model and strong secular growth drivers across our end markets, we expect another year of steady core sales growth in 2026. And we will continue to leverage the power of the Veralto Enterprise System to drive continuous improvement in support of our customers. Our financial position remains strong, and we will continue to evaluate strategic opportunities within our disciplined capital allocation framework. We are proud of the progress we've made on our journey as a young public company, and we are excited about the opportunities in front of us as we continue to build Veralto, and help customers solve some of the world's biggest challenges in delivering clean water, safe food and trusted essential goods. That concludes our prepared remarks. And at this time, we are happy to take your questions. Operator: [Operator Instructions] We will take our first question from Deane Dray with RBC Capital Markets. Deane Dray: Since we're at the start of the year, I think it's a good place to get synced with the water sector macro. Just what's your expectations on muni CapEx? And just related, any differences in demand trends from your municipal customers versus the industrial -- broadly industrial, commercial power, electrical, semiconductor and so forth? So just start us there, if you could, please. Jennifer Honeycutt: Yes. Thanks for the question, Deane. What we see in the water quality markets is really steady demand. And I would say that we see that both across muni and industrial markets. Relative to your CapEx question, we are relatively insulated from fluctuations in CapEx funding cycles. As you know, 60% of our business is recurring revenue. We sit in the high end of the value chain where we are integral to the operation of the customer's process. They can choose not to use us, but the cost of failure, or the risk of failure to them is going to be high. So highly sticky business needed to continue to deliver clean water. And so we feel good about our position there. Relative to the demand between muni and industrial, we see pretty good opportunities on both sides. Every year, we always see some fluctuations in which industrials are up or down. Currently, we're seeing strong read-through here in the industrial markets that really support data centers. So data centers themselves, precursors, which would include semiconductor, mining and power as well. So strong growth, as we had mentioned in our prepared remarks relative to those industrials. And then on the muni side, government funding continues to flow. So feel good about demand in both cases, and I think we're well set up here in 2026. Deane Dray: That's really helpful. And then just a quick follow-up. It's come up in a number of calls across the sector regarding DRAM. Given across both of your businesses and the level of automation, are you seeing any pinches in supply or pricing? And could you size that for us, if you could? Sameer Ralhan: Yes, Deane, this is Sameer. I'll take that one. No, our exposure actually in dollar terms is very small to the DRAM side. So as we kind of look at it and size it, we don't expect it to be material at this point. Operator: Our next question comes from Andy Kaplowitz with Citigroup. Andrew Kaplowitz: So maybe this one is for Sameer. Your guidance of 50 basis points of margin expansion ex In-Situ, which is, I think, right in your incremental margin algorithm. But maybe you could give us some more color into the puts and takes you're seeing? Because I think you'll be lapping tariff-related headwinds. I think you said in the past like by Q2. But Deane asked a question on inflation. It's out there in different areas and there are investments that you're making In-Situ. Is that kind of front-end loaded? Any more color would be helpful. Sameer Ralhan: Yes, Andy. As you kind of look at the core business, we are guiding towards 50 basis points of margin expansion. A big chunk of that is actually pricing is driving it. And as you mentioned, some of the headwinds from the tariff-related friction that we had in 2025, those things will start rolling off. We're going to start seeing the impact of that in the second half of 2026 as we kind of look at it and model then. That's really offset by some of the investments that we continue to drive. You heard from Jennifer a little bit earlier about the investments we're making the services as we're trying to expand that part of the business. And also just on the sales side as we continue to increase feet on the ground as we kind of think about the sales side. So it's really the algorithm for the core business is steady as for the long-term value-creation algorithm. So there's no changes over there. We feel pretty confident on that side. In-Situ, a really great acquisition for us as we kind of get through some of the initial costs, especially in the first half of the year to integrate and some of the costs tied to the realization of the synergies. Those are the kind of really things that are driving the upfront impact. And on a net year basis, that's going to be 25 basis points. So those are some of the puts and takes as you kind of think about the margin expansion. Andrew Kaplowitz: Got it. That's helpful. And Jennifer, you mentioned data centers are strong. I know in the past, you said it's still a relatively small part of Veralto. But we've seen a wave of data center orders here over the last couple of quarters for a lot of industrial companies. Could we see the data center wave be sort of meaningful for you guys in growth in '26? Or is it still too small? Maybe you could elaborate on sort of your TAM, and, sort of, what's going on there for you guys? Jennifer Honeycutt: Yes, Andy, we don't size our markets publicly. And I would say that our sales into data centers are still relatively small. We wouldn't expect to see a meaningful contribution this year, although the aggregation of power generation, cooling towers, mining, semiconductor, right, it does start to add up if you kind of include all of the ancillary vertical markets that go with it. But data center specifically, again, small base of business, growing double digits, but not going to be a meaningful contributor to core growth this year. Operator: We will move next with William Grippin with Barclays. William Grippin: My first question here just was hoping to drill down into PQI a little bit and perhaps specifically, what you're seeing in that business as it pertains to this kind of high-protein boom that we're seeing. Could that really start to be a volume driver within PQI? And just any color there would be helpful. Jennifer Honeycutt: Yes. Thanks for the question. Our CPG market tend to be holding up really well. They're stable. We're not seeing any changes in demand patterns, good linearity across the 4 quarters. And within that, we've got solid demand across some of our new product innovations. UV laser, we've seen some good interest there. Relative to changes in terms of food products and package size and so on. Look, any time changes get made to what is being produced, it's generally a nice pickup for us, right? So the secular drivers around the proliferation of brands, the proliferation of SKUs, changes in package size, even regulatory influences, right, those are all positive drivers for our business there. So we absolutely feel good about changes to packaged foods to support changes in dietary requirements and so on. So I think on the coding and marking side, that's a volume game for us. So the more packages, the more coding and marking equipment and consumables that gets sold into that space. So as far as protein-intensive consumer packaged goods goes, I think we're well positioned to capitalize on that. William Grippin: Got it. I appreciate that. And then just one specifically on geographic performance in 4Q. If we're doing the math right, it looks like Western Europe may have actually been down year-on-year in terms of core growth. Do you have any color or commentary on the drivers there? Sameer Ralhan: Yes. If you kind of look at the Western Europe, really, Will, that's driven by the impact of the 3 days if you start looking on a year-over-year basis. If you recall, we saw pretty solid growth in the Q1 across the regions, especially in the Western Europe as well because we had 3 excess shipping days. That's really kind of driving the year-over-year comp as you can look at the Western Europe. There's nothing otherwise on that. So on a full year basis, we feel pretty good if you kind of look at the growth in the Western Europe, really great execution by the team on the Water Quality and the PQI side. Jennifer Honeycutt: Yes. Our recurring revenue business is really what drives that, right? So 60% of the business being recurring revenue is going to have a pretty big impact when you've got days fluctuation. We see that in the first quarter and the fourth quarter last year. Operator: Our next question comes from John McNulty with BMO Capital Markets. John McNulty: Maybe just digging into the guide a little bit. You're looking for mid- to high single-digit EPS growth. And yet your growth overall on the top line is kind of in line with what you've seen over the last couple of years when you put up double-digit EPS growth. So I guess, is there anything that gives you some pause either in the end markets or on the cost side that has you forecasting EPS growth that's a little bit more modest than what you've seen over the last couple of years? Sameer Ralhan: Yes, John, thanks for that question. Look, as we kind of look at the guide overall, maybe just, John, start from the top for the P&L, for the core growth perspective, we expect to be in the low to mid-single digit as we kind of came out of the year. I think it just makes sense for us to be prudent. At -- there's still some moving parts from the macro perspective. But underlying demands are pretty good and pretty, pretty solid. So we feel pretty confident on the demand side. But as you kind of move further down, we'll have the margin expansion of roughly 25 basis points, including the impact of the In-Situ acquisition, that really boils down to EPS growth in the mid- to high single digits. There's nothing material, John, anything on the cost side. So we'll have the top line growth and margin expansion, that's ultimately coming down. It's really -- the only other impact I would say on the EPS side is from the In-Situ perspective. It's going to be accretive to the earnings -- operating earnings from $0.02 per share. But there is a $0.04 dilution from the lack of interest income because of the cash being used. So that's kind of baked into the EPS as well. So that helps you do your math. John McNulty: Got it. Fair enough. And then just a question on the data center opportunity and the market. I think recently, it became more clear that there is an opportunity for warmer water cooling as opposed to refrigerated water cooling. Can you help us to think about if that changes the game for Veralto at all in terms of how they target and maybe benefit from the data center growth as we look forward? Jennifer Honeycutt: This is a great question, John. Liquid cooling tends to increase the need for Veralto solutions because it's really a smaller volume of water focused on high-purity fluids. And these need to be monitored along with ensuring sort of continuous chemical control and monitoring. So it doesn't really matter in terms of what the temperature of that water is. And even though in these cases where it's a closed-loop system, liquid cooling using less water, it's more valuable. You can think of it as more valuable water, right? So there's precision dosing to prevent corrosion and biofouling. That supports our ChemTreat business. You've got continuous monitoring of ultra-low range organics such as TOC. That benefits our Hach business. And then you've got high-purity disinfection needs there, which benefits our Trojan business. So we do get this question from time to time, and it's really not a function of the temperature of the water. It's the fact that water is used at all. And the lower the volume of water you use, the higher the need to have precision control over that water to make sure that, that process is running well and not creating problems and other kinds of quality risks for the data centers themselves. So that's the way to think about it. Operator: We will move next with Jacob Levinson with Melius Research. Jacob Levinson: You folks have done a couple of interesting bolt-on deals in the last 2 years. And I know you've got a new buyback authorization and the balance sheet is in a pretty nice spot here. But maybe you can just speak to your confidence in, maybe, getting some more deals across the goal line in '26. And any color around just the activity levels that are happening behind the scenes here. Jennifer Honeycutt: Yes. Thanks for the question, Jake. We feel good about the level of activity we've got right now in our M&A pursuits. We've got full funnels, both on Water Quality and PQI, and continue to work on a number of different opportunities, which we do believe are actionable. That said, we've got -- we're going to hold true to our discipline here in terms of making sure that we like the market, that we've got a top-tier asset, and that we can get it at the right valuation. We don't always -- there's a lot about that, that we don't control and timing tends to be a little bit episodic. But we are excited about what we have in the funnel. I do believe that we will be continuing on our M&A journey this year. And relative to share buybacks, that just gives us another lever here in terms of the way to return value to shareholders should we see a period here where we're going to be a little bit lighter in M&A. But I would say even with that program in place, it takes nothing away from our ability to transact on our aspirations here relative to M&A. Jacob Levinson: Okay. That makes sense. And just another one quickly on In-Situ. It seems like a pretty interesting asset. I'm just trying to get a sense of what the integration plan might look like. I'd have to imagine it's maybe a bit subscale and a lot of these private assets tend to need some help operationally or maybe just need to be larger. So maybe you can speak to where the low-hanging fruit is or the biggest opportunities that you see. Jennifer Honeycutt: Yes, great question. We're really excited about the In-Situ acquisition and certainly have plans to realize synergies on both the top line and the bottom line. I would say right out of the gate, we're most excited about the top line synergies, to be honest. We've got a good opportunity to accelerate growth. And as a reminder, In-Situ has grown 8% over the last 3-or-so years. We believe we can get that to low double digits here with the combination of the OTT portfolio. The thing that's so attractive about this is that they are complementary product portfolios. So In-Situ is strong in water quality. So that would be the analytics measurements and environmental water. And OTT is strong in water quantity, which would be level and flow. And together, the product portfolio really snaps together like LEGO pieces. So the combined product portfolio is going to give us strength going for complementary channels, right? In-Situ is predominantly a North American company, and so we've got the opportunity to leverage OTT channels outside the U.S., including Europe, Latin America and Asia. And then certainly, to your point, Jake, they're going to benefit from the VES tools, whether that's those being deployed on the factory floor for improved operating efficiency or those deployed for our commercial efforts and helping them really grow faster. We're going to also look to the cost synergy side of things. We will move in parallel with our top line synergy activity here, and these would fall into things that you typically expect. So VES on the factory floor, improving operating efficiency, we're going to have opportunities to leverage global supply chain and our procurement teams through purchase price variance and in-sourcing activities, and then just globalizing or optimizing the global resources. So a number of things there. The teams will be busy and running at breakneck pace, but I think we're really excited about the possibilities here. Operator: We will move next with Ryan Connors with Northcoast Research. Ryan Connors: I wanted to talk a little bit about the water segment. It seems like the growth has been there generally. Obviously, you've got some great secular themes behind that, but it does seem like the growth has been more price driven and that the volume growth has been a little more tepid. So can you just unpack for us what's it going to take in your mind to kind of unlock the volume growth in water given that you do have such compelling big picture themes behind it? Sameer Ralhan: Ryan, this is Sameer. Yes, as you kind of look at the water side, you're absolutely right. We feel really excited about the opportunity that's in front of us. The steady demand drivers, both in the muni and the industrial side continue. Overall, if you're going to unpack between industrial and the muni side, the muni side, actually, we've been doing really well. You noted some of those things on the pricing side, but the underlying volumes have been pretty good as well. Industrial side, I would say it's -- when you start looking at things like the data center ecosystem, as Jennifer said earlier, I mean, those kind of industries, be it semiconductor on the power, all the ancillary systems around the data centers, they are kind of helping us drive the volume as well. As you kind of look at our filings, you'll see a little bit of commentary around the chemical treatment side, which is the ChemTreat and the UV side. Those businesses are growing sort of solidly in the mid-single to mid-single-digit-plus kind of a range. And the muni business is a little slower grower, but it's a steady rock solid, as you know, given the stickiness of that business in the market. So overall, as you're going to start look long term, Ryan, we're in a really, really solid place. Now 2025, just with a 3-day dynamic that moved between Q1 and Q4 has made the numbers look a little bit odd. But otherwise, if you look on a full year basis, we're doing really well. Full year basis, volume -- Water Quality was up more than 3%. Ryan Connors: Yes. Okay. And then switching gears over to PQI. Also some great big picture themes there, especially with the combination now of Esko and TraceGains. But can you talk about how exactly you monetize that demand? Is it more subscriber licenses and existing accounts? Is it adding new accounts? Is it higher pricing for existing users? Just curious if you can give us some more color on better understanding how you actually convert that demand into revenue and earnings? Jennifer Honeycutt: Yes. So our Esko and TraceGains businesses together are growing really well in the software space, as you mentioned, on the back of some secular growth drivers relative to digitized workflows across food and beverage and things to that effect. These are SaaS-based businesses, right? So we've got recurring revenue in terms of the mechanics behind how revenue is recognized there. I would say one of the things that was so attractive about TraceGains is that they had a leading position in mid-market brands. Esko largely has the enterprise brands. And so the cross-pollination of the 2 allows the TraceGains channel to bring Esko into mid-market, and the Esko channel to bring TraceGains into enterprise accounts. So there is a fair number of new accounts, new business that we see there, and it's the fastest-growing sector is mid-market. But we also see product expansion happening. So Webcenter Go is kind of the backbone of Esko. We've now integrated the TraceGains AI offering into that backbone through a product called [ ComplAi ] that allows for automated AI verification of copied print in packaged goods. And as we mentioned in the prepared remarks, helps reduce errors -- transcription errors, costly product recalls and so on. So it's both menu expansion and its new customers. Operator: We will move next with Nathan Jones with Stifel. Nathan Jones: I guess I'll start with a fairly basic question out of the guidance. The low to mid-single digit is a pretty wide range. Can you talk about what would get you to the low end of that range, what would get you to the high end of that range? And then the 50 basis points core margin expansion, would that change if you were at the low end or at the high end, but can you do 50 basis points on low single-digit growth and maybe you get a little bit better than that if you get to mid-single-digit growth? Just any color you could give us on the width of that range. Sameer Ralhan: Yes. Nathan, thanks for that question. As you kind of look at the top line from a core growth perspective, low single-digit to mid-single-digit range, really, as we kind of come out of the year, the demand underlying patterns are pretty good, frankly, Q1 out of the gate, the order patterns are looking pretty good as well. So we feel pretty good about the business. But there's still things on the macro side, you always have to keep an eye on and it's just the beginning of the year. So we just wanted to have a guide that's a little prudent and a little judicious at this time. Overall, we feel pretty good about the business. As it kind of pertains to its impact on the margin side, you're absolutely right. Given the fall-through and the leverage you would expect on the system as we kind of move up, that should help us. But we do have flexibility to modulate some of the cost side as well, right, depending on whether we are trending on the low side or the high side. So I think it's good at this point to model in 20 basis points on the core side, but more to come as we kind of give the Q1 guide. Nathan Jones: And I guess my follow-up question on supply chain moves and some of the regionalization of footprint, Jennifer, that you talked about in your opening comments. Maybe a little bit more color around what's been done there? I know some of that was kind of a tariff avoidance kind of things, so might be okay regardless of tariffs. Is there incremental profitability that drops through from that, that contributes to the margin expansion and that maybe offset some price that maybe you don't take? Or just how you're thinking about your ability to keep that improvement in cost? Jennifer Honeycutt: Yes. I mean, principally, we initiated regionalization of our manufacturing lines and sort of regionalize our supply chain to certainly deal with the tariff environment that we are facing last year. As a reminder, these are all no-regret moves because we're effectively a light assembly house, right? There's no big capital monuments to replicate or move. And so it's fairly straightforward to kit up these lines and move them within a 6- to 9-month kind of time frame. And so far as what kinds of moves happened, our Videojet business had a fairly large China manufacturing footprint. We've diversified that footprint into the U.K., into Europe. We derisked our Trojan business in Canada by adding footprint into an existing -- or expanding footprint in an existing location here in the U.S. We've had some Hach product lines that have been diversified as well. So all told, they were close to a dozen line moves there to really get a setup for any kind of trade environment that we would be facing going forward that would be more restrictive given sort of the geopolitical dynamics. The things that we're working through now here are to make sure that we're not encountering any absorption issues, right? We got to make sure that those new line moves are up and running to full capacity and that we're operating efficiently there. So there's a little bit more work to do there. But again, these are no-regret moves. And to the extent that trade relationships continue to change, we just had one yesterday between the U.S. and India with -- that became favorable for us, right? So we're going to continue to be flexible and nimble and agile in how we approach the geopolitical tariff trade environment. And I think VES does a great job of serving us well here. Operator: We will take our last question from Brad Hewitt with Wolfe Research. Bradley Hewitt: Just curious in terms of what you're assuming for the price contribution to growth in 2026, both consolidated and by segment? And how much of that is carryover versus incremental pricing? Sameer Ralhan: Yes. Thanks, Brad, for that. Yes, if you're going to look at the pricing that we have modeled into the guidance in 2026, historical range is 100 to 200 basis points. You should expect us to be towards the high end of the range this year. Part of it is carryover, as you said, from the pricing actions that we initiated, but we are implementing price increases on top of that as well, just as part of regular cadence. So that will put us closer to 200 range -- basis points range. Bradley Hewitt: Okay. Great. And then as we think about organic growth phasing throughout the year, is it fair to assume organic growth accelerates each quarter through the year and then Q4 given the easy comp you're kind of comfortably in the mid-single digit zone? Sameer Ralhan: Absolutely, Brad, as you're going to think about this thing. Interesting thing is that you're going to look at the sequential sort of buildup of the revenue throughout the quarter, it's pretty much in line with the historical averages, right? 24% of the total revenue in Q1 that if you look at overall, just because of the 3-day impact, the comps will be a little bit of a headwind in the first half of the year, but they become favorable in the second half from that 3-day math. But otherwise, underlying demand patterns, there's no changes. Ryan Taylor: This is Ryan Taylor. We appreciate everybody joining the call today. We appreciate you sticking with us a little bit past the bottom of the hour here. As usual, I'll be around for follow-up questions over the next days and weeks. Should you have any, just reach out to me. And thanks again for joining our fourth quarter call. Operator: This brings us to the end of Veralto's Corporation's Fourth Quarter 2025 Conference Call. We appreciate your time and participation. You may now disconnect.
Operator: Greetings, and welcome to the Reservoir Media's Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jackie Marcus, Investor Relations. Thank you. You may begin. Jacqueline Marcus: Thank you, operator. Good morning, everyone, and thank you for participating in today's earnings conference call. Reservoir Media issued a press release with results for its third quarter of fiscal year 2026 ended December 31, 2025, earlier this morning. If you did not receive a copy of our earnings press release, you may access it from the Investor Relations section of our website at investors.reservoir-media.com. With me on today's call are Golnar Khosrowshahi, Founder and Chief Executive Officer; and Jim Heindlmeyer, Chief Financial Officer. As a reminder, this call is being simultaneously webcast and will be recorded and archived on the Investor Relations section of our website. Before I turn the call over to Golnar and Jim, I'd like to note that today's discussion will contain forward-looking statements that reflect the current views of Reservoir Media about our business, financial performance and future events, and as such, involve certain risks and uncertainties. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs and projections will result or be achieved. Please refer to our earnings press release and our filings with the Securities and Exchange Commission for more information on the specific risk, uncertainties and other factors that could cause our actual results to differ materially from our expectations, beliefs and projections described in today's discussion. Any forward-looking statements that we make on this call or in our earnings press release are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law. In addition to financial results presented in accordance with generally accepted accounting principles, we plan to present during this call certain financial measures that do not conform to U.S. GAAP, if we believe they are useful to investors or if we believe they will help investors to better understand our performance or business trends. Reconciliations of these non-GAAP financial measures to the nearest comparable GAAP measures are included in our earnings press release. I would now like to turn the call over to Golnar. Golnar Khosrowshahi: Thank you, Jackie. Good morning, everyone, and thank you for joining us today. We continue to execute our strategy in the third fiscal quarter with a sustained focus on deepening relationships with our top-tier talent through new ventures, investing in the next generation of hitmakers and expanding our presence in emerging markets. Organic growth was up 5% year-over-year, underscoring the strength and demand for our catalog. Music Publishing revenue grew another 12%, while Recorded Music revenue for the quarter was up 8% compared to the year ago period. Both Music Publishing and Recorded Music's revenue growth were driven by acquisitions, an increase in Digital revenue and continued growth of music streaming services. Before reviewing our operational highlights, I want to congratulate the nominees and winners of music's highest honor, the Grammys, held on Sunday in Los Angeles. Our roster contributed to 10 wins across multiple genres. Khris Riddick-Tynes' collaboration Folded by Kehlani won Best R&B Song and Best R&B Performance. Sarah Jarosz and her group, I'm With Her, took home Best Folk Album for Wild and Clear and Blue and Best American Roots Song for Ancient Light. Jony Mitchell received the Best Historical Album Grammy, and Miles Davis' Miles '55, The Prestige Recordings, won Best Album Notes. Our songwriters, Michael League, Steph Jones, Robert Augusta, Mike Chapman, Simon Pilton and John Marco also contributed to wins for Best Alternative Jazz Album, Best Contemporary Country Album, Best Dance Electronic Album and Best Tropical Latin Album. Congratulations to all on a memorable night and an extraordinary year in music. Turning to the quarter's highlights. Reservoir's portfolio is distinguished by its diversification, spanning iconic catalogs and genre-defining artists alongside new and emerging creators across global markets. This quarter reflected that balance. We announced the acquisition of the publishing and recorded music rights of yacht rock icon, Bertie Higgins, adding evergreen hits, including Key Largo to our portfolio. As noted last quarter, Reservoir acquired the Miles Davis catalog in September. This January marks the official launch of his centennial year, and we are working closely with the estate and partners to honor his legacy through a global celebration with key integrated moments all year long, including the feature of Miles Davis' Blue In Green as well as his artwork in a recent ad campaign for Lexus. The debut of celebratory centennial logos, numerous planned releases across the various label partners, a co-branded Miles Davis centennial cigar from premium cigar and accessories company, Ferio Tego, a deal between the states official global merchandising and brand licensing partner, Periscope, and premium men's retailer, John Varvatos, a centennial edition of Miles, The Autobiography, several live performances and festival appearances and more. This quarter was also marked by new partnerships with 2 music icons, R&B legend Gladys Knight, and HipHop icon, TI. The agreement with Gladys Knight includes rights to her income streams across both publishing and master recording catalogs. The deal with TI will see Reservoir work with the acclaimed rap superstar across his entire publishing back catalog and future works as well as select recorded music interests, including master recordings, artist royalties and neighboring rights. These agreements mark our team's proven ability to structure and execute unique flexible deals with legendary talent and further build our portfolio of evergreen hits that are accretive to the portfolio as a whole. Alongside partnerships with established and legacy talent, investing in the next generation of hitmakers remains central to our growth strategy. We welcomed critically acclaimed band, Say She She, with a global publishing deal covering past and future works. This female-led band is redefining discodelic soul and recently kicked off a North American tour. We also added Allison Veltz Cruz, an in-demand songwriter, in the popular country pop space, with #1 hits and credits for artists, including Matt Stell, Tenille Arts, Jason Aldean, Luke Combs and Lady A. Also joining the roster this quarter is Britten Newbill, whose pop and R&B song writing and producing credits include hits by Cap Burns, Olivia Dean, Daya, Meghan Trainor and more. We also continue to invest in high-growth emerging markets. We extended our publishing agreement with multi-platinum Indian hip-hop artists, Divine, now overseen through Reservoir's recently launched subsidiary, PopIndia. Originally signed in 2020, this partnership, including our joint venture with Divine's umbrella company, Gully Gang Entertainment, has helped cultivate new talent across India's hip-hop ecosystem, and we are excited to continue supporting the genre's global growth. Additionally, we entered into a joint venture with Dan's Hall publisher, Abood Music, and Jamaican Star Cordel Skatta Burrell. Skatta's hit record Coolie Dance Rhythm exemplifies how enduring works can reach new audiences through inventive sampling. With uses in global hits by Pitbull, Lil John, Whitney Houston, Fatman Scoop, Nina Sky, 2025 Grammy-nominated gold selling global hit After Hours by Kehlani and more, Coolie Dance reinforces the long-term value of culturally significant music. Through the joint venture, Reservoir and Abood Music will acquire catalogs and sign and develop Jamaican creators, aimed at further advancing the new generation of Jamaica's music scene. Our emerging market strategy remains highly impactful with favorable acquisition multiples and streaming growth rates that continue to outpace both the U.S. and Europe. Our performance this quarter is taking place against the backdrop of sustained growth in the global music economy. As reported by music economist Will Page in December, the global value of music copyright reached an all-time high of $47.2 billion for the year prior. Streaming services continue to follow a relatively regular cadence of price increases, which serve as additional tailwinds for general industry growth. We believe our focus on premium assets, long-term creator partnerships and emerging markets positions us well to drive growth and maximize value creation for our songwriters, our artists and shareholders over time. I will now turn the call over to Jim to discuss our fiscal third quarter financial performance. Jim? Jim Heindlmeyer: Thank you, Golnar, and good morning, everyone. Our third quarter results demonstrated another quarter of financial strength, stemming from our ability to acquire quality catalogs and maintain substantial operating leverage. Our confidence to raise our fiscal 2026 guidance as we head into our fourth fiscal quarter is supported by our impressive roster of talent, and we are excited to continue to build upon a successful first 3 quarters of fiscal 2026. Revenue for the third fiscal quarter was $45.6 million, a 5% year-over-year improvement on an organic basis and an 8% increase when including acquisitions. At a segment level, we posted a 12% increase in Music Publishing revenue and an 8% increase in Recorded Music revenue, both of which were largely driven by an increase in Digital revenue due to the acquisition of additional music catalogs and continued growth at music streaming services. Total cost increased 8% compared to the prior year's quarter due to a 3% increase in administration expenses, a 7% increase in cost of revenue and a 16% increase in amortization and depreciation expenses. This led to an expansion of operating margins given our 8% revenue growth. Turning to operating performance for the third fiscal quarter. OIBDA was $18.1 million, an increase of 11% year-over-year, and adjusted EBITDA was also up 11% year-over-year to $19.2 million. Both OIBDA and adjusted EBITDA benefited from revenue growth, but was slightly offset by an increase in administrative expenses. Interest expense was $6.6 million for the quarter, an increase of $800,000 from the prior year due to an increase in borrowings to support our M&A strategy, which was partially offset by a decrease in interest rates. Net income for the third fiscal quarter was approximately $2.2 million compared to net income of $5.3 million in the third fiscal quarter of the prior year. The decrease in net income was primarily driven by a loss on fair value of swaps compared to a gain in the prior year period as well as increased interest expense and the change in other income. This was all partially offset by an increase in operating income and a decrease in income tax expense. Earnings per share for the quarter were $0.03 compared to $0.08 in the year ago quarter. Our weighted average diluted outstanding share count during the quarter was 66 million. Diving into our segment review for the quarter, Music Publishing revenue increased 12% year-over-year to $30.1 million. This was mainly due to an increase in performance revenue, driven by the strong results from hit songs, and an increase in Digital revenue due to the acquisition of additional catalogs and continued growth of music streaming services. In our Recorded Music segment, revenue increased by 8% year-over-year to $12.9 million. Recorded Music revenue benefited from Digital revenue growth, driven by continued music streaming growth and the acquisition of catalogs and an increase in neighboring rights revenue. This growth was partially offset by a decrease in Synchronization revenue due to the timing of licenses. Now let's turn to our balance sheet. As of December 31, 2025, cash flows from operating activities increased by $5.1 million year-over-year to $38.2 million, owing to an increase in OIBDA and cash provided by working capital. We had total liquidity of $114.8 million, consisting of $20.6 million of cash on hand and $94.2 million available under our revolver. We ended the quarter with total debt of $452.3 million, which was net of $3.6 million of deferred financing costs, and thus, we maintained $431.7 million of net debt. That compares to net debt of $366.7 million as of March 31, 2025. With respect to our guidance range, we are increasing our full year revenue guidance range of $167 million to $170 million to now reflect $170 million to $173 million, which, at the midpoint, implies growth of 8% versus fiscal 2025. Similarly, we're raising our adjusted EBITDA guidance range of $70 million to $72 million to now be $71.5 million to $73.5 million, which signals growth of more than 10% over the prior year at the midpoint of the range. Looking at the fourth fiscal quarter of the year, we believe we are well positioned to achieve our increased full fiscal year guidance ranges. Remaining true to our proven capital deployment strategy continues to position Reservoir to provide long-term value as a partner of choice for worldwide talent, which, combined with our ability to grow the top line without an excess of additional cost, should allow us to continue our track record of growth in the coming quarter and fiscal year 2027. With that, I'll now pass the call back to Golnar. Golnar Khosrowshahi: Thank you, Jim. As you've heard today, we continue to make progress toward our top line goals while maintaining discipline across costs and the balance sheet. Reservoir remains a trusted partner for songwriters and artists around the globe with a commitment to our creators and value enhancement. Our pipeline is strong and diversified with landmark transactions at attractive returns. We look forward to closing out the fiscal year in the coming weeks. With that, we will now open the line for questions. Operator: [Operator Instructions] Our first question comes from Griffin Boss with B. Riley Securities. Griffin Boss: So first off, given the step-up in debt, I would say it appears to be another robust quarter for catalog acquisition, and you mentioned several of the deals that occurred. Is there anything you can say about how the fourth quarter is shaping up for deal activity? Do you expect it to stay at what has been an elevated clip the past 2 quarters? Golnar Khosrowshahi: Yes, we do. We are on track with continued M&A for this quarter. And obviously, things are subject to timing and timing shifts, but we anticipate to be continuing at the same clip. Griffin Boss: Okay. Great. And Golnar, you did mention in your prepared remarks favorable acquisition multiples. So I guess the question is, is it safe to say that you're not seeing any material change generally to the weighted average multiples that you've paid historically? Golnar Khosrowshahi: That's correct, we are not. Griffin Boss: Okay. Okay. Great. And then just last one for me, and I'll pass it off. I'm just curious if there's anything that you'd like to say or comment on regarding the activist investors amended 13D filing last night. I think you've been engaged with that specific shareholder for quite a while now, so just curious if there's anything that you wanted to share about the nature of those discussions. Golnar Khosrowshahi: No, I don't have anything to add. I don't have any information to share. We're very much focused on continuing to grow the business and delivering value for all of our constituents. Operator: [Operator Instructions] Our next question comes from Richard Baldry with ROTH Capital. Richard Baldry: Fourth quarter implied revenues looks like down a little bit sequentially seasonally. And that is what happened last year, but I feel like third quarter had an unusually high other income line. And in prior years, fourth quarter has typically been seasonally pretty strong. Are there any call-outs on unusual onetime events this time around? Or do you think just typical conservatism? Jim Heindlmeyer: Rich, last year, we did call out royalty recoveries related to an audit that we completed. There were actually 2 audits we completed last year, 1 in Q3, 1 in Q4. So those certainly impacted the numbers last year. There's nothing unusual that we are expecting in Q4 this year, but we'll have that dynamic with respect to the comps year-over-year. Richard Baldry: Okay. And the G&A number had -- last quarter had been up pretty meaningfully year-over-year. This quarter, it's almost flat year-over-year. How do we think about the trending on that, and how to look at it on a go-forward basis? Jim Heindlmeyer: Well, I think some of those ups and downs in G&A is driven by the small other segment that we have related to our management business, where, as that revenue goes up or down, the commissions that we pay to the actual managers is impacted, and that sits in our G&A line. So that's driving some of those ups and downs that you see. But I think that what you're looking at for this quarter is -- and certainly, when you look at it on a segment level, it's really where we expect to be. We have normal inflationary pressures on our G&A. But other than that, there's nothing that stands out there. Richard Baldry: And then last one would be, if you look at the ROIs on deals and the pricing, is there a meaningful difference between international versus domestic? Will that sort of skew where you're looking for deals in the future? How do we think about those sort of growth trends? Golnar Khosrowshahi: It's not a secret that we can acquire at more favorable multiples in the emerging markets or at least in some of the emerging markets. I wouldn't necessarily put Latin in that same category, given that, that pricing is pretty mature and on par with Western markets. So from that point, I would say that given the expansion and the growth that is occurring and projected to continue in those emerging markets, we're looking at some equally more favorable returns on those investments as well. Richard Baldry: Got it. And then maybe last one from a very macro level, when you think about price increase at streamers and royalty rates agreements at the highest level, are there any tailwinds, headwinds we should be thinking about as we look out to '27? Golnar Khosrowshahi: I think there's a bit of both. I think we have uncertainty around CRB, and that process is underway. Obviously, that's not a process that is new to us, and we've gone through that before. We have tailwinds in so far as subscription number increases, tailwinds in so far as just the emerging markets expansion, people coming online, price increases across streaming platforms. So I would say there's a bit of both, but we continue to be -- we continue to believe that, on a net basis, there are -- we are looking at tailwinds and continued growth in music. Operator: We have reached the end of our question-and-answer session as there are no further questions at this time. I would now like to turn the floor back over to management for closing comments. Golnar Khosrowshahi: Thank you, operator. We appreciate your support and interest in Reservoir, and we look forward to sharing our full fiscal year results with you later this spring. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Ladies and gentlemen, thank you for your continued patience. Your meeting will begin shortly. Star zero and a member of our team will be happy to help you. Thanks again. Again, ladies and gentlemen, thank you for your continued patience. Your meeting will begin shortly a member of our team will be happy to help you. Good afternoon. Welcome to Ares Capital Corporation's Fourth Quarter and Year Ended December 31, 2025. John Stilmar: Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. On Wednesday, February 4, 2026. I will now turn the call over to Mr. John Stilmar, Partner of Ares Public Markets Investor Relations. Operator: Thank you, and good afternoon, everybody. Let me start with some important reminders. Comments made during the course of this conference call and webcast John Stilmar: well as the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share. Core EPS. The company believes that core EPS provide useful information to investors regarding the financial performance. Because it's one method the company uses to measure its financial condition and results of operation. A reconciliation of GAAP net income per share to the most directly comparable GAAP financial measure to core EPS be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings filed this morning with the SEC on Form 8. Certain information discussed in this conference call as well as the accompanying slide presentation. Including credit ratings and information related to portfolio companies, was derived from or obtained from third-party sources. That have not been independently verified and, accordingly, the company makes no representation or warranty with respect to this information. The company's fourth quarter and year-end 2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the fourth quarter 2025 earnings presentation link on the homepage of the Investor Resources section. Ares Capital Corporation earnings release and Form 10-Ks are also available on the company's website. And now I'd like to turn it over to Kort Schnabel, Ares Capital Corporation's chief executive officer. Kort? Kort Schnabel: Thanks, John, and hello, everyone. Thank you for joining our earnings call. I'm joined today by Jim Miller, our President Jana Markowitz, our Chief Operating Officer Scott Lem, our Chief Financial Officer and other members of the management team who will be available during our Q and A session. Let me start by providing a few thoughts on ARCC's performance current market conditions and our outlook for the year ahead. 2025 was another good year for our company. We generated strong financial results supported by our stable credit quality and growing portfolio. Our core earnings per share of $0.50 for the fourth quarter and $2.01 for the full year fully covered our dividends. And drove an ROE in excess of 10% for both the fourth quarter and the full year. Reinforcing our long-term track record of generating NAV growth with attractive dividends, ended 2025 with modestly higher NAV per share and have now paid a consistent or growing level of regular quarterly dividends for over sixteen years. The drivers of these results are embedded in what we believe are our long-term competitive advantages, which include the experience of our team our long-standing market relationships, the scale of our capital base, and our rigorous credit standards. We remain confident that these enduring competitive advantages will continue to support compelling performance for the company in the future. Looking back on 2025, as uncertainty around macroeconomic policies from the early months of the year subsided, and pressure on private equity firms to return capital to investors mounted we saw a rebound in transaction activity during the second half of the year. This in turn led to a meaningful acceleration new investment commitments for us over the same period. Despite a relatively tepid M and A market, in the 2025, remained busy with the majority of our originations coming from incumbent borrowers as we sought to support the growth objectives of our portfolio companies. We believe that our ability to be a steady capital provider at scale through periods of economic and capital markets volatility is especially valuable to our portfolio companies. And continues to lead to further market share gains as our existing borrowers consolidate their lending relationships with us. Specifically, across our top 10 incumbent transactions during 2025, we more than doubled our share of the overall financing. These incumbent transactions can offer attractive opportunities to increase our exposure to some of our best performing portfolio companies. Therefore, our portfolio of more than 600 borrowers is yet another factor that we believe can drive future incumbent lending opportunities and in turn the long-term performance of our company. While we continue to see opportunities with incumbent borrowers into the 2025, the M and A and LBO markets also gained momentum. This accelerated transaction activity and new borrowers comprised the majority of our new lending activity in the 2025. Reflecting the breadth of our market reach and further expanding future incumbent opportunities, ARCC added more than 100 new borrowers to the portfolio during the year. A new record for the company. While the broader tailwinds of increasing market activity levels helped drive higher originations to new borrowers in the second half of the year, much of this growth also came from the continued expansion of our specialized industry verticals. The deep knowledge and specialized skill set we have developed in industries such as sports media and entertainment, specialty healthcare, energy, software, consumer, and financial services ultimately results in access to differentiated deal flow. Particularly in the non-sponsored channel. Building on the momentum we have in these verticals, our non-sponsored originations grew by more than 50% during 2025. Collectively, these factors supported a record year of gross originations at ARCC with $15.8 billion of new commitments in 2025. Importantly, we are maintaining our highly selective approach supported by a widening set of sourced opportunities. In 2025, our investment team reviewed nearly $1 trillion of potential investments, representing a 24% increase the number of opportunities we reviewed relative to the prior year. We also see the merits of origination scale in our ability to garner attractive terms and pricing. Against a competitive market backdrop, market spreads declined before stabilizing over the course of the year, we were able to drive a modest year over year increase in spreads. For our first lien commitments while also maintaining LTVs in the high 30% to low 40% range and upholding our stringent underwriting and documentation standards. The quality of our portfolio remains in excellent shape as our borrowers continue to demonstrate healthy overall performance. On average, our portfolio companies are growing faster than the economy and the comparable broadly syndicated loan market. In 2025, the weighted average organic EBITDA growth rate of our borrowers was more than three times that of GDP and more than double the growth rate of borrowers the broadly syndicated loan market. The continued growth and stability of our borrowers also contributed to improvement in portfolio fundamentals. For example, average portfolio leverage decreased approximately a quarter turn of EBITDA from the prior year, while our portfolio's average interest coverage ratio improved to 2.2 times driven primarily by lower market interest rates and earnings growth. Our credit quality showed stability throughout the year. As our non-accruals at cost ended 2025 in line with both the prior quarter and year-end 2024 levels and our weighted average portfolio grade remained consistent throughout the year at 3.1. We also generated pretax net realized gains on investments more than $100 million during 2025. These results extend our long track record of generating realized gains by successfully investing across the capital structure with the support of our industry-leading portfolio management team. During 2025, we realized over $470 million of gross gains from our equity co-investment portfolio and our successful portfolio management and restructuring efforts. The exits on our equity co-investments over the course of 2025 generated an average IRR in excess of 25% returning more than three times our initial investment on average. These results further support our track record of generating an average gross IRR on our equity co-investment portfolio that was more than double the S and P 500 total return over the last ten years. Collectively, these results underscore the strength of our team and the merit of our differentiated investing strategy. Even as our overall portfolio continues to perform well, we remain steadfast in our approach to risk management and diversification. With a 0.2% average position size at ARCC, we believe we are well positioned to minimize single name risk and thus lower portfolio risk overall. We believe this level of diversification stands apart from many others in the industry and in our view, contribute to further differentiation in performance between ARCC and industry averages. Against this backdrop of strong originations and stable credit performance, let me make some comments on our dividend outlook. We believe ARCC is in a good position to maintain its dividend despite market expectations for further declines in short-term interest rates. We generally set our dividend level based on our view of the earnings power of our company. While lower short-term rates present an earnings headwind, we believe there are multiple factors that can support our earnings and thus our current dividend level for the foreseeable future. First, we believe our dividend level was set in an achievable benchmark for today's interest rate and competitive environment. Second, our balance sheet leverage remains low below 1.1 times net debt to equity, leaving meaningful capacity relative to the upper end of our 1.25 times target range. Importantly, as we prudently grow the portfolio above one times, earnings will also benefit from the lower management fee rate on the marginal portfolio. Third, we see incremental growth opportunities from two of our most strategic investments, the senior direct lending program and IDL Asset Management. And as market activity increases, our ability to invest across the capital structure has historically provided us with higher returning opportunities. Fourth, we expect continued healthy credit performance considering the current economic outlook, the strength and stability of the current portfolio and the team's track record, over more than twenty years. Finally, which provides an additional cushion have more than two quarters of spillover income help support dividend stability in the event that our quarterly core earnings temporarily dip below the dividend. In closing, 2025 was a great year for ARCC. We believe our results for the fourth quarter and full year will continue to show differentiation in a market where there is already increasing dispersion in financial results. With this momentum, I believe we are well positioned for a successful 2026 and beyond. I will now turn the call over to Scott to take us through more details on our financial results and balance sheet. Scott Lem: Thanks, Kort. This morning, we reported GAAP net income per share of $0.41 for the 2025 compared to $0.57 in the prior quarter and $0.55 in the 2024. For the year, we reported GAAP net income per share of $1.86 compared to $2.44 for 2024. We also reported core earnings per share of $0.50 for the 2025, compared to $0.50 in the prior quarter and $0.55 for the same period a year ago. For the year, our core earnings per share of $2.01 compared to $2.33 for 2024. The decrease in core earnings year over year was driven in large part by the decline in base rates. Importantly, in 2025, our core EPS remain in excess of our dividend in all four quarters, and we generated 10% core ROE for the year. Which was in line with our historical average since inception. Looking forward, as mentioned in previous it's important to consider the timing of contractual rate resets in our floating rate loan portfolio on our core earnings. Changes in base rates typically take about a quarter to be fully reflected in earnings. Therefore, assuming all else equal, the decline in base rates during the fourth quarter will create about $0.1 per share of earnings headwind for us in the 2026. As a reminder, there typically is seasonality in our business. As origination volumes generally tend to be slower in the first quarter than in the fourth quarter. Capital structuring service fees which are tied to origination volumes typically follow the seasonal pattern as well. Now turning to the balance sheet. Our total portfolio at fair value at the end of the fourth quarter was $29.5 billion which increased from $28.7 billion at the end of the third quarter and $26.7 billion a year ago. Our net asset value ended at $14.3 billion or $19.94 per share down 0.35% from a quarter ago and up 0.25% from a year ago. Shifting to our debt capital. We're proud of what we accomplished in the past year. By continuing to grow and strengthen our best in class balance sheet. In total, we added new gross debt commitments of $4.5 billion in 2025. A new record for the company. That progress was driven by consistent and leading execution across multiple funding channels, starting with our unsecured notes. We were active in the unsecured notes market during the year, issuing $2.4 billion of investment grade bonds marking our second most active issuance year since our inception. Notably, we remain the highest rated BDC by all three of the major rating agencies. Consistent with our long-term strategy of being a regular issuer and investment grade, notes market, we began 2026 by issuing $750 million of long five-year debt at an industry leading spread of 180 basis points over treasuries. Which we swapped to SOFR plus 172 basis points. We have also been a beneficiary of broader investor support as more than 75 new investors have participated in our bond offerings over the past twelve months through this transaction. We were also active with our diverse bank capital providers expanding our credit facilities by $1.4 billion over the course of 2025 while also reducing borrowing spreads by approximately 20 basis points on average. We are proud of the relationships we have with over 40 banks many of whom have been long-term and growing supporters of ARCC. And finally, we continue to benefit from Ares' long-standing reputation as a top-tier manager and one of the largest CLO issuers in the market. That positioning helped us execute our largest on-balance sheet CLO in our history. With $700 million of debt price in December at a blended cost of SOFR plus 147 basis points. Beyond the efficiency of this transaction, our execution further broadened our funding mix by accessing the strong demand for rated asset-backed financing secured by a significantly diverse high-quality portfolio of assets. Collectively, our floating rate financings help company capture the benefits of lower borrowing costs, should market rates decline further. Nearly 70% of ARCC's borrowing today are floating rate compared to approximately 50% at year-end 2024. Overall, our liquidity position remains strong. Totaling over $6 billion including available cash, on a pro forma basis for the post year-end activity that I just mentioned. In terms of our leverage, we ended the fourth quarter with a debt to equity ratio net of available cash of 1.08 times. Versus 1.02 times a quarter ago. Which still leaves us with meaningful headroom relative to the upper end of our target leverage ratio of 1.25 times. We continue to believe our significant amount of dry powder positions us well to actively support both our existing and new portfolio companies. Furthermore, we appreciate the continued support of all of our debt investors and lenders and we look forward to building on these partnerships in the year ahead. Finally, our first quarter 2026 dividend of $0.48 per share is payable on March 31 to stockholders of record on March 13. ARCC has been paying stable or increasing regular quarterly dividends for sixty-six consecutive quarters. In terms of our taxable income spillover, currently estimate that we will carry forward $988 million or $1.38 per share available for distribution to stockholders in 2026. I will now turn the call over to Jim to walk through our investment activities. Jim Miller: Thank you, Scott. I'll provide some additional details on our fourth quarter investment activity our portfolio performance and our positioning at year-end and then conclude with an update on our post quarter end activity and backlog. In the fourth quarter, our team originated over $5.8 billion of new investment commitments which is up more than 50% from the 2024. This brought our total new commitments for the year to $15.8 billion marking a new annual record for ARCC. About half of our new originations in the fourth quarter supported M and A driven transactions, such as LBOs and add-on acquisitions. Which builds on the momentum we saw last quarter and highlights our ability to benefit from the early signs of a more active and M and A driven market environment. Reflecting on our broad market coverage across the lower core and upper parts of the middle market, Our fourth quarter originations included companies with EBITDA ranging from under $20 million to over $800 million. Additionally, we made commitments to companies across 21 industries and 58 sub-industries. Demonstrating the benefit of our vertical focused origination team and identifying specialized opportunities. Which Kort touched upon earlier. We ended the year with a record $29.5 billion portfolio at fair value. A 3% increase from the prior quarter and 10% increase from the prior year. As of year-end 2025, our strong and growing portfolio remains well diversified across 603 different borrowers. The number of companies in our portfolio has also increased nearly 10% over the past year and 72% over the past five years. Further enhancing our diversification. The granularity of our portfolio can also be seen in our small position sizes. Each of our investments represents less than 0.2% of the overall portfolio on average. And our top 10 investments, excluding our investments in IAM and the STLP comprise approximately 11% of the overall portfolio. Which is less than half the average concentration of our relevant peers. The scale of capital available at Ares and ARCC supports our ability to execute our origination strategy invest across the middle market while also mitigating the impact of negative credit events in any one borrower on the credit performance of the company. The financial position of our portfolio companies remains strong. Our portfolios average interest coverage ratio of 2.2 times increased 10% quarter over quarter. And 15% year over year. The portfolio's average leverage level also showed strength. Declining about a quarter turn of debt to EBITDA from year-end 2024 and remaining stable with Q3 levels. Additionally, healthy enterprise values continue to underpin our loan positions. As loan to value ratios remain low, and stable at approximately 44%. Our portfolio companies continue to demonstrate growth their profitability. The weighted average EBITDA of our underlying portfolio companies demonstrated organic growth over the last twelve months expanding 9% year over year. This organic growth rate remains in line with our ten-year average and was more than double the EBITDA growth of the borrowers in the leveraged loan market of approximately 4%. When looking across the different segments of our portfolio, we continue to see healthy performance. We are observing positive EBITDA growth in excess of the broader economy across both senior and junior capital investments. As well in both large and small companies. We are also seeing outperformance through our industry selection as the top five largest industries in our portfolio including software, are experiencing faster EBITDA growth than the aggregate portfolio. The organic growth rate of our borrowers underscores what we believe is one of the many merits of not being a benchmark style investor. As we are able to be selective not only with the companies we are financing, but also with the industries we target more generally. Supported by these underlying portfolio trends, the credit performance of our portfolio remains strong. Our non-accruals at cost ended the quarter at 1.8%. In line with prior quarter and prior year levels. This level remains well below our 2.8% historical average since the global financial crisis. And the BDC historical average of 3.8% over the same timeframe. Our non-accrual rate at fair value also remained low at 1.2% of the portfolio and well below our historical levers. Our overall risk ratings remain stable throughout 2025. And the share of our portfolio companies in our lowest risk category Grades one and two, totaled 3.8% at fair value. Remaining 180 basis points below our five-year average. While our overall portfolio continues to perform well, we remain vigilant in monitoring our portfolio for underlying credit issues and seek to be proactive in addressing any issues as they arise. Shifting to 2026, we've had a strong start to the new year. Our total commitments through January 29, 2026 were nearly $1.4 billion an 11% increase as compared to commitments closed in January. Additionally, our backlog as of January 29, 2026 stood at $2.2 billion which is more than 17% greater than the reported backlog at January 28. As a reminder, our backlog contains investments that are subject to approvals and documentation and may not close, or we may sell a portion of these investments post closing. Furthermore, we are closely watching current market conditions to see if the choppiness in retail capital flows impacts the competitive landscape in our favor. In contrast to managers that have a have concentrated their fundraising in retail oriented products, We believe managers such as Ares, with both significant institutional and retail sources of capital possess a more stable base of committed dry powder. This allows Ares and in turn ARCC to be a consistent capital provider with the scale, in the market through changing periods. As we look to the future, we believe we are well positioned to capitalize on an expanding market opportunity supported by the collective expertise of our team and our differentiated approach. These advantages have underpinned both our leading investment performance and stock based returns. Since our inception in 2004, our stock based total returns have outperformed the KBW Bank Index BDC peer averages and the S and P 500 by approximately 40% or more. Most recently in 2025, ARCC generated more than 600 basis points of additional total return versus the BDC average as measured by the VanEck BDC ETF. As always, we appreciate you joining us today. And we look forward to speaking with you again next quarter. On behalf of the executive team, I'd like to thank our team for the hard work and dedication that led to another strong year for ARCC. With that operator, please open the line for questions. Operator: If you would like to withdraw your Please note, as a courtesy to those who may wish to ask a question, The Investor Relations team will be available to address any further questions at the conclusion of today's call. We'll take our first question from John Hecht with Jefferies. Your line is open. John Hecht: Good morning, guys. Thanks for taking my or I guess good afternoon. Thanks for taking my questions. You guys did mentioned the position you have in software. You also mentioned that software continues to grow faster than the pretty strong rates of growth elsewhere in the portfolio. But there's a big emerging fear in the market about the impact of AI on that type of business performance. I'm wondering, do you guys are you eyeing that emerging subject? And do you have any points to make on how you think it's positioned in that regard? Hey, John. For the question. Very glad that this is the first question of the day. Because obviously, there's a lot of noise going on out there. And I think we really want to make sure that we hit this hard and address anyone's questions and spend real time making sure that people understand our thesis in the space and how we built our portfolio. And our strategy going forward. So look, I think the first thing I want to say is we feel very good about our software book. And we don't feel any differently this quarter than we did last quarter despite all the noise in the market. The fundamental and the underpinnings of our portfolio and our underwriting haven't changed. And we did make a lot of comments last quarter in our prepared remarks on earnings call about AI and our software book. People could certainly refer back to that as well. But I think, you know, I'll spend a little bit time and sorry if it's a little long winded but I I wanna really make sure we frame up our strategy for people today. So the first thing to just sort of remind people is we started an in the software space about fifteen years ago or so. Here at Ares Capital. And from the beginning, the number one risk that we identified in the software space was technology risk, and obsolescence risk. And so we said to ourselves, if we're going down have a thesis in the space and build a book, really want to make sure is highly resistant that every single software company we put in the portfolio to technology risk. And obviously AI is probably the most disruptive technology risk that we could have imagined. And it absolutely is going to disrupt a lot of software companies, and I don't want to sugarcoat it. But we still believe strongly that we've constructed a portfolio that will remain highly resistant to this risk. So think maybe I'll just outline a few characteristics that we've always looked for in our software companies. And that we obviously continue to raise the bar on and look for even more in our new investments. So look, the first thing is that we primarily look to invest in foundational infrastructure software for complex businesses. Right? This is software that sits at the center the technology stack. And powers all core business systems. Right? It's the last type of software in our opinion, that a company would look to switch out because that all of your downstream systems that feed off this software might also be at risk. So we like this kind of software where the entire business and operations of the customers are dependent on the accurate functioning of this system. So that's that's kind of the most important point number one. We're also looking software companies that a lot of our software companies do this. We're looking for these companies that collect and own proprietary data. And they collect this data and build this data over many years of their customers and then they use the data as a core part of their value proposition when they deliver the software. Right? So we call this a data moat. And it's important to mention that AI is not a database. AI doesn't house data. It can't replicate proprietary data. So we really believe that these data enabled software companies will prove resistant. And these types of companies, you'll find a lot of these types of companies in our portfolio. We also are looking for software companies that serve regulated end markets like Where healthcare, financial services as a couple of examples. There's lots of these regulated end markets. the need for accuracy and auditing of information is really high. And the penalties for lack of compliance can be severe. Right. So John, you think about like Jeffrey's is not going to rip out its core infrastructure software and replace it with an AI based solution anytime soon in our opinion. We think it's gonna take a really long time for companies are in these types of industries to gain enough trust in any kind of new product if ever. So that's a really important point as well. Obviously, we always talk about diversification in our strategy in so many different ways and that applies to our software companies as well in terms of their customer base, right. So we're looking for software companies that have very diverse customer bases. So even if some customers do switch to maybe an AI generated software solution, Others will remain and they create sort of this long tail of cash flow. That will hopefully survive and we really do not see quick and binary outcomes that occur when you have this kind of diversified customer base. Right. And it's, it sort of leads into the next point to remind people about which is we are lenders. To these companies with maturity dates. We're sitting at the top of the capital structure We have all the assets as collateral, including intellectual property. Lots of ways that we can look to recover our principal if things do start to get disrupted. And this is just a very different place to be sitting in the capital structure. Than sitting down in the equity. Right? So if you look at some of the metrics on our software book, they're extremely healthy. The book itself is also highly diversified. With lots and lots and lots of different position sizes none of which is outsized in any way. These software companies are very large. Established businesses, right? The average EBITDA on our software book is $350 million that's above the average in our portfolio. You mentioned John in your question the growth rate of our software businesses remains really strong. The The software book, the LTM EBITDA growth in the software book is growing at a faster rate than the overall average EBITDA on our book. Even through the the recent quarter. The loan to values and this is maybe of the most important points below the values on our software book our software loan book is 37% on average. That's below the loan to values on our overall book there is just an enormous amount of equity cushion below these loans that sit in the first loss position beneath us. So there really would have to be a whole lot of value destruction that would occur before we as a lender lose a dollar. Right? So I I I again, sorry for being a long winded. I really wanna make sure we're getting clarity out on this topic. And maybe the last point I'll just say is we've got an incredible team of resources here at Ares. We've got a software vertical within our credit business that consists of a bunch of investment professionals that only do software credit investing. We've got an in house AI team at a company called Bootstrap Labs which we acquired a few years ago, which is a venture capital firm. It's been investing in AI for more than a decade And we use all of these resources to help us evaluate every new deal we do as well as during our quarterly evaluation process. To assess the risks and the marks that we're taking on all of these names. Don't think everybody does that. So that's something that's pretty unique to Ares and hopefully gives people confidence in the marks and the risk in the portfolio. So look, as we sit here today, we're obviously watching everything going on out there playing close attention want to sugarcoat it, but we really see minimal near term risk to our software portfolio and I'd say very manageable medium to longer term risk in the bond. That is very helpful, and I appreciate the color because I do think it's a an important topic. Follow-up question is you guys have an active pipeline strong growth year over year. You mentioned, I think, about half of them were buyout sponsor related stuff. Anything to the other half? And how that paints the picture for how you think market's firming up for the duration of 2026? Yes. I mean there's still a lot of add on activity on existing portfolio right? So that makes up usually the bulk of the remainder of the deal flow. Us just putting capital into support continued acquiring of added EBITDA. So those are good uses of capital. We have not seen a real big resurgence of dividend transactions. There have been a few obviously, private equity firms looking to return capital are going to test the market on dividends. But I wouldn't say that that's a huge driver of our deal flow right now. It's really the the add ons. Obviously, there are refinancings still going on. But most of the sort of refinancings in spread sort of reductions have worked their way through the system and spreads have been really stable now for better part of a year or so. That's not been a huge driver. There also have been some refinancings out of the broadly syndicated market. Where obviously the broadly syndicated market can be a little bit volatile at times or maybe a sponsor just wants values having certainty of capital in all environments that has come to us take out a deal that currently is in the broad syndicated market. So probably the preponderance of the other activity. Great. I really appreciate all the color. Thanks very much. Of course. Operator: We'll take our next question from Finian O'Shea with Wells Fargo. And actually, we'll move next to Doug Harter with UBS. Line is open. Douglas Harter: Thanks. I guess as you guys look at this current environment, clearly, Ares as a platform has a lot of advantages relative valuation gap versus your peers. How do you think about potentially playing offense and taking advantage of market weakness? In this type of environment? Yeah. Great question. We certainly get excited about those types of opportunities. Historically, there have been any kind of periods of dislocation, or volatility that's been a strength. For our industry in private credit and certainly for us at Ares, especially since our capital base is much more diversified than a lot of our peers. So the stability of our capital and the ability for us to sort of fill gaps in the market is a big advantage. So I think we'll see what unfolds from here. But to the extent that there are any pockets of changes in supply of capital, I think we stand to benefit. I mean, we just talked about software at length. I certainly might expect that the broadly syndicated market will have a hard time providing financing for some software businesses and if there's very high quality software companies that meet the standards I described earlier, I would venture a guess that the cost of capital for those companies probably has gone up a bit. And I think we might be excited to provide that type of financing to the very best of those companies. So we'll see again, we'll see what unfolds. Obviously, there's been some changes in the environment for some of the retail flows. And that could also create some changes in competitive behavior that we're watching closely, as Jim said in the his prepared remarks. And feel like we're in a great position capital wise to step in. Thank you. Operator: And now we'll move to Finian O'Shea with Wells Fargo. Your line is open. Finian O'Shea: Hey, everyone. Good morning. Thanks for keeping my place in line. So a follow-up on John's question on software. Just to push back on a couple of those points for the spirit of argument. The risk, I think, is presented pretty widely as still a few years out. You have a good a good feel of resistance in the book as you outlined but what sort of developments are you looking out for that would threaten even the more, say, foundational enterprise SaaS plays And do you see any progress toward those risks from AI in real time Or if not, why so confident that that will take a very long time? Thanks. Yeah. Yeah. Thanks, Fin. And I would love to offline sit down and debate it at length. I I think it's really hard, though, for for me to see a scenario where we would find any kind of real dramatic risk or change in our view toward those core kind of enterprise software businesses or those regulated industries just talked at length about all the reasons why think for us what we're focused on is the businesses that can be disrupted or I'm not going to say our portfolio is entirely clean. We have a very small amount of portfolio companies that could be disrupted. And that's where we're spending a lot of our time and focus and working with the financial sponsors and getting ahead of any kind of potential situation. It's not in those core enterprise software businesses. So I'm challenged right now to come up with you know, scenarios where would really see that get disrupted. Look, I think the areas that we do think can get disrupted and where we're trying to be really disciplined on new transactions are kind of more single function software apps that sit on the edge of the tech stack. Certainly any kind of software that creates or delivers content because AI is fantastic at creating content. So we'd be extremely careful about those, you know, data analysis or visual type companies. AI is exceptional at summarizing data and spitting out all different types of reports and synthesizing those. So know, the I think I just think those are the areas that are more at risk And again, very, very small exposure our portfolio for those. So sorry, not a great answer. Just can't come up with risks to those core enterprise businesses. Appreciate that. Hard to envision. Follow on the dividend, appreciate the color there. It feels like there'd be like a pretty good tailwind even though the structuring fees are lighter in today's environment. Has been the volume The deployment has obviously been fantastic. Does that sort of need to continue in your outlook or guidance or does that maybe moderate and something else offsets that impact? Yes. Yeah. I mean, there's so many variables and things that change all at once. Right? So it's hard to sort of look at one variable or one driver and just say if that changes, what happens? One thing I do want to say on the foot structuring fee point is the fees were actually consistent during the quarter. We had a actually quarter. Another quarter where we had some transactions that we fronted for and sold. Right after closing. And so that dilutes the fee percentage, the sort of stated fee percentage, but actually the fee percentage on a constant basis, if you just look at the dollars that we're holding in the book was constant. Quarter over quarter. So just want to hit that one. But look, I think if if the spread environment stays where it is now, which is obviously tight. And we see, you know, rates potentially continue to fall a little bit like the curve shows. Then we're gonna wanna have a lot of volume like we did this quarter in order to produce results. And I don't see any reason why that wouldn't be the case. That we'd see that kind of volume. kinda stays where it is. If the spread environment and the economic environment If volume falls off, I would think there would be other things that are happening in conjunction with that. Which maybe is less supply of capital our space. Therefore, maybe spreads widen, maybe fees widen, Certainly what we saw in 2022 and 2023 coming off a super high volume here in 2021 and everything was getting tight. Spreads widened 150 basis points, volume fell off, but we obviously had a fantastic period of performance. At Ares Capital through 2022, 2023 despite the lower volume. So I just think it's really hard to pick one variable. So hopefully that helps answer the the question. Yes, helpful. Thanks a lot. Operator: We'll take our next question from Casey Alexander with Compass Point. Your line is open. Casey Alexander: Hi, good morning, Court, and thank you for taking my questions. I do want to expand on that. I mean, you did give a little bit of color on broadly syndicated market and what that could cause to happen with spreads in software But I'm curious in that we've had some at least psychological market dislocation going on since before you guys reported your third quarter results. As a result of the Diamond comments and whatever and this has continued to be you know, picked up a lot from the media, on the minds of investors left and right, And so I'm curious why haven't we or are we about to see a widening of spreads in general Normally, in a period of of dislocation, such as this, we usually see that happen fairly quickly. And in this event, it hasn't happened. And and I would add, you know, I think inflows into the non traded market are slowing down. So I'm just curious on some comments as to why we haven't seen spreads widen or if you think they're about to. Yeah. Great question, Casey. Probably two points I'd make on the events you mentioned. So when we saw some of that volatility a quarter or two ago and First Brands and Tricolor and there was concerns about credit quality and potential blowups the BSL market wind out for a pretty short period of time. And it actually did recover pretty quickly and the fourth quarter became active again for the BSL market and spread kind of tied back in that side of the market. So I just it was too short lived is what I would say. To drive real impact on the private market and then know, I'm sure there's a lag our market. We often see the broadly syndicated market will move up and down. And our market takes a little bit of time to react to that, which is by the way, one of our value propositions in our market is we don't gyrate as much and our capital is more stable for our borrowers. And we take our time to make sure that any spread movement in the syndicated market is going to be more sustained. So I think that's just what we saw for the first event you mentioned last year. We were thinking there would be a maybe a more sustained period, but it just didn't really prove out. On the non traded flows, absolutely something we're watching really closely. Again, what I would say on that one is that pretty new. So it's really in the last month or two max that we've seen those flows change. It's not like they are on a net basis, moving wildly negative. They're really on the whole just kind of moving. You're seeing redemptions but you're still seeing inflows So they're kind of the money is not flying into those funds like it was before, but it's still remaining pretty stable in terms of the funds that are there. I do think if it stays like that, It will impact competitive behavior for our peers that are more concentrated to that channel. And at Ares Capital and at Ares Management I should say, we've been purposeful about not becoming too concentrated into that channel so that we can take advantage of maybe those kinds of changes in competitive behavior. So yeah, if it stays like that, I expect it to change things and that could absolutely be a catalyst for spread widening. But it's just too soon and we're really anecdotally not Hopefully that helps. we haven't seen enough volume come through the system. It's January seasonally the slowest month of the year, but we're watching it closely. Yes, it does. Thank you. My follow-up is, it's been a while since the stock has traded below NAV. And certainly recent market turmoil is been a catalyst for that. I'm sure investors would love to hear, our view has always been that if you're willing to take capital from the market when you're trading at a premium DNAV, you should be willing to give capital back to the when you trade at a discount. You guys do have $1 billion share repurchase program. I think investors would like to hear your willingness to deploy the share repurchase program depending upon how volatile the markets get. Yeah. Good question. I I guess the only thing I'd say on that Casey, is just we have heard we have purchased shares back in the past. So it's not something that we're not unwilling to do. And it's always on the table. And something that we're looking at and discussing with our board based on where the stock is trading. So other than that, I'd probably don't wanna speak too much or give much, you know, any kind of forward looking statements about what we might or might not do on that front. Other than to say that we have done it and we're always open to it. Okay, thank you. Operator: We'll take our next question from Arren Cyganovich with Truist. Your line is open. Arren Cyganovich: Thank you. This will probably show my lack of knowledge in the tech sector, but going to give it a shot anyways. You mentioned that average EBITDA for the soft port portfolio companies is over $350 million and they've been growing. When I look at public software companies that have been facing a lot of pressure, EBITDA is not really a metric that they use in terms of valuation because I guess, they're in a higher growth phase. I was wondering if you could just describe some of the differentiation between the software that you own versus you know, what we might be looking at in the in the public markets? Yeah. I don't know that it's all that different. I just think you're it's a difference between equity and debt. Thesis, right, when we're thinking about the investments strategy. So we, as lenders, are looking at the underlying cash flow of these businesses. We're our loan and get us paid our money back. So, you know, we're we're very focused on EBITDA. The equity markets and publicly traded companies are focused on forward growth to justify their valuations. And there have been you know, extremely high expectations of future growth. And I think as you start to see some of that growth temper, that is driving a lot of the fall off in values in the public market. And that's why those public companies are always pointing to revenue metrics and growth metrics, because I just think those investors are more focused on that. But I don't think they're necessarily different types of companies. We have seen obviously in the lending space over the last five or six years the development of recurring revenue loans where there are lenders that will lend against the revenue and the forward growth, not necessarily the EBITDA or the forward achievement of EBITDA. We have been very conservative on that. And I didn't even really mention that as part of the overall, you know, the intro I did on the software topic. But another data point to even point out around our strategy which is we've been much more conservative around recurring revenue lending than I think a lot of our peers. And it's less than it's like less than 2%, one to 2% of our book right now. Is recurring revenue loans and that's also extremely diversified. We've had a strategy of building that book with a bunch of very small positions. That we can watch that space develop and see how it would perform By the way, it's actually performed quite well. And those loans have actually converted into EBITDA loans. So it's actually been a good space. But we've been very conservative on that. So hopefully that helps answer the question. It does. I still need to do some some reading on on the sector since I'm not my area of expertise. As a follow-up, we've been waiting for the M and A markets to really open back up and the IPO markets to kind of open back up to free up some of the investments that the private equity have been holding on for longer periods. You feel like the software pressure is going to weigh on that timeline for 2026 in you know, maybe what other areas outside of you know, in this kind of story, other sectors, do you see within your pipeline that might be able to take up some of that slack? Yeah. I mean, I I think it it it obviously might impact in the software space. Right? So and especially for the your prior question around valuations in the public market and when you're private equity firm looking to buy a software company, you're obviously gonna rethink value. And a lot of it private equity firms that own the existing companies pay pretty high prices So I certainly do expect there could be a bit of a widening of the gap on bid ask spreads on new buyouts in the software space. That being said, still think there's going to be really attractive add on opportunities for existing portfolio companies. To potentially take advantage of lower valuations. I think that'll be a good opportunity for us to deploy into the space And certainly take private opportunities on in the software space given lower valuations will probably tick up if I had to venture a guess. So there's some offsetting factors I think within that industry. I mean, in terms of the rest of the economy, again, fundamentals feel strong, growth rates are good. And I don't necessarily see that spilling over into other areas of the economy. I think the ingredients are in place. Given the sort of long in the tooth nature of the whole periods on a lot of private equity funds that just continues to extend. And given the apparent confidence in the overall economy for on the part of buyers to step up and buy new companies. So I think we still feel optimistic on the rest of the year. Great. Thank you. Appreciate it. Operator: We'll move next to Brian McKenna with Citizens. Your line is open. Brian McKenna: Okay, great. Thanks for squeezing me in here. So maybe one more on the theme of software. I think all the focus recently is clearly been around the negatives from AI, and and no one has really talking about maybe the potential upside for your portfolio companies from AI and leveraging AI, specifically those companies away from software. So I'm curious, when you look across your portfolio today, there any way to think about what percent of your portfolio companies could actually see more talents from AI than headwinds over time And then is there actually a scenario where your portfolio collectively is experiencing more net benefits longer term? Yes. Thanks so much for asking, Brian. I you know, we're lenders, so we're always focused on downside risks. But 100% there is upside. And I think that is being that is missing from the discourse here in the public, which is it sort of almost feels like people think big software companies are sitting their heads in the sand asleep at the switch while AI is creating competitive threats and they're not doing anything. It couldn't be further from the truth. We we have great dialogue with our software companies. They are all working on augmenting their products with know, using AI solutions or just using AI to create additional software modules and tools to add on to their core infrastructure software. And that's actually going to help some of these core infrastructure software businesses create new products to on and upsell faster than they might otherwise have been able to do. And they already have that leg into the customer via the core enterprise. So I 100% think it's going to be a boon to some of our companies. Obviously as lenders you know, help us get our money back. Maybe faster, but is not a ton of upside as a lender. But back to our equity co investment strategy, which we talked a lot about in the prepared remarks. So certainly could be really helpful on those equity co investments that we have made selectively into some of those software companies. And then just one more for me. Just taking a step back and looking at the industry, it's clearly getting larger and larger, more competitive. And there's really a long list of firms that can write large checks. In the market. So I think having intellectual capital and really a full suite of value added capabilities are becoming that much more important. So you guys clearly have this you noted, you know, some of the strong expertise that exists across your your deal teams and just the platform more broadly. But when you look at some of the differentiated deals you're winning in the market today, how much of these how much of those are a function of kind of these, full suite of capabilities, if you will, and really the capabilities away from just being a provider of capital and just trying to think through that a little bit more? Yeah. It's all about those capabilities. And and not just about being a provider of capital. So you know, it's a combination of so many different things. I think first and are the amount of people and the talent that we have on our origination and investment team We do believe we still have the largest investment team in the direct lending industry and means we have a lot of people out there calling on companies trying to source opportunities. And that deal flow takes longer to germinate and result in an actual transaction We could be out talking to, you know, CEO or management team or a board of a of a non-sponsored company for years building a relationship and there might not be any transaction to do and then all of a sudden they want to do something and they pick up the phone and call us. Because we've been building that relationship. So this is something that not happen overnight, takes a really long time to build those and lead to this kind of deal flow. And, you know, so it starts with the team, starts with those touch points, but then it also combines with the fact that that team is out there offering a huge amount of flexibility of products. Right? We're not out just saying we can be your senior lender, your bank. We're saying we can be your junior capital provider, We can you equity co investments. We can start as a mezzanine lender and then down the line if you want a senior lender, we can become that lender. So we're we're really trying to explain to these companies that we can be their capital provider for the next ten to twenty years, not just the next three to five years. And I think that really resonates. So it's all those things combined. It's not really just one thing. And I do think we're ahead of our of our peers in that respect. Operator: We'll take our next question from Robert Dodd with Raymond James. Your line is open. Robert Dodd: Hi, guys. A quick one from me maybe. Obviously feel very comfortable with the underwriting process you're doing on software and you got a well thought out thesis there. You seem also optimistic that maybe spreads will widen that market if BSL market becomes less inclined to finance new software? LBOs, etcetera. I mean, so looking at that, would that make software even more attractive to you from a risk return perspective? And would you be looking to potentially increase your allocation to software over the next you know, call it twelve to twenty four months? Yeah. Good question, Robert. Look, we will have to see what unfolds, I think is what I would say. I don't it can go in so many directions in terms of yeah, how how widespread gets. Right? What types companies are looking to raise capital? So there's just so many different things that can go into that, but I don't know that I wanna necessarily speculate. We we are big on diversification. As we said, over and over in so many different ways, And software is our largest industry category. We're very comfortable with it. But at the same time, we like diversification. So maybe I'll just leave it at that and we'll see what the market gives us. Operator: We'll move next to Kenneth Lee with RBC Capital Markets. Your line is open. Kenneth Lee: Hey, good afternoon and thanks for taking my question. Just one on the broader industry. The recent OCC FDIC changes to the leverage loan guidance for for banks. You expect to see any kind of potential for meaningful change in over the competitive landscape over time based on the change of guidance there? Thanks. Yeah. Ken, definitely something we're watching closely. I you know, I I don't think so. The reality is the leveraged lending guidance that was put in place a while ago hasn't really been enforced. And so I think the relaxing of that guidance is not necessarily gonna change behavior. I think the the larger driver of you know, regulatory behavior on banks is the the regulatory capital requirements and the capital capital charges. That banks see if they make a loan into our market. And that's still remains punitive and is not changing. So I just don't think the leverage lending guidance change is gonna make sense. Got you. Very helpful there. And just one quick for me. On some of the recent deals you've been seeing or some of the new investments in terms of the terms and documentation that you're seeing there, any changes more recently and more specifically, have you been seeing any loose loosening of example, like EBITDA add backs or any other terms there? Thanks. Not really, no. If anything, would say there's probably a heightened focus on documentation terms just given some of the headlines around LME transactions in the broadly syndicated market. And the looser documentation that exists in that market. There's been a little bit more a spotlight that's been put on that. And so I think it's actually been a good thing for our space. It's woken up more of our peers to the importance of focusing on documentation. We've made that a priority here for years now. And it's a critical part of our committee process. We will walk away from transactions based on documentation terms. Not really seeing a big change to that, if anything, getting better. Got you. Very helpful there. Thanks again. Operator: We'll take our next question from Paul Johnson with KBW. Your line is open. Paul Johnson: Yes, good afternoon. Thanks for taking my questions. I know you have been fairly conservative with the ARR structures in the past, as you said. But is there any sense of like the number or the percent of your software book that is below profitability today? Below profitability, you mean negative EBITDA? Yeah. Correct. I don't have the numbers in front of me, but I I can't imagine that there would be another software company in our portfolio outside of those ARR loans. That would be negative EBITDA. And in fact, I would also venture a guess that many of those ARR loans have positive EBITDA as well. For two reasons. Number one, when we do a new ARR loan, a lot of cases, they still have positive EBITDA, but it's not necessarily enough EBITDA to maybe justify the amount of debt. You look at it on a revenue basis, and they're growing 50% a year and it's going to be a lot of EBITDA in a year or two. But it's not like everyone is negative EBITDA. Some of those are actually EBITDA at the outset. But then secondly, others ARR loans in our portfolio have been in there for a number of years and have achieved the growth, that they were expecting. And so now they are positive EBITDA. So, I mean, very, very, very small almost de minimis amount, I would say, of our software book. Has negative EBITDA. Got it. That's very helpful. And then last, I would just ask, on the PIK portfolio, which has been a good portfolio for you guys historically, I'm just curious though within the debt side of some of the pick assets, is there a tilt toward software within that portfolio? Or has that generally been just as diversified as the broader portfolio? Yeah. It's it's around the same. We did take a look at that, and the I'll say two things. Number one, the percentage of the software book had a slightly higher percentage of PIC in it. But the pick in that software book is I wanna say, 99% maybe even 100%. Structured at the upfront at the outset of the investment, not amendment pick. Right? And that's an important thing on the overall pick book that we talk about all the time and try to disclose, which on a consistent basis, which again this quarter on our overall pick book, it's roughly 90% of the pick interest and dividends was structured at the outset of the investment. And purposely done Only 10% is amended PIC. And then so again, in the software book, it's almost a 100% is structured. So again, back to the point that we're just not seeing weakness in the software book at all. We don't have the need to provide any amended PIC there. Got it. Appreciate it. That's all for me. Thank you very much. Operator: We'll move next to Derek Hewitt with Bank of America. Your line is open. Derek Hewitt: Good afternoon, Court. So how large are you willing to grow both the SDLP and Ivy Hill over the next year or so kind of given the more favorable economics versus the core portfolio? And then are there assets on the balance sheet today that could potentially be sold down to those entities? Yes. Thanks, So, I'd say, if you look historically, we've had an investment in Ivy Hill go as high as 11% and I think STLP as high as 7%. So those are probably good you know, guardrails for now. So we truly value those two assets quite a bit and agree with they're very strategic to us and you're right, are pretty high yielding particularly in a low yield environment. So I could certainly see you saw us grow this quarter. So, I think there's a it's really in our playbook to continue focusing on those two investments over the course of this year. And yes, we did see in the fourth quarter, did sell assets in Ivy Hill. And so that is certainly there's certainly more assets on the balance sheet we could move to look to move down to IVL over time. Yeah. And I don't think we wanna I there's not really a, a stated cap or a target that we manage business toward? Again, I think we wanna see the market develops, what kind of transaction activity there is, where spreads go, all of those factors. Work into it. The only real cap would be the 30% non-qualifying asset cap. So that would be the sort of governor on the top end. Okay. Great. Thank you. Operator: This concludes our question and answer session. I'd like to turn the conference back over to Kort Schnabel for any closing remarks. Kort Schnabel: Great. Well, you all for joining us today. And for your continued support and engagement. And we look forward to reconnecting with you on our next quarterly call. So till then, stay well, everyone, and have a great day. Operator: Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of the call will be available approximately one hour after the end of the call through March 4, 2026 at 5PM Eastern. To domestic callers by dialing toll free +1 808394018. And to international callers by dialing +1 (402) 220-2985. An archived replay will also be available on a webcast link located on the homepage of the Investor section of Ares Capital's website. Goodbye.
Operator: Hello, and welcome, everyone, to the 4Q 2025 LATAM Airlines Group Earnings Conference Call. My name is Becky, and I will be your operator today. Before I turn the call over to management, I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations and as such, constitute forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance or guidance are forward-looking statements. These statements are based on a range of assumptions that LATAM believes are reasonable, but are subject to uncertainties and risks that are discussed in detail in the published 20-F, 2026 guidance, earnings release, financial statements and related CMF and SEC filings. The company's actual results may differ significantly from those projected or suggested and any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. If there are any members of the press on the call, please note that this call for the media is listen only. I will now hand over to your host, Ricardo Bottas, to begin. Please go ahead. Ricardo Dourado: Hello, everyone, and good morning. Welcome to our fourth quarter 2025 conference call, and thank you all for joining us today. My name is Ricardo Bottas, and I am the CFO of LATAM Airlines Group. Here with me is Roberto Alvo, our CEO; Andres Valle, Corporate Finance Director; and Tori Creighton, Head of Investor Relations, and we will present the highlights and results for the fourth quarter and full year 2025. I will hand it over to Roberto to share his opening remarks about the quarter and year's highlights. Roberto Alvo Milosawlewitsch: Good morning, and thank you, Ricardo. 2025 marked a year of continuous consolidation and delivery. The strong results we're presenting today are the product of a model that LATAM Group has been building over the last 6 years, anchored first in the people and the customers, focused on impeccable execution and in the design of a superior experience. All of this in the context of an ever stronger passenger cargo networks, frequent flyer program, a very strong balance sheet and cash generation, a disciplined cost delivery and a highly diversified business model, all of which make our results resilient and less much subject to external factors and industry cycles. At the heart of this performance and more than 41,000 employees working at the different affilities of the group, their daily commitment, whether at customer touch points or behind the scenes, continues to be LATAM's Group most powerful asset. The culture of passionate, engaged people translated directly into the customer experience. In 2025, the group achieved a record Net Promoter Score of 54 points, which is a 3-point increase versus 2024, the highest full year results in our history. When our people thrive, customers feel the difference. Internally, the Organizational Health Index reached 83 points, placing LATAM Group in the top decile of the global benchmark for the first time. In terms of the operations, the group transported more than 87 million passengers during the year, including 23 million passengers in the fourth quarter alone. This was boosted by a capacity increase of 8.2% for the full year and 7.7% in the quarter, demonstrating the group's ability to grow efficiently while maintaining a healthy load factor of 84.4%. This ability to connect passengers to, from and within South America was enabled by the modern and efficient fleet that the group operates. In 2025, LATAM received a total of 26 aircrafts, 7 of which were incorporated in the fourth quarter. This includes the first Boeing Dreamliner with GE engines and brought the total fleet to 371 aircraft as of the end of the year, a 7% increase versus 2024, enabling the group to launch 22 new routes, of which 15 were international. On the financial side, adjusted operating margin reached 16.2% for the year, while adjusted EBITDAR came at almost $4.1 billion. Net income totaled approximately $1.5 billion, resulting in earnings per ADS of $4.95, highlighting the group's ability to translate operational performance into bottom line results. This bottom line grew by 50% versus the income generated in 2024. With this, in December, LATAM was able to distribute $400 million in interim dividends aligned with its capital allocation strategy determined by the financial policy. 2025 was just not a strong year. It was a reaffirmation of LATAM's structural strengths translated into consecutive years of margin expansion in the context of high capacity growth and driven by a strategy that combines a focus on people, a differentiated customer experience, an unmatchable footprint, disciplined cost control and a resilient balance sheet. This is what defines this new LATAM. This performance and design set the base for expected 2026 strong performance highlighted in our yearly guidance, of which we feel very confident at the moment despite fuel and currency volatility. I'm very proud to be here leading a group of 41,000 souls and to highlight and discuss our performance. With that, I'll hand it over to Ricardo, who will walk us through the achievements of this fourth quarter and full year 2025. Ricardo Dourado: Thank you, Roberto. Let's move to Slide 4. LATAM delivered a solid financial performance during the fourth quarter with improvements across all key metrics. Total revenues reached almost $4 billion, increasing 16.3% year-over-year. This growth was driven by the passenger segment, which rose 20.3%, supported by the strong demand and capacity growth. Cargo revenues declined 9.6% in the period, explained by a particular high comparison base as the fourth quarter of 2024 had delivered an exceptionally strong performance. Despite the full year cargo revenues increased year-over-year. As a result, the group delivered an adjusted EBITDAR of $1.1 billion, representing a 30.4% increase versus 4Q 2024. Adjusted operating income came in $661 million, up 42.7% year-over-year, and net income totaled $484 million, increasing 78.1% compared to the fourth quarter of last year. Margins also improved with adjusted operating margin standing out at 16.7%. This quarter, we saw an increase in unit cost ex fuel with passenger CASK ex-fuel reaching $0.047. About $0.02 of this can be explained by the appreciation of the local currencies during this period, along with another $0.02 related to the other nonrecurring costs in wages and benefits, which include a special onetime bonus approved on this last quarter. While quarterly unit costs were elevated, it's worth highlighting that full year passenger CASK ex-fuel came in at $0.044, fully within the updated guidance range for 2025 provided on last November. Importantly, this 7.9% increase in unit cost was more than offset by an even stronger improvement in unit revenue. Passenger RASK increased by 11.7%, reflecting LATAM's ability to sustain its value proposition and capture customer preference in an environment of healthy demand. Please join me on this next Slide 5 to take a deeper dive on the drivers for revenue performance across the different affiliates and business units. Overall, the fourth quarter showcased a well-balanced dynamic between capacity deployment and demand across our network, supported by healthy load factors and target commercial actions. On a consolidated level, capacity grew by nearly 8%, while maintaining a solid load factor of 85%, showcasing our ability to grow efficiently. Looking at the LATAM Airlines Brazil's domestic capacity expanded by 12% and demand kept pace with load factors increasing by 0.7 percentage points. This balance supported by a solid passenger RASK performance with growth of 14% in U.S. dollars and 10% in local currency, highlighting the strength of LATAM's value proposition in this market together with the resilience of demand. In domestic Spanish-speaking affiliate markets, passenger RASK grew by 23% in dollars and nearly 20% in local currency, driven by a disciplined capacity allocation that resulted in an increase in the load factor to 1.7 percentage point higher than before. Turning to the International segment. Capacity and passenger volumes both grew at a high single-digit pace. While load factor declined slightly year-over-year, it remained at a very healthy 85% levels. In parallel, unit revenues increased by 6%, supported by a well-diversified network, both in the regional and long-haul international operations and a strong execution. Altogether, these results reflect the robustness of LATAM Group's commercial model and its ability to grow profitable. The fourth quarter confirms that the network strategies and the disciplined capacity deployment continue to deliver strong outcomes across the board. Turning now to our value proposition and customer experience on Slide 6. During 2025, LATAM Group continued advancing initiatives focused on enhancing services across key touch points with a particular emphasis on consistency, reliability and design. At the center of this improvement is our continued focus on the premium segment, where LATAM has made significant upgrades to its value proposition. During the year, we introduced a renewed business class experience, launched the signature check-in and our new signature launch in Lima and announced the future enhancements like the investments in Wi-Fi on wide-body fleet beginning in 2026 and the new premium comfort cabin coming in 2027 as well as the investments on the new and the brand-new launch in Guarulhos. As part of this ongoing focus, LATAM was once again recognized internationally. In the fourth quarter, the group received the most improved brand award globally by the Design Air, a recognition that adds to early achievements such as Skytrax' Best Airline in South America, the APAC 5-star Global Airline Award and the Air Cargo Airline of the Year award by Air Cargo News, all serving as third-party endorsements that we are on the right path. The customer experience enhancement initiatives demonstrate the group's commitment to delivering a consistent and differentiated travel experience across the region and further strengthen the customer preference for LATAM, and the results are validating these investment decisions. For the full year, premium revenues accounted for 23% of passenger revenues and continue to grow faster than the passenger revenues overall. While passenger revenues grew 12% year-over-year, premium revenues increased by 14%, highlighting the continued momentum of this segment, which provides LATAM with access to a customer base that is structurally more stable throughout the year, less exposed to seasonality and more resilient to potential macroeconomic headwinds. Coupled with this, the LATAM PASS program plays a critical role in accessing this segment, fostering loyalty among customers who travel more frequently and generate higher expense through the wide range of benefits the program offers. LATAM PASS is by far the largest airline loyalty program in the region with almost 54 million members, accounting for nearly 60% of LATAM's passengers revenues. This combination of a resilient customer segment and a highly effective loyalty program reinforces the sustainability of LATAM's revenue base and equips the group with the tools to continue driving profitable growth. Jump to Slide 7. You see on this slide that the way that we are translating this into tangible results. Customer satisfaction reached record levels. Net Promoter Score rose to 54 points, as Roberto mentioned, for passenger operations, while among premium travelers each reached 58 points, the highest ever recorded by the group. This is a clear indication that our customers are recognizing and valuing the improvements. At the same time, premium revenues continue to show an upward trend, supporting by growth, customers' preference and a more differentiated onboard experience. And importantly, we have managed to achieve these results while maintaining costs stable since 2019, confirming that LATAM can deliver a differentiated experience, all while keeping its cost base stable. Let's move to Slide 8. We have spoken a lot about structural improvements and the sustainability of the profitability stemming from the unique ecosystem of LATAM Group. Passionate people, a financial foundation, an exceptional product, premium revenues and a focus on cost containment, all of that supports a virtual cycle that results in these numbers year after year. This year, LATAM expanded its revenues in 11.2% and its adjusted operating margin to 16.2%, reflecting the profitable growth strategy and the continued disciplined capacity execution. Over the course of the year, the group received 26 aircraft, launched 22 new routes and grew capacity by 8.2%, making the 3.5% margin expansion, a clear reflection of LATAM's ability to grow strategically, not just in volume but in the profitability targets. It's also a testament to the group's deep knowledge of its markets and disciplined execution over time. Adjusted EBITDAR grew by over 30% year-over-year to $4.1 billion, supported by revenue growth and efficiency across the operation, all within the guidance range. At the bottom line, net income increased significantly by 50% versus last year, further reinforcing the group ability to deliver sustainability financial results. These results are part of a broader trend, one of continuous improvements and reliable execution. LATAM enters 2026 on solid footing with a strong foundation to continue creating long-term value. Please join me on Slide 9. As you can see on this slide, LATAM's strong performance is not only reflected in earnings generation, but also in its ability to consistently translate those results into cash generation. During 2025, adjusted operating cash flow reached $3.3 billion, supported by strong operational and financial performance. This cash generation enabled the group to fully fund its core business needs, including maintenance and growth investments with $1.5 billion invested in CapEx net of financing while also covering interest payments. As we highlighted earlier, our CapEx investments have been directed towards enhancing the customer experience, but they have also been focused on accelerating LATAM's digital transformation across the business. With that, LATAM generated close to $1.4 billion in cash after covering all business-related commitments. Over the course of the year, the group executed 2 share repurchase programs totaling $585 million. Also, LATAM Group distributed $400 million in interim dividends in the fourth quarter, bringing total dividends for the year close to $605 million. Even after all of these, LATAM still delivered almost $200 million in positive cash generation in 2025, demonstrating its ability to invest in the business, meet its key obligations and also allocate capital towards additional initiatives, all while considering defined financial policy range. Let's move to Slide 10 and see how this is reflected in our balance sheet metrics. Balance sheet strength has been one of LATAM's key priorities over the past few years, and liquidity is one of the clearest expression of that focus. The group has consistently grown its nominal liquidity, reaching $3.7 billion by the end of 2025. As we just reviewed on the previous slide, it was through the additional capital allocation initiatives carried out in 2025 that LATAM was able to bring liquidity as a percentage of last 12 months revenues closer to the top of the policy range at 25.7%, demonstrating the flexibility the group has to allocate capital across multiple fronts while aiming at the final financial framework. At the same time, on the debt side, adjusted net leverage reached 1.5x below the last year and the maximum policy level of 2x, placing LATAM in a strong position heading into 2026 with the flexibility to continue investing while also preserving financial strength. Moving to the next slide. Let's take a look on the continuous optimization of the cost of capital and debt tenure. LATAM has taken important steps over the past 2 years to improve its cost of debt. Through refinancing exercises carried out in '24 and '25, the group successfully reduced the weighted average cost of debt from 10.7% in 2023 to 6.6% as of the end of 2025. In parallel, LATAM debt amortization profile is well balanced with no short and midterm relevant maturities. And furthermore, LATAM holds call options in '26 and '27 that offer potential opportunities to reprofile these maturities and also reevaluate the potential tender split to improve even more this debt profile. Let's move now to the Slide 12. As reflected in 2026 guidance published back in December, we expect it to be another year of continued profitable growth. Capacity is projected to grow between 8% and 10% and to deliver an adjusted operating margin between 15% and 17%, reflecting LATAM's focus on efficiency and disciplined execution. In terms of cash, adjusted levered free cash flow is expected to exceed $1.7 billion from $1.5 billion this last year, reinforcing the group's ability to consistently translate earnings into liquidity. We also expected liquidity above $5 billion for the end of 2026. And as we have mentioned in Investor Day held in December, given our financial policy range, we would have between $1 billion and $1.6 billion after CapEx investments and minimum dividend payments available for additional capital allocation initiatives in 2026. This year, LATAM will continue investing in key strategic areas, including the customer experience, the renewal of the fleet, efficient focused innovations and the continued reinforcement of balance sheet discipline. Again, to remind you of the main figures that were disclosed in the Investor Day, the CapEx plan for this year, net of finance -- the fleet of financing is about $1.7 billion. For the year, the group is expecting to receive 41 aircraft, of which 3 are wide-bodies and 12 correspond to the first Embraer E2s. The last slide, Slide 13. And before we move to the Q&A, let me briefly highlight the key message from 2025 performance. 2025 was another year of strong and consistent performance for LATAM, both operationally and financially. Operational excellence was matched by record levels of customer and employee satisfaction with NPS and Organizational health index reaching all-time highs. The group transported a record number of passengers, expanded the network with discipline and delivered a significant improvement in profitability with adjusted operating margin increasing 3.5 percentage points year-over-year to 16.2%. This profitability was translated all the way to the bottom line with annual net income closing at $1.5 billion. These results reflect the group's ability to grow efficiently while maintaining a focus on margins and operational excellence. During 2025, we fully funded investments in the business and met all financial commitments while generating cash. LATAM generated $1.4 billion in cash before executing 2 share repurchases and separately distributing dividends while still holding a strong liquidity level and low leverage. At the same time, we strengthened our balance sheet, aiming at the financial policy targets and focus on reducing the cost of debt, which now stands below 7%. Looking ahead, we are entering 2026 with solid momentum. Our guidance reflects continued profitable growth, supported by healthy demand, commercial discipline and a clear focus on the strategic priorities. With that, we will now open the line for your questions. Operator: [Operator Instructions] Our first question comes from Julia Orsi from JPMorgan. Julia Orsi: So we have 2 questions on our side. The first one is on yields. So we saw a strong pricing performance this quarter. Congratulations on that. Can you provide additional details on how yields are tracking across the regions? And the second one, based on recent trends, how is the booking curve and demand environment evolving? Is there any particular region that has been outperforming or underperforming? Roberto Alvo Milosawlewitsch: Julia, this is Roberto. Thanks for the questions. We saw, in general, strong and stable demand over all of the business areas where we operate. In the last couple of months of the year, domestic Chile was a little bit slower as compared to particularly 2024, but at an industrial level, and you can see that on the public figures. But we have seen already a recovery in the first months of the year. So I would say that all the business performed on a relatively good basis in 2025 last quarter in the passenger segment. Cargo, it was also good. Again, as Ricardo said, a very strong basis of comparison the last quarter in 2024. It still was robust and the current appreciation of the currencies will probably increase import demand into the region in the upcoming months. Booking curve for early 2026 looks healthy. We see no issues that concern us today. And in general, all the segments are performing well. As it has happened in the past 2 or 3 years, the segment that has been growing the most is international, and this is also reflected in our capacity during 2025 and also the guidance that we provided for [indiscernible]. But in general, we see no concerns on the demand side going forward, at least for the first quarter. Operator: Our next question comes from Michael Linenberg from Deutsche Bank. Michael Linenberg: A couple of questions here. Great way to end 2025. These are fantastic results. The when you talked about the CASK impact of 0.2% from the impact of the weak dollar. As we think about LATAM and how you have evolved your structure and the seasonality and the geography of your network, where do you come out with respect to the dollar? Is a weaker dollar overall better, even though I realize there's a cost headwind, is it just better overall for the performance of the company? And I'm just sort of in the context of the last 12 months, we've seen about a 10% depreciation of the dollar. How should we think about that on your business? Roberto Alvo Milosawlewitsch: Michael, thanks for the question. A great question. So let me give you -- at the end of the day, for us, a stronger local currency is more positive than a weaker local currency. And this derives from, a, on the domestic markets, basically, most of our revenue is expressed in local currency or happens in local currency and a significant portion of the cost is in dollar. So domestic markets work like import industries, if you want. And in the case of international, for us, it's also beneficial because even though the countries become more expensive for traveling into the region, if you want, purchasing power for traveling abroad is higher and our point-of-sale balance is higher on our South American side than our long-haul side. So the balance that we see is that a stronger currency vis-a-vis the dollar, net of higher cost because of the same effect are net positive. Michael Linenberg: Great. That's super helpful. And then I just -- I want to talk about CapEx for 2026. Last year, you took 26 airplanes. I believe this year is going to be a heavy delivery year. I know that the Embraers coming in are a big component of that. I think you're taking delivery of over 40 airplanes, 40, 41 airplanes. Can you just refresh us and how we should think about CapEx in 2026? Ricardo Dourado: Michael, it's Ricardo. And you are right. We are expecting to receive 41 aircraft and the CapEx is $1.7 billion net of financing. Remember that a relevant part of the CapEx delivers is going to be financed through [indiscernible] and also finance lease. And we are holding the increase in the investments that we have. And remember, we have a lot of investments in the retrofit of the cabins, still the renovation and the starting of the process to implement the new premium content and so on and so far. So that's the overall picture that we have. And remember, from these 41 deliveries that we are expecting, we expect to receive 3 additional 787s and also the first 12 Embraers on the last quarter, the last quarter. Roberto Alvo Milosawlewitsch: So the balance is [indiscernible], Michael. Neil Glynn: Okay. Great. And the balance is... Ricardo Dourado: 26 from the A320 family. Operator: Our next question comes from Jens Spiess from Morgan Stanley. Jens Spiess: Congrats on the results. I have a question on the net debt coming in at $5.9 billion, which was around 8% above your guidance. So if you could just elaborate on what turned out to be different versus your initial expectations. I would appreciate that. Ricardo Dourado: Sure. Actually, when we provide that guidance was before the announcement and the decision to distribute the $400 million dividend. So that was the main difference from the guidance that we disclosed before, Jens. Jens Spiess: Makes sense. Makes sense. So going forward, you will be updating your net debt guidance, right, for the potential dividends you will be paying. Is that correct? And just a follow-up question, if I may. On the E2s, when do you expect to deploy them? And what is your thought process on allocating that capacity? Will it be mostly targeting new routes and destinations? Or what's the plan there? Ricardo Dourado: Okay. So only for that reason in terms of the debt update, we don't need to update the guidance for that because we disclose all information related with that. And if and when we need to update other specific situation from the guidance, we will update everything. Roberto Alvo Milosawlewitsch: Jens, this is Roberto. Just complementing and clarify one thing on what Ricardo said. So our guidance doesn't provide any distributions on top of the minimum statutory dividends that we have to pay by law here in Chile, which is 30%, okay? So that's why you see $5 billion of liquidity going forward. But as Ricardo explained as well, over and above our finance policy, we have around $1 billion to $1.6 billion, and the Board will further decide on opportunities for capital allocation. If we end up doing something and if we will inform the market at the right time, and we will update the figures related to that with those potential things happening, okay? With respect to the A2s, so this will be deployed in Brazil domestic, the first 12 that we will receive this year. The strategy is that they will based out of our hubs. So we expect to see them flying out of Guarulhos, out of Brasilia, out of Fortaleza. And you can think about this in 2 ways. They allow us to fly new cities where the 319s, even though at the same time, their economics don't allow us to operate those cities. So you will see new destinations. You will also see probably increased frequencies on certain routes where we currently operate A320 related fleet and some combinations of these that we have never flown when you combine these 2 things. So you will see domestic Brasilia routes, both in opening new routes and increasing frequency in certain routes. Jens Spiess: Okay. Very clear. And just one quick follow-up, sorry, on the dividend distribution and the net debt guidance. So looking at 2026, everything that will be forward-looking is only the regulatory or mandated dividends that you're factoring in there. Anything in excess basically would only be updated on like looking backwards basically on what you already paid or what you already announced, right? Just to make sure we'll be modeling this correctly. Ricardo Dourado: Yes, you are correct. So as Roberto mentioned, the range that we disclosed as a calculation under the financial policy to have between $1 billion and $1.6 billion available, it's the consideration regarding the 21% and 25% range of the guidance in terms of liquidity. And that amount is not considering the guidance that we provide. So we only consider the CapEx that is expected and also the minimum dividends. Operator: [Operator Instructions] Our next question comes from Filipe Nielsen from Citigroup. Filipe Ferreira Nielsen: So I have 2 on my side. One is related to the costs that we saw this quarter. Just trying to break it between potential one-offs or costs that you think it could be something more structural during 2026. We know that there are effects from a weaker dollar, stronger local currency. So if you could like clarify which impacts were more like one-offs in the quarter and which ones were -- could remain for longer during 2026? And my second question is regarding the cargo operations. Just wanted to check your sense on how cargo yields should evolve in 2026. We have the guidance for volumes, but I just wanted to make sure how the top line on cargo should evolve. Ricardo Dourado: Okay, Filipe. Just to give you, I think, the more color in terms of the impact that we have in the fourth quarter, we disclosed that from this 4.7, we have 2 different impacts. 0.2 coming from the weaknesses of the U.S. dollar in the fourth quarter, 0.2, and the other 0.2 as what we call one-offs from this quarter. But remember, I would like just to emphasize the guidance that we provided for 2026. There is nothing structural. So we are confident that the level of investments that we have in all initiatives. Remember from the Investor Day, we disclosed that we have more than 700 initiatives internally in the company to provide more efficiency. We have this cost containment structural behavior in the company. And the guidance that we provide for this year is well aligned with the same trend between $0.043 and $0.045. So there is nothing material, nothing structural to be considered that could represent any risks from our perspective. But yes, we also have -- remember, in our guidance, the assumption to have, for instance, the BRL at 5.5. The BRL is now at 5.2, and then we have to reflect. But on the other hand, as Roberto explained in another question, we also have another positive impact in terms of RASK. So I also emphasize on the slide in terms of the results from the fourth quarter. The CASK have increased to 7.9%, but the RASK have increased even more to 11.7%. Roberto Alvo Milosawlewitsch: And the cargo question, Filipe, we don't disclose our unit revenues on cargo, but let me give you a couple of data points that are important. Northbound traffic is export traffic. Southbound traffic is import traffic. Import traffic normally has higher yields than export traffic just because of the nature of what is exported. It's basically raw materials going north and it's, if you want, perishables -- technological perishables coming south. So there may be a potential change in the mix just because of the currency appreciation that we will see if it happens during the year. But we don't see today significant issues in the demand side to believe that our -- that the unit revenues in cargo are going to be materially different. The start of the year is always low because people send inventories to close the prior year, and now we have the Chinese New Year, which is very relevant on the cargo side because basically China shuts off for a week. But the basis of growth and the stability of the market is [indiscernible]. We have no -- nothing to concern us at this point in time. Operator: Our next question comes from Gabriel Rezende from Itau BBA. Gabriel Rezende: Congratulations on the set of very strong results. Two questions here on our side. Correct me if I'm wrong, but you mentioned that around 23% out of your passenger revenue came from those more premium-related revenue. Just trying to understand where the company is targeting to land this number along 2026. So how much can this 23% increase along the year, what is the company's target at this point? And also, we talked a lot during the call about this positive FX environment, especially here in Brazil. And also, we are seeing a favorable oil price environment as well. Just trying to understand whether you see the sector at some point in time, perhaps this year, accommodating yields into a slightly lower base versus where we are at this point. Roberto Alvo Milosawlewitsch: Thank you. So second question first. We see -- I mean, Brazil was out of the 10 largest domestic markets in the world, the one that grew the most in 2025 which is quite impressive, I think. And we see momentum from that perspective. And at this point in time, I think that the capacity outlook for the industry in Brazil, together with the demand perception leads us to believe that it's going to be a stable year as compared to what it was in 2025. So we see potential for development of our strategy and our network over there as we have done it in the last 2 or 3 years. So I don't think at this point in time that we will see a significant change in dynamic of the market, at least for 2026. We don't see the elements of that. And more generally, I think that the capacity situation in the industry as a whole with the engine situation and the manufacturers still trying to catch up to replace older aircraft and to meet their commitments in deliveries is going to mean that 2026 is going to be similar to 2025 in terms of global capacity. I forgot the first question. Can you remind me, sorry, please? Unknown Attendee: What percentage -- with regard to our premium revenues, how we see that target going forward given the fact that we reached 23% of premium revenues. Roberto Alvo Milosawlewitsch: We don't disclose the target for premium revenue, but we believe that premium revenue will still grow faster than our total revenue and our capacity during 2026 as it has happened in the last few years. Operator: Our next question comes from Savanthi Syth from Raymond James. Savanthi Syth: Just a couple of questions from me. First one, just on the corporate side. I know you mentioned demand strong widely across the regions. But I was curious what you're seeing on the corporate side, if there's any acceleration there or any trends to call out? And then just secondly, I'm wondering there's one of your competitors that have kind of refocused on premium offering. And just wondering what you're seeing in the region and if there's still kind of maybe premium growth in offering is still outstripping or actually maybe demand is outstripping the supply. Roberto Alvo Milosawlewitsch: So corporate recovered probably 1.5 years ago from before 2020 already. Growth in corporate demand looks stable. I think what's most relevant is that we have been gaining consistently market share in corporate segments. And that you can see very clearly on public information provided by travel agency in Brazil, for example, where you can see that public information figure. And the set of what we have created, the network, the execution, the frequent flyer leads us to believe that this position we have is going to be maintained or even be increased in the upcoming future. So no concerns with respect to corporate demand at this point in time. And I think that LATAM has put itself in a very strong position to serve corporate customers, whether it's because of our network, because of our FFP, because of our delivery. And the second question, it's interesting. You mentioned premium offer. I think I said it in my speech, and it all starts with people. you are not going to be able to attract customers that want to fly again with you and particularly demanding customers as customers -- as premium customers only with hardware. You need software. And in that sense, I think that LATAM stands out completely with respect to not only its direct competition in the region, but also in many regions across. And this is one, I think, of the learnings of the last few years and what has started the cycle where now you see profitable growth that we have. At the same time, we believe that we can improve on execution, and I believe that we can still improve significantly on hardware, on the physical delivery of our product. As Ricardo mentioned, we just inaugurated a launch in Lima. We're going to reinaugurate a bigger launch in Guarulhos next year. We'll have premium economy on wide-bodies, we'll install WiFi and wide-bodies, which I think is an important lag. And at the end of the day, even though maybe our competitors are trying to catch up to us, we continue improving. But the DNA of this organization and the people, I think, is unmatchable at this point in time. Operator: [Operator Instructions] Our next question comes from Felipe Ballevona from Santander. Felipe Ballevona: I have a follow-up on Jens question about net debt. You stated that you ended up missing the guidance due to the $400 million dividend announcement. However, you said that the minimum dividend is considered in the guidance. And if I'm not mistaken, those $400 million wouldn't be extraordinary dividends, but minimum ones. So how can I put this 2 together? And also on a separate note, what's the currency breakdown of your debt? Roberto Alvo Milosawlewitsch: Yes. I'll pass to Ricardo on the second one. But I mean, just maybe it's good to clarify, minimum dividends 30%, but they are paid the following year, normally after the shareholders' meeting, and that happens in Chile normally in April, okay? What we did is that we advanced a significant portion of minimum dividend in December, and we paid $400 million in December. So as what you are seeing is net debt as of 31 of December, and that was not in the previous guidance, you have to adjust for those $400 million, okay, which means that in April, the company would have already counted those $400 million for the calculation of the final dividend that it would. So that's probably the clarification on this, okay? With respect to currency... Ricardo Dourado: Is that clear, no, the question regarding -- okay. And in terms of currency, I think almost 100% of our debt are in U.S. dollar. We only have one local bond that close to $160 million in local currency. So it's almost everything in U.S. dollars. Roberto Alvo Milosawlewitsch: And that's local currency... Operator: We currently have no further questions. So I'll hand back to Ricardo for closing remarks. Ricardo Dourado: Again, thank you all for connecting this morning. Please note that our Investor Relations team is available for any further questions. Have a great day, and thank you again. Operator: This concludes today's call. Thank you for joining. You may now disconnect your lines.
Operator: Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Fourth Quarter 2025 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; and David Pauli, Chief Financial Officer for Zurn Elkay Water Solutions. A replay of the conference call will be made available as a webcast on the company's Investor Relations website. As a reminder, this call contains certain forward-looking statements, which are subject to the safe harbor language outlined in Zurn Elkay's press release issued yesterday afternoon and in the company's filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. The company's earnings release and SEC filings contain additional information about these non-GAAP measures, why they are used and why the company believes they are helpful to investors and contain reconciliations to the corresponding GAAP confirmation. Consistent with prior quarters, the company will speak to certain non-GAAP metrics as they feel they provide a better understanding of the company's operating results. These measures are not a substitute for GAAP. Zurn Elkay encourages you to review the GAAP information in its earnings release and SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions. Todd Adams: Thanks, Rebecca, and good morning, everyone. I'll start on Page 3. We wrapped up calendar year 2025 with a pretty decent fourth quarter as sales grew 10% organically over the prior year Q4 and EBITDA grew 14% to $104 million, with margins expanding 100 basis points to 25.6%. In the quarter, we generated $83 million of free cash flow, bringing the full year to $317 million, which was up 17% over 2024. Over the course of the year, we repurchased about 3% of our outstanding shares for $160 million and paid $64 million in dividends. All this while leverage declined to 0.4x. Taken as a whole, we accomplished a lot over the course of 2025. The most important of which are the additional sustainable competitive advantages we've built in our business that will help us grow faster and be more profitable in the future, and I'll touch on those in just a bit. Along the way, 2025 afforded us the opportunity to live test the supply chain optimization plan that we have been deploying and talking about for several years and for the most part, it's worked flawlessly. We quickly celebrated 2025 here, our attention has turned to the next 3 years and even more specifically delivering another record year in 2026. For us, leveraging the Zurn Elkay Business System and everything we do, and how we operate, keeps us relentlessly focused on getting just a little bit better every day. To that end, one of the core pillars of ZEBS is our strategic planning and strategy deployment process. We wrapped up our annual 3-year strategic planning process in Q4 and are now actively deploying year 1 of that plan. It's a process we've used and done annually for about the last 18 years or so, and we think we've made continual improvements in that process. But this process isn't a desk exercise. It's a full contact sport where we evaluate every aspect of our business from our markets, competition and our industry to products, customers, channels and adjacency as well as larger, more disruptive ideas. We ask what's changed, what did we get wrong last year and what are our risks? And importantly, where can we further exploit the competitive advantages we've built? This defines and aligns our organization around what our priorities are going to be over the next coming 1, 2 or 3 years. The resources and investments required as well as the tools, processes and capabilities we need to leverage or develop to get there. While we're not going to be super specific this morning about the exact things we're up to, at least at this juncture, I can say this. We see more new organic growth opportunities, largely in adjacencies and underserved verticals than I can remember. We have a plan to attack these opportunities. And assuming we execute, which we have a reasonable track record of doing, I'm confident this only enhances our organic growth trajectory over the coming 2 to 3 years. I also believe that in time, our approach in attacking these adjacencies and verticals will have an incrementally positive impact on our M&A cultivations. Before I turn it over to Dave, I'll touch just briefly on our initial outlook and framework for 2026. The approach we're taking to our outlook this year is exactly the same approach we've taken in the past. We start with a range of outcomes that are reasonable, not back half weighted and in line with our demonstrated performance. We then go about retiring risks quarter-by-quarter while we work on our strategic breakthroughs. We gave everyone our view on the market last quarter, and that hasn't changed. We also have some carryover price from last year. And most importantly, we're executing well. All things equal, we're off to a really good start in January, but still 11 months to go in 2026. So now I'll hand it over to Dave to take you through some more color on the quarter. David Pauli: Thanks, Todd. Good morning, everyone. Please turn to Slide #4. Our fourth quarter sales totaled $407 million, which represents 10% core and reported growth year-over-year. Continuing what we saw throughout 2025 and in line with our expectations going into the quarter, core sales growth in our nonresidential end markets outpaced the softness we experienced within residential and pockets of the commercial segment within nonresidential. In the fourth quarter, we continued to deliver positive price/cost position with respect to tariffs and saw the benefit of roughly 5 points of price in the quarter from our previously announced tariff-related pricing actions. Overall, we continue to have solid execution on our growth initiatives, and they helped to drive our sales performance above the outlook we provided 90 days ago. Turning to profitability. Our fourth quarter adjusted EBITDA was $104 million, and our adjusted EBITDA margin expanded 100 basis points year-over-year to 25.6% in the quarter. The strong margin and year-over-year expansion was driven by the benefits of our productivity initiatives, leveraging our Zurn Elkay Business System and continuous improvement activities across the organization that Todd will touch on in a few slides. For the fourth quarter, profit performance continued on a trend we saw all year of strong year-over-year margin expansion. 2025, our sales and adjusted EBITDA have increased $129 million and $52 million, respectively, which represents a 40% drop-through on the year-over-year volume increase. Our full year adjusted EBITDA margin improved 120 basis points year-over-year as core sales grew by 8% in 2025. Please turn to Slide 5, and I'll touch on some balance sheet and leverage highlights. With respect to our net debt leverage, we ended the year with leverage at 0.4x, the lowest leverage we've had as a public company. We continue to repurchase shares in the quarter, we deployed $25 million to repurchases. That puts our 2025 full year repurchases at $160 million with an average repurchase price of $36.74. Free cash flow finished strong at $83 million in the quarter, bringing our full year total to $317 million or a 17% improvement year-over-year. We continue to cultivate and evaluate our funnel of M&A opportunities and our combination of management team capability, low leverage and cash flow generation all support our ability to execute on the right M&A opportunity. At the same time, we're actively working on entering organic adjacencies through investment in internal development. I'll turn the call back to Todd. Todd Adams: Thanks, Dave. I'm back on Page 6 here, where I want to briefly highlight a few of the things you'll see in our 2025 sustainability report that we'll be issuing later this month. So last year alone, our drinking water products provided 2.4 billion gallons of cleaner, safer filter water while preventing 20 billion single-use plastic bottles from entering waterways. We launched Pro Filtration, our latest evolution of our trusted Bottle Filling Station line, advancing both water quality and sustainability for customers worldwide. Pro Filtration features included top-mount filter access for faster 30-second filter changes and reduced downtime, new 10,000 gallon filtration capacity for longer filter life -- filter life gauges, UVC LED lights. We also introduced a filter that expanded filtration beyond PFOA and PFOS to capture the full family of PFAS or forever chemicals. Filters are now certified to reduce microplastics, lead, total PFAS and much more. And we expanded our filtration portfolio with Liv EZ bringing commercial-grade water filtration into residences, commercial and hospital applications, helping people enjoy the same high-quality water trusted in schools, airports, hospitals and stadiums. We're especially excited to share that we have recently partnered with TerraCycle to launch a recycling program for used water filters. Customers can now return filters through TerraCycle's Zero Waste Boxes where plastic casings are repurposed into durable industrial materials and carbon media is responsibly managed. Activated carbon filters like ours retain more than 99.5% of PFAS, ensuring contaminants remain securely contained during disposal. And it's not just advancements in drinking water. The sustainability benefits of our products permeate into our other product categories. Our World Dryer hand dryers eliminated the need for 3.5 billion paper towels in 2025. We launched the SANITIZE + DRY sanitizing dryer, a breakthrough hygienic, sustainable hand dryer. Its cold plasma technology neutralizes 99.99% of common bacteria and viruses, including SARS, COVID, E. coli, Norovirus, Influenza A and the common cold, all without chemicals. It's not why we do it, but our work continues to earn recognition. Zurnlkay again maintained top-tier ratings from Sustainalytics, MSCI and S&P Global. And we were named to 6 leading sustainability lists, including Newsweek, TIME, Barron's and USA Today. Proud of our efforts to expand access to clean water. Our Fountains for Youth program continued delivering filtered bottle filling stations to under-resourced schools, helping ensure students have reliable access to clean, safe drinking water. And in total, we reached 1.9 million in philanthropic giving in 2025. All in, another really solid year of walking the talk with respect to sustainability and watch for the report in the coming weeks. So the last one for me is on Slide 7. And last quarter, I shared our 1-page slide on ZEBS that depicted how we think about and manage our business, leverage our operating philosophy and ultimately, how we measure ourselves. In the middle of all of it, we highlighted that the glue to this was the Zurn Elkay Business System, our common language, which is rooted in a deep culture of continuous improvement. We found that continuous improvement can connect and engage everyone, in every location, function and role around the simple idea of making things 1% better every day. And the best part of it is it compounds every day and to improve quality, better customer satisfaction, more engaged associates, lower cost, career development, the list goes on and on. We have an internal portal creatively named #CI, where we ask our associates to communicate and share in real time some of the things they're doing or have done to get better. This creates a way to celebrate successes, share ideas and radiate these across the company regardless of position or location. Back in 2024, our team of roughly 2,500 managed to log 3,741 #CI submissions. In 2025, that same group of roughly 2,500 people submitted 5,568, an increase of almost 49%. And if I was a betting man, which for the record, I'm not, I take the over on what our team will do in 2026. And now I'll turn it back to Dave for the outlook. David Pauli: Thanks, Todd. I'm on Slide 8 with our 2026 guidance framework. As Todd mentioned earlier, our approach to the guidance is the same as we've taken in the past, provide a framework that we have confidence in our ability to deliver taking into account the fact that we are 1 month into the year and a range of outcomes are possible. With respect to the full year and based on the assumptions I'll touch on shortly, we expect core sales to be up plus mid-single digits, incremental adjusted EBITDA margins of approximately 35% on the increased sales and generate approximately $335 million of free cash flow in 2026. On the upper left-hand side of the slide are a few assumptions embedded in our outlook. From an end market perspective, our outlook assumes our markets in total look a lot like what we just saw in 2025. Institutional and waterworks end markets continue to grow at low single digits. Commercial end markets to be flattish and a continued tougher residential end market. The result of these individual end market expectations combines to an overall assumption that the market is generally flat to slightly positive. In terms of price, we will have higher price impact in H1 as by the second half, we cycle against quarters that already have the tariff-related price realized. One of the uncertainties that will impact 2026 that we are actively monitoring is the evolving tariff environment. Our guidance assumes that the tariff countries and their respective rates remain consistent throughout the year and are consistent with today's levels. As a business, we navigated through the 2025 tariffs very well and continue to action our strategy to exit direct material purchases from China. We are on track and with some products ahead of schedule to our goal of having only a few points of COGS spend coming out of China by the end of 2026. As we did in 2025, we again remain confident in our ability to execute to positive dollar price/cost impact from tariffs in 2026. For the first quarter of 2026, we are projecting core sales growth to increase 7% to 8% over the prior year with incremental adjusted EBITDA margins of approximately 35% on the year-over-year growth. At 35% incremental margins, the EBITDA margin for Q1 will be approximately 25.5% to 26%. It's roughly 60 basis points of margin expansion over the prior year at the midpoint of the range. In Slide 8, we've included our first quarter and full year outlook assumptions for interest expense, noncash stock compensation expense, depreciation and amortization, adjusted tax rate and diluted shares outstanding. We'll now open the call up for questions. Operator: [Operator Instructions] And at this time, your first question comes from the line of Bryan Blair with Oppenheimer. Bryan Blair: Very solid close to the year. Todd Adams: Thanks Bryan. Bryan Blair: I guess starting with your core sales outlook, maybe speak to what your team is seeing to kick off 2026? And then how we should think about the build to mid-single digits in terms of market outgrowth and price carryover or perhaps incremental price being baked in. Todd Adams: Yes. I mean I would sort of decouple those 2 for a moment and say, if you look at what we're saying for Q1, we're looking at 7% to 8%. I think we're off to a really good start. I think as I also mentioned in my intro comments, there's 11 months to go. And so I don't know that there's a discrete framework that marches you from 7% to 8% to mid-single digits other than there's probably a little bit more price in the first half than second. But all things equal, I think we endeavor to beat what we're saying for the year. And we're off to a really good start, Bryan, I think is the only way to characterize it. Bryan Blair: Understood. That makes sense. And as a follow-up, your balance sheet is in a pretty fantastic position. You're obviously generating a lot of cash flow. Maybe touch on the deal environment now. It's been a while since your team has executed a transaction. I know that's not based on inactivity behind the scenes. Just curious how your funnel has developed, how we should think about actionability this year, whether there's, I guess, any excitement on that front. Todd Adams: Yes. I mean, as we talked about, we went through our strategic planning process. I think we've been even more exhaustive in how we've looked at adjacencies. And so there's a fresh sort of view on the funnel and some of the cultivations that are happening that have been in the works for a while, continue to progress. We have not seen anything transact that we feel like we've missed. And so I'm optimistic that the combination of continuing to do the cultivation work, I would say, maybe a new fresh look at adjacencies and what that can do both organically, inorganically, but I think will be incrementally helpful. And as you point out, we've got tons of flexibility over the course of the year to repurchase shares, look at the dividend again and ideally get something done from an M&A perspective that fits -- meets our criteria and we can do a lot with. So I think we're optimistic, but I'm not going to predict or project either. Operator: Your next question comes from the line of Nathan Jones with Stifel. Adam Farley: This is Adam Farley on for Nathan. Following up on that last M&A question. Could you provide any more color or detail on maybe some of the adjacencies or verticals that you've identified through that your planning cycle? Todd Adams: Adam, you're a little bit muffled. I can't quite hear what you're saying. Adam Farley: Yes. So following up on that last M&A question, could you provide any more detail or color on maybe the new adjacencies or verticals that you've identified in your 3-year planning cycle? Todd Adams: Yes. I guess, I will give you a little color. I mean I think it looks and feels a lot like things we do today. So it's North American-based. It's in and around water, professional-grade plumbing. It could have flavors of leveraging certain lead products into different verticals. And I'll take you back to what we did in fire protection 5, 7 years ago, where we identified we had some niche products and then we built out a portfolio around that and then grew our fire protection business into something that's substantial. And so it's got a lot of that flavor where we start with maybe a larger application where we have some products that are involved and then what else can we add to that bundle, either organically or inorganically to all of a sudden be a formidable supplier into that vertical or into a discrete market adjacency. So I think you'll see some of these things roll out over the course of the year. And when we do that, I think it will become obvious as to why it makes sense for us to get into these and the kind of incumbency that we have right next door that we can leverage that kind of expertise, that go-to-market, that supply chain into these adjacencies and be a formidable competitor right away. Adam Farley: P Okay. That's helpful. And then looking at the 2026 guide, given some of the more recent increases in metal prices and continued general inflation, I mean, do you think you need to or maybe already have been out to the market with additional price increases? Todd Adams: Yes. I mean it's certainly something we're watching. We're not oblivious to it. But in the same breadth, I think when you look at what we're doing with our supply chain, our costs are coming down month by month as we continue to move and leverage the new supply chain base that we've created. That being said, yes, we've seen and watched metals. And I think it's one of those things where we'll be as judicious and smart about any incremental price as we can for our customers and the industry itself. But it is something we're watching. But for the time being, we feel like we're relatively well positioned. Operator: Your next question comes from the line of Michael Halloran with Baird. Michael Pesendorfer: This is Pez on for Mike. I wanted to ask about the drinking water business. I know in October, the Lead and Copper Rule came out from the EPA, and I know that they did some presentation and educational awareness in November and some tweaks to that plan in December. I'm wondering, is that -- do you view that as an accelerant to the drinking water within the institutional, specifically school market? Or do you see that more as helping sustain the healthy trajectory of attachment and acceptance that you've been seeing since the merger? David Pauli: Pez, I think we view it as helping to sustain. I think things like what the EPA came out with only help to continue to raise the awareness around drinking water and some of the drinking water quality issues that we have here in the U.S. So whether it's lead, whether it's lead and copper rules, whether it's PFAS, microplastics, I think any of the legislation or pending things that you see around that is only helpful for us. I think it continues the trajectory that we saw and don't see it as an accelerant to what's already out there, but it doesn't hurt the overall drinking water story. Todd Adams: Yes, Pez, I mean, the way to think about it is there's -- it's a relatively new category bottle filling. And there's 6 million of these drinking fountains installed. And so to the degree people are more aware and it's going to help with that. And it's got such a long tail on it. I'm not sure that we actually need the acceleration. I think it's just a steady drumbeat of better products, more awareness, funding at the right times. And then once that installed base continues to grow, the filtration opportunity compounds from there. And so I agree with Dave's comments that I don't know that it accelerates it as much as it just -- it's another down payment on converting this massive installed base out there. Michael Pesendorfer: Understood. That makes a lot of sense, particularly given the traction that you've already been seeing. Maybe switching gears a little bit. When we take a look at the incremental margin guidance, obviously, execution has been exceptional. The 42% pull-through last year, the supply chain optimization, it feels like that 35% is probably a prudent approach to 2026. And I know that you said that you're taking a similar approach to guidance as you have in the past, trying to remain prudent in mitigating potential risk through the year. As we move forward, do you see an opportunity for that baseline incremental margin to move higher over time, just given some of the work that you've done on supply chain optimization, the new product innovation and just the mix of overall business evolution? David Pauli: We do. I think we're trying to continue -- as we've talked about maybe in the remarks, invest back into the business in organic growth. And so I think when you think about our business today, our fastest-growing categories and products are above the fleet average. So I think there's a mix weighting that's going to naturally raise the overall incremental margin over time, along with putting some resources and investment back in to grow more. So we feel like 35% is a baseline that we're very comfortable with. And all things equal, if we execute like I think we will over the next 2 to 3 years, I think that, yes, the number can move higher for sure. Operator: Your next question comes from the line of James Ko with Jefferies. Jae Hyun Ko: So I wanted to ask about kind of just the construction industry kind of overall. I mean, you obviously track many different indicators, but data continues to kind of suggest elevated planning pipeline, but the conversion remains weak given kind of declining billing. So what are some tangible signs that you're watching that would suggest inflection point in project conversion here? David Pauli: Yes. I think when we look at it, James, if you go back and some of the information that we shared on our last earnings call, we look at a number of different indices. We specifically highlighted some of the Dodge square foot data. But I think when you look at the guidance that we gave -- the guidance that we gave for 2026 is essentially what we're seeing today. So we're seeing an institutional market that continues to grow, a weaker commercial market. And then a residential market that at the start of 2025, I think we called flat, but ended up being a little bit tougher of an end market. And so when you look through what we're seeing in terms of our incoming order rates, what we're seeing in terms of project starts through our reps across the country, we have a pretty good insight into the level of construction activity that's happening and are comfortable with the guidance that we gave in 2026, looking a lot like what we just saw in 2025. Jae Hyun Ko: And I wanted to touch on the drinking water business here again. Can you kind of update us on how filter attachment rate is kind of progressing with the Pro Filtration? And it seems like gallons of filter water kind of increased like mid-single digit in 2025. So how should we think about that in terms of filter sales? David Pauli: Yes. I think we've seen good early adoption of Pro Filtration. So that's the product that Todd talked about, the different feature set and that launched this summer. I think when you look at that product, the features and benefits that Todd walked through were a direct ask of the consumer and the maintenance folks that interact with that product every day. And so one of the nice things about that product is as we sell it, the attachment rate becomes very high. So we've done some things with a proprietary head that only our filters work in. And also to make the unit work properly, you have to continue to change the filter on a regular interval. And so I think Pro Filtration is only going to help us in that effort to get the attachment rate as high as possible. And then just from a filtered gallons perspective, yes, there's some nice growth in terms of actual filtered gallons. And so that stat of us is really how much -- we know how many filters we've sold. We know the gallons of the associated filter. And what you're seeing is the result of that. And so that's the work that our team is doing every day in terms of getting the latest Pro Filtration speced in and then making sure that we pull through the related filtration along with it. Todd Adams: I think it's not a -- we're not going to measure attachment rate every 30 or 90 days. I think with the recent launch of Pro Filtration and the very, very high attachment rate associated with that as that becomes a bigger portion of our overall shipments and as that grows into the installed base, there's without question, it's going to pull the overall attachment rate up. And so I think it's a good question. I think it's something that we're measuring and -- but I don't know that it's a 30- or 90-day sort of thing. Let's get Pro Filtration units into the field over the course of the year. We know the attachment rate on it is exceptionally high. And as that happens over 1, 2 and 3 years and that compounds, I think we see a really good path for filtration. Operator: Your next question comes from the line of Jeff Hammond with KeyBanc. Jeffrey Hammond: Can you give us price in the fourth quarter and what's embedded in 1Q? And then just on your announced pricing for this year, is that kind of in line with back to normal course? Or does it contemplate a higher annual price increase because of tariffs -- newer tariffs or some of this copper inflation? Todd Adams: Yes. I think any price increases that we've put in place this year, Jeff, are sort of back to normal course. And then in terms of what's in Q4 and what's in the guide, I think Dave will. David Pauli: Yes, Jeff. Yes, so Q4 was about 5 points of price. And I think the way to think about price in 2026 is I'll just walk you through what we experienced in 2025 and 2026 looks like the inverse. So Q1 was light price. Q2 1 point or 2 of price. And then in the back half of 2025, we had 4 to 5 points. And so as it rolls into 2026, it's almost the exact opposite. You've got 4 to 5 points of price in the beginning and then starts to lap some of the price increases that we put to the back half of the year. Jeffrey Hammond: And then as you look at kind of these adjacencies and new products, I remember back with Elkay, you were maybe considering entering that market and then you bought Elkay. Like do you see -- and I think, Todd, you mentioned kind of these organic opportunities lead to inorganic opportunities. Maybe just talk about how you see those going together as you look at some of these adjacencies. Todd Adams: Yes. It's a good question, Jeff, and it's really grounded in the way we look at our strategic plan. And so as we're going through our work and looking at competitors and markets and doing the mechs and evaluating who's there and what would it take to compete and all those things, it launches sort of a dual path, right, of what do we want to prioritize and do internally that may lead to cultivation and ultimately an M&A opportunity. And we sort of value those 2 things for a while. And then when there's a decision to go one path or the other, we make it and we live with it. And so that's the process that we've used really for a long period of time. And I think as we've, I would say, expanded our view on what could our served market look like, that only creates, I would say, more optionality for M&A that perhaps maybe we weren't cultivating before. But we can do it organically as well. So it's a little bit of the same path that led us to Elkay, Jeff, as you point out. And so I think we're excited about it. I think it's -- if we can think about our markets being $1 billion or $1.5 billion or $2 billion bigger, that's a big opportunity for us. And when you think about can we grow, 1% is $17 million, 2% is $34 million. So that's a great opportunity for us over the coming years to enhance our underlying organic growth rate, either organically or through an M&A transaction or some sort of transaction that makes a ton of sense because we've already vetted the category. We know the business, we've cultivated it. And so we're excited about it and optimistic that good things will happen as a result. Operator: Your last and final question comes from the line of Brett Linzey with Mizuho. Brett Linzey: Just a follow-up on the adjacent market strategy. So I understand you don't want to expand too much on the product categories. But maybe just a finer point on the expense or the product development spending you think is required this year as you ramp up and get set for any type of commercialization there. Todd Adams: Yes. I mean, there was clearly some throughout 2025, there will be more in 2026. It's measured in the millions of dollars for sure. But it's all sort of embedded in sort of that [ $35 million ] for the year, maybe better. But yes, it's going to be one of those things where we're not going to specifically call it out, but just know that it's millions of dollars in '25 and it will be millions of dollars in '26 as well. Brett Linzey: Got it. And then just a follow-up on data center. So currently not a big market for Zurn. We're seeing orders accelerate as we exit '25. Is this a growing focus for the company internally? And I guess, what is your right to play and win in that vertical, whether it's drainage or filtration and other addressable opportunities? Any color would be great. Todd Adams: Yes. It's funny because we have, I would say, the commensurate amount of content in a data center as we do in anything else. So when you think about a commercial building that requires lots of water, plumbing, drainage to either heat or cool or provide fire protection, we do participate. And I know some people have questioned whether or not we're in it at all? We absolutely are. It's absolutely growing quickly for us. Do I ever see it being a wedge in our pie? Perhaps not. But nonetheless, it's clearly a growth category for us. We have a great suite of products that we compete with others that are in the space. We don't have the heating or the cooling, but we've got everything else that touches water. And so I think we're doing quite well there. And it certainly is helping us as we exit '25 and grow into '26. Operator: I will now turn the call back over to David Pauli for closing remarks. David Pauli: Thanks, everyone, for joining us today. We appreciate your interest in Zurn Elkay Water Solutions, and we look forward to providing our next update when we announce our March quarter results in late April. Have a good day, everyone. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.