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Operator: Ladies and gentlemen, thank you for standing by. My name is Tajiri, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oxford Lane Capital Corp. Third Fiscal Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Jonathan Cohen, CEO. You may begin. Jonathan Cohen: Thank you. Good morning, everyone, and welcome to the Oxford Lane Capital Corp. Third Fiscal Quarter 2026 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our CFO; and Joe Kupka, Managing Director. Bruce, could you open the call with a disclosure regarding forward-looking statements? Bruce Rubin: Sure, Jonathan. Today's conference call is being recorded. An audio replay of the call will be available for 30 days. Replay information is included in our press release that was issued earlier this morning. Please note that this call is the property of Oxford Lane Capital Corp. Any unauthorized rebroadcast of this call in any form is strictly prohibited. At this point, please direct your attention to the customary disclosure in this morning's press release regarding forward-looking information. Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to, among other things, future events and financial performance. We ask that you refer to our most recent filings with the SEC for important factors that can cause actual results to differ materially from those indicated in these projections. We do not undertake to update our forward-looking statements unless required to do so by law. During this call, we will use terms defined in the earnings release and also refer to non-GAAP measures. For definitions and reconciliations to GAAP, please refer to our earnings release posted on our website at www.oxfordlanecapital.com. With that, I'll turn the presentation back to Jonathan. Jonathan Cohen: Thank you, Bruce. On December 31, 2025, our net asset value per share stood at $15.51 compared to a net asset value per share of $19.19 as of the prior quarter. For the quarter ended December, we recorded GAAP total investment income of approximately $117.8 million, representing a decrease of approximately $10.5 million from the prior quarter. The quarter's GAAP total investment income consists of approximately $114.3 million from our CLO equity and CLO warehouse investments and approximately $3.5 million from our CLO debt investments and from other income. Oxford Lane reported GAAP net investment income of approximately $71.8 million or $0.74 per share for the quarter ended December compared to approximately $81.4 million or $0.84 per share for the quarter ended September 30. Our core net investment income was approximately $108.9 million or $1.12 per share for the quarter ended December compared with approximately $120 million or $1.24 per share for the quarter ended September 30. As of December 31, we held approximately $263.1 million in newly issued or newly acquired CLO equity investments that had not yet made initial distributions to Oxford Lane. For the quarter ended December, we recorded net unrealized depreciation on investments of approximately $305.4 million and net realized losses of approximately $7 million. We had a net decrease in net assets resulting from operations of approximately $240.7 million or $2.47 per share for the third fiscal quarter. As of December 31, the following metrics applied. We note that none of these metrics necessarily represented a total return to shareholders. The weighted average yield of our CLO debt investments at current cost was $17.3 million -- 17.3%, down from 17.4% as of September 30. The weighted average effective yield of our CLO equity investments at current cost was 13.8%, down from 14.6% as of September 30. The weighted average cash distribution yield of our CLO equity investments at current cost was 19%, down from 19.4% as of September 30. We note that the cash distribution yields calculated on our CLO equity investments are based on the cash distributions we received or which we were entitled to receive at each respective period end. During the quarter ended December, we made additional CLO investments of approximately $97.2 million, and we received approximately $85.5 million from sales and from repayments. On January 29, our Board of Directors declared monthly common stock distributions of $0.20 per share for each of the months ending April, May and June of 2026. We note that the Board has historically considered a range of factors in setting our monthly distributions, including the company's GAAP and core NII and the distributions necessary to maintain our qualifications as a RIC under the Internal Revenue Code. At the current time, and given the opportunities that the company sees in the market for CLO equity and junior debt tranche investments, the Board has concluded that it would be beneficial for the company and its shareholders to have additional capital to deploy in those markets. We support the idea of a stable or growing net asset value as a meaningful component of the return we seek to generate for shareholders. The Board believes that this reduction in distributions will support that objective, while complying with the company's requirement to distribute to shareholders each year and at least 90% of its investment company taxable income as defined in the code to maintain its RIC status. With that, I'll turn the call over to our Managing Director, Joe Kupka. Joseph Kupka: Thanks, Jonathan. During the quarter ended December 31, 2025, U.S. loan market performance declined versus the prior quarter. U.S. loan price index decreased from 97.06% as of September 30 to 96.64% as of December 31. The decrease in U.S. loan prices led to an approximate 2-point decrease in median U.S. CLO equity net asset values. Additionally, we observed median weighted average spreads across loan pools within CLO portfolios decreased to 311 basis points compared to 318 basis points last quarter. The 12-month trailing default rate for the loan index decreased to 1.2% by principal amount at the end of the quarter from 1.5% at the end of December 2025. We note that out-of-court restructurings, exchanges and subpar buybacks, which are not captured in the cited default rate remain elevated. CLO new issuance for the quarter totaled approximately $55 billion reflecting an approximate $2 billion increase from the previous quarter. Additionally, the U.S. CLO market saw approximately $74 billion in reset and refinancing activity in Q4 2025, compared to approximately $105 billion in the previous quarter. Oxford Lane remained active this quarter, investing over $97 million in CLO equity and warehouses. During the quarter, we also led or participated in more than 10 resets and refinancings, taking advantage of tightening liability spreads to lower the cost of funding and lengthen the weighted average reinvestment period of Oxford Lane's CLO equity portfolio from May 2029 to August 2029. We continue to evaluate existing investments for opportunities to improve the economics of our CLO equity positions. Our primary investment strategy during the quarter was to engage in relative value trading and seek to lengthen the weighted average reinvestment period of Oxford Lane's CLO equity portfolio. In the current market environment, we intend to continue to utilize our opportunistic and unconstrained CLO investment strategy across U.S. CLO equity debt and warehouses as we look to maximize our long-term total return. And as a permanent capital vehicle, we have historically been able to take a longer-term view towards our investment strategy. With that, I'll turn the call back over to Jonathan. Jonathan Cohen: Thanks, Joe. Additional information about Oxford Lane's third quarter fiscal quarterly performance has been uploaded to our website at www.oxfordlanecapital.com. With that, the operator can now open the call for any questions. Operator: [Operator Instructions] And our first question comes from the line of Mickey Schleien with Clear Street. Mickey Schleien: Jonathan, CLO equity funds have been very weak over the last year, even on a total return basis. And over that time, we've seen tighter loan spreads and while CLO liability spreads have been relatively stable, and that's pressured the returns on CLO equity. Some of that trend is being attributed to captive CLO funds, which are accepting lower stand-alone equity returns because they internalize the management and incentive fees. Could you give us a sense of what share of the primary market is represented by these captive funds? Jonathan Cohen: Joe, do you want to take an estimate of that? Joseph Kupka: Yes. It's hard to say, given we don't have specific insight into that. I would say 2025 was probably a more balanced year since the arbitrage was still relatively attractive. Some third party continue to issue primary. I expect in 2026, the majority of that issuance if it continues, will be from these captive funds just given the compressed arbitrage. Mickey Schleien: And how do you assess the impact of those funds on the outlook for CLO equity returns for third-party investors like Oxford Lane? And do you think this is a secular trend, which permanently reduces expected returns for the equity tranche? Jonathan Cohen: I mean it's really impossible to know, Mickey. The behavior of the world's largest credit investors, and whether they're manifesting a portion of their strategies in these captive CLO funds, these captive equity funds is just extraordinarily difficult to try to predict. That is certainly a potential factor in terms of future likely performance for CLO equity tranche investments, but I think there are a great deal of other factors that are equally or perhaps even more important. Mickey Schleien: Okay. If I could follow up, looking ahead, it seems like the constructive case for CLO equity would require more new money loan issuance from improved M&A activity which could help balance the loan market and perhaps widen loan spreads without a recession. So with that in mind, what's your outlook on the balance of supply and demand in the loan market this year and maybe next year? Jonathan Cohen: We would like to think, Mickey, based on historical norms that, that balance will be restored, at least to some extent, over that time frame. Operator: Our next question comes from the line of Erik Zwick with Lucid Capital Markets. Erik Zwick: I wanted to start with a question just on the kind of reduction in the dividend level. And the way I hear you, Jonathan, is one of the big opportunities you see for Oxford Lane going forward is to continue taking advantage of the secondary market and attractive pricing and returns there. And that's one of the driving factors for the magnitude of the dividend cut and not so much your view into where the earnings power of the fund is going. Is that correct? Jonathan Cohen: It's an interesting question, Erik, because we have never adhered to the dictum that we need to focus solely on the primary market or solely on the secondary market. For the last 15 years or so, we've had the flexibility, the investment flexibility to vacillate between those 2 opportunity sets. And at the moment, we are seeing what we consider to be generally strong opportunities in the secondary market for a host of reasons, many of which are related to what may be a fundamental supply-demand imbalance in the secondary market on a flow of funds basis. But to answer your question, the answer is we see probably more opportunities in the secondary than in the primary market. And given that we believe we are one of the world's largest market participants in the secondary market, we are trying to position ourselves to take advantage of those. Erik Zwick: And just a bit of a follow-up on that one. The opportunities that you're seeing in the secondary market, I would assume, but opportunities buying things at discounts that if they perform well, would have a pull-to-par effect, which would kind of help in terms of your goal of supporting the NIM -- I'm sorry, the NAV and potentially [indiscernible] as well. Is that right? Jonathan Cohen: Yes. Erik, I think that's definitely one of the profiles we're focusing on previously in times of more benign environments, you see a healthy premium to NAV based on trading levels in this environment with the arbitrage add or near historic types, you see that NAV compress or sometimes even flip. So the optionality -- you really see that optionality in terms of capturing the NAV, whether that's through a reset plays or just liquidation of the CLO [indiscernible]. So yes, there's definitely potential to support the NAV with those profiles. Erik Zwick: And then for my next question, I haven't fully gone through and fine-tune my forward estimates, but just kind of quick back to the calculations would suggest that the earnings power of the fund is still in excess of the distribution -- the new distribution level that you've disclosed. So is there a potential then for a special dividend at some point over the next year or so? And if so, does -- would that be on a calendar year? Or based on your fiscal year, which ends March of each year, how would you think about that? Jonathan Cohen: We think about that, Erik, principally in terms of maintaining compliance with the RIC test under the code, under the tax code. So to the extent necessary or to the extent that we want or need to reflect the earnings level of the fund in the distributions yes, we -- it is certainly possible that we declare a special dividend or modify the existing rate of distribution to comport with those fundamentals. Erik Zwick: Got it. And timing on that when you do your RIC test, is it the calendar year? Or is it based on your fiscal year reporting? I can't recall how that's done. Jonathan Cohen: Fiscal, so March. Erik Zwick: Fiscal. Got it. And last one for me. Either Jonathan or Joe, if you could just kind of frame the current opportunity for resets and refis in your portfolio and how that could potentially support cash flow going forward? Joseph Kupka: Yes, this year should be a very active year in terms of resets and refis for us this past year. 2025 was also very active. We participated or led about 70 resets of refinancings. We have a few in Q1 and Q2 that are rolling off non-call. And starting in July, we have a lot of our portfolio rolling off that we see AAA spreads generally in the 130s or 140s just based on where AAAs were 2 years ago when we initially issued those deals. So just based on the timing, we see a lot of take some kind of action. Jonathan Cohen: Right. Market fundamentals permitting. Operator: There are no further questions at this time. I would like to turn the call back over to our CEO, Jonathan Cohen for closing remarks. Jonathan Cohen: Thank you very much. I'd like to thank everybody on the line and everybody who's listening to the replay for their interest in Oxford Lane Capital Corp. and their participation on this call. Thank you very much. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Primis Financial Corp. Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. On your telephone keypad, if you would like to withdraw your question, again, press 1. Thank you. I'd now like to turn the call over to Matthew Alan Switzer, Chief Financial Officer. You may begin. Matthew Alan Switzer: Good morning, and thank you for joining us for Primis Financial Corp's 2025 Fourth Quarter Webcast and Conference Call. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate site, primisbank.com. We undertake no obligation to update or revise forward-looking statements to reflect changes, assumptions, the occurrence of unanticipated events, or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measure is used, if not readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember. Dennis J. Zember: Thank you, Matt. And thank you to all of you that have joined our fourth quarter 2025 conference call. We're very pleased to be reporting our 2025 results today and really excited about what 2026 is going to look like. For the quarter, we're reporting earnings of $29.5 million or $1.2 per share, which works out to almost a 3% ROA. I tell people all the time that your best result ever isn't good enough tomorrow. And that you have to strive to keep reaching higher, which may have trashed me. But, obviously, in the quarter, we had just this gain from the sale leaseback and quite a bit of related noise from the restructure and some other items that we were afforded because of the outside gain. The most important thing you can take away from this call is this. In 2025, Matt and I are showing our run rate earnings at about $8 million, which works out to about an 80 basis point ROA on about $4 billion of average assets. That reflects virtually no improvement from the restructure that we announced. And it includes a seasonally slow quarter mortgage. So taken together, going into 2026, we see substantial momentum and a lot of opportunity to hit our goals. I want to talk about some of the real notable improvements this year. When you look at the fourth quarter or you look at December 31 of any year versus the prior year, you know, what do you notice? For us, we noticed that our margin increased from 2.90% in the fourth quarter of last year to 3.28% in the fourth quarter of this year. Excuse me. The restructure had virtually no impact on fourth quarter margins. And our press release showed that when it's fully implemented, it went at about 28 basis points. Pushing this kind of margin in our company to a place where 3.5% margins are in range is very impressive against our peer group and our region. And our core bank has led the drive. Next, we grew checking accounts, which has been a big focus of the bank. We grew checking accounts by over 23% during the year. Talk a little more about this. But from a percentage basis, we have to be in the top 10 banks nationwide on checking account growth. We achieved this by leveraging our proprietary delivery app in our market and abroad. We grew our C&I portfolio substantially and saw the normal deposit balances you would expect from this effort show up. We benefited from our warehouse division's effort selling our treasury services to their clients. We improved our noninterest-bearing deposits to total deposits from 12%, 13% in mid-2024 to 16.3% at 12/31/25. We've been even higher than that early this year. Most importantly, we continue to fund nearly every dollar of earning asset growth with transaction accounts, not retail or bankruptcy need or wholesale borrowings. Lastly, we rebuilt our earning assets just like we said we would after the life premium sale. With balances from the core bank and our lending divisions, and we did it with much more yield and scale than we had in life premium. For the year, we grew earning assets by $325 million with a larger growth in the loan side. We held our yield steady compared to 2024 with loans only dropping 10 basis points despite the fall in short-term rates during the year. Where are all these successes coming from? And, you know, why are we confident that there's more to come here? Our core bank has led the way this year in almost all of the areas, particularly on deposit growth and driving success with cost of funds. For the year, I'm showing that we grew checking accounts by about $116 million. This is about 23%, as I stated earlier. On the loan side, our focus has been on C&I, and under occupied as it you know, for as long as we can remember. And as we finished the year, we saw a real flurry of closed loan closings and sales success that are gonna carry over into 2026. In December alone, the core bank closed about $75 million of new commercial loans with about $90 million of related deposits. Importantly, the incremental margins on this business are almost 4% with no incremental operating resources or new staff. So we achieved the operating leverage that Matt and I have been talking about and that has been the drive of our 2025 improvement. In the fourth quarter, we rolled the digital up under the core bank's reporting arm. So now everything, basically, the bank customer reports to Rick. We finished 2025 with $903 million in digital deposits, which is down maybe less than 10% from where we were a year ago. Despite the fact that the range is down 115 basis points. We have over 20,000 customers on this platform, about 15% of those in our core footprint. Because of the success of this platform, there is not a single ounce of pressure on our core bank deposit goals, production efforts, or pricing, which is reflected in their remarkably low cost of deposits. Through the year, and the changes in rates, we've maintained 90% of the balances, which is unquestionably a testament to our style of surprising the customer with a personal banker, 24/7 access to the bank, rapid turnaround with any question or concern, and near zero fraud. In short, we engineered a community-style banking approach for these customers. And when rates started falling, they rewarded us with their loyalty. Think a key success or something that's all those are important items, but the thing that's really driving the bottom line improvement or the ROA improvement is operating leverage. As for maybe two years, we have controlled and reworked our operating expense base. We've invested only in production and revenue per and we've leveraged our back office resources on the growth. Every moment of turnover or attrition on our administrative functions has been an opportunity to improve talent and drive more leverage, and we've not really missed any opportunity. Matt provides the table in the press release that shows our operating expense burden, and it obviously includes some of the noise from the restructure and some other items. But on a go-forward basis, we reconcile right back around $22 million or so. So we believe we can hold this. I think maybe we've been saying this for four, five quarters, but we think we can hold this line for several more quarters and allow a reliable trend on revenue to keep improving results. Another success, another area where we believe the success is gonna continue is on the mortgage side. Or where we face the mortgage industry with warehouse and retail. They're obviously separate lines of business, but in our company, they both work together and drive results in a markedly different fashion than what you see in most community banks. It's all quite a bit about warehouse this year and about those results are impacting our results. But the fact is warehouse only averaged $175 million of outstandings for the year. That's not even half of the assets we sold with Life Premium Finance. And only about 35% of what we think 2026 could average. Our margins in the business are accretive to our overall levels, and our run rate efficiency ratio here is in the mid-twenty. Which is going to be noticeable on our consolidated ratios when we rescale. At Primis Mortgage, we saw closed loans increase to approximately $1.2 billion, a 50% increase over 2024. But more importantly, we closed $143 million with great profitability. And on a pretax basis, Primis Mortgage earned $1.4 million in the fourth quarter. Which is about $1.8 million higher than 2024. Before I give it back to Matt, let me say what is special about Primis. Know, about what we're managing in. Obviously, I could soak up a lot on this call, on this topic. But I think the important thing for our investors to know is that we've rebuilt a core bank into one that is leading on deposit successes and growing. We're not just milking a branch infrastructure from two decades ago. We're growing the core bank with good deposits, good core deposits, and improving our mix. We've built integrated lines of businesses that have substantial scale. Every single one of our lines of business, Phil, that's pumping the brakes, every month. To not outrun our resources or our capital or become our whole story. The growth part of our story is baked. It's fully built, requires very limited resources to continue growing. When you combine that with a strong and leading community bank, we have strategic options that many banks in our region do not have. We've had a lot of noise in our past. I'm not gonna pretend that we did. But there's no doubt in my mind that every quarter of reliable ROA growth intangible book value that we can post, that noise subsides and our multiples, I believe, will return and reward the shareholders for our hard work. Matthew Alan Switzer: Thirty to December thirty-first. Including the Panacea loans sold in the fourth quarter, gross loans would have increased approximately 17% annualized, led by growth in Panacea and Mortgage Warehouse. Importantly, average earning assets increased 13% annualized in the fourth quarter with a slightly slower growth rate versus period-end growth adjusted for the loan sale due to substantial loan closing activity that took place at the end of the quarter. Deposits were up 10% annualized in the quarter also due to strong production late in the fourth quarter. Even more impressive, as Dennis mentioned, noninterest-bearing deposits ended the year at $554 million or 16% of total deposits versus $439 million or 14% at the end of 2024. Net interest income was approximately $31 million, a substantial improvement from $26 million in the year-ago period. Our net interest margin in the fourth quarter was 3.28%, up from a reported 3.18% last quarter and 2.9% in the year-ago period. We have expectations for further margin expansion as we progress through 2026. Our previously announced investment portfolio restructuring only benefited half of December, and we will complete the redemption of $27 million of subordinated debt at the end of this month. If both those transactions had been in place for all fourth quarter, the net interest margin would have been approximately 11 basis points higher. Earning asset growth rate in the fourth quarter was accretive to margin, as is our current loan pipeline. We also have approximately $331 million of loans repricing predominantly in 2026, with a weighted average yield just under 5% that will add to loan yields. Lastly, we have $40 million of deposits with a contractual rate leaving in January with a cost almost 80 basis points higher than wholesale funding. The core bank cost of deposits remains very attractive, at 159 basis points for the quarter, down 14 basis points from the third quarter. Cost of total deposits was 226 basis points in the fourth quarter, down 20 basis points linked quarter. Our focus on growing NIB deposits is a key part of our strategy to continue driving funding costs lower from here. Our provision this quarter was $2.4 million, partially driven by growth in the loan portfolio described above. Approximately $1 million of the provision was due to specific reserving at year-end for impaired loans, while another $600,000 was tied to activity in the consumer portfolio. Noninterest income, excluding the gains and losses from the sale leaseback transaction and investment portfolio restructuring, was $14.2 million for the quarter versus $12 million in the third quarter. Mortgage revenue was solid in Q4 at $10 million versus $8.9 million in Q3, with Q4 seasonal slowness offset by the production from new hires. Year-over-year retail mortgage production was 84% higher in 2025 versus 2024, showing momentum for a strong 2026. Including net production was $32 million of attractive construction to permanent loan production in the quarter, up from $26 million last quarter and an immaterial amount in 2024. On the expense side, when you exclude mortgage and Panacea division volatility and nonrecurring items, our core expenses were $28 million versus $22 million in the third quarter. The strong performance in the year resulted in higher compensation accruals, particularly restricted stock expense, which totaled $4.5 million in the fourth quarter. There are a handful of other items described in the earnings release that are one-time in nature but don't rise to the definition of nonrecurring for reporting purposes and totaled another approximately $1.8 million, including one month of lease expense. Not highlighted in the press release because of the small nature, there's roughly another $3 to $400,000 of cleanup expenses in the quarter that will moderate next quarter. Normalizing for all of these items, core noninterest expense on a comparable basis was approximately $21 million, putting us only slightly higher than our run rate for the past year. Our conservative estimate for our quarterly core expense range next year, adjusted for mortgage and Panacea, is $23 to $24 million in 2026, inclusive of the $1.5 million of quarterly lease expense that we've incurred with the sale leaseback transaction, and we're pushing hard to be at the bottom up or below that range. In summary, the sale leaseback transaction in the fourth quarter was timely and allowed us to reposition a number of areas to enter 2026 with a lot of momentum. We have the capital to achieve our goals and fundamentals in place to hit our 1% ROA goal this year, and we are confident we will do so. With that, operator, we can open the line for Q&A. Operator: Thank you. We will now begin the question and answer session. Russell Elliott Gunther: If you would like to ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, simply press 1 again. Your first question comes from the line of Russell Gunther from Stephens. Your line is open. Nicholas Thomas Lorenzoni: Hey, good morning, guys. This is Nick stepping in for Russell. Matthew Alan Switzer: Hi, Nick. Nicholas Thomas Lorenzoni: Hey. So starting on the loan side, you saw average warehouse balance is showing a nice growth of 812% year over year, and given that $1.23 billion in existing commitments plus the seasonality of the business, where do you see those balances ending in 2026? Matthew Alan Switzer: I think we're anticipating mortgage warehouse to average $500 million across the year. Now it's seasonal, so that might be an average of $400 million or so in the first quarter. But we'll probably peak well over $600 million over the summer and then come back down in the fourth quarter. So the fourth quarter may be, call it, $100 million higher or so than the fourth quarter of this year. Maybe a little bit more. But for the whole year, it'll be, call it, $200 to $250 million higher than the fourth quarter because of the seasonality. That makes sense? Nicholas Thomas Lorenzoni: Okay. Yeah. Yeah. And you're relating to the last one. What I think what's important is, I mean, that business for us is doing comfortably over a 2% ROA. Let's just say that number, I mean, for this year, it was a $175 million average. Business, I'll call it $3.5 million, you know, net income. I mean, I don't think scaling getting to $500 million is only gonna improve that number. And so you sorta can see the pickup bottom line wise from scaling this from $175 million average for the year to $500 million next year. Or, excuse me, this year. Nicholas Thomas Lorenzoni: Okay. That makes sense. And related to all of that, how should we think about overall loan growth in '26? Matthew Alan Switzer: We're shooting for in the core bank, the core bank probably somewhere in the $100 million or so. That'd, you know, call it 5, 6, 7%. Again, we're not going to be doing investor CRE. That's just not our focus. So we're looking for C&I and under occupied. Panacea, again, Panacea and Warehouse, I mean, if we let them out of the ring fence, it would get away from us. But I think Panacea, I think Matt's modeling about $150 million for them. And, you know, if you look at, again, really more on an average basis, I think, warehouse is probably, call it, $250 million more. Maybe $200 million more from where we finished the year. Nicholas Thomas Lorenzoni: Okay. And just switching to expenses real quick. You guided 2026 quarterly to a range of $23 to $24 million, it looks like. How should we think about expense sensitivity as mortgage banking and the fee income side improves? Or, I mean, better said, what impact on expenses should we anticipate in relation to mortgage banking? Matthew Alan Switzer: Yeah. So that $23 to $24 million is excluding mortgage. Right? Because the mortgage is gonna be volatile and scale with the revenue side. So it's just easier to think of mortgage on a pretax contribution basis. Okay. And assume they're gonna please. This assume whatever your revenue assumption is for mortgage, assume that they're gonna earn, call it, 50 to 60 basis points pretax, and then you get back into the expense from there. This year, we did about a billion 2 of loan closings. We probably, I mean, fully loaded, we were probably high thirties basis points on pretax bottom line there on loan closings. We say next year, we're gonna see 40, 50% improvement in loan closings. And even a better improvement in the bottom line. I think we're modeling somewhere between fifty and sixty basis points of pretax on those loan closings. Nicholas Thomas Lorenzoni: To your point, Nick, it does scale tremendously as you get sort of above a billion 5 because, really, we're still recruiting, call it, $50, $60, $70 million a year producers. But when you're bringing those on and it's a 10% growth in production, you can sort of feel it. When you're already at $2 billion, it's just not noticeable. Nicholas Thomas Lorenzoni: Okay. That's good to know. And last thing, talking about the ROA, what is your target sustainable ROA for the full year 2026? Matthew Alan Switzer: Mean, our bogey is still, for the full year, a 1% ROA. And we may be below that in the first quarter because the first quarter is seasonally slower, particularly for mortgage and mortgage warehouse. But we'll be above that in the second half of the year. Would put us in that range for the full year. Nicholas Thomas Lorenzoni: Got it. That's it on my end. Thanks for taking my questions. Matthew Alan Switzer: Thanks, Nick. Operator: Your next question comes from the line of Christopher William Marinac from Janney Montgomery Scott. Your line is open. Christopher William Marinac: Hey, good morning, and thanks for all the detail both on the call as well as on the disclosures yesterday. Just wanted to go back to the noise that may be on top of the $23, $24 million quarterly expense, is some of that noise still going to be with us this first half of the year? Or think a lot of it's behind us? Matthew Alan Switzer: I think the best majority of it is behind us. We may have a little bit in the first quarter, but should not be anywhere near as significant as the fourth quarter. Christopher William Marinac: Got it. And then part of getting back to the 1% ROA is gonna be a higher margin, right? I mean, expenses make a big difference to get you from the core 80 to 100. But how big of a piece is the margin? Matthew Alan Switzer: No. You got a question. I mean, that's part of it, but, I mean, there's we got margin expansion on the existing balance sheet plus healthy margins on the growth agenda. Dennis just outlined that we're expecting for the year. And the incremental some significant portions of that growth come with much higher incremental ROAs. For example, Orange Warehouse, which is gonna be a big portion of the growth and have very wide ROAs relative to the consolidated. On the existing balance sheet, we, you know, we had a 3.28% margin in the fourth quarter. Call it high threes if you adjust for paying off debt. Which will have two quarters of that in the run rate in the first quarter plus the full quarter of the securities portfolio restructuring. I mean, we should be hopefully in the mid-three fours in the first quarter. If not a little bit better than that. And call it, push it three and a half as we get through the year. So some of that is margin-related, but a lot of it's just holding expenses. Dennis J. Zember: Okay. And, Chris, I'd say sort of adding to what Matt said. I mean, there's I'll start on the bottom side. There's virtually no pressure anywhere in our company for OpEx growth. And, you know, to the degree there is, it's a new producer or a new revenue or revenue-related opportunity. But outside of that, there's just no pressure for that. There's also virtually nothing that we're doing on the earning asset side or the growth side that's dilutive to our current margin. So when you look at where we were a year ago at $2.90, versus where we probably are gonna be somewhere closer to three and a half, you know, midyear. The math there is just very accretive to getting us to the 1% ROA. And over the 1% ROA. We're not trying to be conservative. We definitely see a pathway into getting to 1% and it being sustainable. And a lot of it is a much more improved margin absolutely sort of set in stone operating expense discipline. Matthew Alan Switzer: So the other thing I would add, Chris, mortgage will be a much for the full year much higher contributor in '26 than '25. Partly because of the growth we're expecting in production. Which does not assume, like, some big refi boom or whatnot. It's that's driven by teams that we hired in '25. And recall in the first half of the year, mortgage was not a contributor, particularly in the second quarter because of expenses related to those hires, and that was about, call it, a million and a half. Of impact at least. That don't have any of that in our expectations for 2026. So mortgage, retail activity, contributed maybe a couple million dollars pretax in '25. Because of expenses and build-out and whatnot. It's gonna be multiples of that in '26, which is also accretive to ROA. Christopher William Marinac: Got it. Thanks for all that. And I guess just to follow-up on it, on deposits is, Dennis, talked about the deposit account growth that's been in place for a while. Do you see those same accounts funding more? Or do you see deposit growth coming because you continue to build accounts, just that? Just curious kind of how you look at balances versus accounts. Dennis J. Zember: We look at both. It's interesting you'd ask that. We do measure one of the things we measure around here is new customers. So that's not new accounts. So new accounts to existing customers, we don't count. We look only at new customers, new people to the bank, whether it's EINs or Social Security. And last year, it was almost 6,000 new customers to the bank. The first year I got here, we barely cracked a thousand. So the sales efforts are definitely attracting new customers. And interestingly, what you said, the balance is three years after you acquire the customer are almost double what they were in the first year. So I mean, I can't scientifically guarantee that what we did this year on checking account growth is going to be double in three years. But I can tell you if you go back two or three years, four years, five years, and you look at what those customers have done here, unquestionably, the balance has grown to about double. Now just like every bank, we have attrition. So you do have to grow $100 million of new customers to be able to come on the call, Chris, and tell you that we grew $50 million. Just that happens. But new customer acquisition is key. What I will tell you is, I mean, every investor and analyst on the call knows this. When you're growing the bank, when you're not focused on investors, CRE, you're growing the bank with C&I or owner-occupied or treasury-related sales when you're focused only on deposit. Those are absolutely relationship core. And after you've got them on the books, they 100% turn into a center of influence. And most everything we did, and I was talking about the fourth quarter, December, really, and the growth. Almost every one of those were a referral from an existing customer. And so, I mean, again, I wish I could, you know, I wish I had the foresight to say or the I wish I was a prophet could say all of this is gonna turn into that. I can't. But I do know that what we did in the fourth quarter is, number one, a good sign that the sales culture is working. And number two, it gives us a big platform springboard to drive more results in the coming year. Christopher William Marinac: Got it. That's great. Thanks for that, Dennis. And just another question on the mortgage business. Do you think you'll still have more production hires there? Or do you have a team in place that you want at this in terms of headcount? Dennis J. Zember: We're definitely going to have more hires. But it won't come with the large upfront expenses. It'll be more incremental than the two large teams we had last year. Yeah. We hired $2.2 billion a year producers last year. There was some cost for onboarding them. No question about it. The folks we're recruiting now, Chris, back to what I said, they're probably $30 to $50 million to $70 million producers recruiting them smart. We're not trying to do all of them in one order. But you know, recruiting those two big teams really just keeps paying dividends, and people, you know, the more success we have here, honestly, the more our phone is ringing. I will tell you, we're a $4 billion bank. We probably need mortgage to be, call it, $2.5 to $3 billion. I think at $2.5 billion, we're not too concentrated in mortgage. At that point, we probably sort of need to marry growth in mortgage along with growth in the core bank so that we're not a mortgage company. We're still a bank with a mortgage company. Christopher William Marinac: Got it. Okay. And then last question, on the one loan or loans that had an increase on special mention, do you see any of those graduating to substandard, or would you see that those go back to pass at some point? Dennis J. Zember: The specific impairment that you're referring to? Christopher William Marinac: Yeah. Just the $40 million that went up from September to December. Dennis J. Zember: Special. Oh, the special mention. I'm sorry. Think there's a list. I'm I don't what Probably, I think one of them is an office CRE deal that's got very strong cash flows. Got very strong cash flows. An investor that investing in the property. We downgraded it because we did a modification. So I think we're probably gonna leave it special mention. There's we got good LTVs. Very strong debt coverage. It's probably gonna sit in special mention. We've not had a payment problem. But because of that modification, we're probably gonna leave it there. The other one's got extraordinarily strong guarantor with a lot of liquidity, a piece of collateral that we're not very delighted with maybe. It's probably gonna be there for a little while too. But given the strength of the borrower and his liquidity position, I don't think it's going to substandard. Is that a with one piece as an assisted living that they had an issue with their tenant, but they're working through that, and the guarantor is supporting it. So assuming they get the tenant sorted out, they can be fine. They're probably be in a position to upgrade that back in the next couple of quarters. One of them is in the process of being recapped. And at that point, we would actually be paid off, which would be a nice chunk of that. Yeah. But it also has a very strong pullover behind it. So we don't see substandard on these, and we definitely don't see big impairments or losses. Christopher William Marinac: Okay. Great. That's good color. Thank you for sharing all that, and thanks for taking all of our questions. Dennis J. Zember: You bet. Operator: And that concludes our question and answer session. I will now turn the call back over to Dennis Zember for closing remarks. Dennis J. Zember: Thank you again for joining our call. Thank you for your interest in our company and staying with us through 2025. We look forward to what 2026 will bring, and Matt and I are available for any questions or comments after this if you want to give us a ring. Thanks, and have a safe weekend. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. Welcome to today's Colgate-Palmolive 2025 Fourth Quarter and Year-End Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. Now for opening remarks, I'd like to turn this call over to Chief Investor Relations Officer and Executive Vice President, M&A, John Faucher. John Faucher: Thanks, Betsy. Good morning, and welcome to our fourth quarter and full year 2025 earnings release conference call. This is John Faucher. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Forward-looking statements inherently involve risks and uncertainties and are made on the basis of our views and assumptions at this time. Please refer to the earnings press release and our most recent filings with the SEC, including our 2024 annual report on Form 10-K and subsequent SEC filings, all available on our website for a discussion of the factors that could cause actual results to differ materially from these statements. These remarks also include a discussion of non-GAAP financial measures which excludes certain items from reported results, including those identified in tables 4, 6, 7, 8 and 9 of the fourth quarter earnings press release. Full reconciliation to the corresponding GAAP financial measures and related definitions are included in the earnings press release, which is available on our website. Joining me on the call this morning are Noel Wallace, Chairman, President and Chief Executive Officer; and Stan Sutula, Chief Financial Officer. Noel will provide you with his thoughts on our results and our 2026 outlook. We will then open it up for Q&A. Noel? Noel Wallace: Thanks, and good morning, everyone, and thanks for joining us today as we discuss our stronger-than-expected Q4 results, and more importantly, our outlook for 2026, which marks the beginning of our new 2030 strategy. I'll give some brief thoughts on 2025 before heading into why I'm excited for what 2026 could bring despite a very volatile environment as we enter the year. We delivered organic sales, net sales, gross profit, base business earnings per share and free cash flow growth in 2025 despite lower-than-expected category growth higher-than-anticipated raw material inflation and the impact of higher tariffs. I believe our ability to deliver dollar-based earnings per share growth in a year with that much volatility is a sign that the flexibility and resilience we have built into our operating model is working effectively to drive value for our shareholders. Encouragingly, we are exiting the year with improved momentum with organic sales growth in all 4 categories in the fourth quarter and sequential improvement in organic sales growth versus the third quarter in every division, except North America. And we delivered modest volume growth in Q4, excluding the impact of both the Prime 100 acquisition and the planned exit of the private label business. Last year, we completed our 2025 strategy as we added $5 billion in sales, and this year marks the transition to our new 23 strategy, which we believe provides the building blocks to accelerate change at our company to continue to drive top-tier growth and total shareholder return. The 5 key areas where we're focused on are: First, we have strong brands with global reach. We believe this provides a competitive advantage. For example, the Colgate brand is the most penetrated brand in the world and this helps us drive distribution for our portfolio, particularly in emerging markets. Second, we are accelerating our investment in new innovation models with additional resources focused on delivering more impactful science-based innovation across all price tiers with greater investment in key strategic growth markets. Next, we're harnessing the power of best-in-class omnichannel demand generation by adapting how the right products with content and messages are delivered to the right people at the moments that matter in order to drive purchase behavior. The goal is to deliver consistency of this consumer-centric model around the world to build brand strength and penetration. Fourth, we're continuing to double down on and accelerate investments in scale capabilities, digital, data, analytics and AI including our efforts in revenue growth management and AI-driven innovation to generate faster growth, higher return on investment, efficiency and productivity and to integrate new ways of working across the company. We are also executing on our plans to optimize our supply chain through predictive analytics and automation to handle customization and personalization in a new dynamic environment. This is intended to deliver personalization at scale, drive optimal asset utilization, minimize downtime, improve service levels and enhance quality systems. Finally, anyone who has worked for me knows how much I believe in culture is a competitive advantage. We are laser-focused on continuing to develop a high-impact culture by aligning key performance indicators in our training and development programs. We also announced our strategic growth and productivity program which should unlock the organizational changes and funding necessary to help us deliver on our new strategy. Combined with our fund growth initiatives, which delivered another strong year in 2025 and we believe we are well positioned to invest to grow our brands, build our capabilities and deliver productivity to help offset cost inflation and drive margin expansion. We have several reasons for optimism in 2026. Our new strategy and the resilience and strength of our operating model gives us the ability to adapt to this volatile environment. Emerging markets where we have significant exposure continued to perform ahead of developed markets. We delivered improved momentum on our business in Q4 in terms of organic sales growth and market share, and we have seen stabilization of category growth rates as we exit 2025, but we still face significant uncertainty. While category growth may have stabilized, growth rates remain low. This is difficult in and of itself, but also could lead to higher levels of promotion and other competitive activity. Foreign exchange is favorable right now but has been a negative impact for 8 of the past 10 years. The geopolitical environment, including tariffs, is volatile, particularly in Latin America, and the U.S. market remains sluggish, while we think trends will improve, we're not building in a big rebound. Because of this uncertainty, we're giving a wider range than normal in our net sales and organic sales growth guidance to incorporate various levels of category growth. So to finish up, I'm confident in our ability to navigate through this uncertain environment. I believe we have the correct long-term strategy, very well-designed 2026 plans and, of course, the best people and culture so that we can continue to deliver value to all of our stakeholders through achieving our long-term ambitions. And with that, I'll take your questions. Operator: [Operator Instructions] The first question today comes from Dara Mohsenian with Morgan Stanley. Dara Mohsenian: So nice sequential progress on organic sales growth in Q4. 1% to 4% guidance for '26 is a wide range, understandable in this environment. But Noel, I'd just love to get your perspective on category growth within that guidance as you look at key regions around the world, where we sort of stand here at the beginning of the year. Obviously, a difficult '25, but you talked about improvement in Q4, where we saw that clear sequential improvement. So just does that give you more confidence here? How do you see Colgate as positioned also within that industry framework just from a market share standpoint and as you look to drive greater marketing effectiveness? I think the point blunter is really just trying to understand how you think about landing within that OSG range in '26, an improvement versus '25 with the points you made around optimism versus the uncertainty. And then if I can slip the second one in, Stan, it's just been so long since we've seen favorable FX. Can you just talk about the flex on the earnings line relative to the top line dynamics I just asked about and how you manage the business in terms of spend and the way you manage that business relative to that FX benefit? Noel Wallace: Yes. Thanks, Dara. Clearly, we're pleased with the -- as you said, the momentum exiting the year. On an underlying basis, excluding private label, organic in excess of 3%. So a good number that we think sets us up well, but the environment continues to be very challenging and very volatile. Overall, it seems like the categories have stabilized at the lower rate than our historical assumptions, as you well know, probably in that 1.5% to 2.5% as we showed in the prepared commentary. We're seeing a lot of month-to-month swings in the U.S., which you can see in the candidate, obviously, plus we continue to see some downward pressure on inventories as category slow. The volume is the particularly more acute issue in the U.S. where we've seen on our core categories some of the volumes go negative in the categories. Our anticipation is that will get a little better. But as I mentioned, we're not assuming the U.S. will get significantly better, at least in the next couple of quarters. On an underlying basis, though, we think North America was actually a little better for us this quarter, but still not where we need it to be, as I've discussed before. We do things with a better -- with a little better thinking in 2026 versus our strategy in '25, we've got easier comps, we've got a much stronger innovation pipeline and the execution is improving, and we certainly saw that improve as we went through the back half of the year. If I go on to some of the other regions, as expected, Europe is seeing less pricing than before. Volume is maybe slightly better than we were expecting. Western Europe better, which was good to see, but some continued weakness, particularly in Eastern Europe and specifically calling out Poland in that regard. Latin America was very encouraging with Mexico and Brazil very strong in the quarter. The Andina region and Central America regions improved, although still very challenging from a category standpoint in those areas of the world. Asia improved sequentially, which is terrific to see with India returning to growth Hawley & Hazel not out of the woods yet, but improving on an underlying basis, and we particularly saw some encouraging shares as we exited the quarter in e-commerce on Hawley & Hazel driven largely by a very successful new product entry. The Chinese New Year moves into the first quarter this year, so we should see a little bit of improvement there. But solid growth across Asia, across the rest of the division, particularly on our premiumization strategy. Hill's is a terrific quarter, while the category remained soft and dogged down with the CAT continuing to grow. We think the U.S. bounced back quite nicely. On an underlying basis, you saw obviously the strong growth on Hill's ex private label in excess of 5% and volume being positive on Hill's. So we're very pleased with the continued progress, but the category continues to remain quite sluggish. And we've seen some of the issues in up in Canada with the Buy Canadian on the business. But overall, on a broad basis, we're very pleased with the continued growth on that and particularly the share growth we're seeing on the prescription diet side. So overall, we think we were exiting where we want to. We're very pleased that we've set up our 2030 strategy in 2025 that we think addresses a lot of the shortcomings in the market right now. And I think you saw some of that resilience come through and the flexibility we had in the quarter as well as setting up our SGPP, as we announced in the third quarter, that we think will give us the flexibility and the funding to continue to execute around building our brands and capabilities for the long term. So let me turn it over to Stan for the FX question. Stanley Sutula: Thanks, Noel. So we saw in Q4 that FX was slightly favorable versus our expectations. As Noel highlighted, FX has only been favorable on an annual basis, 2 of the last 10 years, and we know it can change quickly. As we look at 2026, we see it as a low single-digit benefit to revenue in 2026, focused on primarily the first half of the year. On the bottom line, we use that as part of our flexibility in our business model, using it to invest back into the business as well as contribute to the bottom line. At current rates, Europe is the biggest marginal benefit, but most currencies have moved favorably and Latin currencies have been stronger most recently, which is also good for us. I guess I'd close with FX, our -- we have very experienced teams. They're really good at dealing with currency in a volatile environment. So they'll deal with it through RGM, through pricing and make sure that we don't try to take too much advantage of it and use it as a flexibility in the business model. So I think our teams will execute this well. Noel Wallace: Dara, you asked a question on guidance in terms of the wide range. Let me provide a little specificity in terms of what went into that thinking. So it's pretty simple. If categories get worse, we're at the low end of that guidance range, if categories stay where they are, that we're in the middle of that 1% to 4% range, more than likely if category strengthen, we hope to obviously achieve more towards the higher end of that range. But as we've outlined and as you've seen, significant uncertainty all around the world, categories have stabilized but remain at lower levels. Operator: The next question comes from Peter Grom with UBS. Peter Grom: So I wanted to follow up on Hill's. I wanted to ask about Hill's, and you kind of alluded to this now a strong quarter on the volume front despite a pretty tough category backdrop. But can you maybe just speak to the performance in the quarter relative to your expectations? Where were things stronger than expected? Were there any pockets of weakness? And then I guess, as you noted, the category remains challenging. But as you look ahead, I'd be curious what you expect from a category standpoint and just your ability to continue to deliver this level of outperformance? Noel Wallace: Yes. Thanks, Peter. Again, as you mentioned, strong quarter for the business on a backdrop of pretty tough category. Private label was a 360 basis points negative impact to volume. And despite that, if you take that out, obviously, on an underlying basis, we grew volume 2%, which is terrific. And that growth was pretty broad-based with the exception of the softness we continue to see in the category behind dry but we grew across all of our core strategic segments. So that's terrific to see. And the volume improved on a 2-year stack basis, which is also encouraging. Therapeutic continues to be a big growth driver for us. The Prescription Diet business growing very, very nicely with improved obviously, market shares, and that clearly helps the mix in the operating margins and gross profits. We're gaining share across all channels as our strategy of science-based innovation clearly continues to deliver growth for the category and our retailers. So we're pleased with that. But clearly, a little bit of softness on pet adoptions is driving some of the sluggishness we're seeing in the categories. But science is winning, and we clearly continue to see upside in terms of our opportunities to grow the category for some of the premiumization and innovation that we're bringing into the category. We've also gained a [ shelf ] space as we exited 2025, which we think will help us as we move into 2026 in a more challenged environment. We've got a real benefit in the supply chain as we ramped up a lot more innovation going into 2026. Our [indiscernible] plant that we've talked about has greater flexibility now to deliver more wet product around the world. and we continue to see across all of the key retail environments, growth of the Hill's brand. Very competitive categories we saw exiting the back half of the year, but the good news is we continue to drive incremental growth, and we continue to fund that business with increased brand advertising. Operator: The next question comes from Rob Ottenstein with Evercore. Robert Ottenstein: Great. You had a tremendous amount of success turning around and then growing the Colgate brand in China. I'm wondering if you could kind of reflect on the learnings from that, to what extent you can transfer those learnings to Hawley & Hazel. And I think you had mentioned that, that brand is starting to do a little bit better. And are there really learnings that are transferable outside of China to the rest of Asia and even in the U.S.? Noel Wallace: Yes, Rob, thank you. It's interesting you asked about the transferability. And in fact, we've seen so much interesting learnings coming out of our China team, our Colgate China team that we've sent all of our key leaders and marketing directors over to China for immersions into the commercial strategies that they've deployed over the last couple of years, which have clearly are at the center of our omni demand generation. And they've really learned how to deliver in an omni demand world with very strong brick-and-mortar, but equally important is a very strong e-commerce and online business, and that learning is clearly getting transferred around the world as we speak. But the underlying objective of that business has been to transfer a lot of our success over the years in brick-and-mortar over to a rapidly growing online business. And we've seen a significant amount of competition online. But despite that, we've been able to bring a lot of nation into the category, and we've learned how to personalize the message on a much more fluid basis, which we're getting at the right time and the right place to drive a lot of that share growth we're seeing on the Colgate side. And your specific question, that's exactly what Hawley & Hazel now is trying to replicate. Now they have a significant widespread, downscale distribution business that we want to continue to leverage, but we realize the category continues to evolve to e-commerce and our ability to exploit the learnings that we've had on Colgate onto the Hawley & Hazel business will ultimately prove the long-term success of that. As you mentioned and as I mentioned, we had a great new product entry on the super premium side online with Hawley & Hazel, a dual chamber technology that's quite unique for that market. and we're seeing great uptake on that as we exit the quarter. And that will clearly be the business model that we need to continue to execute on the Hawley & Hazel business moving forward. We've also made some pretty significant structural changes on that business. to better set us up for where the environment is going and where we anticipate the go-to-market should end up in the next couple of years. Operator: The next question comes from Bonnie Herzog with Goldman Sachs. Bonnie Herzog: I had a question on your ad spend. Consumer backdrop remains challenged and your ad spend was slightly down last year following increases in the prior couple of years. So I guess with category growth still below historical levels, curious if the decision to spend more on A&P this year is because you want to improve your market share in certain categories. If you could touch on that, that would be helpful. And I'm wondering how much flex you ultimately have to maybe pull back on A&P spend, I guess, if necessary, to deliver on your EPS guidance? Noel Wallace: Thanks, Bonnie. Clearly, a lot of the success we've had over the couple of years has been behind building our brands and our advertising acceleration has been a key driver of that. That being said, with the sluggishness that we saw in the back half in the categories, it was prudent for us to scale back a little bit of the advertising given some of the headwinds that we saw in the categories. That being said, we spent a lot of time in the last 6 to 9 months really deploying the omni demand generation capabilities that I talked about as part of our 2030 strategy, which is allowing us to get much more focused on driving efficiency through our spend. And while the advertising on the percent of sales was down a little bit in the fourth quarter, it was still up 5% on a dollar basis year-on-year, which is good in terms of the number of impressions and the impact we're getting in the market. So moving forward, a real focus on optimization and efficiency, but we have areas of the world and brands that we believe will continue to benefit immensely from improved advertising and increased levels of advertising in the market in order to drive not only our market share and penetration but to drive the categories as well. Operator: The next question comes from Peter Galbo with Bank of America. Peter Galbo: Noel, I wanted to dig into your comments a little bit on North America specifically. As I look at the holistic portfolio, right, you've got pretty much every region moving in the right direction. And North America seems to be kind of the last ship to turn around here, particularly, I think you called out Personal Care as maybe one of the weaker points within that bucket. So would just love some comments from you around kind of the planning whether it be innovation and market execution for North America specifically as we get into '26 to kind of write that ship so that, hey, maybe organic sales can come in even a little bit more accelerated than you saw in Q4. Noel Wallace: Yes. Thanks for the question, Peter. Tough quarter for North America, but certainly an improvement of where we saw things in the third quarter. And you've heard from other companies, the category growth continues to lag in North America and that's been a challenge for most. October and November specifically impacted by the government shutdown, likely Snap and other factors December was a little better, but let's not get too excited about December. We'll see where the first quarter ends up. It's clearly what we're seeing now is continued softness in the category growth numbers across the board. Nine of our categories were down in volume in the U.S. in October and 10 in November. That's category numbers. It was only 6 in December. So as I mentioned, improved a little bit. Home Care category is interesting seem to be particularly impacted. This category took a pretty significant hit in the fourth quarter as did fabric softeners showing both mid-single-digit decline -- volume decline. So again, like you've heard from others, we're all plagued by the fact that there's a lot of headwinds in the category. And I think what's really driving that right now is just a lot of uncertainty at the consumer level in terms of where things are headed in the marketplace. And as a result, they're holding back on filling their pantries, buying a lot more on promotion as perhaps they've done in the past. They're taking their penetration of the category down to a certain extent. Still, we see a lot of growth in the super premium side of the business, which is -- that's terrific and some trade down into value. But overall, as we've talked about, we have real opportunity in the North American business, particularly in Oral Care, to drive a lot more of our mix towards the super premium part of the category. There's a gap in organic versus consumption, as you may have seen from some of the standard data. This is probably possibly due to some of the coupon activity that we've seen in the category, some downward pressures on inventories, as I mentioned upfront due to the slower category growth and also some softness in the non-Nielsen category. So a very uncertain environment in North America, what are we doing about it? We're obviously really gearing up with a much stronger innovation pipeline as we move into 2026, and you'll see that unfold as we go through the balance of this quarter. And we'll obviously be much more focused on making sure our revenue growth management strategies are well in place. Clearly, there's going to be a chase of volume. We're going to have to watch the competitive activity. So far, the competitive activity has been rather constructive. We are seeing some of our competitors do more on couponing. So we'll have to watch that carefully as we move through the balance of the year. But our belief is that the right value is to drive -- in the categories is to drive more premium innovation, and that's what we'll be focused on across our categories. Skin was soft in the category. That's our premium skin health business, particularly as we consolidate that all into the North America business. Some of the decisions we've taken on China obviously slowed the skin health business, specifically as it rolls up to North America. We have strong strategies. We've done a significant restructuring on that business moving forward, and we're quite confident that the innovation and the focus that we have on some of the growing markets around the world, will yield better results for the business moving forward. Operator: The next question comes from Filippo Falorni with Citi. Filippo Falorni: I want to touch on the emerging market business that saw a pretty significant improvement in Q4, especially Latin America and Africa, Eurasia. Maybe can you first talk a bit about what you're seeing from a macro standpoint, especially in big countries like Brazil, Mexico? And then longer term, still a lot of contribution from pricing. How should we think about the balance of pricing and volumes in emerging markets as the FX turns potentially more favorable going forward, as you mentioned before? Noel Wallace: Yes. Thanks, Filippo. As you probably saw emerging markets across the board, broadly, we're quite strong. If taking aggregate, emerging grew at about 4.5% organic growth in the quarter with a good balance between price and volume, which is encouraging. You specifically called out Latin America, which had a very, very strong quarter. We were up in both Mexico and Brazil, high single digits and we had strong growth across all 3 of our categories. We also had solid growth, as I mentioned in my comments, in the Andina region in Central America, but those regions continue to be challenged by heightened competition. But overall, we continue to execute our strategy and grow the business. We're seeing a similar movement in terms of Latin America, a little bit of sluggishness, but they are growing faster than the developed markets across the world, both in Latin America as well as Asia and Africa, which we think bodes well for us, given our strategic exposure to those categories worldwide. And FX has certainly helped us a little bit in the short term. We'll see where that goes ultimately longer term, but the volatility is clearly there. The good news on our emerging markets is we're very focused on executing against very strategic growth markets in our 2030 strategy and we'll see up investment in those markets where we were able to obviously go capitalize on the stronger category growth rates we're seeing overseas, and that will be a clear focus as we move through the balance of 2026. Operator: The next question comes from Lauren Lieberman with Barclays. Lauren Lieberman: Hoping you guys could talk a little bit about India, just with the GST change and just some volatility there have been in that market overall, not just for you guys on demand, consumer and so on. Would love an update there. Noel Wallace: As you saw in India company results, which we recently announced, organic was up in the quarter and certainly importantly, sequentially up versus the third quarter and better than, quite frankly, expected. But underlying demand in India, mostly in the low-income urban, consumer continues to be rather soft. Our focus and our strategy as -- and our innovation is supporting that is really to grow the premium side of the business in the urban market. And we have some pretty aggressive new product introductions, Colgate Total, we've launched Colgate PerioGard through the profession and our Optic White purple brands are all moving through distribution as we speak, and we will continue to focus on the premiumization of the urban market while we continue to defend some of the implications from the GST changes that were made. We're mostly through those, by and large, and we think the execution will improve as we move through 2026. Overall, we are still quite bold on India longer term, a very important market for us where we've had great success. The team has a strong plan for 2026 with a lot of the changes in interventions we made in 2025 that we think will play out in '26 for a much stronger year. Operator: The next question comes from Kaumil Gajrawala with Jefferies. Kaumil Gajrawala: I guess digging into maybe even a little bit more on what's behind the slowdown in the category. You mentioned a bit of pantry destocking, but for how long can that continue? Maybe there's a little promotional activity. But I'm sure we will dug into sort of what's maybe going on more specifically on the category that historically has been very consistent, seem to be slowing down. And then on FX, just to confirm, I think, Stan, you had mentioned the benefit on the top line. Is it fully intended to be reinvested? Or was the comment more related to -- not to expect any leverage from the benefit on top line down the P&L? Noel Wallace: So on the U.S. and the categories, by and large, I think your question is more germane for the U.S., it is unusual for everyday use categories to see the sluggish mish, obviously. And clearly, I think as consumers get more certain around where their futures are headed and where the economy is headed, we're going to see those categories come back. And it's incumbent upon us to ensure that we're bringing the right innovation across multiple price points with the real value orientation associated to it. We know consumers react to great new product ideas. So we have to accelerate our innovation in order to drive a little bit more vibrant in the category. Clearly, we've got some pricing opportunities as I laid out earlier on whether it's revenue growth management or going after the premiumization segment. But right now, I think it's largely driven by uncertainty. And as a result of that, we've seen obviously some softness in Hispanic cluster markets as we've talked about and you've heard others talk about. But the anticipation is that we think the category has bottomed out but it will be a slow return over the balance of this year. And I think as we put more innovation in the market, we should see the North American market come back nicely. And as we deploy our premiumization strategy, we believe there's a lot of upside growth for us still there. Stanley Sutula: And on FX, we said in 2026, we see a low single-digit benefit to top line focused largely in the first half of the year. And on the bottom line, what I said was that this would be part of our flexibility in the business model. We use it to invest back in the business as well as a combination of contributing to bottom line, which is all of what we put into our overall guidance on top and bottom. We'll have to use this and see. The other thing we know is it's going to be volatile as we go through the year. It's been volatile through January, and we expect that, that will continue. So that's why we look at it through a flexibility model, which is how we've designed our guidance. Operator: The next comes from Andrea Teixeira with JPMorgan. Andrea Teixeira: So I was hoping if you can elaborate a little bit more on the outlook for LatAm. Clearly, you reaccelerated in the quarter, even strong volume growth. I was hoping to see if you can parse out -- I think you got impacted in Brazil for the reformulation of [indiscernible]. I was trying to see if there is any reload in the inventory at this point and what are you embedding within that category growth global for LATAM, you have some tailwinds with potential elections in Brazil and how Mexico has been recovering? Because you called out Mexico being the biggest driver for volume. So it's curious if Brazil was driven by volumes as well. Noel Wallace: Yes. Thanks, Andrea. Yes, a good quarter for Latin America coming off a slightly softer quarter in the third quarter, which is somewhat unusual given their long-term success. Clearly, some of the strategies we're executing are now starting to see prove out in terms of the growth and the volume which was terrific to see in the quarter. As we look forward, obviously, the total issue that we had in 2025, we'll lap some of that moving into 2026 and the execution of our strategy will hopefully drive some incrementality to what we've seen, given some of the softness we experienced in 2025. But overall, the category seems to be behaving okay. Yes, they're down versus historical levels. We're still able to get pricing given the strength of the brand and some of the inflationary aspects we've seen, particularly on fats and oils in the region, we've been able to take some pricing in that market and we'll continue to do that moving forward. Our focus is on a strong innovation pipeline across multiple price points, and we believe we can continue to drive volume executing against the clear price points. We are seeing some of the middle gets squeezed in Latin America as well, where the super premium continues to grow quite nicely. The value segment is growing where the middle is getting squeezed. So we need to up our innovation across all price points in order to ensure we're securing better volume growth across the board. And both Brazil and Mexico are contributing very nicely to the growth and we anticipate that will be the case as we move through the balance of 2026. Operator: The next question comes from Robert Moskow with TD Cowen. Robert Moskow: Noel, in response to the plans for driving growth in the U.S., you're really focused on the premiumization strategy. But you also said that economic uncertainty is a problem, especially among Hispanics who just tend to have less purchasing power. So can you talk a little bit more about the U.S. And how does your strategy take into account improving performance, I guess, for lower and middle tier priced products? That seems to be where your competitors are increasingly focused as well. Noel Wallace: Yes. Thanks for the question. Listen, it's a combination of many things in terms of strategically how we deploy our go-to-market. If you take just the lower end of the market, obviously, more prochly sensitive. We need to get our couponing strategy in the right place. We need to get our price pack architecture in the right place. We have very, very strong core base businesses in the U.S. and around the world. And so our ability to innovate against those and bring some new news will create some excitement in the category, executing the planogram successfully as we move through '26, making sure we're bringing growth stories to our trade in terms of the ability to drive some of the value end of the business in the middle price segments as well and the trade up necessary to do that. But it really comes down to executing a well-thought through promotional strategy, combined with a very aggressive innovation strategy. If we can get those 2 right, I realize I'm oversimplifying, but that's critically important to drive growth in the U.S. across all price points. And we clearly will match any competitive activity that happens, but we're very focused on driving the category much more through innovation and I hope that the constructiveness of the category that we've seen over 2025 will play out that way in 2026 as well. Operator: The next question comes from Nik Modi with RBC. Nik Modi: So just if I could just follow up on Rob's question. Just how do you think about portfolio construction in this kind of K-shape world we're living in? I'm not talking about kind of what's going on here and now. I mean, income bifurcation globally has been going on for 40 years, right? So I would assume that it's going to continue. So when you think about portfolio construction or just product construction, low end versus high end, how do you think about that over the next couple of years? That's just a quick follow-up on the K shape. And the real question is just some of your larger competitors have announced and probably will announce soon organizational design changes that are less category-centric and more solutions-centric. And I'm just, again, thinking about just kind of the world we're living in right now and how you think about the Project 2030 or your business plan going through them? Like how do you think about organizational structure? And do you think that may be making any changes might make sense just given the way the world is evolving? Noel Wallace: Yes. Thanks, Nik. Let me take a lot about our portfolio composition. And something we talked along about relative to our 2025 strategy was the importance of our core business. And it's interesting, you're hearing quite a few staples talk about revitalizing their core. We've been on that journey for 3 to 4 years, really elevating our core businesses, relaunching them with science-driven innovation and driving a lot more value in our big core businesses, which is the bulk of our business. And that strategy will absolutely continue as we move through 2030. We've learned that making sure that our big core businesses are not forgotten and then we get too focused on line extensions and super premium innovations, and we forget what got us to where we are today. That's a dangerous place to go. And so our core business and the strategy that we've been deploying, we think, has played out very nicely through 2025 and we have some exciting relaunches against our core business as we move into 2030. So that will continue to be very important around shaping our portfolio. But you've heard me consistently talk about where we under-indexed the most globally is on the super premium side. And that will be a very focused effort going through 2030. For us to get more of our fair share in the super premium side of the business, we now have been spending years developing great science-based innovation that we think can exploit the super premium and drives real value and premiumization opportunities. You've seen that obviously on the Hill's business. We need to replicate that across our other categories more successfully. So you'll see that executed as we move through the 2030 plan. On organizational structure, I think the strategic growth and productivity plan is doing exactly what you, in general, laid out, which is laying out our organization for where we think the world is going. And at the core of that is structuring our organization against what we call omni demand generation. So we will desilo the organization from an e-commerce business in a brick-and-mortar business and indirect trade distribution business and now have a much more holistic commercial, one commercial organization, that's deploying strategies to win the omni demand consumer. And that is a big focus for us in terms of how we're organizing ourselves, the SGPP plan is enabling us to look at the structure that we have today and find ways to optimize that, to drive faster decision-making and to organize ourselves against a very challenging and changing consumer environment around the world that requires us to be very fluid and dynamic in terms of our content and how we advertise and how we execute digitally and personalize our messaging at the same time at the right time and the right place. So it encompasses all of what you said. It's a pretty substantial change for us, but a really exciting change and a journey that we've been on for a couple of years to get to where we're ready to really embark on more substantive stages as we move through 2030. Operator: The next question comes from Michael Lavery with Piper Sandler. Michael Lavery: I just wanted to come back to North America pricing. You've gained some steam there and it was positive again. You've touched on just the need for flexibility and the consumer uncertainty. But maybe can you give a sense at a high level what your expectations are in 2026? And you touched on some of the RGM capabilities. But maybe I just want to clarify if you meant more that to manage price realization? Or if you meant that more as driving value for the consumer? I'm sure it'd be a bit of both, but should we expect a little bit more pricing momentum to continue? Or any watch-outs there? Noel Wallace: Yes. Thanks for the question. Clearly, we've always suggested that we need to have a balance between pricing and volume. And a lot of the efforts and capabilities that we've built over the last 5 years in revenue growth management, where we now have AI helping to deliver better, more prudent decisions around price pack architecture, promotional environment, how we think about our premiumization is a key vehicle for us to continue to execute against to drive pricing in the category. So we need to get some pricing in that category. And clearly, the teams are very focused on that. We'll be looking at our promotional strategies much more diligently on how we get pricing out of those. We'll be looking at our price pack architecture, how we get those. And importantly, as I laid out the innovation becomes critically important to ensure that we're getting premium innovation to drive pricing for the category, while we continue to execute core renovation to make sure that we're bringing value to that consumer as well. We're looking at the portfolio in terms of getting the price points right, as I mentioned, and making sure that we're competing against the growing price points, and we have innovation there. So in essence, it's a little bit of everything there. The U.S., I think, will continue to be a challenging environment for the next couple of quarters. But as we move through the back half, I think our expectation is, is most of our competitors continue to bring more innovation in the category. We see the U.S. market start to settle down post the elections. We think we'll see the categories come back, and we are ready to make sure that we drive penetration and brand share in that environment. Operator: The next question comes from Olivia Tong with Raymond James. Olivia Tong Cheang: I know you mentioned FX has only been a tailwind in 2 of the last 10 years. But can you remind us what happened to pricing promo in the past in emerging markets, whether price push back? Is there any risk that price pushbacks led -- could happen led by consumers or whether competition? Also uses the flex provided but at a greater magnitude to try and chip away at your shares in international markets? And then are there -- assuming that there is that flex, right, that you can spend back, are there programs that you have on tap that you plan to unleash if possible? Or is it more -- or should we think about this more as evenly spread across incremental advertising, investment and promotion? And then just lastly, you briefly touched on sort of a nationalistic view in Canada that impacted results. Are you seeing that anywhere else globally? Or how do you think about the risk of that potentially increasing? Noel Wallace: Let me take the last one. Currently, it's mostly Canadian -- Canada issue, we haven't seen it necessarily travel in other parts of the world but you never say never in this environment, anything can happen, and we'll have to watch that carefully. I'll let Stan get into some of the specifics around foreign exchange. We don't have a lot of experience. And to answer your question, quite frankly, it's only happened 2 out of 10 years. But clearly, we don't plan nor do we build our plans based on foreign exchange being a benefit for us. And so we clearly have our funding to growth programs. We clearly have our productivity and we clearly challenged our teams to get the pricing in the category to drive the value and return on the investment we put in to delivering science-driven innovation. So all of those will continue to happen. We don't necessarily -- I think someone [ pressing ] your question, take our foot off the gas on taking pricing because of foreign exchange. If we need to take pricing because our products require it and the cost of the formulations require it we will take what the market can bear. And we've always done that quite successfully as you've seen through the years. And I think a lot of the capabilities we've built on revenue growth management have helped that. So let me give Stan a sense to answer a couple of more questions around foreign exchange and how we're thinking about it moving through the P&L. Stanley Sutula: Yes. On the FX here, even if you go back and look at those 2 years where FX was favorable, we actually executed pricing in those 2 years as well. So as I said in my comments before, we have very experienced teams on the ground around the world. They know how to navigate this market. Yes, some local players will on occasion try to use that for short-term advantage, but I come back to the flexibility in the P&L. We'll work that flexibility, whether it's investments in advertising, investments in product placement, et cetera, to optimize that for whatever currency environment we're operating in. So I would expect that we'd still be able to execute pricing. It may not be in every single geography around the world, but I think history is a good indicator of our ability to execute that. Operator: The next question comes from Kevin Grundy with BNP Paribas. Kevin Grundy: Congrats on the results. Noel, I wanted to pivot back to the Fat food business, but thoughts specifically around fresh, really from a couple of angles. One, you're learning so far from the prime business, comment on how the brand is performing versus expectations, your ability to further expand that. But then two, and perhaps more broadly, just kind of taking a step back, your updated thoughts on the attractiveness of that subsegment within pet food and whether Hill's will play a role. Noel Wallace: Yes. Thanks, Kevin. Let me address Prime 100, which is the acquisition we made in [indiscernible] those that aren't familiar with it. Our results continue to come in ahead of plan. And I think we're very pleased with one, how that team is executing against the plan and quite frankly, exceeding our expectations. As you may recall, it's a science-driven, [ Bett ] endorse brand. So it really fits our narrative in terms of how we think about businesses and how we think about sustaining long-term growth in businesses, particularly through the profession. The formulas obviously bring more science to fresh, which we think is an interesting play. They're more positioned in the derm space there, which we like. But we're learning. And we have a lot to learn on that. We don't take that innovation lightly. We're making sure that we think about what -- where it may apply for us around the world. The good news is that's a profitable business. So we're not obviously chasing our tail to get gross margins up, but we're finding ways to drive more efficiency and more science through the formulations and improving their supply chain. But right now, it's basically just watch and learn and continue to learn from the team and figure out whether we can apply that to other areas of the world in the long term. But right now, we're focused on making sure we have a successful business in Australia. Operator: The last question today comes from Chris Carey with Wells Fargo. Christopher Carey: Can segue actually into the question that I wanted to ask. So the balance sheet is in very good shape. Leverage is reasonably low or very low. And I guess I just wanted to ask, what is the kind of the state of the union on how Colgate is thinking about using the balance sheet, perhaps more specifically with M&A? Does the impairment today change your views on the sorts of categories that you'd like to play in? And so I guess just taking a step back, what is the desire for M&A? And perhaps just give us a bit of flavor on whether your thought process is evolving on the sorts of assets or categories that you might be interested in? Stanley Sutula: Yes. Chris, it's Stan. So why don't I start, Noel can add in any additional commentary. So as part of our work over the last several years on kind of rebuilding our business model, one of the areas that I think has really benefited is the balance sheet and cash flow. If you look at '25, we had a strong finish to the year. We delivered record operating cash flow of $4.2 billion. Free cash flow is also up. That came both from generating cash profit, but also really good performance on net working capital. That has resulted in a really strong operational ROIC and good improvement on our cash conversion cycle. So when you take a look at our balance sheet and cash flow, I think it has really improved, which gives us flexibility. We often talk about flexibility in the income statement, but we also have flexibility in the balance sheet. We have really nice debt towers looking out over time. We've got really strong cash flow. We have low leverage here, which gives us dry powder. Now as we look at capital allocation as a result of that, our first priority is going to be investing in the business. And you've seen us do that through investing in new facilities, investing in R&D, investing in capabilities. And we think that we demonstrate really good discipline in that area. The second primary area is return to shareholders. So dividends, 63 years of dividend increases, share buyback. And then, of course, M&A. And around M&A, we always look at our options to improve our portfolio of businesses. The impairment that we announced today is part of running the business. The market conditions changed. We still believe in the long-term health of that business and where it can fit into our portfolio. As we look at that M&A, we're going to demonstrate discipline there. We're going to look for the right market opportunities. And if you look over the last few years, we saw those opportunities predominantly in Hill's. We've made those investments and Red Collar and in Prime 100. We're very happy with the Prime 100. We'll continue to look for where that complements our portfolio in total, and then we have the wherewithal to go execute it in the environment due to all the hard work from the team. Noel Wallace: Yes. Well, said, there's not a lot to add to that. And clearly, our teams on the ground and around the world are looking for opportunities to optimize their portfolio. These are discussions we have all the way at the Board level. And rest assured that if we found the right opportunity to utilize our balance sheet, we would. But we are, as you well know, cautious and we want to manage through this uncertain environment in the right way to ensure that we come out of this stronger than we went into it. And clearly, investing back behind the business, where we see continued growth opportunities will be our priority, but it's good to be in a position where your leverage is so low, your cash generation is strong, and it gives us, I guess, the keys to kind of address the market as we see it unfold and deliver portfolio optimization at the right time in the right place. So with that, let me say thank you to everyone in terms of the questions you had this morning. I want to specifically thank all the Colgate people around the world for their tireless efforts and the results that they delivered through 2025 in a tough environment. And I look forward to seeing everyone at CAGNY in a couple of weeks. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Orchid Island Capital Fourth Quarter 2025 Earnings Conference Call. At this time, all presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Melissa Alfonso. Please go ahead. Melissa Alfonso: Thank you, Debbie. Good morning, and welcome to the Fourth Quarter 2025 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, 01/30/2026. At this time, the company would like to remind the listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements. Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-Ks. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. Now I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir. Robert Cauley: Thank you, Melissa, and good morning. I hope everybody's had a chance to download our deck off of our website. As usual, that's what we will be using for the basis of the call today. And, again, as usual, I'll just walk you through the deck. I'm joined here today by Jerry Sintes, our controller, and Hunter Haas, our chief financial officer and chief investment officer. Starting on the third page, I'll just kind of give you an outline. Jerry will quickly go through our results and discuss our liquidity position. I'll then go through the market developments, which basically shape the market that we operated in and the impact that that had on both our results for the fourth quarter and then also our outlook going forward into 2026. Then Hunter will spend some time discussing the portfolio, hedge positions and so forth, developments during the quarter, positioning in the portfolio as of today. And then we'll have a few concluding remarks. We have some information in the appendices that we want to share with you. And then we will take your questions. So with that, I'll turn it over to Jerry. Jerry Sintes: Thank you, Bob. If we go to page five, I'll begin with financial highlights for the fourth quarter. During the fourth quarter, we earned $103.4 million in net income, which equates to 62¢ per share compared to 53¢ in Q3. Our book value at the end of the quarter was $7.54 compared to $7.33 at the end of Q3. Stockholder's equity at the end of Q4 was approximately $1.4 billion. We paid dividends during the quarter of 36¢, which has been the same rate for a couple of years now. Total return for the quarter, taking into account the change in book value and the dividend, was 7.8% for Q4 compared to 6.7% for Q3. During Q4, we had average MBS of $9.5 billion compared to $7.7 billion in Q3. The actual balance was $10.6 billion, so we grew a lot, approximately 27% during the quarter. Leverage for Q4 was 7.4%, which is the same as Q3. Liquidity during the quarter at the end of the quarter was 57.7% and 57.1% at the end of Q3. That's a little higher than our historic numbers, which are usually around percent. The reason for that is primarily because of lower haircuts, which are around 4% at the end of the year. Prepayment speeds for the quarter were 15.7% compared to 10.1% in Q3. On pages seven and eight are our financial statements, which you can read in the deck or in our earnings release last night. And now I'll turn it back over to Bob. Robert Cauley: Thanks, Jerry. I will start with the market developments on page 10. I always do. The top left, this treasury curve here, this curve is actually a very good place to start because it basically encapsulates what went on during the quarter, recognizing that these three lines just represent snapshots, if you will, of the cash curve as of 09/30, 12/31, and 01/23 or one week ago. In fact, rates were more or less steady throughout the quarter, and rates traded in a very tight range, realized interest rate volatility obviously was in for low, and implied vol in the swap ship market was declining throughout the quarter and really has declined for quite some time. What's behind this? Well, typically, economic data for one as it comes out tends to drive interest rate movements. Prior to the quarter, the data was basically considered to be suspect because of well-discussed issues at the various entities that collect the data. Then we had the government shutdown on 10/01. So, basically, we went from having suspect data to no data at all. And then when the government reopened, you had very much delayed data that was still considered suspect. So, basically, there was not much to drive interest rate other than geopolitical events, or political events, which did, but not meaningful. So. If you look to the right, you can see the swap curve is fairly similar but it did move more, and that's all swap spreads. And I'll discuss in a few moments why that is, but we basically had swap spreads moving up as in less negative and that's why you see movement in the curve from the red line up to the blue and the green line. If you look at the spread between the three-month treasury and the ten-year bill, really hasn't changed much over for over a year, but there's been movements elsewhere in the curve. Moving on to slide 11. This is very germane to what's going on. The spread of the current coupon mortgage to the ten-year treasury you can see, this is a very long look back period. This goes all the way back to 2010. And the thing that sticks out very obviously is how much we've tightened of late and especially since year-end. The most recent data point there is last Friday, you can see it's at about 80 basis points. You look back to the period, say, between the taper tantrum and '13, up until the outbreak of the COVID pandemic, mortgages trade in a very tight range centered at approximately 75 basis points, say. We're basically there. And, obviously, the most recent development which just becomes evident on the bottom left, when you just look at these prices. This is, again, the same chart we always use. These are selection of thirty-year fixed-rate mortgages 3%, four, five, and six, and these are normalized prices. So this basically shows you the price movement relative to the starting point the beginning of the quarter. And as you can see, especially with respect to lower coupons, they had a very good quarter. And then if you kind of try to focus in on what happened around January 8 when the administration announced that the GSEs would be buying up to $200 billion of mortgages performance was affected. In the case of lower coupons, they went materially higher. In the case of higher coupon, sixes, they gave up performance. And the reason Operator: As reflected in the rural market, for any of the higher coupons five, five and a half, and six and above. Are for very, very fast speeds. And lower coupons did very, very well. Looking to the right, you can see in the rural market, especially the four roll and the three and a half have been really much on fire very strong. And this reflects the relative value trading because these coupons are below par, not gonna be cited to prepayments. And if the markets rallied, these will be obviously the targets for purchases. So they've done extremely well. So the technical they're strong. And that being said, going forward into 2026, to the extent that plays out and those coupons are produced because rates are lower, then the supply will overwhelm the demand and that probably relative performance will delay. But that very much remains to be seen. Moving on to slide 12, I talked to Moe and Bill about swaption volatility. You can see that this trend is very, very clear and strong past year-end even today. Vol continues to decline. The peak that you see there on the top left, that's day, 2025. We all know what happened that day. But ball has done nothing but come off and continues to do so. And if you kinda look at it in a historical context, going on the bottom of the page, we go back to you know, ten plus years now, pretty much back to the levels that we were at, back during the days of the Fed rate suppression regime when the Fed was using QE to keep rates artificially low and doing so, obviously, based suppress volatility, and it was indeed suppressed very low for many years. And we're basically turning to the next slide. On slide 13, we see a sample of swap spreads. The blue line is the two-year swap. And the purple line is a ten-year. And as you can see, going back to the quarter and really since the second half of the year, these have been moving higher or less negative. Why is that? Well, the Fed announced at the October meeting that they were going to end QT. The market anticipated that. Swap spreads started to move. And then they announced in December that they're meeting reserve management program in which they are going to be buying up to $40 billion of bills. And so the logic behind that is the recognition on the part of the Fed as the economy grows, that their balance sheet should grow in proportionate fashion. As a result, they will be growing, so they're taking out bills which also helps bring the Fed treasury holdings in line with the outstanding universe of treasuries because historically, they have not owned bills. And also has implications for the funding market because bills are an investment option for money market lenders. And to the extent that the Fed is buying them, that allows more funding available for repo. Such as ourselves, repo borrowers. Our hedge position, and Hunter will discuss this in greater detail later, but as you can see, we look at our hedge positions from the perspective of DVO one. That's just our sensitivity of our hedge instruments the movements and rates. And you can see it's very heavily concentrated in swaps. And this is the reason why, what we just discussed. We had expect that this may continue for some time. Moving on to Slide 14. These are the same trucks we've had for a while. As you can see, something has changed, but not much. On the top left, the red line is in the mortgage rate. But it's still at 6.38%. And the refi index while it's higher, it's not high. It's still quite low. I think if you look on the right-hand chart, you get an idea why while mortgages have tightened substantially, and we mentioned that the current coupon mortgage spread to the ten-year treasury was 80 or 90 basis points. The ten year's about $4.25. And these spreads and available mortgage rates to borrowers are still north of six. So the spread for the borrower, not for mortgage-backed security, but for the borrower is still relatively wide. It has not tight as much as mortgage-backed securities have. As a result, mortgage rates available to borrower are still close to 200 off the ten year. And therefore, refinancing activity involves picked up some, it's still not particularly high. Chart 15, just basically the same picture I like to show. The red line just shows you the supply of money M2, and the blue line is just the economy, GDP, and nominal terms. And as the chart implies, the economy is still awash in liquidity. The takeaway from my list, I believe, is that it's hard to say that financial conditions are overly tight. And if you look at the economy, the GDP data, retail sales, you know, there's not really weakened precipitously, and this might be help explain why that might be. With that, that's the end of my discussion of the MAC backdrop. I will turn it over to Hunter to discuss the portfolio. Hunter Haas: Thanks, Bob. Turning to slide 17. Just a few highlights for the quarter. During the quarter, we purchased $3.2 billion of agency expenses agency specified pools. The breakdown of the purchases is $892 million in Fannie fives, $1.5 billion in Fannie 5 and a halfs, $600 million in Fannie sixes, and $283 million in Fannie 6 and a halfs. All these pools had some form of call protection. Primarily, lower loan balances, loans that were originated in refined challenged states like New York or Florida, and loans backed by borrowers with low credit scores high LTVs, or high DTIs or the like, some sort of credit impairment that would keep them from being able to refinance as readily as borrowers that didn't have those constraints. On a modeled yield, our acquisitions were in basically the low 5% range. And we did sell some assets that were yielding us mid fours, at the time we sold them. The model yield on I'm sorry. The repositioning enhanced our carry profile while mitigating our exposure to higher rates. And spread widening as the higher coupon mortgages, have much less spread duration sensitivity than the lower coupons that we sold. 18 is a new chart we just put in to kind of recapture what happened throughout the course of the year. Over 2025, we experienced substantial growth, doubling both our equity base and MBS portfolio. Important to note that this growth occurred at a time when MBS spreads were at wides, allowing us to build a portfolio with strong long-term return potential. The line on slide shows a time series of Morgan Stanley index that tracks zero volatility spread over the treasury curve. For a hypothetical thirty-year, MBS priced at par. And the green shaded area highlights the timing of our asset purchases during 2025 and into early 2026. Over 75% of the $7.4 billion in acquisitions that we made during the last year and a month or so occurred at a time when me and Nick's when this index was well over 100 basis points. On average, the spread level of all of our was 108 basis points. And, that's the weighted average of the Morgan Stanley index at the time we made the acquisitions, I should say. So turning to slide 19. As you can see, we've talked about this in the past, our portfolio evolution. As mortgage spreads tightened throughout the year, we increased our allocation to production and premium coupons. Primarily fives through six and a halfs. This strategic shift reflects the fact that lower coupon MB Edge which carry greater spread sensitivity, I. Duration, significantly outperformed higher coupon assets during the course of the last year. Initially, we executed this sort of strategic portfolio shift through acquisitions deploying new capital into higher coupons. And then in mid-December, we took more active portfolio, management approach by actually selling lower yielding threes, three and a halfs, and fours, reallocating that into higher carrying, lower duration, spread duration pools, the five to six and a half percent range as I previously discussed. Turning to slide 20, just to make a few quick notes about our funding costs. Our funding costs saw meaningful improvement over the quarter, driven primarily by Federal Reserve policy actions. Benefited from two rate cuts and the Fed's announcement that it would begin purchasing $40 billion in treasuries per month plus an additional roughly $15 billion tied to MBS paydowns, through its reserve management purchase program. Oregon's average repo rate declined from 4.33% at the beginning of the quarter to 3.98% by quarter end. After the December 10 FOMC meeting, SOFR initially settled in to the upper three sixties. Before spiking to three eighty seven into, year end. During that time, repo spreads to SOFR also widened kind of pushing from the mid teens into the low to mid 20 basis point range. So we've had a little bit of funding pressure going into year end. Since year end, the funding environment improved markedly SOFR settled in the $3.63 to $3.65 range. And Orchid's repo spreads have trended to the to the 14 basis point area, call it, so we're kind of on track to turn over the repo book in sort of the 3.8% range, going into next few months as we don't really expect any Fed cuts before the next governor's sworn in. Turning to slide one. I just wanna do a overview of the hedges. Our hedge notional remained relatively stable. Over the quarter. At the end of the quarter, were 69% of outstanding repo, just slightly lower than the 70% it was in at the end of the third quarter. The unhedged notional portion of the portfolio stands to benefit from a material decline in short-term rates. And tighter repo funding spreads as monetary policy continues to ease. As roles weaken and mortgage spreads tighten, we also adjust our hedges positions by, increasing our TBA shorts. Primarily in fives through six and a halfs. As mortgages tighten, we put on a little bit of basis hedge. It's not material, but, you know, just sort of legging in as as as we saw mortgages that tightened for several months in a row. We added pay fix swaps on the very front end of the curve, further improving our, downside. Rate protection? Slide 22, in a little more detail, this slide helps visualize the hedge adjustments I just discussed. The end of the third quarter, we had virtually no outright TBA hedges. The short positions you see here reflected a fifteen thirties coupon swap we had in place, which we've maintained for several months. Now as shown here, we're outright short five and a halfs and six and a halfs. And we put on a small short of fives, in early January. On the treasury hedge side, we continue to reduce our exposure there. And it's reflected in the top left table. And then as we require as we acquired new specified pools, we hedged them almost entirely with interest rate swaps. And we were focused more on the very front end of the curve. As rates come down to duration of the portfolio is shortened, and we put these hedges on, at a time when there were still several rate cuts, baked into 2026. Which is on around a little bit since. Net of the unwinds that we did during the quarter, we added $950 million to your pay fixed swaps $800 million three years, $90 million five years, and $75 million in seven years. Strategy is aimed at locking in, as I said, the market predicted rate cuts will fine-tune the hedge book to account for shorter net duration of the portfolio. On slide 23, just gonna kind of quickly go over some of the risk metrics in the portfolio. We'd like to follow these measures. You'll notice portfolio duration remains low at two point o eight. That's a direct result of our higher coupon SKU, which carries less duration of exposure than the lower coupon alternatives. The shorter duration profile is a key part of our risk management strategy. Perform better in a sell-off or spread widening event, which we think could occur. It offers us more defensive positioning than the threes, three and a halfs, and fours, which we sold in December. On the other hand, this profile, is will benefit less from further tightening, which we've actually seen in January. Which is consistent with our modestly lagging performance versus so what some of the other for some of the peer group has reported since Trump's announcement in January, how they wanted the GSEs to purchase $200 billion more MBS in their retained portfolios. Also, just wanna note that OAS shown here So for OAS for fives, to six and a half remains quite attractive, and the fifty sixty basis point range, reflecting strong call protection in our portfolio. For comparison, when we published Q2 Q2 earnings call deck, the same OAS levels were at least 20 basis points wider. This tightening reflects improved technicals and more constructive tone in agency MBS markets. But also speak to still how, well-timed our 2025 purchases were. Slide 24 I'll discuss the interest rate risk profile. You see we continue to maintain a very flat interest rate profile. You know, this portfolio has some negative convexity. This is reflected in the fact that both the plus digit and minus 50, interest rate shocks show small mark to market losses. It's a natural result of hedging and a convex agency MBS asset with more linear instruments like swaps and futures. December 31, our DVO one stood at a 122,000 long. As of now, more recently, it's increased slightly to a 178,000. The duration gap also moved modestly throughout the fourth quarter. It was negative point o seven years at nine thirty. Point one two positive point one two years at twelve thirty one, and currently sits at approximately point one seven years. Turning to slide zero twenty five. Prepayment speeds were a major focus during the fourth quarter, especially given a relative underperformance of up in coupon TPAs. However, as we've emphasized in the past, Orchid's is exclusively invested in specified pools with call protection. This and this positioning insulated us from the more dramatic impacts seen in the TBA markets. That's been that said, she did trend a little bit higher in the quarter, particularly for six sixes and higher coupons. Which reduced carry slightly and trimmed yields in those positions. Looking forward, we expect prepay speeds to moderate modestly, which would improve carry. We continue to closely monitor in light of the potential Fed actions and influence of GSU related policy headlines that could put a little bit of upward pressure on speeds. But think that most of that is probably baked in at this point. To wrap it up, 2025 was a was a great year for us. We took advantage of the dislocated market. And stay while staying very disciplined with respect to risk and liquidity. We raised capital when spreads were wide. Put it to work in production, coupons, and call it protected pools that should deliver great carry with lower interest rate sensitivity. Continue to manage our leverage tightly. With a year with the we ended the year with a very flat duration profile. And, our hedging where we see the most risk, which is continued to be sort of into a reignition of inflation type of bear steepening rate shock scenario. That's where we think that companies like ours get pinched the hardest. So with that, I'll turn it back over to Bob for his concluding remarks. Robert Cauley: Alright. Thanks, Hunter. Thank you very much. Just a couple of things I wanna go over. Just kinda spend a few moments just talking about our outlook. Hunter did a very good job of disclosing how discussing how we're positioned in our hedge outlook and so forth. But it seems even though mortgages have tightened quite a bit, based on what you see in the market and the sentiment in the market, it seems that it could continue. Especially if you look at alternative assets available to multi-sector fixed income investors. Investment grade corporate spreads are at or near the tightest levels we've seen since the late nineties. High yield spreads, tight as well. And there's at least a prospect of the GSEs, you know, becoming more active, guess debatable. How much $200 billion per year represents in terms of an increase because from what we see, their current run rate's not far from that. But in any event, to the extent they become stay there or become more active, you could see mortgages tighten further from here. And then with respect to just the rate outlook, generally speaking, and, you know, with what would be on the horizon that would thank you you think we're gonna see a meaningful change. You know, there isn't anything really there now, although, as know, those are famous last words. So to the extent we kinda stick around here, mortgages continue to grind tighter, the portfolio should do well. You know, we everybody in our space is benefited from the benign rate environment in the fourth quarter and really two twenty five generally. We could see a continuation of that. And until we get the next black swan event or shock, it should remain a decent environment. Certainly, compared to a year ago, mortgages aren't as attractive. But that being said, I don't think it's unrealistic to think we could see some further tightening. One thing I do wanna point out though, which is I think very important, I wanna turn your attention to slide seven. And we discussed this. Jerry went over this brief. But what I want to point out, if you look on Slide seven in our balance sheet, you can see that the company basically doubled over the course of the year size-wise. So whether it's shareholders' equity, or our total assets, they basically increased by a little over 100%. If you look at the income statement for the year, on slide eight, you see that our expenses were up much less than 100%. Now you could argue that that's somewhat misleading because the growth occurred over the year. And what's more relevant is kinda your run rate at the end of the year, which would be consistent with the current size. That's a valid point. So if you look at the income statement on the prior page, page seven for the fourth quarter, you compare the '25 to the '24, that should capture the lion's share of that growth. And indeed, our expenses did go up but certainly far far less than double. And so now I wanna turn your attention to a slide in the appendix which is if I can get there. Slide 33. In slide 33, this is what we kind of our expense ratio. So, this is all of our G and A expenses. Inclusive of our management fee in relation to our shareholders' equity. And as you can see, you know, back pre-COVID, we were running in the high twos close to 3%. Then we had the COVID breakout, and then, of course, this prolonged Fed tightening cycle, which forced some deleveraging in our expense ratio got up over five. But now we're running our current run rate as of the 2025 is 1.7%. I'm not gonna name names, but we all know that there are two other agency REITs out there that are substantially larger than us and their expense ratios are not meaningfully below that. So when you get our 10-K next month, you will see, for instance, that our management fee did go up in fact, over the course of the year. The rest of our G and A expenses only increased very marginally. So we have been controlling expenses and allowing the company to grow obviously, and this is the byproduct. This is the benefit of that is bringing the expense ratio down so that just makes the company more profitable on a go forward basis, all else equal. And then the final thing I wanna bring your attention is, given that it's year-end, on slide 42, this information has been lifted right off of our website. And on the bottom of the page, or on the top of page, you see the dividends for 2024. And 2025. As you can see, for every month, the dividend was 12¢. The next column, tax total ordinary dividends. That's basically taxable income derived dividends and then the nondividend distribution in the second to last column, that is just the return of capital. So that basically tells you that in the case of nine 2024, that 95.2% of our dividends were derived from taxable income, and in the case of 2025, 95% were derived from taxable income. The dividend was 12¢ per month for the year. Basically, we were distributing all of our taxable income. Had the dividend been, say, for instance, 11¢ instead of 12 we would have slightly under distributed our taxable income and either had to make a special dividend at the end of the year or opted to potentially pay tax on the undistributed earnings. So wanna, you know, bring this to your attention, show you that the dividend policy does reflect current taxable income. Both for the 2025 and 2024. And that our dividend in relation to the taxable income is very slightly over distributed, less than five last year and 5% this year. So with that, I will turn the call over to questions, operator. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press. And our first question comes from Mikhail Goberman of Citizens. Your line is open. Mikhail Goberman: Is doing well. Hi. How are you, Joe? Well. Thank you. A little cold here, but it's alright. Couple of questions. I guess we could start and forgive me if I missed this. I dialed in maybe three or four minutes after ten. Any update on current book value? I will not give that. We have accrued and reflected the dividend in our current book. So our book is up just ever so slightly reflective of the dividend. After the dividend accrual, we'd be up I think, 1.6%. Robert Cauley: Okay. So we're basically up just slightly. Inclusive of the accrual of the dividend. Mikhail Goberman: Inclusive of the dividend. Okay. I was wondering if you could get your thoughts on prepays. Going forward, obviously, the CPR went up quarter over quarter given the portfolio construction. But also, prepays with respect to your prepaid protected portfolio. And what kind of what kind of premiums you guys are paying on those on those prepaid protected pools. Especially. Robert Cauley: I'll say a few words, and then I'll turn it over to Hunter. I would say that this the securities in the portfolio, targeted par to slight premiums. As you can see on the charts, five and five and a half six, and lesser extent, six and a but it's mostly five and a halfs and sixes. And those are modest prepays. We're not paying up for the highest forms of protection. So the premiums have been tried, you know, mindful to keep the premiums kind of from too being too high. I'll turn it over to Hunter, and I wanna say a few words about the prepay outlook beyond the next few months. Hunter Haas: Yeah. So over the last couple of years, we've really tried to focus on I'd say the bulk of our acquisitions have been in just sort of, like, the first premium coupon or the first discount coupon. And we were you know, at times, able to you know, even add sevens with, you know, using that strategy. So from a historic cost perspective, we've always been very tight, not getting too far out in the premium land. And we focused really more on kind of the mid-tier call protection. We think that the the old low load balance you know, eighty five one ten k's, you know, those are really expensive stories. New York's have gotten pretty pretty expensive. We really focused a lot more on, sort of leaning into this so-called k-shaped recovery by focusing on more credit-sensitive borrowers. You think that they have a hard time refinancing, doing buying things like high LTV, first-time homebuyer, type of pools. You know, we've focused on geos like state of Florida is great. There's it is an there's a tax that's punitive for refinancing, but also home price depreciation is really sort of, helping out with the portfolio there. So we've seen very good performance, especially after the Trump announcement about the the GSEs. The sort of the knee jerk reaction was that the higher coupon MBS TBAs didn't perform very well at all. But you know, once things kind of stabilize, we've really seen good appreciation in all of those specified pool stories underlying those coupons. And as I alluded to in my prepared remarks, we've taken advantage of the fact that roles have weakened in order to shed a little bit of basis exposure because those roles are so cheap now, it actually makes a little bit of sense to be short the TBA and long the specified pool. So kinda how we're thinking about things. Robert Cauley: Yep. Just to add some one number to that, if you go on slide 34, and you can do this. I'll just try the numbers. You don't have to do it right now. But the weighted average current price at year-end was basically one of two and a half. So that would be all in price. Yep. By comparison, the price at the September was, you know, a little over $1.00 1. Call it $1.00 1 and two ticks. So we shifted the portfolio up in couponing the weighted average coupon at the end of the third quarter was $5.50. It's now $5.64. So slightly higher. But, of course, the market has moved. So the price is at one of basically, $1.00 2 and eighteen. Is the is the price. Yeah, it's a premium, but we've tried to avoid real high premiums. Just not that kind of market. I mean, we going back to post-COVID, you know, we were buying New York's threes with, like, dollar prices of $1.10 and change. Right? So you know, we just don't have the kind of premium in the marketplace now that owing to the kind of the relatively high nature of of of interest rates. So it will compress earnings to the extent that we see an acceleration in speeds. And, but we could think the combination of the call protection we have in the portfolio and the fact that we just don't have huge premiums on is not gonna remove the needle too much. Hunter Haas: Yeah. I would just add that look at the roll market, you know, five and a half, sixes, and six and a halfs, the speeds implied in those rolls for the next few months are extremely high, 55, 60 CPR. That's fine for the next few months. But if you kinda step back and look at the balance of the year, I think a number of market participants, ourselves included, don't really think we're gonna see a lot more Fed cuts. I think the economy is quite strong. The inflation's good sell ups. Now let's think about that. So the current Fed funds rate is three four and the two-year yields, like, three fifty four. So if you don't think the Fed's gonna cut rates much over the next two years, you really think the two-year should be yielding loaded Fed funds? Second question you might ask is, given that, do you think that for instance, twos tens is going to invert? I don't think so. So the current ten years at four and a quarter, if the two-year moves higher, unless that curve flattens, the ten years should also move higher. So now you've gone to till your tenure's going from four and a quarter to whatever, four fifty. The current mortgage rate available to borrowers is six or low sixes. Right? And so if rates are gonna go higher over the next year, I don't that rate's not going down unless mortgage rates to borrowers tighten substantially. I don't know how likely that is. So if you have to available borrowing rate at six, six and a half pushing up to 7%, know, a 6% mortgage-backed security implies basically a 7% gross WACC. Know, that's not that in the money. Especially if mortgage rates push to six fifty and higher. So are they gonna sustain fifty and sixty CPR? Don't know. But I think there's kind of an inconsistency in market pricing between the mortgage dollar roll market and the, say, for instance, market pricing of Fed cuts. There's they don't seem to jive. Anyway, that's my 2¢. Mikhail Goberman: Thank you. That's very helpful. If I can squeeze in one more, I appreciate the good work done on getting expenses down. How much more do you, you know, available capacity you guys have for driving that down further going forward? Do you think? Robert Cauley: Well, it's the I don't I get you the numbers. Maybe we'll try to work on it for next quarter, but almost all of the increase in our expenses was management fee. Unfortunately, we don't have detailed line item expenses here, but I know, from memory, like, reading through you know, drafts, nonmanagement fee expenses were only up in the few $100,000. So it's gotten to the point that pretty much it's the management fee, and our and our marginal management fee is a 100 basis points. Yeah. Right? And, you know, our management fee is $2.50 to first layer is up to $250 million, and there's a lay that's a 150 basis points. Then from $2.50 to $500 is a 100 and a quarter, and everything over $500 million is a So now every dollar of capital we raise, the manage marginal management fee is a 100 basis points. And the nonmanagement fee expenses are going up very modestly and low percentage points. So know, just as we if we double from here, don't I don't have I have to run the numbers, but it's that trend would continue. I don't know how much lower it goes, but it should be asymptotic towards 1%. Right? Mikhail Goberman: Gotcha. If the capital were $500 billion, our math deal that we have. Pay ourselves something. But, I mean, management fee would be basically a 100 basis points plus whatever your, you know, audit fee and your legal fee and whatever. So that's that's kind of where it could go. Robert Cauley: That makes sense. Thank you, guys. Appreciate it. Operator: Thank you. I'm showing no further questions at this time. I'd like to turn it back to Robert Cauley for closing remarks. Robert Cauley: Thank you, operator. I hope we didn't scare everybody off the call with the length of that answer. But to the extent anybody has call or questions that come up either because you didn't have time to answer them, ask them now, or you didn't listen to the call and you wanna catch us later. Please feel free to do so. The number in the office is (772) 231-1400. Otherwise, we look forward to talking to you again in next quarter. Thank you. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good day, and welcome to the Ameris Bancorp Fourth Quarter Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nicole Stokes, Chief Financial Officer. Please go ahead. Nicole Stokes: Thank you, Megan, and thank you to all who have joined our call today. During the call, we will be referencing the press release and the financial highlights that are available on the Investor Relations section of our website at amerisbank.com. I'm joined today by Palmer Proctor, our CEO; and Doug Strange, our Chief Credit Officer. Palmer will begin, and then I will discuss the details of our financial results before we open up for Q&A. But before we begin, I'll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We list some of the factors that might cause results to differ in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as required by law. Also during the call, we will discuss certain non-GAAP financial measures in reference to the company's performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation. And with that, I'll turn it over to Palmer. H. Proctor: Thank you, Nicole. Good morning, everyone. I appreciate you taking the time to join our call this morning. I'm proud of our fourth quarter performance and our record-setting results for the full year of 2025. We continue to operate at a high level of consistent core profitability while remaining focused on capital returns and accretive growth to enhance our shareholder value. We're positioned extremely well going into 2026, both from a growth and profitability level. Not only are we in the best southeastern markets that are growing faster than the national average, but we also have as bankers who are focused on servicing our customers and growing our franchise organically. The call is going to talk about the details of our financials in just a minute, but I did want to give you just a few top-level comments about our core profitability. . We reported record earnings for 2025 at over $412 million for the year with our diluted EPS hitting $6 per share for the first time in our history. That's a 15% increase in EPS year-over-year, and we did it organically. Our PPNR ROA was consistently above 2% this year. Our margin expanded every quarter, and our efficiency ratio improved throughout the year. We remain focused on generating revenue growth and positive operating leverage. We reported a 6% growth in revenue for the year, while our expenses declined by 1%. Combined, this positive operating leverage pushed our efficiency ratio to 50% for the year. This core profitability led to tangible book value growth of over 14% for this year. We remain diligent with our capital planning and are focused on generating shareholder returns. We paid off all of our sub debt during 2025, and as a result, have a very simple common stock capital structure going forward. During the fourth quarter, we announced an increased share purchase repurchase program, and we were active in the fourth quarter buying back almost 1% of our stock at an average price of $72. For the year, we repurchased $77 million or 2% of the company at an average price under $67. Capital ratios remained strong, ending the year with common equity Tier 1 at 13.2% and tangible common equity ratio growing to 11.4%. Capital at this level positions us well for future growth expectations. On the growth front, we were very pleased with our asset generation during the fourth quarter, growing earning assets by almost 6%. We experienced unusually high payoffs in the CRE portfolio this quarter, which is indicative of a healthy economy, but does affect our net loan growth. Notwithstanding, we grew loans almost 5% in the fourth quarter, even with the elevated CRE payoffs of over $500 million. Under normal CRE payoffs, our loan growth would have approached double digits. Our pipelines remain strong, and we saw the highest level of loan production since 2022, coming in at $2.4 billion for the quarter, which was a 16% increase above third quarter levels. Asset quality for the year remained strong with net charge-offs and NPAs improving from the prior year. Our allowance remains healthy at 1.62% of loans. CRE and construction concentrations were consistent at 262% and 43%, respectively. On the funding side, we remain focused on core deposits and relationship banking. Our noninterest-bearing deposits represent a strong 29% of total deposits, even with typical seasonality of the fourth quarter. We're well positioned for future growth, both from the strength of our balance sheet and our fundamental operating model. We have strong momentum into 2026 on our organic growth strategies, which will be complemented by the disruption with our growing Southeastern markets. We have strong core profitability with diversified and durable revenue streams. These will continue to grow tangible book value, franchise value and shareholder value in 2026 and beyond. I'll stop there and turn it over to Nicole to discuss our financial results in more detail. Nicole Stokes: Thank you, Palmer. We reported net income of $108.4 million or $1.59 per diluted share in the fourth quarter. Our return on assets was 157%. Our PPNR ROA was 2.38%, and our return on tangible common equity was 14.5% for the quarter. For the full year 2025, we reported record net income of $412.2 million or $6 per diluted share. That brings our full year ROA to $1.54 compared to $1.38 last year. Our year-to-date PPNR ROA was $2.25 compared to $2.05 in 2024, and our full year ROTCE improved to [ 14.51 ] from [ 14.41 ] last year. Tangible book value increased by $1.28 during the fourth quarter to end at [indiscernible]. For the full year, we grew tangible book value by $5.59 per share or 14.5%. As Palmer mentioned, our capital levels remain strong. We were active in our buyback, buying back $40.8 million of common stock or about 564,000 shares at an average price of $72.36 during the quarter. Our remaining share repurchase authorization was $159.2 million at the end of the year. On the revenue side, our net interest income increased $7.3 million in the quarter or 12.2% annualized. The core bank grew by about $8.7 million, while mortgage and premium finance both saw some seasonal declines in spread revenue. For the first time this year, we saw improvements on both components of spread revenue, not only did our interest income grow by $3 million, but our interest expense also improved by $4.3 million. Our net interest margin expanded 5 basis points to a robust 3.85% for the fourth quarter, and that expansion came from a 10 basis point positive impact on the funding side and more than offsetting the 5 basis point decline on the asset side. For the full year, net interest income increased $87.7 million or 10.3% from 2024 and our margin expanded from 3.56% last year to 3.79% for the full year. Although we have positioned ourselves to be mostly neutral from an asset liability sensitivity perspective, we anticipate we could see some slight margin compression over the next few quarters due to the pressure on deposit costs. As we see loan growth increasing, we believe there will be additional deposit pressure as we fund that growth in '26. During the fourth quarter, we reported $23 million of provision expense with $6.3 million of that relating to reserves for unfunded commitments. That's a real positive signal for future loan growth. And our reserve remained strong at 1.62% of total loans, which was the same as last quarter. Annualized net charge-offs this quarter normalized to 26 basis points. For the full year, net charge-offs improved from 19 basis points down to 18 basis points. We anticipate net charge-offs in the 20 to 25 basis point range in 2026. Overall, asset quality trends remain good with nonperforming assets, net charge-offs and both classified and criticized remaining low for the quarter. Moving on to noninterest income. Adjusted noninterest income decreased $10.5 million this quarter, mostly from seasonal declines in mortgage. And for the full year 2025, adjusted noninterest income actually increased $1.4 million year-over-year. Total noninterest expense decreased $11.5 million a quarter, mostly driven by lower compensation costs and also some lower marketing and advertising costs. For the full year 2025, our total noninterest expense declined $3.8 million or almost 1% year-over-year. The majority of this decline is from the mortgage division as variable cost declined with the decreased production due to the current interest rate environment. For the fourth quarter, our efficiency ratio improved to 46.6%, and for the full year '25, our efficiency ratio was 50%, an improvement from the 53.2% reported last year. I do anticipate the efficiency ratio to return above 50% in the first quarter especially when you consider our seasonally heavy first quarter payroll taxes and 401(k) contributions. Looking at our balance sheet. We ended the quarter with $27.5 billion of total assets compared to $27.1 billion last quarter and $26.3 billion at the end of Q4. For the year, that reflects a 4.8% balance sheet growth, and we had a 5.5% earning asset growth. Profitability, looking at NII and EPS, they grew over 10% during that same time, really reinforcing our focus on profitable growth and positive operating leverage. Deposits increased $148 million with strong seasonal growth in our public funds, partially offset by some usual seasonal outflows of mortgage-related escrow deposits that will sit back over the year. Because of the seasonality of deposits, our NIB to total deposit ratio is usually lowest at year-end. And this year, it remains at a strong 28.7%. And then broker deposits were stable in the quarter, representing only 5% of total deposits at the end of the year. We continue to anticipate loan and deposit growth going forward in that mid-single-digit range and expect that longer-term deposit growth will be the governor of loan growth. And with that, I'm going to wrap it up and turn the call back over to Megan for any questions from the group. Megan, go ahead, please. Operator: [Operator Instructions]. The first question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: Great quarter on loan production, obviously. And Palmer, you noted if payoffs have been more normal, you think loan growth could have been in the double-digit range. Can you talk about what sort of visibility you have into future payoffs and maybe how those are -- maybe how they were surprisingly high this quarter and kind of what you're seeing as loans maybe mature and renew or are those maturing and renewing at the same pace or kind of what caused some of the elevated paydowns and how we can think about the progression of that into the new year? H. Proctor: Yes, 2 things there, Stephen. We are encouraged by the pipeline we continue to see building. And then more importantly, too, when you look at the payoffs, fourth quarter is typically for us, one of the busier quarters in terms of payoffs, and I think that's reflected in a lot of banks that have reported. So we see that moderating as we move into the first quarter and second quarter of the year. So that's encouraging. I will tell you, activity is -- continues to improve. And we like what we're seeing throughout the entire bank, not just in certain pipelines, but all the pipelines across the board. . Now mortgage, we'll see what happens there within 10-year. So that could be a real tailwind for us depending on what transpires. But all in all, we feel pretty bullish. Stephen Scouten: Okay. And with rates kind of -- well, we'll see -- if they continue to trend down, I guess, would you think that would accelerate paydowns even further? Or would you be more excited about for a pickup in production and activity kind of to ofset potential phenomenon? H. Proctor: Yes. I think for us, where we are in our business development stage, I don't think the -- I think the increase or decrease in rates would actually accelerate our opportunity. And in terms of payoffs, I don't see that causing any migration out refinance and elsewhere because most people either depending on the conditions of the loan or the term loans are locked in. And like a lot of banks, we've got prepayment penalties, refinance penalties and so forth. So I don't see that being a big contributor to outward movement. . Stephen Scouten: Got it. Makes sense. That's great. And then I guess, in terms of thoughts around new hiring activity, I mean this has come up on every earnings call. I think I've been on the Southeast this quarter and people are calling it somewhat of a generational opportunity. I think your approach to it maybe has sounded different in terms of just improving your talent throughout the spectrum of your bank, but maybe not adding just pure head count quite as aggressively. Can you talk a little further about that if I'm hearing you right when I summarize that and kind of how you're thinking about it in the new year with the opportunity set? H. Proctor: Yes. I think ours is very different. And like we've said for several years, when I look at the budget and our expectations, we do not have the compulsion and the need to have to go out and hire massive amounts of people to accomplish what we want to do here. We've been very fortunate with the level of talent that we have. We've been very fortunate with the retention, and we stay focused on that. But in perspective, I mean, we hired 21 lenders this year. But net-net, we were up 3. So what we do a constant view of is looking at the talent how it's progressing or not. And so what we've been able to do is upgrade talent on a consistent basis, thereby eliminating a lot of the churn and the constant need to have to add additional bankers. We've got a -- we've got great bankers and they can help us deliver on what we need to deliver on. And that being said, we obviously will remain selective and if there's opportunities out there. But in terms of having a need to drive up noninterest expense and add on a bunch of bankers each quarter, we're in a very fortunate position, which we don't have to do that. Operator: The next question comes from Catherine Mealor with KBW. Catherine Mealor: I wanted to ask about the margin. Nicole, appreciate your caution on just thinking that the margin will come down next year just as deposit costs accelerate, but we're coming from such a higher level than maybe your -- historically, I think you've kind of talked about a margin like a 360 to 365 range, but we're a lot higher than that today. So just kind of curious if you could put a range on your margin expectations for the year. . Nicole Stokes: Yes, absolutely. And I know this is yet another quarter of saying that it's going to go down and then it went up. But real quickly on that 5 basis points of expansion, 2 basis points of that expansion really came from our sub debt payoff. So really, we only had kind of 3 basis points from both the loan and deposit side. So when I look out over the next few quarters, so much of our guidance is dependent on those deposit costs and the deposit pressure that we see as we see growth accelerating. So I feel like 5 to 10 basis points over the next few quarters. And then longer term, it's really going to depend kind of on growth and interest rate environment and where we are after that kind of 1-year horizon. Catherine Mealor: Okay. And that's 5 to 10 basis points from today's level or the full year '25? Nicole Stokes: That would be kind of where we are today. . Catherine Mealor: Got it. Okay. Great. And then maybe on expenses, I know there was a big reduction in expenses this quarter just from personnel. Can you help us get a range as for where a good starting point is for 1Q just given the increase in payroll taxes and things like that? Nicole Stokes: Absolutely. So when you look at the fourth quarter and the first quarter, there's always some big wins. So when you look at the fourth quarter, the difference in payroll taxes and 401(k) match. We have -- a lot of that is kind of front loaded in the first quarter. And so that's about a $5 million swing that we expect to come back in, in the first quarter. And then we also had some less incentive accrual in the fourth quarter based on truing up all those accruals based on end of year numbers. So that's about another $2.5 million. So I know that the fourth quarter, we were at $143 million. If you add back in that $7.5 million, you kind of get us back in that $150 million, $151 million range. And then I think kind of a guide is probably for the year, I think consensus is really good, but I feel like maybe the first order might be a little bit heavy. So maybe the year-to-date consensus number is good, but it might be a little bit heavy in the first quarter. Some of it may come in later in the year as we see growth accelerate throughout the year. Some of those expenses, commissions, et cetera, could come in as well. So probably $154 million, somewhere between $154 million, $155 million is a good starting point for first quarter. Operator: The next question comes from Russell Gunther from Stephens. Russell Elliott Gunther: I wanted to start with just a margin follow-up, if I could. Nicole, could you give us a sense of where kind of new production is coming online relative to the incremental cost of deposits and sort of along that question set, just the cadence of the fourth quarter margin over the course quarter of that quarter, kind of where we exited? Nicole Stokes: Sure. So the fourth quarter kind of when you look at loan production, it came in right at about $635 million for the quarter. And that's with all divisions. That's with the bank, premium finance, warehouse, all of that kind of blended yield was about $635 million. And that's compared to the deposit production, all deposits came in right around 2%. So we're looking at about a [ 435 ] spread on production, which is accretive to growth -- I'm sorry, which growth is accretive to margin. . However, if you look at that loan spread compared to the interest-bearing deposits only, it was a little bit dilutive. And so that really says where the -- where our focus continues to be on the growth in NIB and really those core deposit growth to be able to help with the interest-bearing spread that we see the pressure on. And then I think the second part of your question was kind of the quarter -- we were very consistent the $385 million for the quarter. I mean it was up or down each month by 1 or 2 basis points, but there were no significant swings over the quarter. Russell Elliott Gunther: Okay. Very helpful, Nicole. And then maybe just switching gears to capital. Very robust position here. You got reserve levels that are incredibly healthy. Just level set us in terms of your kind of CET1 bogey in order to get a sense of what you guys might consider excess? And then given how quickly you accrete capital, how do you guys plan to put a dent in that over the course of the year? H. Proctor: Our capital priorities have not changed. I mean obviously, first and foremost, it's growing into organic and levering it up. Then as you saw, we were active in the buybacks, we will remain opportunistic there. Then the dividend and then obviously, last would be any sort of external activity. But given the markets we're in now and the opportunities we see, that would be far, far down the list. In terms of target for us, I think we would be looking more on the TCE level, probably around 10%, 10.5%. And then on the CET1 target of around 12%, if you wanted to look at longer term. . Russell Elliott Gunther: That's really helpful, Palmer. And guys, just last one for me. Curious on the charge-off guide for the year. Fourth quarter results were kind of at the high end of that. Could you just discuss quickly the drivers of the net charge-off activity this quarter and perhaps [indiscernible] contribution specifically? Douglas Strange: Well, Russell, this is Doug. First of all, Equipment Finance really was -- they were in line and consistent for the whole year. We did have some consumer medical notes that we charged off, but our charge-offs, they tend to ebb and flow from quarter-to-quarter and fourth quarter was preceded by 2 very low charge-off quarters, that being at 14 basis points. But as Nicole framed it, when you look at it for the year at 18 basis points, we were below the prior year and below consensus. And just to reiterate, for this year, we're still in that 20 to 25 basis point guidance. Operator: The next question comes from John McDonald with Truist Securities. John McDonald: Nicole, I was wondering if you could give us a little more color on the puts and takes on deposit trends in the fourth quarter. There's a little bit of a decline in NIB and wondering if you've seen some of that come back? And then just as you think about your mid-single digit outlook for this year, what kind of mix evolution are you planning for in the overall deposit mix? Nicole Stokes: Sure. So we did have, and there is some cyclicality in our balance sheet every year, and this year was no different. We have kind of the fourth quarter, we have public funds that roll in. And then at the same time, we kind of have the mortgage escrow deposits that roll out. So fourth quarter is always kind of our lowest point for that NIB mix. So we were pleased that it ended up close to 29%. What we also saw this year was a little bit different to your point about how any of it come back? And the answer is yes. So from a noninterest-bearing perspective, our number of accounts has continued to increase. And so what we saw in that decline of NIB were 2 things, some of that mortgage escrow deposits. And then also, we had some customers, and I'm not talking about 2 lumpy customers. It's spread across 20 to 30 customers that moved money out at the end of the year. And some of that, we believe, was used for some tax planning purposes with some of One Beautiful Bill items. And then also some of it was used because -- do their balance sheet management at the end of the year. And we've seen a lot of that come back in already. So while it looks a little bit like an anomaly, I think it's -- our underlying focus continues to be on noninterest-bearing. And based on the number of accounts that we're opening and that net growth in number of accounts, we still feel positive about NIB growth. So that kind of leads right into the second part of your question is where do we see that growth. We are so focused on growing core deposits and being the relationship banker. And that's where we see some of the excitement of the market potential market disruption or the potential from the market disruption where we continue to grow those core deposits with the relationship. So we would focus on the operating accounts as well as their money market accounts. And then backfill any of that was broker, but we're pleased to be able to keep brokered at 5% year-over-year. John McDonald: Great. And just to follow up on the idea that deposit growth is a governor of loan growth. Are they -- if you're looking at mid-single-digit growth on both, is it a related forecast? Or are they impendent -- because as Palmer mentioned, it feels like the loan growth paydowns normalized would be better than mid-single digits. Just kind of wondering if those are connected as a forecast. Nicole Stokes: So we do actually forecast -- I mean we budget and we forecast for core deposit growth. But when you look at our balance sheet, there's several components of our loan portfolio that don't necessarily have a deposit feature with it. So really one of the -- if you kind of look at where we get core loan growth for the bank, core deposit growth and then some of the other lines of business. So if we ended up funding some of those other lines of business with either brokered or wholesale, as long as we are continuing to focus on that margin. So that's where you may see from our kind of forecast perspective. But from a core bank, core growth, we are definitely focused on funding that with core deposits. John McDonald: Great. And one last follow-up. On the provision build this quarter, some of it was for unfunded commitments. Is that relationship of growth to provision build something that had anything unique about it this quarter? Or is that how we should think about it going forward? Nicole Stokes: So I think a lot of that unfunded commitment and this is actually the second quarter in a row that we've seen that. And when you look back over our -- we kind of put a governor on our -- some of our CRE and some of -- all of our constructions whether that was homebuilder as well as CRE. So that bucket of unfunded kind of hit a wall. And now we're building that bucket back up. So as we're building that bucket, in a normal environment that, that stays consistent, you don't have that refill. So kind of we're starting from a much lower point of filling it, and we've got it about full. Now if we had a really big quarter of production that unfunded, you could see it go up, but we also see that as opportunistic. That means we've produced loans. We've closed loans. They just haven't funded. So every time we see a growth in unfunded, we feel like that's a good driver for future loan growth because we know we have those in the pipeline. Operator: The next question comes from Gary Tenner with D.A. Davidson. . Gary Tenner: I've got a couple of questions on the mortgage segment. You had the $2 million net revenue decline from the MSR sale and the valuation change. But given the flattish production and gain on sale margins. Can you talk about kind of what draw the remainder of that $10 million quarter-over-quarter decline in fee income in the division? Nicole Stokes: Absolutely. So while mortgage production and gain on sales were fairly stable. The fourth quarter had a heavier mix of wholesale production, and that's a little less profitable than the retail origination. And you always have a little bit of cyclicality in the fourth quarter because your pipelines are down. So that gain on -- I'm sorry, your market value of your pipeline is as well. So -- but when you look at the year-to-date, if you take out that MSR gain last year, you kind of level the playing field for that noise. And you look, mortgage revenue was down about $13 million or about 8% from '24 to '25. And that our expenses were down $6 million or about 4%. So it's right in line with our expectations of running kind of that additional road or pullback in the mortgage group at that 50% efficiency ratio. So while there were some anomalies in the fourth quarter, it evens out for the year. Gary Tenner: Okay. Great. And then the second mortgage question, I guess, is can you give us -- because I didn't see -- and I apologize if I missed it, but the unpaid principal balance of the servicing portfolio at year-end? Nicole Stokes: Yes, at the end of the year, our unpaid principal balance was about $8.7 billion, which is about 4% of Tier 1 capital. So well below the 25% regulatory threshold. . Gary Tenner: Great. And then last question for me, just a follow-up on the capital side. Proctor, you talked about your remaining opportunistic there. I'm just curious if you're willing to talk about any kind of sensitivities around price levels. I mean the stock is up 15% from where you repurchased in the fourth quarter. Obviously, the capital accretion outlook remains very strong. So just wondering how you balance kind of the relative price versus your appetite there? H. Proctor: Yes. No, it is a balancing act. But the way we look at it right or wrong is if you see a lot of M&A out there in the market. And if there was a mini Ameris Bancorp sale out there, what would we be willing to pay for it is another way to look at it and who better to invest in than yourself. So we'll still be selective there in terms of buyback opportunities. . Operator: The next question comes from David Feaster with Raymond James. David Feaster: I wanted to circle back to the production side. I mean, [Audio Gap] was real the strongest in the past 3 years. I wonder if you can give us a sense of how that is increase [Audio Gap] productivity from your bankers versus the shift in demand. And just curious if the [Audio Gap] markets that you're maybe more shift [Audio Gap] more opportunities? . H. Proctor: David, this is Palmer. I'll try and answer your question. You're kind of coming in and out. There's a bad connection. But I would answer it this way. I would say it's all of the above. We've got a lot of focused individuals that are here and generating great production regardless of additional market disruption from M&A. And then you compound that with recent activities that I think will continue to deliver additional opportunities for us. And then also given how we're positioned in just high-growth markets, that bodes well for us as we look out. And if the macro environment continues to improve, what you'll see is our -- we're well positioned to grow at a faster pace. And we're not going to stretch on our assumptions because to put another way, we prefer to earn the upside rather than promise it. David Feaster: Yes Okay. And maybe just staying on the loan side, I mean, anecdotally, we hear a lot about increasing competition. It [Audio Gap] primarily on the [indiscernible]. But I'm just curious, what's the competitive landscape lending like from your standpoint? Has it primarily just been on the prior [Audio Gap] or are you starting to see more pressure on standards and structures as well? H. Proctor: No, it's mainly been on pricing. I mean structure, fortunately for us and for the industry, which is a good sign, has held up relatively well. You'd have some folks get a little more aggressive than others. But good for us. We've grown up in a very competitive environment when you're in these high-growth markets. So the competition is nothing new to us to have to adapt and adjust to, and we will get our fair share of the opportunities. David Feaster: Okay. And then premium finance. You talked about -- this is a segment I know you all have been pretty excited about. You talked about some of the seasonality in the prepared remarks. Just kind of curious what are you seeing about within that segment and growth expectations and any other opportunities there? H. Proctor: No. Thank you for the question. Premium Finance has been a good, steady, stable performer for us. I don't think you're going to see -- in terms of balance sheet composition, it's not going to consume a lot more of the balance sheet, but what it will do is continue to provide meaningful earnings to the company on a go-forward basis. And the pipelines there remain full. There are additional opportunities, I think, that we will see in the market, but we're -- we like that space and are committed to that space, and it's obviously delivered for us. . Operator: Our next question comes from Christopher Marinac with Janney Montgomery Scott. Christopher Marinac: Palmer and Nicole, I wanted to look at just the growth over the last couple of years in terms of the accounts of DDAs and noninterest and the NOW accounts. It seems that you're up about 4% or 5% in both those categories and in money markets, too. And I'm curious, as you look at new -- net new accounts being higher, is there a way that you are incenting to get balances to grow faster? And does it start with getting the account in the first place on a net basis? Nicole Stokes: Yes, Chris, sorry. We had a little technical difficulty here. So we do focus on -- I mean, you're exactly right. The first part is getting a customer in the door and getting the account opened. And then the second aspect is how do you grow that relationship and you start with one account and then how do you get more. And I think that's where we look forward to some of the disruption in our markets because maybe right now, we're we have one account, but not the whole account. And so as they maybe have some disruption in their banking relationship with the other bank, we might be able to pick up some of those other deposits as well as grow the current relationship. So we see it as 2 to -- kind of 2-pronged. One, you have to grow the number of accounts and you have to grow the number of relationships and then you also have to grow those relationships within it -- within it -- within the relationship. So yes, it's absolutely both of those. H. Proctor: And Chris, just to add a further comment, our incentive plans are geared around that, too, and motivate that type of behavior. And one of the things I think that a lot of folks in the industry, the exception of a few, overlook is a lot of the value of the consumer accounts. And while they may not add as much in the way of total deposits and funding, what they do add are meaningful, sticky, stable relationships. So we have not lost focus on the consumer, and we're able to leverage our branches and the retail land extremely well, and we'll continue to do that. And then a lot of the additive to with us is the investments we made in treasury management over the last several years. A lot of people talk about lenders that they've hired, but we like to focus on the deposit side and on the treasury side, equally, if not more. And so I think that's been a big driver for us as we look forward into opportunities for good commercial deposit growth. Christopher Marinac: Is the treasury success going to show up in just the NOW accounts or will it show up in money market to some extent, too? H. Proctor: Both. You're right, both. I mean you got your operating payroll accounts. And then obviously, any excess funds will be swept into a money market type of account or higher interest-bearing account. . Christopher Marinac: And you've had success dropping the cost of funds we see every quarter here. And I'm just curious, do you have any opportunity to kind of tweak deposit pricing to get more dollars in and still keep your margin where you are trying to manage? H. Proctor: It's becoming more and more competitive. Obviously, when you look out there at the rates that are being offered by banks and nonbanks, and you compound that with the fact that we've got a lot of new entrants coming in with splashy rates. But most of those are going to be at your -- those are going to be more your, I call it, hot money where people are just chasing the yield. What we try and stay focused on is garnering opportunities to bring in more core relationships and less on that. But that doesn't mean at some point, we don't have to participate and have to be competitive. But our focus remains on the relationship side. And then I'd rather pay an existing relationship customer, a higher rate on their CD than just lower people then with high rate funding. Operator: This concludes our question-and-answer session. I would now like to turn the conference back over to Palmer Proctor, CEO, for any closing remarks. H. Proctor: Great. Thank you, Megan. Finally, I'd like to also thank all of our Ameris teammates for their contributions to a record year 2025. I'd also like to thank everybody again for listening to our fourth quarter and full year 2025 earnings call. We're proud of another solid quarter of performance, and we're really looking forward to 2026. And please note that we remain focused on core profitability, organic growth and enhancing value through our core deposit base and tangible book value growth. We appreciate your continued interest in Ameris Bank. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Anders Edholm: Good morning, and welcome to this presentation of SCA's 2025 Year-End Report. With me here today, I have President and CEO, Ulf Larsson; and CFO, Andreas Ewertz, to go through the results and take your questions. Over to you, Ulf. Ulf Larsson: Thank you, Anders, and also from my side, good morning, and a very warm welcome to the presentation of SCA's results for the full year and the fourth quarter 2025. During 2025, SCA showed resilience. Despite increasing wood raw material costs, a challenging market environment and a currency headwind, we reached SEK 6.6 billion on an EBITDA level and by that an EBITDA margin of 32% for the year. Our high degree of self-sufficiency in strategic areas continued to be an important factor to mitigate higher costs. Harvesting from our own forest increased and reached 5.4 million cubic meters during '25, partly offsetting the higher cost of wood raw materials. SCA continued to gradually increase production in the sites where strategic investments have been made, and this has resulted in higher delivery volumes in comparison to last year, driven by the new paper machine in Obbola, the grading mill in Bollsta Sawmill, the biorefinery in Gothenburg and so on. These investments will contribute to increased productivity and cash flow generation during the upcoming years. The book value of SCA forest assets decreased slightly compared to last year and amounted to SEK 104 billion at the end of 2025. As you already know, SCA bases the valuation of the forest on complete transactions in the region where SCA owns land. Turning over to some financial KPIs related to the full year '25. As already said, our EBITDA reached SEK 6.6 billion for '25, which corresponds to a 32% EBITDA margin. Our industrial return on capital employed came out to 4% for the full year '25 and the leverage was at 1.7 after having finalized our big strategic investments. The proposed dividend for the AGM to decide on is SEK 3 per share, and this is in line with our aspiration to provide a long-term stable and over time increasing dividend to our shareholders. We handed out SEK 3 per share also last year. And finally, earnings per share was SEK 4.56. This slide will give you an overview of KPIs for the fourth quarter of '25, and our EBITDA reached SEK 1.2 billion during the fourth quarter, which gave us an EBITDA margin of 25%, driven by a negative currency effect and lower selling prices. Our net debt to equity remains on a solid level of 11%. I will now give some comments for each segment, starting with Forest. Stable harvesting levels from our own forest have contributed to balanced supply of wood raw materials to our industries during the period. We have seen a continuous long-term trend of increasing prices for both pulpwood and sawlogs and as can be seen in the graph in the bottom left. Regarding pulpwood, we have now passed the peak and prices have continued to come down during the quarter. Demand for sawlogs continued to be high, especially for spruce logs. When one compares Q4 '25 with Q4 '24, sales were up 10%, while EBITDA was up 3%, mainly due to higher prices for Wood raw materials. The storm in mid-Sweden during the end of the year had a limited impact on SCA land. We estimate that approximately 100,000 cubic meters has fallen. When we widen the scope to Sweden, we estimate that around 10 million cubic meters has fallen and the majority in Gävleborg and East Dalarna County. I guess we have also another 3 million to 4 million cubic meters in Finland. SCA will prioritize harvesting windfall volumes to support private forest owners, and this might have a minor impact on the total level of harvesting from our own forest during 2026. Harvesting activities in windfall areas will primarily be carried out from Q2 and forward. Windfall volumes will contribute to an increased availability of wood raw materials in this region. Over to Wood. And in general, we still have a slow underlying market for solid wood products. We continue to note signs of improvement in the repair and remodeling segment as well as a decreased production level in Germany, generating better supply and demand balance, especially for spruce. Stock levels remain on the high side among producers for pine, but are on normal levels for spruce. Stock levels at customers continue to be on the high -- on the -- sorry, on the low side. SCA had strong deliveries in the fourth quarter, resulting in a seasonally low stock level of sawn goods for us at the end of 2025. The price for solid wood products decreased by 5% in the fourth quarter of '25 in comparison with the third quarter same year. And this development is in line with what I said when I presented the report for the third quarter. As expected, the cost for sawlogs has increased from the third to the fourth quarter, and we will also -- we also expect them to continue to increase going into the first quarter '26. Sales were up 5% lower in comparison with the same quarter last year. EBITDA margin decreased from 17% to 6% due to higher raw material costs and the negative currency effect. Today's stock level of solid wood products in Sweden and Finland is described at the top left on this slide and is shown in relation to the average for the last 5 years. As mentioned earlier, we note that the inventory level is on the high side, especially for pine, while the SCA level is seasonally low. As can be seen in the diagram to the bottom left, the Swedish and Finnish sawmill production has been on a normal level during '25. In the diagram to the top right, we can note that the price decreased during the fourth quarter. The decrease in pine has been higher in comparison with spruce. Coming into the next quarter, I estimate the price on average will be unchanged in comparison with the fourth quarter with a stronger tendency for spruce related to a better balance. Going forward, we will closely monitor the market development in Continental Europe that is impacted by lower production, not the least in Germany. So coming over to Pulp. When comparing Q4 '25 with Q4 '24, sales were down 14%, mainly due to lower prices and a negative currency effect. The negative EBITDA development was also driven by lower prices and a negative currency effect. The cost for the planned maintenance stop in Q4 '25 was SEK 198 million compared to SEK 250 million in Q4 '24. Global demand for pulp was at a healthy level during the first quarter of '25. During the second quarter, the market changed with reduced demand and prices came under pressure much due to uncertainty related to U.S. tariffs. During the third and fourth quarter, prices on NBSK pulp was stable at low levels. On the demand side, we saw an increased activity in China. The weakening of the U.S. dollar in relation to the Swedish krona, which started already in Q1 continued to have a negative impact on the price in SEK also in Q4. Tariffs on NBSK pulp from the European Union to the U.S. were removed during the third quarter. This allows us to maintain a competitive offering to the U.S. Market rebates are expected to increase by low single digits in the U.S. and mid-single digits in Europe. PIX prices are expected to start to increase to compensate for the rebate. Looking at CTMP, prices were mostly unchanged in Europe and Asia at low levels during the fourth quarter. Inventories of softwood pulp were on the highest level during the fourth quarter. Hardwood inventories on the contrary were on average. CTMP inventories came down during the quarter to a more normal level. Moving over to Containerboard. Sales were up 8% in Q4 in comparison with the same period last year, driven by higher delivery volumes somewhat mitigated by lower prices and the negative currency effect. EBITDA was down by 6%, driven by lower prices and a negative currency effect. We have seen box demand moving sideways in Q4, but still with a positive development on a year-to-date basis of around 1.5%. The retail business remains a positive driver. On the other side, we continue to see a weak European manufacturing industry, which, for the moment, has a negative impact on the demand. European demand of Containerboard has developed like the box demand and has moved sideways in the last quarter compared to Q4 '24, but with slight growth for the full year. During Q4, we saw some closures of capacity in testliner, although not yet enough to balance the capacity started up in previous quarters. As can be seen in the graph, Kraftliner inventories remain above average level in Q4. Prices for brown kraftliner in Central Europe decreased during Q4 with EUR 20 per tonne, while white kraftliner has remained stable. We can see another negative price adjustment of EUR 20 per tonne in January. On the other hand, we now hear announcements of around EUR 100 per tonne price increase for testliner. And if that succeeds, I guess, we will have a price push also in kraftliner at the later stage. So finally, I will say some words about Renewable Energy. And in Renewable Energy, we have had a strong quarter compared to the same period last year, mainly due to higher production and stronger margins in our -- with St1 jointly owned by refinery in Gothenburg. In addition, we have had higher production and stronger deliveries in solid biofuels. Electricity prices continued to be low during the fourth quarter, but slightly higher than same period last year. Low electricity prices in the market impact on our wind business negatively, but is positive for SCA as a net buyer of electricity. SCA land lease business increased to 10.6 terawatt hours according to plan. This is equal to 20% of installed capacity of wind power in Sweden. The Fasikan wind farm was taken over by SCA by the end of 2025 and is now ramping up production. And with the Fasikan adding to our current power production within the group, we increased our self-sufficiency rate to approximately 100%. The market for solid biofuels in Northern Sweden continues to be weak but stable, and this fact increases our European export share and by that, a somewhat reduced margin. For liquid biofuels, we have seen continuous higher margins compared to previous quarters. And the main reasons for our European countries implementing RED III and better control mechanism within EU regarding imported products and feedstocks. And we expect market volatility in renewable fuels to remain high as Europe ramps up the blending mandates both in HVO and SAF. And by that, Andreas I hand over to you. Andreas Ewertz: Thank you, Ulf, and good morning, everybody. I'll start off with the forest valuation and the 3-year average price, which we used in the forest valuation to get enough transactions decreased by 4% to SEK 372 per cubic meter. The 1-year average increased slightly and the market activity during the year was on the normal level. The valuation of SCA's forest assets decreased to SEK 104 billion in 2025. The decrease in the 3-year average price was partly offset by continued increase in standing volume to SEK 277 million cubic meters. Biological asset increased by just below SEK 1.8 billion, driven by increasing long-term prices for raw materials and higher standing volume due to the net growth, while the value of the land decreased due to lower prices for forest land. Prices for wood materials continue to increase. The slide shows the index price development for sawlogs and pulpwood paid by SCAs industries delivered to site. Prices are at a record high level with a continued tight market for sawlogs, especially on spruce, while the balance of pulpwood has improved. If we move on to the income statement and focus on the full year to the right. Net sales were stable at around SEK 20 billion. Higher delivery volumes and higher prices were offset by negative currency effect. EBITDA increased 8% to just below of SEK 6.6 billion, driven by negative currency effects and higher raw material costs, which were partly offset by higher delivery volumes and somewhat higher prices. The EBITDA margin was 32%. EBIT decreased to SEK 4.4 billion and financial items totaled minus SEK 433 million. With an effective tax rate of just below 20%, bringing net profit to SEK 3.2 billion or SEK 4.56 per share. If we look at the fourth quarter to left, EBITDA totaled SEK 1.2 billion and was affected by a planned maintenance stop in Ostrand by SEK 198 million. Net profit for the quarter totaled SEK 485 million or SEK 0.69 per share. Looking at the dividend. The Board has proposed a dividend of SEK 3 per share, which is unchanged from the previous year. On the next slide, we have the financial development by segment for the full year. Starting with the Forest segment to the left. Net sales increased to just below SEK 10 billion and EBITDA increased to SEK 3.8 billion, driven by higher prices for pulpwood and sawlog and increased harvesting from SCA's own forest. In Wood, net sales increased to SEK 6.1 billion driven by higher delivery volumes and higher prices, which was offset by negative currency effect. EBITDA increased to SEK 856 million, corresponding to margin of 14% and was negatively impacted by higher cost for sawlogs. In Pulp, net sales decreased to SEK 7.1 billion due to lower prices and negative currency effects. EBITDA decreased to SEK 752 million corresponding to a margin of 11%. The decrease was mainly related to lower prices, negative currency effects and higher cost for pulpwood. In Containerboard, net sales increased to SEK 7 billion, driven by higher volumes from Obbola and higher prices. EBITDA increased to SEK 1.1 billion, corresponding to a margin of 16%. In Renewable Energy, EBITDA was stable and totaled SEK 442 million, corresponding to a margin of 22%. The market for liquid biofuels improved during the later part of the year, while electricity prices continue to be low. Moving on to the quarter. And on the next slide, we have the sales bridge between Q4 last year and Q4 this year. Prices decreased 6% with lower prices in Pulp and Containerboard. Volumes increased by 7% due to higher volumes in mainly Containerboard but also Pulp. And lastly, currency had a negative impact of 6%, bringing net sales to SEK 4.9 billion. Moving on to EBITDA bridge. Starting to the left, price mix, a negative impact of SEK 370 million, and higher volumes had a positive impact of SEK 77 million. High cost for raw materials had a negative impact of SEK 37 million, which was mitigated by high degrees of self-sufficiency in wood raw materials. We had a positive impact from energy of SEK 41 million and a negative impact from currency of SEK 269 million. Others was impacted by lower costs from planned maintenance stops. In total, EBITDA decreased to SEK 1.2 billion, corresponding to a margin of 25%. Looking at the cash flow. We had an operating cash flow of SEK 3.1 billion for the year and SEK 529 million in the quarter. And as you know, other operating cash flow relates mostly to working capital currency hedges and should be seen together with changes in working capital. Moving on to the balance sheet. The value of the forest assets decreased to SEK 104 billion, working capital decreased compared to the previous quarter but increased year-on-year to SEK 5.3 billion. In the quarter, we have increased our harvesting rights of especially spruce, sawlogs for 2026 from private forest owners, which increased both inventories and payables, but no impact on the quarter's cash flow. Capital employed decreased to SEK 112 billion and net debt totaled SEK 10.9 billion, and we have now almost finalized our large ongoing investment projects. Equity totaled SEK 102 billion and net debt-to-equity was 11%. Thank you. With that, I'll hand back to you, Ulf. Ulf Larsson: Yes. I mean, I'll try to summarize 2025. I think we have delivered a solid result given the current market situation. When we compare 2025 with 2024, I mean, we are negatively impacted by almost SEK 1 billion related to currency and also to raw material costs. On the positive side, now I can see that our strategic investments, they have started to deliver, and it's -- it will be interesting to see when we have a turning point in the market, what kind of leverage we will get from those investments. So by that, I think that we open up for questions. Operator: [Operator Instructions] We will now take our first question from Ioannis Masvoulas of Morgan Stanley. Ioannis Masvoulas: Just two questions on storm Johannes where you've given us some very useful color. But just to get your perspective on how things develop from here, assuming we do have the additional wood supply coming into the market, shall we expect to see an acceleration in the decline in pulpwood prices? And what would it mean for solar prices that have remained stubbornly high? And then second and related to the storm. Your costs, harvest costs were likely a bit higher in Q4 going into Q2 where you expect to focus on harvesting windfall volumes. How should we expect your harvesting costs to develop in Q2 and Q3 this year? And would that have a meaningful impact on your P&L? Ulf Larsson: Okay. If we start with the cost, I mean, as I said, not more than 100,000 cubic meters has fallen on SCA land. And of course, when you take care of that part, that will increase the cost, but that's a minor part of the harvesting we do on our own land. But for private forest owners, okay, we will have increase in costs. And typically, I mean, the forest owner has to pay for the increase in cost level. So that will be no major impact on SCA in that perspective. When it comes to prices, I mean, as you say, for pulpwood prices, they have already start to decline, and that will step-by-step come into the accounts of companies as we have. I mean, we have a lagging effect, of course. But that will continue and maybe it will also -- yes, I mean it will not be -- pulpwood cost will not be -- that will be positively helped by the storm, that's for sure. When it comes to sawlogs, I guess the main part of what has fallen is pine. And maybe we start to see decreasing prices for pine and that will also, I think, after a while, come also for spruce. But during the first quarter, at least for SCA, I mean we have to take care of what we bought already in the fourth and third quarter. And that means, increasing sawlog costs in the first quarter. But then I guess, we start to see some decreases also for sawlogs. But as it is just now, I guess it's an oversupply. It will be at least in the second quarter an oversupply of pulpwood while it will be a little bit more stabilized situation for sawlogs. Ioannis Masvoulas: Okay. And sorry, just -- sorry, go on. Ulf Larsson: No, that's my view, more or less. Ioannis Masvoulas: Very useful. And so, just one follow-up on pulpwood. What sort of cost development into your industries shall we expect for Q1 versus Q4? Andreas Ewertz: Yes. On pulpwood, it's a low single-digit decline, around 2%. Ulf Larsson: But on the other hand, for sawlogs, I guess, we will have almost an 10%... Andreas Ewertz: Yes, 7%, 8%. Ulf Larsson: 7%, 8% price increase. And then step-by-step, we will see reducing prices. Operator: And we'll now take our next question from Charlie Muir-Sands of BNP Paribas. Charlie Muir-Sands: Just firstly, on currency, I know you gave the -- in the statement, you gave the average hedging rates. It looks like those are still meaningfully ahead of latest spot market rates. So as things stand, should we continue to expect, sort of, a sequential currency headwind over the next couple of quarters, I guess, particularly on the pulp segment given the movement of the dollar? And then secondly, I'm sorry if I missed it, but have you given or can you share your thoughts on CapEx for 2026? And any early thoughts on where that might go to in 2027 as you complete wrapping up any final expansionary projects? Andreas Ewertz: Yes. So, I'll start with the currency. You're absolutely right. We have -- I mean, for next year, on average, we hedge about 50% of our net currency exposure. So once those hedges goes out, of course, if the dollar stay at the same level, that will be a headwind. And if you look at our dollar exposure, if you include the indirect FX, meaning that we might sell in SEK or euro in pulp, but the price also depends on the fixed prices in dollar. If we include that indirect effect, our dollar exposure is around USD 700 million per year. And then on the CapEx side, our early estimate is around -- on current CapEx is around SEK 1.5 billion for next year and strategic CapEx, we have some spillover from this year to next year, suspecting that to be around SEK 400 million, maybe SEK 500 million. But after that, I mean, we have finished basically all of our strategic CapEx that we've currently decided on. Charlie Muir-Sands: And then just briefly on pulpwood, as you've acknowledged, it's coming down. I just wondered, are you seeing at all any of your customers start to pressure you to pass those costs on in terms of lowering your prices in any of the industrial output grades? Andreas Ewertz: I mean, prices are already very, very, I mean, low at the moment for our finished products. I think this lower cost will, of course, help our margins. Operator: And we will now take our next question from Robin Santavirta of DNB Carnegie. Robin Santavirta: First question I have is related to harvesting volumes. You have nicely increased those in line with your guidance a few years ago and land at 5. 4% now in 2025. What is the best guess for 2026 and 2027? Is it roughly harvesting volumes in line with what you achieved in 2025? Or is it higher or lower? What are the key, sort of, reasons for that? Ulf Larsson: So, if we start with that one. I mean, we will -- I guess, we might see a minor decrease from our own forest as we now have to support private forest owners in our region, and we have some also agreements in place already, which is long-term good for us. I mean, we will place some of our resources in South from Sundsvall in Gävleborg and even further south to help it. I mean, 10 million cubic meter in a rather limited area, that's quite a lot and that will, of course, need some extra resources to take care of it. And we also have -- we have to fight against the time because now we had more or less 1 meter snow, which -- I mean, it's not too easy to go in there and start to do the harvesting operations. So, I guess, we will have a peak in the second quarter and as fast as possible to avoid getting the wood destroyed, blue stain and things like that. So that might have a minor impact on the harvesting volume from our own forest -- on our own forest. Robin Santavirta: So for the full year, roughly the same or slightly lower, perhaps? Ulf Larsson: Yes. I mean, it is around this level. Robin Santavirta: All right. In terms of the European softwood pulp sales, can you shed some light on the discounts you have agreed for 2026, helping out with modeling here. And also in terms of the lease prices, where are they now at the end of January? And what's the outlook for the next month or 2 months? Just so we understand how the net price of the outlook is? Ulf Larsson: Sorry, I didn't get it. Was it pulp or was it solidwood products? Robin Santavirta: Yes, on pulp. I guess the discounts, the annual discounts for the year gone up a bit. Ulf Larsson: Yes. You're right. I mean fixed prices, they were on 1,500, and now they have started to increase. And I guess we will end up in 1,550, maybe at the end of January, and we start to -- by that start to compensate for increasing rebates. But we will, as you can calculate, we will not do it in one quarter. I guess, we will see another price increase in February. And I guess also, we will see a third price increase in March. And at that time, I guess, we have at least compensated for increasing rebates. But that's the case. So, if you compare sequentially, if you compare Q1 with Q4, I guess we will have a lower price. We will have a lower price in Q1 in comparison with Q4. And in addition, you also have a stronger SEK against dollar, which have an impact also. That's harder to predict, but that's the case as it is just now. Andreas Ewertz: And then Ulf guided previously on that the rebates in the U.S. is -- increases low single digits, while in Europe, it's mid-single digits. And that's the general market rebates. Operator: And we'll now take our next question from Johannes of SB1 Markets. Johannes Grunselius: Yes. It's Johannes. So I have two questions. The first one is on Containerboard. You did pretty well on volumes there or shipments, at least compared to my expectations. Could you share some color on that, sort of, ramp-up of volumes? And were you able to sell the new incremental volumes at market terms? Or were you -- did you have to, sort of, give hefty discounts there? If you could give some color there, please. Ulf Larsson: Yes. I mean, we are happy with the ramp-up in Obbola. And as I said also before, we are close to 600,000 tonnes in 2025, which is according to plan. So, we are -- we will continue that work also going in now to 2026. And I mean, it's more a question about mix. I mean, as it is just now with the current market situation in Europe, it's not possible to deliver the extra volume, so to say, in Europe, so that we have to find places overseas. And by that, of course, we have as it is just now substantially lower margin. But again, our main focus just now is the ramp-up. And then I guess, we are looking forward to the point when the market turns because then we will have a good leverage also from those volumes. But as it is just now, we are impacted price-wise due to the mix, geographical mix. Johannes Grunselius: Okay. That's clear. My second question is more on capital allocation. And of course, this is more of a question for the Board, but I try to ask it to you, Ulf, anyway. But the sort of SCA's way of distributing cash to shareholders has always been traditional dividends. But in the light that strategic CapEx is now coming to an end and in light of the share price valuation, are you increase -- do you have, sort of, more intense discussions about share buybacks going forward? If you can elaborate on that question, please? Ulf Larsson: I mean, as you say, that's a question for our owners and the Board. And I think it was a sign of stability to keep the dividend at the level we had last year. And I mean, that's a sign of -- we believe -- I believe that we are now at the bottom of this business cycle. It's volatile, and now we are at the bottom. And also, I mean, we know that we are well prepared when the market turns. We have done big investments now, and we have ramped up them in a rather good way. And we are looking forward now to see increasing prices and then leverage from those investments. And as Andreas said, I mean, we have no big investments in plan now coming years. So I mean then, then let's see what kind of discussion we will have at that time. But for now, I mean, we are happy to deliver the same dividend as we did last year. Operator: And we'll now take our next question from Oskar Lindstrom of Danske Bank. Oskar Lindström: Three questions from me. The first one is actually carrying on from Johannes' question a little bit here about capital allocation, but I'm not going to ask you about the share buybacks. I mean, given kind of weak markets, structural challenges and that the Energy segment, at least my book presumably is attractive as it did a few years back. Where do you see your potential to sort of structurally grow earnings in the coming years? I mean, where could you invest to drive your growth? That's my first question. Do you want me to ask the other ones as well? Ulf Larsson: No, if -- we can take the first one first, I'm happy. I mean, again, as we said, I mean, just now, we are in a challenging market environment. As you know, we have done a lot of big investments. We will grow our volumes. We have been growing our volumes also in both '24 and '25. And I mean, just now, we are 100% focused on delivering on those investments. I mean, of course, we will come back when this is fully ramped up and when we have started to see a slightly better market and by that also a strong cash flow, then I think it's the time to come back to the development. But just now, we are so focused on, do what we have started, to finalize what we have started. Oskar Lindström: Yes, right. My second question is maybe for Andreas. Is there any impact from loss of emission rights on earnings in Q1 or for full year 2026? And if so, how much? And where have they been reported so far? Andreas Ewertz: Look, we will have an impact if you look at '25 compared to '26 as now the new emission rules, ETS, is in place. That means that, if you look at our four big mills, Obbola and Ortviken will still be part of the ETS system, while Ostrand and Munksund, they are too good in their emissions. And therefore, they will strangely be removed from the system. On Ostrand, we don't have a surplus. That doesn't matter. But on Munksund mill, we will lose our emission surplus, which is about 100,000 tonnes of emission rights each year. And then if you look historically back, publication paper, Ortviken was the biggest receiver of emission rights. But that, we divested in -- or closed down in 2020. So that had the biggest impact, but now Munksund will be removed for next year. Oskar Lindström: And if I may just ask a follow-up on the Munksund. Have you been selling those, the full sort of all the emission rights that you've been given each year? Have you sold them each year? Or have you built up a backlog? Or how should we calculate that? Andreas Ewertz: We've usually -- some we sell internally to our logistics department, especially with 2025 when you have to have -- also buy emission rights for -- in the transportation sector, and the rest we have sold. So we will sell, we will lose 100,000 tonnes going forward. Oskar Lindström: So we should assume, sort of, loss of 25,000 tonnes per quarter times whatever the average price was for emission rights? Andreas Ewertz: Yes. That's correct. Oskar Lindström: All right. Just a final question, if I may, on, I guess, the Wood segment. You mentioned this sort of dramatic or lower harvesting levels in the Central U.S. I presume it's as a consequence of the bark beetle infestations there. So two questions there. How dramatic is this decline in harvesting levels in Central Europe? And is there any sense that this is impacting or will impact the sort of the long-term timber and sawn timber supply for that region? Is it's the competitor that's disappearing? Ulf Larsson: Yes. I guess, I mean, we see also as it is just now, the spruce market is substantially stronger than the pine market, and that's due to the balance, I would say. And the production level in Germany has been also lower for a while now. And I guess, one part of it is that it is trickier to get access to sawlogs and, of course, when you have a tighter balance, you have to pay more. And then as it is a marginal business, I mean, then they have in some areas taking curtailment. So the long-term effect, I mean, I don't -- typically, I guess, it will be tougher to get access to raw material in that area, especially in the Eastern part, where they were heavily hit by the spruce beetle and that is also -- I mean, long term, the estimation we've done is that we will have a strong balance for -- as a producer, we will have a strong balance for solid wood products going forward. But then, of course, it's also a volatile business. It will be impacted by the current business cycle. But we believe that solid wood products will be rather strong going forward as the material is needed, not the least. If we shall have a chance to mitigate the climate change and so on, I mean, we have to use non-fossil products, and that will be -- that will be good, I think, for that business going forward. Operator: And we will now take our next question from Andrew Jones of UBS. Andrew Jones: A couple of questions. First of all, on Containerboard. Obviously, we've seen some price hikes announced by some of recycled players. I'm curious what you make of the potential for price increases in the current market given the demand situation and oversupply? I mean, is there more potential in kraftliner, maybe given the market is a bit more balanced there? And my second question is on forest valuations. I mean, given, obviously, wood prices potentially coming down and obviously, rates going up as well. I mean, what are you seeing, hearing in your regions in Sweden in general on the sort of trends for valuations? Are you concerned about sort of more negative valuations as we go into 2026? Ulf Larsson: I'll take the Containerboard market first. I mean, as I said, I mean, we have seen now some announcements. I don't know if testliner producers, if they have come through with price increases, but they have asked for EUR 100 per tonne, and they certainly need it as I think that many testliner producers, they are bleeding just now. Short term, we have seen gas prices coming up 35%. OCC prices still on the same level, but typically, they -- I guess they will also start to ask for more if testliner producers will come through with their attempts to reach higher prices. And when that happens, then, of course, that will give price push also for kraftliner in a later stage. And I mean that is now needed in the market. But I guess we have a chicken race out there. There's a lot of capacity is coming on stream for testliner. And so, I don't know when it will happen, but it will happen, and we are at the bottom just now. That's my estimation. Andreas Ewertz: Yes. And if you look at the forest valuation, I don't want to speculate going forward. But if you look at 2025, activity was a normal basis and the 1-year average increased slightly during the year. And for next year, we see, in general, that the Swedish economy is improving. Wood raw material prices are coming down a bit. But usually, I mean, when you buy a forest asset, you have 100-year view on the forest prices or the wood raw material prices. So it's not -- I mean, it's the general long-term view that's the most important. But we'll have to see. But this year was slightly up on the 1 year average, but the 3-year average declined. Andrew Jones: Yes. Okay. That makes sense. And actually, just a follow-up on the wood prices. I mean, you're talking about relatively modest declines, obviously, prices being pretty flat so far for pulpwood. Given the decreases we've seen in Finland. I mean is there any -- I mean, I would assume that Sweden would have followed to a greater extent already. Is there anything stopping prices sort of gapping down lower given the potential for arbitrage across the border? I mean, what's the -- what's are the thoughts there? Ulf Larsson: Sorry, what was it wood raw materials? Was that pulpwood? Andrew Jones: Yes. Ulf Larsson: Pulpwood, yes, but I mean, we have seen pulpwood prices fallen also in our region. And as Andreas said, I mean, we will see some of it also in Q1, I guess, for pulpwood. Andreas Ewertz: But it's this lag effect because, I mean, you buy on stumpage what -- I mean, what we harvest in Q1, we bought in Q2 and Q3 and Q4, you had this delay effect because you buy stumpage to write the harvest from the private forest owner. Ulf Larsson: And also, you cannot just follow-up public announcements as you also, on top of that, have different premiums and things like that, which is individual for each buyer and for each market and so on. So, I mean, what you see announced will not be the -- exactly the same effect that you will have in the account, I guess. But you always have this lagging effect. But we are -- we have the same journey. And of course, now boosted by the windfalls we've seen in our region that will come -- that will also have definitely an impact on pulpwood prices. Andrew Jones: And actually, just final one, just on context. I mean, what is the total size of the market in Sweden in terms of pulpwood consumption per year? I mean, how significant is that in the broader market? Andreas Ewertz: I'm not sure. We have around 10% of the forest assets in Sweden, and we harvest around 5 million cubic meters from our own forest each year, just to have some kind of ballpark. Ulf Larsson: But was it the total harvesting volume in Sweden, was that the question? Andrew Jones: Yes, exactly. Ulf Larsson: Yes. It's -- okay, sorry, it's around 85 million cubic meters per year. Andrew Jones: Okay. So it's roughly 10% additional supply? Ulf Larsson: Exactly 10%, 15% -- 10% between -- I guess, it will be 15%. And then also in addition, you have 3 million to 4 million cubic meters on the Finnish side. Operator: [Operator Instructions] And we'll now move on to our next question from Cole Hathorn of Jefferies. Cole Hathorn: I'd just like to follow up on sawn wood business. I just missed your commentary on what your expectation is of price declines quarter-on-quarter into Q1? And just on your sawlogs, I know you said they were -- they're going to be up around 7%. But just to clarify, that is Northern Sweden, I imagine the rest of Sweden sawlog prices are lower, just a clarification there. Ulf Larsson: Yes. I mean, starting with the price development for Finnish products. As I said, from Q3 to Q4, we had -- the average price was down 5%. From Q4 over to Q1 2026, I guess we will have a flat price development. But what we didn't expect really was the -- we have had another impact from -- negative currency effect impact, of course. But I guess it will be close to zero. On the other hand, for us, as I said, we will have close to -- yes, 7%, 8%, you said, increasing log prices. And I mean, we cannot comment what will happen in other parts of Sweden, I guess. The reason for that for us is that we thought it would be a very tight situation coming into the first quarter, not the least for spruce log. So we bought rather big volumes in the fourth quarter. And I mean, we couldn't know or expect that we should have a big windfall in our region between Christmas and New Year. And if we would have knew that, then, of course, we should have acted differently. But now we have to take care of what we bought. Cole Hathorn: Also, and just a longer-term question on wood products. I mean, we've seen CBAM boosting the cost of cement, the cost of steel, import restrictions, increasing prices of these construction raw materials. Do we see wood as kind of an underappreciated beneficiary? When do people look at the construction costs of sawn wood and say, we should start using more of this product? Or is that just too far away into the future? And then following up on Containerboard, we've seen some of the U.S. players talk about slightly better order books, slightly better demand. I'm just wondering, are you seeing any more positive trends in the containerboard and bauxite at this stage or not yet? Ulf Larsson: I mean, starting with solid wood products. I guess, we are pretty positive to the future market for solid wood products. Then again, it's always a balance between what you have to pay for the raw material and what can you get out from the market. As you know, more than 70% of the cost for the sawmill is related to the raw material, of course. But I mean, we feel that the demand for solid wood products is -- I guess it's okay as it is just now, and we see an improving trend also for coming quarters now. And let's see where we will end up. But... Andreas Ewertz: I think, Q2 is usually typically a stronger quarter. Ulf Larsson: Structurally, I think that, I mean, in many cases, people have tried to turn from -- also from fossils over to non-fossil materials. And I mean, that will also benefit the solid wood business going forward. So I think we are positive long term in this field. And then about Containerboard. I guess, we had -- if we look into last year, I mean, the consumption was up 1.5% during last year. And also when you look at the box demand, as you saw maybe on the slide I did show, I mean, you have a positive -- the trend is positive. Then again, I think what is harming the balance just now is that we have seen a lot of new capacity coming on stream, not for testliner. I mean, the only capacity in kraftliner is what we are providing the market ourselves in -- from Obbola. But otherwise, in testliner, we've seen a lot of capacity coming on stream. Some has been closed, and I guess some more capacity will be closed. And I guess we have, for that reason, a little bit of chicken race just now out there, and let's see where and when that will -- how and when that will end up. So I guess, but then you asked about consumption. Honestly, I don't think -- I think we are -- it is a rather slow market out there, at least for us being in Europe and might be a little bit better in U.S. and also in other regions, we have a slightly better demand. But again, the price is, of course, lower when we have to go overseas with our volumes. So that is -- and that has also impacted the result for us as we are now ramping up Obbola. That was not a very clear answer, but it was a trial at least. Operator: And we will now take our next question from Pallav Mittal of Barclays. Pallav Mittal: I have two of them. So firstly, can you talk a bit about the adverse mix impact that you highlighted for your pulp and the containerboard business, especially over the last couple of quarters? And do you expect that to continue in 2026 given the weakest demand that we are seeing in Europe? And just to follow up, what are your expectations on CTMP pricing in the near term? Ulf Larsson: Did you get the first one? Andreas Ewertz: Can you repeat the first question, please? Pallav Mittal: Just asking about the adverse mix impact on your pulp and containerboard business? Andreas Ewertz: Okay, yes. Okay. Yes. So, what we saw in -- especially in Q4, as Ulf mentioned, we had lower delivery volumes in Europe due to a weaker market, which means that we sold a larger part in Q4 in overseas market. And I think that was partly because -- I mean the weak market, but also because that customers knew that the rebates were going to increase at the beginning of the year. So they ordered as little as possible, of course, during the quarter. As you know, the rebates were kicking in the 1st of January. So I think you might have some positive effect there, but the weak market. I mean, we still expect that in Q1. Ulf Larsson: And the second one was around CTMP. I don't know if I get you right. But I mean, the demand is still slow on CTMP. And I think we and also other producers are -- we are taking curtailments now when we have a high energy price. And so, I mean, we do a marginal calculation. And by that, we have reduced capacity as it is just now from Ortviken. Price-wise, we have not seen any increase in rebates in '26 in comparison with '25. So the price is more or less sideways. And the business we have in Europe is, it's okay. But then again, it's tough for us to come from Europe over to Asia not the least and make some money on it. So, we monitor this carefully, and we do this marginal calculation where we have to calculate on the marginal wood cost and also marginal energy cost for CTMP. Pallav Mittal: Sure. If I can just squeeze one more in, and this is regarding the first quarter of '26. I appreciate there are a number of moving parts. But can you help us understand, I mean, sequentially, how we should think about the first quarter, especially given the declining prices, negative effect but some support from the pulpwood cost side of things. So is it fair to assume a very similar EBITDA in Q1 despite having a zero maintenance? Andreas Ewertz: Yes. So we won't -- we don't give direct guidance. But if you just look at the moving parts, we had a maintenance stop in the fourth quarter, and we won't have any maintenance stops in Q1. On the pulp side, we see no maintenance stop, but the increase in rebates and negative currency effect as a negative and as a positive slightly lower pulpwood costs in containerboard. It's, as Ulf mentioned this in the beginning of the quarter, this minus EUR 20 per tonne in prices. And then we'll have to see if this testliner prices goes through, that might have a positive impact if you go through that at the end of the quarter or Q2. And then in solid wood products, we see fairly stable prices, a bit better on spruce, but increasing sawlog prices. And then in Forest, we harvest seasonally a bit lower in Q1 compared to Q4. And then other costs, OCC is slightly cheaper. Also transportation cost has go down slightly. Operator: And we'll now take our next question from Alexander of Pareto Securities. Alexander Vilval: Just a quick question regarding harvesting. If you could elaborate a little bit on expected -- the harvesting volumes sort of in the next few years? And also with regard to biological assets, what kind of long, sort of, term growth rate you see regarding harvesting specifically? Ulf Larsson: I mean, as I said, I mean, this year, we reached 5.4 million cubic meters. And I guess, next year, we will -- yes, if not do that as we have to support some forest owners in windfall areas, we will do that, of course. But I mean, we will remain on around 5 million cubic meters. So that's it. Andreas Ewertz: And on biological assets, we -- it will -- we expect it to be slightly lower, the revaluation, next year compared to this year. But we still have -- I mean, we look at the long-term average trend price of wood raw material prices, and that will still increase even if the prices go down next year, the long-term average will still go up. But impact will be a bit lower next year compared to this year. Alexander Vilval: And on volumes in that calculation? Ulf Larsson: In the volume term. Andreas Ewertz: No, the prices will go up and the volumes is based on our latest harvesting calculation, that would be unchanged. Operator: That was our last question, and I will now hand it back to the host for any closing remarks. Anders Edholm: And that concludes our presentation of the year-end report. Welcome back in April for our first quarter report. Thank you, ladies and gentlemen.
Suguru Miyake: Good afternoon, ladies and gentlemen. Thank you very much for coming to our third quarter results briefing for the fiscal year ending March 2026. And today, we also have a simultaneous translation. So we are communicating all around the world. For those in Europe, it must be in early morning. For those from the U.S., but I bet you are in very late at night. Thank you very much for joining this call for those hours. So I am the President of the company. And also, we also have Naraki-san and Takeuchi-san with me. Takamaro Naraki: I am the Vice President for the company. My name is Naraki. Naoki Takeuchi: And I am a Senior Managing Director. I am Takeuchi. Suguru Miyake: Okay. So let's get started. In 2026, we are having the 35th anniversary of the company. So we made the anniversary logo, which we put on the front page. The bird in the middle is a Mascot character. She is called MAppy, M and A and happy. And those 2 words were combined together to be named as MAppy. And let me first start with the summary. In this Q3, showing the 9 months total and Q3 alone, basically, we recorded the highest sales and recurring profit ever, and we were able to surpass 40% for our recurring profit margin. For 9-month total, we accomplished JPY 37.7 million, which is increasing by 26.5% year-on-year. And the recurring profit went up by 46.8% to be JPY 15.7 billion. The OP margin was 41.7%, which is up by 5.8 percentage points. The number of transactions closed increased by 9.8% to be 810 deals and also M&A sales per transaction increased by 15.3% to accomplish JPY 45 million. On a Q3 alone results was JPY 15.1 billion revenue, and that was a record high number, up by 34.6% year-on-year. And ordinary profit was JPY 7.1 billion, which increased by 51.5% and OP margin was 47.2%. And number of transactions closed was 322 deals, which are progressing pretty good. And M&A sales per transaction was JPY 45 million, maintained at a very high level. So where are we at for the overall against the guidance numbers? I think that is important to note it. And for the sales, our target was JPY 46.3 billion. We are at JPY 37.7 billion, which is 81.5% progress. And ordinary profit against the forecast of JPY 17 billion, we are at 15.7% with 92.5% progress. And even more, we are quite pleased to see a very steady progress in returning back to our growth cycle. So M&A jobs, we do see many different conditions and situations, and we do see a lot of extension of the deals. So in Q4, March, if we were to trying to target at Q3 to accomplish the target, then we tend to see some delays into the next year. So we need to accomplish the certain business performance while satisfying customers. We will need to bring up the high performance as much as possible in Q3. So we can work on more preparation work in Q4, so we can have a rocket start for the next fiscal year and matching and also receiving a lot of commission work. And so that way, we can accomplish the stable growth. And finally, I believe we were able to come back to such a business cycle, and that is the most pleasing information that I have for this time briefing results. And let me go one by one, a little bit more in detail on the sales of 37.7% -- sorry, JPY 37.7 billion. And of course, we saw increases both in the number of transactions closed and also the unit sales, and that helped to see a substantial increase in the sales. The best part was the number of consultants who accomplished budget. We saw a substantial increase in such a number, such members and also department who accomplished the budget increased drastically. At the same time, Takeuchi-san, who is the President of M&A Center, always talks about each individual will need to accomplish the target to be happy and also each department to accomplish the target to be happy. And as a result, the company to accomplish the budget to be happy. So he is always pursuing to accomplish both the individual and the whole group. And such a policy and thinking is now being understood and spreading among the employment -- employees, and that was accomplished this time. And I think now we were able to build a very solid foundation to accomplish that. And the number of transactions closed. I think we were quite successful in implementing a very scientific approaches. It wasn't the result of a coincidence to increase the number of success rate and also on time closure of the deals, and we implemented 2 measures to accomplish them. One, when we start the deal negotiation, we had -- we are now having kickoff meetings, both sellers and from the buyers, the person in charge and their managers and accountants, lawyers and tax accountants and all these professionals, they all got together to confirm the schedule. We also confirm the stakeholders, and we also confirm the challenges, which is more important. So we identified those challenges ahead of the project kickoff, and that is very important. And we are making a smooth flow in the deal procedure. We conducted an M&A audit. And if we were to find the challenges at the time, then that could actually cause a situation that people might wonder, maybe they were hiding this information or they were deceiving us. And such a concern will be rising. So at the beginning of the whole deal, we need to assume what the challenges are so that way, both sellers and buyers can prepare themselves to be able to take action towards them. And that will actually increase the trust in us and also trust in between sellers and buyers, and that helps to have a smooth process going forward. The other thing is, and since this scandal we had, we actually increased the number of managers drastically. Of course, some of the -- a lot of managers are still not fully experienced, but we created a role for the deal management in place. So every Monday, we instructed them to give right instruction of the deals to their subordinates. So those are the 2 actions we implemented, which supported us to have such successful results, which were led by the President Takeuchi as well as the sales General Manager and their leadership actually worked quite well to permit this type of thinking among all the staff members to increase the number of transactions closed as well. And we are also able to maintain a very high M&A sales per transaction. And as I've been talking in the past, we're not trying to grow the sales per transaction. That's not our main purpose. Our target is to maintain around JPY 40 million per deal. But as we grow the number of deals, the unit sales goes down. So to stop that, we basically trying to capture the mid-cap business deals as much as possible, and that was quite successful, and that's also sustaining good unit prices. And the number of large deal was 85 cases. We did see a huge increase, increased by 66%. So our volumes on the midsized deals are properly secured. And but also for small deals, actually, we passed those deals over to our affiliate companies, the companies by the equity method, the patents. We have patents to handle those smaller deals. And I think that was also effective at the same time. And because of that, the percentage of smaller deals are now declining with us, and that is actually helping to see a stronger performance. That's how we understand right now. And talking about the cost and expenses, I pass the floor over to Naraki-san. Takamaro Naraki: On this page, so we are showing the cost of sales and SGA expenses. So those costs and SGAs for this year, starting from March 2026, we have changed the classification of human resources that actually changed some of the number changes. And so we are talking about comparison after the reclassification change. Then cost of sales was increased by 19.1% to be JPY 13.7 billion. SGA expenses was JPY 8.37 billion, increased by 7.7%. Referral fees ratio was 13.1%, increased by 0.9 percentage point. For the SGA expenses, the IT cost was JPY 848 million, and it increased by 46.7%. And let me also touch on the overview of the expenses and numbers. This is the total income statement. And towards the top on the cost level in total as Line 3, JPY 13.725 billion, and it was 36.4% of the sales. Last year, it was 38.6% and this ratio went down year-on-year. And 2 lines down from here. the SGA and operational cost, so it was 22.5% with JPY 8.49 billion. It was 25.6% last year. So percentage reduced this year because of the sales increase. So as I mentioned, ordinary profit came out to be 41.7%. So now it's back in the 40s. Suguru Miyake: And next is talking about the commission status. So it's very important to understand how many that we are receiving as mandates. In total, we received 328 mandates, which is down by 3% year-on-year. Of that mid-cap mandates were the 58 deals, which is down by 10.8%. For the buy-side mandate was 383 mandates, which is down by 6.6%. And number of new transaction negotiations was 295 deals, which is down by 13.2% compared to last year. I will have more details to come later on. This is nothing really negative. Actually, in the first half last year, we did have a huge amount of mandates that we received. And based on that, we decided to focus on the business performance. We wanted to revive our business performance. That was the main purpose of this fiscal year. So the number of transactions closed, and we try to focus also on the track record of the closed contracts. So we did not focus too much on receiving mandates in the first half. But second half, we will focus more on the quality of the mandates. And that was the policy we had in the second half. For those with no possibility of getting concluded, we try not to pursue to conclude them and close them. And so that is why the number is declining, but this is not because of a negative situation. So I hope you can understand this is still a result of positive effort, and this is the overall flow. Mandates in the central area are in green. These are the mandates in the city areas. We've been acquiring city area mandates quite well and local area mandates are about 45% of the total. So revitalizing the local economy and also contributing to the central area I believe that we have a really good balance of achieving mission and achieving good results at the same time. And about the fourth quarter, when it comes to receiving mandates or matching, we will put in bigger efforts. So I believe that we will be able to have overall good performance in the whole year. And the summary of the status of acquiring mandates is this. These are detailed figures. So please take a look at this later. And about the number of new mandates we have acquired, we believe that we're not experiencing a deterioration. We think that we are in a transitional period. About last year, we, as a company, were finally trying to be revitalized. So our focus back then was on acquiring more mandates. We were going after volume. However, since the start of this fiscal year, our focus is more on closing mandates and eliminating troubles. Therefore, when it comes to acquiring mandates, we've been refraining from the mandates with limited possibility of closing them after -- later on. And also, there can be inappropriate buyers. So really delegate projects that are close to renewal type of mandates, we've been cautious in receiving those mandates to improve customer satisfaction rate and also to improve our productivity. So we've been raising our productivity, and we've also been trying to improve customer satisfaction. And also, we plan to further improve the quality of the mandates we receive. And at the same time, we plan to improve the quality of our business and our service and the customer satisfaction level. This is going to be our direction. And I would like to hand over to Naraki-san for summary. Takamaro Naraki: Okay. About our balance sheet assets. JPY 60.011 billion. And below that, total net assets, JPY 48.257 billion. So ratio of this was 80.4%. And we have the same for the previous fiscal year on the right-hand side, JPY 47.5 billion in net assets. The ratio of net asset was 77%. So there is an increase by 3.4%. And about headcount, as I said, we had a reclassification of employees. So at the top of this table, we have the role for M&A consultants. These are the sales representatives belonging to the sales headquarter of Nihon M&A Center and the sales staff at local -- foreign local entities. And as I said, we've been doing effective hiring in M&A consultants. However, we have the increase in turnover of our employees with tenure of less than 3 years. So we've been implementing measures to improve retention of our employees. And we plan to provide more information about that later. Next page, Page 14. This one is about our current fiscal year. This fiscal year, we've been showing numbers both as reported and both -- and also on a reclassified basis as well. Thank you. About our headcount. We've been doing a lot of things. And headcount is the area -- the only area where we feel there's an issue, especially turnover ratio of the employees with tenure of no more than 3 years is declining or rather it's worsening this fiscal year. So we have already started taking measures to address this. However, we have a lead time, about half year's lead time until we start to benefit from these initiatives. So until then, we are going to continue root cause analysis, and we've been taking measures. And we have multiple issues, but the issue of the increase in the turnover of the people with tenure of less than 3 years, this is the largest issue we think we have in our company. So we want to address this immediately. We want to reduce turnover. We want to have a net increase in sales representatives. Just having a net increase itself is not good because when there are a lot of turnover, that means that we have relatively beginners -- more beginners in the company that leads to lower productivity. So we have to reduce turnover while securing enough personnel. And we've been taking measures. So we think that we'll be able to have major improvement next fiscal year. Next, let me touch on the shareholder returns. So for this fiscal year, we try to face the change in the external environment and trying to go back to the accomplishing cycle that we used to do in the past. So we intend to continue sustaining the dividend JPY 29 same year. So we had JPY 29 for March 2025. Therefore, for March '26, we intend to go with JPY 29 with no change from the beginning. In during the midterm plan period, the dividend payout ratio is to be 60% or higher. So we maintain this basic policy as well. And next, the ROE trend. In 2024 March, we conducted share buybacks. And with that, we were able to get back on 20% -- and also March 2026, we expect to be at 22.9%. And next, shareholder situation and also the market cap trend. And shareholder mix is shown here. Individuals are decreasing. And now we see increases from institutional investors in this pie chart. Individuals showed 30.7%. And last year, a year ago, it was 33%, but it came down to 30.7%, down by 3.2 percentage points. For financial institutions, sales 30.2%. Last year, it was 25.1%. So it increased by 5.1 percentage points. The foreign investors -- foreign institutional investors was 28.9%. The last year, it was 30.4%. So it went down by 1.5%. And next, talking about the forecast number, there is no change to our forecast numbers. We maintain the same number. And so we can move forward according to the guidance numbers. In a midterm target, there is no change in our midterm target. And of course, we will make sure to have an upside to the midterm target to be accomplished. So we ensure to accomplish them, and we will try to have as much upside as possible so we can lead to the next phase from there on. And related activities. Currently, the other sales is about JPY 1.2 billion. This is only about 3.3% within total sales that's coming from fund business and PMI business. And so this is still a small business, and our intention is to grow this with other business. And also TOKYO PRO Market, we are making good progress. And this year, the number of IPOs were not that many. The listing to the market, it takes about 2 to 3 years for preparation. So those deals that came 3 years ago and 4 years ago are going to be IPO this year. With the scandal, right after the scandal, TPA commissioned project have decreased. So therefore, we see less IPOs this year, but we intend to accelerate the number of IPOs, and we do have enough backlog of the potential IPOs to come in, in the coming years. The most important thing is the PMI. Both FSA and SME agencies, they say not just closing M&A. What they need is having a successful PMI activities as well. That's their direction. And we think that we are the only company in Japan who is doing M&A consulting, but is also doing PMI support activities. And the plan for this fiscal year is to receive 120 mandates, and we have already acquired 95 mandates. 120. We think that we're going to -- we'll exceed 120 this fiscal year. And we think that this is going to be a major differentiating factor going forward for our company. So we're going to do more aggressive sales activities. And at the same time, we would like to enrich our activities or enrich our support to customers, but we cannot do this on our own. Therefore, we would like to do more collaborations of private, public and academia collaboration. And we have ASEAN-based local entities. And they have been working really well. they closed their financial years in December. And this fiscal year, they achieved their budget sufficiently. So from the next fiscal year, they are going to enter into the next stage of growth. So I have been really counting on this overseas business, and I am excited to see the development of this business going forward. And about our fund business, its contribution in terms of profit may be limited. However, A2G Capital, J-Search and Japan Investment Fund, they are all going quite successfully, respectively. And about J-Search, they have already established companies in 4 locations, and they've been working together with local banks. And Japan Investment Fund, they have launched their second fund that's been working effectively. And roll-up activities are done, which are the add-ons of generating synergies with companies with good affinity after acquiring a company. And we have done 2 of such roll-ups this fiscal year at the Japan Investment Fund. Topics. DX and AI usage, especially AI-based activities have expanded quite significantly. And Takeuchi-san has been talking about data-driven management. Bring out is a name of our analysis soft of conversations and discussions. With this AI-based software, we've been collecting a huge volume of various information that's used for our sales approach improvement. And we've been also accumulating customers' qualitative information. When it comes to quantitative information, we can accumulate the data by receiving financial documents. But when it comes to qualitative information, we have to do interviews to customers. And just like in human marriage, qualitative information can be more important than quantitative information. This is the same in M&A. So when we get more qualitative information, eventually, we believe that we will be able to have more accurate AI-based auto matching. So activities that we've been doing based on DX and AI are -- have huge potentials, and we've been doing all of what we can do. And about seminars, we've been holding physical marketing, and we've been getting a lot of applications. We had 80% more applications compared to the same time last year for these kind of events and 2 major reasons. One is that our planning has been quite getting better. And the second is that customers' interest in M&A are growing. And in the next fiscal year, we would like to do such real marketing more actively. And we've been having successful area marketing activities as well. For example, signage advertising that you often see at stations, railway stations, like you can find in the photo on this page, we've been doing advertising there. For example, in Tokyo, Osaka, Nagoya, Fukuoka, Hiroshima, Hokkaido, Okinawa as well. And it seems that we have one at Haneda Airport. I saw the video of our ad there. And also, we've been doing things that are based on the local communities. For example, local representative office with discussion desk. We now have one Yamaguchi, Niigata, Miyagi, Ibaraki, Shizoka and Yamaguchi finally. This is the fifth one that we have established. Thanks to customers' support and thanks to our efforts. We are recognized by Guinness World Records for 5 consecutive years. The number of closures last year was 1,088. This was the highest in the world. We would like to use such track records and awards for our branding activities. And the next one is about integrated report that I hope everybody will read. We publish them or we have published them at the same time in Japanese version and English version. And we plan to do the same in the same manner this year as well. And this is not just about senior management thinking. We have been including the dialogues and stories and thinking of the various people, including external directors, executive offices, et cetera. I hope that you will feel our culture and momentum. And about our industry trends, we are experiencing increasing the number of intermediary agencies and SME agency had the second revision of their guidelines and also introduction of qualification systems. So in such initiatives, they announced their skill map and qualification system committee was established and inappropriate buyers. We've been enhancing our activities to avoid getting involved by them at the M&A association. And also, we would like to be an exemplified or we would like to be a model in this industry. And our 3-party collaboration, tri-party collaboration, we've been doing that quite widely with University of Kobe, Kyoto, Waseda, Hitotsubashi, et cetera. We've been doing joint research with them. And also with Kwansei Gakuin University, we're going to do the same going forward. So we've been inviting many universities to do this. So the company is not an object. It is a place where we create and look at the lives of many different people. It's not just completing all the contract to be closed, but we hope to be able to be successful in accomplishing the best M&A to make everyone involved to be happy. So in order to accomplish such a success and the best closure, we intend to implement various measures, as I mentioned. So this is all for the results briefing. And now we want to move on to a Q&A session. Suguru Miyake: Thank you very much. So let's move on to the Q&A session. [Operator Instructions]. While we are waiting for your questions, first, we want to pick up some of the major questions that we received in our shareholder interviews in the Q&A session. This is a question first. So regarding your initiatives to maintain high retention, is there any issue in your hiring policy and hiring environment? Okay. Thank you for the question. This is the only challenge I am feeling the most and also the largest challenge that we are facing. And we are making a very detailed analysis and taking various actions. So we want to have Takeuchi-san to explain more details on this. Naoki Takeuchi: Thank you very much. Regarding the hiring environment, in the last time results briefing, so we are getting a good response in terms of receiving applications. But of course, we need to look at the conditions in market. So we have a close watch on the market situation. But currently, we are receiving good application, and we are selecting the right candidate. When it comes to hiring policy, so the turnover rate is on the rise. So -- what we did to address that for the past 6 months or 3 months, we try to understand the reason why they left the company and where they went. And what was the reason they decided to leave the company. So I myself went into more details to understand one by one. And the major reason for leaving the company was that they had an expectation for M&A Center before joining the company. But after joining the company, they saw a huge gap against the ideal they had. That's what we found, let's say, they thought, okay, they could do more, they could work a lot and hard. But due to the compliance and the governance, it wasn't really giving enough flexibility to do a lot of work. And some people thought this was a large company, but why do we have to be bound by certain behavioral rules. So those gaps, we thought that they were in the different directions. So basically, the major challenge was that in a final interview with those candidates, we needed to communicate our company core value to the full extent to them. So therefore, since February, every Friday, and I spent half day every week, I decided to be part of the final interview with a potential candidate, every interview. And we also had the channel General Manager as well. So in the final interview session, first, I'm trying to eliminate those gaps that they may have in the future. So that's why I'm now involved in a hiring process that we are able to improve the hiring situation. That is where we focus the most. May I add one more? Yes, there is one more thing. This is the biggest challenge I'm facing right now. So the other thing is once they join the company, once they start working, and then those who decide to leave the company. Of course, if they are not able to perform fully during the first year, they tend to leave. And what is the definition of being successful? So I think the important thing is to have closing the deal within a year. So last year, also the year before and even this year, for those who joined the company for the past year and only 60% of those members have accomplished closing deals. So we first want to raise this percentage to 80%. For those members who accomplished the first closure, those 60 members are not leaving. But the remaining 40 are the ones who are leaving. So that's why we are focused on increasing the number of success rate up to 80% during the first year. So as you can read on the slide, of course, I look at all the members, I see all the members through the hiring process interview. And then I myself will have an interactive communication with all the people so I can give them more confidence. And a year later, even with the channel General Manager, if they are having hard time getting closer, then we think about reassigning them to a different channel. So we want to show the value to those employees for the first year as a part of the flow. So we need to pay extra attention and proper care of those who joined -- who just recently joined the company and so we can develop their capability, and this will be led and adopt top-down manner. Suguru Miyake: Next question. M&A sales per deal has been trending at a high level. Is this a onetime trend? And how reproducible are mid-cap mandate-related initiatives? How do you see your current M&A sales per deal and the level you'd like to be in the future? Thank you. I have always been talking about JPY 40 million as our target M&A sales per deal. Our social mission is to grow in volume so we can save as many companies as possible. When we have more volume, it's natural that, that sacrifices our M&A sales per deal. That means lower productivity. So we want to acquire mid-cap mandates, both them so we can maintain M&A sales per deal. This is what we've been trying to do as mid-cap measure. And this measure has been actually been more successful than we had anticipated. Fortunately or unfortunately, it's not really coming from the mid-cap mandates per se. It's rather coming from the fact that we have established a team of mid-cap dedicated consultants and targeting all sales representatives, these mid-cap -- we have established a system where they can educate and instruct about acquiring mid-cap mandates. Actually, companies have only 2 ways of closing their business or getting acquired. These are the 2 only scenarios they have. However, with us, they have new options, for example, fund option and others or maybe handing over the business to their sons, owner, sons and so on, IPO possibly. So in order to convince customers, we need to create proposal documents and however, beginners are shy about those options. And we have established a consultant team that can make such proposal documents when they receive referrals about those mid-cap potential mandates. So this has been working effectively and leading to the improvement of our closure rate. Things have been more smoother -- more smooth than we had anticipated. And of course, increase in M&A sales per deal is something that we welcome. But we want to maintain this. And the level that we would like to be is JPY 40 million, in my opinion, basically JPY 40 million. So maybe JPY 42 million, JPY 43 million should be enough as our M&A sales per deal. So when it comes to JPY 45 million or JPY 46 million, I think that's too good for us. Next question. Could you tell us the number of the deals under negotiation, which are left open at the end of December? Thank you for the question. So the number of deals under negotiation, currently, there are about 944 -- right now, 449 deals, 449 deals are under negotiation. and 295 are newly opened deals. I believe this is a pretty good condition. We are coming to the end of the fiscal year in March. We are able to have enough negotiation. We have secured enough pipelines, which are those deals under negotiation. And for the next year, to have a rocket start in Q1, we want to actually increase more of such a pipeline. So in Q4, in February and March, we will be working more on matching activities that is going to be quite important. Next question, leading indicators that determine your business results from the next fiscal year. So the number of new negotiation starts and the number of consultants, these indicators are deteriorating for 2 consecutive quarters. Is there going to be any negative impact from this on the likelihood of exceeding your budget in the midterm plan? I don't have a concern about this because our productivity is increasing and our closure rate has been growing solidly, meaning that we are more capable of doing effective management than before. And also, the quality of our pipeline mandates or pipeline projects are improving as well. So I do not have a concern or anxiety about not being able to exceed our budget under the midterm plan. And about the number of new negotiation starts, I think there is limited possibility of not being able to achieve this indicator target. And even so, the shortfall -- potential shortfall can be covered enough by good closure rate. And also the number of consultants, I have a major concern about that. So we're going to reduce turnover rate enough, and we will establish a system where new people can grow sufficiently. And at the same time, we want to do more recruitment so we can have net increase. This cycle is something that we have been establishing in the recent 3 months. And we think that the level of success in this measure will impact the level of how much we can achieve our midterm guidance -- midterm plan targets. So we will do more about this. Next question. Regarding the decrease in number of sell-side mandates, do you think SME agency policy is affecting because they encourage the regional banks to be the intermediary for M&As. So can you tell us the current status of the direct network ratio in the sell-side mandates? And what do you think is the forecast? Regarding the first part, that is nothing to do with the situation. Actually, their policy is working on a positive way. The SME agency and FSA and they are talking regional banks to work on revitalizing regional economy and trying to accelerate M&As and also asking them to develop the businesses, which is making more than JPY 10 billion. And so regional banks are actually collaborating and working in tandem with us. So that's why the regional bank team in our company are going quite well so far. They're receiving a lot of mandates and having a lot of closures as well. So the decrease in number of sell-side mandate is because in the first half, as I mentioned earlier, so this year, we had -- this year will be almost a conclusion year coming out of the scandal. So it's going to be the year for recover from -- fully from the scandal 4 years ago. So first, we wanted to focus on the number of closures and also the amount, the yen amount as well. And so that's where we focused on first half. And that was affecting the result in the first half. But second half, now we are focusing on improving quality of the mandates, and that's what's also putting some pressure on the number of mandates. And so that's also causing a slight decline. But there is no major impact by them. And rather, we see a much positive impact on our business with those policies by the governments. And so the ratio between direct and network, the network is increasing for the mandates. And right now, in Q3 of fiscal '25, regarding sell-side mandates, in ratio-wise, 37% versus -- no, correction. 74% versus 26%. Network, 74% and 26% for direct. So ratio for network is increasing. And the network is increasing more. Of course, we need to increase the ratio -- direct ratio. But recently, pretty recently, direct market is exposed to very fierce competition. So, so many, too many boutiques out there in the market. And it's very difficult to obtain mandates. So that's why for network channels, we pretty much have an exclusive relationship, and we receive also the retainer fee as well from them. So we are receiving good revenue through the network. So that's where we can leverage on our strength. Next question. About dividend, do you have a plan to change your dividend of paying JPY 29, including special dividend of JPY 6? Thank you for the question. Of course, we have to make a decision to announce. So we cannot say anything definite on this occasion. But to share with you my thinking, we're not planning to cut dividends. At least when we are steadily growing and when our share price and our market cap are growing steadily, we would like to make sure that shareholders can enjoy capital gains. And until we go into that phase, we're not going to cut our dividends at least. So I would like our shareholders to be believed about the possibility of dividend cut. Next question. And so regarding returning to your normal performance achievement cycle, how do you think its repeatability or continuity for next year onward? Takeuchi-san, can you answer this question? Naoki Takeuchi: We next year beyond, repeatability and continuity have such a cycle. So this year, we are looking at this progress. And the answer could be a little abstract, but I think the people in the field did great work. You don't misunderstand this -- my comment, but I think it was actually too good to be true, but still, we are making such a great progress so far. And we have taken every strategy measures that we are able to take in details. The important thing is not to rush too much. If you rush too much, if you just try to accelerate the performance, that can actually cause too much pressure or the burden on the field members. So we need to avoid that. We need to focus on completing good quality M&A. And so the whole industry is focused more on safety and security and the responsibility accountability for the result. So we need to be seriously addressing that trend and what's been required by the society, and that will lead us over to a strong performance. So repeatability and continuity will be accomplished by pursuing this policy. Suguru Miyake: Next question. Your interim fee grew by 28% year-on-year. When does that lead to you receiving contingency fee or a success fee? If you go along with the flow that you were in, in the recent few years, I can assume that this level -- this increase in interim fee will lead to an increase in success fee in the next quarter. However, since your company seems to be able to get back to the customary cycle of achieving results earlier than planned, do you think that -- do you plan to carry this over to Q1 next fiscal year? This is not something that we're going to make a decision about because for M&A, we need a buyer and a seller. These are our customers and they have their schedule. They have their conveniences and they have emotions as well. So timing is not something we adjust. They determine the timing of M&A closure. So in accordance with the normal cycle, we tend to close deals in the following quarter. However, unlike major M&A, like an M&A between listed companies, they actually make decisions at respective Board meetings. So there is no change basically. But when it comes to M&A among SMEs, there can be pretty natural doubts. There can be a half month or 1 month deferral of closure and also buyer can be involved in a sudden major trouble and President of the buyer may have to go on a business trip to foreign country. So there are many cases where there is about a 1-month lag in closing deals. This can happen to us as well. There can be deals that can be closed smoothly by the end of this fiscal year. Takeuchi-san, what do you think? Naoki Takeuchi: I completely agree with what he has said. It's our customers who form and decide on market results. So of course, we pay attention to the expected results on a quarterly basis, but we pay attention to our customers. Our senior management will, at the same time, closely monitor our results. So I completely agree with what Miyake-san has said. Thank you. Suguru Miyake: Today, thank you very much for staying with us for a long time. We have explained our results for the third quarter, and we had a Q&A session as well. Thank you for staying with us till the end. And finally, from the appropriate incident, we experienced many things. And in FY '22, we had a shift to a compliance-based management, and we implemented many prevention measures. And in FY '23, we tried to be a more united company and a more cheerful company. And in FY '24, we received a huge volume of mandates in this fiscal year '25 is about recovering in our financial results and getting back to the primary customary cycle of achieving results. This has been the direction of our company's management. And thanks to these efforts, we had a rocket start, really good start in Q1 this fiscal year. And we had an upward revision in the second quarter. And in the third quarter, I think that we had good enough results that matches with what we have been doing, and we are now almost back to the customary cycle and the level of enthusiasm among our employees is quite high. It's been rising. And of course, we have some issues, including an issue of higher turnover rate. There can be some potential issues. However, we are trying to be transparent to shareholders and investors and we've been discussing with them about our issues. And we will continue to do the same as our manager company going forward. And our Q4, the next briefing session will be the full year briefing session -- full year results briefing session. So our company will be united and make efforts and also acquiring mandates, so we will be able to have a rocket start next fiscal year. We will not ease up on our efforts for that. Please continue to support us. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Hello. Welcome to the Signify Fourth Quarter and Full Year 2025 Results Conference Call, hosted by As Tempelman, CEO; Zeljko Kosanovic, CFO; and Thelke Gerdes, Head of Investor Relations. [Operator Instructions] I would now like to give the floor to Thelke Gerdes. Ms. Gerdes, please go ahead. Thelke Gerdes: Good morning, everyone, and welcome to Signify's Fourth Quarter and Full Year 2025 Earnings Call. With me today are our CEO, As Tempelman, and our CFO, Zeljko Kosanovic. During this call, As will discuss our full year 2025 results and business highlights. Zeljko will then walk you through the financial performance in more detail. As will then come back to discuss our fiscal year 2026 outlook and closing remarks. After the prepared remarks, we will be happy to take your questions. Our press release and presentation were published at 7:00 this morning on the Investor Relations website. A transcript of this call will be made available shortly after. And with that, I would like to hand over to As. A.C. Tempelman: Thank you, Thelke, and good morning, everyone, and thanks for joining us today. It's actually great to connect with all of you again in second earnings call, my second earnings call at Signify. Now 5 months in the role, I've learned a lot, and I feel that I've got a solid handle on the business, of course, really supported by great collaboration with the management team here at Signify. And I gained much more clarity about the business, the market dynamics we face and also the actions we need to take. And I want to express that I'm confident about the future and the strategy we're putting in place, and I'll come back to that a bit later in the call. But let me first comment on the full year results and the full year performance 2025. We delivered what I qualify as a mixed performance, as we are navigating a very challenging market environment. It's marked by reduced demand, price pressures in select markets, weakness in trade channels, and of course, the ripple effect of trade tariffs. And despite all these headwinds, I mean, if you look through it, our business has shown good resilience. In Professional, we delivered growth in the U.S. in the fourth quarter, while Europe remained under pressure, and that's particularly true in the trade channel. And we see in countries where we have large positions, like Germany, France and the Netherlands, that demand is sluggish. Our Consumer business grew in 2025 with momentum remaining strong across all the regions with the exception of China. We saw continuous growth -- strong growth in connected and specialty lightings, and that now -- that part now represents about 36% of our sales. And this strength of that connected and specialty lighting was really visible across both the Consumer and the Professional businesses. The OEM manufacturing business, on the other hand, has continued to experience reduced demand and persistent price pressures. And I'm pleased that we hold a solid gross margin, above 40%, and that was really supported by discipline on the cost side as well as price management across both the professional and the consumer business. For the full year, we delivered adjusted EBITA margin of 8.9% and strong free cash flow of 7.6% of sales. And this strong free cash flow is really driven by working capital discipline, and that really underscores our resilience when it comes to cash generation. Now, diving a bit into the respective businesses. Let me start with the Professional business. Comparable sales decreased by 1.4% as growth in the U.S. was offset by the weakness in Europe. And then, like I mentioned, particularly in the trade channel. The adjusted EBITA margin was decreased by 40 bps to 8.9%, mainly reflecting price and volume pressure in the European business. Our teams did a great job at mitigating the direct effects of tariffs, which resulted into a kind of neutral impact on sales and profitability. And that's something we should be really proud of. That was achieved through effective supply chain and price management. And the -- while the direct effect of tariffs was contained, of course, we clearly felt the ripple effect in other parts of the world, particularly through production overcapacities in China and the resulting price pressure in parts of our business. Now moving on to Consumer. Comparable sales increased by 1.4%, and this was driven by strong connected sales throughout the year. The adjusted margin decreased by 50 bps to 10.6%, mainly due to higher commercial investments, which we will discuss in more detail later on. Moving to the OEM business. Comparable sales were down 16.5%, and we mentioned that before as a result of weak demand and intense price pressure and that we also there felt the structural overcapacity in the market. Throughout the year, the business was also impacted by lower orders, and we mentioned that before of 2 specific major customers of the OEM business. Adjusted EBITA decreased to 4.8%, reflecting the impact of lower volumes and continued gross margin pressure. And then finally, wrapping up with the Conventional business. Comparable sales decreased by 23.1%, reflecting the structural decline of this business, and the adjusted EBITA margin decreased with 180 bps to 16.1%. So all in all, a mixed results, difficult quarter, but where we showed strong cash generation and good resilience. Now, let me move to showing you a few of the examples of what is -- how actually our business then works out in real life. With the professional business in Europe, while that business remained under pressure, our Connected business in the region continued to grow. And we had a recent project we completed in Madrid. And that this is a great example of this momentum, showcasing how connected outdoor lighting can completely transform what is a truly iconic landmark. And we carried out a full architectural lighting renewal of Teatro Real, some of you might know it, reworking both the exterior as well as the ornamental lighting. And the goal was to enhance the theater's presence in the city at night while fully respecting and preserving, of course, its nice historic character. And beyond aesthetics, the impact on energy efficiency is significant. We achieved over 40% savings, and that is kind of equaling 2 tons of CO2 avoided every year. And this installation is fully connected through our Interact platform, and this allowed cloud-based control, monitoring, and enables dynamic lighting scenes that can be adapted to different cultural events. So really great project that supports Teatro Real's net zero ambitions while combining sustainability, digital innovation and a richer visitor experience. So really cool example. And then on the Consumer side, I wanted to highlight a -- the Hue business. We'll focus on Philips Hue on this slide. Following a very successful new product launches in September, we delivered a very strong commercial execution in the fourth quarter, building on the momentum we have seen throughout the year, great momentum on Hue. During Black Friday and Cyber Monday, we exceeded expectations in both North America and Europe. And that also underscores the strength of the brand and our execution during these key commercial moments. And given our focused investments in Hue's social media presence, we saw a significant brand -- increase in the brand engagement in the fourth quarter as well with the social views -- media views rising more than 100-fold on a year-on-year basis. So we're really stepping up online. And we further invested in the Hue app. As a result, in-app sales also grew by more than 50%, reinforcing the strength of that connected system, and it also is a clear signal of its long-term value potential. And then finally, on Hue, we launched the Hue Essential range. That was a key step in making Hue more accessible to new customers by offering them a lower price entry point into the ecosystem. And this also successfully drove new customer acquisition. So once customers enter the Hue ecosystem, they typically continue to add products. So it's a real strong platform play. Moving on to our Brighter Lives and Better World program. That is now completed. The program ran until the end of '25, and we will be introducing an updated sustainability program later in this quarter. And that is really designed to further align our sustainability ambitions with our strategic business objectives and long-term value creation. So actually good for sustainability and good for business. In the final quarter of the 2025 program, we delivered following results. First, on the climate actions. We surpassed our targets, reducing greenhouse gas emissions across the entire value chain with 40% versus the 2019 baseline. And this is all SBTi-driven targets. Minus 40% was actually a target that was set by the Paris Agreement by 2031. So we got there much, much faster, and it's something we are very proud of. Secondly, on circularity, circular revenues reached 37% of sales, well ahead of the target of 32%. And then thirdly, we have our Brighter Lives revenue, so that relates to portfolio -- our product portfolio that benefits beyond lighting society. And you have to think about food availability, safety, security, health and well-being. And the Brighter Lives revenues reached 34% of sales, again, exceeding our targets. We have one red on the slide that is on diversity and inclusion. The percentage of women in leadership stood at 27%, which means we did not meet the target of 34%. And this is an area where we have -- progress has been slower. I want to highlight that we remain fully committed to improving the representation through focused diversity hiring, retention, but also attrition. We try to reduce attrition on the diversity side. With that, let me hand it to Zeljko. Zeljko Kosanovic: Thank you, As, and good morning, everyone. Let me begin with an overview of our fourth quarter performance on Slide 10. Starting with our Connected installed base. This continues to grow strongly, reaching 167 million connected light points at year-end. Turning to sales. Nominal sales declined by 9.9% to EUR 1.49 billion, mainly due to a negative currency impact of 4.7%, largely driven by the weaker U.S. dollar. On a comparable basis, sales declined by 5.2%, reflecting continued weakness in OEM, Professional Europe and the China Consumer business, and this was partially offset by ongoing growth in the other markets such as the U.S. and India. Excluding the Conventional business, the comparable sales decline was 4.2%. The gross margin was impacted by temporarily higher manufacturing costs in Conventional and OEM, while indirect costs increased as a percentage of sales due to lower volumes. On profitability, the adjusted EBITA margin declined to 10%. This was mainly driven by a lower contribution from the Consumer business as well as OEM and Conventional businesses as well as lower results in other. Overall, the dynamics and the drivers of our EBITA margin are well understood. Beyond the structural pressures we are targeting through our cost reduction program, the margin also reflects targeted commercial investments and other short-term factors. Finally, we delivered a strong cash flow generation of EUR 291 million, underscoring the resilience of our cash conversion and the effectiveness of our working capital management actions. Moving now on to the fourth quarter performance of the Professional business on Slide 11. Comparable sales in Q4 declined by 1.9%. This reflects a mixed regional performance as growth in the U.S. was more than offset by weakness in Europe and emerging markets, particularly in the trade channels, where demand remained under pressure. From a margin perspective, we maintained a solid gross margin, as we successfully compensated the effect of price erosion and tariffs with price increases and a bill of material savings. The adjusted EBITA margin declined by 40 basis points to 10.4%, mainly due to lower fixed cost absorption. Moving on to the Consumer business on Slide 12. Comparable sales declined by 2.7%, driven primarily by a significant weaker performance in China, where the consumer environment remains subdued and also Klite, our export business. At the same time, our connected home portfolio delivered a strong finish to the year. The adjusted EBITA margin declined by 330 basis points to 14.1% against a high base of 17.4% last year. This development reflects the higher investments and commercial activation behind our connected home products during the peak events. While these targeted actions temporarily weigh on the margin, they helped us drive momentum in a strategic growth category and are expected to support long-term customer acquisition. Importantly, the connected portfolio remained margin accretive to both the Consumer business and Signify overall in Q4 and also for the full year. Moving on now to the OEM performance on Slide 13. Comparable sales declined by 19.2%, reflecting very challenging market conditions in the Component business. Demand remained weak, and the business continued to face intense price competition. As a result, the decline in the adjusted EBITA margin to 1.5% primarily reflects a gross margin reduction caused by lower volumes and ongoing price pressure. The impact of lower orders from 2 customers was no longer material in Q4 compared to prior quarters and will roll off going forward. However, the market remains very challenging due to low demand and oversupplies, leading to price pressure in the market. And finally, the Conventional business on Slide 15 (sic) [ Slide 14 ]. Comparable sales declined by 19.6%, reflecting the continued structural decline of the Conventional business. Profitability was impacted by 2 transitory effects rather than a change in the underlying economics of the business. The first is the impact of the site rationalization and site transition, which temporarily increased costs and disrupted production efficiency. This effect is expected to normalize in the second half of 2026. The second effect is a short-term lag in the price realization following the implementation of tariffs, meaning cost increase were not yet fully passed through to customers. Moving on now to our adjusted EBITA bridge for the fourth quarter on Slide 15. Our adjusted EBITA margin decreased by 240 basis points from 12.4% to 10% in quarter 4. The volume decline impacted the adjusted EBITA margin by a negative 100 basis points. Price and mix had a combined effect of minus 200 basis points. Within this, the effect of price erosion has remained stable or slightly improving. As mentioned, we see higher effects of price erosion in some parts of the business, such as OEM and Professional Europe, but on the other hand, positive pricing in the U.S. Mix was a positive contributor, mainly to higher -- mainly due to higher connected sales. Cost of goods sold had an overall negative contribution of 50 basis points this quarter, driven by 3 main factors. First, we continue to deliver bill of material savings across all businesses. Second, the manufacturing productivity was impacted in OEM by the significant volume decline and in Conventional by temporarily higher manufacturing costs related to the site rationalization. And finally, COGS will also include the effect of incremental tariffs, which were mitigated through pricing action, and therefore, neutral at the gross margin level. Indirect costs improved by 40 basis points on adjusted EBITA margin level. Currency had a positive effect of 40 basis points. And finally, other had a small negative effect of 10 basis points. Turning to the working capital bridge on Slide 16. Compared to the end of 2024, our working capital decreased by EUR 93 million or by 120 basis points from 6.9% to 5.7% of sales. Within working capital, we saw the following developments: inventory decreased by EUR 106 million, receivable reduced by EUR 170 million, payables were EUR 225 million lower. Finally, other working capital items reduced by EUR 42 million. Thanks to disciplined execution, we brought working capital back into the mid-single-digit range by year-end, a solid improvement that contributed to our strong cash flow generation. I would like to share now an update on our capital allocation plans. First of all, the priorities within our capital allocation policy remain unchanged. We aim to maintain a robust capital structure and maintain an investment-grade credit rating to pay an increasing annual cash dividend per share year-on-year to continue to invest in organic and inorganic growth opportunities in line with our strategic priorities, and finally, to provide additional capital return to shareholders with residual available cash. In 2025, we paid a dividend of EUR 1.56 per share, representing a total cash dividend of EUR 195 million and a payout of 52% of continuing net income. We also repurchased shares for a total consideration of EUR 150 million and canceled 5.8 million shares. In 2026, we are proposing a dividend of EUR 1.57 per share, representing a total cash dividend of EUR 188 million and a payout of 61% of continuing net income. While our policy continues to include returning excess capital to shareholders, we will pause share buybacks for capital reduction purposes. This allows us to prioritize a robust capital structure while our portfolio and strategy review is underway. Once the review is complete, we will reassess the pace and scope of further capital returns under our existing framework. We aim to provide an update at the Capital Markets Day in June 2026. And with that, I will now hand back to As. A.C. Tempelman: Thank you, Zeljko. You covered a lot. You mentioned the strategy review. So let me update you a bit about the priorities as I see and what we have been doing in that space. There's 2 things really important -- I mean, on the strategy. Firstly is to outperform in what is a very tough market. That's kind of the near-term part of the strategy. And then, the second priority is to define a clear path to durable growth, and that includes a portfolio review. So let me comment on both. Starting with the first priority, outperforming in a tough market. We are now taking very concrete actions. We are stepping up operational excellence across sales, marketing, supply chain and IT with a clear focus on managing price pressure, improving efficiency and also strengthening the company consistently in its performance. So it's really a performance step-up. On the supply chain side, we already brought the inventory down, but there's more to go after. We want to lower transportation costs and also deliver our performance to customers with reliability. But in addition to these 3 items around focused marketing and sales investment, supply chain and IT, also, it is absolutely crucial that we keep our cost discipline and our cost base competitive. And therefore, we announced this morning a EUR 180 million cost reduction program. And the majority of the savings will be delivered throughout 2026 with the full benefit realized in '27. So we have to make sure we get to the right cost run rate in the fourth quarter. Now, let me briefly explain the aim of this program. First, of course, like I said, we need to ensure we maintain a competitive cost base and achieve that cost leadership while we rescale our cost structure to match today's sales levels. And we will fully leverage the operating model that we introduced 2 years ago by driving productivity and simplification across our business. So we stay with that operating model. It was the right thing to do, my predecessors put it in place. It was the right thing to do, much more customer-oriented, and we can now deliver the efficiencies and the productivity improvements within that operating model. So we are building on the strong cost discipline already present in the company, while we deliver the cost saving and increase our competitiveness. The program will unfortunately impact 900 roles worldwide. And of course, this is very painful when it affects people, and we need to manage that very carefully and with full respect for our colleagues. The second priority, I mentioned, is defining a clear path to durable growth. We are making good progress on the strategy and the portfolio review. And I would like to emphasize that I'm confident about the choices we will be making to focus the company and to grow value in the future. We are really -- we'll provide clarity at the Capital Markets Day in June about where do we want to invest and grow and what are the parts of the business that we see more for harvesting or divestment. This will be completed in the coming month. And like I said, 23rd of June Capital Markets Day is planned. On that day, we also intend to provide a clear update on our capital allocation strategy, linking our portfolios directly to value creation. So that's on the strategy. Now finally, I would like to discuss the elements of our guidance for 2026, and that is here on the slide now. You might have read that we are not providing guidance on comparable sales growth, and let me explain why we don't do that. We had a really good look, and we continue to see a huge divergence in dynamics across our markets globally and actually across the different parts of our portfolio. And combined with this is, of course, the ongoing uncertainty in the macro environment. And in this context, providing a very wide guidance range would, in our view, not be meaningful. So we thought we better than -- not provide guidance. That said, of course, I can comment on what our expectations are. We expect continued resilience in the U.S. We expect our OEM and professional business to remain challenging, so more of the same. At the same time, our Consumer business is expected to maintain its momentum, supported by the strength of our connected portfolio. Regarding the profitability, we expect an adjusted EBITA margin in the range of 7.5% to 8.5%. We are anticipating a soft start of the year and near-term view with headwinds that we experienced in Q4 to persist in the first half of this year. And of course, this will continue to weigh on the margins in the first half and the challenges we have then on the cost under absorption. For the second half of the year and onwards, the actions we are taking on costs are expected to start providing upsides. And finally, the free cash flow generation is expected in the range of 6.5% to 7.5%, so supported by that strong cash conversion that we have and the continued capital discipline. So with this, I would like to hand it back to the operator and start the Q&A session. Operator: [Operator Instructions] The first question comes from Goldman Sachs. Daniela Costa: Daniela from Goldman Sachs. I just wanted to ask how have the market shares by division trended recently? Yes. A.C. Tempelman: Thank you for the question. Market share is always a bit lagging because you asked about it recently. So typically, we have actuals for the quarter. The market data follows the quarter. So there's a bit of a lag effect. What we mentioned on the -- before on the results in Europe, the market has been a bit sluggish. But a lot of the revenue decline also is driven by lower prices. So when it comes to volumes, we feel that we are keeping or maybe even growing market share in many of the segments when it comes to projects. And then probably where there is the trade channel is where we see the steeper decline, and we probably lose some market share there. In the U.S., it's pretty stable. Yes, I think it will be the short answer what we know now. That said, I mean, maybe just to highlight on the Consumer and the Connected side, I think that's where we are actually -- we spoke about the momentum, and the comments I just shared were more on the Professional business. On the Consumer, we are building momentum. And in the Connected space, we're clearly gaining market share. So that's positive. Operator: The next question comes from Max Yates from Morgan Stanley. Max Yates: I maybe had just sort of 3 quick questions. Just firstly, on the Chinese competition, could you maybe give us a feel for kind of what kind of pricing you're seeing from those Chinese competitors? And I don't know whether you have any kind of good feel on the level of imports that are coming into Europe now as a result of obviously tariffs in the U.S. So maybe any feel of, yes, how the level of pricing is versus those competitors and the level of imports, if you have any kind of knowledge of that? A.C. Tempelman: Yes. Let me say a few things, and maybe, Zeljko, you can add to it. I mean, there's China in China and then there's China for the world. So within China, I think we saw growth in our professional business, where I think we have really outperformed market. So that's positive. On the consumer market in China, we saw quite a steep decline in the fourth quarter. And you see that the consumer demand in China is very dependent also on the subsidies provided. So absent subsidy, we saw quite a bit of decline. That weakness is not just in lighting, that is beyond in the broader consumer space. When it comes to exports, basically, the dynamic in China is such that there's overcapacity in the market. And of course, a lot of the LED is produced in China. Also to deal with some of the challenges around tariffs, we see Chinese suppliers building additional capacity in the East, but outside of China. So, therefore, the overcapacity is only increasing. And that, of course, results into price pressure. We see that in ASEAN. We also see that in Europe, particularly in the trade channels, the more commoditized part of the portfolio. On the positive side, on the Prof side and the project side and the connected lighting, that is a lot less impactful. And there, of course, we also retain our strong margins. Quarter-to-quarter, we don't see it worsening a lot. So it's pretty stable now. Has it bottomed out? Well, too early to tell, I guess, but we don't see a rapid further decline in that sense. Zeljko, is that -- do you want to add anything to that? Zeljko Kosanovic: No. I was going to confirm, indeed, if you look at the sequential, the drivers of price pressure that were there, especially in the non-connected and in the over-the-counter parts of our business, have been amplified indeed by the ripple effect of the tariffs. Having said that, the price pressure remains very, very strong in OEM, in Professional Europe. But at the same time, we've seen a positive dynamic in price in U.S. and also in the Conventional businesses. So I think overall, from a gross margin management perspective, that's very important because we do manage as a whole, and we've been able to extract and continue to extract strong bit of material savings to match the reality of those price pressures. Max Yates: Okay. And maybe just the second question, as maybe just on sort of the strategy, I know you're going through the strategy update. But obviously, the results show kind of quite a sort of difficult environment. So I guess some of the shareholders will be very keen to understand any initial takes. I hear you talk kind of quite a lot about getting growth back in the business. Any initial views on kind of how you do that? Will that require investment? Is that new product momentum? I realize we'll get a kind of full picture later this year, but maybe just any initial takes on sort of what direction you may take? And how you plan to sort of tackle the growth challenges, which the business is having? A.C. Tempelman: Yes. No -- I mean, like I said, I feel increasingly confident that we'll make the right choices and focus the company. And of course, focusing on where the growth is. So that is with -- we are really going quite granular on how do we expose our portfolio to growth and how do we then challenge our marketing and sales investments to those areas where we do see the growth. And so we look at where we can win in terms of geographies, in terms of value chain, but within the Prof and Consumer business also very much at the segment level and product market's combinations where we see the growth. So that's what we're currently working towards. And that will then ultimately result into, hey, these are the areas where we want to focus less. This is where we want to focus more. This is where we want to invest and grow, and this is what we want to harvest or consider for divestments. And I'm confident that in June, we can give you that full picture of what that results into. And I'm quite excited about the plan that we are piecing together. Max Yates: Okay. And maybe just the final one, and it kind of comes back to that growth. Obviously, you didn't do another share repurchase while you're doing the strategy review, but you did keep the dividend at last year's level. And obviously, that's quite a high level relative to your cash conversion. Do you think that's appropriate? And is that sort of consistent with what you need to do in terms of getting kind of growth back into the business and the investments that you'll have to make? Zeljko Kosanovic: Maybe just -- thank you for your question. I think first, what's important to -- that our capital allocation policy remains unchanged, and it's all about balancing growth, shareholder returns and financial strength. So maintaining a robust capital structure, of course, is very important. Now, while the returning excess capital remains part, and that's still a part of our capital allocation framework, we will pause beyond the first tranche that we have successfully implemented in 2025. And this is really to allow to sustain and maintain financial strength, balance sheet strength while keeping the flexibility. So it's really keeping the strategic flexibility as we are going through the strategic review and portfolio review that As was commenting upon. So we will reassess the timing, and that's one of the key elements, of course, that we will give full clarity upon during our Capital Markets Day in June. Operator: The next question comes from Sven Weier from UBS. Sven Weier: The first one is on the cost saving program. A few follow-ups there. I was just wondering because you said you have to unfortunately lay off 900 employees. But in total, you're seeing EUR 180 million of cost savings. So that sounds quite high relative to the number of headcount. So I was just wondering what else is in the cost savings here? And you just had a EUR 200 million program 2 years ago. So I was also wondering, you're now cutting quite a lot here again. Does that not automatically enforce also getting out of certain businesses because your basis becomes quite a bit lower? That's the first one. Zeljko Kosanovic: Yes. Thank you, Sven. Thanks for your question. So just as a clarification, I think, as you rightly pointed, we did go through a substantial cost resizing program a few years ago, but this is different. And the main important difference is that we are implementing that, as mentioned earlier, leveraging and fully leveraging our operating model. So the cost reduction program has different elements, and this is really going into all the layers of -- in particular, of our SG&A, R&D and on a business per business level. So there's a lot of granularity in the way we drive that. Of course, a big portion of that is relating to headcount, but not only. So there are different levels of optimization that we are also implementing, which are behind, and that is being, of course, underpinned at a very, very detailed level. So I can't give you the -- all the detailed breakdown of that. But to your point, I think there are different elements, including headcount resources redeployment, but also many other efficiency measures that we are implementing. A.C. Tempelman: Yes. And Sven, to add to what Zeljko is saying is that I see cost discipline and cost management in our industry as absolute critical to stay competitive. And therefore, it should be a continuous effort, right? And it's business as usual to drive productivity up, right? And of course, also with automation and applications of AI, I think in the future, we can continue doing that. This is, however, a reset that is now required with the new operating model in place. We can make this step change without harming the business. And then, from there on, it should be much more of a continuous effort. Sven Weier: And does that already preclude kind of what you do in June? Or could there be another round of major cost savings announced then after June? A.C. Tempelman: Sven, the current program is -- as a basis of the current program is the current portfolio. So of course, if we take decisive action on the portfolio, we will then again assess what is the appropriate cost base. Sven Weier: And then maybe finally, I just wonder, because if I take the guidance and you don't give a top line guidance, obviously, but let's, for the sake of the calculation, assume flat revenues and you take the midpoint of the margin target, that kind of implies already mid-double-digit EBIT decline. But on the other hand, you say the majority of the cost savings are going to be in 2026 already. So -- I mean, what's really happening on underlying business then because that sounds quite extreme in terms of what you're losing in terms of earnings? Are you assuming such steep revenue declines, price pressure or -- because as you can see that when you do the bridge, it sounds pretty drastical? Zeljko Kosanovic: So maybe, Sven, to give a bit of perspective on what's behind the guidance more as a dynamic of the main building bricks in our profitability, I think first, and that's important, as we've been able to sustain in 2025, gross margin resilience and robustness. So this is still something that we are driving and aiming to continue to drive, which is built in. Now, what we see in terms of the dynamic is we do anticipate a soft start of the year from a top line perspective with the headwinds that we've commented upon and that we experienced in Q4 that are expected to persist into the first half, and that will continue to weigh on margins in H1 just due to the fixed cost under absorption. Now, at the same time, as we are implementing and putting in place and putting in motion, now in execution, the cost resizing actions that will take -- which benefits will be more captured in the second half of the year. That will help to, of course, rebuild the strength of the bottom part of the P&L, and that's what is behind, let's say, included in the guidance or in the expectation on the EBITA margin. And as mentioned earlier, this is in the context of very diverse dynamics in the different businesses from the top line perspective. So these are the elements that we are -- that are to be understood in the evolution of our operating margin throughout 2026. Sven Weier: Are you assuming, again, 2/3 of the savings this year like in the last program? Zeljko Kosanovic: It's more back-end loaded. I think here, the aim is -- and of course, different impacts in different geographies and different businesses depending on the phasing. So it's mostly going to be as back-end loaded, a little bit different, as I said, from the previous program because the previous program was doing an organizational change at the same time as implementing cost resizing. Here, it's really the implementation within and leveraging the same operating model. So there's a different pace of capture in the different businesses. Obviously, in businesses like OEM, where we are facing, I think, action, have already been put in motion. So there, we expect to have much faster implication and much faster capture. So it's going to be a diverse pace of realization of the savings across the different businesses. But mostly in general and overall for Signify, mostly back-end loaded towards the fourth quarter of the year. The key thing, that's what As mentioned, we want to reset and resize to the reality of our revenue to make sure that we enter -- end '26 and entering into 2027 back to the right level of competitiveness of our cost base. A.C. Tempelman: Yes. Thank you, Zeljko. And we know -- yes, I was very impressed actually with the ability of Signify to pull off such a program at the -- in a very short window. So I think very impressive. We know how to do this. That said, I mean, about 25% of the savings will be in countries where there is a consultation process. So of course, with all the respect for the people and the colleagues, we will carefully also work this in consultation with our staff councils, and that takes a bit of time. Operator: The next question comes from Akash Gupta from JPMorgan. Jeremy Caspar: It's Jeremy asking on Akash's behalf. I just have one quick follow-up on the Asian competition topic. Maybe could you elaborate a bit? I'm wondering, are we talking about 1 or 2 competitors here that are showing aggressive pricing? Or are there more than a couple? And also just wondering how do those players compare to Signify in terms of size in their comparable businesses? Zeljko Kosanovic: Maybe -- yes, thank you for your question. I think what's important to remind is that if you look at the -- let's say, the non-connected landscape of our business, if you only look at the number, and this is public information, but always important element to have in mind, is we have over 15,000 registered LED companies in China. So it's very, very scattered. So you have a lot of intensity, which is very fragmented. And the level of fragmentation is particularly high in Europe, in particular in the Professional business. So in short, the price intensity that we see is, of course, across a very, very wide and fragmented landscape. Now, having said that, as soon as we move more into the Connected space, which is much more concentrated, then we have a totally different landscape of price competition dynamics. So this is -- but this is a reality that has been there, by the way, for several years that continues to be the case and which has been amplified, as mentioned earlier, with the ripple effect of the tariffs. A.C. Tempelman: Yes. And to your question, Jeremy, is it 1 or 2? It's multiple. I mean, you see a lot of these Chinese manufacturers that sit on an overcapacity of 30% to 50% of underutilization of their plants. So of course, that translates itself into lower prices. We benefit from that on our sourcing side. So that's the upside of it. But of course, on the lower end in the trade channels, you see these Chinese products under different brands coming to the market. Operator: The next question comes from Martin Wilkie from Citi. Martin Wilkie: It's Martin from Citi. Just a question in terms of what we can expect at the Capital Markets Day in terms of timing of any actions you might take? I mean, I guess you've obviously included disposals as one potential action at the CMD. But we know in the past, some of these assets are not necessarily having huge numbers of potential buyers. I don't want to obviously preempt what you might say, but if we think of the Conventional business, it's probably not obvious that there are lots and lots of buyers for that. Will your review include sort of how quickly you could take these actions? And so can we see that sort of level of detail at CMD? Or just to understand how quickly whatever you might announce in June then be implemented, just to understand sort of how quickly the portfolio might change? A.C. Tempelman: Yes. Good question. Well, we won't be sitting still until Capital Markets Day, so where we believe we have good actions to take, we will, of course, already start that. And the doability of our choices is an integrated part of the choice itself, right? So it's not that we are dreaming on all sorts of desired states not executable. So it's really -- that plan should be really anchored into realism. And we are actively engaging also, hey, if there's value and if it comes to harvesting or divestment, is that value best delivered within Signify or by others or with others. So that's all in scope of what we look at. So the short answer is, no, that is already kind of in motion, and we will update you in June about where we stand. I don't see June necessarily as a starting point. And so we are taking a decisive action and try to move quite swiftly. Martin Wilkie: That's great. And if I could just have an unrelated question just on how we think about the profit for next year. Am I right in thinking that the EUR 180 million all falls within the OpEx line? And so any savings that you have in COGS to offset price and these kind of things to protect gross margin is distinct from that, and therefore, this EUR 180 million is all inside OpEx? Zeljko Kosanovic: Yes, you're right, Martin. I think the cost is mostly our nonmanufacturing cost base optimization for all the other cost of goods sold, as we've mentioned, and we'll continue to do that. I think there, we are driving and exercising cost leadership and leveraging scale, of course, to the largest extent we can, but the cost reduction program that has been mentioned of EUR 180 million is non-manufacturing cost related. Operator: The next question comes from Chase Coughlan from Van Lanschot Kempen. Chase Coughlan: I just have 2. Maybe starting off with the U.S. market. I think you flagged that it's, of course, still growing in the fourth quarter. You said that 2026 expectations are for a resilient market in the U.S. I think it's a little bit, let's say, against the grain as to what I've heard elsewhere in the market from building materials or construction players. And I'm just curious on what's giving you that confidence in a resilient U.S. market for '26. A.C. Tempelman: Okay. While we see the U.S., we expect flat to moderate growth, Chase, and the expected increase in the bit of public spending also is supported by the recent bills. The residential market, I expect will remain soft. So I think when you say, I see more bearish fuse, then it's probably more related to the resi construction. Yes. We -- yes, so kind of flattish markets, low-digit growth potentially. On the consumer side, however, there, we are more optimistic, and we think we can keep the momentum and keep growing the business, particularly on the Connected side. Chase Coughlan: Okay. Great. That's very helpful. And then, my second question on China, so you've flagged that, of course, you're seeing some inflows there for several macroeconomic reasons and particularly in the commoditized sort of range that you offer. I'm just curious on, especially given the 5-year plan in China now, it seems that they're focusing a bit more on connected lighting systems as well being manufactured domestically. Do you see, let's say, a midterm risk that over time, yes, maybe the Chinese products in flowing into Europe are not just limited to this commoditized range? Or how might you protect against that? A.C. Tempelman: Well, what I can say is what we've seen so far. And there, I think we feel quite confident that we have a very strong competitive edge in that connected market, and we see no signals of that changing. I mean, we'll see how the market responds to offerings by others. But so far, I have no reason to believe that, that is where the Chinese commoditization will go. It's very much focused on manufacturing excellence on the hardware side. Yes. Operator: The following question comes from Marc Hesselink from ING. Marc Hesselink: Yes. First question is on your free cash flow guidance. If you look at the -- let's call it, the drop in the adjusted EBITA margin and then compare it to the free cash flow drop as a percentage of revenue, it is a bit better. I think you also started -- ended the year with very good working capital, good free flow of that. Do you expect more of those working capital improvements to support the free cash flow a bit? Zeljko Kosanovic: Marc, yes, the short answer is yes, definitely. As we've indicated in previous communication, I think working capital improvement in particular through inventory optimization, and that goes hand-in-hand with the supply chain excellence focus that As was commenting upon, is an important driver to our structural cash generation improvement. So that's an element that indeed is taken into account on driving the continued dynamic of strong cash generation in '26. Marc Hesselink: Okay. Second question is on your Conventional business. I think historically, you had -- did a very good job managing down that Conventional business and also protecting the margin in that process with the footprint rationalization. And now, you see actually quite a big hit on your margin. Did those dynamics that you can run down that business, did that materially change that it now is different? Zeljko Kosanovic: So actually, there are 2 elements. And so the answer is no. I think we do have -- and that's what we expect to normalize back to the entitlement of the teens' level of operating margin for that business in the context of continued decline. Two transitory elements that indeed weigh in the EBITA margin over the last 2 quarters, one, which is related to manufacturing process transition because as we are scaling down and adapting proactively that business, where we do a lot of site transition and manufacturing process in that context, can be impacted. So this is what we've seen a temporary increase of our manufacturing costs in the transition, and this is something we do expect to normalize by end of Q2, so into H2 back to normal. And then the second one, which was a little bit more specific to Q4, where we had the delayed effect of tariff cost increase, which are being mitigated through price. So the price-through had a bit of a lag effect compared to the cost impact in Q4, which will be normalized already in the first quarter. So 2 transitory elements that are impacting in what you see, but no change vis-a-vis our ability to bring the profitability again to the levels of entitlement of teens profitability that we had indicated earlier. So it's a transitory impact of a few quarters. Marc Hesselink: Okay. That's clear. And another bit smaller question is on the other division. You mentioned that you had less revenue from your ventures business. But then, it's quite a big hit on your profitability, almost EUR 10 million difference. I mean, that seems a bit big for a ventures business. But can you explain the dynamic? And if that's true, what does that mean for the coming quarters? Is this something where you will have quite significant higher cost than what you had in the previous quarters of '25? Zeljko Kosanovic: Yes. So look, first of all, and as the scope of what is reported in the other, so you have indeed the profitability of our central ventures. So you do have also other global costs, right, which are reported there. So I think the main impact, indeed, as you highlighted, is the effect of indeed a much lower sales volume in the ventures, and that impacted directly to the bottom line, which is -- one of them is also exposed to the dynamics of the consumer market in China, in particular, so this one. And it's good to remind that we had actually a comparison base that was very high in Q4 last year because this was a business that really had a very strong growth and strong dynamics. So we have a bit of a double whammy kind of comparison base effect. So it's transitory by nature, and this is the nature of those venture businesses, which are reported under other. But the other segment is not only venture P&L, just as a reminder. It includes also other global costs. Marc Hesselink: Okay. So what would then be like a normal level that you would have without these temporary effects? Zeljko Kosanovic: Yes. Look, I cannot disclose a specific guidance on the other. But I think what we've seen in Q4, I think we expect in the coming quarter to go back to kind of normalized level that we saw in the previous quarter. So there's a bit of volatility in the venture business. So I can't give you a precise guidance on that, but we do not expect coming quarters to be as low as what we saw in Q4 in terms of revenue for the ventures. Operator: The next question comes from Adam Parr from Rothschild & Co Redburn. Adam Parr: Just a question on CapEx, please. Could you just share a little bit more detail? It appears to have jumped to 2.7% in the fourth quarter versus the 2022 to 2024 range of about 1.7% of sales. Just wanted to ask what's been driving this increase? And what do you see as a sort of more normal level in 2026 and 2027? Zeljko Kosanovic: Yes. Look, in the CapEx line, so you have different elements. So the -- if you compare on the quarter-to-quarter or year-on-year, quarter-on-quarter basis, I think you may have a different dynamic. So typically you have 3 things. You have the tangible CapEx, which is, in general, quite stable. So no real volatility there. Then, we also had the effect of real estate transactions, so that impacted differently this year compared to the previous year. And then, we have also intangible CapEx, which are more related to product development to IT project capitalization. So different dynamics. But overall, I would say, as a percentage of sales, I think we should not expect any significant change of the level. I think our business has a very low CapEx intensity in general, and that will remain so. So a bit more volatility when you compare it on the quarter versus quarter because of those 3 buckets or 3 building bricks that have different dynamics. Adam Parr: Okay. Maybe I could just follow up. And when you say capitalizing sort of cost of product development, can we assume that's mostly connected there? Zeljko Kosanovic: It is indeed. Operator: The last question comes from Wim Gille from ABN AMRO-ODDO BHF. Wim Gille: I hope you can hear me. First question is on the, let's say, comments that you made around the consumer business. When you were looking into 2026, you mentioned you expect to keep momentum in Consumer. However, if I look at the comparable sales growth for the fourth quarter, it was actually quite weak. So what did you actually mean with that comment? So should we look at the comparable sales growth in Consumer for the full year? Or what exactly did you imply with keeping the momentum in the consumer space? And in relation to that, you mentioned specifically that the consumers in China have been weak. But if I read any other consumer company, the consumers in China have been absent since COVID. So they haven't done anything in the last couple of years. So do you actually see a material change here? And is that market-driven? Or is it more market share related, where you basically lose out against very desperate local producers there? And my follow-up question would be a much more optimistic one, and it's around the growth verticals. If I hear you correct, connected lighting in growth vertical actually stands at around 36% of group sales for the year. That's up materially from 33% last year. So is my math correct that the growth verticals, including connected lighting actually grew in 2025 in the low to mid-single-digit range? A.C. Tempelman: Thanks, Wim. And let me give it a go and maybe Zeljko wants to add. But indeed, for the consumer, I think if you have a reference point, the full year would be much more indicative of how we see the consumer business moving forward than the fourth quarter. We have great momentum. I think it's fair to say that we are confident about market, but we're also confident about gaining market share. And that is both on the Connected Hue range, but also on the luminaire side. We expect -- we see some real good growth opportunities, and that offsets a decline on the more commoditized and declining lamps business. So if you add the whole mix of consumer, we feel we can keep that growth momentum as we've seen for the full year last year, maybe more. On China, that, like I said before, it's -- the demand in China, it has been sluggish, but it's also heavily imported by the support schemes put in place by the government. And you see that once these subsidies do come in that you see demand popping up quite quickly as well. So it's a bit volatile and unpredictable. So we'll need to see how that plays out. But indeed, a decline -- sharp decline we've seen in China consumer markets in Q4. We think that, that will continue to be challenging at least in the first quarter of this year. On the growth of the verticals, you're quite right. I mean, we are very excited about the growth opportunities there. And we do see that growth that you spotted is indeed happening in '25. So that is -- I don't know what you said, low single digit. I think it's more higher single-digit growth that we see around Professional and Consumer. So we -- like Zeljko indicated, we will continue to invest in it. We also see that clearly as an area for future growth going forward. Wim Gille: And can you split the, let's say, penetration? So it's 36% on group level. Can you give us a broad indication where you are in Prof and where you are in Consumer? A.C. Tempelman: Well, that is the level of granularity that we typically don't provide. What I can say, Wim, is that it is -- in both businesses, it's growing at a similar high rate. Yes. So high single digit, if not double digit in some areas. Operator: Thank you. And with that, I will now hand the call back over to Thelke Gerdes for any closing remarks. Thelke Gerdes: Ladies and gentlemen, thank you very much for joining our earnings call today. If you have any additional questions, please do not hesitate and reach out to us. Thank you very much, and enjoy the rest of your day.
Kentaro Asakura: Ladies and gentlemen, thank you very much for your patience. Now we would like to start FY 2025 Third Quarter Financial Results Presentation. I am from Corporate Communications. My name is Asakura. I will be facilitating today's session. In this presentation, we are going to use Japanese and English. We have simultaneous interpretation service available. [Operator Instructions] We have uploaded Japanese and English presentation material in IR library on our corporate website. Whenever necessary, please feel free to download the material. Today's presenters are Mr. Ogawa, Senior Executive Officer, CFO; Mr. Abe, Head of R&D Division; and Mr. Ken Keller, Head of Global Oncology Business. Now Ogawa and Abe are going to take you through the financial results for the third quarter FY 2025, and then we are going to open the floor for the Q&A. Today's session will be recorded. I would like to ask for your cooperation. Now Ogawa-san, please. Koji Ogawa: This is Ogawa. Thank you for participating in Daiichi Sankyo's earnings briefing today despite your busy schedule. Now I will explain the consolidated financial results for the third quarter of fiscal year 2025 announced at 15:00 today based on the materials. Please look at Slide 3. The content I will discuss today is as follows. Fiscal year 2025 third quarter consolidated financial results, business update, research and development update. The research and development update will be explained by Abe, Head of R&D Unit. We will take your questions at the end. Please look at Slide 4. These are the highlights of the current earnings. Our flagship products, the anticancer agents, ENHERTU and DATROWAY continued to grow steadily and revenue increased significantly. The cost of sales ratio improved compared to the second quarter and core operating profit increased by 8.8% year-on-year. No additional major temporary expenses were incurred in the third quarter. There are no changes to the fiscal year 2025 consolidated earnings forecast from the October announcement. Please note that as reference information, the latest sales forecast for each product are listed in the supplementary earnings materials. Although there are some movements in individual products, there is no change in total revenue from the October announcement. Please look at Slide 5. This slide shows an overview of the fiscal year 2025 third quarter consolidated financial results. The revenue was JPY 1,533.5 billion, an increase of JPY 165.9 billion or 12.1% year-on-year. Cost of sales increased by JPY 13.8 billion year-on-year. SG&A expenses increased by JPY 93.7 billion, and R&D expenses increased by JPY 38.1 billion. As a result, core operating profit was JPY 249.2 billion, an increase of JPY 20.2 billion or 8.8% year-on-year. Operating profit, including temporary income and expenses, was JPY 233.8 billion, a decrease of JPY 14.5 billion or 5.9% year-on-year and profit attributable to owners of the company was JPY 217.4 billion, an increase of JPY 8.8 billion or 4.2% year-on-year. Regarding actual exchange rates, the dollar was JPY 148.75, yen appreciation of JPY 3.81 compared to the same period last year and the euro was JPY 171.84, yen depreciation of JPY 7.02 compared to the same period last year. Please look at Slide 6. From here, I will explain the factors for increases and decreases compared to the same period last year. Revenue increased by JPY 165.9 billion year-on-year, and I will explain the breakdown by business unit. First, for the Japan business unit and others. Sales of DATROWAY, Belsomra for the treatment of insomnia and Lixiana, direct oral anticoagulant and Tarlige, the pain treatment drug increased. On the other hand, sales of Inavir, influenza treatment drug decreased. And unrealized profit on inventory of Daiichi Sankyo Espha was recorded as realized profit in the previous period, resulting in a revenue increase of JPY 10.7 billion. The actual increase or decrease in the vaccine business, which is affected by seasonal demand after provision for returns was an increase of JPY 300 million. Next, I will explain the overseas business units. Here, the foreign exchange impact is excluded. Oncology business increased by JPY 113.3 billion due to growth in sales of ENHERTU and contribution of at DATROWAY sales. American region decreased by JPY 24.3 billion due to the impact of generic entry for the iron deficiency anemia treatment, Venofer, and the impact of price competition for Injectafer. EU Specialty business increased by JPY 13.6 billion due to growth in sales of Nilemdo/Nustendi for the treatment of hypercholesterolemia. ASCA business, responsible for Asia and Latin America increased by JPY 35 billion as ENHERTU grew mainly in China and Brazil. Contract upfront payments and development sales milestones related to partnerships with AstraZeneca and U.S. Merck in the third quarter resulted in an increase of JPY 20.9 billion. We received development milestone income from AstraZeneca associated with approval for first-line treatment of HER2-positive breast cancer in the U.S. for DESTINY-Breast09 and received a second upfront payment from U.S. Merck for R-DXd, which were recorded as sales revenue. The foreign exchange impact on revenue decrease was JPY 3.3 billion overall. Slide 7 shows the factors for increase and decrease in core operating profit. I will explain the JPY 20.2 billion increase by item. As explained earlier, revenue increased by JPY 165.9 billion, including a foreign exchange impact decrease of JPY 3.3 billion. Next, regarding the cost of sales and expenses. Excluding the foreign exchange impact, Cost of sales increased by JPY 12.4 billion due to increased revenue and the recording of inventory valuation losses for ENHERTU and others in the second quarter. SG&A expenses increased by JPY 100.3 billion, mainly due to an increase in profit sharing with AstraZeneca. R&D expenses increased by JPY 42.6 billion due to increased R&D investment associated with development progress of 5DXd ADCs. The expense decrease due to foreign exchange impact was JPY 9.7 billion in total and the actual increase in core operating profit, excluding the ForEx impact was JPY 13.8 billion. Next, on Slide 8, I will explain the profit attributable to owners of the company. As explained earlier, core operating profit increased by JPY 20.2 billion, including the impact of ForEx. Regarding the temporary revenue and expenses, again, as explained at the second quarter briefing in late October, same period last year included temporary income from the sale of shares in Daiichi Sankyo Espha. However, this year, we don't have such impact. Although there were incomes related to litigation with former shareholders of Ranbaxy, overall income decreased. Furthermore, there was a JPY 34.7 billion negative impact due to CMO compensation fee associated with the change in the launch timing of HER3-DXd as well as write-down of inventories of DATROWAY and HER3-DXd. Financial income and expenses contributed positively to earnings by JPY 9.5 billion, mainly due to improved FX gains and losses. Income taxes and so on decreased by JPY 13.9 billion, reflecting lower pretax income and the lower effective tax rate compared to the same period last year. As a result, profit attributable to owners of the company increased by JPY 8.8 billion year-on-year to JPY 217.4 billion. Next is business update. Please turn to Slide 10. This slide shows the sales performance of ENHERTU. Global product sales for the third quarter of FY 2025 increased by JPY 102.4 billion year-on-year to JPY 506.8 billion. New patient share remains #1 in all major countries and regions for existing indications such as breast cancer, gastric cancer and lung cancer. Regarding the new indications, we've started promotion for first-line treatment of HER2-positive breast cancer in the U.S. last December, driving growth in new patient share. In China, we've initiated promotion for hormone-positive HER2 low or ultra-low chemo-naive breast cancer patients in December, followed by promotion for second-line treatment of HER2-positive gastric cancer in January. The NCCN guideline has seen new additions and updates for multiple cancer types. First, ENHERTU has been newly added as a Category 1 recommendation for adjuvant therapy in HER2-positive breast cancer with high recurrence risk. For HER2-positive metastatic breast cancer, HER2 monotherapy was already recommended as first-line therapy based on data from the DESTINY-Breast03 trial, a second-line trial, which demonstrated extremely high efficacy. Additionally, based on data from the DESTINY-Breast09 trial, combination therapy with pertuzumab has been newly added with a category 2A recommendation. For HER2-positive uterine cancer, in addition to existing recommendations for endometrial cancer, ENHERTU has been newly listed with a Category 2A recommendation for endometrial carcinosarcoma. For HER2-positive esophageal and gastric cancers, the recommendation level has been elevated from Category 2A to category 1. ENHERTU is already listed in the NCCN guidelines for numerous cancer types and is recommended for use. We'll continue to generate data to pursue further new listings and category updates. Next, I will explain the sales status of DATROWAY. Please refer to Slide 11. Global product sales for the third quarter fiscal 2025 reached JPY 31.6 billion, representing 83.8% of the October forecast. In addition to steady market penetration for the breast cancer indication in Japan and in the U.S., the lung cancer indication rapidly gained market traction in the U.S., significantly increasing the number of new patients. Globally, prescriptions were issued to over 3,000 cumulative patients, approximately 1.5x more than the end of the previous quarter. Sales growth significantly exceeded expectations in both the U.S. and Japan with lung cancer indication, particularly driving sales in the U.S. Given these circumstances, we've updated our full year forecast to JPY 47 billion, up by JPY 9.2 billion from the October forecast. For both breast cancer and lung cancer, prescriptions have expanded beyond the projections. This is primarily due to much higher-than-expected unmet needs, especially in the third line and later, leading to prescriptions for more patients than expected. Additionally, awareness among health care professionals regarding AE management such as stomatitis and dry eye, an area where we have focused on since the launch has increased and experience is being accumulated. Furthermore, DATROWAY has seen new additions and updates in the NCCN guidelines. For triple-negative breast cancer, it's been newly added as a Category 2A recommendation for first-line treatment. For EGFR mutated NSCLC, recommended EGFR mutation coverage has been expanded from the existing category to existing, widening the opportunity for DATROWAY to make further contribution. We'll continue to pursue further market penetration in existing sales regions and expand into new countries and regions while advancing efforts to obtain new indications. We are committed to delivering ENHERTU and DATROWAY to as many patients as possible who need these medications. Slide 12 shows an update on Seagen U.S. patent dispute related to our ADC. Last December, the U.S. Court of Appeals for the Federal Circuit issued a ruling reversing the District Court's decision that ordered us to pay damages and royalties to Seagen, finding that Seagen's U.S. patent was invalid. The court issued a ruling affirming the U.S. Patent and Trademark Office decision that Seagen's U.S. patent is invalid, dismissing Seagen's appeal. We highly value this ruling by the court. Slide 13 is information about the briefing session. On April 8, Japan time, we will hold the sixth 5-year business plan briefing. Once details are finalized, we will inform you. From here, this is the R&D update. I will hand it over to Abe, Head of R&D. Yuki Abe: Thank you. This is Abe. I will talk about the R&D update. First, I will explain about 5DXd ADCs. Next slide, please. In December last year, ENHERTU in combination therapy with pertuzumab obtained approval for the first-line treatment of the patients with HER2-positive unresectable or metastatic breast cancer in the U.S. As you know, this indication based on the DB09 study was approved under breakthrough therapy designation, priority review and real-time oncology review program. Regulatory filings have also been accepted in Japan, China and Europe. And through Project Orbis, multiple regulatory authorities are proceeding with reviews. Next, please. I will talk about the final analysis results of the DESTINY-Breast03 study presented at the San Antonio Breast Cancer Symposium in December last year. This is a Phase III study that compared and verified the efficacy and safety of ENHERTU and T-DM1 for second-line treatment of HER2-positive breast cancer. As you can see in ENHERTU group, the median OS was 56.4 months and estimated 5-year survival rate was 48.1%, showing long-term significant efficacy compared to the T-DM1 group's median OS of 42.7 months and estimated 5-year survival rate of 36.9%. In addition, no new safety findings were observed through long-term follow-up. And the incidence rate of ILD adjudicated to be drug related in the ENHERTU group was 17.5% with no Grade 4 or 5 ILD observed. This indication has already been approved and launched in many countries and regions, including Japan, the U.S. and Europe. But these results reconfirmed ENHERTU's consistent sustained efficacy and long-term safety and substantiated its contribution to improving survival. Next, please. This slide summarizes updates toward expanding indications for ENHERTU. ENHERTU is making steady progress in expanding indications in various countries and regions centered around breast cancer. And in December last year, based on the results of DB05 for post neoadjuvant therapy for HER2-positive breast cancer with high recurrence risk, it received breakthrough therapy designation in the U.S. Also in December, based on the results of DB06, approval was obtained in China for the indication of chemotherapy naive hormone receptor positive and HER2 low or HER2 ultra low breast cancer. And this month, based on the results of DG04, approval was obtained in China for the indication of second and later line treatments for HER2-positive gastric cancer. Previously, in China, third-line treatment for HER2-positive gastric cancer had conditional approval. But with this approval, full approval has been obtained for second and later-line treatment. Next, please. This slide shows the progress of each ENHERTU study. Aiming to contribute to more HER2-expressing cancers, we started DESTINY-Lung06 in October last year, targeting first-line treatment of HER2 overexpressing non-squamous NSCLC. And in December last year, we started the randomized phase of DESTINY-Ovarian01 targeting first-line maintenance therapy for HER2-expressing ovarian cancer and DESTINY-Endometrial-02 evaluating adjuvant therapy for HER2-expressing endometrial cancer. Next slide, please. From here, this is the progress of DATROWAY. Data from the TROPION-Breast02 trial targeting TNBC not eligible for PD-1, PD-L1 inhibitor treatment was presented at ESMO in October last year. Based on this data, filings for approval were submitted in Europe and China and were accepted in December last year. Procedures toward filing are also progressing in other countries and regions. For TNBC, as shown in the table on the left, in addition to the TB02, 3 Phase III studies are ongoing in early stage and recurrent metastatic stage. Next, please. This slide introduces new Phase III trial. The TROPION-Lung17 trial compares DATROWAY monotherapy with docetaxel in patients with non-squamous NSCLC in second line or later setting. Building on insights from prior studies such as TROPION-Lung01, we target at patients with TROP-2 NMR biomarker positive. This trial aims to expand the treatment opportunity for DATROWAY monotherapy in NSCLC. Next slide. This slide introduces the latest status of the ongoing DATROWAY trials. The first is the TROPION-Lung07 trial, which targets first-line treatment for non-squamous NSCLC with PD-L1 expression below 50%. This trial had not previously applied the TROP-2 NMR biomarker, but following a protocol amendment, PFS and OS in the TROP-2 NMR-positive population were newly added as primary endpoint. The second is the TROPION-Lung12 study. This is an adjuvant therapy trial for Stage 1 NSCLC with ctDNA positive or high-risk pathological features evaluating combination therapy with rilvegostomig. Regarding this trial, due to complexity of study operation, we've decided to discontinue patient recruitment. No new safety concerns were identified, and there is no impact on other DATROWAY trials. Next slide, please. From here onward, I would like to talk about the progress of next wave. For EZHARMIA, we are preparing a Phase I trial combining darolutamide with EZHARMIA for metastasic CRPC. Regarding DS-9606, a modified PBD ADC targeting Claudin 6, we've decided to discontinue its in-house development following a strategic portfolio review. Meanwhile, DS-3610, a STING agonist ADC introduced at last year's Science and Technology Day commenced its first in-human trial in November last year. This slide shows that EZHARMIA received Prime Minister's award. EZHARMIA was approved in Japan 2022 for the treatment of relapsed/refractory adult T-cell leukemia lymphoma and in 2024 for relapsed or refractory peripheral T-cell lymphoma. Japan was the first in the world to obtain approval. This time, in combination of health care -- in recognition of health care contribution through establishing a new cancer therapy targeting EZH1/2 epigenetic regulation, we've received the Prime Minister's award at the 8th Japan Medical Research and Development Awards following Enhertu's award at the 6th ceremony. We are extremely pleased that the drug independently developed by Daiichi Sankyo is contributing to patients' treatment and that its achievement has been recognized by the society. Finally, news flow from now onward. Regarding upcoming regulatory decisions, we anticipate review results for DESTINY-Breast11 trial from the U.S. FDA in the first half of next fiscal year. As for the upcoming key data readouts, for the DESTINY-Lung04 trial of ENHERTU for the first-line therapy of HER2-mutated NSCLC, data is expected in the first half of next fiscal year. For the TROPION-Lung07 and Lung08 trials of DATROWAY for first line of NSCLC, data is expected in the second half of next fiscal year. Furthermore, AVANZAR trial data is now expected in the second half of calendar year 2026. Additionally, data from TROPION-Lung 15 trial, which targets EGFR mutated NSCLC after osimertinib is still expected in the next fiscal year as previously planned. Slide 29 and onwards are appendix. Please take a look at those slides later. That's all from myself. Operator: [Operator Instructions] The first question is from Yamaguchi-san, Citigroup. The sound is back now to the translation line. Sorry, we missed the question from Yamaguchi-san. Unknown Executive: Well, regarding 9606, we stated that our in-house development will be discontinued. As we proceeded in our development, we had the result. And regarding mPBD itself, its utility was confirmed. Hidemaru Yamaguchi: And then how should we do moving forward? Unknown Executive: We may have an option taking partnership with other companies who may be interested in out-licensing of this asset, but in-house development will be discontinued. Therefore, regarding mPBD technology, its usefulness has been confirmed. Therefore, the subsequent researches are ongoing. Therefore, changing the targets, the clinical programs will continue. That is our policy. Hidemaru Yamaguchi: So I'm sorry. But including the competition, for clothing -- regarding 9606, given the strategic value, you decided not to do it on your own. Is that right? Unknown Executive: In giant cell tumor, we had a positive result. So there is a room of making more development in that area. But given the portfolio perspective, we decided not to continue the in-house development in this field. I see. Hidemaru Yamaguchi: Another question is ENHERTU marketing. First, starting from December, promotion started. And I'm sure if it's already appearing quantitatively in the numbers, but what is your feeling in the market, DB09 marketing promotional activities, how effective the activities are producing the results? Unknown Executive: Thank you for your question. Regarding DB09 current status, Ken Keller is going to give you a comment, please. Joseph Kenneth Keller: Yes. Thank you very much for the question. So DESTINY-Breast09, which is the first-line HER2-positive metastatic breast cancer indication, it's been launched in the U.S. The team is now educating our oncology customers in the U.S. The data, as you know, is really outstanding. It's being received very, very well. I would expect the adoption to be very, very quick. At this point, the oncology community knows ENHERTU very well. They're comfortable with it. And with this data, I think they will embrace it very quickly. Hidemaru Yamaguchi: Do you have some sense of penetration rate as of today or it's too early to say? Joseph Kenneth Keller: It is too early to say what it is. We just launched it really just a little while ago. And so we'll be able to provide you with more information in about a quarter from now. Operator: Next question is from Daiwa Securities, Hashiguchi-san. Kazuaki Hashiguchi: This is Hashiguchi speaking. My first question is related to ENHERTU Japan, your sales situation. So this time, you have made a downward revision of your forecast slightly compared to the original forecast, what's going -- what is going differently? What is the background for you to take your forecast downward? Can you explain about the reason and the background for that? Unknown Executive: Yes, I would like to make one comment first, and then I would like to ask Ken Keller to make some additional comments. In Europe, we are seeing some adjustment. When we look at the quarter-on-quarter situation in Europe, there has been a change to the ERP system. As a result, we had to do some shipment in the second quarter, and that was affecting the quarterly sales. But I would like to ask Ken Keller to comment on the situation in Europe and sales from a full year sales perspective. Joseph Kenneth Keller: Thank you very much. When we look at ENHERTU in Europe, we're in a situation where all of the countries have launched the HER2-positive second-line metastatic breast cancer indication. And the market share, the penetration has already achieved a very, very high level. And so we see continued growth in that setting. But now as we look forward, we're going to see substantial growth in Europe as the different countries obtain access for the HER2-low indication. We've got the HER2-low indication in most countries in Europe, but now we're working through the typical reimbursement approval. As these occur, you'll see an acceleration of growth in Europe. Kazuaki Hashiguchi: For Japan, what's the situation in Japan? Unknown Executive: Yes. Let me respond to that question regarding Japan. Last year, in April, we had seen some impact. NHI drug price revision just before -- just before the start timing in April, we had seen some last minute on demand and that impact still lingered. Overall, ENHERTU future growth trajectory in Japan remains unchanged. Kazuaki Hashiguchi: Next, DATROWAY NSCLC Phase III trial progress, that's what I would like to understand. Avanzar study was changed from the first half to the second half in terms of the timing. And for TL07, your disclosure was always saying that FY 2026, but AstraZeneca is saying first half of the calendar year. And in your fiscal year, latter half, you've made a timing change to the latter half of your fiscal year. And what is the reason behind this timing change? Unknown Executive: Thank you very much, Mr. Hashiguchi. First, regarding AVANZAR, enrollment has been complete. And with the event -- with the incidence of event, we understand that there has been change made, and that's all we know. And for TL07, 08, we've disclosed second half of this fiscal year. So it's still being in line with our initial plan. Kazuaki Hashiguchi: Regarding 07, primary endpoint was added this time. And so when you get the overall primary endpoint data, I guess you are going to make a disclosure. Is that the case? Or if you collect -- can collect the data on already set endpoint, are you going to disclose those endpoints first or like all of them altogether? Unknown Executive: Thank you very much for your question. Regarding 07, NMR biomarker has been added to primary endpoint, as we have explained. And next year, second half, the PFS data is expected to be disclosed. So whenever we have event, we are going to make a disclosure. And as we have experienced at AVANZAR, when event becomes long or takes longer, then the timing of the disclosure may come later. But when that happens, we are going to communicate to you. This time it's protocol amendment, with regard to that, we've had a lot of sufficient discussion. And what's more important here is that is that we are going to get the positive study results. So we do our best, and we continue this study. Operator: Next question is Sakai-san from UBS. Fumiyoshi Sakai: This is Sakai, UBS. My first question is about the follow-up question of TL-07. There are 4 primary endpoints now. Is that right? And then what is the hierarchy of the statistical analysis? And how should we consider the alpha? And TL-08 and 10, don't you have to change their primary endpoints? Unknown Executive: Thank you for your questions. Whether or not in total, there are 4 endpoints in ITT and NMR positive population, PFS and OS will be evaluated as primary endpoints. And as a result, how we will be leading to the filing, we will consider risks and benefits, taking a look at the study results and make a strategy for filing. Therefore, at this point in time, which is going to be included or not, I may have to expect that anything is not yet definite. Therefore, I'd like to reserve my comment this time. But based upon data, we will proceed our filing. Fumiyoshi Sakai: What about 08 and 07. Unknown Executive: regarding TL-08, we are also having discussion. And we are currently considering to include NMR as of today. And if we decide and add to this change, then we will also let you know. Concerning TL10, we don't have any idea at the moment to make such an aggressive change. Fumiyoshi Sakai: Second question is the inventory write-down on the balance sheet. I think it was towards the end of the year, and it increased remarkably. What are the items contributed to that increase? And like the past case, don't we have to worry about any potential write-off of inventories? Unknown Executive: Thank you for your question. At this point in time, there is no potential impairment we anticipate. So that's one point. And for ENHERTU and DATROWAY, overall, they are accelerating the growth globally. And especially the stock takings are accumulating in the U.S. for the purpose of growth, and that is affecting most. Operator: Next question is from BofA Securities, Mamegano-san. Koichi Mamegano: I am Mamegano from BofA Securities. I would like to make one clarification on IDX. Phase III trial received a clinical hold, but I heard that this clinical study was reconvened -- recommenced. Is that the case? And for this, I think it was a trial to support the filing. And can you tell me like whether you've made -- you've submitted the filing already or not? Unknown Executive: Yes. Thank you very much for your question. And sorry that we've concerned you I-DXd, we've received a partial clinical hold, and it's been lifted already. However, I would like to explain the current situation. ED8-Lung-02 study shows ILD series serious, may have ILD serious cases and our R&D team came to realize that and we stopped the patient recruitment, and we made a report to the FDA. And then FDA has issued partial clinical hold and that's been already disclosed -- sorry, that's been already lifted. But in a meantime, ourselves and Merck decided to have a more strict risk management for ILD. So ILD high-risk patients are now excluded from the trial, and we have more strict inclusion criteria. Independent data monitoring data is looking at the safety and efficacy data more frequently. And on top of that, participating investigators and clinical site staff are receiving additional education and updated training amendment of protocol, ILD symptoms and ILD management are now more thoroughly implemented with those partial clinical hold has been lifted. Koichi Mamegano: And for ED801 study submission. What is the impact on the filing? Unknown Executive: There is no impact on such filing. So we are having a discussion with the regulatory authorities in different countries and regions. And we stick to the original time line. That's all. Koichi Mamegano: One more question. You're going to announce MTP, midterm business plan in April. And that's -- with regard to DATROWAY, I'm sure this is a growth driver for you. But now you have a AVANZA trial. And in the second half, you're going to have top line result. And in midterm business plan, DATROWAY's assumption. How should we expect DATROWAY's assumption to be laid out in the MTP? Unknown Executive: Thank you very much for your question. Well, we would like to make a detailed presentation on MTP when we make announcement. So I can't make a detailed comment at this point of time. But DATROWAY study result such as AVANZA study result and the others will make a big difference in coming 5 years business. So when we make announcement of MTP, we will explain about the assumptions and the scenario on which MTPs being formulated. We would like to offer you as much explanation as possible. Operator: Next question is from Ueda-San, Goldman Sachs Securities. Akinori Ueda: This is Ueda, Goldman Sachs. I have a question about clinical trials of DATROWAY. This time, TROPION-Lung07, which biomarkers were used. As a result, enrollment increased in terms of number of patients and the data affect to the data announcement timing? Or do you think that you still need to review all those? And also for 08 study, biomarker usage is now under review. And if you decide to use it, then should we anticipate that the timing of announcement will be changing. Unknown Executive: Thank you for your question. Regarding the timing, this time, the enrolled patients numbers have been increased and already we completed enrollment. Therefore, there is no delay anticipated. It's already complete. But as we experienced with AVANZAR, if any events happen and causing any delay, we will let you know. So for the enrollment of the patients compared to the original plan, we added on NMR, and we have already completed the enrollment. Did I answer to your question? Akinori Ueda: Yes. And it's the same situation for 08? Unknown Executive: Regarding 08, as of today, I'm sorry, I cannot comment in details, but a similar strategy is taken to move forward. Akinori Ueda: I understood. My second question is about ENHERTU indication expansion impact. First, in the first-line treatment, as you expand the indication more, I think the sales will be accelerated. And already in the U.S. DB09 positive results has been disclosed. And as a result, do you see already some positive impact in the clinical practice? Or can we expect more acceleration of the sales expansion? And DB05 and 11, those approvals are also expected. And number of patients seems to be big. But given the number of cycles of treatment, I may consider 09 contribution may be big or if actual the target population expands and if the clinical practices are conducted more efficiently, then there will be also a major contribution expected from 11's result. Which way do you consider? Unknown Executive: For this question, Ken Keller will answer to your question. Joseph Kenneth Keller: So if I heard the question correctly -- we're already seeing some spontaneous use in DESTINY-Breast09, from almost the moment when that data became public. So we are seeing people adopting it and using it already, even though commercially, we've launched this just a little while ago. As we project out to the early-stage breast cancer settings of DESTINY-Breast11 and 05, in these early settings, the goal is cure. And both of these studies provide standard of care changing new data. And I expect them and everything we're hearing from the community is that they will -- it will be embraced very, very quickly. Did that answer your question? Operator: Next question is from JPMorgan Securities, Mr. Wakao, please. Seiji Wakao: This is Wakao from JPMorgan. My first question is as follows. This time, you didn't have a temporary expense. But wasn't there any special factor? And then for the CMO compensation fee, I thought that there is something which is still under negotiation. What's the status right now? Unknown Executive: Temporary expense that we disclosed. And on top of that, is there anything else? The answer is no. And going forward, with regard to the CMO compensation fee, we did -- if we scrutinize the situation and when something comes up, we are going to disclose. But at this point of time, we don't -- we haven't identified any outstanding remaining compensation fee that we need to pay to CMO. Seiji Wakao: When are we going to see the conclusion of this? Unknown Executive: We are having an ongoing discussion with CMO and we cannot determine when is the expected timing of the conclusion of this negotiation. Seiji Wakao: TL-07 and 08, you are now adding NMR marker -- biomarker. And can you explain about the background why you've decided to do so? I understand that you are trying to improve the probability of success. But if you are confident in the result of Dato, I don't think it was necessary, but what's the reason behind? Unknown Executive: Thank you very much for your question. We've had a lot of internal discussion on that. And at one point of time, we thought that this biomarker is not necessary. But pembrolizumab and Dato-DXd, as we have experienced in breast cancer, these 2 are good match. And for lung cancer -- in lung cancer, patients are hetero as based on our experience. So NMR biomarker in lung cancer is very critical. That's one of the reasons. And although you haven't asked this, but TL-17 NMR biomarker study is going to take place. So in the area of lung cancer, with the existence of biomarker, we can offer better benefit to the patients. And in 07, 08, by using biomarker, we can enhance the probability of success. That's why we've decided to add biomarker in the protocol. Seiji Wakao: So I understand that you've discussed with FDA on this. And for NMR-positive population, if you meet endpoint, I would understand that you can successfully make submission and of course, depending on the data, but I think you can get the approval from FDA. Unknown Executive: Yes, we've consulted with FDA before we amended protocol. And it all depends on how good our clinical trial result is. MTP is to be announced in April. The other day, in the JPMorgan Healthcare Conference, CEO mentioned regarding the profit outlook into 5 years. So in 5 years from now, you have a sales milestone for ENHERTU, and you have cliff with Lixiana. So the profit somewhat may decline. However, if things go well, you can make some growth. Seiji Wakao: And I think that's the outline of the message of you. But can you explain about that once again? Unknown Executive: Well, with regard to the next MTP to be announced in April, I am very sorry, but we cannot offer you any detailed comment because we are having an ongoing discussion to formulate MTP. Lixiana, LOE, Injectafers being impacted by generic, you understand those things quite well. Those would be the downside factor, negative factors. So with 5 ADC growth, we are hoping to catch up or compensate those decline as much as possible. And that's all I can tell you for now, but we are still committed to improve profitability and that's the baseline for the next MTP. Operator: Next question is Muraoka-san, Morgan Stanley MUFG Securities. Shinichiro Muraoka: I'm Muraoka from Morgan Stanley. I have a follow-up question about Wakao-san's conference-related item. I'd like to understand the wording exactly. Did you say decline or a slight decline? And I think it depends on how much inclusion you assumed. And if you included Dato conservatively, is it a decline or slight decline? Could you share that part once again with us? Unknown Executive: In terms of wording, the word we used is slight decline. And overcoming the factors against the profit, we will be putting ourselves back on track for growth. And in that context, this wording was used. But how much -- I'm sorry, we cannot talk about it specifically. But at any rate, there would be some directions, negative direction putting us downside, but we would like to recover from that as much as possible and all those measures will be incorporated in our 5-year business plan. So if it is a slight decline, then I think naturally thinking you should be able to achieve a V-shaped recovery after that. Shinichiro Muraoka: Another question is smuggling point, are you going to make acquisition by the time of next 5-year business plan? And how many deals at what the scale? Unknown Executive: Well, excuse me, what you're asking about is to acquire external assets? Shinichiro Muraoka: Yes, yes. Unknown Executive: At this point in time, we don't have anything that we can talk about. But again, in our 5-year business plan, we look at our pipeline, especially in early-stage pipelines, if there are anything which we can expect working as a complementary, we would like to pursue toward the growth during the 5-year business plan and beyond, we'd like to explore externally any good candidates of assets. So that strategy is unchanged. And before the announcement of April, the announcement of the 5-year business plan, nothing is now moving at the moment in this regard. Shinichiro Muraoka: And just one more point. Well, actually, your stock price went down much, but it came back quite quickly. Did you conduct a buyback, share buyback? It is a sharp decline and recovery. So I think probably in the next week, you will disclose whether you conducted the share buyback or not. But could you comment regarding share buyback, as we have been talking about it. Unknown Executive: We will take into the stock price and others, and we make a comprehensive review and make a decision. And so far, on a monthly basis, we have the timely disclosure in the first operating day. And on that timing, we will continue disclosing the information. Operator: Next question is from Bernstein, Sogi-san. Miki Sogi: Regarding TL-07 and TL-08, I have question. NMR biomarker is now added in the primary endpoint. And I think this is a good news. Regarding this, I have 2 questions. Regarding 07, 08, it was a combination with KEYTRUDA and you use NMR and then this will increase the probability of success. And I think it will have a big commercial impact because you can combine with standard of care KEYTRUDA. 07, 08, for those 2 studies, I think you are done with the patient recruitment. And within 12 months, the result will be presented. So you have come to this end. Now you're making amendment. But you've got the kind of like consensus from the FDA. Does that mean that FDA understands the significance of NMR as a biomarker? Unknown Executive: Thank you very much. In terms of the marketability, I would like to ask Ken Keller to make some comment. And I would like to respond to your second part of your question, whether -- how FDA sees the significance of NMR. Well, this relates to the discussion of contents of FDA, so I can't make any comment. But by including biomarker, our intention is to improve the probability of success of this trial. That was the main intention, and please allow me to repeat that point once again. And depending on the result, study result, we will consult with FDA and figure out how we want to do with the filing. Joseph Kenneth Keller: And the question in terms of adding in and working with the standard of care, you are absolutely correct. KEYTRUDA is clearly the market leader, and we've got a number of first-line non-small cell lung cancer studies with KEYTRUDA. And also, to remind you, we've got the AVANZAR study with Imfinzi which is AstraZeneca's I/O drug. So we feel that whatever the preference is of that specific oncologist, we're adding DATROWAY in a way that is very convenient, and it should lead to very quick confidence in our drug adding to whatever they prefer. Miki Sogi: Next, regarding MTP, regarding health care conference hosted by JPMorgan. I know you're announcing MTP in April, so you can't talk much about it now, but slight decline, as you say, with regard to profit, It's not margin. Are you talking about absolute amount? Is that correct, not margin? And also when the profit declines, the driver behind is, I guess, the aggressive R&D cost assumption. So in your case, 5 ADC has many trials and you have partners. So with regard to the R&D cost, I would assume that with AstraZeneca, Merck, you've already, I guess, made alignment on the cost. And I don't think you alone cannot make adjustment or changes by yourself, correct? Unknown Executive: With regard to the future R&D spending, splitting R&D cost between us and the partner has been determined. So we stick to that. Which study is to be dealt by who. This is different in different trial. And when we've made agreement and then we just stick to the cost split structure we've predetermined with the partner. During the MTP period, how are we going to control R&D cost? I think that's what you wanted to understand. So to that end, we have trials where we work with partners, and we have development that we take care of all by ourselves. So in coming 5 years, what are going to be -- which projects are we going to prioritize. That project prioritization and the resource allocation needs to be well managed. Miki Sogi: Okay. I have a follow-up question. In next 3 years -- well, in next 3 years, not 5 years, am I correct to understand that you've already had a lot of discussion with your partners as to what kind of trials are going to take place for what product. Unknown Executive: Yes, depending on the product, we are in a different stage. And for each product, we have formulated joint team. So rest assured, we have sufficient discussion going on between us and our partner through the joint team. And we stick to the priority that we decide on. Operator: The last question is from Tony Ren from Macquarie. Tony Ren: So I want to go back to your Claudin 6 ADC, the decision to discontinue DS-9606. My question is about the construct of the modified PBD construct. You mentioned its clinical utility has by now been established. Can I confirm that the decision -- because I also noticed your peer company, Chugai also discontinued a Claudin 6 T cell engager in October. Can I confirm that it might be an issue with the target of Claudin 6. Can you also give us any sense about the toxicity of the modified PBD construct? So that's my first question. Unknown Executive: Thank you for your question. Regarding mPBD. In terms of technology, yes, we confirmed that technology utility, as I mentioned earlier. And the reason we selected Claudin 6, there are several reasons. Therefore, we expected in this asset, but there are things that turned out as it's expected or unexpected. And in terms of science contents, we'll be discussing it in some medical conferences. So allow me not to touch upon those. But in terms of utility in the giant cell tumors, if we can confirm the efficacy, then technology-wise, it should be very good. And for that point, we could confirm. And also side effect was manageable as well. Therefore, amongst the difficult challenging technology with PBD, we believe that our technology utility level is high. And talking about the Claudin 6 in, giant cell tumors, can't it be developed for this particular type of tumor. Well, I think it is possible. Therefore, any companies interested in this may consider development, including in-licensing. But what about the business viabilities or in terms of portfolio. Well, given our business portfolio overall, we decided to discontinue. That is the background reason. Did I answer to your question? Tony Ren: Yes. Yes, answered very well. I was mostly concerned about the toxicity. My second and the last question is about your CapEx plan. So Nikkei Asia reported that you guys were considering spending JPY 300, that is close to USD 2 billion on CapEx, right, in 4 different countries, Germany, Japan, U.S. and China. This obviously feels pretty big in relation to the JPY 800 billion in CapEx you guys already disclosed in the last 5-year plan. Can I confirm that this JPY 300 billion is in addition to above and beyond the JPY 800 billion already committed? Unknown Executive: Thank you for your question about our CapEx. Well, it is not a new additional investment. So what we announced is as we have been explaining so far within the range that we have been already talking about, this spending will be incurred. Therefore, there is nothing new, nothing additional to the CapEx that we have already announced. Tony Ren: Okay. So it is part of the JPY 800 billion already announced? Unknown Executive: Yes. Sorry. I'm not familiar with the articles detailed content. But yes, your understanding is correct. Operator: Thank you very much. So with that, we would like to conclude today's earnings call. Thank you for your participation today.
Operator: Welcome to the Enea Q4 presentation for 2025. [Operator Instructions] Now I will hand the conference over to the CEO, Teemu Salmi; and CFO, Ulf Stigberg. Please go ahead. Teemu Salmi: Thank you, and good morning to everyone. This is Teemu Salmi, CEO of Enea speaking here today to take us through the Q4 results in the next coming 30 to 45 minutes. Our agenda will be very much similar to the previous reports that we have made. We will have a short introduction of some highlights in quarter 4, and then we will deep dive deeper into our financial results, and we will also end up with a way forward and outlook for the year and the years to come. So let's get going with a bit of market and business development highlights from the quarter. Of course, I think we all see what's happening on the geopolitical scene and that the tensions and the development there are driving the demand for secure and controlled national communication solutions. And we see also a more nationalistic approach in sovereignty and when it comes to handling data, which is actually playing us well into our hands in Enea. Our solutions is definitely supporting nations, states and other governmental institutes as well as telco operators to up their security posture. We have had a tough year in 2025 with the FX. Swedish krona has strengthened almost 20% towards the U.S. dollar in the last 12 months. And it's 15 years since that happened last time in 2010. So it's nothing that happens every day. Obviously, having a majority of our net sales in U.S. dollars, it impacts our reported results. We will come back to later on in the presentation today. However, our underlying market development remains positive, and we actually have also a good pipe for the future in building. If we look at the business side, like I said, our underlying business development remains positive across both our focus areas, security and networks and in constant currency, both of them are actually growing in the quarter. And our core offerings continue to develop very well, in particular, Traffic Management and our Deep Packet Inspection, where we've had almost 20% growth in the Deep Packet Inspection and over 30% growth in Traffic Management, which is positioning us super well for the future and to the continued growth that we anticipate accelerating now moving ahead. Another thing that we really see taking off now is that our government customer base is increasing. We have announced 3 deals only in the end of the previous year in 2025. And we also have a good momentum there. We have other opportunities in the pipe as well in that segment, which is very good for us because it's going to diversify our customer base for Enea that today is quite heavily depending on CSP environment. So this is really good for us. Last but not least, I also want to mention a couple of words about cyber. We mentioned that cyber is something that is growing in the world. And unfortunately, we were also a victim in quarter 4 for this criminal activity. However, we were able to contain and execute and handle that cyber incident in a very good way, I should say. And today, it's handed over to authorities for -- and there's an ongoing criminal investigation. So I will not comment on that any further. We have had no financial impact, and there's been no impact to our customers either from this incident. In the quarter, we have reported or signed 10 new customers, 5 in EMEA, 3 in North America and 2 in Asia Pacific. And you can also see here in the textbooks, which solutions it's all about. It's about our growth products, Traffic Management, our ixEngine, our DPI solution and our firewalls. So that's good, great development for us, and that momentum will accelerate in 2026. Moving on to key numbers for quarter 4. We report a net sales of SEK 239 million, which is a reported decrease of 5% from Q4 last year, but it's a growth of 1% in constant currency. So the FX is still hitting us bad. And quarter 1 will still be comparability-wise, a very tough quarter for us because quarter 1 in 2025 was still a quite strong quarter for the U.S. dollar. And we see that the U.S. dollar is continuing to weaken against the Swedish krona now in the beginning of this year. Something that we are very proud of, and I am proud of is how we are working with our profitability. We are reporting the highest quarter 4 profitability in 4 years with an adjusted EBITDA margin of 40%. Obviously, that is good and playing us in favor when it comes to future investments now when we're going to accelerate and put our new strategy into motion. And I will come back to that already in the next slide and talk about what we have done and what we anticipate to do in order to accelerate our growth in 2026. Earnings per share, SEK 2.21 in the quarter and operating cash flow of SEK 45 million. And of course, we continue to invest in R&D and R&D for us is the key and critical engine to make sure that we continue to stay as relevant as we are today for our customers and for our future customers as well. On the full year, we report a net sales of SEK 889 million, which represents a 2% drop in reported numbers, but a 2% growth in constant currency. Our margin is on the same level as last year. Our adjusted margin ends up at 33% and operating cash flow of SEK 107 million. And we're going to dive deeper into these numbers in the section with Ulf a little bit later on as well. And also a couple of comments on the margin maybe there. In the quarter, we had a good business mix. We have proportionally sold more licenses in quarter 4 and also a bit of tailwind from the FX as well because we have a lot of our costs in euros, so helping us to achieve that good profitability. And of course, that higher license sale that we had in Q4 will eventually also turn into support and maintenance and professional services revenues in the coming years as well. Right. Let's take a couple of words about our strategy. We launched our strategy in Q4 as well, which is basically built on 3 pillars: market acceleration, vertical expansion and offering evolution. And in short, we can say that market acceleration is about investing in our sales and ensuring that we penetrate the markets where we think that we have a good potential to win and to -- or to accelerate our growth. So we have decided to invest in Latin America in selling our telco portfolio there. We have already a good presence in Latin America with parts of our portfolio with our firewall portfolio, and we need to leverage that also to sell the rest of our portfolio to do some cross-selling in Latin America. North America is one of our strongest regions, and there's still more to do in North America. So we're going to double down on North America and invest there as well. And then in Asia Pacific, we have good momentum, both with our telco portfolio and our embedded security portfolio. And also the government sector is developing nicely there. So we want to invest in order to grow faster in Asia Pacific as well. In the vertical expansion, it's more like broadening our customer base, how can we take our existing offerings and solutions and sell that more wider. So obviously, we mentioned already several times, but one vertical that is super relevant given also this time of the world with all the geopolitical development intentions. The government sector is investing heavily. National security is pouring money into building up and maintaining sovereignty around the world. And we will, of course, want to be part of that journey with the good solutions and offerings we have in that sector. So we are investing in both our -- selling our Traffic Management and our embedded security solutions into the government sector. And I'm going to come back just shortly to talk a little bit about some of the recent wins we've had in Q4, showing that we are already doing this and that we are already building on this relevance for the future. Last but not least, there is also a Tier 2 or mobile virtual network operator segment that is very important for us. So we will also make sure that we target that customer segment with our solutions, and we are developing our offerings for a more SaaS-ready business model addressing that customer base as well. And then in the offering evolution, finally, it's all about securing that we stay ahead of the curve and that we stay leading in the world like we are today. So that's more about building and developing our current offering and also looking at what potentially could be complementing our current portfolio looking outside of Enea as well. So what have we done so far? In the market acceleration, we are building now a sales organization that is much more customer-centric than a product-centric organization. I have recruited already a Chief Commercial Officer that will start now in quarter 1. Unfortunately, I can't name that individual yet because of confidentiality, but that will be communicated shortly, I hope. This will accelerate our investments in sales and making sure that we push the needle in bringing our offerings to the market. And then also strengthening the sales organization by simply employing more salespeople in those dimensions that I showed on the previous slide as well. We will do this in a controlled manner, of course. We will now start investing where we already see traction in order to make sure that we also secure that growing business that lies ahead of us. In the vertical expansion, like I said, already in quarter 4, we have communicated some wins. We have communicated 2 government wins, one in Asia Pacific and one in Africa during fourth quarter, where we have sold our DPI solution to one government and our telecom and security offering, including also DPI to an African government. Basically, this helps and ensures these governments and nations and countries to stay on top of the security posture by getting full transparency of the network communication going in and out of the country. And there, we can help. We have world-leading solutions for doing that, and this is a proof point of that journey that we have started into growing into the government sector is real. It's happening, and I see in front of me that, that will accelerate as we move ahead. Good. On the offering evolution, we are -- there's nothing new there yet. I mean we launched a strategy in the fourth quarter. There's many things that we are planning to do. We are investing quite a lot in AI, and I'm going to come back to that a bit later on to tell you a little bit what we have done in AI. We are also repackaging some of our offerings like our traffic management and our firewalls to become an as-a-service solution. So we can target Tier 2 operators that necessarily don't need as much of configuration when deploying our solutions as the Tier 1 CSPs needs. So we are also repackaging our offerings to fit another tier and another customer base, which I think is good for also accelerating the growth of our -- predominantly our firewall business and our traffic management business. More to come here later on in the year. Some of the highlights. I've already mentioned some of these, so I will not repeat them. Maybe a couple of additions. We have in North America during the quarter also secured a customer TextNow, which is an operator, a CSP in North America that predominantly competes with free texting and is now also going into the space of free calling. They have chosen our firewall solution to actually deploy that in their operations, and we are very proud to make sure that we continue to show in North America as well as globally that our firewall products are super relevant for the future. And also in -- we communicated late in December a prolonged partnership with an European Tier 1 operator for a cloud-native access control solution. This partnership is securing our cooperation for the next coming 7 years, and we come from a long partnership already shows just the relevance of what we're doing together and prolonging this for the next 7 years to come. Coming back to what I spoke about AI a couple of minutes ago. What we actually are doing, we are not talking about AI as a hype. We actually have AI as part of our solutions today, and we are continuing to deploy AI-based software in our offerings. Here are a couple of examples that I would like to highlight for you, starting from the left with our messaging firewall. For our CPaaS customers, when they are sending messages, of course, messages have different priority. One example being, of course, multifactor authentication passwords needs to be delivered immediately in order for end users and consumers to be able to sign in whatever they are signing into, while maybe commercials can be sent throughout a certain time span. And of course, the price for sending these kind of messages is different. And we can help our customers optimize their revenue base and their cost base by with our AI solution, defining when and how these messages should be sent based on the price pattern that is available. For the Traffic Management Solution, we are working with the mobile operator in Europe, where we are looking at with the help of AI, how we can predict traffic congestion in the network and also, well, of course, secure that our customers get the best -- delivers the best quality of service to the end users. And part of this solution, we also have an AI solution that optimize video content. So you always have the best end user quality of service when viewing -- when streaming video through the mobile networks. Last but not least, our Qosmos ixEngine DPI solution together with a mobile operator in South Africa, we are classifying the traffic. We are also able with AI now to classify encrypted traffic, which makes our solution future-proof to a certain extent. We are not yet able to classify 100% of encrypted traffic, but a high -- relative high percentage point of traffic can already now be classified even though it's encrypted. So this -- we are testing a mobile operator in South Africa right now, and we are hoping to be able to scale this very shortly as well. Let's see here now what happened here. Okay. Then we continue to my last and final slide before I will hand over to Ulf. Of course, we continue to drive the thought leadership across our ecosystems. We are very visible. We are invited to speak in different conferences, and we go and we are. And -- but this quarter, I wanted to highlight some of the recognition our products has been getting out in the world. And if we start from the left, we have the Kaleido Intelligence award that we won. Kaleido Intelligence is a respected independent research and advisory firm specializing in telecoms, roaming and digital infrastructure. Enea, we were recognized as Champion vendor, which is the highest vendor category in this award for our signaling and security firewall capabilities, and we are super proud of that. And we were acknowledged for our leadership in delivering intelligence-driven signaling security in all spectrums of mobile networks. Super good, very nice and just showing how relevant our firewalls actually are. The second prize in the middle is from Juniper Research, where we have been -- we've been winning the platinum category, which is the highest category. And this category highlights solutions that use advanced analytics and AI for image detection and our messaging firewall solution was recognized for our restricted image detection, which uses AI to detect images that violate industry guidelines and best practices. So basically, we are able to review and understand what kind of image is a part of a message before it's sent and then block it if it contains content that is abusive or violating whatever rules that have been set up. Last but not least, we have the Fast Mode award where we -- in the category of video experience, we have been winning with our solution traffic management. Fast Mode is a leading industry platform that analyzes and recognizes innovation and performance across telco, cloud and digital infrastructure. And we were recognized as the video experience leader for traffic management, as I said. And it focuses on that our solution, how we enhance our video quality by intelligently managing network traffic to ensure consistent, high-quality user experience. We are very proud and happy for these wins, and it just shows once again that our solutions are very relevant, good and future-proof, building the way for future growth for Enea. With that, I would like to hand over to Ulf to take us through some of the financials. Ulf? Ulf Stigberg: Thank you, Teemu. Let's see here. So we are reporting a 5% decline in the quarter, but in fixed currency, we report 1% growth. And you can see the seasonal variations between the quarters during the year. This is typical that we have a strong quarter 4, but this year, we didn't reach the quarter 4 for previous year in reported figures. For the full year, a decline of 2%, but in fixed currency, 2% growth. In the quarter, we are proud to present a report the 40% adjusted EBITDA margin, which is highest in many years. And we can see also that compared to the previous quarter last year or quarter 4 last year, we report SEK 7 million increase in absolute figures. And reaching this EBITDA level is, of course, a combination of sales and cost. But on the cost side, we have a stable cost development and also we have had some impact from FX development on the positive side for the result. We also proudly report a 21% EBIT margin for the quarter and reaching SEK 48.9 million in Q4 compared to SEK 45 million in quarter 4 last year. And this translates down to earnings per share in SEK 2.21 for the quarter compared to SEK 4.7 quarter 4 for 2024. Looking into the revenue split within the different product areas. In Security Solutions, we can see a strong sales of license for the quarter. Professional services and support and maintenance are quite stable, but the main increase has been related to more license deals in the end of the year. Similar pattern actually within Network Solutions. Q4 this 2025 was higher than Q4 2024 in license sales and professional services and support and maintenance are quite stable, although we had a step down in support and maintenance with some contract terminations in 2024, which leaves us on a little bit lower level in '25 going forward. However, based on that, we are now also signing new license deals, we will expect a good development of support and maintenance contracts going forward. Looking at the product areas development between the years, we can see a decline in security and also in networks. But in fixed currency, we report a plus 2% growth for security area and plus 1% within networks areas. Operating systems are declining 3%, but this was actually a lower decline than expected. So we're happy to report that. And overall, a plus 1% growth in fixed currency. The same analysis over the year, we'll see a 4% decline in security areas, but a flat development in fixed currency. And within networks, we see a flat development in reported net sales, but an increase or a growth of 5% for the networks area in fixed currency. One item that has been on the board this year is the development of the financial net. And for this quarter, we can report less exposure in financial net and the figure for quarter 4 2025 is a currency net of minus SEK 2.6 million. And in the graph to the right, you can see the development of the U.S. dollar compared to the Swedish krona. And in quarter 4 last year, we had quite a big increase of the dollar rate, which left us with a quite positive currency net for that quarter. Now we have worked with our balance sheet and reduced our exposure. So these swings will be less or limited in the future. In the cash flow analysis, we can also see the effects here on the financial net in quarter 4 this year, we have minus SEK 6 million and quarter 4 last year, we had plus SEK 41 million, and that gives quite a big impact on the cash flow. However, we want to reduce these swings, and that's what we have done now. Compared to quarter 4 last year, we had amortization of our term loan of EUR 15 million. So that figure is higher than normal. But for quarter 4 2025, we reported total net cash flow of plus SEK 10 million. Our net debt is SEK 208 million, and our balance sheet is strong in terms of capitalization, and we are -- we have a headroom for leverage going forward based on a stable capital situation. And finally, in the quarter, we bought back 166,000 shares to a value of SEK 11.8 million. And this program continues until the Annual General Meeting in May 2026. Teemu Salmi: Good. Thank you, Ulf. And before questions, we will round up a little bit with the key takeaways and guidelines. Some key takeaways from the fourth quarter. Like I said, we have a very strong profitability, building for the future, best quarter 4 in 4 years and EBITA margin of 40%. In constant currency, growth continues in networks and security, one respective 2% in constant currency, and we intend to accelerate this growth in the year. We have good momentum in our government business, like I said, 2 strategic customers signed in quarter 4, and I hope more to come in the coming periods. And of course, on the negative side, our headwind in FX continues, which has been putting pressure on our reported numbers in 2025. And like I said in the beginning of the call as well, I think first quarter of 2026 will still be comparability-wise, quite a tough quarter given where the dollar was standing in the first quarter in 2025. Then we should see -- starting quarter 2, we should see improved comparability numbers year-over-year, unless, of course, the dollar continues to drop compared to the Swedish krona now in the beginning of 2026. On the short-term outlook, market remains stable to positive. I think our pipeline is fairly good. We have a relevant -- highly relevant portfolio for the markets and segments we're serving. And the diversification that is now starting for our customer base is great and building for the long-term development of Enea and of course, gives us also access to new and bigger revenue pools as well. So this is good for continued business development for us. And one of those pools is the government sector, which is growing well, and we will continue to focus on that heavily in 2026 and the years to come. And then, of course, like I said, the FX headwind in quarter 1 will put pressure on us comparability-wise still. So that's just a fact that we know given where the dollar stands now and where the dollar was in quarter 1 in 2025. So our guidance of 2026 is a single-digit growth and an adjusted EBITDA over 30%. We will make some investments in 2026 that is then, of course, the starting of the acceleration of our growth to be able to then meet our long-term financial ambition, which we presented during fourth quarter last year. And that is to have an average growth over 10% on an annual base throughout the full period of 2026 to 2028. And you can already now see that it's not going to be a linear growth because we are saying that our short-term outlook is single-digit growth for this year, but we stay firm and we believe strongly that this is something we can make in the next 3 years to come. And we're also saying that our profitability at the end of the period when we exit 2028 we will have an EBITDA over and above 35%. So this is our long-term guidance that we keep from our strategy that we communicated in quarter 4. And with that, 30 minutes as promised or 31 minutes, I will then actually open up for questions and answers. Operator? Operator: [Operator Instructions] Teemu Salmi: All right. We have some written questions here. Let's take them in order. We have a question from Matias. Why did the order bonanza in quarter 4 not translate into higher growth? Well, I mean, the business mix that we are having, I think that we have our normal business, and we had some good wins at the end of the quarter, right? I think that it's paving the way for the future. But I mean, it is the total business mix that gives us the result where we're standing today. We have another question, how come there is no growth in Q4 despite the large announced contracts? That's the same question as we had before. Can you comment on the decline in operating cash flow before changes in working capital? Ulf? Ulf Stigberg: Yes. Partly that was explained by the financial -- big swings in financial net. We reported a positive SEK 41 million in financial net in quarter 4 2024. And now in '25, we have minus SEK 6 million, and that relates both to the -- our balance sheet composition, but also to the development of the dollar. But during the year, we have reduced the exposure. So these swings will be less. But just quarter-by-quarter, we see a big swing here. Teemu Salmi: Thank you, Ulf. And then we have a couple of questions here from Rasmus, growth constraints. What is the #1 restraining factor in your growth today? Is it driven by market dynamics or the current market cycle? Well, I think that there's a couple of things that -- we are now restructuring and reorganizing a little bit how we do our sales, like I said in the beginning, we will be much more customer-centric, and we will also be selling a broader portfolio to our customers, which we haven't maybe done in the past. And we are also now getting a more focused setup on our sales. I think that there's a lot we can do in our sales. We have a great sales force, but we just need to focus it in a bit of a different way. The market dynamics actually are positive. So I think that -- and the development, even though it comes late in the year and in 2025, I think the momentum we have to diversify our business is good, right? So that's also answering the second question and how confident are we that we can grow in 2026? Well, we are fairly confident given where we stand and what we see in the dialogue with our existing customers and with our new customers, and we look at our pipe. So -- and the investments we are doing, they are not going to pay off immediately. We have quite long sales cycles, but we will eventually also see good results from the investments that we are making, both in sales and product development. Ulf, the last question is for you. Net working capital relative to sales seems to have been growing for several years. Is there any specific within this that is causing the increase? Ulf Stigberg: Our business mix and the deal mix, customer base mix is we have increased development in areas in the world with a little bit lower or longer payment patterns. And I think that's one explanation why we now see a slight increase in the working capital. But that's something we are working on and take the challenge and solve the problems with the customers, of course. Teemu Salmi: And I think one comment to that, if we look at Q4 isolated, actually our working capital is declining year-over-year, quarter 4, right? So we are on top of it. We are not happy with it. And we, of course, are actively working with getting it down. You mentioned good pipeline and better billing going forward. Can you elaborate on the better billing? What do you mean? Better billing? Sorry, I cannot recall I said better billing. But the good pipeline, I can comment. I mean, we have a solid pipeline in both customer segment or both -- in all customer segments, I should say, where we are working. We've had some pushouts of some deals that we've been working on, not necessarily saying that we are losing them or we have lost them, but our customers are taking a bit longer time to decide. And we are positively looking at materializing these deals in the coming quarter. And adding to that a fairly stable and good pipe gives me confidence that we will be able to turn this around into growth numbers. Also, hopefully, in reported numbers, obviously, FX is nothing we can do anything about, but that is definitely our ambition, yes. Then a question in Swedish. I will translate it into English. What can one expect when it comes to growth within security and 2026 and up till 2029? We are not guiding on the segments or focus areas, security and networks in our guidance. It's the business mix in totality that will deliver the growth that we are seeing. But of course, personally, I see good momentum both in networks and security. And we've also seen that in the recent quarters that even though we've had a different business mix in quarter 4 that they have been growing steadily previously. And that's what I perceive going forward as well. Your SG&A is down quite a lot. Is that really sustainable? Given dollar weakness, will you be able to increase prices over time? Ulf, do you want to comment on SG&A? Ulf Stigberg: This -- I mean, increased prices over time, I think it's a development and our product mix and product capabilities and features going forward, we see a possibility to price -- have a good price development with the customer. Teemu Salmi: Yes. And it's a competitive market, right? I mean we also have market pricing. We are unfortunately not alone. So of course, competitive pricing. But we, of course, try to stay ahead of that when it comes to feature development, our investments in AI and all of that is going to make our products stand out and be better than competition where we also are able to price that. So of course, we're investing quite a lot in R&D, as you can see, and that in itself is going to make sure that we have a headroom and headwind when it comes to -- sorry, tailwind when it comes to how to price our products compared to competition. Where are we there? Does your growth guidance for 2026 include FX or? No, it includes FX. It includes FX. So we are -- our guidance is in reported numbers, if I put it like that. So it includes FX. Are you hearing that customers are shying away from U.S. and Israeli competitors, i.e., are you benefiting as a Swedish company from -- very good question. And even though it's a bit early days to say that, but at least the dialogues I have with our customers, I definitely see this. Yes, we are well positioned to be a Swedish company in this geopolitical turmoil that is seen. Sweden as a nation, as a country is still seen, I wouldn't say as neutral, but at least as a trusted partner, someone you can trust in and have a long-term engagement with. So yes, I hear this discussion more and more. And another topic I hear, especially in Europe is about data sovereignty and how can we -- I mean, a lot of European companies, of course, are relying on U.S.-based cloud providers for ensuring their operation works. And of course, that question is parking also now a lot of dialogue about how to -- how can we trust our current allies or our previous allies for the future in order to secure that there are no problems or issues with services that are being delivered today. So I don't know if it's good or bad, but the nationalistic view and the world getting smaller again is a fact. And we, of course, have to navigate that and play our cards well there. And I think that we are super well positioned in that dialogue as a company. Those were the questions written. Do we have any more? If not, then I'd like to thank you all for listening. And I will hand over the call back to the operator. Thank you for now, and have a good day ahead. Ulf Stigberg: Thank you.
Jane Morgan: Good morning, and welcome, everyone. My name is Jane Morgan, and thank you for joining us today for this webinar with archTIS Limited, a global provider of data-centric security solutions for the secure collaboration of sensitive information, listed on the ASX under the ticker code AR9. Just this morning, the company has lodged their quarterly report for Q2 FY 2026. And today, I am joined by both Daniel Lai, who is archTIS' CEO and Managing Director; as well as Mr. Kurt Mueffelmann, who is archTIS' Chief Strategy Officer and the U.S. President. Both presenters will be covering off the quarter's activities, the ongoing strategy and developments in the U.S. market and are here to guide us through what's ahead for the 2026 calendar year. Following the presentation, we will have time for questions. [Operator Instructions] Kurt, I'll hand to you. Kurt Mueffelmann: Yes. Great. Thank you, Jane, and good morning, everybody. We're really excited, and thank you for attending today's presentation. And during today's session, we'll update you on some great happenings around our quarterly performance, provide an in-depth financial review, update the U.S. DoD opportunity, obviously, the Spirion integration, how that's really progressing in a wonderful manner and further discuss the go-to-market strategy around how we're growing and where we see the markets going into the future. So what I'd like to do initially is send it over to Dan and start off with some of the Q2 FY '26 quarterly highlights. Dan? Chun Leung Lai: Thanks very much, Kurt. Welcome, everybody, and thanks for attending this webinar. So I'm going to start from the bottom O and then work my way around. Obviously, the biggest -- big elephant in the room is updating you on the U.S. DoD deal. The first thing that we announced this week was the U.S. DoD custom development milestone was achieved. Now that was work that the U.S. Department of Defense requested for us to make amendments to our software so that it could be more deeply integrated into their environments and expanded to a broader customer base. We finished that software custom development, and we've provided that back on time to the U.S. DoD for their acceptance and evaluation. So we're very happy about that. We have one component left to do, which is a piece of integration with the third-party software, which is more configuration work. So we expect that to go fine through with flying colors, and that's all on track to be delivered as well. So the next step there, which I think is a great milestone is that NC Protect has been deployed into the U.S. DoD365 environment. That is a production trial so that the system integrator can make sure they can manage that software in multiple different locations across the U.S. DoD environments, which are located around the world. We have expanded the client base there for more trials in that sense to be done. We expect that to be a 30-day deployment trial with real live data. And that's really important because this is the final milestone before that we would see our licensing for larger users to be issued. So that's critical. It's something that we've been expecting, and it's something that we see as an extremely positive sign. That, combined with the software development, gives you a very clear indicator that we have great confidence in this deal. The ARR for the company, obviously, with the integration of Spirion, we've increased that ARR. It's up 308%, $16.3 million, a strong performance. And what's really important about that now is that our gross margins are still above 75%, which gives us good cash back into the business, but licensing revenue sits at around 83% of total revenue, which is good as well. Total funds available, $7 million, and we also announced that we've had agreed to terms with an $8 million debt facility to make sure that we've got that runway with any variance of expectations of delivery of this U.S. DoD licensing deal that we're expecting. 76% gross margin, as I said. And of course, the main activity for the last quarter has not just been U.S. DoD but other deals as well and working out how we're going to cross sell to that 150 clients in the U.S. that we have acquired with the Spirion acquisition, integration of their teams, standardization of the software development life cycles and how to -- and working through how we integrate the products as well to take this forward in a very strategic manner to pivot into this U.S. market, which is 40% of the data-centric security market globally and really start to ramp the business up. And of course, that's what we're trying to achieve strategically, and we're looking for those short, medium and long-term results. Over to you, Kurt. Kurt Mueffelmann: Yes. I think the main financial aspects were really revolving around Spirion, and so when we look at that acquisition was really October 1. It was the first quarter of operating together. And I've done 20, 25 different M&As, and actually, it was one of the smoother ones that we've done. And if you look at the [ 4C ], you'll see generally staffing. Staffing costs are generally high in the first or second quarters that come out of such deals like this. And so we were fortunate enough to have a really good pre-acquisition understanding of where the business was. And as we'll talk about, we were able to cut some real solid expenses out of the business and start to look at where we get to a real runway of the business as we go forward. So if we dive a little deeper, ARR in the December quarter was $16.3 million, a 308% increase over the prior comparative period. We know that ARR did drop from the prior quarter. We understand that there was churn from the Spirion acquisition. We did a really good job in really digging into our understanding from a due diligence standpoint, and we knew what churn was forecast and what was taken into consideration and where we need to be from the purchase price. So our purchase price is still under 1.25 of the current revenue, which is really attractive by any market analysis that's out there today. So we feel really good that we have our hands around where the churn rate goes on Spirion and where the go-forward revenue is coming from. Total revenue for the quarter was $4.6 million, and that was comprised of $1.5 million from Australian operations, which is in line from the prior comparative period and $3.1 million from U.S. operations, including U.S. archTIS and Spirion. And we continue to see really software licensing being really strong as a percentage of overall revenue. Software revenue was $3.8 million, and services and equipment was only $800,000. So again, it's a real focus on where we want to take the business. Gross margin for the quarter, which is really showing where that strategy around driving software licenses came, really came in strong at 76%, a bit of an improvement of 73% from the prior corresponding period. And again, it's that transition away from lower-margin services, equipment, third-party software and really driving the licensing that archTIS has from a proprietary standpoint. Operating expenses for the quarter, excluding one-off transactions and integration costs, yes, it did increase to $5.9 million from $1.5 million in the December 2024 quarter. This increase, as I said, was anticipated. A lot of staffing in there reflects expanded headcount and operating capability aligned with the U.S. market expansion. Our one-off costs were a little bit over $1 million and included the Spirion transaction and integration costs. However, at the end of the quarter and as part of the global integration plan to include Spirion, we really implemented a workforce and cost synergy realignment initiative, which expects to deliver over $4.5 million in operating efficiencies on an annualized basis. So we're really being strongly driven by where our operating cash flow goes, what our cash runway is and where we drive the business forward from an overall cost standpoint. Operating cash flow for the quarter was negative $4.1 million, reflecting the temporary elevated costs aligned with the Spirion acquisition, further U.S. market expansion and the timing delays from the U.S. government delays from the government shutdown. The company closed the quarter, as Dan mentioned, with cash balance of $6 million and a total available funds of a little over $7 million, and that does exclude the $8 million Regal debt facility. So overall, we feel that we have a really good handle on where our costs are going. We have a strong understanding of where our total ARR is going and locking that in to limit the churn and the loss of any customers as we move forward and really drive where we need to go from a strategic standpoint. So let me just turn it back to Dan to talk a little bit about how we're pushing to supporting the global scalability and growth of the business for the coming quarters. Chun Leung Lai: Yes. Look, we've seen good traction obviously. We discussed the momentum in the U.S. They renewed that 1,000 licenses. It had expired. They needed to do that to do a production trial for deployment of the product into different [ co-cons ] as we call them, and that has happened. That's underway, and we expect that to last approximately 30 days for that period of time for that trial to be done. And it's more so about how they manage it, what [ order logs ] they can get back and make sure that they can maintain that software. Post that, we expect to have -- see some sort of licensing deal come through for the organization. Importantly, what was really an impressive milestone was not only seeing it being deployed, but the fact that they had such confidence in it, they were expanding those commands for it to be trialed across, and we were very happy to hear that. So we feel that there's strong indicators coming out of the U.S. DoD at this point in time. In terms of the U.S. expansion, the cost synergies, Kurt's already been across that. I think that it's really important to understand that we're taking it very seriously that we found more synergies than we expected. We acted upon them, and we're taking those type of actions to make sure that we're looking after that capital very tightly. Of course, the other aspect there is the cross-sell and upsell that we are looking at with these customer bases. We've already identified $2 million worth of opportunities in the first 3 months, which we have commenced starting to execute and engage, start to demonstrate. Obviously, there's a process there of training the U.S. team into our product suites, how to present that, where it fits and of course, also that vice versa, the opportunities that we're now finding in Australia where we can pitch the Spirion products, which is that discovery of that information and that labeling of the information for NC Protect then to be able to enforce that data-centric security process. And of course, out of that 150 global blue chip, it's really important that we market to them and the branding to them and they see a strategy not from a best of breed but to an integrated platform future that this is a long-term investment, and we are their partner of choice for data-centric security along that journey to continue that growth. Kurt? Kurt Mueffelmann: Yes. I think what was interesting, so I spoke to our partners over at Copper River, and they were blown away that we were able to actually commit and deliver to the January 16 delivery of a customized software development. It was over the holidays, and they said we were one of the few vendors that had the ability to actually say we were going to do something and get it done. So that builds huge credibility, and that goes straight up the chain right up to the U.S. DoD. I know we were presented by one of our other partners associated with Copper River, right up to the #2 person at U.S. DoD that handles this within the IT operations, and again, they passed on their thanks down to the level of individuals within archTIS for performing and getting that done. And that just doesn't stretch into the U.S. It stretches back into the development teams and the project management teams and everybody across the archTIS employee base and delivering that. It's a true team effort, which is really nice to see. It's nice to get those accolades when you're in the trenches. The other nice thing about being in the trenches was when you start to talk about that $2 million of cross-sell and upsell, you start to look at what the scope and the breadth of that is. In looking at our pipeline and looking at the individual opportunities, there's 1 opportunity in there that has 30,000 users, which is fantastic. That's a significant opportunity for us to do. We're really tied into that. I think we did our fourth or fifth demo on that over the last month. So you really see the excitement around where you take that to the next step around going from discovery and classification up to enforcement and governance that NC Protect provides. But on the other side, we also have smaller organizations. We had a couple of small educational institutions that had 1,000 users. We have a small manufacturer of 500 users. So we really go up and down the scale of Spirion 150 users -- 150 customers that Dan talked about and really driving that cross-sell, upsell opportunity. So we see tremendous opportunity there as we continue to move forward. So Dan, as we look at kind of kicking off calendar 2026, let's talk a little bit about where we're going with the market and where is the market going because it's still continuing to boom from a cybersecurity perspective. And when you start to look at the scope and the scale of the number of vendors and where we are in the market, it sometimes becomes a little mind-boggling. So I think it's good at the beginning of the calendar year to bring it back in to say where are we and where do we compete and how do we differentiate ourselves in the market. Chun Leung Lai: Yes. Well, this could be somewhat terrifying if you didn't have a plan. Luckily, we've got a plan. So there's probably about 12 major organizations out there, which dominate the cybersecurity market. There's your CrowdStrikes, your Varonises, Microsoft, AWS, Ciscos, Palo Altos and so on. They're the big guys, the big dogs, as we like to call them. They control a vast amount of that security budget. But there's about 4,500 other vendors out there vying for visibility and usually filling a gap or is the best-of-breed product, which has been adopted over time and is working. And I think the real question that you've got to look at from your strategy is how do we differentiate, how do we partner and value add to those big players in a space where they don't have that capability, and we can extend their value propositions to their customer bases as well as for us, exploit their customer base for selling. And I think that that's really, really critical to have those differentiations in the strategy. And I think with data-centric security, we're extremely well placed to do that and most importantly, leverage that, as I said, that cooperation in terms of selling and structures. And again, I think that we're well placed to do that, but we'll go through a bit of a detail here. So why don't you talk a little bit about that strategy, Chief Strategy Officer, Kurt Mueffelmann. Kurt Mueffelmann: Yes. So I think what's really interesting, though, is when you start to look at what's around us, right? And there's a lot of activity going on, right? There's a lot of M&A. There's a lot of roll-ups. There's a lot of money coming into the space. And of the $300 billion that are out there today, as an Australian micro-cap, we can't compete with that. We can't be all things to all people. So we really look at where we target our business and market opportunity around data-centric posture management, data loss prevention and data access governance. That's about an $11 billion market that's out there today. So we're trying to really scope down of where we compete and how we do that. And when we start to look at where that M&A activity, where market valuations come in and everything, companies that are driving right around USD 100 million in revenue, there are some massive transactions that are out there today. One of them includes the Israeli firm, Cyera. They just received $400 million in a December raise, and that's implied valuation of $9 billion. They sound just like huge numbers, but again, $9 billion valuation for $100 million in revenue. You do that multiple of revenue, and it's just mind-boggling. BigID, U.S. firm, $1.25 billion valuation, $100 million in revenue. Securiti AI, they just got acquired by Veeam for $1.8 billion. So that reinforces really that institutional conviction and scalable data-centric platform. And we need to continue to execute our strategy, expand, obviously, where we're going with the U.S. DoD and the government enterprise adoption and really create that pathway towards where we believe we can drive the business. And ultimately, our available market opportunity is not defined by how many feature sets we can build or how many adjacent categories we can claim. It's really all about how we focus on complementing that hyperscaler platform, remain essential to large market consolidation and really drive those partnerships and building what we think is really strong in the message that's out there today. And so from a strategy standpoint, we start to focus on that modern data fragmentation that -- the DSPM, the DLP and the DAG markets. They're still big at $11 billion. So we're trying to even be really focused on that center intersection of all those 3. And Dan, do you want to talk a little bit about what that entails? Chun Leung Lai: What that's really about is that as a business today, I exist in a hybrid environment. I've got AI driving my data usage. I've got IoT. I've got data analytics. I'm using SaaS platforms such as Salesforce, which is taking my information from my on-prem to the cloud. I might be using different cloud vendors for different infrastructure purposes or different services, digital services. So I exist in a hybrid world. And what's really difficult about this is how do I extend my current investments to maximize those investments without having to replace all the functions that I've already got and the capabilities that already exist. And the way of doing that is essentially about creating a fabric between all of those points. How do I get visibility of my data? What are the threats? What is sensitive? How do I label that? How do I protect it? How do I prevent data loss prevention? And how do I do access and governance? And most organizations today have a myriad of different products and aren't consolidated into any one vendor because, quite simply, not one vendor can do it all. And where they all got vulnerabilities is they do that at the application layer, the network layer, but they don't do it to the data object, and this is where our competitive advantage is. And with the introduction of TDI, Trusted Data Integration platform from the acquisition of Direktiv, we now can become that fabric, which enhances that value for the customer and provides a single point to manage and control and orchestrate policies across their entire security ecosystem to give them a zero trust fabric. That's really key. Kurt Mueffelmann: Then, I think the way we really drive that across the product lines is through policy. We've always talked about policy-based orchestration. And so when you look at data-centric policy orchestration, it really unifies these 3 different markets through a data control plane, as Dan talks about. It really abstracts the business and regulatory intent in the policy, evaluates the policy in real time. It drives that attribute-based access controls that we know we have out there. And the result is really this closed-loop security in real time, consistent decisions and really turned fragmented controls into a single operating control plane across all data, not just unstructured that we've been historically but across all types of data that are out there today. And so Dan, can you talk a little bit about and explain maybe what the control plane is because that will be a big vernacular aspect that we bring into the business as we move forward? Chun Leung Lai: Well, we see this race from all of these companies, Microsoft included, to be what they call the control plane. We see it with Varonis. We see it with BigID. We see it with Cyera. We see it with Zscaler. However, what they're really talking about is if you put all of your information into my cloud or my product suite, you can have a control plane. And as I just said, we're living in a hybrid environment and what they're not doing [ is that ] to the data. That's really hard to do. So we're not going to go out there and compete with CyberArk or Palo Alto or Cyera. What we're going to do is integrate with them and extend their capabilities across that hybrid environment by providing that policy. But if you're in a Microsoft environment, our platform might call and produce a policy to run NC Protect or it might take the CyberArk identity as a trusted identity and then put that into that process for SharePoint Online protection but also then extend that out to a data set in an AWS cloud environment. So we become the fabric that integrates all of those products that already exist to leverage that investment for our clients but also has the ability to integrate into any data source, any device, any structured data source, AI, particularly, which is really important with the advent of agentic AI and the usage of that. We're seeing now employees coming to the table and bringing their digital twin for -- as part of the interview. So this is changing very rapidly. And how do we protect that intellectual property and then also use that -- share that information with other organizations and still protect it? That's the play here. And I think we've got a very strong play. Kurt Mueffelmann: And I think what that does is it takes kind of where we are with best-of-breed products that are out there today across a number of different areas and pulls it into this data-centric or data security policy orchestration and control plane. And the individual point solutions, we address individual discrete problems such as data discovery, classification, enforcement, customers looking at ways of requiring unified layers, translating security, looking at what the business intent is and how you pull that all together. And really, this transition expands archTIS' addressable market, strengthens our strategic relevance within the hyperscaler without competition. It drives further government ecosystems across playing well and nicely in the same sandbox and creates that foundation for that durable platform level creation over time. And Dan, maybe you can talk a little bit about how the move from best of breed to platform is something that as we start to look at where we go over the coming horizons of the business itself. Chun Leung Lai: Well, all of this sounds very highfalutin. And when will that be? It sounds a bit like it's far out. It's actually not. What we've been doing is collecting companies that give us a best-of-breed solution, which -- and we've done that for any data-centric security problem. So we can now discover data. We can label data. We can actually then integrate it and provide enforcement controls, which is where our competitive advantage is. We can do that with using Direktiv as the foundation and adding our policy enforced ABAC controls into that platform. We now have the foundations to rapidly build out a platform offering for our customers. And these use cases that we did for BAE about integrating multiple parties and consolidating that information for manufacturing supply chain, the deployments that we're doing currently in the military for allied force integration, they're all providing the input into this and referenceability for the market. The acquisition of Spirion also gives us commercial clients to explore with these synergies and strategies. And we're expecting before the end of the financial year that we're going to have a minimum viable product for that platform to exist off and integrated with things like NC Protect and Spirion. Now what does that mean for execution for short-term revenue, medium-term revenue and long-term revenue where we believe we can really disrupt the market and become -- coexist with the big dogs and provide value add and really ramp up the ARR? Well, really, that comes down to these 3 horizons. And Kurt, you can talk about some of the opportunities here, but it starts with things like the U.S. DoD, winning NATO and Japan to get that referenceability and build along with them solutions for -- to implement that strategy with them. Kurt? Kurt Mueffelmann: Yes. I think what you find is that a lot of companies come out with these grandiose strategies, but they forget where they need to be and where they are, right? We're a public company. We need to report back to shareholders. We need to be very concerned about where our expenses go, our total cash runway. And our strategy, we're structuring it across these 3 horizons that really address immediate needs around, number one, defending and extending the base. We now have 200 customers that we can go in. We can do upsell, cross-sell. We obviously have some strong opportunities with the U.S. DoD, NATO and other coalition forces. So we feel like we can continue to drive really aggressive top line, be very conservative from an expense standpoint and really try to drive where we need to be in a business. But yet being in a competitive sector that we are, we need to look at where we go. And that next stage or next horizon is really taking that and building, as Dan said, the TDI into a policy orchestration engine but going through not only that from a technology standpoint, because it's easy to get lost in that, but taking what we've learned and taking it to the next level, expanding where we're going, taking that initial U.S. DoD opportunity and expanding it broadly into a broader 3 million to 4 million U.S. DoD licenses that are possibly out there today, continuing to work with the Microsofts, continuing to work with organizations that are coalition partners. We've had prior successes in the global DIB supply chain. How do we take that and drive that together? And then Spirion brings a whole different opportunity around regulated industries across state and local education, across health care, which is where one of our big pipeline opportunities is coming up. When we take that and take that into financial services and regulated industries there, you start to see where we can take that over the next -- between now and the next 18 months and then work towards that repeatability and commercialization that takes us to scale across the platform of where we drive that. So we think that there's some good opportunity. There's some good tailwinds behind us around zero trust mandates, driving that urgency, the compelling events around what customers are looking for. We're hearing that all the time. We're looking at how we take that and bring this to a simplified market opportunity that really leverages where we want to go, be strong today but drive towards the future to where we can start to look at and expand some of those market opportunities of valuation, driving shareholder value, which is one of the key opportunities that we need to consider on a daily basis, wake up every day and say what are we going to do to drive shareholder value and build the business and how do we maximize where our shareholders need to be as we go forward. Dan, any summaries on that? Chun Leung Lai: No. Look, I think the Horizon 1 is sell what we've got today. We're selling those best of breeds. We're doing that cross-sell. Horizon 2 is really about that orchestration, TDI sales. We know we've got a number of opportunities in the market. And it paves the way for that to become Horizon 1 pretty quickly. And that's really the progress that we want to make. And of course, this Horizon 3 is about the interfacing to those large, big dogs we've talked about, your Varonises, your Cyeras, your Zscalers. And of course, we've already got that relationship with Microsoft. So we see that as fueling the fire not only across defense and intelligence but also expanding us back into those commercial environments. Once we get that success there, I think it's going to really start to roll. So really important that we get the foundations right now, we get the strategy and the focus right now. I think the other part of this strategy is it really keeps you clear on what you're not developing, where you're not competing and where you do have to compete and win. And I think that brings us back to the focus that Kurt talked about, which is going to be key for our success as a small player and growing -- to get that growth strategy really, really running. Kurt Mueffelmann: Great. Why don't we turn it over to some Q&A, Dan? So we're talking a little bit about product strategy, and the big thing that's on everybody's front of mind is AI. So can you talk a little bit about how archTIS is using AI in product development? So I think this is a 2-phase question. How are we using it in product development, I think, to become more efficient? And how can we use that as market opportunities to sell more product and where we will be securing AI into the future? Chun Leung Lai: Okay. I can do that very quickly. So part of the integration with Spirion was to get a corporate AI from the development platforms and increased productivity from our developers but also particularly in making sure that our testing and quality assurance is being higher productivity and higher levels of assurance in that, particularly against security frameworks and security code and all of that sort of thing. So we're not only just using it in the business at all levels. We're experiencing that levels of how do we integrate this securely, and we are eating our own dog food first. So one of the great things about Direktiv, it was a really early product to secure, let's just say, a code from AI, particularly for defense environments. So it has been deployed to do that -- exactly that. So we have a demonstration being built today for how it would work with agentic AI. And the big challenge for adoption in most organizations are twofold for AI. The first one is compute capacity; and the second one, obviously, is security. There's no questions about the productivity gains people get. It's about how do I make sure that the productivities I get don't undervalue the business through a data spill. And that's the challenge that companies are looking at from the adoption. We certainly have already adopted it in our innovation framework, and we are building demonstrators much faster than we have ever done before to demonstrate the value of our products using AI. Kurt Mueffelmann: Great. Why don't we jump into -- there's a couple of questions around cash flow and the raise potential and what Regal facility adds to that. Could you interpret the Regal facility because you talk about nondilution funding and where that goes? And how does that come across versus what a traditional cap raise maybe look like? Chun Leung Lai: Yes. Look, I think we always keep all options as a Board on the table for making sure that we have runway as people -- as shareholders are referring to. Obviously, when we close some of these big deals that are in the pipeline, it's fantastic that you get a lot of cash in. You can do multiyear deals. You get a lot more cash in and you solve those issues, and you don't dilute your shareholders through any raises. There are a number of nondilutionary options out there, including the Regal debt facilities, which we've agreed the terms on. But there's also other options as well. So we're looking at -- to balance dilution versus strategic investment from raisers and if we have a partner that really wants to come and is going to be a long-term shareholder and can grow -- help us grow the businesses, we'll obviously look at that, too. But at this point in time, we've announced that debt facility because it is a nondilutionary way of extending our runway and ability. And look, we are just as frustrated as shareholders trying to pin down the U.S. DoD in a country. And I think everyone is clearly aware of the turmoil that's going on in the U.S. at the moment and a different day changes, a different decision from the President, which can backflip on a decision. It creates uncertainty. The business environment has uncertainty. That's the nature of the beast, so we're looking to protect that runway. However, the indications that we are getting from our customer is that this is the time frame that we are -- and that's all we can relate to you, and that's the expectation from us in terms of when we will get this deal done. Kurt Mueffelmann: So when we talk about the U.S. DoD, there was a question about do you see any licensing in the next 30 days because you talked about the different commands adding on and using some of the custom code that was delivered just recently and how they're going to go out and test it. What does it look like over the coming weeks or months from a licensing standpoint in your estimation? Chun Leung Lai: I'll talk people through that whole actual life cycle if you like. The first thing that you do with your customer is socialization, problem identification. Tick, we've done that. Compelling event established, tick, we've done that. In fact, not only has the President mandated zero trust across the federal government, the Department of War CIO has mandated and provided a date that this must be accomplished by -- which is 2027. So they've got real motivators to solve this problem. We know that we -- our product has got a sponsor, who has got budget and that we have to find the use case. We've done the proof of concept. We've done the customer identification. And in this case, that customer identification are those commands. We've done the security accreditation process. We've done the custom software development. We've done the licensing purchase for the trial, and that is where we are today, a 30-day production deployment exercise to those different commands, and that's what is being conducted. So do I see licenses happening in the next 30 days? No, I don't because we've got 30 days of that process to go through. I expect something to happen shortly after that and of course, given that there's the stability in the U.S. environment, the political environment, I'm saying there. So -- and then I expect us to be deployed, and then I expect us to be able to look at -- commence conversations on that 120,000 licenses that we expect to come through. Kurt Mueffelmann: Yes. And I think having feet on the ground here in the U.S. and having a little bit more, I think, insight, you hear these stories about a second government shutdown and what have you. The first government shutdown, it hurt more around the timing of getting things such as security certifications or what they call the STIG finalized. All of that blocking and tackling and ticking of boxes is done. The government shutdown should not affect any funding because we're dealing with frontline war fighter networks. We are actually right in the [ co-cons ] themselves, and those don't get affected by government shutdown from a funding perspective. Where a government shutdown could affect something is if someone needed to come back and said, hey, you need to revalidate this, what have you. And the person that's doing that revalidation is furloughed because of the government shutdown. I don't expect that to happen. Now again, silly if things will and have taken place before around government shutdowns, but number one, I think it's a stretch to have another shutdown. I don't think the politicians within the U.S. can go through that. They can't go through that for their constituents on either side of the aisle. So I think that will be a big challenge for them. And we've gone through a lot of the administrative stuff that would not be affected by a second government shutdown. And we know that the funds are there from a flow-down standpoint. We've seen them, and that's what we've been looking at as we move forward around the purchase around the -- extending the licenses themselves. So I guess, Dan, last question I thought would be good and this is kind of an interesting one. So we're at the beginning of 2026. When do you see or hope to see archTIS at the end of 2026? Chun Leung Lai: Look, obviously, where I see the business is that we're cash flow positive. We're starting to build that EBITDA up. I would love to see very, very strong new logos in that business with strong, sticky ARR, all the things that you're looking for, high gross margins, all of that sort of stuff. But I really think that what we want to be able to do is move out of that, really, survive phase where we sort of have been burning some capital for the opportunity to arrive. And I think we'll have transcended that into that. We've got our own destiny in our hands because we have had that success of those deals driving and expanding the growth of the business. So really, that's where I see the business at the end of these 12 months. You've seen the plan that we've just put up. It is an 18-month strategy. These are not long time frames. Technology moves far too quickly for us to have big 5-year plans and all the rest of it. AI is moving quickly. These are organizations moving quickly. And part of this is that exploitation of those strategic alliances. And that's something by the end of the year that I really want to see that we have this platform base, and we're starting to being sold and referenced by our alliance partners, those big dogs, and we're starting to access their customer base. And then I think, in 2027, it's about that growth story, a really strong growth story, and that's where I hope to see the business. Kurt Mueffelmann: No, great. Yes, I think it's -- the industry is moving very quickly. You see a lot of consolidation. You see a lot of money coming into the business, so we need to stay ahead of that curve. We need to drive this recurring ARR. We need to get ARR moving in a much more aggressive fashion. We can't be solely dependent on the U.S. DoD deal, right? We know that 8,000 users is not going to move the needle. That's not our expectation. What we do expect 8,000 users from a licensing standpoint is lean into a broader enterprise agreement. It also brings us back into how do we address what we're doing at the Australian DoD, where do we go with other coalition forces, whether it's in the U.K., Japan, Taiwan, Korea, across Western Europe and what have you, going back and leveraging that back into the various defense industrial base partners that we have and look at the primes of the Lockheeds, the Boeings, the Raytheons and carry that across into some of the prime delivery vehicles that are out there from a partnering standpoint. And then remember, we still have Microsoft out there. And there's been a lot of great meetings going on with them. We need to continue to drive that and really push that. And I think if we can accomplish those kind of areas across 2026, maintain costs, drive towards where we're going to be from a strong business perspective around cash, making sure our investments are providing returns, making sure that we have an understanding of where we're going from our overhead and operating standpoint, I think that would be a good year and drive that -- continue to drive that forward. So Dan, any closing comments? Chun Leung Lai: Might be in that top right-hand quadrant where people who go to those research organizations such as Gartner and Forrester, they're saying, these are the guys. And you want your customers to be saying these are the guys. And if we can get that by the end of 2026, happy days. No, I'd just like to thank everybody for attending. It's been a really dynamic last 3 months in terms of the integration and the repositioning, formulating our combined strategies, setting the sales targets and making sure that the sales force is executing and that being supported by the technical resources and then getting up to speed on the whole, I guess, the suite of the products that we now have. It's now going to be about -- probably all about focusing on that Horizon 1 and generating that ARR and revenue and setting the foundations with that Horizon 2 for that control plane to be established. Kurt Mueffelmann: Great. Well, thank you, everybody, for attending. I know Jane from JMM will have the recording available, and we're going to distribute that out. And so we'll be able to follow up on that. And please feel free to reach out to us through investors@archtis.com. So at this point, I'll turn it back to Jane for any closing comments. Jane Morgan: Yes, absolutely. Again, thank you, gentlemen, for the insights today, and thank you, everybody, for joining us. As Kurt and Dan have just mentioned, if we do have -- we missed any of your questions, reach out via the contact details, which can be found on the bottom of our ASX releases. But we look forward to hosting you again next time. Chun Leung Lai: Thank you very much. Kurt Mueffelmann: Thank you. Have a good day.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Coveo Solutions Third Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, January 29, 2026. And I would now like to turn the conference over to Mr. Adhir Kadve, Head of Investor Relations. Please go ahead. Adhir Kadve: Good afternoon, everyone, and thank you for joining us. With me to discuss Coveo's fiscal third quarter 2026 results are Laurent Simoneau, Coveo's Co-Founder and Chief Executive Officer; Louis Têtu, Coveo's Executive Chairman; and Brandon Nussey, Coveo's Chief Financial Officer, and Karine Hamel, Coveo's incoming Interim Chief Financial Officer. A reminder that some remarks made today will be forward-looking statements within the meaning of applicable securities laws including those regarding our plans, objectives, expected performance and our outlook for the fourth fiscal quarter and full year fiscal 2026. These are forward-looking statements given out of January 29, 2026, and while we believe any statements we make are reasonable, they are based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from those expressed or implied. Coveo disclaims any intent or obligation to update our forward-looking statements, whether as a result of new information, future events or otherwise. Further information on factors that could affect the company's financial results is included in filings we make with Canadian securities regulators, including in the Risk Factors section of the company's most recently filed annual information form as well as the key factors affecting our performance section of the company's most recently filed MD&A, both of which are available on our SEDAR+ profile at sedarplus.ca and on ir.coveo.com. Additionally, some of the financial measures and ratios discussed on this call are either non-IFRS measures, ratios or operating metrics used in our industry. A discussion on why we use these metrics and where applicable reconciliation schedules showing IFRS versus non-IFRS results are available in our press release and our MD&A issued today. Finally, please note that unless otherwise stated, all references and financial figures made today are in U.S. dollars. Our presentation slides accompanying this conference call can be accessed on our IR website under the News and Events section. I will now turn the call over to Louis for an overview of our third quarter, followed by Laurent, taking us through a strategic update and we will end off with Kevin, taking us through the financial details and providing our outlook for the fourth quarter and fiscal 2026. We will then open the line to your questions. With that, over to you, Louis. Louis Tetu: Thank you, Adhir, and thanks, everyone, for joining us today. We have excellent news to discuss. In the third quarter, we broke new records in both subscription bookings and net bookings. This is the strongest new bookings performance in the company's history. Total revenue and SaaS revenue both came in above guidance. And as a result, we are reaffirming guidance for fiscal '26 and are now expecting SaaS subscription revenue and total revenue at the top end of the previously guided range. Customer momentum remained very strong during the quarter with a healthy balance between new customer wins and expansion within our existing base. We signed major new contracts with leading brands such as GE, Liberty Mutual, Total Tools and Insight to name a few. Notably, we secured the largest new customer win in Coveo's history, a 7-figure deal with a Fortune 500 global leader in the industrial sector. We also expanded more than 80 subscriptions and deployments with existing customers, including Deloitte, United Airlines, Ticketmaster, Cardinal Health, Anderson Windows, Thomson Reuters, USAA, Vanguard and Workday, all of whom increased adoption of our AI platform. Our commerce offering continued to deliver exceptional growth. Retailers, distributors and manufacturers increasingly recognize the imperative for AI-powered relevance and are seeing measurable results from Coveo-AI. During the quarter, we closed the second largest AI commerce expansion transaction in our history with Cardinal Health, a customer we discussed last quarter. Cardinal supports more than $220 billion in health care commerce distribution and have validated our ability to deliver enterprise-grade AI at massive scale. How we operate in highly complex environments and generate tangible financial results. Our generative AI solutions also sustained strong growth. Laurent will expand on this opportunity and the growth levers enabled by our continued platform innovation. Overall, it was an outstanding quarter, and Karine will provide the financial details. During the quarter, we announced a strategic partnership with Deloitte, a global leader in digital transformation. Deloitte shares our belief that the future of enterprise digital experiences is AI and relevance first, and this partnership expands our reach across joint customers. We also signed an important memorandum of understanding with the government of Canada to support the modernization of digital services using Coveo AI. We already serve the governments of Australia and New Zealand with modern search and generative solutions for citizens and civil servants. And with Canada, discussions are underway to evaluate large-scale deployments across agencies coast-to-coast to improve efficiency, service quality and digital sovereignty. I am pleased with the pace and value of our innovation. Our strong bookings and increasing number of larger transactions confirm that these breakthroughs are resonating and that our customers anchor Coveo in their core AI plans. We're particularly excited about our RAG as a service and Coveo hosted MCP server offerings. These solutions allow customers to securely ground generative AI and digital agents in permission-aware, context-aware enterprise data, one of the most difficult challenges in enterprise AI. Coveo removes the complexity around retrievals, security and relevance. Building on this, we announced the availability of RAG-as-a-Service for AWS Agentic services, helping AWS accelerate customer adoption in Agentic. We also recently launched the Coveo app for Open AI ChatGPT Enterprise. This brings secure, enterprise-grade relevance directly into natural language workflows. The key takeaway here is that our flexible, agnostic RAG and MCP architecture significantly expands our integration and partnership opportunities across the rapidly growing Agentic ecosystem. Investors often ask us why Coveo is so valuable and sustainably differentiated in an increasingly crowded AI landscape. Why do enterprises choose Coveo often investing millions in subscriptions instead of building these capabilities themselves? The answer is twofold. First, Enterprise AI does not inherently know your data. One of the major most profound breakthroughs of generative AI is its ability to synthesize and stitch fragmented siloed information into coherent answers in real time. However, securely connecting models to complex fragmented enterprise data at scale remains extremely difficult. Second reason, AI does not understand context by default. Enterprises cannot tolerate hallucinations. Customers, employees and stakeholders require accurate answers based on current context and governed data. Achieving this level of precision requires surgical governance of relevance. It's a science. Coveo has spent years building and refining AI models that govern relevance and intelligently connect enterprise data to digital experiences. That technology is critical. Customers consistently measure superior outcomes with our platform, validated through A/B testing and reflected in cost reductions, revenue growth, margin improvement, productivity gains and better decision-making, just to name a few. In the past, search was just retrieval embedded in apps. Today, relevance is what matters. In fact, during the quarter, Salesforce reconnected Coveo Search within its global support portal after customer dissatisfaction during a brief disconnection. While Agentforce is designed to answer questions from within Salesforce Data Cloud, Coveo search relevance is still necessary to surface the exact issue resolving content for these millions of Salesforce users. In our view, Coveo is complementary to agents such as Agentforce. As Laurent will discuss in a moment, AI search and relevance is needed to enrich and augment Agentic, and we have multiple examples of this with Agentforce customers in particular. Today, relevance is a necessary enterprise-wide capability that powers interaction channels and Agentic workflows with consistent precision, security and governance across all data silos. That relevance and connectivity layer is what Coveo-AI delivers, and replicating it requires years of deep enterprise engineering and real-world experience. We are more convinced than ever that Coveo's addressable market is large and expanding. We've built defensible moats and relevance for knowledge-intensive industries and an AI-powered search and discovery for complex consumer and B2B commerce. We have rapidly evolved Coveo into a highly flexible AI platform that allows enterprises to access data anywhere, adapt to multiple AI and large language models and inject context-aware intelligence into any application or conversational agent. This flexibility significantly expands our use cases and market verticals potential. We're particularly excited about the large and fast-growing market for Coveo AI in the industrial sector. Think about manufacturing, distribution, aerospace, energy, medical devices or hardware, for example. Here, we're addressing the economics of uptime and dependability with AI. In the U.S. alone, nearly 10,000 companies generate revenues above $250 million across these industrial segments. Think about assets such as MRI machines, aircrafts, HVAC systems or heavy equipment, downtime costs for these are significant, often in the millions of dollars annually. This creates very compelling economics for our software. As we help increase efficiency and uptime with 360-degree customer care intelligence. Industrial data and content are highly complex and siloed. Our AI can unify it and turn it into context aware intelligence for issue diagnosis, prescribed solutions, service intelligence and complex parts recommendations. So our manufacturing customers can deploy a single Coveo platform as the real-time orchestrated intelligence for self-service, contact center agents, search portals, field service, and of course, linked to complex aftermarkets parts commerce, advice and recommendations, something that is very time consuming and more costly to do without AI. Our AI insights can even be embedded within connected products that then continuously feed back data into our AI models for even greater speed and precision. We are not aware of any other platform that delivers this breadth of experiences from a unified AI intelligence layer. Our mission and conviction remain unchanged since we began combining enterprise search and machine learning in 2012. The world runs on digital experiences. It is now widely understood that all of them will be transformed by AI. Coveo is uniquely positioned as a mature platform that governs and optimizes AI-powered experiences on enterprise data. Before passing it to Laurent and Karine, I want to thank Brandon Nussey, who is stepping down in a few days for his years as our CFO. After a 20-year career as a public company CFO, Brandon is moving to the private company side. Brandon, we're deeply grateful for your contributions and for helping build our solid growth foundation. With that, Laurent? Laurent Simoneau: Thank you, Louis. First, I'm extremely proud of our team during this record third quarter and how we are positioned for continued growth acceleration. The applied AI market is moving from confusion to clarity. Organizations are now more educated buyers, shaped by early experiments and in many cases, inflated AI claims that failed to deliver. Customers some to Coveo with a strong appreciation for platform maturity and more importantly for provable results. while investment in foundational AI remains strong, the market is shifting towards operationalizing AI with company-specific data and use cases with a focus on tangible outcomes rather than AI as technology and search of problems. One of the largest and most immediate areas of impact is digital experiences, serving buyers, customers, citizens and employees. Persons online with high relevance expectations. Digital and Agentic experiences must be grounded in secure proprietary enterprise data with relevance that remains coherent across the entire journey. Governing AI models to deliver precise relevance is therefore critical. Given the rapid commodization of AI models, flexibility and agnosticism are no longer optional. This is where Coveo plays, providing the trusted foundational plumbing that allows enterprises to realize value from AI at scale and adapt over time. As CEO, for close than a year now, I'm focused on 5 priorities: innovation, value to customers and differentiation, growth and market expansion, disciplined execution and, of course our healthy business economic model. First, innovation. I could not be more excited about the pace and impact of the innovation we're delivering with our customers. The progress is driven 100% by the intentional flexibility of our platform. We covered our MCP server and RAG-as-a-Service launches. The takeaway is straightforward. Coveo delivers out-of-the-box connectivity and governed relevance across digital experiences with security and precision. Our platform is easily accessible to developers, applications and Agentic systems, enabling consistent unified intelligence layer across multiple channels. This capability is central to our expansion into new markets and higher-value use cases. Coveo is now available in ChatGPT Enterprise, AWS Quick Suite and Salesforce Agentforce, for example. In addition, we see many customers independently leverage Coveo through MCP with AI systems such as Anthropic [ Claude ] and others. Organizations will adopt multiple Agentic platforms over time. It is imperative those platforms rely on a common relevance and connectivity layer and Coveo is designed to be that stack. As CEO, I'm fully committed to a strategy centered on interoperability, flexibility and unique value. This capability has allowed Coveo to evolve from addressing a limited set of use cases to broaden its scope across more strategic vertical specific challenges. From a growth perspective, this is also driving broader expansion and more 7-figure subscriptions for Coveo. Once we land in an account with initial more urgent use case, our ability to expand meaningfully with the same platform increases. Second, value to customers and differentiation. Let me share concrete examples. First in commerce, we built on our platform Agentic Discovery solution that moves Coveo from ranking results to orchestrating the storefront experience. Now an intelligent agent can dynamically select and present the optimal mix of products and content to serve both user and business objectives. Over time, Agentic Discovery will evolve into a true end-to-end agent that guides customers seamlessly from free purchase discovery to post sales support proactively recommending products, providing guidance and resolving needs across the entire customer journey. Louis highlighted our growing presence in the industrial sector, including a new 7-figure customer in industrial automation. Their decision reflects our ability to unify content across their complex technology stacks and improve knowledge access and service efficiency. As you know, Coveo AI was built over more than a decade working with leading tech companies. They were the early adopters of relevance driven across their engineering and customer service operations. Today, Coveo is trusted by many of the world's leading technology companies from AMD, Intel, Dell and NVIDIA to SAP, Snowflake and DocuSign. The same dynamic lies across aerospace, energy, transportation, heavy industry, companies such as Halliburton, Schlumberger, Cummins, Honeywell already relying on Coveo. We recently successfully built an AI-powered diagnostic solution for global medical devices company, synchronized with intelligent aftermarket parts commerce. In environments where equipment failure carries high financial and human states, such as an MRI machine, for example, rapid resolution depends on securely interpreting siloed engineering data maintenance, history and parts compatibility and availability through context-aware routes. Without the ability to securely connect and interpret the siloed information at scale, resolution times lengthen, cost rises, revenue declines and outcomes suffer. Related to this, our partnership with SAP remained a key driver of bookings during the quarter and also an anchor in industrial segments where SAP has a deep market penetration. What began with SAP commerce and global retailers is now expanding into multiple knowledge use cases, reinforcing the strategic importance of this partnership. In 2025, Coveo was one of the SAP's fastest-growing endorse partner in the SAP CX ecosystem. I'm also pleased with our momentum in Financial Services, the core knowledge industry vertical for Coveo. During the quarter, a leading global asset manager overseeing nearly $10 trillion in asset under management significantly expanded its Coveo subscription. This customer initially deployed our Generative Answering to support financial advisers handling complex investor questions in real time. The results were compelling, driving meaningful improvements in productivity, consistency and overall customer experience. Based on this success and strong internal confidence in our accuracy and security, they have now extended these capabilities to investor-facing self-service experiences. Today, they are using Coveo AI across more than 40 internal and external digital properties. This, for us, is a big deal. First, this represents a growing 7-figure subscription and constant expansion, but more importantly, this validates Coveo as a core technology platform, delivering relevant accuracy and reliability in highly regulated, high-stakes environment. It also reflects the confidence to move from adviser-assisted to a probably more unforgiving direct customer-facing self-service. These marketing wins with industrial leaders who have the scale to build in-house or choose from many vendors highlight why they partner with Coveo, our agnostic tech stack, platform maturity, and proven ability to manage complexity and govern relevance at scale are the reasons. As Karine will explain, many of our largest customers continue to increase their spend with Coveo. To us, this validates our platform and reinforces Coveo's position as a vendor of choice for generative and Agentic AI road maps. These are powerful illustrations of our long-standing vision of unified relevance in action, a single AI platform connecting internal advisers and customer self-service for a bank, a single AI platform, unifying diagnostics, aftermarket parts and service in one coherent intelligent layer for an industrial company. By delivering high-impact use cases on a shared foundation, we increasingly address strategic challenges for customers and open the door to new vertical markets and expanded technology alliances. Our third area of focus is our growth and market expansion. We are building a powerful growth engine on a single, flexible agnostic AI platform. On the one hand, the strategy drives consumption and subscription expansion with our existing customers by broadening use cases and solving more strategic, higher-value problems in a more integrated way. On the other hand, it fuels market expansion by enabling applications and Agentic to leverage the Coveo platform across multiple new vertical industries. Today, Coveo is focused on commerce for retailers, brands, large distributors, and B2B industrial customers, while remaining a leader in search and generative experiences for knowledge industries, such as financial and professional services. These segments represent a large and growing TAM. We see significant upside from further verticalizing our applications into new markets. So net-net, our customers are expanding with us and we're increasing our ability to serve a broader and more diverse set of customers. Finally, my overarching priority is disciplined execution and a strong sustainable economic model. Focus matters for any successful business. At Coveo, our focus is on playing where we win and where our customers win. Vertical markets where we deliver the highest financial and operational value operates with repeatability and consistency and where we're the most trusted partner for our customers, of course, in markets we carefully select I've shared multiple proof points, and we continue to build a roster of leading innovative global enterprise customers with close to 1,000 brands and organizations with thousands of use cases deployed. And we're widening our competitive advantage and expanding into markets, industries, use cases and channels that were previously unimaginable. At the same time, we remain disciplined about economics. We operate with high product gross margins above 80%, very sticky recurring revenue that grows organically and a favorable customer acquisition costs relative to the lifetime value of our customers. We manage the business with a long-term mindset. We have built a real company with clear strategy to scare, and we believe this is only the beginning. To wrap up, I'm in freely proud of our team's execution in this record quarter. Our focus on innovation and obsession with customer outcomes continues to differentiate Coveo and the flexibility of our platform positions us well to capture the significant market opportunity ahead. Finally, I also want to thank Brandon for his contribution and for being such an outstanding colleague and leader over the years. With that, I'll turn it over to Karine to walk through the financial details. Karine? Karine Hamel: Thanks, Laurent. As you've heard from Louis and Laurent, we're pleased to report that Q3 was a record quarter for Coveo delivering the strongest bookings performance in the company's history. This was driven by meaningful lend and extend transactions across our core growth drivers, especially our Gen AI and commerce solutions. First, I will quickly summarize our Q3 fiscal 2026 results. SaaS subscription revenue was USD 36.6 million coming in ahead of guidance and representing a 13% year-over-year growth. Within this, Coveo Core platform subscription revenue was $35.8 million, growing 15% year-over-year with ARR growth roughly. As previously announced, we have now fully deprecated the Qubit platform and no longer expect any further Qubit revenue beyond this quarter. Total revenue was $38 million, up 12% from last year. NER on the Coveo Core platform was 105%. Gross margin and product gross margin remained strong and broadly in line with last year at 78% and 81%, respectively. Adjusted EBITDA was in line with our expectations at negative $0.2 million, down from positive $0.6 million in the prior year. Cash flow from operating activities was $0.5 million compared to negative $0.2 million a year ago. Our cash position remained strong at USD 100.8 million as of December 31 with no debt. Getting into further details. As you've heard from Louis and Laurent, Q3 was a strong quarter across the business, marked by high-quality wins, meaningful validation from new and existing customers' transactions and solid and efficient execution by the team. This performance reinforces Coveo's position as a strategic platform supporting our customer search, Gen AI and Agentic AI use cases. NER for the Coveo Core platform was 105% in Q3. As a reminder, from last quarter earnings, this continues to reflect the impact from a single onetime contract renegotiation that took effect last quarter. Without this event, NER would have been 108% in Q3. We emphasized last quarter that this was a unique customer-specific event. What we see from our largest customer is Coveo becoming a core AI tech partner with impressive expansion. To give you some context, our current top 20 customers, none of which individually represent more than 5% of total revenue and averaging more than $1 million in ARR have achieved a 3-year net expansion rate of nearly 150%. Over the past 3 years, this group has materially increased its spend with Coveo. Notably, this period aligns with the broader emergence of generative AI, underscoring how large enterprises are increasingly turning to Coveo's platform to power their AI and Gen AI experiences. Turning into the economics of the business. Gross margin and product gross margin remained strong at 78% and 81%, respectively. As we continue to see strong uptick and proliferation of Gen AI and adoption of some of our newer solutions, we've maintained enterprise best-in-class product gross margin which speaks to our ability to efficiently grow the business. Adjusted EBITDA for the quarter was negative $0.2 million compared to $0.6 million a year ago. Cash flows from operating activities were $0.5 million compared to negative $0.2 million last year. Please note that adjusted EBITDA and operating cash flow both include $1.4 million onetime severance expense associated with targeted workforce optimization actions as part of our continued focus on directing investment towards the highest return opportunities. Coveo ended the quarter in a strong financial position with approximately USD 100 million in cash and no debt. During the quarter, we deployed $4.7 million to retire approximately 1.1 million shares under our NCIB, reflecting our continued focus on disciplined capital allocation. All in all, and consistent with what you've heard from us in the past, our primary focus remains on growing our top line, while operating efficiency and with discipline, supported by a strong balance sheet and improving cash flow profile. I will now wrap up and discuss our guidance. Our revenue guidance reflects the now completed end of life of the Qubit platform. As a result, Q4 SaaS subscription revenue will now consist solely of Coveo's Core platform revenue. I would also like to remind everyone that we recognize revenue on a daily basis. Q4 includes 2 fewer calendar days than Q3, which impacts sequential revenue comparison by approximately $0.8 million. With that context, for Q4 fiscal 2026, we expect SaaS subscription revenue to be in the range of $35.6 million to $36.1 million. Total revenue to be in the range of $37.1 million to $37.6 million. For full fiscal year 2026 revenue, we now expect to exit the year at the high end of the previously announced range. SaaS subscription revenue to be in the range of $142.2 million to $142.7 million. Total revenue to be in the range of $148 million to $148.5 million. Consistent with our prior commitments for Q4 and the full fiscal year 2026, we continue to expect adjusted EBITDA to be approximately breakeven and to deliver positive operating cash flows for the fiscal year. In closing, I will end where I started. Q3 was a strong quarter with solid and efficient execution, record bookings and results that validate our growth strategy. While we remain focused on disciplined execution, we are encouraged by the momentum we are seeing across the business. With that, operator, you may now open the line for questions. Operator: [Operator Instructions] And your first question comes from the line of David Kwan from TD Cowen. David Kwan: Congratulations on a great quarter and Good Luck Brandon. I wanted to dig into kind of maybe look at the bigger picture, you mentioned seeing strength across your primary solution areas, which I assume kind of is commerce, service and CRGA. I was wondering though, are you also seeing strength across the customer base? Or is there maybe some pockets in terms of end markets where demand might be a bit softer? Laurent Simoneau: Yes, sure. David, this is Laurent here. So look, we're seeing a lot of strength with our large customers. And Karine mentioned during the prepared remarks, our NER on the top 20 customers of 150%. These customers are seeing us as a strategic platform, and they are expanding substantially with Coveo, but it doesn't stop at those 20 customers, obviously, and we are seeing market dynamics here where with the interoperability that we're building and the requirements and the interest of customers at connecting Coveo with their Agentic AI frameworks that they are deploying. Coveo is uniquely positioned to cover the ground these Agentic AI frameworks with the enterprise, the enterprise secured platform in a very relevant way. So we are -- Yes, we're becoming critical for these large customers, David. David Kwan: That's helpful. And when you look at the new customer wins that you've had, obviously, you highlighted that the large industrial customer, Fortune 500. In terms of the solutions that are driving those wins, is it really still primarily on the commerce side and CRGA or are you seeing also on the services side and the knowledge side? Laurent Simoneau: It's across the board. So B2B commerce, B2C commerce and Knowledge Solutions all fueled with CRGA and with GenAI Agentic capabilities. So -- what is super interesting this quarter, what we're seeing is we are not only fueling user experiences and making user experiences better. We're also making Agentic frameworks better, which is something that we were expecting in the past and now that we are seeing picking up this quarter. Operator: And your next question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Thanos Moschopoulos: Can you comment on ARR growth in the quarter broadly, if that was similar to the prior quarter or any uptick in that regard? And then as you look at your pipeline, whether you would expect that to accelerate in the coming quarters, whether it kind of remains at a consistent level. And any color on that front would be helpful. Louis Tetu: Your question -- Thanos, good to talk to you. Your question specifically is with -- as it relates to the pipeline or the growth? Thanos Moschopoulos: Yes, specifically just ARR growth in the quarter and kind of the trajectory that you're seeing in that regard based on your commentary. Karine Hamel: Thanos, it's Karine here. As you've heard on the prepared remarks, I believe I mentioned that ARR growth for Q3 was roughly in line with SaaS subscription revenue growth of 18%. And remember, we have a 3% headwind from the last quarter, renegotiated contracts that you've heard from us. Now when you look at the guidance for Q4, I think you can drive similar patterns in terms of growth there. Does that answer your question? Thanos Moschopoulos: It does. I apologize. I missed that in your prepared remarks. Louis Tetu: We're not guiding '27 yet, as you know, right? Thanos Moschopoulos: No, I understand. And then regarding SAP, we've obviously I heard you talk about your relationship there on the commerce side. Your SAP Service Cloud relationship has been kind of more recent. How is the pipeline building on the Service Cloud side of SAP. Louis Tetu: Yes. What's really interesting, Thanos with the SAP endorsed relationship is that increasingly as the Coveo platform broadens we become more and more relevant to the broad sector that we described, which we call industrials, where SAP truly dominates. Increasingly, companies don't look at commerce and service in silos. They look at the holistic picture. Let's say you're an aircraft manufacturer. Your goal is to be extremely effective when there is an aircraft on ground to put that aircraft back in the year, for example. And so we're seeing really the convergence of commerce and knowledge, the ability to understand with AI parts availability substitutes, but also diagnosis, recommended solutions et cetera, to serve everything from engineers to self-service to end product, to field service and commerce and so this is increasingly what we're seeing and frankly, what we're quite excited about. And that drives higher value, bigger deals ultimately. We announced in the quarter that we had landed the biggest land ever, and that's one of those examples in industrial. And so this is where the synergy with SAP really lives. So a lot of words here, maybe, but the direct answer to your question is we continue to do extremely well in B2B commerce because -- and B2C commerce with large enterprises because this is where SAP dominates. SAP dominates really the enterprise commerce market, but really, really expanding with customer service and more broadly, knowledge solutions, AI-powered diagnostic and things of that nature. And as I said, this drives high value because we're in the economics of uptime here on those equipments. And that's -- those are significant dollars in ROI. So I hope that puts some perspective on your question. Operator: [Operator Instructions] And your next question comes from the line of Taylor McGinnis from UBS Company. Taylor McGinnis: Just to build on the last ARR question, could you give us a little bit more color on maybe what the normalized new -- net new bookings growth or net new ARR growth was this past quarter. So if we're going to adjust for Qubit and the renegotiated contract, and maybe how that compares to prior trends? And then it's just a second part to that question. When you strip out the 7-figure deal within that, I'm curious how bookings momentum was broadly across the base. Karine Hamel: Yes. Thanks, Taylor, for your questions. So maybe what I would like to add here to give you some color on Q3. We're really pleased with the breadth of the transactions we've seen. Yes, we have highlighted this large 7-digit deal for us, which was a good one, but it's not the only one that made a good quarter. So when we look at both from a land from an expand perspective, size of transactions, names that we have added to our expanding list of customers, we're really proud to all of that going into the right direction. So I don't think there is any normalization necessary with regards to Q3's results. It was a good quarter. Remember that compares to a strong quarter last year, same timing as well. What I want to add as well is when we think about Q4, a couple of things, as you said, Qubit, no more further revenue expecting from that. And when you think of the Core platform, we've got to remember that we're recognizing revenue on a daily basis. And that, of course, will impact sequential revenue for Q4. And then I want to mention as well that we have great opportunities ahead of us. We are very pleased to what we've seen in Q3. And when we look in terms of pipeline and et cetera, we're excited for what is in front of us. However, we can get ahead of ourselves and execution is key here. So I hope it addresses your question, Taylor. Taylor McGinnis: Yes. And then just last one for me. If I look at the implied guide for 4Q for subscription revenue, it looked like it came down a little bit. So it sounds like you're seeing a lot of really good momentum in the business. So could you just help us square that maybe with a slightly lower guide and what you guys are seeing at the start of 4Q, particularly on the back of some of these AI announcements? Karine Hamel: Yes, of course. I mean as I said, we're pleased with what we're seeing. We just don't want to get too much ahead of ourselves here, dynamic market. We're getting good signals. We're grounded on execution, and we have a lot of opportunities ahead of us. Operator: And your next question comes from the line of Paul Treiber from RBC Capital Markets. Paul Treiber: Just a question on the business momentum. I mean, if you put aside the large customer turning off. The new business bookings have been strong for a couple of quarters now. When you look at it fundamentally, like what's changed over the last couple of quarters? Is it more external factors like customer readiness? Or is it internal factors like sales execution that's allowing you to better capture or convert the deals in the pipeline? Louis Tetu: It's both, and I'll add a third one. It's also the evolution of our platform and positioning. So first of all, Paul, thanks for the question. So as we said in the prepared remarks, clearly, we're selling to a much more educated market. There's no question there's a huge difference from a year ago where people were still experimenting, lots of hype, frankly, some successes with lots of failures. So customers come to us with a much clearer understanding of the stack and hence, a much greater appreciation for what we do. So that makes much better sales conversations. Number 2 is really the expansion of the platform. The platform is becoming really, Laurent talked about RAG-as-a-Service, MCP servers, supporting Agentic and so on, the flexibility of the Coveo platform to adapt to any data, any LLM, any app and any agent is starting to be recognized and highly valuable to these customers. So that's really what's driving here, the difference. And yes, there is a difference in market dynamic overall, and we're seeing a positive trend here. Paul Treiber: And as a follow-up, just on -- can you speak to the pipeline for RAG-as-a-Service and then MCP? Like is that a separate pipeline? Is it part of the current pipeline? And do you see the nature of customers that you're -- that's in that pipeline different than maybe your core product? Louis Tetu: Well, the pipeline is made up of 2 main areas, right? I mean the -- what we call land and expand. So landing new customers and then expanding the existing one. That pipeline is -- would qualify as very healthy for the reasons I've explained before. The recognition of the -- I'll use the term necessity of the stack that we provide to inherently, as we said, AI models do not understand your data, do not understand corporate data and are not really good at relevance and governing that, and that's what we do. So that pipeline is expanding for that reason. And the conversion rates are also in healthy territory. And again, it goes back to the reasons before. The market is more mature, people understand what we do, the flexibility of the platform. So it's really across the board, back to the fundamentals of what we do. And that obviously creates some growth in -- across the board in both Knowledge Solutions and commerce as well. Laurent Simoneau: And if I may add, Paul, what it does also ultimately drive additional consumption of Coveo, these new capabilities around interoperability, what we do around MCP, servers and so on. It exposes Coveo to additional experiences and also additional Agentic experiences and it will drive consumption of Coveo. So we want this to be as present as possible in our future deals. Operator: And your next question comes from the line of Koji Ikeda from Bank of America Securities. George McGreehan: This is George McGreehan on for Koji Ikeda. So I wanted to ask just in light of everything good happening in terms of how Coveo is viewed more strategically by customers and the momentum you're seeing both in expand and land. How do you guys feel about S&M capacity? And maybe if you could share some color on how productivity in the sales force has kind of trended. I appreciate it. Louis Tetu: So productivity in terms of -- well, I think I'll qualify, George -- this is Louis, I'll just qualify by saying that very healthy performance from our sales team, evidenced by the bookings and the guidance and the performance. But we measure productivity in terms of quota achievement in terms of conversion rate and also in terms of long-term customer value. The types of customers that we land and how we expand them and what's the expand potential of these customers. And I would put all these metrics at green right now. So we're growing when we see -- or I should say, George, as we see a more mature market, as we see very healthy deal economics, convert both conversion and deal size moving in the right direction. Obviously, you'll see us continue to invest and expand our field force. You just don't throw -- you just don't throw a sales team when you don't have a defensible moat or healthy economics. We're very, very pleased with our CAC to ACV, our CAC to long-term customer value. We operate the company at 80-plus gross margin. And so from a product side. And so those are all -- and as you know, net expansion rate is also very healthy. So from a from a sales standpoint, this is where you'll see us invest. Operator: And your next question comes from the line of Suthan Sukumar from Stifel. Suthan Sukumar: First question for me is on the demand environment. In terms of recent wins, what would you say has changed? Or what is different about the companies buying Coveo. I was wondering are these companies later adopters? Or did they attempt to do AI without enterprise search and coming back? Or are they moving from competing solutions? And how do you describe the sense of urgency compared to, say, last quarter or 6 months ago? Laurent Simoneau: So that's a great question. This is Laurent here. So here's what we're experiencing is companies that see the value of AI, that want to invest in AI, but that understand that they need to ground AI in their own content. That's what Coveo does, right? It does really well. They -- sometimes these companies have also started some internal projects trying to build that on their own. And they discovered that it's hard. They discovered that it's expensive, and it's even harder to maintain and evolve. So Coveo is becoming really an important piece of the infrastructure for these large companies. I would say a year ago, we were convinced in companies that it was the case. Now they are adopting this. And not only they're adopting this, they are expanding with us, which is an amazing proof point. Suthan Sukumar: Great. And for my second question, I just wanted to touch on the Canadian government opportunity. From where you sit today, what are some of the core use cases that you guys are well positioned for to solve for the government. I was wondering if there's anything kind of from a low-hanging fruit perspective that you guys are going to be tackling in the near term? Louis Tetu: Right. As I said in the prepared remarks, we already do business with agencies such as, for instance, the Australian Taxation Office or the New Zealand Taxation Office, the state of Tennessee or the City of New York or so on. And mostly, it's about using generative AI for acute citizen services and really civil servants insights and so there's a lot of opportunity in Canada to deploy AI. And I guess not unrelated to the overall macroeconomic environment right now, Canada is really taking AI very seriously both from an industrialization standpoint, which we can participate in across the country, but also from a government efficiency perspective, which is top of the agenda for our Prime Minister, Mark Carney. And so as a result, Coveo being one of the Canadian -- sort of Canadian leaders in applied AI has been called by the government and we signed a memorandum of understanding, which is sort of a normal way that the government proceeds to essentially explore deployments across agencies essentially coast to coast. So we'll see how that unfolds. We're not announcing anything. There's nothing formal, an MOU is essentially the equivalent of a letter of intent and government jargon. But certainly, there's a significant opportunity for us to save and we've already said publicly that we can save billions to the government and create that equivalent amount, billions also in economic value with our technology. And we can do that. We have thousands of use cases of Coveo and we can do that in a highly industrialized way. which most people cannot do. And so we think that could be a significant opportunity. Now the MOU was signed by 2 ministers, the Minister of AI, Evan Solomon and Joel Lightbound, the Minister of Government Transformation and Service Canada, so we'll see. I can't speak on their behalf as far as what decisions they'll make regarding their transformation and how they'll deploy AI in the sovereign way in Canada, but it's certainly -- those are certainly discussions underway, as you might expect. Operator: [Operator Instructions] Your next question comes from the line of Richard Tse from National Bank Capital Markets. Richard Tse: Yes. It seems like you've sort of had some really accelerated momentum in sort of new verticals or I don't want to say new, but sort of verticals like industrial and financial services. I think you sort of called out industrials in particular. What would you attribute that to? Is that kind of because you made a sales push there? Or is it goes back to your comments that there's more sort of understanding in the market? Like it seems like that is becoming a much bigger opportunity than you have sort of talked about in the past? Laurent Simoneau: Absolutely. So our customers are bringing us there. We -- the fact that we cover both the commerce part, think about large catalogs and pricing entitlements, inventory and so on and the knowledge side that involves service that involves field service and so on, it becomes a logical next step to handle that altogether. Now what is also accelerating this is search and conversational experiences are allowing to stitch all of this information altogether. So customers are evolving in a way where these new experiences will serve customers, all silos of the customer lifetime into customer lifetime with them, which is highly strategic. So Coveo serves as an infrastructure layer supporting all of that. And because, again, we connect to commerce, we connect to service and knowledge, and we have the AI on top of it to deal with relevance. We become a strategic component for them in the future. Louis Tetu: Richard, I'll add the following to perhaps illustrate this and for everyone on the call, which is -- which really speaks volume to our thesis and what we're experiencing. One of the most -- and this -- I think for everyone, this is really, really important to understand Coveo. One of the most fundamental breakthroughs or paradigms that new paradigm that generative AI, in particular, enables is the ability to stitch content in real time and bring it in context. So think about how you can go on ChatGPT and essentially ask a very complex question, provide the context and how ChatGPT will literally stitch it for you and tailor it for you. And so if you think about that in the context of an enterprise, data doesn't need to be moved anymore. You do not -- if you think about something like Agentforce, for instance, at Salesforce, it was designed to work on Data Cloud. You need to move all your data into Data Cloud. Well, guess what? And for a lot of use cases, especially the ones we cover, you don't need to do that anymore. Why does that matter is that search and the ability, which we've mastered for now 15 years, the ability to reach content across multiple silos, highly securely govern that process, understand the semantic behind it, vectorize it and then the relevance to understand the context and stitch it together in real time is what we enable. And so fundamentally, as companies discover that, and they understand better than ever how to take advantage of that. And that is really, really, really critical to what the market is realizing to what AI is truly enabling and to what Coveo at the core is doing. We're in the stitch and tailor business. We stitch data and we tailor it. Think about it that way in those terms. And this is why we're becoming very relevant to these customers because of that ability, does that make sense? Richard Tse: Yes. Yes, that's very helpful. My next question -- your second question here is as workflows shift more away from search and directly in the agents, does that kind of change the revenue model going forward in any way? Or is it essentially the same? Laurent Simoneau: Well, for us, we have primarily a consumption model, right? So we don't really sell seats. So if the if the usage of Coveo goes through Agentic workflows, it's fully fine. We're going to serve these Agentic workflows just like we serve, user experiences, classic user experiences, and it brings more consumption for Coveo. So we are -- we are quite comfortable with serving this diversity of experiences basically. We're in the good side of Agentic as a summary. Operator: And there are no further questions at this time. I will now hand the call back to Laurent Simoneau for any closing remarks. Laurent Simoneau: All right. So thank you again, everyone, for joining us today and to our shareholders for your continued support. We look forward to updating you on our next earnings call after our Q4 and full year results. Thank you. Operator: This concludes today's call. Thank you for participating. You may all disconnect.
Vesa Sahivirta: Good morning, everyone, and welcome to Elisa's Fourth Quarter 2025 Conference Call. I'm Vesa Sahivirta, Head of Investor Relations. This is now a purely conference call. We don't have audience today here. So we start with the presentations, and the team is here, CEO, Topi Manner; and now as first time, CFO, Kristian Pullola. And I think we are ready to start. So I give the word to Topi. So please go ahead. Topi Manner: Thank you, Vesa, and good day, everybody. Welcome to this Q4 Elisa earnings call. And let's get right down to business and go through the Q4 highlights. During Q4, our revenue increased by 1.5%. That was predominantly driven by mobile service revenue growth but also related to growth of revenue in international software services. Mobile service revenue growth amounted to 2.4% and the telecom service revenue, to 2.2%. And to telecom service revenue, we include both mobile service revenue as well as fixed service revenue. In international software services part of the business, the Q4 total revenue growth was 11.3%. The comparable organic revenue was flat, predominantly driven by projects being postponed to 2026. Importantly, in this part of the business, the full year EBITDA was positive, as we stated at the start of the year. So in that sense, we delivered according to our plans. Looking at the total company, comparable EBITDA was at the previous year's level despite quite intense competition during Q4, leading to increased temporary sales cost. The amount of those sales costs was EUR 5 million to EUR 6 million during the quarter. Comparable cash flow was very strong during Q4, especially driven by net working capital efficiency. Comparable cash flow grew by 37.6%. In Finland, postpaid churn was 23%, reflecting also Q4 being seasonally, typically, the highest in terms of churn. But then again, if you look at Q3, Q4 churn in total, that is a reflection of intense competition in mobile services on the market during those quarters. Postpaid subscriptions decreased by some 2,000, and then M2M and IoT subs grew by some 19,000 pieces. The fixed broadband subscription base increased by 6,000. So we are seeing a gradual pickup in those subscriptions, which is positive. And then importantly, during the quarter, we maintained our market share in consumer postpaid subscriptions in Finland, as we stated in connection to our Q3 report. So in the intense competitive environment, we showed competitiveness by maintaining our market share. The transformation program that we launched in connection to the Q3 report proceeded well during the remainder of the year. We have been conducting the first phase of that transformation program, leading to reducing 360 jobs in the company. And that means that majority of the cost savings that we are targeting has already come into force from 1st of January onwards. So we are well on our way of delivering according to the plan and realizing EUR 40 million of cost savings on the back of the transformation program during the course of 2026. And then finally, our Board of Directors proposes a dividend of EUR 2.40. And assuming that the AGM so decides, this would be a 12th consecutive year of continuously increasing dividend in Elisa. Looking into the numbers a little bit more deeply. As stated, revenue landed at EUR 588 million during the quarter, and we saw 1.5% increase in that one. On top of the international software services and mobile services, we also saw equipment sales picking up a bit. In terms of EBITDA, the EBITDA for the quarter was impacted by the mentioned temporary sales cost. These costs would be related to the competitive situation in the sense that we have been having marketing costs like gift cards, related to our mobile services business, and also investing to promotional sales force, for example, in shopping malls, in fairs and these kinds of events -- also in telemarketing. And when you look at the EBITDA margin on a year-on-year basis, the impact of these temporary sales cost was approximately 1% unit, as stated, amounting to some EUR 5 million to EUR 6 million during the quarter. Mobile service revenue, 2.4% up with continued 5G upselling. I will come back to that in a minute. And then when we look at the ARPU development, the ARPU grew 3% on a year-on-year basis, also driven by the upsells, but also the value-added services in the form of the security features that we have been introducing to the part of our customer base during the year. Now when we look at what has happened on the market after Q4, we have seen, in January, some front-book price increases taking place on the market. We were the first mover on that as a market leader. And this leads us to think that our operating environment will gradually improve during the first half of '26. Going into the segment-specific reporting. Consumer customer segment was impacted by the competition during the quarter. The temporary sales costs that I mentioned were impacting in full the consumer segment, and that is visible in the comparable EBITDA development for the segment as well as the EBITDA margin for the segment. The revenue growth for the segment was 1.9%. In corporate customers, we saw some quarterly fluctuation in terms of revenue. But if we even that out and especially if we look into EBITDA development, corporate customer segment developed in a stable fashion and the EBITDA margin actually increased with 1% unit on a year-on-year basis to EUR 63 million. In international software services, the profitability picked up during the quarter and landed at EUR 4 million in terms of EBITDA. On the back of that, as stated, the full year EBITDA for that segment was positive. And then the EBITDA margin for Q4 stand-alone was 9%, reflecting that we are taking steps gradually to improve the profitability of that business as the scale of the business grows. Just shortly looking into Estonia. In Estonia, during the quarter, the revenue increased by 3%. In EBITDA, we also saw some quarterly fluctuation in EBITDA that was largely flat in Estonia, but then especially looking into the full year development, in Estonia, EBITDA increased by 5%, so above the company average of Elisa. And therefore, we can conclude that the market was performing well, and job well done in Estonia. And at the same time, in connection to the Q4 results, we are wrapping up the full year of 2025, and it was a record year in terms of comparable EBITDA development and in terms of revenue as well as cash flow. I think that the high point was that we increased our cash flow during the year with 15%. Revenue increased 3%. Comparable EBITDA increased 3.2%. And in the intense competitive environment, we kept our base of mobile subs largely intact. Postpaid churn during the year was 20.3%, increasing 3.5% in comparison to previous years. This is a reflection of a competitive situation. But at the same time, this is clearly something that we would want to improve for '26. And now as stated, in the first weeks of the year, we have been seeing positive signals on the market related to this. Our strategy, Faster Profitable Growth, is on track, and we stay the course. We have our 4 growth pillars: 5G and fiber, telecom service revenue in effect; home services; corporate IT and cyber; international software services, enabled by simplicity and productivity, that we are especially tackling with the transformation program that we have been introducing. When executing the strategy during the year, we will be putting more focus on customer centricity and AI-enabled growth as well as AI-enabled productivity. And steps are being taken on all of those fronts as we speak. So the bottom line being, we stay the course, we focus on implementing the strategy. During the quarter and at the end of the year, we reached a milestone related to 5G penetration, now hitting the 50% mark in 5G penetration. And with that, we are now disclosing a bit new information to you in this presentation. Previously, we have been discussing about high-speed penetration of mobile services, namely above 200-megabit speeds, including all of our 5G subscriptions, but also some 4G subscriptions. And now this graph is only about 5G subscriptions. As we can see, the 5G smartphone penetration in the market has been increasing to 74%. And as stated, our 5G subscription penetration now hit the 50% mark at the end of the year. And it is a nice, linear trend over the years from one quarter to another, that we also expect to continue from here onwards. What is worthwhile to mention is that 5G stand-alone subscriptions are today already a significant part of all of our 5G subscriptions and the number of those subscriptions is growing steadily. We also have the highest customer NPS score for the 5G stand-alone users. And that is basically signifying that we are already quite well into taking next steps in terms of network technology, providing value to our customers and also being able to monetize that value. In other part of telecom services, in the fiber business, the strong revenue growth continues and then clearly is picking up. We are also transforming to modern technologies in there and ramping down the ADSL technology. Then just quickly taking a look at the domestic services a little bit from a customer and product perspective. In terms of home services, during the quarter, we launched Elisa Entertainment Sound, bringing home theater quality to our entertainment services. This has been well received by customers, and it is clearly boosting the sales of entertainment services. Another development on the product front was that we launched licensed home security services, Elisa Kotiturva service, to customers. It is early days for this product, but clearly, the reception from customers has been upbeat. In corporate IT and cyber part of the business, we launched a new feature to customers, Who's Calling feature. Basically, technologically, we were the first one to be able to crack the code and be able to deliver this information to customers without a separate app being used. So this is a nice feature that the customers seem to appreciate, and the penetration is growing as we speak. On the same space, we also won European Crime Prevention Award for our scam call prevention solution. In Finland, this has effectively meant that on a yearly basis, we are preventing 3 million scam calls on the market, effectively erasing this category of fraud altogether in the market and protecting vulnerable groups, like elderly people. And this is a nice innovation, having societal significance, also something that -- where we have patents and where we can help other telcos in Europe to do similar kind of crime prevention in their respective markets. In terms of international services -- software services, as I mentioned, some of our projects during the quarter were postponed to 2026. We did not lose any deals. We did not lose any customers. This is a timing issue. And therefore, at the end of the year, we had a record high backlog in international software services. The new sales was impacted during the year related to the tariff concerns, and that was very similar phenomenon that we have been seeing all across the software industry globally. During Q4, the order intake, however, picked up notably. And Q4 was a record quarter in terms of order intake for the software part of the business. And on that note, we won a big deal from Ooredoo Group, a big Middle Eastern telco, also reflecting that our product offering and our product strategy is very competitive on the marketplace as we speak. And we have been winning new customers in that telco vertical during the course of '25, which will be supportive of our revenue during '26. And this brings me to the outlook and guidance for '26. In terms of revenue, our guidance is that we see revenue being at the same level or slightly higher than in 2025. In terms of comparable EBITDA, we are introducing an EBITDA range from EUR 815 million to EUR 845 million, the midpoint there being EUR 830 million. CapEx, 12% of revenue. And then related to our outlook and guidance, we introduced certain assumptions. And these assumptions are that we expect our economic and operating environment to gradually improve during the year. And then secondly, we expect telecom service revenue growth being in the bracket from 1% to 3%, where mobile service revenue growth is the main part and main driver of telecom service revenue growth. In International Software Services, we expect an organic revenue growth to be above 10%. So I guess this covers my presentation, and now I will hand over to Kristian before we go to the Q&A. Kristian Pullola: Okay. Thank you, Topi. As Topi said, the intense competition did negatively impact both growth as well as EBITDA in the quarter. We did especially see temporary sales costs increased during the quarter, partly as a result of increased kickbacks in the form of vouchers, for example. This decreased EBITDA margin by approximately 1 point. I want to highlight that these costs are temporary in nature and can be avoided if the market situation changes. Also an additional note here. When it comes to the costs related to kickbacks, we have a conservative policy as we book these costs upfront, even if, in most cases, the costs relate to fixed-term contracts with a maturity of 1 year. When it comes to CapEx, the strict discipline continued, and our investments were focused into areas that further improve our technology leadership and allow us to continue to upsell both 5G and fiber. We are also making investments into IT systems to drive simplification and productivity longer term. Our fiber investments did ramp up. And as discussed earlier, these mainly take place through the JV structure we established during the first half of '25. And thus, the investments are visible through the increased IFRS 16 liabilities. Then into an area which is very important to me, cash flow. We continued strong cash flow momentum in Q4, delivering 38% growth compared to last year. For the full year, cash flow was up 15%, driven by good net working capital development, especially in inventories where the focus have been during the year. Also lower CapEx continued -- contributed positively, while this was also -- this was somewhat offset by higher cash outflows related to financial expenses. Going forward, we will further focus on cash and cash flow, and I do see possible areas of improvement in net working capital, especially in accounts receivable and accounts payable going forward. Then a few words on capital structure and our returns. Elisa continues to have a solid capital structure, and in the quarter, we took proactive steps to refinance the maturities we have this year. Both the bond transaction as well as the increased loan from the Nordic Investment Bank further improves the maturity profile of our debt. Elisa continues to have industry-leading returns, both on equity as well as on investments. The proactive financing that we did during Q4 resulted in us having somewhat higher cash balances at the end of the year, which temporarily negatively impacted the return on investments. With the cash flow focus and the continued strict CapEx discipline, we want to continue to produce industry-leading returns also in the future. And then finally, to shareholder remuneration. The Board proposes to pay an increased dividend of EUR 2.4 for the financial year '25. The proposal is supported by the earnings development, the strong cash flow generation and the solid capital structure of Elisa. The dividend has been and continues to be our main distribution mechanism. By making payments quarterly going forward, we make the dividend even more continuous to our shareholders. Quarterly payments also give us the flexibility from a financing and a liquidity management point of view. We are committed on our dividend policy, and we will continue our competitive shareholder remuneration. And as I said earlier, strong cash flow focus is a key enabler for this also going forward. With that, Vesa, over to you for Q&A. Vesa Sahivirta: Thank you, Kristian. And now we move on to Q&A, and we ask first question from the conference call lines, please. Operator: [Operator Instructions] The next question comes from Andrew Lee from Goldman Sachs. Andrew Lee: I had just 2 questions. The first was on -- thanks for the great color you've given in the guidance for 2026 around the total service revenue growth. Could you just help us understand the contribution of mobile service revenue growth within that guide? Just you've given us some help on that in the past, especially on the midterm guidance. And maybe just give us a bit more of an insight into how important you see the price rises that you made followed by DNA and Telia last week. How important are they in getting the pricing environment back on track in Finland? Is it quite important or very meaningful? And how have you seen responses to that? And then just second question, you've guided to medium-term EBITDA growth of 4% CAGR. You obviously fell a little bit short of that last year in 2025 and are guiding to be falling short of that again in 2026, so certainly in the midpoint. That puts a lot of pressure on 2027. What are you thinking about in terms of your ability to actually deliver to that midterm EBITDA growth? Topi Manner: Yes. Thank you, Andrew. If I start from the last one, related to the midterm targets, we are committed to our midterm targets, 4% revenue growth, 4% EBITDA growth. We are targeting that, and these targets are valid. Now in our guidance, we, of course, now need to take the prevailing economic environment and the operating environment into account. And that we have done. But as stated, we will be staying the course with the strategy and targeting the midterm targets by '27. Then coming back to your first question that was around mobile service revenue. As stated in our guidance assumption, we now speak of telecom service revenue, including mobile service revenue and fixed service revenue. And the range for that is from 1% to 3%. And in that, we see that mobile service revenue will be a main contributor to the telecom service growth. And if you look at the development in Q4, the mobile service revenue development was 2.4% and telecom service revenue development, 2.2%. So they were basically going forward hand by hand. And then, Andrew, there was a little bit of interruption on the line when you said something about price increases as part of your second question. So could you please repeat that? Andrew Lee: What I was trying to understand was just there are some price rises last week, and it's difficult for us to get a sense of scale always in the Finnish market given promotions and below-the-counter pricing, et cetera, et cetera. So I just wondered your sense of how meaningful the price rises and DNA and Telia's response was last week in terms of the progress of the Finnish market, to trying to get back to some sort of rationality given the irrationality of Telia's pricing strategy over the last year or so? Topi Manner: Yes. Thank you for that. As stated, we have seen during the weeks of January positive signals on the market. And as the market leader, we increased some of our price -- front book prices a couple of -- 2 weeks back. And we have been seeing competitors following those moves. It's early days at this point of time. But when we look at the step-ups in 5G and 4G from the levels of experienced in Q4, those increases so far are noteworthy. Operator: The next question comes from Max Findlay from Rothschild. Max Findlay: I just wanted to ask a couple of questions regarding your OpEx. So at Q3, you guided to EUR 20 million of restructuring costs to deliver 450 personnel reductions, but actually delivered EUR 26 million restructuring costs for only 360 personnel reductions. Can you help us understand why restructuring costs were higher than expected and positions reduced lower than expected? And on that note, you suggest that savings not made up by headcount reductions, would include cost savings initiatives like reduced use of outsourced services and procurement efficiencies. Presumably, you need more savings from these reductions than initially expected given fewer headcount reductions. And I just wondered how you think about the net savings from such measures given you presumably will incur some costs by in-housing these services? And then finally, can we just get some color on the EUR 12 million in network dismantling and repair costs, which were also excluded from adjusted EBITDA. Are these costs that you've not incurred before? Kristian Pullola: Yes. So thanks for the question. So first of all, I think when we set out to simplify and rationalize our organization, we had some estimates in mind both in terms of what could be the potential headcount and the related costs. In the end, after also a thorough kind of negotiation with the personnel, we ended up with somewhat different numbers. And it is a somewhat different mix than what we set out. Of course, you always have buffers in also the numbers, particularly on the headcount side. And then on the cost side, yes, they were a bit higher, but still in the same ballpark. So no drama there. When it comes to the dismantling costs, this is really air cables, related to the copper business that we are now having to take down as the service will be ending and thus, costs that we haven't occurred in the past. And I don't see that we would have similar costs in the future either. And thus, we are dealing with them as a one-off item. Topi Manner: And just to continue on the transformation program. So we introduced it in connection to Q3. And now we are through the first phase of that transformation program, which included the headcount reductions. And we are proceeding well in accordance with our plan, meaning that with the headcount reduction, majority of the targeted cost savings for '26 has already come into force. But we will continue with the transformation program. And like you mentioned, we will be looking into outsourced services, for example, in the area of IT consulting and software development. We have opportunities there. We will continue our initiative of taking a long and hard look on the procurement of the company, materializing cost savings from there. And then we will be continuously working with AI-driven productivity going forward. The bottom line of all of this being that we are well on our way on delivering on the EUR 40 million target. Operator: The next question comes from Paul Sidney from Berenberg. Paul Sidney: I had 2, please. Firstly, you've stated that Elisa wants to maintain your #1 position in Finnish mobile, maintain your postpaid market share. I was just wondering, is this still the plan over 2026 and beyond? And just wondering how you sort of balance that with protecting your back book ARPUs? And just wondering if this volume strategy is the right one, given we're seeing some of your European peers focus more on price increases and not be obsessed about volumes? And then just as a second question on comparable cash flow. I think you generated EUR 411 million in the year. You've clearly got a very clear focus on free cash flow given your presentation remarks, but you have no targets for '26 and '27. So I was just wondering if you could help us in terms of the direction of free cash flow over the next couple of years? If you could give us a bit more detail around that? Topi Manner: Okay. Thank you. If I could take the first one and then Kristian will continue with the second one. So related to the mobile service business and our strategy on the Finnish market, we are a market leader. We want to maintain that position on the market. So we are committed to keep our market share, like we said in connection to the Q3 and like we delivered during Q4. At the same time, it is very important to note that we are a responsible market leader. We don't want to grow our market share, and we don't want to fuel irrational behavior in the market. And we have been striking that balance during the Q4. Our strategy in mobile services is a value strategy. We want to provide customers with value. We are a technology leader. We have 50% penetration in 5G. We have a significant portion of our subscriptions already in 5G stand-alone network, and our competitors have not started on 5G stand-alone as of now. And then we have, during the year, brought value-added services to our customers in the form of the security features. And our plan in '25 was that we roll out the security features to some 600,000 customers, and that we did before Q4. And then to start with Q4 rollout, was not planned to play a big role in that. We continue to do this during '26, building our ARPU, in our business. But the security features rollout, we will be pacing in accordance with the competitive situation on the market. But we definitely see possibilities to bring value to our customers with all the kind of innovations and features like Who's Calling service and others that we have innovated. Kristian Pullola: And on the cash flow question, you're right, we haven't provided any specific guidance or targets on cash flow. You need to give us a bit time to get back to that topic. But as I said, last year was strong. We had clear measures when it comes to inventories. I think inventories are now on a good level. We need to continue to maintain that level going forward. We will now look at additional areas and see how much cash conversion can we drive from those net working capital areas. And as we have clarity on that and as -- and if it makes sense, we'll then get back to more clear targets around cash flow. But rest assured, this is an important area of focus for me and the team. This is the enabler for us also, continue to pay dividends to shareholders and thus, we are on it. Operator: The next question comes from Ulrich Rathe from Bernstein. Ulrich Rathe: I have 3 questions, please. The first one is, the guidance is framed around the expectations of an improving trading environment. And you highlighted the ability to raise prices despite intense competition at the beginning of the year. What other reasons do you have to expect an improving trading environment, in particular, vis-a-vis the behavior of the MVNOs, which I understand, are a big part of this intense competitive environment that you're currently experiencing. My second question is, you highlighted postpaid subscriber momentum and also the business situation in postpaid with 5G. Now in your reporting, you always include M2M, machine-to-machine, as postpaid. Are the comments that you're making about the postpaid situation, including M2M as well, like in the reporting? Or are you looking at the sort of human subscriptions there? The reason I'm asking is that the subscriber base is actually shrinking, excluding M2M, and you're sort of pointing out KPIs there in the commentary that suggests the subscriber base is doing a lot better than that, also on Slide 8, when you're talking about 5G penetration? And my last question is, the ISS organic growth is guided at 10% versus flat last year. You mentioned deferred projects, which probably give you some visibility into the growth, into -- reaccelerating quite materially. But what was the visibility overall to go from flat to 10% for the year? Topi Manner: If I start from the first one and related to the mobile competition and MVNOs and the operating environment at large, I think that what we need to acknowledge is that MVNOs, of course, have entered the market. There has been 2, Giga Mobiili and [ OMI ]. But the impact of MVNOs on the market has been marginal. They they have not introduced that disruptive price points. So the competition that has been experienced in the market during Q3 and Q4 has been driven by competition between the established players on the market, first and foremost and some of the competitors changing their strategy in that respect. So I think that, that is important to note in terms of the market dynamics. And as a small nugget of information, what we have sort of observed on the market right now during the weeks of January is that Giga Mobiili, an MVNO that is a subsidiary of Gigantti Electric Stores, has actually clearly become more passive on the market. And Gigantti Stores are sort of reinitiating their collaboration with other players, established players, on the market. So clearly, things have not been easy for the MVNOs on the market so far, which is consistent with the historical evidence on the market when we go years back. So I think that, that is useful to say. And then related to the economic environment and the operating environment on the overall -- I mean, if we look at our home market economies, the GDP and consumer confidence, in particular, has been sluggish during '25 in Finland and Estonia, driven by many factors, one of them being the geopolitical situation. Now the forecast is that there would be a small improvement in the overall economy during the course of 2026. And as stated, when it comes to the operating environment, otherwise, we have been seeing -- in the market dynamics, we have been seeing positive signals during the first weeks of January. Then to your second question related to M2M subscriptions. I mean, when we say that our consumer postpaid subscriptions have been stable, and we have been keeping our market share during Q4, that is based on number portability statistics on the market. And M2M subscriptions are not included in that figure. So to use your terminology, this would be human [ postcriptions ] or people-based subscriptions. And then finally, your question related to the ISS revenue momentum. If I remember correctly, then indeed, the backlog at the end of the year is record high, given some of the projects being postponed. And then during Q4, we saw a record intake and the intake clearly picking up -- the order intake clearly picking up during the quarter. We have a competitive product. We have been winning customer deals in a more sizable category than we have been winning in the past. Ooredoo is one of those examples. And then this makes us optimistic about the revenue prospects during '26. Ulrich Rathe: That's very helpful. Can I just follow up really quick? I realize I'm stressing patience here with 3 questions. But on your first point, we're saying the MVNOs really didn't have an impact. But would you -- how would you frame this? I mean the MNOs have gone into this hyper-competition mode in 3Q and 4Q because the MVNOs came in, I would suspect, but correct me if I'm wrong in this, which then sort of leads to the MVNO impact being a bit muted simply because of this heavy competition of the MNOs. So to sort of simply say, oh, it's the MNOs, it's not the MVNOs that are driving the competition, seems to sort of -- seems to sort of ignore that dynamic a little bit. So I'm just wondering how I should look at that? Topi Manner: I mean, of course, competitive dynamics on the marketplace are driven by a number of factors. And certainly, the MVNOs entering the market sort of play into that equation as well. But our analysis of the situation is that, that has not been the main driver. The main driver has been competition between the established players and the balance between the established players being sort of -- or that equilibrium being rebalanced in the market. Operator: The next question comes from Ajay Soni from JPMorgan. Ajay Soni: Mine -- I've got a couple. One is on the EBITDA guidance. So I think comparable EBITDA for '25 is around EUR 810 million. And then if I just kind of take the building blocks of going into next year, you've got around EUR 40 million of cost savings. I think telecom revenue growth adds another EUR 10 million on EBITDA. You probably have some benefit from ISS as well. So that gets us to EUR 50 million to EUR 60 million higher, which is well above your guidance range. So maybe a nice to ask it would be -- what would need to happen within the market for you to deliver at the low end of your guidance of EUR 815 million for 2026 because it feels like there's quite a few tailwinds which push you above your current guidance range for EBITDA. And then the second one was just around, you mentioned accelerating fiber network construction. So do you still see this being within your current CapEx guidance of around 12%? Or do you see a need to maybe increase that in the short or medium term? Topi Manner: We'll start from the first one. The question about the lower end, what would need to happen? I think that we would need to see the kind of competition levels that were experienced during Q3 and Q4 to prevail during the course of '26 and even intensify. And then we would need to see in the B2B part of the business, both on the home market as well as in industry, the economic situation not picking up and then new kinds of geopolitical uncertainties materializing in the market, for example, impacting the software business and then on top of that, us not being able to move forward in cost efficiency-related measures in the planned way. Kristian Pullola: Maybe just an additional note there. So as we said after Q3, the EUR 40 million OpEx savings that we get from the restructuring and the savings that we have executed on, some of that will be invested back to growing the business. So that will not all be kind of visible as a net reduction of OpEx going forward. Some of that will be kind of reallocated to drive faster profitable growth going forward throughout the business. So that's also a good thing to keep in mind. Then on the fiber investment. So first of all, we are committed to the 12% CapEx target that I stated, and that is part of the guidance also. But then as I said, some of our fiber investment that was ramping up during last year is done through the JV structure that we have established and in that sense, is a more kind of capital-efficient way to ramp up. That's part of the EUR 200 million investment program that we have also talked about in the past. So we'll be dealing with parts of the fiber investment in that sense outside of the 12% target. Operator: The next question comes from Felix Henriksson from Nordea. Felix Henriksson: I have 2. One is on the dividend. You're now paying out more than 100% of your comparable EPS as opposed to your target of 80% to 100%. Is this something that you consider acceptable going forward? I know it's a Board decision, but any commentary around that would be great. And secondly, can you open up the dynamics in your fixed business for 2022 -- 2026, I mean, in particular, when it comes to the ramp down of the ADSL business and at the same time, growth in the fiber business? Overall, should we expect growth in fixed service revenues for 2026? Topi Manner: So when it comes to dividend, it is very important to note that our dividend policy stays intact. And when you look at the dividend proposal for the AGM now, EUR 2.40, our cash flow covers the dividend in full and more than that. So the focus on cash flow is and will be very important when it comes to the dividend considerations. Kristian Pullola: And then the second part, do you want to take that you want to take that on the fixed business? Topi Manner: Yes. Felix, could you please remind me, was that about ADSL? Or -- can you... Felix Henriksson: Yes. Just about the dynamics between ADSL ramp down and growth in fiber, should that overall lead to positive growth in the fixed service revenues for 2026? Topi Manner: Yes. I think that -- I mean, we are sort of seeing sort of a gradually changing momentum in the fixed service business. We are ramping down legacy technologies, PSTN, like we announced during the course of the year, other technologies, like ADSL as well. And at the same time, we are seeing fiber take-up -- picking up in terms of FTTH, FTTB and potentially going forward with new categories, like data center connectivity. So that is something that we are expecting in terms of future development. Operator: The next question comes from Sami Sarkamies from Danske Bank Markets. Sami Sarkamies: I have 3 questions. We'll take this one by one. Firstly, coming back to dividend. You've been previously raising dividend by approximately 4% per annum. Now that's been cut to half. You still keep your medium-term targets, which should indicate sort of 4% EBITDA growth and sort of covered dividend even with sort of the earlier increases. So can you explain what's, call it, broken that you're cutting back on the dividend growth? Kristian Pullola: I think -- so first of all, I think it's fair to say, as Topi said, we are sticking to our targets of 4% plus 4%. Then as was visible during this year, some of the line items below EBITDA are, from a cost point of view, growing faster than EBITDA, which is then reducing the growth of EPS. And that is a dynamic that we need to take into account. Having said that, growing the dividend by EUR 0.05 on the back of strong cash flow is a good performance. Sami Sarkamies: Okay. And then next question on campaigning. I think you said that the additional marketing and campaign costs can be avoided in the future. Why will it be different in the future than in Q4? So what are you thinking here? Topi Manner: So it is very much driven by the competitive situation, of course. So the temporary sales costs that were amounting to EUR 5 million to EUR 6 million during Q4 are related to, for example, gift cards that were used as kickbacks for fixed-term contracts. This is a market phenomenon. So again, we did not fuel that kind of competition on the market. We responded to competition to keep our market share. This is a variable cost that will -- it's basically a derivative of a competitive situation on the market. And the same goes to additional promotional sales force. During the Q4, we spent money to promotional sales force in shopping malls, in fairs, in telemarketing and so forth. These are typically part-time employees, variable cost and therefore, easily adjustable and yet again, a derivative of a competitive situation. Sami Sarkamies: Okay. And then lastly, I wanted to check what's been happening in January on the pricing front. So was it so that you did raise prices in January and then both competitors have been following these price increases? Topi Manner: By and large, so in big picture. And then as stated, as a market leader, we were the first mover in that one, and we have seen competitors following up. Different price points in different channels, but generally positive signals on the market. Operator: The next question comes from Artem Beletski from SEB. Artem Beletski: Topi and Kristian, so I still have 3 to be asked. And the first one is relating to ISS outlook for '26. So you do comment, what comes to revenue development and double-digit growth, what you're anticipating, is it fair to assume that we should see also some further improvement in terms of profitability? Could you provide some color on that front? Then the second question is relating to PSTN network shutdown during this year. Could you maybe talk about net impact in terms of earnings? So you will be losing some customers, but of course, there should be some savings associated to it. And the last one is maybe a bit more longer-term question. So how do you see business opportunities relating to data centers? So we have many projects being planned and ongoing in Finland. What is your business opportunity on that front? So those are my questions. Topi Manner: Thank you, Artem. So starting on the first one, related to the ISS business and especially the profitability outlook, on that one. I think that it's very important to note that during '25, amidst all kinds of tariff-related uncertainties that impacted our software customers business, we grew inorganic and organic growth. Together, we grew with more than 20% in terms of revenue. And we delivered on our soft guidance on profitability, so reaching positive EBITDA for the full year of '25. Then if you look at the Q4 ISS EBITDA margin, we reached 9% EBITDA margin. So we have been gradually improving the profitability as the scale of the business grows. There will be seasonality in ISS business also going forward. Q1 is typically relatively good. Q2 and Q3 are seasonally calmer. And then Q4 is typically the strongest in that business. Adjusting for the seasonality, we expect to see gradually improving profitability in that part of the business as the scale of the business grows and as we get our sales machine humming better and better all the time. Then if you take the PSTN... Kristian Pullola: I think on the PSTN, so yes, we still have some net sales headwind to work through. But as Topi said to the earlier question, we still see that, that will be more than offset by the growth that we can achieve in fiber. And then you're right, there will be kind of improvements on the cost side that will then also be coming through. So I think during next year, we'll start to move from a situation -- or during this year, we'll start to move from a situation where this is a headwind to one where we'll start to see benefits. Topi Manner: And then to your question related to the data centers, I think that -- now taking a longer-term perspective on this one. This is a longer-term business opportunity, 5 years onward, 10 years onward and more than that. Finland is a very attractive place for data centers. The cost of electricity is low. The electricity grid is probably of best quality in Europe at least. Climate is cool, stable earth and high-quality infrastructure in terms of telecommunications and other things. So it is clear that data centers -- more and more data centers will be placed in this country. And therefore, we see a longer-term opportunity in this one. We think that we are -- our business in data centers is related to the data center connectivity in particular, the fiber connectivity from data centers to the world. And we think that we are naturally advantaged in that business because we have the best backbone network in the country, meaning that if you build a mammoth data center on a more rural part of the country, you simply need to build less fiber to connect it to our backbone. And this is certainly an opportunity that we are eyeing on over the long term. Operator: The next question comes from Ondrej Cabejšek from UBS. Ondrej Cabejšek: Thank you for the presentation, all of the additional color that you are providing today. I also have 3 questions, if I may, and I'll also go one by one, please. So first of all, on the cost-cutting program, the EUR 40 million. So you mentioned that obviously, this is now a bit of a different structure, fewer or less of an impact from the FTE reductions, more of an impact from other things. So is it fair to assume that the impact under this new kind of structure will be more kind of phased into 2027 than before? And is there any reason to believe that because, again, the structure of the -- or the nature of the cost cutting is a bit different that the net impact from this new structure could be less or more than the previous one? Kristian Pullola: So I think, first of all, maybe it was my unprecise comments that might have triggered your question. And if so, apologies for that. We are on plan when it comes to our EUR 40 million cost reduction program. When we set out and when you set out to do a program like this, you naturally kind of indicate a higher headcount than maybe where you will end up. Our headcount-related costs and the related reduction is on plan. And as a result of that, we are on plan both when it comes to where is it coming from and the pace at which it will come through our P&L. So in that sense, everything is in order there. We don't see that there are kind of mix shift here. And again, there will be no spillage into '27 or anything like that. Having said that, of course, we then continue to work on other areas, areas that are non-headcount related, to find more efficiencies, to drive longer-term productivity. And that's business as usual, particularly in a market environment like the one that we are operating in currently. Topi Manner: Yes. I think that what Kristian is saying is very important to understand. Majority of the headcount reductions were related to Finland. And in Finland, there is a specific law that at the start of the so-called change negotiations, you need to announce the maximum amount of possible job reductions. That then will be negotiated with the unions. And that means that you cannot, under any circumstance, exceed that number, leading to companies typically announcing a bit higher number than in real life is in their plans. And that is really the case in this situation as well. So the bottom line is that there's no deviation in terms of mix from our plan, and we are well on our way on delivering on the targets of the transformation program. Ondrej Cabejšek: That's clear. Maybe a clarification. So you mentioned EUR 40 million for this year, the calendar year '26 clear, but surely the run rate of the impact would kind of at least on the non-FTE costs impact positively 2027, right? Kristian Pullola: I think the impact and the run rate is relatively close to each other. So no need to worry there. Ondrej Cabejšek: Okay. Okay. Cool. On Estonia, and apologies if you addressed this before and I missed it, but can you explain why EBITDA suddenly from like a -- usual decent growth rate is suddenly negative? Topi Manner: You mean on Q4? Ondrej Cabejšek: Yes, exactly, yes. Topi Manner: Yes. There's some quarterly fluctuation in that one. I mean, if you look at the full year EBITDA growth on the Estonian market, that was plus 5%. And in Estonia, given the structure, especially of the mobile services, and given the structure of the market, many players on the market have conducted inflationary price increases during the course of the year. And they were a little bit sort of more front-loaded during the year -- conducted during the first part of the year. This dynamic most likely will play out in '26 as well, leading to some quarterly fluctuation in Estonia in terms of EBITDA. So I think that in the case of EBITDA, instead of looking into -- in the case of Estonia, instead of looking into EBITDA development in Q4, it is more relevant to look at the longer-term development during the full year. Ondrej Cabejšek: That is helpful color. And final question for me, if I may. You flagged the extra commercial costs in Finland this quarter to the tune of EUR 5 million to EUR 6 million. I was just curious, number one, I believe this is the first time you're flagging these or at least the severity of these. So I was wondering, is that really -- like did 4Q really get so bad that the amount is high enough for you to flag? Or is it just a case of, in the previous quarters, there were other efficiencies that were maybe mitigating this and there was no reason to flag, but these extra costs have been there all along? Or is 4Q -- or was 4Q really that bad? Topi Manner: Q4 was very competitive. I mean Q4 is always seasonally the most active in the market with all kinds of Black Friday campaigning and Christmas campaigning. And Black Friday is not 1 day. It's these days, it's basically the whole of November and then continued with Christmas. So there would be a bit of that sort of seasonal campaigning cost on every year. But what we did see is intense competition Q4 -- during Q4, more intense than we have been experiencing in this market in many, many years. Kristian Pullola: And just to be clear, when we talk about the EUR 5 million to EUR 6 million or the 1% of EBITDA, that is costs above and beyond what we normally see in the fourth quarter. Topi Manner: Correct. Operator: The next question comes from Abhilash Mohapatra from BNP Paribas. Abhilash Mohapatra: The first one was just around the dividends. There's some language in the outlook around sort of the use of the word maximum. So you say you'll pay EUR 0.60, and then the Board could pay up to a maximum of EUR 1.80. If you could just sort of clarify that, if there's anything there? And then related to the dividend, you mentioned sort of improving working capital is a focus. It's going to be a key driver for dividends and sort of covering divids with cash flow. So when you say that, do you mean sort of covering dividends with cash flow, including net working capital contributions? Do you expect that to be a positive contribution going forward? And like would you be able to cover dividends without working capital, is my question. And then secondly, just around the sort of cybersecurity products bundling, which is presumably a big driver of the service revenue growth. What do you need to see that will make you go ahead and sort of execute this or hold back? What do you need to see changing in the market? Because I suppose the MVNOs are sort of now here. They've been launched, and Telia also seem focused on, I suppose, improving the commercial performance in the market. So what do you need to see changing which will allow you to sort of go ahead and execute these price changes? Kristian Pullola: So maybe if I start on kind of dividend and cash flow. So first of all, dividend, this is now a quarterly dividend, which will total EUR 2.4, so EUR 0.60 a quarter. That -- it's a technicality that we talk about the EUR 0.60 separate from the EUR 1.80, which is then the 3 next quarterly payments because the AGM will make the decision on the first one, give a mandate to the Board, which will then decide on the 3 next quarterly ones. So for all kind of purposes, this is a EUR 2.4 dividend, which is a EUR 0.05 increase from last year. Then when it comes to cash flow, will we be able to cover it without working capital improvements? I would say that we will drive strong cash flow overall and working capital is one lever that we have to being able to generate cash flow to continue to fund the dividend. So it's not the only lever. I'm just highlighting it because we do see that there are -- based on the learnings from this year, there are more opportunities for us to go after in other areas of working capital, and we will do that to continue to deliver strong cash flow going forward. Topi Manner: And on your last question related to the rollout of the security features and the progress of that, as stated, our original plan was to cover, during '25, those subscriptions where the terms and conditions allow us to make changes during the tenure, and those subscription types are of ongoing nature. And that part of the clientele has now been addressed. It was largely addressed already by the end of Q3. And now during the course of this year, we will be continuing and especially we'll be continuing with the fixed term contract base of our customers. And the terms and conditions of those contracts allow us to introduce the new offering when the term -- the fixed term for the customer expires. And that we will be doing. We will be basing our sales approach to the competitive dynamics on the market. Related to your point about MVNOs, the MVNO pricing has not been disruptive. And that is important to note. The price points that they are using are higher, and that creates us some possibility to continue the security feature rollout. At the same time, we do see that on the prevailing economic woes on our home market, there is a price-sensitive end of the market, price-sensitive end of the customers. And certainly, we will need to take that into consideration when we move forward. The bottom line being that we will be pacing the security features rollout to the competitive dynamics, and we will be gradually moving forward with that during the course of '26. Operator: The next question comes from Max Findlay from Rothschild. Max Findlay: I just had a question on mobile. So the midpoint of your mobile growth guidance is 2% despite delivering 3% this year. And as has been referenced several times in this call, your guidance assumes the economic and operating environment improves during the year. Does this imply that the first half of the year, we should expect growth below 2%? And are you factoring in better second half performance? And linked to that, I know we've just discussed facts, but it seems that your kind of value-added services strategy has been less supportive of growth than had hoped. And I was just wondering if this is a fair assessment. Topi Manner: So first of all, we are not giving assumptions related to the mobile service revenue. We -- related to our guidance, our assumption is that telecom service revenue, mobile service revenue and fixed service revenue together will grow in the range of 1% to 3%. So that is an important note. Having said that, we do expect mobile service revenue to be the main driver of telecom service revenue during the year. And then when it comes to competitive dynamics impacting the security features rollout and the value-added services rollout, during '25, we proceeded according to our plans. And Q4 was planned to be a calm quarter in that respect in any case. Going forward, we will need to take the competitive dynamics into account. And as stated, we will be pacing the rollout in accordance with the competitive dynamics. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Vesa Sahivirta: Thank you for participating in this conference call, and we wish you a nice weekend when it comes. Thank you now and bye-bye. Topi Manner: Thank you very much. Kristian Pullola: Thank you. Topi Manner: Bye-bye.
Operator: Welcome to the Brookfield Business Partners Fourth Quarter 2025 Results Conference Call and Webcast. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, simply press 11 on your touch-tone phone. Now, I'd like to turn the conference over to Alan Fleming, Head of Investor Relations. Please go ahead, Mr. Fleming. Alan Fleming: Thank you, operator, and good morning. Before we begin, I'd like to remind you that in responding to questions and talking about our growth initiatives and our financial and operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially. For further information on known risk factors, I encourage you to review our filings with the securities regulators in Canada and the US, which are available on our website. We'll begin the call today with Anuj Ranjan, our Chief Executive Officer, who will provide an overview of the year and an update on our strategy. Anuj will then turn the call over to Adrian Letts, Head of our Global Business Operations team, to share some observations on the global operating environment and progress we've made on our value creation plans. Jaspreet Dehl, our Chief Financial Officer, will then discuss our financial results for the year. After we finish our prepared remarks, the team will be available to take your questions. I'd now like to pass the call over to Anuj. Anuj Ranjan: Thanks, Alan, and good morning, everyone. Thank you for joining us on the call today. 2025 was an excellent year for Brookfield Business Partners L.P. and the execution of our strategy to continue compounding value for our shareholders. Over the past year, we generated more than $2 billion of proceeds from capital recycling, repaid roughly $1 billion of our corporate borrowings, invested $700 million in four growth acquisitions, and we purchased about $235 million of stock at a significant discount to intrinsic value. We also delivered strong underlying financial performance, driven by the continued execution of our value creation plans, which Adrian will get into more later. In addition, we're close to completing our corporate reorganization, which will result in us being a single newly listed corporation. This is a big change, and we think that it will improve our trading liquidity, double the index-driven demand for our shares, and make it easier for investors globally to invest in our business. We received the required unit and shareholder approvals earlier this month, and we're on track to complete the conversion over the coming weeks, pending final regulatory approval. Stepping back, we created our business about a decade ago with a simple purpose: to provide public market investors with access to Brookfield's global private equity capabilities, which has compounded value at exceptional rates for over twenty-five years. The strategy is straightforward. We find great businesses, we buy them for a reasonable value, and we execute on our operational plans to improve performance. More than half of the value we have historically realized has come from improving the businesses we own. In a world where returns can no longer depend on falling rates, cheap financing, or multiple expansion, our approach to operational excellence matters more than ever. This is the environment that our business was built for, and two forces are accelerating demand for that strategy. First, deglobalization is reshaping supply chains, causing businesses to rethink sourcing, manufacturing, and distribution strategies, which require both capital and significant change management expertise. Just to illustrate this, CapEx in US manufacturing has grown from $50 billion in 2020 to nearly $250 billion in 2025. At the same time, AI is reshaping industrial and essential services businesses, not just technology platforms behind the models. The beneficiaries will be those who can implement tools to automate processes, reduce costs, address labor shortages, and transform analog systems to digital operations. The opportunity is massive. The constraint is not technology; it's experienced operators who can implement real change and properly transform. That is where we stand apart. Our integrated operating model, combining investment capabilities with decades of operating expertise and leveraging the power of the $1 trillion Brookfield ecosystem, has underpinned our returns for decades and will continue to differentiate our approach to value creation. It's an exciting time for Brookfield Business Partners L.P. The market backdrop for what we do is as attractive as it has been in years, and the value proposition for our investors is as strong as ever. First, our trading price is 50% higher than it was a year ago, but still at a material discount to NAV, which continues to grow. Second, we own market-leading providers of vital products and services, which underpin the durability of our cash flows. And lastly, every dollar that is recycled is reinvested by the same Brookfield team, which has compounded capital at exceptional rates for decades. We made great progress over the past year and are well-positioned with the capital and capabilities to continue building value in 2026. With that, I'll turn it over to Adrian for an update on the operating environment and the progress we're making on our value creation plans. Adrian Letts: Thank you, Anuj, and good morning, everyone. Starting with some observations on the operating environment, while select regions and sectors continue to have challenges, the overall backdrop remains relatively stable. In North America, conditions are benefiting from easing rates, steady consumer spending, and resilient labor markets. Demand is holding up, although near-term growth is still hard to come by in certain end markets where sentiment and the pace of capital spending remain more measured. Longer-term structural trends around reshoring, automation, and the repositioning of critical supply chains are taking hold as businesses respond to evolving trade policy and geopolitical uncertainty. In Europe, conditions are more challenging. Activity has been slower in some cyclical and industrial end markets, including construction and certain more CapEx-sensitive manufacturing segments where customer decision-making remains slow. That said, we're seeing some early signs of improvement supported by increases in fiscal spending in countries like Germany, stabilizing energy prices, and more accommodative monetary policy across most parts of the region to promote growth. As you know, we have teams on the ground across all the regions we operate, deeply embedded within our businesses, focused on implementing our operating playbook, working closely with our management teams to advance our core value creation plans. One of the best examples of our approach in action is Clarios, which is coming off another record calendar year of performance. Since our acquisition, underlying annual EBITDA has increased 40% or almost $700 million, and we see a path to a similar level of growth over the next five years as the team continues to execute. We're working closely with management on initiatives to strengthen operational efficiency, enhance Clarios' pricing and commercial strategy, and push forward the innovation of new product technologies. At the same time, to meet the growing demand for high-performance advanced batteries, the business is investing to expand its enhanced recycling and critical mineral recovery capabilities and accelerate its state-of-the-art manufacturing capabilities, all supported by strong cash generation and US manufacturing tax credits. We've also made excellent progress over the past year at Nielsen, our audience measurement operation. Since our acquisition, the business has executed about $800 million of cost savings, including over $250 million achieved in the past year, increasing EBITDA margins by more than 350 basis points. Most of the improvements have been driven by organizational simplification, automation, and reduction of third-party spend. On the back of the strong performance, the business recently completed two refinancings, which combined with the debt paydown will result in about $90 million of annual interest savings. The team at Dexco has done great work to manage through weak end market conditions. While overall volumes are down for the year, full-year EBITDA was up low single digits, and margins have held up in line with levels at acquisition, driven by our continued focus on cost optimization, commercial execution, and productivity improvements. It's still early days, but we're cautiously optimistic that volumes are stabilizing with new business wins, positioning Dexco well for a broader market recovery when it comes. Outside of North America, performance at Network, our Middle East payment processor, is tracking in line with our expectations. Over the past year, the team has driven meaningful operational improvements, upgrading the core technology platform, optimizing the cost base, improving Network's e-commerce offering, and expanding value-added services, particularly around data analytics, fraud, and loyalty solutions. We've also strengthened the leadership team, made significant progress on combining the business with our legacy payments processing operation in the region, and closed an add-on acquisition driving both operational and scale efficiencies to position the business for its next phase of growth. We've been busy over the past year and are encouraged by the momentum we're seeing across our businesses. Execution has been strong, and our value creation plans are progressing well. Where we are seeing weaker end market conditions, our teams have leaned in to protect margins and strengthen cash generation to ensure we're best positioned for when conditions improve. With that, I'll hand it over to Jaspreet for a review of our financial results, and I'll be available for questions. Jaspreet Dehl: Thanks, Adrian, and good morning, everyone. We generated full-year adjusted EBITDA of $2.4 billion compared to $2.6 billion in 2024. Current year results reflect the impact of lower ownership in three businesses following the partial sale of our interest and include $297 million of tax credits compared to $271 million in the prior year. Excluding the tax credits and the impact of acquisitions and dispositions, adjusted EBITDA in our Industrial segment generated full-year adjusted EBITDA of $1.3 billion compared to $1.2 billion last year. Excluding the impact of acquisitions, dispositions, and tax benefits, segment performance increased by 10% compared to the prior year. Results benefited from strong performance at our advanced energy operations driven by the favorable mix of higher-margin batteries and strong commercial execution. Performance of our engineered components manufacturer increased over the prior year, supported by margin improvement initiatives and commercial actions, despite weak end market conditions. Moving to our Business Services segment, we generated full-year adjusted EBITDA of $823 million compared to $832 million last year. On a same-store basis, adjusted EBITDA increased by approximately 5% over the prior year. Results at our residential mortgage insurer during the year reflect the timing impact of slower revenue recognition under the IFRS 17 accounting standard given uncertain Canadian economic forecasts. Volumes of new insurance premiums increased during the year, reflecting the benefit of new mortgage insurance products which have expanded the market and helped improve affordability in an otherwise soft Canadian housing market. At our dealer software and technology services operation, stable renewal activity and commercial initiatives year. Results reflect the sale of our offshore oil services shuttle tanker operation and a $14 million impact related to the sale of a partial interest in our work access services operation earlier this year. Improved margins and the ongoing ramp-up of recent commercial wins at our lottery services operation were offset by the impact of lower terminal deliveries and hardware sales during the year. The business continues to execute on a strong pipeline of new commercial opportunities, including the recent full rollout of its UK digital service offering. Our modular building leasing services operation was impacted by lower activity levels and fleet utilization, which was partially offset by continued growth of value-added products and services. Turning to our balance sheet and capital allocation priorities, we ended the year with approximately $2.6 billion of pro forma liquidity at the corporate level, including the fair value of units we received in exchange for the sale of a partial interest in three businesses to a new Brookfield Evergreen Fund last year. During the quarter, $87 million of the units we received were redeemed. We came into 2026 with a strong liquidity position and significant flexibility to support our growth and balanced capital allocation priorities. Credit markets remain quite constructive, and we completed more than $20 billion of financings over the past year across our operations, extending maturities, improving term, and reducing the cost of refinanced borrowings by over 50 basis points. Finally, to date, we've repurchased approximately $235 million of our units and shares at an average price of approximately $26 per unit and share. We remain committed to completing our $250 million buyback program, and beyond that, we will be opportunistic with respect to further repurchase activity. With that, I'd like to close our prepared remarks and turn the call back to the operator for questions. Operator: Please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment, please. And our first question comes from the line of Devin Dodge with BMO Capital Markets. Devin Dodge: Yes, thank you. Good morning. I wanted to start with a question on 45x tax credits. As they start to come in, should we look at that as being a bit of a tipping point for when Brookfield could get more front-footed on monetizing that business? Or are there other factors that we should be thinking about? Jaspreet Dehl: Hi, Devin. It's Jaspreet. Look, Clarios is an incredible business. It's a global champion industrial business that doesn't come around very often. The business is generating a lot of free cash flow today, and the 45x credits just add to that cash and kind of reinvestment into further growth for the business. So we've got a lot of optionality around the business. And, you know, getting proceeds up to shareholders, whether that's doing distributions, doing some kind of monetization event, there's a lot of optionality when you've got such an incredible business. So, you know, we're constantly thinking about that, whether it's Clarios or any of our mature businesses. Like, how do we get cash and distributions back up to shareholders, and you know, that'll be a focus for us. Devin Dodge: Okay. Makes sense. Jaspreet, do you have line of sight for when those production tax credits should start to be received? And would you ever consider selling these credits to third parties to pull forward the timing? I think we've seen that from some others, or are the discounts for that too steep right now? Jaspreet Dehl: So, look, we've filed a return. It's being processed. We feel really good about the qualifying. You know, we had third-party independent advisers verify everything, and we feel very good about qualifying and getting these credits. The timing is hard for us to predict, but we do know that it's being processed. And, in due course, we should receive it. So I'd say from that perspective, you know, we feel good. When we applied for the credit, we had a choice between getting cash back or getting it in a form that's transferable. And for the 2024 credits, we did choose to get cash back. So at this point, we're not looking to sell the credits, and, you know, we should, in due time, get the cash from the IRS. Devin Dodge: Okay. Good color there. Thank you. Maybe just switching over to Scientific Games. I thought it was actually encouraging to see the sequential pickup in earnings this quarter. Just wondering if you feel the business has passed an inflection point where it's on an earnings growth trajectory from here, or were there developments in Q4 at least versus Q2 or Q3 that were more of a one-time benefit that should temper the enthusiasm. Adrian Letts: So, look, I think the first thing to say is we're very pleased that the market launch in the UK has gone successfully last week. You are starting to see the benefit of crystallization in earnings of the pipeline. We still continue to see a relatively strong pipeline for this business. But, you know, to manage expectations, it takes anywhere between six to twelve months for earnings to come through. We remain very positive about the business. We think there's a strong market. The business has a very strong market position. But the outlook, we're cautiously optimistic. Devin Dodge: Okay. And then maybe just one last one. On Scientific Games, we saw that there was a credit rating downgrade this month. Just for you, how do you think about the balance between the need to reduce leverage and pursuing growth in that business? Jaspreet Dehl: Look, if you can grow EBITDA, that reduces your overall leverage levels. And, you know, our thesis when we bought this business was twofold. We thought, as Adrian said, the business has an incredible market position. They've got a good team that could go after contracts, win these great contracts, and we saw the ability to really grow this business both in the US and globally. Both in kind of the instant gaming, but more importantly, the digital side. So that continued growth and focus on the growth and increasing EBITDA should naturally kind of delever the business. And then in addition to that, you know, as we move forward, with free cash flow and as we start thinking about monetization and what that path looks like, we can decide where we use free cash flow, whether it's to pay down debt or other purposes. But growth is a really important lever to hit our original underwriting and the investment thesis on this business. So we are focused on that. And maybe the other thing I'd say is that this is a fairly stable business, you know, contracted revenues. It generates a stable level of free cash flow and is more than equipped to service the debt that's in place. So we don't have any issues around that. And in the fullness of time, the business will naturally delever. Devin Dodge: Okay. Great comments. I'll turn it over. Thank you. Operator: And our next question comes from the line of Gary Ho with Desjardins Capital Markets. Gary Ho: Thanks. Good morning. Maybe just going back to Clarios for a sec here. I recall there was an insurance contract arranged. Just wondering if you can remind me how that works. If the check payment is a bit delayed, is it by a certain time that Clarios would get a payment? Just curious if you can provide a bit more detail on that. Jaspreet Dehl: Sure, Gary. It's Jaspreet. So like I said, you know, we feel really good that we qualify under the regulations, and we will receive the 45x credits. We got third-party advisers involved to verify and support our claim. So we do believe in due course, we will get paid through kind of the normal channels. When we filed the return, just given some of the overall changes that were taking place in the government, we had insured a substantial amount of the credit. And, look, if we don't end up getting paid through the IRS, then, you know, we'll have to go through the insurance claim channel. But, at this point, we feel really good that we will get paid out. But there is kind of the backup of the insurance if we don't receive payment from the IRS. But we have to kind of wait to see what they come back with before we do anything on the claim. Gary Ho: Okay. Got it. And then my second question, maybe moving on to the discussion on the monetization environment and outlook. So outside of the Evergreen Fund, maybe can you talk about some of the mature assets like BRK and Latrobe? Yeah. I think public market multiples are pretty healthy today. Just wondering if you can comment on the IPO environment as well. Anuj Ranjan: Yeah. It's Anuj here. I'll take that one. So look, the environment is strong generally around the world, and capital is available for monetizations or realizations. For us, we review our portfolio on a regular basis, and we try to prioritize businesses where we've completed our value creation plans and we can realize the full and right value for the business, derisking it. And so you hit on two that are definitely in that category. BRK, I'd say in Brazil, the IPO markets kind of open up every so often. They seem to be opening up again right now. Interest rates feel like they have peaked, and the BRK business has been performing exceptionally well, with double-digit growth and actually winning even some new concessions very recently. So, it feels like the right time for a listing of BRK, and it's something that we're, you know, very strongly evaluating and continuing to make progress on. Separately, on Latrobe, again, an amazing business that has done extremely well in our ownership. We really pivoted the business from more of a nonbank model to a fixed income asset manager, which gets more of a premium in terms of valuations. As you know, there was a regulatory notice that was dealt with and resolved. The business has had inflows come back very strongly. So we're sort of reengaging now with parties that could lead to some sort of return of capital in the future, and I'd say all options are on the table. Gary Ho: Okay. Anuj, thanks for those comments. Appreciate it. And then maybe I can sneak one more in. Just on the buyback, Jaspreet, I think you mentioned you're $235 million into your $250 million NCIB program. Stock still trades below your $54 NAV. How should we think about your commitment to renew this buyback this year? Jaspreet Dehl: So the stock's done incredibly well this year, as Anuj mentioned in his opening comments. And we're happy about that. But it still continues to trade below our view of intrinsic value. You know, we're committed to completing our $250 million buyback program. And, you know, we did renew the NCIB in August, and we've got quite a bit of capacity under the NCIB. So beyond the $250 million program, you know, we'll continue to be opportunistic as we always are. And where we see opportunities to buy back at a material discount to intrinsic value, we'll continue to be active. We're also balancing our capital allocation priorities between buybacks and continuing to pay down corporate lines and in kind of further growth of the business. Gary Ho: Okay. Great. Thanks for taking my questions. Over to you. Operator: Thank you. And our next question comes from the line of Bart Dziarski with RBC Capital Markets. Bart Dziarski: Hi, good morning. Thanks for taking the questions. I wanted to ask around CDK, if you could just kind of give us an update. I think you talked about some retentions and new bookings. So any additional color you can provide on just how operations are going there? Adrian Letts: Thank you, Bart. It's Adrian. I'll talk to that. So as you know, we're continuing to invest in modernizing the tech stack and the product proposition, and some of that cost will continue to come through as we go through 2026. The focus of the business is very much adoption and increasing the adoption of the new technology that we're rolling out, which is helping to stabilize churn. Renewal activity has been strong, including, we won a large multisite dealership extension. And the focus of the team has really been on solidifying customer relationships and extending contract duration. Another half of the contracts now have a duration of three years plus. The business has a very strong market position, a very strong product, and we remain very positive on the business and its longer-term outlook. Bart Dziarski: Okay. Great. And then just following up on the attractive kind of market backdrop. So we talked about monetization, but any thoughts you can provide in terms of deployment? It's a pretty healthy year last year, I think, $700 million or so. Like, how should we think about the pacing of deployment this year as you try and take advantage of the environment? Anuj Ranjan: Yeah. Look. I'd say, if I look back, it's Anuj here. Sorry, Bart, and look back on 2025, it was quite a strong year. And we were able to make several acquisitions of the kinds of businesses that we want to own at the values at which we want to acquire them. And the performance, while early, is quite strong. So I'd say going into '26, it feels like we'll continue with that momentum. And, you know, the team is working on many different opportunities, things that we consider right down the fairway similar to what you've seen us do in the past. And there are some exciting opportunities that I think are coming up ahead. I think it'll be a very active year. Bart Dziarski: Great. Thanks, Anuj. That's it for me. Operator: Thank you. And I'm showing no further questions. So with that, I'll hand the call back over to management for any closing remarks. Anuj Ranjan: Thank you all for joining us, and we look forward to speaking with you again next quarter. Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Autoliv Fourth Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anders Trapp, Vice President, Investor Relations. Please go ahead. Anders Trapp: Thank you, Sandra. Welcome, everyone, to our Fourth Quarter and Full Year '25 Earnings Call. On this call, we have our President and Chief Executive Officer, Mikael Bratt; our Chief Financial Officer, Fredrik Westin; and me, Anders Trapp, VP, Investor Relations. During today's earnings call, we will highlight several key areas, including our record-breaking sales, cash flow and earnings per share. We also provided an update on the latest market development. And finally, we will outline the expected margin improvement in 2026 and how our strong balance sheet and asset returns will support the continued high level of shareholder returns. Following the presentation, we will be able -- available to answer your questions. As usual, the slides are available on autoliv.com. Turning to the next slide. We have the safe harbor statement, which is an integrated part of this presentation, and it includes the Q&A that follows. During the presentation, we will reference non-U.S. GAAP measures. The reconciliations of historical use GAAP to non-use GAAP measures are disclosed in our quarterly earnings release available on autoliv.com, and in the 10-K that will be filed with the SEC or at the end of this presentation. Lastly, I should mention that this call is intended to conclude at 3 p.m. Central European Time. So please follow a limit of two questions per person. I now hand it over to our CEO, Mikael Bratt. Mikael Bratt: Thank you, Anders. Looking on the next slide. I am very pleased to report another great quarter with strong development in sales, profitability, cash flow and balance sheet. These achievements reflect the performance of the whole Autoliv team and the depth of our customer partnerships and our dedication to ongoing structural cost savings. We achieved record high sales for both the quarter and the full year supported primarily by strong growth in India and with Chinese OEMs. Sales to rapidly expanding Chinese OEMs surged nearly 40% in the quarter, reinforcing our position in the industry's most dynamic markets. India, again, delivered exceptional growth, representing nearly half of our global organic growth. Looking ahead, we expect to continue to significantly outperform light vehicle production in both China and India in 2026. As we have guided for, adjusted operating income declined slightly in the quarter, mainly due to lower out-of-period compensation and lower customer RD&E reimbursement. We recovered close to 100% of tariff costs in the fourth quarter. We delivered record operating and free operating cash flow for both the quarter and for the full year. In 2025, we generated $734 million in free operating cash flow, an increase of over $230 million, driven by higher profitability and disciplined capital management. It is also important to note that we delivered record earnings per share for both the quarter and the full year. During the quarter, we returned $216 million to shareholders while reducing our debt leverage ratio to 1.1x, reinforcing my confidence in our ability to continue delivering attractive shareholder returns. We also announced that Autoliv and Tensor have developed the first foldable steering wheel for the Tensor's Robocar, targeted for volume production in late 2026. This innovation enhances safety and design flexibility for autonomous vehicles and marks an important strategic step in expanding our role in the emerging autonomous vehicle ecosystem. Looking on the next slide. Fourth quarter sales increased by 8% year-over-year, driven by strong outperformance relative to LVP, along with favorable currency effects and tariff-related compensations. This growth was partly offset by an unfavorable regional and market light vehicle production mix. The adjusted operating income for Q4 decreased by 4% to $337 million, compared to an exceptionally strong fourth quarter last year. The adjusted operating margin was 12%, 140 basis points lower than in the same quarter last year. Operating cash flow was $544 million, an increase of $124 million or 30% compared to last year. Looking now on the next slide. We continue to deliver broad-based improvements with particularly strong progress in direct costs. Our positive direct labor productivity trend continues as we reduce our direct production personnel by almost $700 million. This is supported by the implementation of our strategic initiatives, including automation and digitalization. Gross profit increased by $22 million, while gross margin declined by 70 basis points year-over-year, but improved by sequentially by 100 basis points compared with the third quarter. RD&E net costs rose year-over-year, primarily on lower engineering income due to timing of specific customer development projects. SG&A costs increased by $12 million, mainly due to higher costs for personnel, as well as negative FX translation effect. Looking now on the market development in the fourth quarter on the next slide. Light vehicle production in the fourth quarter of 2025 reached its highest level for any quarter on record. This reflects strong demand across several major markets. The regional production mix has changed significantly in recent years with a large share now coming from lower content per vehicle markets in Asia. According to S&P Global data from January, global light vehicle production for the fourth quarter increased 1.3%. And exceeding the expectation from the beginning of the quarter by 4 percentage points. The stronger-than-expected market was primarily driven by China, where light vehicle production came in 8 percentage points above expectations, supported by consumers taking advantage of scrapping and replacement subsidies before their expiration. India also contributed to better-than-expected light vehicle production growth, supported by significantly reduced taxes on new vehicles. Light Vehicle demand and Light Vehicle demand and production in North America have held up better than expected, leading to a small decline in light vehicle production than anticipated. As many low content markets grow during the quarter, the global regional light vehicle production mix was approximately 150 basis points unfavorable. This was more than 100 basis points worse than expected at the start of the quarter. During the quarter, we experienced increased volatility driven by inventory adjustments in North America early in the period. In December, we also saw production adjustments in Asia, including China, in response to rising inventory levels. We view this volatility as temporary and expect conditions to improve in 2026. We will talk about the market development more in detail later in the presentation. Looking now on our sales growth in more detail on the next slide. Our consolidated sales were over $2.8 billion, the highest for any quarter yet. This was around $200 million higher than last year, driven by volume and positive currency translation effects and $27 million from tariff-related compensation. Excluding currencies, our organic sales grew by 4%, including tariff costs compensations. China accounted for 23% of our group sales. Asia, excluding China, accounted for 20%, Americas for 30%, and Europe for more than 27%. We outlined our organic sales growth compared to LVP on the next slide. Our quarterly sales growth was driven by strong performance across most regions, particularly in the rest of Asia and China. Based on the latest light vehicle production data from S&P Global, we outperformed the market by 3 percentage points globally, despite the unfavorable regional light vehicle production mix. We returned to outperformance in Europe and the Americas. In rest of Asia, we outperformed the market by 11 percentage points, driven by continued strong sales. Growth in India, where we did outperform in more than 30 percentage points. Our sales to Chinese OEMs grew by almost 40%, exceeding the light vehicle production growth by 34 percentage points. Sales to global customers in China were 8 percentage points below the light vehicle production development. On the next slide, we see some key model launches from the fourth quarter. The fourth quarter of 2025 saw a relatively high number of new launches, primarily in China with both Chinese and other OEMs. These new China launches reflect strong momentum for Autoliv in this important market. The models displayed here feature Autoliv content per vehicle from $150 to over $400. Higher CPV is driven from -- by front center [ air ] banks on three [ obvious ] vehicles produced in China. In terms of Autoliv's sales potential, the Mercedes GLB and CLA combined are the most significant. The CLA was the highest scoring or by Euro NCAP in 2025. For 2026, we expect a record number of new product launches, driven by Chinese OEMs. Now looking at the next slide. 2025 was a challenging year for the industry, marked by tariffs, ongoing supply chain disruptions, the slowdown in EV demand, shift in the OEM, landscape and demand pressure due to concerns of vehicle affordability. Despite these headwinds, Autoliv delivered a record year. On the next slide, where we summarize the year. For the year, we met or exceeded all of our full year guidance metrics, sales, adjusted operating margin and cash flow. Our sales reached a new all-time record. global light vehicle production surpassed 90 million units for the first time since 2018. However, the regional mix has shifted significantly with higher volumes in Asia and lower volumes in high content markets, such as Western Europe and North America. We also reached several other significant milestones Operating income exceeded $1 billion for the first time. Earnings per share rose above $9, and we paid more than $3 per share in dividend. During our Capital Markets Day in June, we reiterated our medium- and long-term financial targets, and we initiated a new USD 2.5 billion share repurchase program. Another highlight of the year was the signing of the strategic agreement with Qatar, and we expand further into advanced automotive safety and electronics. Now looking at next slide. Industry sourcing of new business remained at the low level during 2025 as OEMs continue to reassess their product plans. Amid high geopolitical and technogical uncertainty, our customers are reassessing both what and where to produce future models. At the same time, they are navigating a more dynamic and competitive industry landscape with many new players. We have also experienced notable market mix effect as a shorter program life cycles and Chinese OEMs reduced their average lifetime sales. With these OEMs now representing roughly 1/3 of global industry sourcing, the impact of this shift is increasingly pronounced. Despite these headwinds, our intake remained robust, supporting our current market position. Chinese OEMs remained a strong contributor for us, accounting for over 30% of our global order intake. And importantly, we secured our first order with Chinese OEMs for vehicle production in Europe. Despite this, looking on the order intake in more detail on the next slide. In 2025, about 1/3 of our total ordering became from new automakers, highlighting the growth in importance of new mobility players. We won multiple awards tied to industry trends, such as autonomous driving. This includes solutions that protects occupants in reclining seating position, addressing critical safety risks in next-generation interiors. We strengthened our mobility safety solution business by winning new orders for our advanced pyro-safety switch supporting the growing segment of 1,000 volt electrical vehicles. Additionally, awards, including an occupant safety system development program from a major premium automation, as well as wins for steering wheel switches with integrated ECUs and rear window inflatable carton airbags. We continued to expand our safety offering in India with advanced systems such as seat cushion airbags and front center airbags. We licensed our human body model solution to our first customer a leading automaker, enabling next level virtual crush testing and demonstrating the strength of our digital safety capabilities. Let's now look at organic sales growth for the full year 2025. For the full year, we grew in line with global light vehicle production. Outperformance came in lower than anticipated earlier in the year as the regional and market light vehicle production mix developed almost 4 percentage points less favorable than expected. We outperformed in rest of Asia by 6 percentage points. In the Americas by 3 percentage points and in Europe by 2 percentage points. In China, our sales to Chinese OEMs grew by 23% and they accounted for more than 44% of our China sales, doubled our share from 3 years ago. However, the unfavorable market mix still resulted in a 6 percentage points underperformance in China overall. Our global market position remains strong with clear market leadership across all regions and product categories. In 2025, our global market share was around 44%, almost 5 percentage points higher than in 2018 following the Veoneer spinoff. Supported by new launches, especially with Chinese OEMs and CPV growth, we expect sales to outperform light vehicle production by around 1 percentage points in 2026. Now looking at the next slide. I will now hand over to Fredrik Westin. Fredrik Westin: Thank you, Mikael. I will talk about the financials now more in detail on the next few slides. So turning to the next slide. This slide highlights our key figures for the fourth quarter of 2025 compared to the fourth quarter of 2024. The net sales were approximately $2.8 billion, representing an 8% increase. Gross profit increased by $22 million. The drivers behind the gross profit improvement were mainly improved operational efficiency, with lower cost for logistics and labor, as well as positive effects from higher sales and lower material costs. This was partly offset by lower out-of-period customer compensation, less capitalization to inventories and higher depreciation. The adjusted operating income decreased from $349 million to $337 million, and the adjusted operating margin decreased to 12.0%. The reported operating income of $319 million was $18 million lower, mainly due to costs for recycled accumulated currency translation differences related to the closure of our entities in the Netherlands and Italy. Despite lower adjusted profit, the adjusted earnings per share diluted increased by $0.14. The main drivers were $0.10 from taxes, $0.11 from lower number of outstanding shares and $0.05 from financial items, partly offset by $0.16 from lower operating income. The adjusted return on capital employed was a solid at 32%, and our adjusted return on equity was 37%. We paid a dividend of $0.87 per share in the quarter and repurchased shares for $150 million and retired 1.3 million shares. Looking now on the adjusted operating income bridge on the next slide. In the fourth quarter of 2025, our adjusted operating income decreased by $12 million. Operations contributed $41 million, primarily driven by higher organic sales and the successful execution of operational improvement initiatives despite increased call of volatility. We out-of-period cost compensation was $24 million lower than last year. Costs for RD&E net and SG&A increased by $33 million, mainly due to lower engineering income. The net currency effect was $7 million positive, mainly from translation effects. The combination of unrecovered tariffs and the dilutive effect of the recovery portion resulted in a negative impact of around 15 basis points on our operating margin in the quarter. Looking now at full year results on the next slide. 2025 was a record year for sales, adjusted operating profit, operating cash flow and adjusted EPS. Our net sales were $10.8 billion, a 4% increase compared to 2024. The combination of unrecovered tariffs and the dilutive effect of the recovered portion resulted in a negative impact of around 20 basis points on our operating margin for the year. The adjusted operating income increased by 11% to $1.1 billion. The adjusted operating margin was 10.3% compared to 9.7% in 2024. We our operating cash flow was $1.2 billion, about $100 million higher than in 2024. And the adjusted earnings per share rose 18% to $9.85 and reflecting higher net profit and the benefit of a reduced share count from repurchase activities. The earnings per share has grown on average by close to 18% per year since 2021. Dividends of $3.12 per share were paid, an increase of 14%, we repurchased shares for $351 million. Looking now at the cash flow in more detail on the next slide. The operating cash flow for the fourth quarter totaled $544 million, an increase of $124 million, mainly as a result of positive working capital effects. The positive working capital was primarily driven by lower accounts receivables due to lower sales levels towards the end of the quarter and also from $44 million improvement in inventories mainly due to lower sales levels towards the end of the quarter. Capital expenditures net for the quarter decreased by $22 million. Capital expenditures net in relation to sales was 3.9% versus 5.0% a year earlier. The lower level of capital expenditure net is mainly related to lower footprint CapEx in Europe and Americas and less capacity expansion in Asia. Free operating cash flow for the quarter was $434 million compared to $288 million in the same period the prior year, mainly due to higher operating cash flow and lower CapEx. For the full year, free operating cash flow was $734 million. Over the past 5 years, we have delivered average annual free operating cash flow growth of 25%, reflecting improved profitability and capital management discipline. The cash conversion for the full year, defined as free operating cash flow in relation to net income was 100%, exceeding our target of at least 80%. Now looking at our trade working capital development on the next slide. We continue to advance our capital efficiency program with a target of improving working capital by $800 million. Over the last 5 years, we have improved working capital by approximately $740 million. Improved cash conversion supports a stronger balance sheet and supports our ability to deliver attractive shareholder returns. Compared to the prior year, trade working capital increased by $106 million, where the main drivers were $243 million in higher accounts receivables, $208 million in higher accounts payables, and $72 million in higher inventories. This increase in trade working capital was mainly due to increased sales. In relation to sales, it was virtually unchanged year-over-year at 10.8% despite higher cooler volatility towards the end of the quarter. Now looking on our shareholder returns on the next slide. Over the years, Autoliv has demonstrated its ability to generate solid cash flow across different market conditions. During 2025, we returned approximately $590 million to shareholders through dividends and share buybacks. Over the past 5 years, we have improved our debt leverage while returning $2.44 billion directly to shareholders. This includes repurchases totaling nearly $1.4 billion and dividends of almost $1.1 billion. In 2025, we substantially increased the quarterly dividend from $0.70 to $0.87 per share, representing a 24% increase. Since initiating the previous stock repurchase program in 2022, we have reduced the number of outstanding shares by almost 15%. When executing the program, we consider several factors, including our balance sheet, the cash flow outlook, our credit rating and the general business conditions as well as the debt leverage ratio. We always strive to balance what is best for our shareholders in both the short and long term. Now looking on our debt leverage ratio development on the next slide. Autoliv's balanced leverage strategy reflects prudent financial management, enabling resilience, innovation and sustained stakeholder value over time. Our leverage ratio improved from 1.3x to 1.1x during the quarter despite accelerated shareholder returns. Our net debt decreased by over $200 million. The 12-month trailing adjusted EBITDA was $3 million lower in the quarter. Now on to the next slide. And with that, I hand it back to you, Mikael. Mikael Bratt: Thank you, Fredrik. I will talk about the outlook for 2026, more in detail on the next few slides. Turning to the next slide. Overall, global light vehicle production in 2026 is expected to be slightly down compared to 2025, with regional gains and losses nearly offsetting each other. European light vehicle production is expected to remain broadly unchanged as improved affordability is likely to be offset by rising imports from China. Looking to North America, U.S. light vehicle sales in 2025 generally outperformed expectations. However, the market is now facing inflationary pressures as automakers seek to recoup at least part of tariff costs. As a result, S&P forecast light vehicle production to decline by 2% in 2026. The North America outlook remains uncertain due to upcoming USMCA negotiations. Despite weaker demand in China, full year production is expected to show only a modest decline, supported by continued strength in exports. Japan short-term outlook has improved. Supported by tax reductions and the reallocation of production from certain vehicles from Mexico to Japan. For the year, S&P is forecasting flat light vehicle production. Korean light vehicle production remained subdued given weaker domestic demand and a tougher export environment. In the light vehicle production is expected to increase by 8%, driven by a reduction in purchase taxes on new vehicles with disproportionally benefits smaller and lower-priced models. Geopolitical uncertainty, including tariffs and other trade restrictions, the USMCA review and industrial policy shifts are expected to be the biggest risk to the 2026 light vehicle production outlook. Now looking on our way forward on the next slide. For the full year 2026, we expect flat organic sales overall. Growth in China, India and South America is expected to be offset by lower sales in North America and Europe, reflecting a limited number of new product launches in those regions. Turning to profitability. We expect margin expansion supported by higher operational efficiency, ongoing structural cost reductions and improved light vehicle production call volatility. At the same time, we anticipate headwinds from higher raw material costs, particularly gold and from higher depreciation as recent investments come online. Finally, we expect continued strong operating and free operating cash flow generation. CapEx is expected to be slightly higher than in 2025, but still below 5% of sales as we invest in new manufacturing capacity to meet increasing demand in fast-growing regions such as India. Now looking more specifically on the first quarter 2026. The first quarter is expected to be the weakest of the year, which is consistent with the normal seasonal pattern for our industry. China is facing near-term demand headwind due to the reduced scrappage and new energy vehicle incentives, alongside elevated inventories of new vehicles. As a result, light vehicle production in the Chinese market is expected to decline by more than 10% in the first quarter. As a result, Q1 global light vehicle production is expected to decline by nearly 1 million units or 4% compared with the same period last year. Sequentially versus Q4 2025, LVP is expected to fall by 3.3 million units or 14%, about twice the normal sequential decline. We expect adjusted operating margin in the first quarter to decline significantly compared to Q1 2025, primarily due to lower light vehicle production, lower engineering income high depreciation and amortization in relation to sales. It's also worth noting that Q1 operating income last year included $12 million positive impact from the sale of our Russia operations. Turning to the next slide. This slide shows our full year 2026 guidance, which excludes effects from capacity alignment and antitrust-related matters. It is based on no material changes to tariffs or trade restrictions that are in effect as of January 23, 2026, as well as no significant changes in the macroeconomic environment for changes in customer call or volatility or significant supply chain disruptions. We expect to outperform light vehicle production by around 1 percentage points as our organic sales is expected to be flat, while global light vehicle production is expected to decline by 1%. The net currency translation effect on sales is expected to be around 1% positive. The guidance for adjusted operating margin is around 10.5% to 11%. Operating cash flow is expected to be around $1.2 billion. We expect CapEx to be below 5% of sales. Our positive cash flow and strong balance sheet supports our continued commitment to a high level of shareholder return. We expect a tax rate of around 28%. And now looking on the next slide. This concludes our formal comments for today's earnings call, and we would like to open the line for questions from analysts and investors. Now I hand it back to our operating operator, Sandra. Operator: [Operator Instructions] We will now take the first question from the line of Colin Langan from Wells Fargo. Colin Langan: Great. Is there a way to frame some of the major puts and takes when you talk about margins on Slide 25, in particular. I think you mentioned it was about $30 million in cost savings. Is that the structural bucket? How large is the raw material drag? Any way to quantify that? And then two things not mentioned on the puts and takes. Engineering was a drag last year. Is that good news in '26? And is there any FX or peso impact that we should be worried about? Fredrik Westin: Yes. Thanks for the question. So the puts and takes, if I tried to quantify the more explain a bit more in detail. So on the raw material side, we had about $10 million in headwinds in '25 for the full year, and we expect that to be a larger headwind in '26, so more around $30 million headwind. So that's mainly related to nonferrous metals. And here, the largest headwind is from gold actually. Then on the RD&E part, for the full year, we expect the RD&E cost as a percent of sales to be more or less flat. And that was also the case in 2025. It's just the timing in '25 was different compared to 2024. But if you look at the full year cost as a percent of sales, it was more or less unchanged. And that's also what we expect for '26 in terms of percent of sales. Then FX, that had about $20 million positive impact in '25 million, and we expect that the current or the rates that we have included in the forecast, which they've changed a little bit since then on our guidance. It would indicate a similar positive effect of around maybe $20 million for '26 million, again, which is -- as in '25. And then lastly, the structural cost savings, so we have now achieved about $100 million of the $130 million that we set out or detailed out when we announced the plan. So it's about $30 million left, of which we expect to get $20 million here in this year and then the remaining $10 million next year. So that's maybe some more quantifications there on the puts and takes for '26. Colin Langan: Yes. That was very helpful. Just as a follow-up, there was media reports earlier this week that Hyundai has an airbag recall, and I think the reports are saying that you were a supplier? Is that quantified in the guidance? Any color you could provide there? I guess a lot of investors are always a little worried when there's recalls. Yes, is there -- or is that very specific to those models that were recall? Mikael Bratt: Thank you for the question. I think as I said, it just came out here. And I mean, we're working together with the customer here, but at this point, there is no indication really towards our products and so forth. But we continue to work with [ there ] to support them, but there are nothing more really to say at this point on that. So right now, at this point, no indication towards us. Operator: We will now take the next question from the line of Gautam Narayan from RBC. Gautam Narayan: The first one is on the 2026 guidance, you're calling for a 1% outperformance versus the market. In the last quarter, Q4, you did, I think, a 3% outperformance. Just wanted to know if we could just better understand why the outperformance is only 1%. I know the market items you called out, the launch delays in North America and Europe, those are kind of impacting LVP is this perhaps worse for you guys? Just trying to understand the Autoliv's specific why the outperformance, I guess, is only 1%. And then I have a follow-up. Mikael Bratt: Yes. Thank you. I mean, first of all, I think this is very much in line with what we have talked about for quite some while here about our organic growth components where we have the 4% to 6% breaking up into three pieces, you could say, our contributors. And light vehicle production there stands for the first 1% to 2% and then our content or yes, the safety market as such, 1% to 2% and then our Mobility Safety Solutions 1% to 2%. And here, we've been also clear that the 1% to 2% related to mobility Safety Solutions is more towards the 2030 time horizon which leaves us with the LVP and the content there. And LVP, as we mentioned, is negative. So the 1% that we outperformed here is the consistent with the 1% to 2% CPV contributor here, even though it's the lower end of the range here. And as we have indicated here, I think we have faced headwinds during 2025 due to the mix, mix effect where the, let's say, the lower-end vehicles with lower content has been the ones that really have been growing. And for 2026, we expect a neutral mix effect, meaning that the mix structure we have now is moving into 2026 and then the lower end of the range of 1% for content growth. So I think it hangs very well together with what we have communicated in the past and our expectation as well here. Of course, we would like to have seen some more positive mix effects coming through here, but we don't see that right now here for 2026. But it will come further down the road here, I believe. Gautam Narayan: Got it. Understood. That's actually very helpful. My follow-up is, we've all seen the registration data in Europe in the recent months with obviously the Chinese OEMs really gaining share very quickly in certain countries. Maybe you could just -- I know you talked about this a little in the prepared commentary, but maybe just give a little more detail on how you guys are performing with exports and also prospective production in Europe from the Chinese OEMs. Mikael Bratt: Yes. Thank you. No, I think, I mean, as we have indicated here, I think our overall ambitions here to grow with the Chinese OEMs, in general, is progressing very well. And we basically have, I said, double our decision here in the last couple of years here. And have a very strong position in China as the market leader there. And one of the, I think, strength we have here is really that we can support our Chinese customers as they move outside their home market. And as we reported here, we are happy to share that we have on, first, very important quote here with one of the Chinese customers setting up production in Europe, and we are the only external supplier to that platform, which, of course, is really good indication of where we are at. However, I mean, right, so far, it's not the massive localization taking place right now. We are on many of the vehicles that are exported into Europe, of course. But I think it's still some way to go until we see really high volumes of localized Chinese production going forward here. Bottom line is we are well position for that. Operator: We will now take the next question from the line of Agnieszka Vilela from Nordea. Agnieszka Vilela: I have two questions. Maybe starting with your orders progress. Can you tell us what is your estimation of your current market share in the industry? And also, as I understand, you are making progress with the China OEM, but are you keeping your position with the Western OEs? Mikael Bratt: Yes. I mean we had a market share of 44% in 2024. We can also report -- we are reporting a market share of 44% in 2025. So yes, we are defending our market share position globally here. And an important part of that, of course, is that we see such a strong growth also with the Chinese OEMs here. And continue to be in focus. But we shouldn't forget also our strong position in India, which we also mentioned here, where we -- with 60 -- roughly 60% market share in the Indian market, see strong CPV growth and also light vehicle production growth. And I think also India is growing its importance as a global hub as well. So of course, with our position there and that growth. We're also well positioned there to continue to build on our market position globally here. Agnieszka Vilela: Yes, understood. And then the second question is on the raw material headwind that you assumed for 2026 of $30 million or about $30 million. How did you calculate the -- calculate that headwind? Did you use any kind of spot prices that you see? And if in that case, from what to date? Or are you using some contract prices that you have? Fredrik Westin: It's a mix of both. So in some cases, we have some long-term agreements with our suppliers, that's mostly related to steel in Europe. But then we also have contracts which are updated, yes, anywhere between quarterly up to annually. And then we based the forecast here on different index forecast that we have available. And it's -- we lock this forecast at say, late November. We lock the prices and that's what the $30 million is estimated or based on. So we see a headwind from steel. But as I said, the largest impact we see from gold and the [ res ] part. Agnieszka Vilela: And just to understand that this is net of any potential compensations that you would be getting for that? Fredrik Westin: This is a gross impact we're talking about -- so this is only how our costs will be impacted. This is not the net impact on our P&L. Operator: We will now take the next question from the line of Winnie Dong from Deutsche Bank. Yan Dong: I wanted to just go back to the order intake lifetime sales chart. Just wanted to ask what part of this do you think is structural and what part of it is more temporary. I would just take a step back. We've been talking about that we're in the phase of OEMs reconsidering their future offerings due to many different market factors. And then like where are we do you think is in this phase of uncertainty? And then I have a follow-up. Mikael Bratt: Yes. I think when you look at that number, as I said, it's in lifetime, slightly low compared to historic but in line with the previous year. And I would say the structural part is the effect you get from the more higher turnover of platforms. So I mean, as we take the Chinese here, for example, with the high pace of renewal of their model programs, then you get that effect. And I think that will continue. I think there will continue to be a high pace of new models coming out, meaning that you have end of life also coming quicker here for the models here. So I think that at least for a period of time here, I think that's a long-term effect. I think the short-term effect here is the cancellation of programs that were intended to launch here as the uncertainty around the driveline question here is prominent here and now. That should, of course, be of a temporary nature. So we get more -- to more certain product planning that has cleared out. So you have a little bit of both here in these numbers for 2025. Yan Dong: Okay. Got it. That's very helpful. My second question is on the foldable steering wheels that you guys unbilled for autonomous driving. Will this be essentially like the first of many products to come potentially for autonomous driving? And then, just curious on the -- any potential customer feedback that you might have? And when do you foresee for this to take off? And if you can also comment on content versus traditional steering wheels. Mikael Bratt: I think, I mean, in general, starting with last question, I think in general, with more advanced product is a good thing from a growth point of view, for sure. And I think the whole autonomous, even if it's still early days when it comes to volume. We see a lot of interesting and attractive innovation opportunities here where the foldable steering wheel is one. Then, of course, zero gravity seats, even if that's applicable also on the traditional vehicles is for sure, becoming even more interesting in an autonomous vehicle. So comfort is one driver there. And I think as we said, we will launch this together with our customer here towards the end of 2026. So of course, volume-wise, it's not big in 2026. And then it depends on, of course, the ramp-up of autonomous vehicles going forward here. So I think it's more a long-term and a medium-term play at least here. But the important thing here is that I think we see great opportunities in the changing of vehicles going forward here, both when we talk to drivelines as well as autonomous vehicle is positive from a content point of view. And also on the reactions you asked about here, is very positive here, and we have had several approaches and discussions after that presentation there at CES. So very positive response on [ the ]. Operator: We will now take the next question from the line of Jairam Nathan from Daiwa Capital Markets America. Jairam Nathan: I just -- you mentioned how the mix or the regional mix is changing. And I just wanted to understand if there is -- it offers more opportunities in terms of structural efficiencies or footprint rationalizations going forward? Mikael Bratt: Yes, I think, I mean, we are, of course, extremely focused on continuing to sharpen our abilities here to drive efficiency and productivity and all those things, and that we will continue with. I don't think the mix changes that we have talked about here, the mix changes temporary mix composition here is something that has a major impact on our need to do this. I think what we do and what we drive here to improve the company fits well into also manage that, of course. So I don't see any drama in it in terms of our possibilities here to generate earnings growth and cash flow, et cetera, but it's more from, as we said, and the light vehicle production outperformance measurement. But it's is more of a temporary point of view, I think. Jairam Nathan: Okay. And my follow-up was on when you initially announced a 12% medium-term goal for margins, I think there was $85 million or over $85 million LVP. I'm just trying to understand, given that the mix changes again and higher mix of lower content regions, would that -- would you need to update that $85 million and you might need to maybe increase it to hit that 12%. Mikael Bratt: No. I mean, we are very firm and committed on the 12%. I think what we have said here that the 85% is -- it's also a mix effect, as you mentioned here. And also we have markets here that has disappeared since we talked about that certain regions that we can't operate in any longer, as well as -- we have some customers that have taken a large share of the growth here that has their own domestic and, of course, thinking about BYD and SIC that stands for a large portion of the difference there in between that is more of a captive solution. So of course, we see that we can continue to drive our own controllable activities here to support our growth. So we are not hesitating on our ability to get there. Operator: We will now take the next question from the line of Hampus Engellau from Handelsbanken. Hampus Engellau: Two questions for me. Just a question on this domestic Chinese OEM that you got business in Europe with. Is that an already existing client to you guys in China? Or is it a new client? And fundamentals behind this, is this basically transportation cost if it's not the client in China? And second question is just to get a sense of your margin guidance for the full year, the upper range, the 11%,s that within your control? Or is it just -- is it the stability in customer call-ups is that the denominator there? Mikael Bratt: Thank you, Hampus. Regarding the customer there, it's a customer we interact with already. So it's established relationships. So it's not a completely new customer for us. And then on the second question, I don't know if you would like to take it further here. But I would say, I mean, this is, as always, a guidance best on our best knowledge about the future. And what we see here in terms of the external environment, et cetera, is what we have taken into this. So I mean, within this range, of course, is within our own control, then of course, where you can end up a little bit depends on many things, of course, as always. So I think the range is there as it has been now for also last year, is because of the high level of uncertainty in the world around us here. But of course, we feel comfortable on our road here road ahead here to have earnings growth and also the new guidance of $1.2 billion in cash flow here. So that's within lot of our own control. And what we can see also -- just as a reference there, I mean, when we talk about last year's results, is primarily, if not all coming from our own internal [ sites ]. Hampus Engellau: And [ just ] -- I know we need to, but the customer call -- are you getting indications that it's kind of resuming to the trend... Mikael Bratt: No, on the call off here, I mean, that we dropped in the fourth quarter here, we see as a temporary thing. So we expect that to least come back to the 95-ish that we talked about. And I'm still a strong believer that over time, we will get back to pre-pandemic levels when we get presuming more stable external environment here as an industry. But for sure, getting back to where we were before Q4 here, because the volatility here was very much related to some OEMs deciding to -- with very short notice or no noise at all soft production to manage the inventory situations. We also had some cases with some customers have had some supply issues inventory management and supply chain issues. Operator: We will now take the last question from the line of Emmanuel Rosner from Wolfe Research. Emmanuel Rosner: I wanted to ask you again about the margin walk and improvement for this year. So on basically stable organic growth, you're still planning to achieve pretty meaningful margin expansion. And you gave some of the puts and takes and you -- very helpfully quantified some of them before. But I was wondering if there's a couple that we can come back to. In particular, currency, looks like the peso has moved quite a bit. So I've been surprised that it's not a little bit more of a headwind. So maybe you have some other offsets that you could talk about? And then on the positive side, I think you clarified for us the structural cost reduction, but curious about how do you think about the operational efficiency and the call-off benefit, I guess, the positive pieces of the equation. Fredrik Westin: Yes. On the FX part, we do expect, as in 2025, a larger part of the positive development here from the translational effect. I mean, we saw actually on the transactional part, we also saw a net or a negative effect in '25, and that could also continue as to imply here in '26. But the overall results were impacted then expect to be slightly positive. On the structural cost savings, as I said, $20 million of the $30 million remaining coming in we do then expect also further improvements from our operational improvement programs. I mean, automation digitalization. Those contributed quite significantly here in '25 already. and we expect further improvements also from that year in '26. So I hope that answers your question a bit better then. Emmanuel Rosner: Yes, I didn't quite catch the FX piece of it, though. Would you mind just going back over this? Fredrik Westin: Yes. So as I said, in '25, we actually -- on the transactional part, which then includes our exposure to the peso, mostly, we had a negative effect year-over-year for the full year. But the major -- or the positive part was from translational effects and that we expect to continue also in '26 with a similar picture as we stand today. I mean now the dollar has depreciated a bit further versus the assumptions we have based our guidance on. So that could also then have a larger or more positive impact on the top line and potentially also on the bottom line. Emmanuel Rosner: Understood. And then also just following up on the raw materials piece, if you could give some good color for what the growth it would be. Just curious if you can give a little bit more in terms of which of the specific materials, I guess, are most impactful within that and how things have essentially been evolving in terms of input costs? Fredrik Westin: Yes. So as I said, it's -- we expect a gross headwind of a little bit less than $30 million. And then basically, half of that we expect from gold alone of that headwind or closer to 2/3 actually. Then the second largest headwind we expect from steel. And then behind that copper, whereas we expect yarn actually to be a tailwind for us at the current pricing levels. Operator: That is all the time we have for questions today. I would now like to turn the conference back to Mikael Bratt for closing remarks. Mikael Bratt: Thank you, Sandra. Before we conclude today's call, I would like to say that I'm confident that our strong market position and growth momentum in Asia, especially in China and India, sets us up well for continued success. Combined with our proven ability to strengthen profitability also in a low growth environment. We have a solid foundation for delivering attractive shareholder return and a clear path towards achieving our 10% adjusted operating margin target. Our first quarter call is scheduled for Friday, April 17, 2026. Thank you for your attention until next time, stay safe. Operator: This concludes today's call. Thank you for participating. You may now disconnect.
Christopher David O'Reilly: [Interpreted] Thank you very much for taking time out of your busy schedule to join us for the earnings announcement for the third quarter FY '25 of Takeda. I'm the MC, O'Reilly from IR. [Operator Instructions] Before starting I would like to remind everyone that we'll be discussing forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. The factors that could cause our actual results to differ materially are discussed in our most recent Form 20-F and in our other SEC filings. Please also refer to the important notice on Page 2 of the presentation regarding forward-looking statements and our non-IFRS financial measures, which will also be discussed during this call. Definitions of our non-IFRS measures and reconciliations with comparable IFRS financial measures are included in the appendix to the presentation. Now we would like to start with the today's presentation. Today, we have Christophe Weber, President and CEO; Milano Furuta, Chief Financial Officer; Andy Plump, President of R&D; and Julie Kim, CEO-elect. They will present, and this will be followed by Q&A. We'll get started right away. Christophe Weber: Thank you, Chris, and thank you, everyone, for joining us today. Our fiscal year 2025 third quarter results are confirming the strength of Takeda fundamentals and our ability to maintain disciplined cost management and operational efficiency while continuing to focus on innovation and long-term sustainable growth. Milano will explain our financial results in detail in his presentation shortly. Fiscal year '25 remains truly a pivotal year for Takeda. We are in a phase of preparing for significant new product launch, making major step forward in our new growth trajectory. In particular, I would like to focus on oveporexton, rusfertide and zasocitinib, which are key assets in our late-stage pipeline that we expect to launch over the next 18 months. Oveporexton is the first orexin agonist to be submitted to the FDA and has a considerable first-mover advantage. Phase III results were statistically significant across all primary and secondary endpoints, demonstrating clinically meaningful improvement on daytime and nighttime symptoms. This reinforce our belief that this medicine can truly transform the life of patient with narcolepsy type 1. Rusfertide is an hepcidin mimetic that has demonstrated durable and sustained hematocrit control in patients with polycythemia vera or PV. Nearly half of PV patients remain untreated in the U.S. today, and those that are treated still have significant challenge in managing their disease. The Phase III data underscore the potential for rusfertide to transform the standard of care for these patients. We have filed a new drug application with the FDA for oveporexton and rusfertide and are awaiting formal acceptance. Finally, at the end of last year, we announced positive Phase III psoriasis data for zasocitinib, our highly selective TYK2 inhibitors. Full detail will be disclosed at the upcoming congress, but this once-daily oral therapy offers a compelling profile to help shift the psoriasis advanced therapy market towards oral treatment. Regulatory filing preparations are underway, and we expect to launch zasocitinib in the first half of calendar year 2027. The positive data for all the three programs met or exceeded our expectation. Now we are focused on preparing for launch. We will update the peak revenue potential for these three programs in the future. Combined, we believe this product could more than offset the anticipated impact of ENTYVIO biosimilar entry from the early 2030s onwards. And in addition to these three, our transformative late-stage pipeline includes five other innovative programs, two of which we have recently added through our strategic partnership with Innovent Biologics. Each of our eight late-stage program has the potential to transform the current standard of care, providing strong and sustainable growth drivers for Takeda well into the future. Andy will share more details about our pipeline advancement later in this call. Now I will hand it over to Milano, who will discuss our financial results and the outlook for the rest of the fiscal year. Milano, over to you. Milano Furuta: Thank you, Christophe, and hello, everyone. This is Milano Furuta speaking. Slide 6 summarizes our Q3 year-to-date results. As you know, this year, we are managing the significant impact of VYVANSE generic erosion. However, if you look at the performance quarter-by-quarter, the headwind from VYVANSE is steadily tapering off as the year goes by, and we are maintaining strong cost discipline to limit this impact to profit. Revenue for the 9 months period was just over JPY 3.4 trillion, a decrease of 3.3% or minus 2.8% at constant exchange rate or CER. Core operating profit, core OP was JPY 971.6 billion, a year-on-year decrease of 3.4% at both actual FX and CER. This is a meaningful improvement from our first half results. Reported operating profit was JPY 422.4 billion, an increase of 1.2%. Core EPS was JPY 428, and reported EPS was JPY 137. Cash flow has been very strong this period with adjusted free cash flow of JPY 625.9 billion, even after the upfront payment of USD 1.2 billion to Innovent Biologics in December. Slide 7 shows our growth and launch products, which represents over 50% of total revenue and grew 6.7% at constant exchange rate. This is a steady improvement on the 5% growth rate we saw in Q1 and Q2. In GI, ENTYVIO grew 7.4% at CER. Growth in the third quarter was particularly strong as expected, partially due to a onetime gross to net true-up in the period prior year. ENTYVIO Pen continues to be the main driver, helping us maintain leadership share in a competitive IBD market. We are also pleased to report that as of this month, ENTYVIO Pen is now on formulary with all three large pharmacy benefit managers with commercial coverage of more than 80%, in line with competing products. With this progress, we are on track to achieve our full year projection of 6% growth. In rare diseases, TAKHZYRO has slowed to 2.4% growth at CER. Although we continue to see strong uptake in international markets, this is being offset by the impact of new competing products in the U.S. In PDT, Q3 revenue growth marked an improvement on the first half. That said, we acknowledge some headwinds, particularly in albumin. IG growth was 4.3% year-to-date, driven by subcutaneous IG products, which grew double digits. IVIG sales have been impacted by Medicare Part D redesign in the U.S., which we expect to normalize in Q4. Albumin has returned to growth of 1.3%, but this is slower than expected due to softening demand in China, which is also putting pressure on other markets where supply is reallocated. While we anticipate additional tenders in Q4 to support an uptick in growth, there's a possibility we'd finish the year below our full year forecast. In oncology, FRUZAQLA continues to expand as well as we roll out global launches. Finally, in vaccines, QDENGA growth has accelerated to 22.1%, driven primarily by Brazil. On Slide 8, you can see how incremental revenue of growth and launch products and the impact of the VYVANSE loss of exclusivity contributed to total revenue performance. With each quarter, the gap is becoming smaller as the VYVANSE decline was heavily weighted to the first half of the year and the growth and launch products are performing better in the second half. Slide 9 shows year-on-year core OP performance. Here, you can see that the LOE of high-margin VYVANSE was the main reason for the year-on-year decline of 3.4% at CER. However, we have been able to limit the VYVANSE impact through operational efficiencies with R&D and SG&A expenses, both lower than the prior year. As we explained at the Q2 earnings call, we continue to tighten the belt on expenses, building on the progress of the cost efficiency program we started in 2024. This will be critical as we ramp up investment behind the three new product launches. We will not compromise on the necessary investments for long-term growth. We also have multiple programs in the late-stage pipeline that will require additional R&D investments in the coming years. At the same time, we will continue to pursue opportunities to offset these investments where possible to minimize the near-term impact on profit. Next, reported operating profit on Slide 10. This was flat versus prior year, with the lower restructuring expenses more than offsetting an increasing impairment of intangible assets. The main impairment item was booked in Q2 related to the cell therapy, and there were no major new items in Q3. Slide 11 shows our updated full year outlook. Starting with management guidance, we are revising only revenue guidance to low single-digit decline at CER, primarily due to stronger-than-anticipated VYVANSE generic erosion in the U.S. However, our commitment to OpEx discipline allows us to offset the gross profit impact from VYVANSE, and we maintain full year guidance for core OP and core EPS. For our reported and core forecast, we have revised our FX assumptions. As a result, our revenue forecast is now JPY 4.53 trillion, core OP forecast is JPY 1.15 trillion and core EPS forecast is JPY 486. We have also upgraded our adjusted free cash flow forecast. On Slide 12, we show more detail about the updated revenue and core OP forecast. For revenue, we are reflecting latest momentum of VYVANSE and other products, which includes plasma-derived therapies under TAKHZYRO. However, this is more than offset by FX upside, resulting in a net increase of our forecast of JPY 30 billion. For core OP, continued OpEx discipline fully offset the impact of VYVANSE. We also have FX benefit for a net increase to our forecast of JPY 20 billion. Thank you, and I will now pass over to Andy. Andrew Plump: Thank you, Milano, and hello to everyone on today's call. Takeda is entering an exciting new period of growth powered by our late-stage pipeline. As Christophe mentioned, in 2025, we were 3 for 3, delivering positive Phase III data readouts for oveporexton, rusfertide and zasocitinib. These exciting results are at the high end of our expectations, further strengthening our belief that these new medicines have the potential to fundamentally reshape their respective therapeutic landscapes, bringing transformative benefits to patients in the next 18 months. Let me begin with oveporexton, our expected first-in-class orexin 2 receptor agonist, which can transform the treatment paradigm for narcolepsy type 1. Approximately 85% of patients in the Phase III oveporexto trials saw measurable improvement, which brought them into the normative range on the Epworth Sleepiness Scale, or ESS, the gold standard measure of excessive daytime sleepiness. That means the majority of patients have the possibility of a normal day. In both Phase III studies, oveporexton achieved clinically and statistically significant improvements across all 14 primary and secondary endpoints with most participants reaching normative ranges. This normalization across such a broad range of NT1 symptoms, including daytime sleepiness, nighttime symptoms, cataplexy and cognitive function is unprecedented. Oveporexton doesn't just manage symptoms, it addresses the underlying orexin deficiency in NT1, offering patients a single, well-tolerated oral therapy that could restore how a majority of NT1 patients feel and function. We have submitted a new drug application to the FDA and are working to launch oveporexton this calendar year. Next is rusfertide, our hepcidin mimetic for polycythemia vera. One key data point from the Phase III study is the ability to maintain hematocrit control below 45% through 52 weeks. Real-world data shows that 78% of PV patients experience uncontrolled fluctuating hematocrit, leading to a fourfold increase in the risk of thrombotic events, including stroke, deep vein thrombosis, pulmonary embolism and acute coronary syndrome. Rusfertide targets the biology upstream, offering more stable and durable hematocrit control and fewer variable swings in hematocrit. Durable hematocrit control with impressive safety and tolerability also led to clinically meaningful and statistically significant benefits to patients' quality of life as measured by the PROMIS Fatigue Scale and myelofibrosis symptom assessment form. By reducing fatigue and other key disease-related symptoms as well as the need for phlebotomy, rusfertide enables patients to spend less time managing their disease and more time engaging in everyday activities. We have submitted an NDA to the FDA and are working to launch rusfertide in PV this calendar year. And finally, we have zasocitinib, our next-generation TYK2 inhibitor for immune-mediated diseases. In our Phase III psoriasis studies, zasocitinib worked fast with significant improvement in PASI 75 within 4 weeks. Patients, of course, want clear skin. At week 16, more than half of patients on zasocitinib achieved PASI 90 or almost clear skin, and approximately 30% achieved PASI 100 or completely clear skin. PASI scores continue to improve through week 24. These results are at the very high end of reported results for all therapies in development. Zasocitinib is a once-daily, well-tolerated pill that does not have any food interactions. We are looking forward to sharing the complete data at a medical conference in the near future and expect to launch zasocitinib in psoriasis during calendar year 2027. In addition, we remain confident in future indication expansion opportunities for zasocitinib, including psoriatic arthritis and inflammatory bowel disease. Together, oveporexton, rusfertide and zasocitinib represent three transformative medicines we plan to bring to patients over the next 18 months. They demonstrate the strength of our R&D engine, the speed and quality of our clinical execution and our commitment to delivering therapies that meaningfully change how patients live. Next slide, please. These first three approvals are just the beginning. I want to highlight some additional bright spots within our late-stage pipeline. Building on our success, a head-to-head study of zasocitinib versus deucravacitinib is fully enrolled and on track to read out in 2026. These data are not required for filing, but will be insightful to further differentiate zasocitinib from other oral psoriasis medicines. Last November, at the American Society of Nephrology Kidney Week, we presented new IgA nephropathy data from a proof-of-concept study for mezagitamab, our anti-CD38 monoclonal antibody. IgAN is a progressive autoimmune disease that causes irreversible damage to kidney function. Patients receiving mezagitamab demonstrated durable kidney function for about 2 years. This is an incredible 18 months after the initial 5-month treatment period, suggesting a disease-modifying effect sustained long after dosing that could allow for extended treatment holidays, very important for patients with this lifelong disease where many progress to kidney failure within 10 years. In addition to oveporexton, we are excited about the potential of our second orexin 2 receptor agonist, TAK-360, which is initially focused on patients with normal orexin levels like those with narcolepsy type 2 and idiopathic hypersomnia. Phase II studies in NT2 and IH are enrolling well, and we expect to have data this year to inform Phase III development. Next slide, please. Turning our attention to oncology. Late-stage highlights include elritercept, our activin A/B ligand trap that showed compelling data in myelofibrosis as presented at this past ASH meeting. Phase II myelofibrosis data showed clinically meaningful improvements in anemia and thrombocytopenia alongside favorable trends in spleen volume and symptoms when added to ruxolitinib. Elritercept remains a late-stage, potentially best-in-class approach across MDS and myelofibrosis. And lastly, we recently licensed two new innovative oncology drugs from Innovent Biologics, now called TAK-928 and TAK-921. TAK-928 is a potential first-in-class alpha biased IL-2 PD-1 bispecific antibody designed to selectively activate tumor-specific cytotoxic T cells through activation of the IL-2 alpha CD25 receptor while reducing the risk of exhaustion through immune checkpoint inhibition. In early-stage clinical studies, TAK-928 has demonstrated encouraging activity in heavily pretreated immunotherapy and chemotherapy refractory lung cancer as well as in immunologically cold tumors such as microsatellite stable colorectal cancer. We have seen compelling high-quality data in well over 1,200 Chinese patients and consistent early signals from ex-China populations. We have completed the rapid transfer of data and materials and are now executing with speed to generate global data sets that will supplement the China data shared last year at ASCO. This will allow us to advance TAK-928 to treat a broad range of solid tumors, including non-small cell lung cancer and microsatellite stable colorectal cancer. These go to Phase III decisions will start as soon as 2026 and into 2027. The shared investment in TAK-928 has a 60-40 split with Innovent and is stage gated by these go decisions. TAK-921 is a Claudin 18.2 targeted antibody drug conjugate that couples a selective antibody with a silenced Fc region to a topoisomerase payload. This approach is designed for potent, tumor-specific delivery of this preferred payload to patients with pancreatic and gastric cancers where unmet need remains high. The engineered Fc silencing reduces off-target toxicity in the GI tract and lung, potentially allowing for more robust dosing and the ability to combine with first-line regimens. Clinical data shows lower rates of GI adverse events relative to other Claudin 18.2 targeted antibodies in development. We plan to develop TAK-921 in first-line gastric cancer and first-line pancreatic cancer. And now I'd like to turn it back to Christophe and Julie for a few closing remarks. Christophe Weber: Thank you, Andy and Milano. Before we start the Q&A, I would like to share that this is my last earnings call as a main presenter. I will be on the full year earnings call, but in a supportive role as Julie Kim, our CEO-elect, take the lead and sets guidance for fiscal year '26 ahead of our formal handover in June. This is part of our intentional and coordinated transition. Starting this month, Julie began taking on more operational responsibilities to ensure that we remain focused on our upcoming launches without interruption. I would like to thank all of you for the important dialogue we had over the years about our business. I am proud of the work we have done to position Takeda among the global R&D-driven pharma leaders and poised for growth in the years ahead. It has been a wonderful journey, and I am excited about Takeda's future and confident in Julie's leadership in its next era. Julie, over to you. Julie Kim: Thank you, Christophe, and thank you for your leadership and guidance over the last 12 years. Hello, everyone, and thank you for your trust that you're putting in me to lead Takeda's next era of growth. As Christophe shared, our transition has been incredibly collaborative. And one of the benefits of being an internal successor is that we don't have to slow down, we can keep the momentum going and continue to move the organization forward. To that end, you may have seen our post today about changes to our organizational structure and executive leadership we are making effective April 1. These changes are designed to position us for competitiveness, growth and speed in the years ahead, particularly as we plan for multiple launches. As we implement these changes, we expect the teams will identify opportunities to simplify their work further as we continue to redesign our processes to adopt AI and other advanced technologies. Next quarter, I look forward to taking the lead on the earnings announcement and providing guidance for fiscal year 2026. I value our ongoing dialogue and will stay closely engaged with all of you in the months and years ahead. Thank you. And with that, I will turn it back to Chris for Q&A. Christopher David O'Reilly: [Interpreted] [Operator Instructions] Morgan Stanley, Muraoka-san. Shinichiro Muraoka: [Interpreted] This is Muraoka, Morgan Stanley. I hope you can hear me. Christopher David O'Reilly: Yes, we can hear you. Shinichiro Muraoka: Maybe it's too early to ask, but Milano-san, what are your thoughts about the next fiscal year? Contribution from the new product is probably small, and you'll be spending a lot of marketing expenses for those new launches, I understand that. But live situation is coming down, it's getting better, and profit will be maybe flat or slight decrease. And I'm thinking that you can continue to increase dividend. But can you give us some suggestions about what will happen in the next fiscal year? Christopher David O'Reilly: Milano, please go ahead. Milano Furuta: [Interpreted] Thank you, Muraoka-san. Yes, it's a little bit too early, you're right. Our guidance will be provided as usual in May. And the next fiscal year's budget is being finalized as we speak. So please give us some more time. With regard to the current momentum, I believe that we can give you some more information. Top line. Well, growth of growth and launch products versus the LOE impact, I think it's a balance between the two. We expect the growth products and launch products to continue to grow. But as you saw in the numbers in this fiscal year, they are beginning to mature. This cannot be denied. But the gap between LOE and growth and launch products is shrinking every quarter. So we need to see how this balance will work out for the next fiscal year. We are trying to figure that out now. So please give us some more time. As far as expenses are concerned, this fiscal year, the whole company endeavored on saving the costs, and we will continue to make this effort. But Muraoka-san, like you said, launch costs, three products we launched within 1 year. This means that there will be some load burden. But this uptick is very important for the future growth as well. This is a very important timing for us. So we will be discerning in terms of which investments are necessary, and we will not compromise in investing these launches. As far as R&D is concerned, this fiscal year, we have been trying to save the costs and also at the same time, continue to drive various projects through the Innovent partnership. We have introduced new assets for Japan and full-scale development is expected to start. Considering that impact, R&D expenses are likely to go up. I think that would be the correct way of reading it. But again, I would like to emphasize that we will continue to tighten the cost wherever we can, and I hope that you can evaluate that as well. Shinichiro Muraoka: [Interpreted] Do you have any comments about the shareholder return? Milano Furuta: [Interpreted] Well, dividend, yes. Progressive dividend is something that we have been talking about for a long time. So this is the basic policy. So either keep it flat or try to increase the dividend. This is the basis. Whether or not the dividend will increase and by how much? Well, in order to decide that we have to look at the core EPS and also reported EPS as well as cash flow generating power and the speed of a reduction of debt-bearing -- interest-bearing debt. So we'll pay attention to those and decide. Shinichiro Muraoka: [Interpreted] Understand. I have great expectations. I have another question about zasocitinib. UC CD Phase II outcome, when can we expect it? And also what about dosing? Phase II for UC was 50 milligram or 30 milligram? And what about the psoriasis safety data based on that safety data? Can you perhaps comment on this? Christopher David O'Reilly: So the question on timing for the UC and CD readouts for zasocitinib and which doses we are using. Andy, if you could comment on that, please? Andrew Plump: Thanks, Chris. Thanks, Muraoka-san. So we'll have data from both the UC and Crohn's disease Phase IIb studies this year. Both are dose-ranging studies. As we've mentioned -- we haven't disclosed the precise doses, but as we've mentioned, the 30-milligram dose that we've studied in psoriasis and that we'll be registering for psoriasis is the low end of the dose range in IBD. We have reason to believe that higher exposures will be necessary for efficacy in UC and Crohn's disease, and we have significant upwards headroom in dose to study. So those studies are ongoing. And then your last question was with respect to safety profile for psoriasis. So we've just commented at the top line in December when the Phase III studies read out. We'll be presenting at a medical conference in the near future. You could probably guess which conference we're targeting. And overall, the safety profile that we've seen in both Phase III studies is very consistent with the profile that we had seen previously in our Phase II study. Christopher David O'Reilly: [Interpreted] The next question is Yamaguchi-san, Citi. Hidemaru Yamaguchi: [Interpreted] Can you hear me? Christopher David O'Reilly: [Interpreted] Yes, we can. Hidemaru Yamaguchi: This is Yamaguchi from Citi, I have two questions. First of all, the first one is more of a broad question because MFN situation or medical policy in the United States seems to be are coming down because the major companies are now settled with the U.S. comment on MFN. But a Japanese company, including your company, are still excluded from this discussion. But what do you think about this sort of activity, which you need to do regarding MFN or U.S. policy in the near future? That's the first question. My second question is regarding the organization change, which you announced today, especially on the strategic portfolio development, which it sounds like you're trying to speed up on the some of marketing activity in those areas. Especially in the U.S., U.S. marketing is a key for next few years. And it depends on the products, but your marketing activity in the past are not necessarily executing better than expected, to be honest. But how are you going to change, especially in the U.S. marketing organizations or activities in the near future through the Kim-san's roles or our CEOs roles in the near future? Thank you. Two questions. Christopher David O'Reilly: Thank you, Yamaguchi-san. So the first question on MFN and latest U.S. policy updates. The second question regarding the organizational updates that we announced today. So I'd like to call on Julie to address both of those questions, please. Julie? Julie Kim: Yes. Thank you, Yamaguchi-san for the questions. First, in regard to MFN, as you've noted, the number of companies, 17 companies that had originally received the letters from the White House, they have all gone in for negotiated agreements in regards to how they will approach MFN, how they're going to be managing tariffs with the relief that they received and further investments in the U.S. So since those agreements have been made, there were also releases from the government in terms of the generous model, which details how these agreements can be actually implemented through Medicaid. And there have been a release of GLOBE and GUARD CMMI demonstration projects for commentary by the public. So at this point, we have assessed both the impact of generous and looking at the potential design of the two CMMI products on Takeda and Takeda portfolio. So we are evaluating those impacts and taking necessary steps to address that within our approach to MFN. But let me end by saying that in general, MFN is not an approach that we support. Having price controls and importing one component of health care systems that have very, very different structures does not make sense for the U.S. and can impact future innovation. So we are not in favor of MFN, but we will continue to address the challenges that may face Takeda going forward. In regard to the organization changes that were announced today, you will see that from a commercial standpoint, there are basically two key structures that we are trying to focus on. One is a therapeutic one. And so you will see that the oncology business unit is still a separate business unit. Both Andy and Christophe have talked about the assets that we have brought in, particularly the Innovent ones will be a key part of our oncology portfolio, and we are very much looking forward to launching rusfertide later this year. So maintaining our focus on oncology to drive that growth and the potential that we have in our pipeline now is absolutely critical. And then for the upcoming launches, creating two primarily geographic focus, one in the U.S., maintaining the U.S. focus given the size of the market and the dynamics that exist that we have to manage, that is part of being able to set ourselves up for success going forward in terms of the commercial approach to the U.S. as well as the international markets. So what may not be as visible through the org changes that are announced is the work that we're doing in terms of our marketing excellence and sales excellence and commercial operations. So we are working on all those aspects, again, to ensure that we are ready and can deliver successful launches going forward. Thank you. Christopher David O'Reilly: For the next question, I would like to call on Stephen Barker from Jefferies. Stephen Barker: Steve Barker from Jefferies. I have two questions, both about ENTYVIO. The third quarter sales were very robust. The global third quarter sales expanded 17% year-on-year on a reported basis, much better than the 3% growth reported in the second quarter. You said that you are now confident that you can achieve your 6% guidance for the full year, but that would imply a 2% decline year-on-year in fourth quarter sales. So would you agree that your -- that there's a decent chance at least that you can beat the current guidance for full year, 6% growth. And if you could just talk a little bit more about what's driving the good performance in the third quarter and if it is something that can be sustained into next year? That's the first question. And then second question. A couple of days ago, CMS announced that ENTYVIO has been chosen as one of the drugs for the third cycle of IRA price negotiations, meaning that it's likely to get a substantial Medicare price cut from the start of 2028. Any comments on how big that price cut might be? And if you can still achieve your peak sales guidance of $7.5 billion to $9 billion even with the price cut? Christopher David O'Reilly: Okay. Thank you, Steve. So the question on ENTYVIO sales trend, impact of IRA inclusion and the implications on peak sales. So I'd like to ask Christophe to start with this one and then perhaps Julie can add some comments as well. Christophe? Sorry, Christophe, I think you might be muted. Christophe Weber: Thank you, Steve. Obviously, ENTYVIO is operating now in a very competitive market. We know that, but we are pleased by the Q3 performance. One important point is that we have improved our coverage situation in the U.S. All the big 3, now PBM, are reimbursing and covering ENTYVIO Pen. Took a while, but we have now a coverage at the level of our competitors around 80% since January. So it's quite recent. So we are hopeful that the Pen will continue to progress in the U.S. as it has progressed in other countries. And long term, we still aim to have a 50-50 split between the IV and the Pen. So overall, a good performance in Q3. Long term, we project ENTYVIO not to gain market share, but to remain stable and to grow at market pace basically. While the Pen is developing, that's our current estimation, but the market is changing quite a bit, but good performance for sure in Q3. Julie Kim: And then Steve, in regards to the IRA selection of ENTYVIO. As we've shared in the past, this was anticipated. And so we've been preparing for this eventuality. As you know, from a timing perspective, we have a period of time in which we have to confirm engagement in the negotiation. And then towards the end of the year, we will actually find out what price will be set. I think you are also aware, it's not really a negotiation, but we will be submitting our best evidence package to support ENTYVIO. If you look at what's been happening over the previous two cohorts, the second cohort had higher price cuts than the first cohort. So it is too early to say whether that trend will continue into the third cohort or whether it will be similar to the second cohort. So it really depends on where we'd land with the final pricing on ENTYVIO in terms of when that peak sale could -- sorry, peak revenue could be and also if we end up in the 7.5% to 9% or not. So we will update later once we understand what our pricing situation will be for ENTYVIO. Christopher David O'Reilly: [Interpreted] Next question is from Matsubara-san, Nomura Securities. Matsubara: [Interpreted] This is Matsubara, Nomura Securities. First question is about TAKHZYRO. On a CER basis from the second quarter, the growth rate seems to be slowing down. And is it affected by the competitor DAWNZERA? And the transition from TAKHZYRO to DAWNZERA and HAE template showing some 65% decrease. So what about the prescription rate in existing patients or new patients? Could you comment on those? Second is, as Milano-san mentioned, oveporexton and zasocitinib will be launched and also R&D spending -- more spending will be necessary. And in the midterm viewpoint, as you try to increase the operating profit, how are you going to take measures? Christopher David O'Reilly: Thank you, Matsubara-san for your questions. So the first around recent TAKHZYRO trends -- prescription trends in the U.S., I'd like to ask Julie to comment on that. And then the second question, looking at our outlook for profit over the medium term. I'd like to ask Milano to comment on that, please. First, Julie? Julie Kim: Yes. Thank you for the question, Matsubara-san. When it comes to TAKHZYRO, I will share a few comments. First, in terms of the overall market, this is a market that has been maturing. The diagnosis rate is high and the penetration of prophylaxis treatment has been high as well. So TAKHZYRO continues to be the gold standard for HAE patients. And you are correct that we have seen an impact of the launches of the two competitive -- recent competitive entrants. And so we are seeing an impact in terms of new starts from these new competitive entrants. But I also want to point out that part of the lower growth is also due from the impact of Medicare Part D redesign that we are experiencing a bit higher impact from that in the U.S. than anticipated. Now when it comes to long-term efficacy, if you look at the real-world evidence that we have for TAKHZYRO, no other product is able to demonstrate the level of efficacy that we have when you look at the data from an attack perspective. We have patients that are attack-free for over a year at any given point in time. And so from an efficacy standpoint, our real-world data for TAKHZYRO, it can't be beat. So that is something that I would like to highlight, and it's something that we continue to defend and support from a TAKHZYRO standpoint. Milano Furuta: [Interpreted] Thank you very much, Matsubara-san. And I'd like to answer to your second question. At the beginning as Muraoka-san also asked, and I mentioned about the pressure of overall expenditure increase. And therefore, I'd like to touch upon the potential contribution of new products to the profit. And this is a general comment that whenever new products come out, then in the second year or the third year since its launch, we will see a contribution to the profit. It depends on the timing of the launches. Therefore, it is difficult for us to say anything concrete whether it's going to be next year or the year after the next and how much. But amongst the three products, oveporexton's uptake after the launch is expected to be fast. Whereas zasocitinib will have to play in a very highly competitive market. Therefore, I think for zasocitinib, I think we need to take time to monitor. And rusfertide is in between. It is a highly innovative product. But at the same time, the market access may not necessarily be so easy. Therefore, how that will demonstrate the uptake, we would like to monitor. But the speed of uptake will be impacting on to the timing that we start to see the product contribution to the profit. And also not just these three products, but five new pipeline assets, readouts are coming. And in forthcoming 5 or 6 years, they will continue to be launched. And as a result, overall, I think that the overall profit level should be able to be enhanced. At the same time, not just the core OP, but the reported operating profit is also monitored. For instance, VYVANSE, the intangible asset, the amortization will be complete. And as a result, there will be also a positive contribution in that sense. Thank you. Christopher David O'Reilly: Moving on to the next question, I would like to call on from TD Cowen, Mike Nedelcovych. Michael Nedelcovych: I have two. My first is also related to the IRA impact on ENTYVIO. I believe it is Takeda's base case that ENTYVIO Pen will be included in the IRA price negotiation. But I'm curious if that is a completely settled matter or not. Is there any chance that ENTYVIO Pen is ultimately excluded from the IRA price negotiation? That's my first question. And then my second question relates to the partnered AC Immune asset in Alzheimer's. It looks like data may be anticipated in mid this year. Should we expect that to be the time when Takeda decides if it wants to opt in or not? And Andy, I'm curious to hear your thoughts more broadly on prospects for Alzheimer's disease prevention or delay based on early amyloid plaque clearance? What are your general thoughts on this approach? Christopher David O'Reilly: Mike, so I think the first question, Julie, can comment on IRA ENTYVIO impact on -- potential impact on Pen. And then the second question to Andy on the AC Immune partnership and AD in general. Julie? Julie Kim: Thanks for the question, Mike. And in terms of the negotiation with the IRA, we do expect that Pen will be included. Andrew Plump: And Mike, on the AC Immune program, so we won't have data this year to drive a decision that will come in subsequent years. And thanks for asking more generally. Of course, I've been working in this industry for almost 3 decades now. And the first project I worked on was a project of a gamma secretase inhibitor designed to reduce A-beta production. It's been one of -- to me, one of the most exciting and promising, but also one of the most challenging areas in our industry. I'm a big believer that if we could clear a beta plaque early in the longitudinal course of Alzheimer's disease that we could drive even greater benefits than what we see from the passive antibodies that have been used in demonstrated efficacy. So we're quite excited about the vaccine program. Of course, the challenge with the -- historically with the vaccines has been threading the needle of safety and efficacy. We think we have a shot with the -- with our AC Immune partners and still working towards that. Christopher David O'Reilly: [Interpreted] The next question is Wakao-san, JPMorgan. Seiji Wakao: [Interpreted] This is Wakao, JPMorgan. I have two questions. Firstly, regarding PDT, how do you assess the third quarter progress on PDT? Compared with your guidance, PDT progress seems to have been somewhat slower. And could you share your outlook for PDT in fourth quarter and next fiscal year? This is the first question. And second question is about zasocitinib. Should we expect zasocitinib Phase III data to be presented at AAD in March? If so, what key aspects should we focus on? As Icotrokinra and [indiscernible] programs have shown favorable data or so, where do you see zasocitinib's key point of differentiation? Christopher David O'Reilly: Thank you, Wakao-san. So the first question on the PDT business performance and outlook, I'd like to ask Julie to comment on that. And the second question on zaso data, where will it be presented and what should we focus on in that data, I'd like to ask Andy to comment on that, please. Julie Kim: Thank you for the question, Wakao-san. In regards to PDT, as Milano was sharing in his part of the presentation earlier, we do see some slowdown in demand, particularly in regards to albumin in China. As you may be aware, the Chinese government has put in place utilization guidelines that are impacting demand for albumin in China. And it will -- it has slowed down the growth, and it will take time for growth to return in China. When you look at the overall outlook for PDT overall, there, we still believe we will have mid-single-digit growth for this year as previously shared and longer-term outlook is still strong. The quarter-to-quarter, as you know, because there are lots of variabilities in regard to tender timing, et cetera, we do -- as Milano mentioned, we do believe that there is a possibility we will have a shortfall, particularly in regards to albumin. But overall, we will be meeting the forecast for PDT. Seiji Wakao: So could you also comment on the immunoglobulin? Julie Kim: Sure. Yes. From an immunoglobulin perspective, again, long-term growth, we believe will remain steady. And from a short-term perspective, we are expecting to be on forecast for immunoglobulin. Andrew Plump: Wakao-san, this is Andy. So thank you for your question on zasocitinib. So we haven't disclosed yet the conference that we'll be presenting at, but AAD certainly is like is a possibility. I just suggest that you watch out for the abstract when they're released in mid-February for AAD. And then in terms of what to look for, it's pretty straightforward. It's fast onset of action. It's clear skin and it's ease of administration. We have a once-daily oral pill that's well tolerated with a strong safety profile. And then when you double click, you'll see that in the two Phase III studies, we hit on every single primary and secondary endpoint, and that's 44 total endpoints. So there'll be a lot of data that will be shared, and we're quite excited to get it out there. Seiji Wakao: So what is our competitive advantage? Andrew Plump: Well, it's has -- as we mentioned over the last hour, it has an efficacy profile that at 16 weeks is at the very high end of what's been seen for oral agents. It's ease of administration without having any food effects and it's the overall profile, and it's the rapidity with which we generate clear skin in an oral agent. We believe and we think the data will demonstrate that it's as good or better than any other oral option in the moderate to severe plaque psoriasis space. Seiji Wakao: Okay. I'm looking forward to see the data. Christopher David O'Reilly: Okay. Thank you very much, Wakao-san. I think we have just time for one final questioner. So I'd like to call on Tony Ren from Macquarie. Tony Ren: Yes. Thanks for the chance to ask the last question. My first one, and I'll go back to the -- again, for Andy, the zasocitinib regulatory pathway. So assuming that you will present the data at AAD in March, the standard FDA review takes about 10 months. So do you think you can actually launch it earlier than the 18 months of a time line guided? Are you being a little bit too conservative in estimating the time line? So that's my first question. The second one is probably to Julie about the ENTYVIO biosimilar. Have you -- as you're thinking about the biosimilar entry changed because of the subcutaneous Pen, I noticed that a recent conference in San Francisco, you guys are now saying 2030 and beyond. So just want to confirm whether the launch of the Pen and the wide adoption of the Pen has anything to do with the biosimilar entry. Yes. So that's my second question. Christopher David O'Reilly: Okay. Thank you, Tony, for your questions. So the first on zasocitinib regulatory pathway and potential launch timing, Andy can comment on that. And then the second question on the ENTYVIO biosimilar entry timing, I think Julie can comment on that, please. Andy? Andrew Plump: Thanks, Chris. Thanks, Tony. So just to put perspective on the filing time line. So there are three elements that define the time line for filing. There's the Phase III studies, which we've completed. Those are ready to go. There's the overall patient safety database. So we have to accrue safety in about 1,000 patients on active drug for a full year, and then the third is the CMC package. So when you put all three of those together, Tony, we're looking at a submission that's likely to occur sometime in this summer. And then, of course, the time line for the review will be something that will be in dialogue with the FDA and once we've made that submission. Julie Kim: Thanks, Tony, for the question on the ENTYVIO biosimilar timing. So we have not really changed our timing expectations here. As we've shared previously, we do have patents that cover various different aspects of ENTYVIO that go out to 2032. But as you are also well aware, there are biosimilars in development, and they could file with legal challenges -- I'm sorry, they could file and we would then pursue legal challenges. So that's why the timing could be 2030, 2032, and that's why you hear us saying that. Also from an overall market attractiveness perspective for ENTYVIO, as now ENTYVIO has been selected for IRA negotiation. The pricing expectations for biosimilars will also be impacted by that. Thank you. Christopher David O'Reilly: Thank you, Tony, for your questions. With that, we'd like to bring this call to a close. Thank you all very much for participating in the call today. This concludes our Q3 earnings call. Thank you. Good night. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Unknown Executive: It's time for us to start the third quarter financial results briefing for fiscal year ending March 31, 2026 for LIXIL Corporation. This briefing is streamed live online. The materials for this briefing is on our website for the shareholders and investors. I would like to introduce to you the presenters. Kinya Seto, Director, Representative Executive Officer, President and CEO; Mariko Fujita, Executive Officer, Executive Vice President, CFO; Aya Kawai, Senior Vice President, Leader of the Investor Relations office. I will be serving as the MC. My name is Setoguchi from IR office. I would like to explain to you the proceedings for today. First, Fujita, the CFO, will be providing you the overview of the financial results for the third quarter. That will be followed by a presentation by Mr. Seto to explain to you about the earnings structure of LIXIL. The presentation will be followed by Q&A. We are expecting to end the session at 3:45 p.m. I would like to invite Mr. Fujita, the CFO, to give you the financial results briefing. Mariko Fujita: Hello, everyone. This is Fujita. I would like to give you the overview of the financial results for the third quarter. This is a summary of results for the third quarter. Core earnings is JPY 36.5 billion and EBITDA is JPY 98.4 billion. In Japan, LWTJ and Living have continued to do well with increase in revenue and earnings. The renovation products was robust even though the new housing demand was sluggish. As for LHT, it was on par with the previous year, both for the revenue and earnings. The subsidy eligible products contributed to the sales growth. In Europe, Middle East and India, has seen strong performance. The Americas and China's sluggish business had been covered by the strong performance from Europe, Middle East and India. So there was ForEx losses. And because of that financial cost had increased year-on-year. Just like Q2 the expense consolidated subsidiary decreased year-on-year due to changes in the corporate tax rate in Germany. Next, I would like to talk about the outlook for fiscal year ending 2027. This talks about business environment. Overall, the commodity prices are going up, ForEx as well as the government policies have changed from what we had first expected. The commodity prices had significantly increased. In January, there was a rapid increase. And it is hovering high. In Japan, new housing starts -- remain weak, but the subsidy for the window renovation would continue. As for Europe, we had expected in our road map that in fiscal year ending 2027, the housing market would recover, but the timing of the recovery is being delayed. As for IMEA, it's doing well, and China continues to be sluggish. Those are the outlook for fiscal year ending 2027. Next is performance highlights for the third quarter. Revenue decreased slightly, but core earnings increased year-on-year. Revenue was JPY 1,138.5 billion, core earnings and EBITDA as well as profit have improved. Next is consolidated business results. What I would like to highlight here is a gross profit. It was 1.3 points up year-on-year. Because of this, core earnings ratio had improved by 0.5%. And here is the overview of business results by segment. LWTJ performed well. And -- so the improvement in revenue in Europe and the Middle East has contributed, LHT improved and price optimization and renovation sales contributed enabling the segment to maintain the level from last year. Living, we saw a strong performance of the renovation area. And this is the business results by segment using the former segments, which I will skip. Next is consolidated financial position. And the assets in Europe, this has increase due to currency translation impact. Equity ratio is at 34.4%. Lastly is cash flow status as well as cash balance. And because of the accounts receivables and inventories increasing operating cash flow has decreased year-on-year. However, as for the free cash flow, we have been able to maintain the positive territory. So that completes my report. Thank you very much. Unknown Executive: Thank you, Ms. Fujita. Next, I would like to invite CEO, Mr. Seto, to talk about LIXIL's earnings structure. Mr. Seto, please. Kinya Seto: So we talk -- we have been talking about this to the investors as well as institutional investors, but I would like to give you more detailed information, so to avoid misunderstanding. So moving on to the first slide. Compared to EBITDA, the core earnings as well as the net profit tend to be lower. So that's our structure. However, this is because of large depreciation. In the past, we had used a lot of cash for acquisition. And because of that, our core earnings tends to be smaller because of the depreciation. So the tax expenses increase, it's due to the unoptimal tax management, but we do have cash at hand, and our strength is not shown in those numbers. So going back to Page 1. So in our case, PER, PBR, ROA, EBITDA multiple had not been explained in a coordinated manner. PER, because the profit seems to be low, it tends to be very high at 65x. PBR is 0.8x. On that matter, the -- there are assets which are -- with whose utilization is not high, but the -- it's generating cash. And as for ROA and ROE, the after-tax profit compared to cash, it is evaluated low on an accounting basis, and that has become a huge issue. So in improving these figures, so we would, of course, work to improve the business for the improvement of EBITDA. But at the same time, we -- there are -- we are looking at the assets which are not generating cash, and we will be sorting that out so that we can have improved efficiency in the assets. So the -- so there will be less difference between EBITDA and core earnings. And we will also work on to better manage taxes. This is something that we will be working in the coming 1 to 2 years. It's not just about improvement of EBITDA, but we will make reform so that we can have better core earnings. So EBITDA for cash earning power. I think that we are doing fairly well. This slide shows the comparison with competitors. On the far left is LIXIL followed by TOTO, then Takara, Cleanup, YKK. Compared to those companies, you can tell that EBITDA, the earning power that we have is very high. In the case of TOTO, they have semiconductor products. The -- so we are not able to make apple-to-apple comparison with our competitors, but our EBITDA level is quite high. So in the Masco, Fortune Brands, Geberit, those are the highest earnings companies and their EBITDA is high. But from FY '23 to FY '25, the reason for growth, you need to have some footnote. So Geberit is using Swiss franc and has been appreciated from JPY 140 to JPY 200 and euro is also being appreciated. So there are positive factors for Masco as well. The Fortune Brands, they are working centering around U.S. dollars. So the growth rate compared to the other 2 is lower. However, their profitability rate is very high, 70% gross profit for Geberit and Fortune Brands and Masco, and in the faucet, they are -- that's their main product. So we have a bigger line of product. So our EBITDA level is quite good. So Roca and Villeroy & Boch in 2025, you see a significant increase in the numbers. This is because they have acquired Ideal Standards. So Fortune and Masco, they have been growing because of M&A. So considering that our organic numbers is not bad. So our -- we want the world to understand our core earnings power. So we want to normalize our core earnings and EBITDA. And lastly, where we generate the EBITDA and from our perspective, we've been saying this, we have too much asset. And so we don't have to have too much capital expenditure. And investment was the software element like a brand or intellectual property or R&D-related investments. For those areas, they are essentially expensed. And because of that, they do lower the profit margin directly. But in the end, we are not investing in hardware, but we are investing in software that does linked to generating a large amount of cash in the end. So I'm sure some of you are fully versed in this type of information, so nothing new. But just in case, we wanted to provide this explanation. Thank you. Operator: Thank you, Mr. Seto. We would like to now move on to the Q&A session. [Operator Instructions] First, I would like to ask Fukushima-san from Nomura Securities. Daisuke Fukushima: This is Fukushima. I have 2 questions. My first question, the price strategy in Japan is my first question. As you have said at the onset, the commodity prices are going up. On the other hand, if we look at the competitive environment, YKK had acquired the subsidiary of Panasonic and there is a big company who would be competing against you, under that environment, how would you be pricing your products? How would you be profitable in that environment? Kinya Seto: So can I answer the first question? Operator: Yes, please. Kinya Seto: As you have said, what I am concerned the most about is the aluminum and copper prices, which have risen very rapidly. You may be aware of this, but it is not the increase in the demand. So there has been sluggish supply for aluminum [indiscernible] last year because the power -- electricity prices had gone up, they decided to conduct maintenance for a year. And Century, because of the operational issues, they had shut down and they decided to continue because of the electricity prices and also there is reluctancy from Rio Tinto. And the supply of aluminum to Europe had dwindled and the price increase, the premium had gone up. The -- so because that's the situation. And when the prices had gone up at this level for April, because we had assumed last year's levels, we have to think about whether we would be increasing the price. We have to think strategically and we have to think about the competitive environment. One thing that works in our favor is that we are using scrap to 80%. So there will be a time difference in getting the impact and the merger of YKK and Panasonic subsidiary. The -- it is not an increase in the competition because the lineup is separate and the number of competitors would remain the same. The competitors like YKK, so they were -- they had seen the less profitability when decided -- they decided not to raise the prices, but gotten the share. So for them -- so considering the business environment, I don't think that they would be taking that choice again. Daisuke Fukushima: Thank you very much. So from April, you will not be -- you may not be able to respond to the price increase, but considering the ratio of scrap, you would not be facing a situation where the profitability will be deteriorating rapidly, you would still have some time. Kinya Seto: Well, there will be deterioration in the profitability, but it would not be in the extremes. And also, we would be able to buy time to take new initiatives. Daisuke Fukushima: Understood. My second question, I would like to ask about the U.S. business. So the U.S. Standard, it is posting the ordinary losses and the operational losses and you would be stopping the outsourcing, and you would be making the improvements. But as for the sanitary ware, I think last time you said that you would be increasing the prices to improve the profitability. So I would like to know the progress towards the next term, how do you see the situation of the profit for the U.S. business? Kinya Seto: So having better product mix and better pricing that is being accepted in the market. So I think that the profitability will be improved but the environment is worse than what we had expected, and that's our concern. In terms of the deterioration in the market environment, One thing that concerns us is the ceramics and also the housing distribution is 30% less. And so there is an affordability issue. President Trump had said that he would be making huge announcement in January, but he has not been able to do much so far. So I don't think that there will be easy improvement in the demand unless something happens towards the midterm elections. The market recovery is being delayed than what we had assumed. But we have been taking measures for rationalization. So I think that we would be good for the next term. But for -- but the bathtub business losses would continue, so we would still be in difficulties, but we will be able to improve next year. The competitors for the U.S., like China or the Asian players. Daisuke Fukushima: So if they are not able to sell because of tariffs, are you -- have you been able to improve the share? Kinya Seto: Since November, we had seen increase in the share. So up to October, the inventories that the players had acquired before the tariffs had remained. But from November, we have been able to do take shares, but the demand is not increasing. So it's still sluggish. So thank you very much. Operator: [Operator Instructions] So Miki-san from Citigroup Securities. Masashi Miki: This is Miki from Citigroup Securities. I hope you can hear me. I'd like to ask 2 questions myself. The first question, you talked about the dispersing assets generating cash. But what type of the asset reserve are you thinking of right now? For example, structural reform in Japan. And from 2019, I think you've done something quite significant and you worked on the international after that. But -- so in the meantime, so you had inflation or interest rate increasing, which has caused the business environment to change quite significantly. So do we expect a very large structural reform in Japan domestically over the next year or so? That's my first question. Kinya Seto: So as we have announced recently that we're going to stop. This is a subsidiary for exterior works, and so we will stop the operation of this entity and we announced that this will be embedded into the LIXIL. But your question, it's very sensitive. So anything we haven't announced, we can't talk about, of course, because from our perspective, whether it be Japan, domestically or for international, as I said before, we want to look at those businesses with a very low level of asset efficiency. So we have this course of direction to try to -- we organized -- reorganized those or disposal of them. But even if the core earnings is negative, but we have already acquired, and we have already paid the cash. But on the other hand, the gas distribution is still being done right now. For those, we won't sell unless there are buyers for that. So it's difficult for me to give any further, I suppose, response in regards to your question. I hope you understand. Masashi Miki: Well, then for the second question. You did not adjust your -- the earnings forecast. So whether it be core earnings or the net profit when you look at the progress, and I think you are performing well against the full year plan. So why didn't you not make adjustments? And segment-wise, if there are any changes to the initial -- the forecast? And so JPY 45.5 billion, but the JPY 29.6 billion, there is the slowness in terms of progress with zero buffer. So maybe if you could at least explain about the situation there? Kinya Seto: So what we have not announced and we certainly cannot talk about, that's quite obvious. But for January to March quarter. Basically speaking, there are increasing, as opposed to uncertain elements. And the biggest one and the commodity price increasing to this level in January, this may have some impact on a short-term basis. We need to ascertain that. So that's one point. And subsidy in Japan, and decision has been made to have that being provided. But the next subsidy -- and for this year's, the subsidy starting in April, the details have not been finalized as yet. We have not been able to engage in activities on that at this point in time, not just the commodity pricing now, but whether it be Europe or U.S. or the world is seeing a lot of developments. But for the demand for the new builds, I think there is people are waiting for the new policy to be announced. And so how would that reflect into the fourth quarter numbers. We don't have, I suppose, the conviction on that as yet. And also something that I mentioned before, we need to implement various initiatives, address various things. And so jump into the conclusion, we can't announce what we don't know. That is where we have kind of arrived at. And the numbers right now is good. We -- and probably the numbers until now have been better than we had thought, but fourth quarter, this is going to be a quarter we need to be very careful about, be cautious about and this is as a result of the commodity price, the global situation as we have explained thus far. And also the new housing starts in Japan too. This year, so we expected about 2% decrease, but we saw a 13.7% decrease from April to November. And this is unlikely from the impact of amendment or Building Standards Act abolition article for special provision. So would there be a pent-up demand associated with going forward, would we see further deterioration of the succession from where we are? We don't the science of where we may end up with at this point in time. And also the general construction companies may be announcing this, but the projects are delayed all around the world. As of March, project that we had expected completion, but the Japanese general construction companies are saying that they are likely to be pushed back into April onwards. And the reason for that is lack of the craftsman and in the case of Japan, the facility providers lack capability or capacity, not being able to address the demand and so this is happening in other countries in different ways. So in the case of U.S., immigrant workers cannot go to the site of work, and that has led to the project not being completed, leading to delay in the case of Europe politically and, inability to make decisions. And there were -- there's been a lack of strong majority, have not been able to make decision about policies, which has led to delays in permit leading to the project delays. And so overall, there are projects being delayed. The demand does exist, but the projects are being delayed. This is also a worrying situation for us as well. Operator: The next question is from Goldman Sachs, Okada-san. Sachiko Okada: This is Okada from Goldman Sachs. I have 2 questions for you. As for the European market as well as the Middle East market. It is doing well in the cumulative third quarter, Germany and France, which are the central players in Europe. Overall, the economy is weak, is what I have heard. The growing sales growth is in the positive. But I would like to know the background to it. And France and Germany are sluggish. But would they be giving a negative impact to the overall business? That's my first question. Kinya Seto: As for the market in Europe, we have the same view. The reason why growing has been doing well is because of the high-end products like G4, G5 applied products, which are the color products. So the -- so it is replacing a Nickel-Chromium products. And even though the number of units does not change so much, the ASP is higher. And because of that, we have been able to grow in Europe. So going forward, the situation is mixed. So when we look at the project pipeline, we have a very enhanced pipeline but in Europe, the administration is unstable and the approval is now lagging behind in European countries. In 2026, we had expected that starting from April, there would be a recovery of the economy, but the policies, which were supposed to be in place is not in place yet. So we believe now that the recovery will be towards the second half of the year. Sachiko Okada: You talked about the earnings structure. And you talked about tax management. And with regards to that, you talked about the potential of divesting assets. But is there a need to have negotiation with the competent authorities or with the accounting firms, and the reason why the tax management is not optimal, it's probably because of the acquisitions that you have made in the past. But could you talk a little bit more about that? Kinya Seto: We are working for optimization in this area. We don't need to convince the tax authorities or the accounting firms. But when we had acquired the companies in the past, we did not think thoroughly and we were not able to get to the optimal tax management. So we would like to fix that. And we are not getting any warnings or anything from the tax authorities or the accounting firms at this moment. So how we distribute the product, how we allocate our technology. We need to scrutinize that, we believe that the burden is too high for Japan. So we need to sort that out. But to your question, we do not need to change the formalities that we have in place. But rather it will be about where to place the earnings and where to allocate the technology too. So we need to review those things. And it would take about 1 to 2 years on that. Mariko Fujita: Yes. I would like to make a supplementary comment on that matter. As Mr. Seto mentioned, so where IP is as well as how the distribution system works. So upon the acquisition, we were not able to structure it in an optimal manner. So we would work on to optimize that within our compliance framework and the tax expenses, which go beyond the effective tax levels, we would like to get it to the effective tax levels. Operator: So next question is from SMBC Nikko Securities, Kawashima-san. Hiroki Kawashima: This is Kawashima from Nikko Securities. I would like to ask 2 questions. The first question is in regards to the image for the medium-term performance, and so you shared with us the image for the 2027 and 2028, March and the outlook and the commodity and the market condition, I think you talked about that external environment remains to be tough, but positive impact internal factors, which is going well towards those -- if you could share some information in that regard? Kinya Seto: Well, things that's not going as well as back then. Well, the recovery in Europe the economic condition, this has been slower than what we had expected, but something that has performed better than we had expected that is conversion to the renovation business in Japan. And as I was explaining before, but the Japanese housing starts from April to November and the 8 months, it came down by 13.7% year-on-year, but we were still able to increase the revenue and profit. And the reason why we were able to do that was firstly, and this is something that we always talk about that the renovation business has higher profit margin, but SG&A also ends up being higher. And so that does have impact on profitability. So we were using AI or DX digital transformation, utilizing digital technology. And we have essentially worked on lowering the cost, which has enabled us to improve profit margin, and we've been able to do that in terms of demand cultivation, and we were able to secure an extension of the subsidies on this occasion. So given the backdrop for us how can we have the understanding of our customers in regards to the window renovation. I think we have a better idea as to how we can do this. So despite the poor market condition, we have been able to grow the Japanese business despite the headwind. I think this is a positive. And another positive factor and that's actually balanced against what is good, but China is probably worse than what you had expected, but we were able to see improvement in the middle and near East, which was able to offset that negative in China, which is a pretty good thing. Hiroki Kawashima: The second question, and I want to ask about numbers. In terms of the profitability structure as you have explained, right now, the depreciation is greater than investment and once they balance, then due to decreasing the depreciation and amortization, we expect there to be a profit improvement. But because of the FX impact, we are not seeing the decrease in differentiation and amortization cost. But in terms of the tangible asset, how many years are depreciated over, so that will have impact. But overall how long period can we see the balance between depreciation and investment and how -- do you have any numbers in mind of improvement? And so the depreciation of the acquisition of the tangible assets as reported in the financial statement. I think there is probably JPY 4 billion to JPY 7 billion -- sorry, JPY 6 billion to JPY 7 billion of the gap there. Kinya Seto: Well, it's not easy to respond because of various things. But from our perspective, the -- in terms of tangible fixed asset, what is the biggest factor for reduction and would be factory facilities. And there, from our perspective, and does relate to the previous question. But again, I can't talk about what we haven't announced as yet, but in Japan or in Japan and -- sorry, overseas as well to generate profit with a relatively small asset. That is the course of direction that we're trying to pursue. And so the facilities or the plants we have the possibility of being able to work on that aspect. It's not just the how many years that we have those plans are being depreciated over, but I think there are still a lot of room that we are able to work on to make improvements. But if I start to talk about numbers, I end up talking more specifics so I can't really do so. But we are looking at the greater number than what you have referred to in terms of reduction of depreciation expense. Hiroki Kawashima: So investment and the depreciation, it's not just the cycle there, but you're going to do something that is a little more significant. Is that right? Kinya Seto: Yes. Well, investment itself. So investment was a tangible asset, we are not thinking of doing anything major in that area. So conversely speaking, and by organizing the assets to an extent, we will no longer require maintenance investment for that, that would lead to a reduction in the amount of investment required. And so in that regard, so we already have a structure of being able to generate cash. And so in terms of accounting profit, in order for it to become more visible, I think there are things that we can do. Operator: We would like to move on to the next question from CLSA, Mochizuki-san. Masahiro Mochizuki: I have 2 questions. The first question is related to the outlook for the next fiscal year. I think you have given some tips today, but the business environment is very bad. So if we look just at the net profit, I -- is it okay to understand that the net profit may be in the losses. So I don't know about whether core earnings will be going up or not. But if you are going to conduct structural reform, then there will be costs associated with it. So I thought that you may be in the net losses, so regardless of the numbers. Kinya Seto: So well, we don't want that to happen. So in the past 2 years, we have worked on the areas where it would incur losses first in the past 2 years. So in terms of the structural reform, the area where we would work on, I would have less losses. And also, there are -- there is a possibility that it would generate the profit. So considering the net profit levels now, we cannot go lower than that. So we are not expecting the net profit to be in the negative, and we believe that we can increase the core earnings. But of course, the difficult environment continues. But what I would like you to understand is that this fiscal year, we had in a very severe situation even worse than last fiscal year. But we have been able to post better performance. In terms of next year, we don't believe it would be as difficult as the previous years. Of course, we need to wait and see how the commodity prices would impact us. But this is something that we have already experienced in the past. We would like to continue to work on things in a steady manner. Masahiro Mochizuki: My second question... Operator: Sorry, Kawai-san from IR has supplementary comment. Aya Kawai: So this year, there has -- a JPY 12 billion has been decreased from the tax system change, but this is one time. So it would not happen next year. So please understand that this JPY 12 billion is a onetime thing, which occurred this year. Masahiro Mochizuki: JPY 12 billion less tax. Aya Kawai: Right, that impacted net profit. But we would not have that kind of tax reduction next fiscal year. So please compare it to make the comparison without that JPY 12 billion. But we will not be decreasing the net profit. That's what we are aiming for. Masahiro Mochizuki: So the tax cost, onetime positive impact would not be there next year, but you want us to expect that you would work hard to improve your performance? Aya Kawai: That's correct. Masahiro Mochizuki: My second question is related to ROE. So Seto-san, you have said that we should look at EBITDA in terms of your earnings power? And the cost is different region by region under EBITDA, but the -- a lot of shareholders are focusing on ROA. And I think regrettably, that your level of ROA is still low. It -- so for the coming several years, I believe that it would be difficult to improve the ROE, considering the capital cost. Do you think you would be able to improve it? Kinya Seto: Of course, we believe that we can improve it. We would work on to reduce the depreciation and we will improve the tax management so that the net profit will be improved and thus better ROE. And also for the denominator, if we are able to sort out properly, we would be able to get better and ROE will be improved. But compared to capital cost, there may be some difficulties. So there are cash flows in the past, and how we view it is the issue here. For example, we had acquired something at JPY 10 billion, but the -- and the cash outflow is JPY 20 billion to JPY 30 billion. But the past cash outflow should -- it's a past cash flow. But if it's generating JPY 20 billion to JPY 30 million cash, that would be -- that's a good thing for the shareholders. And if it's in the negative like Permasteelisa, we should be divesting it right away. But even if it's inefficient, you -- it may be generating cash. And if it's hard to sell, we -- it may be better to keep it. So that's why I have been saying that please look at EBITDA. If we are to improve ROE, one way is to sell everything, which are inefficient, but that would not be at all positive for the shareholders. So of course, capital cost is very important to us, but capital costs should not be looked at just with snapshot. And so sometimes, we need to consider it as a sunk cost. So we should avoid the -- putting too much cost into the sunk cost. But Mochizuki-san, but I don't want to keep my company hovering low. And if it's optimal, we would be selling the assets where we can. So please monitor us. Masahiro Mochizuki: So we are supporting you, and I will do my best to write good reports. Operator: So next question is from Morgan Stanley MUFJ Securities, Yagi-san. Ryou Yagi: Thank you for the explanation. This is Yagi from Morgan Stanley MUFJ Securities. I have 2 questions. First question is regards to American Standard. So for the American Standard, if we only look at the third quarter, then the metal loss has deteriorated year-on-year. Now this is due to demand related reason only? Or is there other factors that has led to that result? And demand and forecast remains to be quite tough. But for next fiscal year to -- I think you expect a turnaround to generating profit, but based on the forecast right now, the timing of this, is it likely to be later than what you had initially considered. So please explain your thinking in regards to American Standard. Kinya Seto: As for the third quarter, what you said is right. Demand was quite significant. But another factor is that ourselves in the second quarter, we introduced a new system and the installation of the system did not go as well as hoped. And so there were delay in shipment to the customer. So that is what we have experienced in the second quarter. And so as a consequence, some of the orders were canceled in the third quarter. So we did have that kind of special reason. But the third quarter overall was not strong, mainly because of demand factors. And for the third quarter and the fourth quarter, home repair, the rose of Ferguson, they has downgraded their forecast more than we had expected. And so the demand is poor, that is without a fact -- without a question of fact. And that may have impact on turnaround next year. And so the fact that demand is weak. So we are implementing additional measures with that in mind, and that is what we are doing to reduce cost additionally. And so we don't feel that there is a need for us to change our position that we're going to achieve a turnaround next year. Ryou Yagi: If possible, anything you can mention in terms of measures to reduce cost? Kinya Seto: Well, sorry, I can't talk about the initiatives in that area. Ryou Yagi: Okay. My second question is in regards to your thinking about domestic business, so the new starts are quite poor right now, but the remodeling is quite good, but I can't really expect a significant increase in revenue. But in terms of the cost pass on, you have explained about this, but if this is delayed, then the impact of the cost increase, how can you offset that to achieve increase in profit going forward. So could you explain the factors to enable profit increase next fiscal year for Japan domestically? Kinya Seto: First, in regards to commodity pricing and just to make sure, aluminum and copper accounts for most largest portion, aluminum domestic, copper is more for international business. For international business, relatively speaking, we have G4, the product lineup, which is more premier and G3 is upper mass. This is also the main area. So it's easier to pass on cost. But for our medium product in Japan domestically on the other hand, so it's not that easy to pass on our cost. But our competitors, they didn't actually increase the price when a situation like this occurred, and they went after market share. But in the end, they did not really generate good business performance. So in that regard, from the number gains, and I think they will respond to that the next time. So that is likely to see greater progress in terms of the cost pass on. But for April, we have prepared until December to see the price increase. And so we probably have to do something additional to address that. Now in that regard, what can we do additionally? Well, what was successful in the past is for now, we have not been able to fully use our subsidy a couple of years ago. But last year, in the second half of the year, we were able to utilize the subsidy at quite a high ratio. So how can we consume a subsidy. We now know how to do that. So we should be able to make a good start post April with a new subsidy being provided. And we have this strength of the digital and AI progress. And so we still are able to generate profit even if we go to a smaller project, I don't think we have advantage of others in that regard. Operator: The next question from Jefferies, Fukuhara-san. Sho Fukuhara: This is Fukuhara from Jefferies. I have 2 questions. The first question. The raw material prices that you have mentioned, the copper and aluminum. Towards the end of the slides, there was a chart of the evolution of the pricing. And you also have written the assumption for those prices. So in the recent days, there has been rapid increase in the copper and aluminum. Could you explain about how much impact that there would be in terms of sensitivity of the price fluctuation in those raw materials. And in terms of the rapid increase of those raw materials, I would like to think that it would not be impacting the fourth quarter figures, but what's the situation? So please talk about sensitivity. Aya Kawai: Fukuhara-san, thank you so much. This is Kawai from IR office. And in terms of the sensitivity, we do not disclose that. So the -- and we do not disclose the amount of the procurement. So I would like to talk about that when you come for the IR meeting. Kinya Seto: So in terms of the fourth quarter impact, so the increase in the pricing in the third quarter will be impacting in the fourth quarter, and the price increase in fourth quarter will be impacting the first quarter. So when we look at the whole year, the project delays would be impacting the sales and the commodity prices, then will have a full effect in terms of the impact. So in terms of how much, well, we are calculating right now because this is ongoing in January. But what would be most beneficial for us is to increase the ratio of scrap. The scrap ratio at our company, the usage is a lot higher. So for aluminum, 80% is scrap. We had tried increasing the ratio, and we have experimented the 90% aluminum scrap ratio, and we have succeeded in that. So by using the scrap, we would be able to delay the impact of the price increase. So that would be a competitive edge for us. So under the current environment, what we don't know is the consumers' behavior, whether they would place an order before the price increase? Or would there be impact, more impact from the delay in projects. So there has been a rapid increase in prices of raw materials. So we have not decided the next step yet. That's my frank response to your question. Sho Fukuhara: Understood. My next question. So I think there are a lot of things that you still cannot say about the fourth quarter. But at the end of April, you have given us the outlook for next fiscal year in March. And for core earnings, you have eyed on JPY 65 billion, and you have not gotten to that level yet. So this JPY 65 billion in core earnings for the next fiscal year. To me, it seems that it's difficult to accomplish, but how close would you be able to get to the JPY 65 billion? Kinya Seto: I would not be able to provide an answer at this moment in time. But the environment surrounding us is changing and the delay in recovery of the European market is hurting us and also in the short term, the commodity price hike. And also, we did not envision that the new construction starts would be declined so much. And also now we have clarity to how we would be using the subsidy and also how we can reduce the cost in the renovation business is something that's more clear to us. And also in the mid- to nearest East, we are a forerunner there, and we are doing better than we had first expected in that market. So we would like to reflect that into the next budget. I am not able to talk about the specific figures because it would be misleading. Operator: So we have responded to all of the questions that we have been asked thus far. It seems that there are no further questions. So with this, I would like to conclude the Q&A part. So with that, we want to conclude the third quarter financial results for the fiscal year ended March 31, 2026, the analyst and investor explanation meeting. So thank you very much for your participation. The meeting is concluded. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good morning or good afternoon all. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the SoFi Technologies Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions]. With that, you may begin your conference. Unknown Executive: Thank you, and good morning. Welcome to SoFi's Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining me today to talk about our results and recent events are Anthony Noto, CEO; and Chris Lapointe, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. Unless otherwise stated, we'll be referring to adjusted results for the fourth quarter and full year 2025 versus the fourth quarter and full year 2024. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our competitive advantage and strategy, macroeconomic conditions and outlook, future products and services and future business and financial performance. Our GAAP consolidated income statement and all reconciliations can be found in today's earnings release and the subsequent 10-K filing, which will be made available next month. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and our subsequent filings made with the SEC, including our upcoming Form 10-K. Any forward-looking statements that we may make on this call are based on assumptions as of today. We undertake no obligation to update these statements as a result of new information or future events. And now, I'd like to turn the call over to Anthony. Anthony Noto: Thank you, and good morning, everyone. 2025 was a tremendous year on all fronts. Our member focus drove an unprecedented level of innovation across our business that led to the strongest financial performance in the history of our company. As we begin 2026, we're positioned for another year of unprecedented results, and I could not be more excited. We come into the year with a differentiated one-stop shop model with a full suite of products that allow members to borrow, save, spend, invest and protect better. A demonstrated track record of driving durable growth through continuous innovation resulted in compound annual growth of nearly 50% from $240 million in 2018 to $3.6 billion in 2025. A scaled member base of 13.7 million members, more than 20x larger than the 650,000 members we had in 2018 and our highest brand awareness ever at nearly 10% versus roughly 2% in 2018. Despite the unprecedented growth, we still have massive addressable markets across our existing businesses and huge opportunities for growth in newer areas like crypto, AI and business banking. And finally, we have a fortress balance sheet, which we further strengthened through $3.2 billion in new capital, increasing our tangible book value by $2 per share to $7 per share, giving us a broad range of optionality. This gives me great confidence that we will continue to drive durable compounding growth for years to come, resulting in superior financial returns. I will discuss some of what we've planned for the year ahead in a moment, but first, let me begin with our key results for the fourth quarter. Starting with the drivers of our durable growth. We added a record 1 million new members in Q4, increasing total members by 35% year-over-year to 13.7 million SoFi members. This was our first time adding over 1 million members in a single quarter. We also added a record 1.6 million new products in Q4, increasing total products by 37% year-over-year. We now have over 20 million products. Cross-buy continues at an exceptional pace with 40% of new products opened by existing SoFi members. Over the past year, our cross-buy rate has increased by 7 percentage points. This clearly demonstrates the effectiveness of our one-stop shop strategy and our ability to build deeper, multiproduct relationships with members. And as before, we fully leverage new technologies like artificial intelligence. Our strong member and product growth powered our revenue growth in the fourth quarter. Adjusted net revenue was a record at over $1 billion, up 37% year-over-year, marking our first $1 billion quarter. Together, financial services in our technology platform generated revenue of $579 million, an increase of 61% year-over-year and representing 57% of total revenue. In our Lending segment, adjusted net revenue grew 15% year-over-year to $486 million. This was driven by strong originations in this segment of $6.8 billion, a 13% increase from the prior year. Combined with the very strong loan platform business originations of $3.7 billion, total originations reached a record of $10.5 billion for the fourth quarter. This is our first quarter originating over $10 billion in loans, demonstrating our ability to originate high-quality loans at scale. In fact, through all of 2025, we originated over $36 billion of loans. I am also proud to report that total fee-based revenue across our business was a quarterly record at $443 million, up more than 50% from the prior year, driven by a strong performance from our loan platform business, referral fees, interchange revenue and brokerage fee revenue. On an annualized basis, we are now generating nearly $1.8 billion of fee-based revenue, up from less than $1.2 billion in the fourth quarter of 2024. This reflects our delivery diversification towards more capital-light revenue streams. In addition to delivering durable growth, we delivered strong returns and profitability. In the fourth quarter, adjusted EBITDA was a record at $318 million, up 60% year-over-year. Our adjusted EBITDA margin for the quarter was 31%. This is above our original goal of long-term margins of 30% set when we went public. Our incremental EBITDA margin was 44% as we continue to balance reinvesting in the business to drive long-term growth and profitability. Net income in the quarter was $174 million at a margin of 17%. Earnings per share were $0.13. Finally, our tangible book value ended the year at $8.9 billion. In 2025, we grew tangible book value by over $4 billion and $2.54 per share. Our diversified business is uniquely built to deliver a winning combination of growth and returns. In the fourth quarter, we achieved a Rule of 40 score of 68%, once again demonstrating the strength of our model and our solid execution. The consistency with which we've exceeded the Rule of 40 continues to put us in [indiscernible] among fintechs and technology companies more broadly. Despite these exceptionally strong results, I know that we are just getting started. We are still just scratching the surface of the opportunity that exists across each of our existing products and the newer areas like crypto. Given these dynamics, I've never been more optimistic about our prospects than I am today. This is why we will continue to invest heavily to make our existing products even better by providing the best speed selection experience to build new products to help our members get their money right and to further strengthen our trusted brand name. Our investments will power a durable compounding growth and drive stronger returns as we continue to scale. Let me now spend a moment discussing our brand-building efforts, which are key to driving new members to SoFi, feeding our productivity loop and growth. In 2025, we significantly increased our brand strength, and stature through our first ever music partnerships, including becoming the presenting partner of the CMA Fest and partnering with Country Music Star, Kelsea Ballerini and by expanding our sports partnerships. More recently, we signed [indiscernible] NFL MVP, Josh Allen, to team SoFi. Josh has been instrumental in showcasing the most valuable product in financial services in SoFi Plus. This partnership included ads across some of the most watched NFL game of the season and has continued through the existing postseason playoffs. So far, this has been one of our most successful campaigns ever, more than doubling the effectiveness of our advertising in the targeted market. This year, we also kicked off season 2 of TGL presented by SoFi with an exciting plan from the biggest names in Dow. So far, the season is off to a great start, building on the momentum from last year with viewing guardians up 22% versus a year ago in the first 5 matches. And later this year, the World Cup will be coming to SoFi Stadium in Los Angeles, allowing fans worldwide to get a glimpse of the nation's most advanced stadium and the most ambitious stage in sports and entertainment. Our marketing efforts continue to have a strong effect driving unaided brand awareness to an all-time high of 9.6% during the quarter. That's up 250 basis points from the fourth quarter of 2024, a 33% improvement. Turning now to our product innovation across our business. At SoFi, we are one team united under a common purpose of helping people achieve financial independence to realize their ambitions. We are passionate about meeting our members' needs driving us to work harder and innovate more rapidly to bring them the best products and services in the market. We call this the SoFi way. Guided by the SoFi way with a differentiated business model and capabilities, we are uniquely positioned to benefit from both the crypto and AI technology super cycles taking place. Only SoFi has the strength and stability that comes with being a national bank, a tech-driven culture with a track record of innovating in the financial services industry and a large and growing member base that embraces innovation. A full set of products that allow us to leverage crypto and blockchain technology in a number of innovative ways and a technology platform that allows us to innovate more rapidly and serve us as a channel to support business clients. Since March, when the OCC made crypto permissible for national banks, we've moved with urgency to bring new products to our members. In October, we enhanced our unprecedented money movement offering with the launch of SoFi Pay, our first payment product that leverages blockchain technology to provide fast, seamless, low cost and safe international payments. We've already expanded SoFi Pay to include over 30 countries including Mexico, India, the Philippines, Brazil and much of Europe. SoFi Pay is available to all members right in their integrated SoFi App, making money movement easier than ever. In November, we announced SoFi Crypto, once again giving members the ability to invest in dozens of tokens directly in our SoFi app. As the first nationally chartered bank to launch crypto trading for consumers, our members can instantly buy crypto currencies from their FDIC insured deposit account, which is a very meaningful difference. At other providers, customers funds uninsured earning no interest as they wait to fund digital asset purchases. At SoFi, those funds sit in a SoFi money account protected with insurance and earning up to 4% interest. In December, we took an even bigger step forward through to the launch of our own stablecoin, SoFi [indiscernible] this launch made us the first national bank to issue a stable coin on public permissionless blockchain. Once again, this is a meaningful step forward in differentiation versus the landscape. For every SoFi USD outstanding, we will have a dollar of cash into our Fed master account, which means there is no credit, liquidity or duration risk, and we will share economics with partners for their marketing and distribution services. SoFi USD will be a game changer for our business as it enables us to be an infrastructure provider for banks, fintechs and enterprise platforms, positioning us at the center of the crypto ecosystem. As you can see, we're moving quickly, but we have a lot more to do to accomplish our ambitious plans over the near and medium-term horizons. This year, we will leverage SoFi USD to power SoFi Pay and we'll continue to add more contracts to the offering. Over the medium term, we plan to offer a SoFi Pay experience to people outside the United States, allowing them to receive, send, hold and spend money anywhere, all supported by SoFi USD. This initiative could serve as a launching point to build our brand in a more global way. In 2026 and beyond, we will look to offer additional crypto products and services, including secured lending by crypto currencies, which will give members better rates on their loans, institutional trading and correspondent payments and settlement via stable coins. For members that hold SoFi USD, we will look for innovative ways to provide them with benefits such as interest or other perks. Beyond our member-facing initiatives, we are hard at work building our business banking offering, which we will begin to launch in 2026. Our ambition is to be the bank for businesses and other financial institutions that want to transact in both [indiscernible] and cryptocurrencies filling a critical gap that has existed in the market. Leveraging our tech platform capabilities and SoFi USD, over time, we will build an offering that includes institutional and crypto trading, making us the first national licensed bank to offer this service, stable coin as a service, cryptocard issuing, digital asset custody and infrastructure services, and the ability to interchange VAT and digital assets in real time through our SoFi exchange network as well as the ability to settle transactions 24/7 on a virtual ledger. We have brought on significant expertise from the crypto and banking industries, and I couldn't be more excited to see this business take shape in the coming years. Turning now to SoFi Smart Card, which we launched in the fourth quarter. This new all-in-one card and account allows members to earn significant rewards and an industry-leading API while also growing their credit score. Here's how it works. Members can use their SoFi Smart Card to make purchases just like a typical debit or credit card. Purchase amounts are automatically set aside from the deposit in the SoFi account in real time. The balance can be paid in full each month via funds on hand or an alternative bank account or source of funds. And all the while, members are an unlimited 5% cash back rewards at grocery stores. We built and launched Smart Card in just 4.5 months with the help of our tech platform, a feat that would not have been possible had we relied on another party. This demonstrates once again how our tech platform gives us a greater ability to customize and launch financial services products faster than competition. Beyond helping drive innovation across SoFi's financial services products, we are excited to see renewed energy around innovation within financial services more broadly. This started to take shape in 2025 with big consumer brands like Southwest Airlines and United Airlines come with us to help them launch new programs that drive greater loyalty and engagement from their customers. Now we are seeing strong interest from an even wider range of companies, including those based internationally, who see the highly supportive business environment in the U.S., particularly for crypto and are interested in launching new products here. Our tech platform business is in a prime position to support these enterprise clients. Turning to invest. 2025 was a blockbuster year for SoFi Invest in which we significantly expanded our offering to give members the best selection, including investments that have been traditionally reserved for the ultra wealthy. We give members access to private companies, including SpaceX and Epic Games, access to invest in alternative investments through private market funds managed by Cashmere, Fundrise and Liberty Street Advisors, access to invest in IPOs, including [indiscernible], Gemini, Figma and StubHub. We launched Level 1 options in our own SoFi agentic AI ETF. We made rolling over 401(k)s easier and more efficient, and we continue to make our user interface even more intuitive and engaging. This expanded offering helped drive a 2.2x year-over-year increase in the brokerage revenue, helping drive invest closer to full profitability, which we expect to achieve this year. Turning now to our Lending segment, which continues to drive strong revenues and allows us to support members at key points in their lives. We show up with a simple but differentiated message. We are here to help you get your money right. Our personal loan product does just that. With a SoFi personal loan, members can refinance absurdly expensive credit card debt held at other institutions so they can stop paying for other people's rewards and focused on their own financial well-being. For example, if a member is able to refinance $40,000 of debt on which they are paying 24% interest with a SoFi personal loan that has an interest rate that's 10 points lower, they can reduce their monthly payment by nearly $200 moving closer to becoming debt-free. If we would translate that example across the more than 0.5 million loans that were originated in 2025, you can see that we're having a massive impact on our members' lives. SoFi is the preeminent company offering personal loans originating roughly 15% of total U.S. prime volume. However, the opportunity remains massive as the real addressable market is the nearly $1 trillion of prime revolving credit card debt, just sitting there, waiting to be refinanced at up to half the rate. And that $1 trillion opportunity is before even considering the additional debt that is outside of our traditional credit box, but could be refinanced through our loan platform business. Our student loans are also designed to help our members get their money rate. Here, too, we have become the preeminent company for refinancing student debt, having a massive impact on our members' lives. We estimate that we will save our members over $400 million in interest expense just under student loans we refinanced in 2025. Despite our strong market share in the student loan refinance market, we see continued opportunity for growth. We estimate the total market opportunity to be around $400 million, which would increase by 25% if rates were to drop 50 basis points. In addition to refinance, we've launched new private in-school student loans options to help people finance their education along the gaps left by the federal graduate programs. These include medical, veterinary, dental and stem loans with more coming soon. Turning now to home loans where we had our best year of originations and where we are primed for an acceleration in growth when rates decline. In 2025, we originated $3.4 billion of total home loans, surpassing our prior record set in 2021 when the real estate market was added tight. In fact, in the fourth quarter, we originated home loans at an annualized pace of $4.5 billion, nearly 2x the pace of the prior year, and the opportunity for continued growth is massive. Within our own member base, about 90% of those that have home loans have them with other institutions. As rates come down and many of these members look to refinance, we'll be in a prime position to win that business. Additionally, as others within our 13.7 million strong member base look to purchase a home for the first time, we believe they will come to SoFi as a trusted partner. As you can see, 2025 was an incredible year by any measure, our best year ever. We leaned into what sets us apart, our unique one-stop shop strategy, our ability to innovate and our relentless focus on helping members get their money rate. Heading into 2026, we see a tremendous opportunity, and we continue to be energized by our values in the SoFi way to capture it. With that, let me now turn the call over to Chris to discuss our financial results for Q4 and 2025. Chris Lapointe: Thank you, Anthony. 2025 was an exceptional year. Adjusted net revenue for the year was a record at $3.6 billion, up 38% year-over-year. Adjusted EBITDA was also a record at $1.1 billion, up 58% year-over-year at a margin of 29%. This is our first time surpassing $1 billion of EBITDA. Net income was $481 million at a margin of 13%. Net income was up 2.1x, excluding onetime items in the prior year, and earnings per share was $0.39. We finished the year strong with a great fourth quarter. In Q4, adjusted net revenue grew 37% year-over-year to a record $1.013 billion. Adjusted EBITDA was also a record at $318 million and a margin of 31%. Net income was $174 million at a margin of 17% and earnings per share was $0.13. This was our ninth consecutive profitable quarter. An important driver of our growth was the increased contribution from capital-light, non-lending and fee-based revenue sources. Our financial services and tech platform businesses generated $579 million of revenue, up 61% year-over-year, and we also generated record fee-based revenue across all segments of $443 million, up 53% year-over-year. Turning now to our segment performance, starting with Financial Services. Financial Services generated record revenue of over $1.5 billion in 2025, up 88% from the prior year. For the fourth quarter, net revenue was $457 million, up 78% year-over-year. Contribution profit was $231 million, up 2x from last year. And contribution margin was 51%, up from 45% last year. Net interest income for this segment was $208 million, up 30% year-over-year, which was primarily driven by growth in member deposits. Noninterest income grew 2.6x to $249 million for the quarter, which equates to nearly $1 billion in high-quality fee-based income on an annualized basis. Importantly, improved monetization continues its strong contribution to revenue growth. Annualized financial services revenue per product was $104 in the fourth quarter. That's up from $81 in the fourth quarter of 2024, a year-over-year increase of 29%, and we see continued upside as newer products mature. The successful expansion of our loan platform business was one of our greatest achievements in 2025, further diversifying our revenue and making our growth more durable. We've built this business into a powerhouse. In Q4, our loan platform business generated $194 million in adjusted net revenue, an annualized pace of $775 million, which is nearly 3x higher than the same period last year. And as we head into 2026, we continue to see strong demand from both existing and new partners. Beyond our loan platform business revenue, we continue to see healthy growth in interchange, up 66% year-over-year, driven by close to $22 billion in total annualized spend in the quarter across money and credit card. Turning to our tech platform, which generated record revenue of over $450 million in 2025. For the fourth quarter, the Tech Platform business delivered net revenue of $122 million, up 19% year-over-year. Contribution profit was $48 million and a contribution margin of 39%. This includes the remaining revenue earned from a large client who fully transitioned off our platform prior to year-end. Turning to our Lending segment. Lending generated record adjusted net revenue of over $1.8 billion in 2025, up 24% from the prior year. For the fourth quarter, adjusted net revenue was $486 million, up 15% from the same period last year. Contribution profit was $272 million with a 54% contribution margin. These strong results were primarily driven by growth in net interest income, which increased 29% year-over-year to $445 million. During the quarter, we had record total loan originations of $10.5 billion, up 46% year-over-year. Personal loan originations were a record at $7.5 billion, of which $3.7 billion was originated on behalf of third parties through [ LTV ]. In total, personal loan originations were up 43% year-over-year. Student loan originations were $1.9 billion, up 38% from the same period last year. Home loan originations were a record $1.1 billion, a year-over-year increase of nearly 2x. Capital markets activity was very strong in the fourth quarter. We sold and transferred through our loan platform business, $4.5 billion of personal and home loans. In terms of personal loans, we closed $100 million of sales in whole loan form at a blended execution of 106.5%. All deals had similar structures to other recent personal loan sales with cash proceeds at or near par and the majority of the premium consisting of contractual servicing fees that are capitalized. These sales included a small loss share provision that is above our base assumption of losses and immaterial relative to the exposure we would have had otherwise had if we held on to the loans. Additionally, we sold $90 million of late-stage delinquent personal loans. By selling these loans, we're able to generate positive incremental value over time versus selling after they charge off, both from our improved recovery capabilities and by maintaining servicing. In terms of home loan sales, we closed $692 million at a blended execution of 102.3%. In addition to our loan sales, we executed a $463 million securitization of loans originated through the loan platform business. This channel provides our partners with meaningful liquidity to support their ongoing investment in the loan platform business. The transaction priced at an industry-leading cost of funds level with a weighted average spread of 101 basis points. Turning to credit performance. Our credit remains strong, performing in line with expectations and driving attractive returns across all loan types. Our personal loan borrowers have a weighted average income of $158,000 and a weighted average FICO score of 746, while our student loan borrowers have a weighted average income of $149,000 with a weighted average FICO score of 765. For personal loans, the annualized charge-off rate was 280 basis points, up 20 basis points from the third quarter. I would note that while this is up from last quarter, it is down slightly from the second quarter and down over 50 basis points from a year ago. In fact, this is our second best quarter since 2022. Importantly, the increase in our balance sheet charge-off rate is driven by mix rather than credit deterioration. In Q4, as a result of increased LTV activity, we retained fewer new loans on the balance sheet. This naturally increases the average age or seasoning of our personal loan portfolio held on the balance sheet. Adjusting for this seasoning, underlying credit trends actually improved quarter-over-quarter. And we not sold any late-stage delinquencies, we estimate that including recoveries between 90 and 120 days delinquent, we would have had an all-in annualized net charge-off rate for personal loans of approximately 4.4% versus 4.2% last quarter. The on-balance sheet 90-day delinquency rate was 52 basis points, up 9 basis points from last quarter, also driven by portfolio seasoning. I would note that the delinquency rate is down year-over-year. For student loans, the annualized charge-off rate was 76 basis points, up slightly from 69 basis points in the prior quarter, driven primarily by seasonality as well as the impact of a student loan repurchase that began in Q1 2025 and concluded during the fourth quarter. The on-balance sheet, 90-day delinquency rate was 14 basis points, consistent with the prior quarter. The data continues to support our 7% to 8% net cumulative loss assumption for personal loans in line with our underwriting tolerance, although we continue to trend below these levels. Our recent vintages originating from Q4 2022 to Q1 2025 have net cumulative losses of 4.55% with 37% unpaid principal balance remaining. This is well below the 6.27% observed at the same point in time for the 2017 vintage, the last vintage that approached our 7% to 8% tolerance. The gap between the newer cohort curve and the 2017 cohort curve widened by 8 basis points during the fourth quarter. In fact, this gap has widened in each of the past 6 quarters since we began measurement. Additionally, looking at our Q1 2020 through Q3 2025 originations, 60% of principal has already been paid down with 6.8% in net cumulative losses. Therefore, the life of loan losses on its entire cohort of loans to reach 8%, the charge-off rate on the remaining 40% of unpaid principal would need to be approximately 10%. This will be well above past levels at similar points of seasoning, further underscoring our confidence in achieving loss rates below our 8% tolerance. Turning to our fair value marks and key assumptions. As a reminder, we've marked our loans at fair value each quarter, which considers a number of factors, including the weighted average coupon, the constant default rate, the conditional prepayment rate and the discount rate comprised of benchmark rates and spreads. At the end of the fourth quarter, our personal loans were marked at 105.7%, down 8 basis points from the prior quarter. This included an increase in the annual default rate, which was primarily driven by loan vintage seasoning, not changes to the individual loan loss assumptions, partially offset by a lower benchmark rate. At the end of the fourth quarter, our student loans were marked at 105.6%, down 8 basis points from the prior quarter, driven by minor changes in the average coupon and annual default rate. Turning to our balance sheet. In December, we raised $1.5 billion of new capital in the form of common equity. This was our second opportunistic raise of 2025, giving us great flexibility to pursue organic and inorganic growth opportunities. It also allowed us to further improve our funding base. Over the past 2 quarters, we fully paid down our warehouse lines, reducing our funding costs by an estimated $110 million on an annualized basis, fully mitigating the bottom line impact of the additional shares. In the fourth quarter, including the $1.5 billion of new capital, total assets grew by $5.4 billion. This was driven by $3.1 billion of loan growth and approximately $1.7 billion of growth in cash, cash equivalents and investment securities. Total company-wide cash at quarter end was $5.4 billion. On the liability side, total deposits grew by $4.6 billion to $37.5 billion, primarily driven by growth in member deposits. Our net interest margin was 5.72% for the quarter, down 12 basis points sequentially. This included a 30 basis point decrease in average asset yields as we saw a modest mix shift from personal loans to home and student loans, partially offset by a 15 basis point decrease in cost of funds. We continue to expect a healthy net interest margin above 5% for the foreseeable future. In terms of our regulatory capital ratios, we are very well capitalized. Our total capital ratio of 22.9% at quarter end is well above the regulatory minimum of 10.5% as well as our additional internal stress buffer. Tangible book value grew $4 billion year-over-year to $8.9 billion, including the benefit from the new capital raised. Intangible book value per share at quarter end is $7.01, up from $4.47 a year ago, a 57% increase. Let me finish by providing our outlook for 2026 in the medium term, starting with the macro assumptions that underpin our financial guide. In line with market expectations, our 2026 assumptions are as follows: an interest rate outlook consistent with the Fed funds futures and 2 rate cuts to get us to a 3.0% to 3.25% exit rate in 2026. Real GDP growth of approximately 2.5% and an unemployment rate in the 4.5% to 5% range. Now for our specific guidance. For the full year 2026, we expect to increase total members by at least 30% year-over-year. We expect adjusted net revenue of approximately $4.655 billion, which equates to year-over-year growth of approximately 30%. We expect adjusted EBITDA of approximately $1.6 billion, which equates to an EBITDA margin of approximately 34%. We expect adjusted net income to be approximately $825 million, which equates to a margin of approximately 18%. We expect adjusted EPS to be approximately $0.60 per share. The guidance assumes a mid-teens tax rate, which we currently believe to be our effective tax rate in 2026. For the first quarter of 2026, we expect to deliver adjusted net revenue of approximately $1.04 billion, which is a 35% year-over-year increase compared to 33% in the same period last year. Adjusted EBITDA of approximately $300 million, which equates to a margin of 29% versus 27% in the same period last year. Adjusted net income of approximately $160 million, which equates to a margin of 15% versus 9% in the same period last year. And adjusted EPS of approximately $0.12, 2x the $0.06 delivered in the same period last year. It's important to note that each year, we have seasonal payroll taxes during the first 2 quarters of the year, and we plan to accelerate marketing expenses in the first half of 2026 relative to Q4 2025. Overall, 2025 has been a remarkable year for SoFi. We are proud of the strong results we delivered and are excited to build on this momentum in the year ahead. Looking beyond 2026, given our differentiated model, the strength of our balance sheet and the tremendous opportunities that exist across our business and in newer areas, we expect to deliver compounded annual adjusted net revenue growth of at least 30% from 2025 to 2028. Additionally, we expect to deliver compounded annual adjusted earnings per share growth of 38% to 42% from 2025 to 2028. Let's now begin the Q&A. Operator: [Operator Instructions] First question today comes from John Hecht at Jefferies. John Hecht: Congratulations on the good momentum. I guess first -- I guess my question is, you guys gave some good consolidated guidance. Maybe can you break some of those details out at the segment level? Unknown Executive: Sure. I can take that one, John. So overall, like we've said in the past, given that we're right in the middle of 2 super cycles with blockchain and crypto and AI, and the fact that we have significant capital cushion in any scenario that we could have possibly imagined and makes us extremely excited about the outlook for our business, both in the immediate and the longer term. In terms of our 2026 outlook, we expect continued very strong revenue growth of roughly 30% year-over-year. As it relates to the segments for Financial Services, we expect revenue growth of 40% or more. For Lending, we expect revenue to grow approximately 23% year-over-year. And then for Tech Platform normalized for the transition of a large client, we expect revenue growth of approximately 20%. And then for our Corporate segment, revenue should generally be in line with what we saw in 2025 on a dollar basis. As we look forward out to the medium term, we're expecting at least 30% annual revenue growth compounded between 2025 and 2028, and 38% to 42% annual compounded EPS growth between 2025 and 2028. From a segment perspective, we expect to see continued momentum across all segments. And given the investments that we've made to date, we see the opportunity to accelerate growth in 2027 and '28 across a number of products that are just starting to scale, including our crypto business, our brokerage business, home loans and student loans given the rate environment. So overall, really optimistic about the outlook, given everything in head of us. Operator: The next question comes from Andrew Jeffrey at William Blair. Andrew Jeffrey: Great to see the momentum in the business. Anthony, you've talked about driving awareness. And I think you mentioned today on the call, the opportunity for refinancing at $1 trillion. It looks like perhaps that messaging hit an inflection point this quarter, and you mentioned some of the celebrity partnerships. Can you elaborate a little bit on the acceleration in KPI growth, whether it's sustainable, whether you think this is sort of the tipping point in which consumers say, "Hey, look, it's just simply [indiscernible] we have better answer than traditional banks? Can we sort of declare that we've reached that point in your business model? Anthony Noto: Thank you for the question, Andrew. We're just -- we are at 9.6% unaided brand awareness. We would love our unaided brand awareness to continue to grow to get into the mid-20s, which would -- when we get there, likely put as a top 10 financial institution. When I joined, our [indiscernible] brand awareness was around 2%. And for those who aren't familiar with that measure, our needed brand awareness is asked in the following way. When you're thinking about a financial services product, please name 3 companies you would consider. So it doesn't ask about student loans. It doesn't ask about personal loans or any of the other products that we have, it just ask that generic question. The ability to move from 2% to 9.6% is really, really challenging in the time period that we have. The largest banks in our country, the most well-known banks in our country, the most trusted banks in our country, they've been doing it for centuries and some of them are less than centuries, but a very, very long time. So our team has really crushed it in leveraging a combination of branded advertising and performance-based advertising, and we absolutely partner with big, well-known stars, big, well-known entities like SoFi Stadium and innovative things like SoFi [indiscernible] continue to look for those opportunities. But I'm more than confident than ever that we've reached the point where I can go someplace and someone will say, "Oh, you work for SoFi, I have a SoFi account. That wasn't happening 8 years ago. It happens all the time now. And so one of our prior [indiscernible] '26 is trying to build product quality to such an extent that we drive virality and our customer acquisition costs go down meaningfully because of word of mouth, because of referrals. We're doing incredibly well now as it relates to our return on marketing spend. You can see that in our margins. We delivered more than our long-term margin originally stated when we went public, which we've now increased directionally. So we do believe we can spend money and get a return on it. We have the analytics of that now down. That's what's allowing us to drive more than 30% member growth consistently over the last 8 years and coupling it with product growth. The 40% cross-buy number, that is a number that's up almost 10% versus a year ago. And that's not easy to do when you're growing the business so quickly on a new member basis. So we're -- we're really hitting on all cylinders. We feel like we have the right marketing formula, but we're not going to rest on our laurels. I really want us to get that escape velocity where the amount that we spend becomes more and more efficient. And this is before implementing AI. It's really about product quality and awareness and that filtering down to greater productivity of our marketing dollars. Operator: The next question comes from Dan Dolev at Mizuho. Dan Dolev: Great quarter and epic medium-term guidance. Congratulations. Wanted to ask you maybe, Chris, about LTV, in terms of like how do you think about originations specifically? And like how much should be allocated to LTV versus the other stuff? Chris Lapointe: Sure. Thanks, Dan. So step back and talk a little bit about our origination outlook for the entire business. Overall, we had record originations in 2025, which were fueled by strong borrower demand across each and every one of our asset classes. What we're seeing so far in 2026 is that, that demand remains extremely robust, and we have more flexibility than we've ever had as a company entering 2026. We expect the total originations for the company will be up strongly year-over-year. And we have the luxury of, a, choosing to drive capital-light fee-based revenue through our strong capital market pipeline, particularly in the loan platform business, as you mentioned, where we just signed a new partner, and we have several partners at final term sheet stages; or b, we have the opportunity to keep these higher returning assets on our balance sheet and putting our newly raised capital to work. Ultimately, how we're going to allocate those assets is going to be determined by our overarching goals of serving our members, and driving durable growth to maximize returns for our shareholders in the long run. Given that we have significantly scaled our loan platform business to over $14.5 billion in annualized volume, we've diversified our revenue to 44% in fees, and we have the excess capital, we have phenomenal optionality today. Holding these loans on our balance sheet results in the highest total return for each and every one of our loans, while transferring them through the loan platform business carries no risk and results in immediate revenue and cash as well as attractive returns for us. So we're really in an enviable position of choosing between 2 great options, and we're going to balance them accordingly. Operator: Next question comes from Kyle Peterson at Needham & Co. Kyle Peterson: Nice results. I wanted to touch on the deposit growth this quarter. It's really impressive for me to see. So I guess is this still largely coming from member deposits? And then could you guys give us a refresher on what the recent downward beta has been? That would be really helpful. Anthony Noto: So a couple of things on deposits. I've said since we -- since we opened the bank, that we have a competitive advantage in being able to offer our members a better value proposition than anyone else on something like SoFi Money, combination of a high APY reward opportunities as well as other services that we provide like free certified financial planning, et cetera. I think as rates continue to go down, our advantage will make itself more clear. Everyone that we compete against in that top quartile, they kind of fall into 2 buckets. One, they're a newer bank that actually does lending and they have an ability to provide a rate of above Fed funds, but they have a deposit base that's so big, they can't be too aggressive because they'll reprice their entire deposit base. And that's a structural issue that we fundamentally don't have. Second is people that are not actual banks that are using sponsor banks and they can only get Fed funds plus 20 or 30 basis points. Because we have such a large and profitable lending business, we can use that -- those profit pools to give a rate that's unmatched by other people. We haven't had to do that yet because we've had such great demand for our product, and that's driven the deposits. And I think we'll continue to show that we can be the top quartile API and achieve the level of deposit funding that we want, and it remains relatively sticky. The bulk of our deposits almost 97% are direct deposit customers, and that is high-quality primary account relationships, and that's where we're aimed at. Chris Lapointe: Yes. And the only other thing I would add to Anthony's comments because you asked about it is the downward beta. We've -- since we launched a bank, we've been at roughly a 60% to 70% beta, and we would expect that to stay consistent going forward. Operator: Next question comes from Reggie Smith of JPMorgan. Reginald Smith: Congrats on the quarter and strong guidance. Real quick for me. I guess it sounded like, Anthony, you sounded very, I guess, bullish on some of the new products. I'm thinking about the crypto, thinking about stable coin, thinking about the smart card. And I'm curious, do you think that the innovation that we're seeing on the fintech side could spur more interest in demand from your platform -- platform customers. And historically, I think you guys have lived with kind of card processing and things like that. Good stuff, not is as interesting as some of the newer things that are kind of coming down the pipe, maybe can you talk a little bit about that? And if this could signal or catalyze like a change in adoption and growth in Tech Platform? Anthony Noto: Sure. The Tech Platform business is definitely benefiting from, let me say, it could benefit from the areas that you just mentioned. So a year ago, the amount of demand or interest that we had in blockchain, in stable coins and wallets, et cetera, for tech platform partners was really not existent. But since the administration change and the OCC came out with the permissibility of crypto and blockchain among banks, the amount of interest in leveraging the tech platform services has really increased quite meaningfully. We don't have anything to announce yet. We're in tons of dialogues with different types of companies. There are companies that are launching a debit card type of product in LatAm countries that's back to 100% by stable coins. It's not backed by Fiat dollars at all. And so there's a fair amount of that. There's also a fair amount of program managers for that type of product. And then in the U.S., I think there's less activity from financial institutions for those services it's more in the LatAm countries. But we do anticipate it will spill over to the U.S. and some of the international companies will look to the U.S. because it's a more inviting environment from an administrative standpoint. I think the [indiscernible] is very important because it will establish into law the permissibility of crypto and blockchain by banks. Right now, we're all relying on the OCC interpreted letters, and it'd be much better if it was locked into law, especially if the administration changes in a couple of years. But I'd say the outlook and opportunities that crypto provide for the tech platform as well as our own business are pretty enormous, and I couldn't be more excited about it. It adds a whole another dimension of growth for us, but it also drives a whole another sort of lens of innovation across all of our products. And when you have as many products that we have and you have an entirely new technology platform, at a lower cost, at faster speed and it safer, it could fundamentally change everything that we do. Operator: The next question comes from Kyle Joseph from Stephens. Kyle Joseph: On the third quarter call, we talked a lot about capital markets, and I think you guys referenced a flight to quality from investors. Just kind of looking to get an update there. Obviously, sentiments change. But yes, a little bit of a capital markets update and any implications on the competitive front on the personal loan side of things? Chris Lapointe: Yes. Sure. Thanks. So overall capital markets activity and demand remains extremely robust. We continue to see that flight to quality that we mentioned during the Q3 call. We just had a phenomenal quarter in our loan platform business, transferring $3.7 billion of loans on behalf of others. We just signed a new partner this week for 2026. [indiscernible], and we had several other partners who are in final term sheet stages. So overall, demand can be better from an investor perspective. As it relates to personal loan competition, we just had record originations of $7.5 billion in the quarter. We're seeing that trend persist into 2026. So all else people, we feel great both from a capital markets perspective as well as a borrower demand perspective. In terms of how we're thinking about, just as it relates to personal loans and growth in the balance sheet, we are expecting to grow the balance sheet in the double-digit billions, which is in line with what we did in 2025. We're seeing great momentum so far here in early 2026, and we expect that to persist throughout the year. Operator: The next question comes from Peter Christiansen from Citigroup. Peter Christiansen: Congrats on the great momentum here. Anthony, I'm curious to your perspective. There's been some areas within private credit, which have seen some sentiment change more recently. It doesn't seem like it's too much in the direct consumer lending portion of that area. I'm just curious, from your perspective, what you're seeing from some of your private credit partners and demand flows there? Anthony Noto: Yes. What I'd say is the attractiveness of our assets and our loans is tied to the returns that they have and we obviously are focused on a prime customer in the business that we're putting on our balance sheet and mostly what we're doing with partners. And the key is to make sure we're delivering our return -- our target return against that. We'll able to manage the performance of prepayments, the performance of defaults and the performance of interest rates and our cost of funding to deliver great value for our partners. And as long as we keep doing that, they'll continue to be in more demand than supply. With the amount of capital we have on our balance sheet now, I think you could see our growth in originations and revenue and lending start to close a little bit. In the fourth quarter, our originations were up 40% year-over-year, but our lending revenue was up 15%. And so we're really servicing our partners in a great way, but we could keep more of that production if we so chose especially given our confidence in our returns. Operator: The next question comes from Moshe Orenbuch from TD Securities. Moshe Orenbuch: Chris, you talked a little bit about the allocation between the loan platform business and the core product of the balance sheet for your Lending Segment. Could you just kind of tell us what the -- what your -- the contribution from the loan platform business you're expecting in the '26 guide? Chris Lapointe: Sure. We aren't guiding specifically to origination volumes or LPV volumes for 2026. But what I would say is we just exited 2025 at a $3.65 billion quarter annualizes to about $14.5 billion of originations. We feel good about that level heading into 2026. We have sufficient demand from borrowers, like I said, the new one we just signed up. We have all of our existing partners as well have extended their contracts and often upsize their commitments in period. So there's sufficient demand from capital markets participants in our LTV program. But like we said, we have a very robust balance sheet, high capital ratios, and we're going to balance the allocation between the two to maximize shareholder value. Operator: The next question comes from William Nance from Goldman Sachs. William Nance: Just a lot of good questions already on the call. I just wanted to clarify the comment on the expectation for segment growth rate on the Tech Platform business. I think you mentioned it was pro forma for the large customer migration. Is there any way you could give us a baseline or just a jumping off point there as we think about kind of rolling forward the next quarter? And then I think separately, I think that customer has spoken about like a very large termination fee that they would have to recognize. Could you just confirm that was in this quarter if you recognize if you've already recognized that or just how that's being treated, I appreciate the already questions here. Anthony Noto: Yes, sure. So as it relates to the outlook that Chris mentioned, he said 20% growth for the Tech Platform, apples-to-apples without the large customer in both years. We're not going to give you more granularity than that. Our outlook assumes no revenue in 2026 from that large customer. The deal with that large customer ended. The revenue also ended in Q4, and the revenue in the quarter from that large customer was part of our contract, and it was equal to the average of the revenue in the last 6 quarters. So I think people will characterize that revenue in a lot of different ways, but the simplistic way to look at it is the revenue was tied to the ending of the contract. Our revenue came in at a level that was equal to the average of the last 6 quarters. Chris, I don't know if you'd add anything to that. Chris Lapointe: No, that's fine. Operator: The next question comes from Jill Shea from UBS. Jill Glaser Shea: I just wanted to touch on profitability. You've posted some really nice progress on ROTCE. I think you posted 9% in the fourth quarter. And clearly, there's a lot of momentum in the business, and you've been leaning into capital-light businesses and growing the fee income mix. I'm just wondering if you could touch on the ROE of the business over a longer-term horizon. I think you've mentioned 20% to 30% in the past. Has that changed at all? Is the timing of the past changed at all? Perhaps you can just touch on the overall profitability of the business that you're building? Anthony Noto: Jill, I would say that we believe we're building a business that will have superior return on equity, return on tangible equity. We still believe it's in the 20% to 30% range. We are not going to underinvest in the business to get to that number while we're growing at the rate that we're growing. You should expect that we're going to continue to manage the business with a 30% incremental EBITDA margin, and as opposed to trying to drive it higher to maximize the ROE in the near term. Ultimately, if you see us growing less than 15% revenue, you're going to see meaningful margin expansion and thus driving to our long-term ROE. Between there and here, which hopefully I'm long gone by the time we get down to 15% from a -- not [indiscernible] any longer because I expect to be here for the rest of time, unless, for some reason, someone asked me to leave, I hope we never see 15%. But we would be under delivering on the opportunity in front of us if we didn't keep investing. So we're not just dropping it all into investment. We're dropping some to the bottom line, at least $0.30 of every incremental dollar in an annual period, and that will give you a good indication of how we can drive returns over the long term. But the growth rates of over 30% that are in front of us this year at the scale that we're at, just says we're just getting started. So we don't want to underinvest in that. Chris, do you have anything else. Operator: The final question we have time for today comes from Devin Ryan at Citizens Financial Group. Unknown Analyst: This is Noah Katz on for Devin. With over $3 billion raised in the back half of the year, you're entering 2026 with a substantially stronger capital position. How should we think about capital allocation towards balance sheet growth versus other strategic opportunities? And can you speak on your appetite for M&A? And also on M&A, please remind us of the hurdles and considerations there? Chris Lapointe: Yes. So in terms of how we're thinking about capital allocation, like you said, we have 23% capital ratios today. It's over 1,000 basis points higher than our regulatory minimum and meaningfully higher than the regulatory minimum plus our internal stress buffer. So we feel great about the position that we're in. We're in that enviable position where we can grow and put more assets on the balance sheet. These are very good returning assets, that we're underwriting today, and we feel good about that as well as the LTV partnerships, as I've mentioned a few times during this call. I'll let Anthony touch on anything as it relates to M&A. Anthony Noto: There's a lot of opportunities out there. I would say, more than we've ever seen in 8 years here. But I'd also say the bar is really high for us. And when I say really high, we've looked at dozens and dozens of things, some of which were for sale, some of which were interesting to us. What we're prioritizing are things that can accelerate our growth versus the time it would take to build it ourselves. So one area we're very interested in is technology platform capabilities. And so while it's as a custody as a service, stable coin as a service, being able to provide a market exchange for Fiat and for different types of stable coins. Our pay product, SoFi Pay, we launched in September, it is currently using Bitcoin in the Lightning network, the transport [indiscernible] from the U.S. to Fiat dollars in over 30 countries internationally. And so is there a way for us to accelerate SoFi Pay's international expansion through a technology platform type of acquisition or infrastructure. We're also very interested in international countries and the licenses some small companies could have. In addition to that, in technology platform, we don't have revolving credit card processing and issuing. It's something we can build ourselves, but if there's a technology that's not that expensive, and we don't have to pay for a business, we may do that and leverage our technology platform in core plus their processing to enter the revolving credit technology platform services space. There are some horizontal things that we've looked at, but nothing of interest. As you know, we've talked about building big business banking, and we look at some SMB platforms to see if they would accelerate our opportunity there. The fact of the matter is they don't. We're likely going to build that ourselves, big business banking that is, which we have seen really strong positive response from the marketplace as it relates to the need of these services to be a bank that can do both [indiscernible] and crypto. So we feel really good about having optionality in our balance sheet. I don't feel good about finding stuff at the price that we want. So so far, what I'd say is it's all going to be organic. But if something presents itself in the area that I mentioned at the right price versus doing it internally, we would act on that. But the bar is really high. I know that was our last question. So I just want to wrap the call up. First, thank you all for joining. 2025 was an exceptional year by any measure. The more I went through our results in preparation for Earnings Day, the more I was able to truly [ brass ] how exceptional the fourth quarter and full year are looking through any lens, and how far we've come over the last 8 years. I could not be more proud of our team for building a diverse, resilient business that is impacting our members in an unbelievable way, and that positions us to overcome whatever obstacles are thrown our way. All of that said, I think it's an understatement to say that we're just getting started, and I am more excited about what lies ahead than I have ever been at SoFi. You can rest assured that we will move faster than we ever have, we'll work smarter than we ever have, and we'll be more resilient than we ever have to capture the massive opportunity in front of us, fresh horses we ride and look forward to seeing you next quarter. Operator: This concludes today's conference call. You may now disconnect your lines.
Operator: Good morning, and welcome to Air Products' First Quarter Earnings Release Conference Call. Today's call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Megan Britt. Megan Britt: Hello, and welcome to the First Quarter Fiscal 2026 Earnings Conference Call for Air Products. Our prepared remarks today will be led by Eduardo Menezes, Chief Executive Officer; and Melissa Schaeffer, Chief Financial Officer. We have prepared presentation slides to supplement our remarks during the call, which are posted on the Investor Relations section of the Air Products website. During this call, we will make forward-looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including, but not limited to, those discussed on this call and in the forward-looking statements and Risk Factors sections of our reports filed with or furnished to the SEC. We do not undertake any duty to update any forward-looking statements. Please note in today's presentation, we'll refer to various financial measures, including earnings per share, capital expenditures, operating income, operating margin, the effective tax rate, ROC and net debt to EBITDA either on a total company or segment basis. Unless we specifically state otherwise, statements regarding these measures refer to our adjusted non-GAAP financial measures. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our investor website in the relevant earnings release section. It's now my pleasure to turn the call over to Eduardo. Eduardo Menezes: Thank you, Megan. Hello, and thank you for joining our call today. Please turn to Slide 3. Earlier today, we reported results for the first quarter of fiscal 2026. We delivered 12% improvement in adjusted operating income that was broad-based across our reporting segments. Earnings per share were $3.16, up 10% relative to the prior year on stronger productivity despite weak economic conditions. . Our operating margin of 24.4% was also up, while return on capital of 11% was slightly lower than last year but remained stable sequentially. I'm pleased with the progress that our global team is making to improve our bottom line results, and the first quarter represents a solid start to our fiscal year. I have now been at Air Products for full year. In that time, we have taken significant actions to refocus on the core industrial gas business, including project cancellations, head count optimization and asset rationalization that are showing up in our results. Moving to Slide 4. We are focused on 3 key priorities for 2026 consistent with the longer-term strategy that we shared last year: one, unlock earnings growth; two, optimize large projects; and three, maintain capital discipline. On unlocking earnings growth, we are affirming our full year earnings guidance, which implies an improvement of 7% to 9% at the midpoint for the full fiscal year. EPS growth is expected to be achieved primarily through continued focus on pricing actions and productivity and new assets contribution. We are on track to deliver in line with these expectations despite continued healing headwinds in a sluggish macroeconomic environment that will limit volume growth for the fiscal year. Despite these headwinds, we see pockets of resilience from key sectors, including refining, electronics and aerospace. For example, earlier this week, we announced our latest supply contracts with NASA to provide liquid hydrogen to multiple U.S. facilities. On our second priority, we continue to make strides to optimize our large project portfolio. Coming into our products that prioritize descoping and derisking our clean energy project portfolio. Along this path, in December, we announced that we are in advanced negotiations with Yara International on the low-emission ammonia projects in Saudi Arabia and the U.S. I will share more detail about our next steps in a minute. Finally, on our third priority, we continue to take actions to drive discipline in our capital allocation to improve our balance sheet position while at the same time, investing in a strong base business growth and returning cash to shareholders. As we have previously indicated, we expect to reduce our capital expenditures by approximately $1 billion in fiscal 2026 and remain on track on that objective. Fiscal 2026 in the first part of 2027, our heavy CapEx period for the clean energy products in Canada and the Netherlands, and we expect CapEx to decline significantly after these products go on stream. On return of cash to shareholders, we announced earlier this week that our Board has authorized an increase in our dividend, marking our 44th consecutive year of dividend increases. We remain committed to disciplined capital allocation that ensures that we are well positioned to continue our strong track record of returning cash to our shareholders. Please turn to Slide 5. In December, Air Products issued a joint press release with Fara International announcing that we are in advanced negotiations for the low-emission ammonia projects in the U.S. and South Arabia. We believe that the potential collaboration provides a strong strategic fee based on complementary capabilities. The collaboration would connect the global industrial gas expertise of Air Products with the global money supply network and world-leading crop nutrition and ammonia expertise of Yara. In Saudi Arabia, we are in advanced negotiations on a marketing and distribution agreement where Yara would distribute and commercialize all the renewable ammonia that is not used by our products to produce green hydrogen in Europe. We expect to have that agreement finalized in the first half of 2026. For the U.S. product in Louisiana, our goal is to have a traditional industrial gas project is scope and return for our products. To that end, we are in negotiations for Yara to acquire the ammonia production and distribution assets from our Louisiana project and execute a 25-year hydrogen and nitrogen supply agreement for an industrial gas facility that we would build and own and operate by our products. Moving to Slide 6. I want to be very clear that we have set a high bar for moving forward with the Louisiana project, which aligns with our disciplined capital allocation strategy. Already, we have taken action to find a world-class partner for the ammonia production. In this way, we would have traditional industrial gas company scope with a long-term offtake agreement to supply hydrogen and nitrogen to Yara. We also required a partner for the carbon capture and sequestration scope prior to taking a final investment decision. We have already launched an RFP process for the CO2 transport in storage scope and are in active discussions with several key sequestration service providers. More importantly, we must have a highly reliable capital cost estimate based on agreements with reputable EPCs that meet our return requirements. [indiscernible] requirement for Air Products is having a project return on the go-forward capital significantly higher than our traditional hurdle rates. We expect to have full clarity on the project costs in the next few months. Overall, the project has many positive economic aspects, including location and the ability to receive tax credits, which drives significantly higher returns per share for the project during the first 12 years of operation. We are monitoring recent reports related to fertilizer C-band tariffs in Europe. C-band came into effect in January 1, 2026, and proposes to modify the current scheme would need to be discussed and approved by the EU. Any change in the CBN rules would have an indirect effect on our potential Louisiana project as only gray ammonia imports as subject to significant CPM tariffs. Overall, Yara bears the regulatory risk related to C-band changes if the project goes forward. We are following this subject closely with Yara and continue to work on the cost asset. Please be afraid that the Air Products management team and Board will take the time needed and drive a very high level of diligence on the capital cost before we reach our own FIT. Now I will turn the call over to Melissa to discuss our financial results in great depth and review our 2026 outlook. Alisa? Melissa Schaeffer: Thank you, Eduardo. Hello, and welcome to those joining our call today. Please move to Slide 7 for a high-level summary of our first quarter financial results. With respect to sales, volume was flat as favorable on-site volume was offset by lower helium, which included a sizable nonrecurring helium sales in the Americas in the prior year. providing for tough comparisons in the first quarter. Price improved on non-Helium merchant products, particularly in the Americas and Europe. Operating income was up 12%, and margin was up 140 basis points on business mix and non helium price, offset a tough year-on-year comparison. Margin also improved despite a 50 basis point headwind from higher energy cost pass-through driven by the Americas. Lower costs also improved results primarily driven by productivity net of fixed cost inflation and lower maintenance. Earnings per share of $3.16, which grew 10% from prior year, exceeded the top end of our guidance range. Return on capital of 11% was lower versus prior year, but stale sequentially as we continue to execute on our project backlog. Moving now to Slide 8. Our first quarter earnings per share of $3.16 increased $0.30 or 10% from prior year. Despite continued helium headwinds and which include the prior year nonrecurring helium sale in Americas of approximately $0.10, the base business continued to demonstrate strong resilience in an uncertain macroeconomic environment. Favorable on-site volume, non-Helium pricing actions and ongoing productivity improvements drove results this quarter. Moving now to Slide 9. I will provide an overview of our results by segment. You can find additional details of the quarterly segment results in the appendix. For the quarter, Americas sales were up 4%. The driven by higher energy pass-through, operating income improved on price, onset volume and lower maintenance, partially offset by prior year nonrecurring items and fixed cost inflation. Sales in our Asia segment were up 2%, while operating income was up 7%. This improvement was driven by productivity and reduced depreciation from certain gasification assets held for sale, partially offset by lower [indiscernible]. We saw a modest contribution from our new assets as they continue to ramp up, contributing further in the second half of the fiscal year. Europe sales and operating income both increased due to volume and price as well as favorable currency. Higher volumes were driven by on-site including a prior year turnaround and non-Helium merchants. Operating income was also impacted by higher costs associated with depreciation and fixed cost inflation despite productivity improvements. In our Middle East and India segment, operating income improved on lower cost, while equity affiliate income remained flat. Lastly, the Corporate and Other segment results improved from lower costs, including productivity actions. Moving now to Slide 10. We continue to generate strong cash flows from our base business. Our investments in both energy transition and traditional industrial gas projects remain on track with our expected capital spend for the fiscal year. Additionally, we returned nearly $400 million in cash to our shareholders and increased the quarterly dividend, marking the 44th consecutive year of dividend increases. As it relates to our leverage, our net debt-to-EBITDA ratio is 2.2x. As a reminder, we are currently consolidating the joint venture investment in the neo green hydrogen project on our balance sheet during the construction phase. And as previously communicated, we plan to deconsolidate once the project is on stream and being operated by the joint venture. Therefore, we have adjusted our leverage ratio to better represent Air Products investments. Please turn to Slide 11, where we will review our outlook. We are maintaining our fiscal full year guidance of $12.85 to $13.15 given uncertainty around the macroeconomic environment. We remain focused on delivering these results through pricing actions and productivity while bringing new [indiscernible] assets on stream from which we expect increased contributions in the second half. For the second quarter of 2026, we expect to deliver earnings per share in the range of $2.95 to $3.10, representing a 10% to 15% improvement from the prior year. Our outlook assumes growth from pricing actions and productivity, partially offset by lower Helium. As a reminder, we expect our second quarter earnings per share to be lower sequentially due to the normal seasonality. Particularly related to the Lunar New Year and higher planned mine. We are also maintaining our guidance for capital expenditures at approximately $4 billion in fiscal 2026. as we work to derisk our Louisiana project and optimize our portfolio. Now we'll open up the call for questions. Operator? Operator: [Operator Instructions] We'll take our first caller from David Begleiter with Deutsche Bank. Unknown Analyst: This is Emily Fusco on for Dave Begleiter for -- you're targeting double-digit return on the go-forward CapEx, how should we think about the returns on the $2 billion of capital already invested in the project? And is the 45Q credit included in the double-digit return on a go-forward CapEx? Unknown Executive: I imagine this question is related to the project in Bero,right? So Yes, the 45Q credit is going to be taken by Air Products, and it's included on the return. And it's an overall return for the project in the go-forward basis, and that's all we're going to disclose at this point. . Operator: We'll take our next question from Duffy Fisher with Goldman Sachs. Duffy Fischer: First question is just on helium. Obviously, this quarter, you had to eat the onetime sale a year ago in your year-over-year comps. But could you just talk about how much the kind of continuing business is still down? And how much of a headwind do you think that will be kind of in Q2 and throughout the rest of the year? Kevin McCarthy: Duff. Yes, we -- I would say that in general, we had better-than-expected quarter. I think the volume from the Aerospace segment in the Americas was very strong for helium for us in the last quarter. Other than that, we continue to see the same trends we've seen before. As we said, we've continued to try to increase our volumes for new accounts. And we're working very hard to increase our sales with new customers and new deals, especially on the electronics side. But I would say, overall, the information that we gave you in the beginning of the year that we would be down for the year around 4% EPS effect is still our best forecast at this point. Patrick Fischer: And then on the gasification plants in China, what was the benefit from moving them to for sale -- and then what's the expectation for kind of timing? And should we expect any meaningful proceeds coming from those? Michael Leithead: It was about 1%, David, from the overall results for the quarter. I would say that the -- we're still working on the process to sell the assets. We received some offers, we proceed with the negotiations. It's always difficult to forecast these things, but we still expect to get this done on this fiscal year. Hopefully, sooner than later. Operator: We'll take our next question from Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: Is Air Products receiving income from -- or full income from Gulf Coast ammonia? And how much did you invest in that project? And what are the assets that you actually own? Samir Serhan: Thank you for the question, Jeff. Yes, we are in the process of starting the plant. So the plant is making product it was running at up to 80%, 90% capacity for the last few months. In fact that this week, we are taking a turnaround that we were expecting to do that to finalize the less components, and we hope to be up and running at 100% and finalize all the commitments from that side in the next few weeks. So that's the overall picture of the project. . I think when Air Products announced this project 5, 6 years ago, I think we made clear what the investments were on the numbers I can go offline and get to the numbers that we published at that time. Air Products in this case, we own the SMR. So the hydrogen production. We own the assertion plan. and the customer owns the ammonia production and the [indiscernible]. So this is basically the setup that we have there. The plant is connected to our hydrogen pipeline system, and, in fact, import some hydrogen. So we have a reformer data that I think is around 175 million cubic feet a day, which is probably 70% of the total volume required by by the ammonia [indiscernible] when running at 100% and the balance of the hydrogen is imported through the pipeline. Jeffrey Zekauskas: In your corporate line, it looks like there was some kind of sale of equipment cost overrun. How much was that? And -- how much was that versus last year? Melissa Schaeffer: Jeff, this is Melissa. We did see some increase in our sale of equipment this quarter. In the Q, you will see that we had an impact to our results of about $30 million this quarter. That is comparable to what we saw last year in this quarter. And we -- obviously, as we bring this on stream, we will stop seeing that headwind in our results. But again, it was about $32 million this quarter. And as you know, that is a percent of completion accounting and so that is our best estimate of future cost as well. So we recognize the full future cost. . Operator: We'll take our next question from John McNulty with BMO Capital Markets. John McNulty: Maybe on the first one, can we unpack a little bit the margin improvement seen in the Americas. Certainly, it looks like price may have helped, but the volume drop of, I think it was 4% is pretty meaty. So I guess, can you help us to unpack where that 150 basis points of improvement came from? Samir Serhan: Yes, I'll let Melissa answer the question, but that onetime helium impact that we have is reflected in the volumes in the Americas. Melissa? Melissa Schaeffer: Yes, absolutely. Thanks for the question, John. So we did see strong on-site volumes in the Americas. This is specific to our HEICO and non-Helium merchants. So positive in the volumes. Price was also strong in the Americas this quarter across products outside of Helium. And then costs, unfortunately, costs were slightly negative, driven versus prior year. But obviously, we're continuing to look for cost productivity. So the margins were better this quarter, but we're continuing to see improvement there as we continue to focus on productivity. John McNulty: Okay. Fair enough. I appreciate the color. And then can you give us an update on Alberta at this point in terms of the potential for project offtakes, how that's progressing as well as any updates on the construction timing and costs. Michael Leithead: Yes. The construction time and cost is still the same, John. We did the same estimate that we provided probably a year ago, so around $3.3 billion and start up in the first part of 2018. So we continue to work in that direction. I think we have much high level -- higher level of certainty in this project than we had before in terms of scope and costs. The negotiations with other potential offtakers continues. It's not something that we will be able to talk about until we have something more definitive to share with you. Operator: Our next question comes from Vincent Andrews with Morgan Stanley. Vincent Andrews: Eduardo, I wanted to ask you on the fiscal fourth quarter call, you were asked about you spent $2 billion on Daro so far. And how much of that could you recover? And I think you said you could recover about half of it through sales of equipment and so forth. But I wanted to make sure that, that was not interpreted entirely is the answer to this question. Maybe it is, please tell us. if you decide for whatever reason not to move forward with Daro, is it just that you sell the equipment and whatever else, and you recover $1 billion to $2 billion spent -- or would there be other cost to Air Products, small or large to not move forward with the project? And then I have a follow-up. Robert Koort: Yes. I think where we we try to say that we -- nobody really can answer that question, right? So that 50% is -- at that point for us a gas, the number can be higher, it can be lower. It's impossible to determine what the the value will be to recover the -- if you don't go forward until you get that negotiation because at the end of the day, it's the value that equipment has to a potential buyer, right? So of course, we are looking at that in parallel. I would say that the assets that we are -- that we built already in some cases, for this project, we are very specific for this project, probably for the exception of the ammonia loop, which is quite standard and similar to through other projects. So that asset will have a better chance of getting a high market value. As operation plans are also common, but this is a very high pressure in the plant that was designed and built for for the U.S. under U.S. [indiscernible] and so has a limited market. So at the end of the day, we cannot -- no one can tell you exactly how much that will be recoverable if we don't go forward. I would say that this is really the exposure that we have is the capital that was spent before we decided to stop new purchases in a project, which we did one month after I joined the company. So the only money we are spending in this project is really the equipment that is arriving that we purchased before that time. Vincent Andrews: Okay. And just as a follow-up, I know you're intending to make a go/no-go decision on this by the middle of the year, but is that firm date or now with this CBA uncertainty, which let's just assume, is very important to Yara's economics, if there's a need to push that out while the EU finalizes whatever it is that they're going to do or not to -- is it possible that the timing of final investment decision could move later into the year? Samir Serhan: No, there is no 100% or anything in [indiscernible] right? But I would say that our goal is around the mid of the year. The main issue for us continues to be the -- to make sure that we have a capital cost that we feel we have high certainty of execution. So that is what we are working on. The issue of the CBM as we tried to explain that in our slides. It's a very indirect -- if something happens, it's an indirect impact it is an indirect impact to Yara to be honest, by the way this agreement would work, we would produce hydrogen and nitrogen sell that to them, they would make ammonia and from there, it becomes their accountability. They can take ammonia, sell them on in the U.S., ammonia in Asia or in Europe. If it goes to Europe, it still is subject to a very low CBM tariff. The impact is really indirect if something happened with the [indiscernible] what happens with the gray sales. So all -- this is a decision that [indiscernible] has to make. Verbally, we understand from them that they believe is a low probability, but it's something that they need to take into account in their decision, and we'll wait for that. But at the end of the day, I would say that 99% of the decision is related to the construction cost more than anything else. Operator: Our next question comes from James Hooper with Bernstein. James Hooper: Thanks for the question. First question is about the space opportunity. Clearly, you've just signed some contracts with NASA this week. Can you talk a little bit about the kind of the opportunity there, your opportunity with commercial space providers, how that business is performing and where you see the growth in the outlook is? And then I've got a follow-up to that. . Unknown Executive: Yes. It's a very hot segment. It's a segment that products participate since the 60s since we started supplying liquid hydrogen for NASA and continues to this date. I would say that probably over 2% of our total sales is in this segment in aerospace, when you add all the products, hydrogen, helium and oxygen and nitrogen. So it continues to be a very important segment for us. Of course, the market is changing. There is more commercial launches. Some of them use hydrogen, some of them do not use hydrogen. So we are working on these opportunities, and we are trying to grow our market share, but it's a very important market for us. But I think Melissa, you will have more [indiscernible]. Melissa Schaeffer: Yes. Yes. Thanks, Eduardo. So having many conversations because this has gotten a lot of attention lately. So based on the customers we serve, it's our estimate that Air Products is about 40% to 50% of the total space market share in the U.S. And from a growth trajectory, I think our expectations is that for projected sales, we see about a 6% to 7% growth per year. So obviously, a market where we have been focused on for many decades and something that we're going to continue to focus on. . James Hooper: And then just on your volumes. It was interesting at the European volumes are up 5% year-on-year. is Europe back? Are we looking at some recovery here? Or are we remaining cautious about European volumes? Michael Leithead: We remain cautious. A lot of things go in this calculation. So we have some turnarounds last year. So that we are lapping these turnarounds this year. So that created a good tailwind for us on the volume side. But things in Europe, as reported, they are I'd say, complicated at this point. But I would remind that our business in Europe is different from our business in other areas of the globe because it's really fully integrated into packaged gases and other areas. And I like the other industrial gas companies, we see much more pressure in the large customers in [indiscernible] than we see in the retail in the package gas and so forth. So it's still an important business for us, very profitable. We have a very experienced management team that is doing the blocking and tackling and being able to extract good results despite the economic environment we have there. Operator: We'll take our next question from Chris Parkinson with Wolfe Research. Christopher Parkinson: Now that you're a year in, and you've had a time to evaluate prior pricing strategies as well as the cost fund. How do you see these things progressing throughout the year? I imagine you have a good handle on cost now. But also it seems like there's this divergence between kind of cost pricing improvements versus obviously some helium headwinds. And I'm just kind of curious on what the cadence of that narrowing is as we progress through the fiscal year. So any color on those 2 topics would be greatly appreciated. Eduardo Menezes: Thank you, Chris. You're breaking a little bit. But if I understand correctly, it's about the pricing opportunity. As you can see in the results in the first quarter, a lot of our gain coming from and productivity. I think this is -- again, this is the normal block and tackling of the business. When you operate in 40 countries and you have over 20,000 employees. That's what you do. I think Air Products has a good management system and good management talent to continue to make progress in both price and productivity. . I would say that we expect that going forward for the balance of the fiscal year, then the results will be from those 2 aspects to be similar to what we had in the first quarter. The situation hearing is an exception that we are also working on to do the best we can in a long market. But I would say, outside of Helion, we have the right tools and we keep pushing and we expect the same results we had in the first quarter. Christopher Parkinson: Got it. And just as a quick follow-up. There's obviously a lot going on in the tech world right now. And just given the scale that you have in Asia has rolled some of those customers a broad -- can you just perhaps just give us a little bit of insight in terms of how the investment community should be thinking about content when we're looking at things like N2, HBM, et cetera, et cetera. In terms of purify nitrogen, Neon, all specialty rare gases, -- how should we be thinking about the growth in your customers relative [indiscernible] when we should be seeing that show up in your results presumably throughout this year and obviously, for many years to come. Eduardo Menezes: Yes, Electronics is the star segment of the market nowadays. Of course, with AI, you can see in the results of the chip manufacturers, results of ASML and so forth. We see a lot of RFPs, a lot of inquiries. It is a market that traditionally the products are getting -- the products increasing size, getting bigger and bigger. And we used to have the products coming every 2, 3 years and what I think we've seen in the last 24 months, and we'll continue to see in the next 24 months is an acceleration of this investment decisions by the large chip manufacturers. And we have very strong positions, as you know, in Asia. We continue to push hard on signing new business over there. We are executing projects that combined in one side can go up in CapEx to close to $1 billion, and we see an opportunity for new projects in the same range of CapEx being decided in the next 12 months. Melissa Schaeffer: Yes. And one additional comment to your question, Chris. And you did mention that new assets. We absolutely are having new assets come on stream as we talked about when we set our guidance. And additionally, as we talked about, this is a ramp, as you know, with the electronics business. So we will see the majority of those contributions towards the back half of this year. Operator: We'll take our next question from Kevin McCarthy with Vertical Research Partners. Kevin McCarthy: I wanted to unpack if I could, the upcoming deconsolidation of Neom, can you comment on the expected timing of that event and the specific trigger. And then with regard to the financial impact, I appreciate the color that you provided on Slide 10 with regard to your net debt balance and leverage ratio, I wanted to ask whether there would be any appreciable impact on your income statement as well moving through that event? Melissa Schaeffer: Yes. Thanks, Kevin. So we've been talking about the deconsolidation for quite a while now, but I think we need to unpack it a little bit more for our investor community. So because we are the EPC or the engineering procurement and construction group, Air Products to the joint venture, we do consolidate that because we do make the key decisions during that period of time. So at this point in time, with that control aspect, we do consolidate. Once the joint venture is operational, however, the decisions are even amongst the 3 shareholders. So during operations, which as we've talked about, is in the mid '27, we will then deconsolidate that joint venture. As you rightly mentioned, that means that the debt would come off of the full balance sheet and would be within the equity affiliate line, so you will see the reduction in our debt profile at that point in time. As we lead up to the deconsolidation in '27. Obviously, the operating company will be adding resources. So we will see additional costs being run through the O&M as we lead up to the onstream. And once that is deconsolidated, obviously, you'll see that come off, and we will only see the impact of 1/3 of that operating cost. So there will be a slight increase in operating cost as we ramp up, getting closer to onstream in '27, and that would then be deconsolidated, and you'd only see the 33% through the equity affiliate line. Kevin McCarthy: Understood. Very helpful. And then secondly, if I may, can you comment on the sequential price change for helium and whether or not your Asia price of negative 1 would have been flat or possibly positive if we were to carve out Helium? Melissa Schaeffer: Yes. Thanks for the question. So yes, we continue to see Helium as a headwind, both to volume and price. For this quarter, on a global perspective, price was a 1% decrease from helium specifically. In Asia, Asia is an interesting market right now because of the macroeconomic headwinds. We would have seen price up slightly. However, because of the helium impact, we did see that negative in Asia. However, in Americas and Europe, the price would have been up quite more significantly, but the helium headwind did bring that down a bit. But Asia, without a doubt, is the largest impacted region. Operator: Our next question comes from Mike Harrison with Seaport Research Partners. Michael Harrison: I wanted to ask about Europe operating margin. It looks like you saw about 150 basis points of sequential decline from Q4 into Q1. And I think the energy pass-through maybe should have been a little bit favorable sequentially. The top line was pretty similar. Depreciation was lower, is this maintenance costs that we're seeing there? Or maybe help us understand what was causing that sequential margin headwind? And how should we think about margin trajectory in Europe in the rest of the year? Melissa Schaeffer: Yes. Thanks for the question, Mike. So the specific margin for Europe actually is being affected by cost. And so we have some significant productivity in that region. However, we did have sizable depreciation. So the depreciation year-over-year is, in fact, I believe, up a bit. That is largely some in-sourcing and some purchases of our supply chain assets that we are seeing a hit of depreciation and some fixed cost inflation. They are largely wage inflation that we're seeing in Europe that is shrinking the margin. Eduardo Menezes: And there is also some seasonality in the quarter, which is normal for this last quarter of the calendar year. Michael Harrison: All right. And then my other question is if you can comment on what portion of your customers are running below take-or-pay minimums in terms of their volume consumption right now. And I'm just curious, is that most pronounced in Europe? Or maybe if you could comment on what you're seeing region by region in terms of take-or-pay minimums. Eduardo Menezes: Yes. We don't normally disclose that, Mike. We have some cases in Europe and -- but I would say that is not a very large percentage of our business, but Melissa. Melissa Schaeffer: So one of the things that we do track is really utilization. So if I think about utilization across the Americas, Europe and Asia, it's pretty similar in the mid- to high 70s. So that's pretty similar to what we saw in fiscal '25 as well. So we're not seeing a significant change in utilization, but they're. Eduardo Menezes: [indiscernible] it's case by case and -- of course, the steel industry, the chemical industry in Europe is being affected, but it's not a it's not affect every customer in every location in the same way, right? So it's a question of where your assets are and what customers you have. I think if you want to put this way, we -- I don't think it's a question of [indiscernible]. It's a question of the work that was done 20, 30 years ago. selecting the right customers. But so far, we're not having a lot of impact in Europe and with the caveat that we our on-site business in Europe is not as big as it is in Asia and in the U.S. Operator: We'll take our next question from John Roberts with Mizuho. John Roberts: Back to CBAM, for ammonia. Is Section 27 a key issue to watch here? And do you know what the next step is on Section 27. I don't think it's approved yet. Eduardo Menezes: Yes. I'm not an expert on you regulations, John. I don't know anyone is. But from what I understand, this is a proposal that has to be approved and there are several levels of legislation in Europe, one of the directives, which is like suggestions that the countries have to implement. CBM is more like a tariff. So it's a legislation also has to be approved by the entire EU and any changes have to be approved as well. And as you probably know, the CBM is connected to the CO2 ETS scheme. So it's really a compensation for European producers for the CO2 tax that they have to pay. And this CO2 ETS scheme is in place for probably 15 years now. And I would say that to make a change there, you will need to make a change in the entire CO2 ETS scheme. So that's why I think people are telling us that the probability is very, very low. But again, it's -- our job is to run the business and make our decisions and the regulatory is just a signal that we need to use to make those decisions. John Roberts: Okay. And then in the U.S., is contracting for new electric power an issue at all in bidding for new ASU business with all the data center competition and so forth. Eduardo Menezes: Yes, no question. We are seeing increases in power costs for new contracts. We have a very sophisticated power procurement process in the products, as you can imagine, is the main input that we have in our Separation business. So it's an ongoing relationship with suppliers. I would say that if you have something new today, you would need you to go and negotiate the tariffs. But -- at the end of the day, when we have like an on-site contract, as you know, this is a pass-through in the formulas that we have. So [indiscernible] the customer side and for the merchant product, any energy that we use in the energy in the to make liquid oxygen, liquid nitrates and so forth. We we work very hard also to pass those costs to our customers. So it's not that we are completely immune to power, but we work very hard to make sure that we pass this cost to the market. And and try to be ready for any cost increase. But there is no question that the data centers, they are creating demand and they are creating distortions in the power market today. Operator: Our next question comes from Patrick Cunningham with Citi. Patrick Cunningham: Just a few follow-ups related to prior questions on Neon. Is there any dependency on the relationship with Yara at Darrow. And are these go, no go decisions being viewed separately? And do you foresee the same [indiscernible] related risks for Yara's appetite for the [indiscernible] offtake? . Unknown Executive: No, there are no dependence between the true project or the 2 potential contracts. And again, is the same answer from the other one, right? The the product from Neon is will be green. So that's going to be absolutely 0 CBM effect on that product. The effect on other products coming to Europe would be an indirect effect on the overall market, and we need to see if that happens, what the effect is. But again, going back to my previous answer, it's very, very uncertain that there will be any impact on the CBM scheme today. But -- and if there is, it's going to be an indirect impact on this project. Patrick Cunningham: Got it. That's very helpful. And what do you anticipate the run rate contribution of the Neon JV will be from an equity affiliates perspective? And should we expect that to be at a loss when the asset first ramps up given the debt profile and initial fixed cost burden? Jeffrey Zekauskas: No, it's not going to be at a loss and -- but we cannot disclose results from our joint ventures that we own 33% or expected results in this case. But it's not going to be [indiscernible]. . Operator: We'll take our next question from Josh Spector with UBS. Joshua Spector: I guess, I'll follow up on Darrow and CBAM, and see if maybe you'll answer it a little bit differently at all or not. But when you think about like the decision here that Yara would need to make. I understand CBAM doesn't impact Air Products directly, but it does impact the economics for Yara, assuming they're intending to bring that into Europe. And if they say that we don't know what the regulation is going to be, and we need another year to think about it. We want to see if anything is going to change. Is that time value something that you're willing to accept or does that then trigger we need to look at a plan B or some of these other options because we're not going to sit around for a year. How do you game theory that yourself? Eduardo Menezes: Yes, it's a theoretical question at this point, -- so we didn't, let's say, think about that, and I need to see when that happens. I would just say that the way we look at this project, when I came on board here, -- now our products was building a full ammonia project and doing the CO2 sequestration itself and was going to be an ammonia producer and [indiscernible]. We stopped the project as it is, right? So today, the the base case is that we stopped the project. But we -- at the same time, we said the project has positive attributes and has a chance of being a good project. So let's try to find let's try to see if there is a solution to generate some value from this project. And I think we did the most difficult step at this point, which is to find a credible really world-class partner that would be willing to take the commercial risk on the ammonia, which is what they say [indiscernible] buying the hydrogen and the nitrogen and making the ammonia. So we are taking that commercial in operational risk of the ammonia. So this is the most difficult piece of the puzzle here. we need to make sure that the capital cost is -- that the product is feasible for both parties. So the project -- the capital cost will be within the numbers that we assume to be with them. But I would say that at this point, this is more like which one is the plan A, which one is a plan B. It depends on how you see it. But where we are today, if nothing happens, we're going to go back to where we were 11 months ago, which is we're not going to go forward with the project as proposed. So that is the situation. And I would say that -- the way I look at this is that we have only 2 possibilities, right? We're not going to go forward or we're going to go forward with a good project, right? And those are the only 2 cases I'm working with -- of course, there's a lot of work to make sure that when you go forward that you are certain on your capital cost and the project is good, but those are the true outcome. So I hope our shareholders are looking at this is a free option for a good project on top of the current base case, which is not going forward. Operator: Our next question comes from Matthew DeYoe with Bank of America. Matthew DeYoe: I have 2. But so Uniper from Germany announced an agreement to offtake 500 kt of green ammonia from the new Amgen green hydrogen project in India, which looks to be commissioning 2028. Can I ask if you bid on this project? And if you did, why you don't think you won or if you didn't bid on it, why you didn't considering kind of the profile at [indiscernible]. And then last -- sorry to ask another one on there, I guess. But from what I understand, the company is kind of bidding the construction across a few different EPCs to try to lock in fixed economics. Is there any reason to believe the strategy would be more successful than just choosing like one? Eduardo Menezes: Okay, 2 different questions, right? So on the green mode, right, I -- it's a complicated subject here. I would the way I like to think about this is if you want to make ammonia starting from the [indiscernible] like, for every metric ton of ammonia, you need about 10 megawatts of power, right? So when I see people saying, we're going to develop this project in a place like India, and we're going to have a price of ammonia and I read the same articles you probably read. So people talk about $600, $700, something like that. You need to -- when you see a number like that, you need to realize that it's like exporting power from India. Investing a lot of capital to at the end of the day, export power from India at $60 a megawatt or $70 a megawatt, right so which is lower than the local price. So it's very difficult to understand the economics when people talk about doing green hydrogen and green ammonia in this type of jurisdiction. When our project in Saudi Arabia, it's public information, you can look around. Saudi Arabia has a very active renewable power market and they sign agreements with power prices below $0.02 or $20 per megawatt. So we are within that system. We are building our own renewable power. And our -- let's say, if you want to calculate our internal power cost for our project is also below $0.02 per kilowatt or 20 per megawatt. So our project is under construction. We can show you the videos, we can take you there. The power economics makes sense. And I'm not going to make comments about what other people are doing in MOUs and that kind of stuff. There are a lot of activities like that in Europe, a lot of announcements. But the only real project being built at this point is ours. I understand in India, it's a little different because they're trying to use an existing facility and I'm not doubting that they will, at the end, build something. But I would say that the regulatory risk, the -- if something looks too good to be true, normally this right now to have this kind of exporting power at this low price from a country like India, it's a question mark for me. So that's the green ammonia piece on the on the [indiscernible] side, your question about the EPCs. We're not going to make a comment on what we're doing in our activities. I would say that in general, this project is a very large block plant with very well-defined blocks. So you have an asset duration plant, you have a hydrogen plant, we have an ammonia plant. So you can go in different directions, and it is a question of to determine what makes sense. You need to go through a process. And you need to understand the local market, know how what is the appetite of the APCs and what alternatives they have. So -- we are looking at every case here, and we are trying to make sure that we do the best for our shareholders, for our customers, in this case, for Yara and in fact, they will participate in the process with us. and we are not ready to say exactly how we're going to execute this project at this point. Operator: We'll take our last question from Lorex Alexander with Jefferies. Laurence Alexander: A question around sort of AI-related productivity. If it comes in better than expected or compared to expectations a few years ago, do the benefits accrue to your on-site business? Or do your contracts mean that you pass some or all of that benefit through to the customers? And then similarly, I guess, for merchants, it would be more just sort of competitive dynamics in the local market. Is that fair? Eduardo Menezes: Yes. It's -- AI is -- can be used everywhere, right? So when you talk about how you're using it and where the benefit will accrue it depends on what the usage is, right? So you say I'm using AI to lower my power costs in the negotiations with my power suppliers. If I have an agreement with the customer that is really pass-through on the cost that will be somehow share. If we use AI to reduce our power consumption, normally, we will capture that to our products because at the end of the day, what we do, we give the customer a guarantee of a maximum power consumption. So it's case by case. But that's a very specific application of AI. We're using a lot of AI to look at our, let's say, administration, our SG&A activities, our engineering activities, and those are internal costs, and those are not contractually past to customers, although like any other company, we try to be more efficient in order to be more competitive in the marketplace. So you can make the the conclusion as well that in the long run, somehow these benefits will go to our customers. But it's very difficult to determine what share that will represent at the end. I hope that was clear. I'm not sure if that's exactly what you're asking. Operator: This concludes our question-and-answer session. I'd like to turn the conference back over to Eduardo for any additional or closing remarks. Eduardo Menezes: Thank you. I would like to, again, thank everyone for joining our call today. We appreciate your interest in Air Products, and we look forward to discussing our results with you again next quarter. Have a good and safe day. Thank you. Bye. Operator: This concludes today's call. Thank you again for your participation. You may now disconnect, and have a great day.
Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flagstar Bank Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead. Salvatore DiMartino: Thank you, Regina, and good morning, everyone. Welcome to Flagstar Bank's Fourth Quarter 2025 Earnings Call. This morning, our Chairman, President and CEO, Joseph Otting, along with the company's Senior Executive Vice President and Chief Financial Officer, Lee Smith will discuss our results for the quarter and the full year ended December 31, 2025. During this call, we will be referring to a presentation, which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the Investor Relations section of our company website, ir.flagstar.com. Also, before we begin, I'd like to remind everyone that certain comments made today by the management team of Flagstar Bank may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. Additionally, when discussing our results, we will reference certain non-GAAP measures which excludes certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. With that, now I would like to turn the call over to Mr. Otting. Joseph, please go ahead. Joseph Otting: Thank you, Sal. Good morning, everyone, and welcome to our fourth quarter 2025 earnings conference call. We are pleased with the bank's performance throughout 2025, and especially during the fourth quarter. As all of you know, after 2 challenging years, I'm proud to share that we returned to profitability in the fourth quarter reporting adjusted net income of $30 million or $0.06 per diluted share compared to a net loss of $0.07 per diluted share in the previous quarter. 2025 was a year of significant momentum for the bank, which accelerated during the fourth quarter. We continue to successfully execute on our strategic plan to transform Flagstar Bank into one of the best-performing regional banks in the country. One with a diversified balance sheet and revenue streams and strong capital, liquidity and credit quality. While returning to profitability is a significant milestone, but it is only one of several positives during the quarter. Turning to Slide 3 of the investor presentation, we'll highlight those. First, our return to profitability during the quarter was driven by several factors including growth in our net interest income, coupled with NIM expansion and disciplined expense management. This resulted in a $45 million increase in pre-provision net revenue and positive operating leverage of approximately 900 basis points. Second, we had another strong quarter of net C&I loan growth up a 2% on a linked quarter basis or about 9% on an annualized basis. Third, we continue to reduce our overall CRE exposure, mostly through par payoffs resulting in an overall $2.3 billion reduction in multifamily and CRE loans and a CRE concentration ratio now falling below 400% and fourth, our credit quality profile continued to improve as nonaccrual loans declined, while we also had a decrease in net charge-offs and the provision for loan losses. Moving to Slide 4. After 2 years of building a solid foundation for growth, we expect that in 2026, our earning power will continue to strengthen with a full year of profitability driven by continued growth in net interest income and margin expansion, along with a continued focus on managing our expenses lower, leading to a positive operating leverage in 2026. We remain focused on further improving the bank's credit profile as we proactively manage our CRE exposure lower through par payoffs and opportunistic loan sales, reducing nonaccruals and a lower level of charge-offs. We will continue to diversify the loan portfolio through growth in non-CRE loans, especially through our C&I lending platform. And lastly, we will generate deposit growth across various business lines while keeping our discipline on pricing. On the next slide, we highlight the road map we employed to solidify the balance sheet and reposition the bank for growth. We built a strong capital position as our CET1 capital ratio has increased by almost 400 basis points, now ranking us amongst the highest, best capitalized regional banks amongst our peers. We have also fortified our ACL through a rigorous credit review process and have increased the ACL up to 1.79%, also amongst the tops of the regional banks. We significantly enhanced our liquidity position as cash and securities have increased to 25% of total assets, and we reduced our reliance on wholesale funding, lowering the cost of funds and boosting our net interest margin. And during the year, we reduced our brokered deposits almost by $8 billion. We believe that our strategic initiatives over the past couple of years have provided us with the opportunity to drive sustainable growth and profitability going forward. The next 2 slides highlight the continued momentum and tremendous progress in our C&I business. Under Rich Raffetto's leadership we've built in a relatively short period of time of about 15 months, a very powerful origination team across America. As you see on Slide 6, you can see that the C&I lending had another strong quarter in commitments and originations. As total commitments increased 28% to $3 billion, while originations increased 22% to $2.1 billion. This is led by the bank's 2 primary strategic focus areas, our specialized industries and corporate and regional banking group. On Slide 7, you'll see the overall C&I growth was $343 million or 2% compared to the third quarter, our second consecutive quarter of net C&I loan growth. This was driven by $1.5 billion in combined growth in these 2 businesses. One of the things that you also can observe on this slide is that we derisked a number of the businesses, as we've talked about in the past, where either because of hold size or credit quality, we've decided to reduce those exposures or exit those credits. Alone in 2025, it was roughly about $4 billion of actions that we took and we do see the businesses of like asset base and equipment finance and mortgage starting to be accretive to our loan growth going forward. Turning now to Slide 8. You can clearly see the protective of our adjusted EPS as we successfully executed on all our strategic initiatives, resulting in the first profitable quarter since the third quarter of 2023. With that, I now will turn it over to Lee to review our financials and credit quality. Lee Smith: Thank you, Joseph, and good morning, everyone. We're obviously very pleased with our performance in the fourth quarter and for the full year in 2025. We're executing on our strategic vision and have returned the bank to profitability as we said we would do. we feel we're very much on track to make Flagstar one of the best-performing regional banks in the country over the next 2 years. Our unadjusted pre-provision pretax net revenue improved $51 million quarter-over-quarter, while our adjusted pre-provision pretax net revenue improved $45 million versus Q3. We achieved NIM expansion of 14 basis points quarter-over-quarter after adjusting for a onetime hedge gain of approximately $20 million. We paid off another $1.7 billion of high-cost brokered deposits and $1 billion of club advances as we further reduced our funding cost and continue to demonstrate excellent cost control. On the credit side, quarter-over-quarter, we saw a reduction in criticized and classified loans of $330 million, including a reduction in nonaccruals of $267 million, while net charge-offs declined $26 million, and the provision decreased $35 million. CRE par payoffs were again elevated at $1.8 billion, of which 50% was substandard, and we ended the year with 12.83% CET1 capital. almost $2.1 billion pretax above the bottom of our targeted operating range of 10.5%. We're thrilled with the quarter and fiscal 2025, and are excited about what we will accomplish in 2026 and beyond. Now turning to Slide 9. This morning, we reported net income attributable to common stockholders of $0.05 per diluted share. There were only a couple of notable items in the fourth quarter. First, our investment in Figure Technologies was revalued $9 million higher than the value on September 30. Second, we accrued $4 million in severance costs for FTE reductions that occurred in January 2026. Therefore, on an adjusted basis, after also excluding merger expenses, we reported net income of $0.06 per diluted share, significantly better than last quarter and above consensus. On Slide 10, we provide our updated forecast through 2027. We slightly adjusted our net interest income guidance for both 26 and 27 as a result of higher payoffs and a smaller balance sheet for 2026 is now forecast to be in the $0.65 to $0.70 range and EPS for 2027 is forecast to be in the $1.90 to $2 range. On Slide 11, we provide an overview of the expected balance sheet growth in 2026 when compared to year-end 2025-point to point. Another highlight this quarter was the double-digit increase in net interest margin. Slide 12 shows the trends in our NIM over the past several quarters. Net interest margin improved 23 basis points quarter-over-quarter to 2.14% when including a gain of $20 million for the hedges tied to long-term flip advances that we restructured at the end of the quarter. Excluding this onetime benefit, NIM was 2.05%, still a 14 basis point increase from the third quarter. Turning to Slide 13. Costs remain well controlled as core operating expenses declined approximately $700 million when comparing full year $25 million to full year 2024. The modest linked quarter increase was mainly the result of higher short-term incentive compensation and associated taxes. Slide 14 shows the growth in our capital over the past 5 quarters and the strength of our CET1 ratio up 12.83%, our CET1 ratio ranks among the best relative to our regional bank peers. And at this level, we have over $2 billion in excess capital pretax or $1.4 billion after tax relative to the low end of our target operating CET1 range of 10.5%. Slide 15 is our deposit overview. Like last quarter, we further deleveraged the balance sheet by paying down over $1.7 billion of brokered deposits, which had a weighted average cost of 4.4%. We also paid down $1 billion of advances with a weighted average cost of 4.3% and saw our mortgage escrow balances declined $1.4 billion, which was typical seasonality as taxes and insurance balances are paid out at the end of the year. In addition, approximately $5.4 billion of retail CDs matured with a weighted average cost of 4.29%. We retained approximately 86% of these CDs and they moved into other CD products that were approximately 45 to 50 basis points lower than the maturing product. In Q1 2026, we have another $5.3 billion of retail CDs maturing with a weighted average cost of 4.13%. The deleveraging actions, CD maturities and other deposit management strategies have allowed us to reduce interest-bearing deposit costs 26 basis points quarter-over-quarter. We continue to actively manage the cost of our deposits and are performing in line with the 55% to 60% target beta on all interest-bearing deposits with the Fed cuts. Slide 16 shows our multifamily and CRE payoffs for the quarter and the full year. We continue to experience significant par payoffs of approximately $1.8 billion, in the fourth quarter, of which 50% were rated substandard, including the disposition of the previously disclosed $253 million sale in October. -- approximately $244 million of this quarter's payoffs were multifamily greater than 50% rent regulated. We continue to see strong market interest for multifamily loans from other banks and the GSEs. The par payoffs are also leading to a substantial reduction in overall CRE balances and in our CRE concentration ratio total CRE balances have declined $12.1 billion or 25% since year-end 2023 to about $36 billion, aiding our strategy to diversify the loan portfolio to a mix of 1/3 CRE, 1/3 C&I and 1/3 consumer. In addition, the payoffs have led to a 120 percentage point decline in the CRE concentration ratio to 381%. The next slide is an overview of our multifamily portfolio which has declined 13% or $4.3 billion on a year-over-year basis. Our reserve coverage on the overall multifamily portfolio of 1.83% remains strong and is the highest relative to other multifamily focused lenders in the Northeast. Furthermore, the reserve coverage on those multifamily loans where 50% or more of the units are regulated is 3.44%. Currently, we have about $12.9 billion of multifamily loans that are either resetting or contractually maturing between now and the end of 2027. And with a weighted average coupon of less than 3.7%. If these loans pay off, we can reinvest the proceeds in C&I or other loan growth at market rates or choose to pay down wholesale borrowings. And the borrowers stay with Flagstar, the reset rate is significantly higher than the existing rate, which provides a NIM benefit. On Slides 18 and 19, we have once again provided significant additional information on our New York City multifamily loans, where 50% or more units are regulated. This tranche of the multifamily portfolio totals $9.2 billion as an occupancy rate of 98% and a current LTV ratio of 70%. The approximately 53% or $4.8 billion of the $9.2 billion are pass rated and the remaining 47% of $4.3 billion are criticized or classified, meaning they are either special mention, substandard or nonaccrual. Of the $4.3 billion, $1.9 billion in nonaccrual and have already been charged off to 90% of appraisal value, meaning $355 million or 16% has been charged off against these nonaccrual loans. Furthermore, we have also added an additional $91 million or 5% of ACL reserves against this nonaccrual population, meaning we have taken 21% of either charge-offs or reserves against this population. Of the remaining $2.4 billion that is special mention and substandard loans between reserves and charge-offs, we have 6% or $150 million of loan loss coverage we believe we're adequately reserved or have charged these loans off to the appropriate levels and with excess capital of $2.1 billion before tax we think we're more than covered were there to be any further degradation in this portion of the portfolio. Slide 20 details our ACL coverage by category. The $43 million reduction in the ACL was largely driven by lower health reinvestment balances, a better economic forecast and higher recoveries. Our coverage ratio, including unfunded commitments remained flat at 1.79% quarter-over-quarter. Our ACL reserve at 12/31 also includes adjustments for the 1 borrower in bankruptcy, where the auction process was recently finalized and confirmed by the bankruptcy court. We expect to close the sale of these properties before the end of the first quarter. On Slide 21, we provide additional details around our asset quality trends. All of our credit quality metrics trended positively during the fourth quarter. Criticized and classified loans decreased $330 million or 2% on a quarter-over-quarter basis and were down $2.9 billion or 19% since the beginning of the year. Our net charge-offs decreased $27 million or 37% to $46 million compared to the previous quarter. and net charge-offs to average loans improved 16 basis points to 30 basis points. Nonaccrual loans were $3 billion, down $267 million or 8% compared to the prior quarter. Included in this $3 billion nonaccrual amount are the loans tied to the bankruptcy I referenced earlier, which we expect to close the sale on before the end of the first quarter. At the end of the quarter, 30- to 89-day delinquencies were approximately $988 million, an increase of $453 million from the previous quarter. I will point out that the biggest driver of this increase is the additional day or 31st day of December versus 30 days in September. This accounted for $410 million of the increase and as of January 26, approximately $690 million or 70% of these delinquent loans have been brought current. Furthermore, $298 million of these delinquent loans at 12/31 were driven by 1 borrower who pay subsequent to the month end and has done so once again. bringing his account current as of Jan '26. As we reported last quarter, in the month of October, we sold approximately $253 million of these borrowers' loans, reducing our exposure in this 1 name. We're finalizing the review of the 2024 annual financial statements for all CRE borrowers. And today, we've completed the review on approximately 93% of loans of the 93% reviewed 80% are stable, 7% have improved and 13% have declined. So almost 90% are stable or improving. All of this has been considered as part of our ACL analysis. Concluding on Slide 22. Since the beginning of 2024, and we have proactively managed our CRE exposure lower by over $12 billion or 24% through par payoffs, net charge-offs, amortization and other dispositions. We have also increased our ACL coverage against the remaining CRE portfolio during this time. This significant derisking, along with our solid capital position, strong liquidity and an expense optimization program has created the solid foundation for us to grow and be successful. We continue to deliver on our strategic plan and are excited about the journey we're on and the value we will create for our shareholders over the next 2 years. With that, I will now turn the call back to Joseph. Joseph Otting: Okay. Lee. And before moving to Q&A, as I stated at the beginning of the call, we are extremely proud of our performance in 2025 and returning to profitability during the fourth quarter. This milestone reflects discipline and hard work of our entire team. We made a difficult but necessary decisions that strengthened our balance sheet, diversified the loan portfolio, lowered our cost we thoughtfully invested in our C&I and private banking businesses along with our IT and risk management infrastructure. I'd like to thank our executive leadership team and all the teammates for their dedication and commitment to the organization and our customers. I'd also like to thank our Board of Directors for their invaluable advice and support. As I said, I think we probably set a record for Board meetings last year. And now I'd be happy to turn it over to the operator to open up for questions. Thank you. Operator: [Operator Instructions] Our first question will come from the line of David Chiaverini with Jefferies. David Chiaverini: So I wanted to start on NII. I saw that you lowered it by $100 million. Can you talk about the drivers behind that? I'm assuming it's the higher payoff activity, but any detail there would be helpful. Lee Smith: Yes, you're exactly right, David. It's the higher payoff activity. particularly as it relates to multifamily and CRE loans. And we use that excess cash to further delever the balance sheet. And as I mentioned, we paid down $1 billion of flow $1.7 billion of brokered deposits. And then we saw $1.4 billion of mortgage escrows exit in Q4, which is seasonality because they would see escrow deposits, which is when they usually go out and then they build throughout the rest of the year pay out in the fourth quarter. And so that reduction -- the other thing that we -- I will point out is you've heard us talk about tall trees as it relates to that legacy C&I book. And what we mean by that is we have some large oversized exposures in individual names. We're talking $250 million, $300 million. and we've rightsized a lot of those in order to bring them in line with our sort of risk tolerance levels and how we think about things today. And so you've seen run off, particularly in the ABL and dealer floor plan space and also the MSR space. I would say that we are mostly through that and so I think what you're going to see is higher net C&I growth starting in the first quarter here because we are mostly through that rightsizing of those to trees. But coming back to your initial question, it's those additional par payoffs that have effectively reduced the assets. We used the excess cash to sort of reducing NIM, and that's rolled through into '26 and '27. David Chiaverini: Great. And sticking with the payoff activity, you're guiding $3.5 billion to $5 billion for 2026. How much of that -- to the extent you have line of sight on it, how much of that do you expect to be substandard? Lee Smith: Well, I commented on the $1.8 billion this quarter, which was 50% substandard. And we have been throughout 2025, we've seen 40% to 50% of those par payoffs be substandard loans. So we don't see any reason for that to change as we move through. Joseph Otting: Yes. David, in that regard, I mean, as you have followed us, we originally were projecting those payoffs to be in the $700 to $800 million. But as those loans come up, our pricing rollover is higher -- significantly higher than market and so it motivates to align with our goal to reduce our real estate but it motivates people to take those loans to other institutions or to the agencies. Our next question will come from the line of Dave Rochester with Cantor. David Chiaverini: Just looking at, I think, Slide 11 here, you've got some great loan growth planned for this year. I just wanted to hear about how comfortable you are on the funding side of things with funding this with core deposit growth. Joseph Otting: Yes. Let me -- yes, go ahead, Lee. Lee Smith: Yes, I was going to say let me go and then Joseph can jump in. Yes, we feel pretty good. As we think about core deposit growth, I think there are a number of avenues that we're pursuing. Obviously, we think we can grow deposits from our 350 bank brand shares, we're in good geographies across the country, as you know. But we also are going to leverage these new C&I relationships. So as you've seen us grow the C&I business very successfully under Rich Raffetto, as Joseph mentioned, we believe that we will be able to leverage those relationships, not just to bring in deposits, but bringing more fee income as well. And then the final piece is the private client bank, and we feel that we can leverage deposits from our private client bankers as well going forward. And so that's how we're going to drive core deposit growth. as we move forward through '26 and into 2027 as well. David Chiaverini: Great. Appreciate that. And then just on the capital, you mentioned $1.2 billion after tax -- of excess capital. You guys are still obviously trading at a discount to your adjusted tangible book value per share adjusted for the warrants. It sounds like you're making faster progress than maybe you expected even just a few months ago. You mentioned all the all trees that you had then it sounds like you're pretty much at the end of that process of trimming, meaning C&I growth ramps up earlier, faster you're making a lot of progress on the credit front, which is great to see and profitability is only going to follow from that. It seems like you're going to be in a great position to buy back your stock with all the fundamentals going the way you need and you've got a ton of excess capital. I know you talked about a potential Board meeting coming up in April. What are the prospects of you guys coming out strong on that and taking advantage of the opportunity here which I would think is probably not going to be here for very long to buy back your stock. Joseph Otting: Yes. What we've kind of communicated is that the variables really are, as you described, how much balance sheet growth can we get in the targeted areas how quickly we see the nonperforming cure, which we are forecasting in total that in 2026, we'll be down $1 billion. And I think what the Board will look for with management's recommendation, as we look at those numbers coming together in 2026, how do we deploy that excess capital. And I would tell you, it's definitely discussion point amongst the board. And I would say, as we move forward through the year, it would be something we would look favorably if we're not deploying the capital. Operator: Our next question will come from the line of Casey Haire with Autonomous. Casey Haire: Yes. Following up on Slide 11, another follow-up on the funding strategy. So Lee, I heard you sound pretty confident on the deposit growth. Just wondering where do the wholesale borrowings as a percentage of assets at 13%. Where does that go in your budget? Lee Smith: Yes. So we -- as I mentioned, we paid another $1.7 billion of brokered deposits of -- we only have $2.3 billion of brokered deposits remaining as of 12/31. So I mean we are writing probably better than other banks. And we've done a nice job over the last 18 months of reducing our exposure there. As it relates to -- and I talked a little bit about the flood restructuring in my prepared remarks. The reason we did that was we swapped out long-term flood for short-term flub and use some excess cash to pay off that or change out that $2 billion of long term. So we are now mostly sitting on short-term flub. And that is the opportunity for us in 2026 and beyond to further deleverage wholesale borrowings by paying down the club advances because we also get an FDIC benefit from that. So we think and we expect to continue to pay down the flub advances as we move through 2026 with any excess cash. Casey Haire: Got you. Okay. And then just switching to expenses. The expense guide of $1.5 billion to $1.8 billion, your current run rate, you're about $1.85 billion. So there's more expense rationalization coming in 2016? And just any color around that? Lee Smith: Yes. So there's a couple of things that I'd point out. And again, I mentioned this in my prepared remarks, we had additional incentive compensation and associated taxes in Q4. We also had severance of $4 million in the fourth quarter as well. And we -- the severance was related to some reductions. These are tough decisions that we executed on earlier this month. And so as I think about our sort of Q1 I we're probably more like , and this is excluding the amortization in the $4.55 to $4.65 range. And then you will see continue to decline after Q1 because remember in Q1, expenses are typically elevated because of FICA costs that are sort of front-end loaded in the year. But we continue to work through a number of other cost optimization initiatives. And we think you'll see further reductions in our FDIC expenses. We've got technology projects that are coming on stream that will allow us to get more efficient as we move forward. as well. And then there's still some real estate optimization as it relates to a couple of operating centers that we have. So I feel very comfortable, Casey, that we will be within the range that we've guided to, and you will continue to see a reduction in expenses as we move through the year. Operator: Our next question will come from the line of Manan Gosalia with Morgan Stanley. Manan Gosalia: Joseph, maybe a follow-up to the capital question. I know you noted that the priority for capital return or the priority for capital is to deploy for organic growth but I guess you also noted that the balance sheet will be lower given the CRE paydowns. Is there anything that could cause you to hold on to the excess capital for a little bit longer? Like are you maybe -- is it the rating agencies? Is it rent freezes and NYC? Is it maybe the C&I loans are coming on at a high RWA. Can you just help us think through what scenarios you would hold on to that excess capital? Joseph Otting: Well, I think the -- first of all, on the balance sheet, we do feel this quarter will be the low point in the quarter for the size of the balance sheet and that should grow going forward from here. The other thing, I think, limbs that we've been looking at, and I think this quarter, we saw improvement was we've taken on an initiative to move the nonperforming loans out of the bank. And we want to see that, that initiative continues to be successful and we get the nonperforming loans down. The other element that we do in '18, 1 of the reasons we think we have a very conservative view on our credit quality as we do this 18-month look forward on the loans to make sure what would the underwriting look like, both at the current coupon and what it would look like if they reset to market -- and that has historically, for us, drove a lot of loans into the special mention and to the substandard area. So I think as we can get some visibility around reducing all of that and as Lee commented, we have $9 billion of maturing in 2027. And we're about halfway through that because think about the 18 months. So we're -- this quarter, we're into the third quarter of 2027 looking at those loans that we're in a position to really understand what does that bubble look like coming through? And does it have any impact to the credit quality for the company. We haven't seen a major shift, but that's one area that we're keeping our eye on. Manan Gosalia: Got it. Very helpful. And then just maybe on the New York multifamily portfolio. So given that we could get rent freezes in New York in the near term, any updates on what you're hearing from your multifamily borrowers in the city? Joseph Otting: There's just a lot of dialogue going on about like how can we I think, collectively come to resolution between the new city government and owners of properties and banks that finance those about resolution. We are we look what would be the impact if this year, it seems like the rent board will be former Mayor Adams tilted and they have a history of looking at kind of the overall expenses and making adjustments to revenue accordingly. We've started to spend a lot of time looking out like forward thinking is if those rents were flat for 2 or 3 years and expenses went up a couple of percent, the impact on the portfolio. And so that's kind of where we're spending most of our time. But as Lee commented on, we have not seen a decline in liquidity. In fact, we saw acceleration of liquidity, taking us out of those loans in multifamily and regulated in the fourth quarter. So -- but we -- obviously, we spend a lot of time looking at various aspects of that portfolio to make sure that we understand our risk. And we were kind of early on in our process of effectively underwriting with that window out 18 months, both kind of what credit marks and interest rate marks would look like as those loans start to come up for maturity or repricing. Lee Smith: And Manan, I would just add to what Joseph said, I think the 2 key points that we made first of all was we haven't seen any slowdown in liquidity. Looking at the par payoffs we experienced in Q4, so that's number one. Number two, obviously, the work we did in 2024, where we re-underwrote that book and took both Ray and credit marks and we had the $900 million of charge-offs. But the other thing as well as sort of as we look forward, we have started looking at what sort of exposure might we have to the fines, violations, lens. We're just not -- we're not seeing much as it relates to that tie to app, but we don't have much exposure there was a landlord list that came out recently that we took a look at. And again, we don't have significant exposure there either. And we have the annual financial statements that we collect. And as I mentioned, we're 93% of the way through the '24 financials and 80% of stable, 7% have improved, 13% had deteriorated. So the vast majority are stable or improving. So there's a lot of different things we're doing to triangulate everything as it relates to that portfolio. Operator: Our next question will come from the line of Bernard Von Gizycki with Deutsche Bank. Bernard Von Gizycki: Just on a borrower that went through the bankruptcy process, Lee, can you just update us on some main takeaways like on the economics? How much of the loan you have left? I think you mentioned some of the sales you had on there it seems like it's mostly reserved for already from your prepared remarks, the new yields and you thought from improved credit profile. Any additional provided? Just any color you can share on that process on that loan position? Joseph Otting: Yes. So first of all, as we've said before, we do not get into the specifics as it relates to customer loans and deals, transactions. We just don't do that in a public forum. I think what I would say and sort of just reemphasize is the auction was completed. It was confirmed, and we expect that to close before the end of the first quarter. what we've got in all of those loans today are in our nonaccrual balance and there's probably about $450-plus million of nonaccruals as it relates to that particular bankruptcy case. And anything that we do going forward would be an accruing loan. So I think that's how we would look at it. And as I said in my prepared remarks, everything related to that bankruptcy. So any additional charge-offs or that when they did we took in the fourth quarter, so there is nothing that is going to be taken in Q1 as it relates to that because we took what we needed to do in the fourth quarter and previous quarters. Lee Smith: Yes. In addition to lease, I would just add, there were very -- we were almost on top of the mark for where we knew the bid was. So there wasn't a material add to reserves for that particular transaction. But you can you can also run the math of like you have a nonperforming loan of that dollar amount, and you're going to turn that into a performing loan. It obviously is -- will be positive from a net interest income perspective. Bernard Von Gizycki: Great. And then just on re-regulated portfolio on Slide 19, the $4.3 billion of criticized and classified I'm just wondering, of the $1.9 billion, how much of that has repriced as of today? And what percentage does that go through by the end of 2026. And I'm just wondering, similar repricing for that $2.4 billion of the special mention loans. Lee Smith: Yes. So I'm looking at the $4.3 billion in total, 54% of it is already repriced. And then another 36% of that will reprice within the next 18 months. So 90% of it has already repriced or will have repriced in the next 18 months. Operator: Our next question will come from the line of Jared Shaw with Barclays. Jonathan Rau: This is Jon Rau on for Jared. just thinking about the new loans being added to the balance sheet in C&I and then with CRE originations starting back up again, what the new like roll-on yield is for those? And the floating versus fixed mix on those loans? Lee Smith: Yes, yes. So the C&I loans we've obviously got a number of C&I verticals. And the loans are coming on at a spread to sofa of anywhere from $175 million to $300 million on a blended basis, you're probably in that 230 basis point range. As we're looking at the new CRE growth, I would say that the spread to sofa on those loans is more like $200 million to $225 million. basis points. So that's how we would think about the spreads for the new originations. Jonathan Rau: Okay. Great. And then just thinking ahead, to the governor election later this year in New York. Any -- I guess, first, do you expect any potential action on the 2019 law change related to rent regulated in advance of that? And I guess, just broader thoughts on what the election could mean for that? Joseph Otting: Yes. I think that's something that will take its ordinary course. On the 2019 legislation, I think there's -- now that we've had a number of years to kind of look back on that. I think there are certain parts of that, that I think there could be common ground on how do we fix the issue. And 1 of the areas is these go units where the legislation effectively made it uneconomic to remodel units that are vacated. And so what you've had is a number of instances where landlords just keep them vacant. Those are estimated 50,000 or 60,000 units and so I think there's a lot of talk about, is there an economic model that could revise that rule the way it was written to make those available to come back on the market and reimburse the owners. But the rest of that, I think we're going to have to see ultimately what direction that takes and how much discussion? I do know there's a lot of dialogue now occurring between property managers, owners of properties in the city. And hopefully, we all feel that we want people to live in safe and sound environments are supportive of continued correction of any violations amongst our portfolio. We're now watching that very closely. And we do expect borrowers when they have violations to cure those. Operator: Our next question will come from the line of Chris McGratty with KBW. Christopher McGratty: Maybe for you, the $1.1 billion of par payoffs I think it was $1.2 billion or so last quarter. I guess my question is a degree of confidence in the updated balance sheet, especially if the forward curve comes through and you get a couple of cuts and maybe prepays pick up a bit. Lee Smith: Yes. I mean I think we feel good about the PAR Pay of sort of continuing as we move forward. Now, as Joseph mentioned, when we came in to '25, we thought that the par payoffs would be around sort of maybe $800 million on average a quarter. And we've seen in excess of $1 billion a quarter in 2025. There's a lot of demand out there from other financial institutions and the -- and we think that, that will continue in 2016. What I would say, Q1, seasonality-wise, is typically the lowest quarter for par payoffs as we saw in 2025 and then it sort of picks up Q2, Q3, Q4. And we expect to sort of see a similar thing in 2026. And look, I think the forecast we have put forward in the guidance, we were using the rate curve as of the middle of December, it had 2 cuts June and September. And a declining rate environment is only going to help those borrowers refinance. So yes, I mean, look, I think we feel that we should be in that $1 billion ZIP code on a quarter on an average basis plus as we move through 2026. Joseph Otting: Okay. And then Chris, I would just add that we've declared that we're going to begin to originate some CR. And this isn't a big dollar amount. We're talking about a couple of billion in originations in a year. Just as if we've seen the acceleration in the paydowns and obviously, that will be New York City multifamily. But as we look across our franchise in Michigan, California, Florida, markets sourcing opportunities in the commercial real estate will help to offset some of that outflow. Christopher McGratty: Great. And my follow-up, I guess, 2 parts, Lee, on the model. the risk-weighted assets, given the par payoffs and the nonaccrual resolution plus the growth, how do we think about just the cadence of RWA growth over the year -- and then also a help on the first quarter share count with the warrants and everything. Lee Smith: Let me start with the share count. So in Q4, the share count was [ 459 million ]. And then if you're looking at the sort of [ 26 million and 27 million ] you should be using around 473 million and then 479 million shares. So that's how we would think about the share count. In terms of the risk-weighted assets. So you've got to remember that as it relates to the multifamily and CRE book, first of all, the nonaccruals are 150% risk weighted anything that is sort of substandard special mention is 100% risk-weighted and so C&I loans coming on are typically 100% risk-weighted but it's not as if you are really losing 2 we've got obviously the 50% risk weight in our multifamily for the performers. But as we've mentioned, we've seen a lot of those standard loans pay off at 100%. We're looking to reduce our nonaccruals, which are 150%. So while we use capital as we grow the balance sheet, it's actually not as punitive as you may think for those reasons. Operator: Our next question will come from the line of Janet Lee with TD Cowen. Sun Young Lee: I appreciate the Slide 11, where you indicated an average deal size for C&I being around $25 million, which is on a larger side for a typical regional bank, but probably not for you guys. Are some of these syndications? And are you able to share any other metrics on underwriting just given that as a newer segment for Flagstar? Joseph Otting: So Janet, I think that we -- if you go back and look at Slide, -- and the top 2 businesses is where we're seeing most of the growth now in the specialized industries and the corporate regional commercial bank. And so each of these businesses have a little bit different characteristics. But the commercial, corporate and regional we target kind of mid- to upper middle market and lower corporate and in those particular categories, we shoot in a lot of instances that we are the primary bank of those relationships that we're generating. So it is really kind of a 1, 2 or 3 bank where we would look to lead that. In the Specialized Industries group, those are 12 industry verticals and as we've come into those, we've hired highly experienced people that have been in a lot of these industries for 25 or 35 years, we're getting into bilateral and some participations, but our goal in those instances also is to be in smaller bank groups where it's like oil and gas or health care, very few of those where you would have 20 banks, and we're just one of banks making a $30 million commitment to the transaction. That is where our focus has been where we've entered into transactions like that, our people have direct relationships with the management. And it's obviously our goal to swim up the fish ladder, so to speak, in the importance to those companies. So we -- it's highly diversified the originations. And then when you get into the equipment finance, those are usually multibank transactions, but we may be the only bank financing their equipment finance. And then in the asset base, we also look to be the primary bank in those transactions. So it's a really -- it's business by business is the way I would describe that. Lee Smith: Yes. The other thing, Janet, that I would -- first of all, on the credit side, as Joseph has mentioned, we're not we've seen really good growth on the C&I side, but it's not because we're taking outsized positions in single names Far from it. The average loan size is sort of $25 million, $30 million. And so we're kind of managing the risk just in terms of the deal size Credit has final say on all loans that come on to the balance sheet. We have a first line review within the business as it relates to all credits that come on. Then you have the second line credit and then we have loan review in the third line. So we have a very, very robust process in place as it relates to assessing the quality of these loans before we bring them on. And then a couple of other things that I would say. We've talked about the spreads that we're typically seeing. So we're not giving the business away. We're sort of averaging a spread to sofa of $225 million, $230 million and so I think that's a good indication that again, we're not giving it away or doing sort of cheap deals. And we've typically seen a 70% utilization on these facilities as well. And I think that's another important metric that is worth emphasizing. Sun Young Lee: And just lastly, for a NIM guide of [ 240 to 260 ], which is a pretty wide range, I think you said also balance sheet is at a low point this quarter and you're assuming 2 rate cuts. It's sort of the midpoint of that range where your baseline expectation is what would put you at the higher ed versus lower end? Lee Smith: Yes. Well, Janet, it's a good question. As you know, we have a lot of moving parts as it relates to the NIM improvements. And what I mean by that is on the asset side, you do have that multifamily and CRE runoff. And I mentioned that if you look at what is running off in -- what is resetting, I should say, or maturing in 2 and there's about $5 billion, it has a weighted average coupon of less than 3.7%. So you've obviously got how much of that is going to reset and stay how much will ultimately pay off. You've got the C&I growth at the spreads that I mentioned. We're going to be originating new CRE loans as Joseph mentioned. And then we also expect to continue to grow that consumer book, particularly by adding residential 1 to 4 mortgages to the balance sheet. And then on the funding side, we've done a really nice job of reducing core funding or core deposit costs in Q4 and 2025, and we will continue to do that. Even outside of the Fed cuts by leveraging some of the opportunities we have as retail CDs, mature, and we can roll them into lower-cost CDs. And then obviously, continuing to pay down wholesale borrowings, particularly the flood advances. I think that's the focus for us in 2016, given the good work we've done, bringing our broker deposits down to a level that is pretty consistent with other banks. So you've got all of those sort of contribute to the NIM. And the final thing I should have added is obviously reducing our nonaccrual loans which we're intending on doing as well. So you've got all of those sort of moving pieces. They all contribute to the improving NIM. But that's why we've got that range because you've got all those variables. Operator: Our next question will come from the line of David Smith with Truist Securities. David Smith: On the C&I growth, just a clarifying question. You pointed to 125 relationship bankers doing 4 deals a year. So that will be 500 deals at an average deal size of $25 million or what are the offsets bringing C&I growth down this year to $6 billion to $7.5 billion, if you're mostly done rightsizing legacy loans I guess maybe is that like originations as opposed to like actual loans coming on the balance sheet, but it seems still not quite to the 6.75% ramp. Lee Smith: Yes, David, you have to realize that, that's the model we have with the people, but not everybody is going to achieve that 100%. David Smith: Okay. So that's not an average, that's like the target or so -- it's our target. Lee Smith: Yes. Okay. Is what I said. That's the target. But again, that's if everything goes perfectly, number one. Number two, while we're mostly done, I think in '26, the one portfolio where you will see some additional runoff will be the ABL and dealer floor plan. I think there's still some additional sort of runoff there. And then with C&I loans, you're just going to have the normal course sort of pay downs and people using the line, not using the line in amortization so you've kind of got that movement as well. And so I think all we're trying to -- what we're trying to provide people with here is a lot of people have questioned our ability to grow C&I at the numbers that we've indicated -- and I think when you break it down like we have -- when we're showing $3 billion of new commitments in Q4, $2 billion funded and when we're showing the number of customer-facing bankers that we have and what our expectation is, I think what we're just indicating is, look, this isn't as big a stretch as I think some people thought a few months ago. David Smith: Okay. And then just there's a lot of uncertainty, obviously, in the rate backdrop right now. We just got a new Fed share-denominated can you talk about what you see as the ideal rate backdrop for Flagstar when you think about the bank's asset sensitivity today and how that evolves if you plan over the next year or. Joseph Otting: Yes. I would say we're pretty neutral from an interest rate sensitivity point of view, there is no doubt about it, though, a declining rate environment, it helps our multifamily borrowers and so we think that, that is beneficial. It will also -- we believe you'll see more mortgage activity as well and so we have an active and very good mortgage business that we feel will benefit from in a declining rate environment. So we sort of call it this belies model hedge that even though from a balance sheet point of view, we're pretty neutral. The business model, there are benefits that we will enjoy in a declining rate environment. David Smith: And is that a steeper curve still being better or just overall flatter given CRE has been a. Joseph Otting: Yes. I think if the short end because the way we think about multifamily, it's sort of the 5-year and then obviously, mortgages at the 10-year so we'd be looking to sort of see an impact with a 5- and 10-year in particular, that would really benefit the multifamily and mortgage borrowers. Operator: Our next question will come from the line of Anthony Elian with JPMorgan. Anthony Elian: Lee, how are you thinking about NIM and NII specifically for 1Q after we back out the 9 basis points and $20 million benefit you saw from the hedge gains. Lee Smith: Yes. Well, I'm not sort of -- I haven't -- and we haven't deliberately given sort of quarterly guidance. But I think what I would say is as I mentioned, in Q4, when you back out that onetime gain, we were at 2.05% and you've seen a steady increase quarter-over-quarter. So we were up 14 basis points versus Q3. And our expectation is you will continue to see that NIM improvement quarter-over-quarter as we move through the year. So we're not getting sort of specific by quarter. We're giving that overall guidance for the year. But I mean, just looking at that guidance, I think you can expect us to continue on that positive trajectory quarter-over-quarter. Anthony Elian: Okay. And then on Slide 11, so you're calling for year-end assets in the range of $93.5 million to $95.5 billion. But if I stretch this out, how are you thinking about assets for 27 just relative to the range that you gave last quarter, I think it was $108 billion to $109 billion. Lee Smith: Yes, yes. So we think that the balance sheet at the end of [ 27 million ] will be sort of more around $103 billion. Operator: Our next question will come from the line of Matthew Breese with Stephens. Matthew Breese: Popular slide, Slide 11. I was focused on cash and securities. So cash balances are still a bit elevated at 6.7% of assets down this quarter. maybe first, what drove lower cash balances? And then as we look ahead, what is the breakdown between cash growth and securities growth to get kind of that $2.5 billion midpoint of total growth there for the year? Joseph Otting: Yes. So the reduction in cash was the deleveraging and, as I mentioned, we paid down the $1.7 billion of broker deposits, $1 billion of flub. We did actually buy another $1 billion of securities in the fourth quarter. We haven't spoken about that, but we did buy another $1 billion of securities. So we used some of the cash to further build that securities book. And the way we think about it is sort of the cash in the securities is somewhat fungible. And we'll just kind of look on really a real-time basis what are we better doing with any excess cash we have, should we buy more securities? Or can we use that to lever and so that's the relationship between sort of securities and the cash, somewhat fungible. And that's how to think about it when you're looking at the numbers, Matt. Matthew Breese: Okay. And then Lee, I don't know if you have it at your fingertips, but do you have the cost of deposits at year-end or more recently. And as we think about some of the higher cost categories, maybe time deposits what is kind of the blended rate that CDs are going to, as they mature and come back on? And is that a decent proxy for where you think CD cost could go over the next year? Lee Smith: Yes, yes. So the spot rate as of the end of the year, and this is for all interest bearing for all deposits. So it does include our noninterest-bearing DDAs are in here as well, was [ 2.56 ]. And then as I mentioned in my prepared remarks, we had $5.4 billion of CDs that matured in Q4 with a weighted average cost of 4.9%. And we've retained 86% of those move them into products sort of 40 to 50 basis points lower. In Q1, we have $5.3 billion of CDs maturing with a weighted average cost of 4.13%. So I think the way I would think about it is the CDs that are maturing in the first quarter, while we won't sort of probably realize the same 40 to 50 basis point benefit I do think that we can realize a sort of 25, 35 basis point benefit at least as those CDs mature -- and then just looking out further, right now, we have another $4.2 billion maturing in Q2 at a weighted average cost of 4%. Matthew Breese: Very helpful. And then just last quick one, if I can sneak it in, is you provided some updated share counts for the years ahead. Is that both average diluted and common shares outstanding? And that's all I have. Lee Smith: Basically, the share count, it includes the warrants are included in there. So it's fully diluted. Operator: Our next question will come from the line of Jon Arfstrom with RBC. Jon Arfstrom: Curious on the multifamily loans maturing over the next 2 years. Curious on the health of those credits in general. And then any chance that nonperforming balances could have a larger step down at some point over the next couple of years, just based on what's maturing. Lee Smith: So we -- what we said previously, let me start sort of with the last part of the question. As it relates to the -- so we ended the year at about $3 billion. Our expectation is we can reduce those by $1 billion in 2026. Now Again, remember, included in that $1 billion is the bankruptcy loans that we've talked about earlier on this call, which is sort of $450 million. So we do believe that we can reduce the nonaccrual fairly substantially in 2016 when you include the resolution of the bankruptcy. In terms of the loans that are hitting their reset and maturity dates. There is nothing different about the overall quality or characteristics of those loans than any loans that have reset or matured prior, so in '25 or before. And what we do, as Joseph has mentioned, is any loan that is resetting or maturing in the next 18 months. That is the trigger for us to do a deep dive analysis on that loan and run a pro forma SCR based on the interest rate that would be in effect today. And so we are constantly looking out and running those analyses on those loans that are coming to -- up to their reset or maturity day. And obviously, that's all considered as part of our process. So it's all included in everything that we've taken and disclosed in the fourth quarter. But the reason anything unique about the characteristics of the Multifamily and CRE loans that are hitting their maturity and reset dates over the course of the next 18 months, 2 years that we haven't seen in resets of maturities up to this point. Joseph Otting: And one thing Jon, the one thing I would add, we track the payoffs and determining whether we're getting negative selection by keeping the back crafts and good credits are paying off. And it's held almost consistent really since we've been here. the percentage of substandard and then what's in the rent regulated. So it's amazingly consistent how that has continued to b, as those payoffs come in. And that, I think, is just reflective of what we think is a good assessment of the risk in that portfolio. Jon Arfstrom: Okay. Good. And then, Lee, maybe just wrapping this up on the guidance. I get the adjustments in refinements. It's kind of like a mixed blessing, I guess, with the payoffs. But what do you think are the biggest risks on your '26 guidance. It doesn't seem like it's credit. Are we just talking about subtle nuances at this point? Lee Smith: Yes. I think it is certainly one. Obviously, I think we're sort of can we execute. I think that's really what it boils down to as I've mentioned, there's a lot of moving parts, which is -- it's a good thing, and it's a bad thing because obviously, you're having to kind of estimate what that all means -- but I think we're now pivoting to the growth side of the story. And so it's really all about can we execute on that growth side of the story. And look, I think everything we said we would do in '25 we've delivered on. And so I think this management team and this Flagstar team has proven that they are up for the challenge. Operator: Our final question will come from the line of Christopher Marinac with Janney. Christopher Marinac: Just wanted to ask about the mix of deposits as C&I grows. When we see the C&I and the treasury a much different component, 12 and 24 months from now lead? Do you have any sort of guidepost just in general for how that mix is going to shift. Joseph Otting: No, I think, again, we expect to leverage those relationships to bring in deposits. And I think it's going to be a mix, obviously, in an ideal situation you're bringing in noninterest-bearing the operating accounts. But I think as we sort of leg into that you'll see us sort of bring in interest-bearing DDAs and money market deposits. So I think it will be sort of a combination. But ultimately, as our strategy and our business model is about a full relationship business. It's not just giving the balance sheet away. So we would expect to start bringing in, in time, more operating accounts, which would be noninterest-bearing DDAs. And and further leveraging those relationships, not just for deposits, but the fee income as well. Christopher Marinac: Got it. So we'll see movement on those ratios and that mix during this year? Joseph Otting: Yes, I think that's fair. Christopher Marinac: Okay. Joseph Otting: The one comment I'd have for you, if you think about it, we've been effectively in this business about 15 months now. The credit opens up the license for us to be able to move more of the fee income and deposits into the company. And so it's a transitional period. But yes, I do think we will gain momentum on that, especially as we've not only in the C&I side, but we've also geared up some specialized industries on the deposit side. that are focusing on -- these are like some title and some escrow and some insurance companies that generally don't use the debt vehicles from banks as much, but they do use the depository treasury management, cash management services. from a bank. And so we're highly focused on growing that segment of our deposit business as well. Christopher Marinac: Got it. Operator: I will now turn the call back over to Joseph Otting for closing remarks. Joseph Otting: Okay. Thank you very much for joining us this morning. We really appreciate following the company and the questions that we get and both today and the follow-up meetings. We obviously remain extremely focused on executing on our strategic plan. including the transformation of Flagstar into a top-performing regional bank really focused on creating a customer-centric relationship-based culture and effectively to manage risk to drive long-term value. So thank you again for taking the time to join us this morning and for your interest in Flagstar Bank. Operator: This concludes today's call. Thank you all for joining. You may now disconnect.