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Fredrik Wester: Hello, and welcome to the Year-end Report and Quarter 4 Report for Paradox Interactive. My name is Fred. Alexander Bricca: I'm Alex Bricca, I'm the CFO. Welcome, everyone. Fredrik Wester: Welcome. So we'll take you through the releases and the numbers for the quarter. And as you know, we had a very eventful last quarter. It was [indiscernible] for many reasons. We had a lot of releases, first and foremost. So we released DLCs for all our major franchises. We created a good cash flow and a strong top line, where the results were hampered by a big write-off in the quarter. So we had a great release of Europa Universalis 5, which took this franchise to the next level, and it also celebrates 25 years. It celebrated 25 years last year. So it was a good time to release it as well. And we had some good results for a wider range of DLCs as well. Worth mentioning is the All Under Heaven DLC for Crusader Kings III, that expanded the map all the way to Japan. And as I said, the profit line or EBIT is affected by a big write-down of the game Vampire: The Masquerade – Bloodlines 2. And we were also facing some foreign exchange headwinds with a stronger krona and the weaker dollar, among other things. So we'll move on. If you look at the year as a whole, we had a year-on-year improvement of cash flow, which is always a great sign. We strengthened the balance sheet as well during the year and got a new balance on the balance sheet. We released, like I said, a new base game in Europa Universalis 5 and strengthened all the core of our IPs by having a constant flow of releases. We established 2 new franchises as well. So Victoria 3 and Age of Wonders 4 are now both part of our catalog with growing player numbers, and we're going to continue -- and we hope to continue these games for a long time, typically 10 or more years. So we also strengthened our foundation for building up the management games capabilities. We acquired Haemimont Games in February, creators of among other games, Surviving Mars and Tropico 3 and Tropico 4. And we took the Cities: Skylines franchise in-house, and we can already see the positive effects in the community of Cities: Skylines too. So those are all great news. If we want to look specifically at the releases this quarter, I mentioned Europa Universalis 5, I mentioned All Under Heaven. We released Stellaris: Infernals. We released Age of Wonders; Thrones of Blood; Hearts of Iron IV; No Compromise, No Surrender; Victoria 3, Iberian Twilight. And a smaller DLC for Victoria 3 during the same chapter of the game. On the management segment, we did a relaunch of the game Surviving Mars. It's been very popular in the community. We see great retentions. We hope to keep developing this game for a long time as well. And we released finally the first big DLC for Cities: Skylines II, Bridges & Ports, which had great results, great reviews and also good sales. At the same time, we released for Cities: Skylines II, 2 content creator packs and 2 audio packs. So talk about a very busy quarter. Other releases, I touched briefly upon Vampire: The Masquerade – Bloodlines 2 and we also for our deck-builder Across the Obelisk, we released and Necropolis of the Damned, which has been quite well received and also good sales for the franchise. We'll see what happens if we can build that franchise over time together with Surviving Mars. So they're a bit smaller at the moment. All right. And I'll leave to Alex for the numbers, a walk through. Alexander Bricca: Yes, let's do it. So revenues for the quarter came in at SEK 875 million, quite impressive. It can be compared to the SEK 709 million of Q4 of 2024. So that's an increase of 23%. Let's look at the drivers of that difference, mainly 3 things that make up the difference. Foreign currencies. So dollar was down, I think, 12% if you look at quarter average, euro down was at 5%, 6%. So all in all, it impacts our top line quite significantly in the wrong direction. Then the other 2 positives is the releases of Europa Universalis 5 and Bloodlines 2. Fredrik Wester: But it's also on revenue, it's our second best quarter ever. The record is still the quarter we released Cities: Skylines II. Alexander Bricca: Correct 2 years ago? Fredrik Wester: 3 years… Alexander Bricca: So these 3 explains the difference, I would say, between SEK 709 million and SEK 875 million. Then we have released content on pretty much all our major franchises during Q4 '25. So that helped the revenue significantly. But Q4 2024 was also a very huge release quarter in terms of live game. So -- but all in all, the live games have performed similar over those 2 quarters if you remove FX impact. So some better in '25 and some better in '24. So you mentioned Crusader Kings III, they did a fantastic Q4 in 2025 and increased revenues. Hearts of Iron on the other hand, they did a fantastic Q4 in 2024 when we released the Gotterdammerung expansion, which was very, very popular. So that was -- we couldn't really match that in Q4 of 2025. Victoria 3 did a little bit better '25. Stellaris a little bit better in '24. It varies with each expansion. Is it a popular expansion? And do we get it right or less so. So that differs. But all in all, live games performed very similar on a revenue level, it's similar effect. Fredrik Wester: Yes, solid performance from the core portfolio… Alexander Bricca: Correct. So top revenue contributors, we normally call them the usual 5 suspects, Cities, Crusader Kings, Hearts of Iron, Stellaris. Now we have added 2 to that list, Victoria and Age of Wonders. Fredrik Wester: So the usual 7. Alexander Bricca: Then, it will be the usual 7. But good to see both Cities 1 and Cities 2 are on this list if you break out the franchises and separate them. And in Q4 '25, we also had an 8th, and that is Bloodlines. Even though it had a negative impact on profit, it had significant revenues. Let's move on. Operating profit, minus SEK 245 million compared to SEK 395 million in the previous year's quarter. SEK 395 million was a record profit. So it's a difference of SEK 640 million. And the ones of you that followed our press releases in November when we took the write-down of Bloodlines, you know that we had SEK 701 million in amortizations and write-downs of Bloodlines 2 in Q4 '25, which we had 0, of course, in '24. So those SEK 701 million explains more than the difference of the SEK 640 million, you could say, if you want to do it super high level. Fredrik Wester: Yes, we chose to clean out the balance sheet. So it looks completely different today starting in '26. Alexander Bricca: Correct. So if you would disregard our Bloodlines 2, we would be at this record-breaking levels of EBIT despite the FX headwind. Fredrik Wester: Yes. That's great news because the dollar is down significantly. Alexander Bricca: It is. So profit after financial items, SEK 242 million compared to SEK 404 million, profit after tax SEK 201 million compared to SEK 311 million. And of course, profit margin is minus 28% and compared to 57%, which was a record high in Q4 of 2024. Asset or equity to asset ratio, very solid 79%. It has gone down a little bit from 82%. It's mainly driven by -- we prolonged the lease contract for the office here in Stockholm, with the accounting rules, you put the whole contractual agreement, the value of it on the balance sheet as a debt and as an asset. Fredrik Wester: All the years into the future. Alexander Bricca: All the years, exactly. Employees, average number in Q4 of '25 was 663. So that's up almost 90 -- 89 from 574 year before. The main driver is, of course, adding Haemimont to the team. Fredrik Wester: 55 people there. Alexander Bricca: 55 people at the acquisition. And then we have increased a little bit in Haemimont. Iceflake, we have increased in order to be ready to support Cities: Skylines. We have increased here in Stockholm Studio as well. Triumph has increased a bit as well. So a solid number. Let's move on. Right. So this is a breakdown revenue, green and the 3 cost items in yellow, blue and red. Let's go through them and break them out a bit so we can all understand what has happened. So cost of goods sold, biggest item, SEK 1 billion pretty much exactly in Q4 2025, up from SEK 263 million the previous quarter. So a super quick explanation would be to say it's the SEK 701 million in amortization and write-down of Bloodlines that makes up the difference. Then there is something left, and that's, of course, amortizations on EU5. So that is a very high level. But let's go down… Fredrik Wester: We see the selling expenses in blue, right? Alexander Bricca: Selling expenses in blue. That's the same drivers. Fredrik Wester: It goes was up when we release a lot of content, as you can see on the line there as well. Alexander Bricca: Yes. So it goes -- it was SEK 59 million in Q4 of '24, and it goes up to SEK 85 million -- SEK 84 million in Q4 of 2025. And the big explanation is releasing EU5 and Bloodlines that drove more marketing cost. The rest was very stable. So -- but SEK 59 million is a decent number, and that's because we have had a lot of releases on the live games, both in '24 and '25 years Q4. But let's go back a little bit to COGS and break it down for you who are interested in that. Amortization is the biggest item, SEK 510 million in Q4. Last year's or the previous year's Q4 was SEK 91 million, so it's up SEK 419 million. And we have written in the report Bloodlines SEK 346 million of that increase. And the rest is pretty much EU5. Then we have movements up and down on all the other titles, but mainly, it's the releases of Bloodlines and EU5 that has made up the difference. Write-downs is another item in the SEK 1 billion COGS. Write-downs was SEK 355 million, 100% regards Bloodlines, the previous year's Q4, 0 write-down. Then we take in COGS, SEK 8 million as cost for amortizations of the acquired businesses and assets. So this is down from SEK 14 million in the previous year's Q4. The reason it's down is because in 2020, we acquired Playrion and that was last summer, that was fully amortized from the books. But we add that we acquired Haemimont in the beginning of the year and in Q2, we acquired Stranded. So what we have done with the purchase price for those 2 assets is that we have fully allocated that to assets that we amortize. Fredrik Wester: Yes. So Stranded with Alien Dawn, the game, just to clarify [indiscernible] Alexander Bricca: Yes. So that is being amortized, I think, over 5 years. Haemimont, there we amortize it quicker. The fixed purchase price, it's amortized according to plan. Then we have taken -- then we have an earn-out for Haemimont as well that goes, I think, over 3 years roughly, and that is being driven by certain milestones being achieved. We have taken -- in 2025, we have taken SEK 32 million as earn-out. So that is all included in the COGS. So of course, we believe that the value of the studio is going to increase when we work together. But in our books, we are taking this as a cost. So it's kind of an aggressive way to do it. It pushes down our profits, but it's a very prudent way to handle it, perhaps overly cautious, but this is how we've always done things in Paradox, and we like to do it that way. Fredrik Wester: Yes. We have, I think, around SEK 20 million in goodwill. Alexander Bricca: Yes. Fredrik Wester: Something like [indiscernible] Alexander Bricca: Very little. All right. What sales in COGS, other depreciation, SEK 7 million, that's pretty much how the rent is being accounted for. We have royalties that's mainly regarding Age of Wonders and Cities: Skylines. That has gone down from SEK 45 million in Q4 '24 to SEK 35 million in Q4 '25. Then the remaining item, if you have memorized the numbers, then you will find out that we have SEK 85 million left in Q4, which is for noncapitalized development and tech costs in the publishing, so kind of support functions for the game development. So SEK 85 million in Q4 compared to SEK 105 million in Q4 the previous year. And here, we have items that moves both ways. But the main reason why this is lower is that when we have negative profit like we had in Q4, which is very rare, that has an opposite impact on the personnel cost because we share all the profits with the personnel. So a quarter when it's negative, we release previous balance sheet items. So it works like a bit of a hedge. Fredrik Wester: That's a small positive. Alexander Bricca: Yes, that's a small positive, correct. Selling expenses, we have already gone through. Admin is everything else. That tends to be quite fixed. So it was SEK 29 million Q4 '25 compared to SEK 25 million in the previous quarter. It might vary from time to time. Here, we have -- the reason why it's SEK 4 million higher this period is one-off things. We had a very massive popular staff conference in September. And part of those cost went into Q4. And then there were some other one-off items that made up SEK 1 million or SEK 2 million, so it differs from quarter-to-quarter. Fredrik Wester: Other income, I guess, is interest rate on money in the bank. Alexander Bricca: Other income is mostly currency movements on the working capital. So it's the movements on the foreign currencies during the quarter. Fredrik Wester: But last year, we also sold back the game Mechabellum to the developers, about SEK 13 million, I think, something in there. Alexander Bricca: Yes, that’s right. Fredrik Wester: That's one of the points of comparison in Q4 last year or Q4 in '24. Alexander Bricca: Exactly. So SEK 13 million or something SEK 12 million, SEK 3 million Mechabellum and the rest building up. So -- then we had some SEK 20 million positive effect last year's Q4 or '24 [indiscernible] we had a very strong dollar increase during that quarter. And this -- the Q4 2025, we have seen the opposite, especially in December, I think the dollar has come down. So there the net, if you add income and expenses together, you have SEK 6 million negative. So that's the difference. Interest, that's a financial item and the reason why it goes down from SEK 9 million to SEK 3.7 million is lower interest rates. Good if you have financed the company with debt, less good if you have cash positions. Fredrik Wester: If you have a house with a big mortgage, that's perfect. Alexander Bricca: Yes. But I'd rather take a company with a lot of cash than debt, even though... Fredrik Wester: I agree. Alexander Bricca: What else… Yes, let's move on then I think or did you have anything else? Fredrik Wester: Yes. Look, I say it's good. It's not very good. The result is not very good. But it's good to clean out the balance sheet as we will see in the next slide here. Alexander Bricca: Well, here we have... Fredrik Wester: The revenues… Alexander Bricca: Rolling 12 months of revenue and profit, it shows how volatile it is, but it also shows, especially if you look at the revenue line, there is a steady up growing trend, some accelerations and some falling down, but over time, it's a very strong growth. Profit-wise, it's more difficult to see it because when you have such a massive write-down and amortization like we had in Q4, it distorts the picture a bit. Fredrik Wester: It impacts a lot. And as you can see in Q4 '23 there, we released this guidance too, we had a peak on revenue on rolling 12. It's sliding down a bit, and now we're turning back up. So... Alexander Bricca: Yes. Let's say, now cash flow. So profit was or the result EBIT was minus SEK 245 million, but the cash flow is super strong in Q4. So cash flow from operating activities, SEK 513 million. It's not quite a record, but very close to the record we had 2 years ago when we released it too. So SEK 513 million, very strong. Cash flow from investing activities, that was SEK 145 million, that is what we have invested in game development. It's down from SEK 159 million Q4 of the previous year. And if you look a bit further or if you remember our report from 2, 3 years ago, when we had Lamplighters League in production, Bloodlines in production, Life by You in production, then we have come down significantly in cost for development. And now we are at SEK 145 million. I think that's a good representation of the new level that we are with. It fluctuates a bit between the quarter. But I would say SEK 145 million is a good representation of the new normal. Fredrik Wester: Unless something extraordinary happens, a big investment or requirement [indiscernible] Alexander Bricca: Sure, sure. Like you see it in Q1, it was -- the yellow bar is a bit bigger, and that's when we acquired Haemimont. So the upfront acquisition price went in as an investment. Do we have any more. No, I think that's it. Fredrik Wester: Actually, that’s hit. So we're open up for questions. We've got a lot of questions. So I hope you have time to listen to our answers. Alexander Bricca: So the first one is for you, Fred. Fredrik Wester: Yes, let's do it. Alexander Bricca: Could you share how Paradox is thinking about growth opportunities in Asia and whether there is a clear marketing or market entry strategy for that region? Fredrik Wester: Yes. I mean we've seen a very good growth in -- especially in China, but all over East Asia actually and that's also one of the reasons we expanded the map in Crusader Kings III to actually get more of the Asian users as well, not only make the gameplay more interesting, but we do have specific strategies to get into the Chinese market and the Asian market in general. We have all localized content, for example, we work with specialized PR agencies locally. We work with influencer networks locally. So we're really putting an effort into growing in these markets. And it has paid off for the past 7, 8 years, and we continue to see strong growth. I think China is our second biggest market when it comes to number of gamers. I don't know on revenue, but it's up there as well at these top 5. So yes, we're seeing a lot of positive movements on the Asian market. So Alex, how does Paradox view currency fluctuations such as recent dollar depreciation? And what's your general approach to managing currency risk? Alexander Bricca: Yes, it's a big impact for us as we could see this quarter. It's a big part of our business and kind of a risk factor for us. We have roughly 97%, 98% of the revenues in foreign currencies. And there, it's a little more than 1/3 that is in U.S. dollars. Almost the same, a little bit less is -- so roughly 1/3, a little bit more is in euros. And the rest is in Chinese yuan, British pounds, Canadian dollar was the dollar, SEK and everything else. So that's the revenue split. Cost-wise, it's a bit different. There, we have roughly 50% in Swedish krona. We have maybe 1/4, so maybe 25% in euros. So that's mainly our foreign studios in Finland, the Netherlands, Bulgaria, Spain, France. And so roughly 25% of the cost is in euros. Roughly 20% has been in dollars over the last year. So that is Marketing, all the tech tools we buy is in dollars. A lot of the external costs are in dollars. And then it's a mix, but the pound has been a big cost the last years because mainly the Chinese yuan that has developed Bloodlines. So if you add it all together, we are -- we depend -- the dollar movement has the biggest impact on us. But we don't -- we have decided to not hedge this. We have a strong cash flow, strong profit margins. So we have taken the decision that we rather live with the direct impact of the [indiscernible] Fredrik Wester: Yes. I mean we've been doing this for the past 15 years. Alexander Bricca: Yes. And it has gone -- if you look at over a 10-year period, this has gone in our favor. One more for you, Fred. How is Paradox currently thinking about reinvesting its revenues into existing games and future projects? Fredrik Wester: Well, obviously, there is a mix in between these things. We have cut down a bit on third-party investments, for example, focusing more on the internal studios. We have more internal studios now as we have more games that we want to make. Obviously, we reinvest in 4 different areas. One is more content for the current games, the live games that we have. One is new titles and sequels within the core segments of what we -- grand strategy games and management games. And the lion's share there goes, as I said, to internally developed projects. A minor part is allocated to experimental projects and smaller projects in adjacent sectors, games that could be similar to Paradox games, but not necessarily GSEs or management games. And last, less frequently occurring are -- that we buy things, IP or studios like Haemimont last year. However, the core should come from the investments that we make and not from the acquisitions that we do is probably generally the ground rule. Alex, are share buybacks something Paradox considered as part of its capital allocation strategy? Alexander Bricca: No, it's not now because we are -- our shares are listed on Nasdaq First North. And there, you can't do buybacks, at least not in a good way. So as long as we are on that list, we can't do buybacks. Fredrik Wester: It's limited too. Alexander Bricca: Yes, we are using dividends instead. In a situation where we would change list, then of course, that is a tool that would open up. Fredrik Wester: Yes, theoretically in the future. Alexander Bricca: Yes. More questions for you. The size of your catalogs can create a high entry barrier for new players. Are you exploring alternative long-term approaches to improve accessibility to legacy content, such as price restructuring or bundling strategies? Fredrik Wester: Yes. We're well aware that if you go in and see a barge of DLCs, it might be a bit off putting to buy the game directly if you're a new gamer. But we -- like I mentioned, we do bundlings to get different types of starter packs to make it easier to get on board. We also work with pricing in different territories, but also deep discounting and the publisher weekends and whatnot. We also have DLC subscriptions on -- is it a majority of our games or at least maybe half of our games. So that's an option as well. So you pay a smaller sum to try everything out and you can do it on a monthly basis. So those are the strategies we've tried so far, and they're working really well. But we continue to try to make our offerings more appealing to more gamers. That's for sure. Right. Alex, do you see a Capital Markets Day as something that could be relevant for Paradox in the future? Alexander Bricca: I think so. I think it's about time to do one. Is it 3 years ago? May '23, we had one. I think now it makes good sense. We have cleaned up the balance sheet. We are finally at a position strategically that we have been talking about for a few years where we want to take the company to, where we have a solid balance sheet and strong cash flow and razor focus on what we're doing. So it's a good idea. I think we should plan for one. Fredrik Wester: Yes, we should. Very good. Let's do it. Alexander Bricca: Let's do it. Fred, I feel like I've heard this sentence from Paradox before, there's a quote, "Strengthening our strategic focus." I think it's from the CEO word. What's different this time? Fredrik Wester: It is not different this time. That's the thing. So this is what we've been working for in the past 3, 4 years, at least to see focus on what we do best, continue to do that and also release the projects that we still had in pipeline, and then we have sort of a new slate to start with. So I mean, we start with almost -- not a blank paper today because we have a great pipeline of games coming out, but it's a different balance sheet and it's a different new year. So still proof is in the pudding. So we have to continue to deliver great stuff, both for our live games and for the games coming out. And I think we have Prison Architect 2 is the one that we announced. We're going to be happy to show more of, hopefully, this spring, but we'll see exactly the time line for that. But nothing changes. Everything is new. Is that how they say. I think that summarizes it. Alex, with a more focused release pipeline compared to previous years, how is Paradox thinking about capital expenditure and the use of increased free cash flow going forward? Alexander Bricca: I think you have touched a bit upon it already, Fred, but what we spend most of our cash to is development, development of new games and new content for the live games. That's how we've been doing it the last years, and that's how we're going to continue to do it. And the second-best part we can do, I think, is if we find attractive assets that we can acquire studios or IPs. But we are -- we have high requirements on both. So if we're going to acquire something, we have high requirements on the risk-reward offering. When we invest in new projects, we have now very strict requirements on the risk/reward offering as well. And we have a very strong cash flow from our operating activities. So that means that we are generating more cash than we like to spend. And that excess cash, it should go out to the shareholders. And we set out in the report SEK 5 as a proposed dividend to the Annual Shareholders Meeting in May. Fredrik Wester: More questions? Alexander Bricca: Yes. Fred, this is for you. Many companies are expanding their IPs beyond games into other products and media. How does Paradox think about brand extension and additional revenue streams outside of traditional game development? Fredrik Wester: Yes. I mean we have been experimenting a bit with this. We do merchandising. We do board games. We do licenses to other video games companies for some of our IP, most notably White Wolf IP. But it's a great way to strengthen IP recognition. It hasn't had any significant impact on revenue or profit, but it's still a good way to keep the IP alive and to reach new target audiences. So this is something we're going to continue. I mean there are no -- just -- I think what they're after here is like a TV dealer equivalent. There's nothing like that on the table at the moment. But who knows in the future, but I think we need to work more on deepening and strengthening our IP as they are. We work a lot with history in our Grand Strategy games. We work with the fantasy IP in Age of Wonders. We work with Stellaris, for example, that are very strong or Stellaris and Age of Wonders are their own IP where we own everything. When you use history as your background, it's harder to sort of work with the IP, if you like. But also the White Wolf catalog offers a wide range of really interesting ways to expand into new universes of opportunities. Alexander Bricca: Exciting. Fredrik Wester: Yes. Alex, last year, Victoria 3 had many very well-received DLCs and updates. The team behind the game is doing great work. Maybe this is from the Victoria 3 team. It sounds like, especially with communications later in my opinion. Do you see a positive effect of the well-received DLCs and updates financially? And is the game generally on a positive trajectory? Alexander Bricca: Someone that works in communications. Fredrik Wester: For Victoria 3. Alexander Bricca: Exactly. But it's a great question regardless who it's from. Yes, we have seen a strong positive effect since Q2 when we released, I forgot the name of it, but... Fredrik Wester: The trade expansion. Alexander Bricca: Yes. It put… Fredrik Wester: Chambers of Commerce, thank you very much, our camera man. He knows his games. Alexander Bricca: So with that release, especially, there were signs… Fredrik Wester: Charters of commerce. Sorry, not Chambers of... Charters of Commerce. Sorry to interrupt... Alexander Bricca: So with that release, something happened with the monthly active users. And so we got up to a healthy level and also the studio has made good work efficiency-wise. So now that game has reached a level of healthy profit margins... Fredrik Wester: And good retention. Alexander Bricca: Good retention. And with that comes a stable, strong revenue level as well. And we foresee that it's going to continue like that. So we very much look forward to treat this as like a staple in our portfolio for '26 and for the following years. Fredrik Wester: That's right. It's a great game. Go play it. Alexander Bricca: Fred, will the Tinto Talks method used in the development and lead up to EU5 become the standard for future Paradox releases as it seems to have worked with great success with EU5? Or will it be up to the individual studio leads discretion as to how to handle community outreach and feedback? Fredrik Wester: As a ground rule, we prefer that the studio handle their own way of communicating the way they feel is the most comfortable and best way to explain and talk about their game, but we always encourage direct talks to the community because it's a great way to receive feedback and to change things in the game that might need some feedback from people who love our games and spend a lot of time with our games. So I think Tinto Talks is a great framework on how to operate, but we will continue to encourage the studios to find their own way to connect to the community. But it's great. I really like that. I really enjoyed it personally to watch. Alex, how has Paradox monthly active users developed? Alexander Bricca: It's 6 million. It varies from time to time. We have sometimes been up well above 6 million, but we only talk about full million. So we want to be stable at 7 million before we start to say 7 million. Fredrik Wester: Can we say that we've been above 7 million as well? I think we have. Alexander Bricca: You just said it, so… Fredrik Wester: I just said it. But not until it's a stable level. We want to communicate it. Alexander Bricca: Yes. Because the number we communicate is where we are stable. Fredrik Wester: We don't count spikes as something that we want to communicate. I said it. Alexander Bricca: Exactly. Correct. Good. Okay. More questions. Fred. Where do you think growth will come from versus last year? Will it be higher DLC velocity, new game releases, pricing, player base increasing? Fredrik Wester: If the answer can be all of the above, I choose to answer all of the above. But I think say -- we have a couple of examples here that will grow over a couple of years coming. As we mentioned, Victoria 3 and Age of Wonders 4 are now more stable, have better retention. They have stable release schedules. So our view is that they're going to continue to grow. You can see that the Europa Universalis franchise has been declining over a couple of years because we made less DLCs and material for Europa Universalis IV because we were working on V. So we're looking for V to grow over the next couple of years sort of not automatically because we can't just sit on our assets and wait for it to happen, we actually have to work actively with it, but that's something that we see as one of the core growth things within live games. But we will also continue to grow our live games, both on number of releases, hopefully, and the number of gamers by attracting people more often to come back and play the game. Of course, I mean, the larger jumps in revenue can come from a new release. If we get more games out this year, it's spiking in revenue as well. But we want to have it from actually several different sources, the revenue growth. So it all adds up. Alex, how should we view a risk for a write-down in Europa Universalis V? Alexander Bricca: That's a low risk. When we look at the risks or when we look at the write-downs we have made over the last years, it has been on projects where we are kind of far outside of our core. Europa Universalis V is as in the middle as we can get in our core. And now we don't break up normally and share revenues and profit by game, but Europa Universalis was highly profitable already in its release quarter, so in Q4. And we expect that it's going to continue to be highly profitable for many, many years. So… Fredrik Wester: And as you can see, I mean, initially, you get a huge spike of gamers. It slows down a bit, which is natural. And then we continue to grow from the [indiscernible] slope there. And that's true for all our games. If you take Hearts of Iron is going into its 10th year in June, it's going to turn 10. And we have more gamers than ever on a monthly basis for Hearts of Iron IV. So that's basically how we operate. So we focus on the retention and the retention brings revenue with it. So, that’s it. Alex again, could you maybe quantify the FX hit on the P&L? Would you break out the sales from the new releases in the quarter in order to get a feel for the performance in the back book? Alexander Bricca: The short answer is no. Fredrik Wester: And do some math in your head… Alexander Bricca: So we got another question whether -- to what extent we're impacted by FX and I gave you the rough split of the revenues and the costs in currency. So you can do your own… Fredrik Wester: You do your own math. Alexander Bricca: Exactly. But of course, as any exporting company, we are doing great when the Swedish krona is doing less great. Fredrik Wester: Yes. So 3% is krona and the rest is foreign currency. Alexander Bricca: In the revenue, yes. Fredrik Wester: Something like that. Alexander Bricca: Exactly. Fredrik Wester: And there was a sub-question, would you break out the sales from the new releases in the quarter? No, we don't go into that level of detail. Alexander Bricca: No. Fredrik Wester: So that was the final question. So thank you for watching. It was, like we said, a very intense quarter with not a great outcome due to different reasons that we have explained now. Alexander Bricca: Profit-wise, but… Fredrik Wester: Profit-wise, but cash flow-wise, exceptional actually, even by our standards. And I think just to summarize, I think we're in a great place to do great things in the coming years. I hope you continue to follow us, and thanks a lot. Alexander Bricca: Thanks for watching. And see you in end of April with Q1 report. Fredrik Wester: See you then. Take care. Alexander Bricca: Bye. Fredrik Wester: Bye.
Operator: Hello, and welcome to the Robert Half Fourth Quarter 2025 Conference Call. Today's conference call is being recorded. [Operator Instructions] Our hosts for today's call are Mr. Keith Waddell, President and Chief Executive Officer of Robert Half; and Mr. Michael Buckley, Chief Financial Officer. Mr. Waddell, you may begin. M. Waddell: Hello, everyone. We appreciate your time today. Before we get started, I'd like to remind you that the comments made on today's call contain forward-looking statements, including predictions and estimates about our future performance. These statements represent our current judgment of what the future holds. However, they are subject to the risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are described in today's press release and in our most recent 10-K and 10-Q filed with the SEC. We assume no obligation to update the statements made on today's call. During this presentation, we may mention some non-GAAP financial measures and reference these figures as adjusted. Specifically, we present adjusted revenue growth rates, which remove the impacts on reported revenues from the changes in the number of billing days and foreign currency exchange rates. Additionally, we present adjusted gross margin; adjusted selling, general and administrative expenses; and adjusted operating income by combining the gains and losses on investments held to fund the company's obligations under employee deferred compensation plans with the changes in the underlying deferred compensation obligations. Since the gains and losses from investments and the changes in deferred compensation obligations completely offset, there is no impact on our reported net income. Reconciliations and further explanations of these measures are included in the supplemental schedule to our earnings press release. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website, roberthalf.com. For the fourth quarter of 2025, global enterprise revenues were $1.302 billion, down 6% from last year's fourth quarter on a reported basis and down 7% on an adjusted basis. We are very pleased to see talent solutions and enterprise revenues return to positive sequential growth on a same-day constant currency basis for the first time in over 3 years. Weekly revenue trends during the quarter continued to show positive momentum, which extended into the first 3 weeks of January. Our revenue and earnings exceeded the midpoint of our previous fourth quarter guidance. Net income per share for the quarter was $0.32 compared to $0.53 in the fourth quarter 1 year ago. We entered 2026 very well positioned to capitalize on emerging opportunities and support our clients' talent and consulting needs through the strength of our industry-leading brand, our people, our technology and our unique business model that includes both professional staffing and business consulting services. Cash flow provided by operations during the quarter was $183 million, the highest quarter this year and an 18% increase over 2024 Q4. In December, we distributed a $0.59 per share cash dividend to our shareholders of record for a total cash outlay of $59 million. Return on invested capital for the company was 10% in the fourth quarter. Now I'll turn the call over to our CFO, Mike Buckley. Michael Buckley: Thank you, Keith, and hello, everyone. As Keith noted, global revenues were $1.302 billion in the fourth quarter. On an adjusted basis, fourth quarter talent solutions revenues were down 9% year-over-year. U.S. talent solutions revenues were $623 million, down 9% from the prior year's fourth quarter. Non-U.S. talent solutions revenues were $200 million, down 8% year-over-year. We conduct talent solutions operations through offices in the United States and 18 other countries. In the fourth quarter, there were 61.4 billing days compared to 61.6 billing days in the same quarter 1 year ago. The first quarter of 2026 has 61.9 billing days as did the first quarter of 2025. Billing days for the remaining 3 quarters of 2026 will be 63.1, 64.6 and 61.1 for a total of 250.7 billing days in the year, which is the same as the full year of 2025. Currency exchange rate movements during the fourth quarter had the effect of increasing reported year-over-year total revenues by $15 million. That was $10 million for talent solutions and $5 million for Protiviti. Contract talent solutions bill rates for the fourth quarter increased 3.2% compared to 1 year ago, adjusted for the changes in the mix of revenues by functional specialization, currency and country. This rate for the third quarter was 3.7%. Now let's take a closer look at results for Protiviti. Global revenues in the fourth quarter were $479 million. $373 million of that is from the United States, and $106 million is from outside of the United States. On an adjusted basis, global fourth quarter Protiviti revenues were down 3% versus the year ago period with U.S. Protiviti revenues down 6%, while non-U.S. Protiviti revenues were up 9% compared to 1 year ago. Protiviti and its independently owned member firms serve clients through locations in the United States and 28 other countries. Turning now to gross margin. In contract talent solutions, gross margin was 39.2% of applicable revenues in the current quarter compared to 39.1% in the fourth quarter 1 year ago. Conversion or contract to hire revenues were 3.2% of contract revenues in both the current quarter and the fourth quarter of 2024. Our permanent placement revenues were 12.5% of consolidated talent solutions revenues in the current quarter compared to 12.1% in the fourth quarter of 2024. When combined with contract talent solutions gross margin, overall gross margin for talent solutions was 46.7% of applicable revenues in the current quarter compared to 46.4% in the fourth quarter of 2024. For Protiviti, gross margin was 21.9% of Protiviti revenues in the fourth quarter and 24.9% in the fourth quarter 1 year ago. Adjusted gross margin for Protiviti was 22.8% for the quarter just ended compared to 25.1% last year. We ended 2025 with 11,200 full-time Protiviti employees and contractors, up 1.5% from the prior year. Enterprise selling, general and administrative costs were 35.9% of global revenues in the fourth quarter compared to 34.1% in the same quarter 1 year ago. Adjusted enterprise SG&A costs were 34.6% for the quarter just ended compared to 33.8% 1 year ago. Talent solutions SG&A costs were 47.6% of talent solutions revenues for the fourth quarter versus 44.4% in the fourth quarter of 2024. Adjusted talent solutions SG&A costs were 45.6% for the quarter just ended compared to 43.9% last year. We ended 2025 with 7,400 full-time internal employees in talent solutions, down 3.2% from the prior year. Fourth quarter SG&A costs for Protiviti were 15.7% of Protiviti revenues compared to 15.3% for the same quarter 1 year ago. Operating income for the fourth quarter was $22 million. Adjusted operating income was $43 million in the quarter or 3.3% of revenues. Fourth quarter adjusted operating income from our talent solutions divisions was $9 million or 1.1% of revenues. Adjusted operating income for Protiviti in the fourth quarter was $34 million or 7.1% of revenues. Our fourth quarter 2025 income statement includes a $21 million gain from investments held in employee deferred compensation trusts. This is completely offset by an equal amount of higher employee deferred compensation costs, which are reflected in SG&A expenses and direct costs. As such, it has no effect on our reported net income. Our fourth quarter tax rate was 32% compared to 28% 1 year ago. The higher tax rate in the current quarter is due to the increased impact of nondeductible expenses relative to lower pretax income. At the end of the fourth quarter, accounts receivable were $748 million, and implied days sales outstanding, or DSO, was 51.8 days. Before we move to first quarter guidance, let's review some of the monthly revenue trends we saw in the fourth quarter and so far in January, all adjusted for currency and billing days. Contract talent solutions exited the fourth quarter with December revenues down 8.9% versus the prior year compared to a 9.9% (sic) [ 9.0% ] decrease for the full quarter. Revenues for the first 2 weeks of January were down 6.6% compared to the same period last year. Permanent placement revenues in December were down 11% versus December 2024. This compares to a 5.9% decrease for the full quarter. For the first 3 weeks in January, permanent placement revenues were down 9.4% compared to the same period in 2025. We provide information so that you have insight into some of the trends we saw during the fourth quarter and into January. But as you know, these are very brief time periods. We caution against reading too much into them. With that in mind, we offer the following first quarter guidance: revenues, $1.26 billion to $1.36 billion; income per share, $0.08 to $0.18. Midpoint revenues of $1.31 billion are 5% lower than the same period in 2025 on an adjusted basis. Our midpoint revenue guidance for the first quarter reflects continued positive adjusted sequential revenue growth for talent solutions. Our Q1 midpoint adjusted operating margin guidance declined sequentially by 1 percentage point, which is consistent with long-term historical trends. This includes Protiviti's sequential decline of 4 percentage points. Historically, Protiviti's Q1 segment margins seasonally declined by mid-single-digit percentage points on a sequential basis. There are 2 primary drivers. Internal audit revenues are negatively impacted as clients focused instead on annual financial statements and related external audits. In addition, Protiviti employees receive annual compensation adjustments effective January 1, which are recovered through pricing adjustments realized as client contracts are negotiated. Segment margins then improve accordingly. We estimate our midpoint tax rate for the first quarter to be 56% to 58%. This is much higher than normal for 2 reasons: as expected tax charge related to stock compensation and the magnified impact of nondeductible tax items when measured against seasonally low Q1 pretax income. A majority of our employee stock compensation awards vest in the first quarter each year, and the related tax impacts are measured based upon the stock price at that time. With the current stock price below grant values, a tax charge estimated at $4.5 million or $0.05 per share results. For the remainder of 2026, a quarterly tax rate of 33% to 35% is expected. The major financial assumptions underlying the midpoint of these estimates are as follows: adjusted revenue growth year-over-year for talent solutions, down 4% to 8%; Protiviti, flat to down 4%; overall, down 3% to 6%; adjusted gross margin percentages for contract talent, 38% to 40%; Protiviti 18% to 21%; overall, 35% to 38%; adjusted SG&A as a percentage of revenues for talent solutions, 44% to 46%; for Protiviti, 15% to 17%; overall, 33% to 36%; adjusted operating income as a percentage of revenues for talent solutions, 0% to 3%; Protiviti, 2% to 5%; overall, 1% to 3%; tax rate, 56% to 58%; shares, 99 million to 100 million; 2026 capital expenditures and capitalized cloud computing costs, $70 million to $90 million with $10 million to $20 million in the first quarter. All estimates we provide on this call are subject to the risks mentioned in today's press release and in our SEC. Now I'll turn the call back over to Keith. M. Waddell: Thank you, Mike. Our fourth quarter results reflect a return to sequential growth on a same-day constant currency basis for the first time since early 2022. Concerns around a near-term economic downturn have moderated supported by a more conducive macro environment. Continued progress in the rate cutting cycle, easing inflation, less regulation and relatively more clarity on trade policy all contribute. The NFIB Small Business Optimism Index has continued to trend higher with hiring plans holding steady and labor availability remaining a key constraint. At the same time, the Uncertainty Index declined meaningfully last month, falling to its lowest level since June of 2024. Although hiring and quit rates remain subdued, job openings continued to run well above historical averages, underscoring significant pent-up demand for skilled professionals. Decision time lines are beginning to shorten, and we're seeing increased client engagement as clients revisit postponed initiatives and discuss hiring tied to business-critical priorities. Internal resource levels at small businesses remain particularly lean as these companies have focused on cost containment for much of the last 4 years. Employment data from the ADP National Employment Report indicates that between January of '22 and December of 2025, companies with fewer than 500 employees have grown their employee counts by only 1.1% annually, while below the 2.8% annual growth rate seen among companies with over 500 employees. As project activity begins to pick up, this places additional strain on already limited internal capacity. Against this backdrop, unemployment remaining low and skilled talent in short supply, clients increasingly require specialized expertise to help fill open roles and execute critical work, supporting demand for both our talent solutions and consulting services. While prospectives on medium- to long-term structural impact of AI on the labor market vary greatly, most of the evidence suggests a negligible impact so far on our areas of employment particularly among small businesses. For example, a very recent study by Oxford Economics concludes that, "firms don't appear to be replacing workers with AI on a significant scale and we doubt that unemployment rates will be pushed up heavily by AI over the next few years." Also, feedback from our SMB clients indicates that potential future labor savings from AI are not a material factor in their current headcount decisions. That said, as AI reshapes how work gets done and the skills required for many roles evolve, clients are increasingly relying on us to help them navigate change, deploy talent quickly and support the implementation of new technologies, including the requisite data requirements. At the same time, the fast-growing use of generative AI by job seekers, particularly to tailor their resumes to client opportunities, has made it more difficult for clients to distinguish among candidates and authenticate their qualifications. This further reinforces the value of our services, including our proprietary data on actual candidate performance. As expected, Protiviti's year-over-year growth rate showed improvement in the quarter, although it continued to be impacted by tougher prior comparables from large project builds and by longer sales cycles and smaller sized new engagements. Protiviti's pipeline remains strong across all its major solution areas, and at the midpoint of our Q1 revenue guidance, its growth rates are expected to continue to improve. Our strategic engagement of contract professionals via our talent solutions divisions plays an essential role in Protiviti's success and further amplifies our unique enterprise-wide competitive advantage. Protiviti was recently recognized on Glassdoor's Best Places to Work for a third consecutive year. We begin 2026 energized by our time-tested corporate purpose to connect people to meaningful and exciting work and provide clients with the talent and consulting expertise they need to confidently compete and grow. We weathered many economic cycles in the past, each time emerging to achieve higher peaks. Aging workforce demographics and clients' desire for flexible resources with variable costs are structural tailwinds that are expected to propel us forward in the years to come. Finally, I would like to thank our global workforce for their continued dedication. Their efforts once again earned Robert Half recognition by Fortune as one of the World's Most Admired Companies for the 29th consecutive year. We're proud of our unique position as the only company in our industry to be awarded this distinction for nearly 3 decades. We are also recognized as one of Forbes' World's Top Companies for Women and chosen by Newsweek as one of America's Most Responsible Companies. Now Mike and I'd be happy to answer your questions. [Operator Instructions] Operator: [Operator Instructions] Your first question will come from Andrew Steinerman with JPMorgan. Hearing no response from that line, we'll take our next question from Mark Marcon with Baird. Mark Marcon: Keith and Mike, it looks like -- first of all, it's good to see that you're returning to sequential growth here. And when we take a look at the guide as it relates to 2026, we're still looking at a year-over-year decline, but you're expecting margins on the whole to improve, primarily because of Protiviti. And so what I'm wondering about is it's great to see the projection for the margins to improve. I'm wondering how you're thinking about the top line potentially inflecting kind of a modest economic environment. Obviously, there's still a lot of discussion with regards to the impact of AI. And a lot of it is unknown, and a lot of it is changing rapidly. So I'm wondering how are you thinking about the top line from a longer-term perspective? And also, if we end up having just a very moderate sort of improvement in terms of the top line, what are some of the steps that you've taken to increase the efficiency of the operations, which it seems like we're seeing in the first quarter, but just when we think about it from a longer-term perspective in order to be able to get back to halfway back and then ultimately all the way back to prior margins? M. Waddell: And so Mark, on the top line, so if you take our current trend line from a sequential revenue point of view, we would return to positive year-over-year growth in the third quarter and that would be both talent solutions, Protiviti and enterprise. As to steps for efficiency, I'd say we -- as you know, we've held on to our best producers throughout this downturn, and we would expect that they would ramp more quickly than what we'd otherwise ramp, and there's some positive leverage from that. We continue to get traction from our own use of AI, both in terms of how we match and in terms of rank ordering the prospects that we pursue as we try to capture that additional revenue as it becomes available. And so we've said for some time, we certainly expect we can retrace in a positive way the negative leverage we've had to deal with over the last 4 years. Mark Marcon: That's great. And then within talent solutions, just how are you thinking about the perm market just given relatively flat no hire, no fire kind of an environment thus far? Do you think that, that ends up seeing some sort of change? And what sort of impact as we start getting to Peak 65 could we end up seeing? M. Waddell: Yes. I'd say that perm is stronger than the headlines would lead you to believe. As we talked last quarter, we have just as much difficulty getting candidates to change jobs as we do getting clients having demand for additional roles and positions. And so given that the market remains tight, given that candidates remain conservative in their willingness to entertain new roles, I'd say the perm outlook is solid. And again, I understand the no hire, no fire overall environment, but our SMB clients are in a different place. As we talked about, they've added significantly fewer people the last 4 years. They've been in cost mode for quite some time. They've largely normalized their headcounts for that over that extended period of time and they're left very lean not only from a full-time standpoint but contractors as well. I would just say SMB is in a very different place. Operator: And the next question will come from Andrew Steinerman with JPMorgan. Andrew Steinerman: Keith, it's Andrew. I wanted to ask you about what I've been hearing with really kind of industry, staffing industry executives talking about the current labor uncertainty because of AI driving more interest in flexible workers as the labor recovery takes hold. What do you think of this thesis? And have you seen any evidence that flex might kind of gain share even in a moderate labor hiring environment? M. Waddell: Well, I think any time uncertainty declines, clients are more willing to add resources that, early on, they're conservative of adding those resources full time and are more receptive to contract help. I think in addition now, we've got this uncertainty around, well, if I hire full-time now, I might need to adjust that later because of AI is going to make everyone more productive. I think it certainly adds to that potential, but as I said in my prepared remarks earlier, we're not seeing a lot of current demand on the full-time side by clients saying they're holding off from their own internal hiring because of AI. I think they're basically saying, particularly SMB again, that they're not being impacted but for the potential of what AI might become. Operator: And the next question will come from Trevor Romeo with William Blair. Trevor Romeo: I had one on Protiviti. I think you disclosed the headcount numbers, talked about, I think, 1.5% growth for Protiviti, including contractors last year, while revenue, I think, was flat. So I think some rough math there. Protiviti's revenue per head well below what it was several years ago. So at this point, what are your headcount growth plans for 2026 there for Protiviti? And how much revenue upside do you think you could capture in that segment without adding meaningful headcount from where you are now? M. Waddell: Well, the other dynamic in Protiviti's headcount is their use of contractors, which flexes with the revenue and the revenue expectations. And so clearly, their full-time staff is underutilized relative to what it could and arguably should be. Further, as we've talked about before, some of their full-time staff is underutilized and that they've been reassigned to roles typically performed by contractors at much lower rates. And so there's hidden capacity, if you will, there, as that converts to what they're typically working on. And so I'd say there's full-time capacity. There's also a contractor capacity relative to what it's been in the past. So I don't think Protiviti is concerned about having the resources to scale up quickly and appropriately as the revenue support. Trevor Romeo: Okay. Helpful there. And then just sort of a, I guess, a modeling question. Last quarter, I think you were kind enough to call out the typical seasonal trends for 2 quarters ahead. I was wondering if you might be able to do that again for Q2, what you've kind of historically seen for revenue and earnings just so we're all on the same page heading into next quarter. M. Waddell: Well, there's certainly nothing near as dramatic as is the case for the first quarter because of Protiviti's seasonal impacts. But typically, in the second quarter, on the contract side, it's modestly down on a same-day basis. For full time, it's typically up seasonally relative to the first quarter. Protiviti, they began to recover from their seasonal low Q1, and overall, we certainly have more profitability in Q2 than we do Q1. But the seasonal impacts are nowhere near in Q2 what they are in Q1. And by the way, the tax rate that's been jumping all over the place as we talked about, it normalizes back to 33%, 34% in Q2 and beyond versus the much higher number that was the case in Q1. Operator: And the next question will come from Manav Patnaik with Barclays. John Ronan Kennedy: This is Ronan Kennedy on for Manav. Keith, you talked in your response to Mark's question on the first positive same-day CC sequential growth that if the momentum -- or if the trend sequentially continues, you would see positive growth in the third quarter. Could we just get a sense of your optimism on that and what you would need to see in the February, March weekly trends to confirm it will be a potential multi-quarter recovery if it's anything beyond weekly revenues such as time to fill, the rec conversion, pipeline, anything else? And then you also referenced some external leading indicators. What can you place trust in at this stage, whether it's ADP, NFIB, JOLTS, ASA, SAI? Curious as to your thoughts there and your overall optimism. M. Waddell: Well, I'd say our overall optimism is a reflection of, a, discussions with clients; b, weekly results. I'm very happy to report that, as of this morning -- and we get weekly results every Thursday, but as of this morning, they were very encouraging and better than they had been even for the first 3 weeks, which were good themselves. And so we sit here feeling very good about very short-term trends. As to external indicators and sources, there's no magic bullet there. We look at everything. We look at ASA. We look at SIA. We look at NFIB. We look at PMIs. I mean, we look at everything, but nothing has a high correlation factor in and of itself. But altogether, I mean, it certainly tells a trend story. And generally speaking, the entire staffing industry is trending upward. Most are close to, if not at positive year-on-year revenue growth. And I would say the differential there with us is most of them are larger mid- and large-cap enterprise serving staffing firms. We're mostly SMB enterprise typically leads SMB. Even ourselves, we're 70% SMB, 30% mid-cap. That mid-cap is doing better than SMB as we speak. So it's not a surprise that we're lagging a little. But like I said earlier, at current trends, which we're feeling even better about, as of today at those current trends, we'd be positive year-on-year third quarter. That's a great thing. John Ronan Kennedy: Understood. Appreciate it. And may I ask for your current assessment of capital allocation and sustainability of the dividend? M. Waddell: So the really good news is our cash flow, our free cash flow, operating cash flow for the first -- for the fourth quarter was really strong. And in fact, we added $100 million to our cash balance after paying for the dividend. And so for all of 2025 for the full year, our free cash flow covered the dividend, and we reached into the balance sheet for about $100 million to buy stock. And so given those trends, if you extrapolate them, that we just talked about, that would say that we would have enough free cash flow in 2026 to cover the dividend. And then we would have -- we could then look to our balance sheet to the extent we wanted to buy stock. And so excellent, excellent Q4 free cash flow quarter, the highest of the year. We did a very nice job of managing our working capital on both the receivables and the liability side. And we also got a $20 million benefit from the new Tax Act from expensing what would otherwise be capital cost. But even without that, it would have been our highest quarter of the year by a long shot, which is a great thing. Operator: And the next question comes from Stephanie Moore with Jefferies. Harold Antor: This is Harold Antor on for Stephanie Moore. I guess just on Protiviti, it seems as though like the revenue growth performance globally was a little bit different in the U.S. versus international. So want to know if you guys could discuss what you're seeing in the Protiviti business in the U.S. versus internationally in this. Any comments you could give on what you're seeing on the pricing side of that business? M. Waddell: And so U.S. versus international Protiviti, Protiviti international is stronger for a couple of reasons. One, the regulatory environment with financial institutions internationally is stronger. That is the case in the U.S. The regulatory environment in the U.S. is more benign. Examiners are more accommodating. That allows clients to use more of their internal resources for things they might otherwise have used outside partners for. So that's a modest headwind for U.S. Protiviti, not the case for Europe Protiviti, if you will. Further, U.S. Protiviti has these larger projects that you're just beginning to anniversary that impact their growth rates. The international locations didn't have the same extent of those larger projects, and to the extent they've had them, they haven't wound down. And so that would put international Protiviti a bit stronger. The other thing that I would say, offsetting what I just said about U.S., technology consulting in Protiviti, U.S. included, is very strong. It's actually leading as we speak, is Protiviti's largest solution area, particularly in the United States. Platform modernization is a big demand driver. Protiviti is participating nicely there, and so we feel good about Protiviti globally, U.S. and non-U.S. Pricing environment for some time has been very competitive with the Big 4. That continues, not really worse, not really better. Harold Antor: Got it. I guess, when you think of pricing going forward as AI's implemented, do you see risk if customers were to [ perhaps ] share in that benefit? And I guess my other question is just on ACS on admin and customer support. I guess to what degree of confidence do you have that the business line rebounds in line with historical levels? In the quarter, it seems to remain fairly weak. And given implementation of AI, there's -- there are comments out there that say that this business line could be one of the most at risk. So just any comments on that would be super helpful. And that's all for me. M. Waddell: So Protiviti pricing going forward in the AI era, Protiviti in virtually every consulting firm is currently looking at should they, could they, will they price differently than hourly time and materials going forward, should it be more outcome-based, should it be more unit-based, based on what's being worked on, a number of cases, number of transactions. And so I would say the entire industry is taking a very creative and innovative look at how it prices with a strong consideration to the value added and how should they appropriately participate in the value added that might be different than the time and materials of late. But early days there. ACS, we do have confidence in ACS. ACS had a couple of larger projects [ within ] that kept its negative growth rates higher than the rest. Oddly enough and kind of counter to the trend you hear about, our customer service, which includes call center, actually did better than the rest of ACS. So you can't pin AI call center impact on ACS' relative performance. Operator: And the next question will come from Jeff Silber with BMO Capital Markets. Jeffrey Silber: I want to ask a couple of questions about talent solutions that were asked about Protiviti, first, if we can just focus on your internal headcount. I know it shrunk a little bit, but the rate of decline, I guess, is getting less worse, so to speak. What do you expect for 2026? Do you think you'll be adding headcount in talent solutions? And what will it take to get there? M. Waddell: On talent solutions, we did not reduce heads as much as revenues would have otherwise dictated as things declined. And you should -- we, therefore, have unused capacity anywhere from 15% to 30% based on what metrics you use and how robust the demand environment is, but we can grow nicely in talent solutions without adding heads given what we've done so far, which is hold on to our better people. Jeffrey Silber: All right. That's great to hear. And then also on talent solutions, can we just get some comments what's going on internationally versus the U.S.? And maybe you can focus on any specific markets that are doing better or worse. That would be great. M. Waddell: Well -- and as we break out the growth rates between U.S. and international talent solutions, frankly, they're not very different one to another. Generally speaking, Germany is doing well. The U.K. is doing well. Canada is doing well and Brazil are doing well but not much different than the last few quarters and not much different than the U.S. Operator: And the next question comes from Kevin McVeigh with UBS. Kevin McVeigh: Keith, were there any charges or rightsizing of the expense base to position for '26 to help with some of the margin expansion that it looks like you're going to be able to put up over the course of the year? M. Waddell: No special charges in fourth quarter for headcount-related or any other expenses, and it's pretty much taking our current cost structure and getting more efficient where we can, getting more on the Protiviti side as they manage kind of all levels of their pyramid from managing directors down to the entry-level consultants and the mix of that versus contractors. All of those play a part in their gross margins and their operating margins. So no special charges. It is what it is. It's straightforward, but we do believe we can add to margins. In fact, Protiviti, I would say Protiviti would be disappointed if, for 2026, they didn't add 100 to 200 basis points to their gross and operating margins for the year. Kevin McVeigh: Got it. And then the commentary on the Q2 was super helpful. You think from an EPS perspective, should it be kind of the normal sequential step-up that you see from a Q1 to Q2? M. Waddell: I would say that's true. I think you need to be careful when you look at 2025's sequential trend from Q1 to Q2. We took a cost action charge in Q1 that didn't repeat in Q2. And so that progression is not representative of a normal progression and just be careful with that. But otherwise, from a revenue standpoint, as I said earlier, not much typical impact, contract a little less seasonally, perm a little more seasonally, Protiviti better and particularly better on the margin side as they start to distance themselves from their seasonally low first quarter. Kevin McVeigh: Right. So I know last year, it was about $0.24. It's -- so do you think maybe like $0.15 because I know there's the adjustment factor on the tax rate, too, right? The tax rate goes down a lot from Q1 to Q2. M. Waddell: That's right. That's right. And again, I think last year and prior trends at the revenue line are fine, but just be careful in SG&A, not to overly rely on the short-term trend because of the cost actions. Kevin McVeigh: That's helpful. And that was again about $0.17, I think, last year, right, or $0.08 something like that, $0.08? M. Waddell: It was $17 million, as I recall, in cost -- in severance cost in Q1 that didn't repeat in Q2. So Q2 showed an improvement with the absence of those costs, and you won't see that improvement this Q2 because we don't have those severance costs. Kevin McVeigh: And that's a normal tax rate, Keith, on the $17 million, right, just to make that adjustment? M. Waddell: Right, right. Yes. Operator: And the next question will come from Kartik Mehta with Northcoast Research. Kartik Mehta: Keith, I was hoping to go back to your comments on Protiviti and pricing. And you had said kind of the Big 4, nothing is different. It kind of stays the same. As you look to get price increases in 2026, I'm assuming you will since you've got to offset the comp expense, what's the environment like and maybe your confidence level as to why you might be able to get some price increases in 2026 to offset comp expense increases? M. Waddell: Well, I didn't say the industry aren't getting any increases. They are because -- but the other dimension to this is the nature of the work, both as to industry, as to solution. And many times, that mix determines the composite rate as much as anything. But being -- generally speaking, the industry is getting cost of living type increases as they have to give those to their staff, which is true with Protiviti as well. But mix is a big deal. And as Protiviti's had less of the large high-margin FSI regulatory that it has replaced with smaller, somewhat lower margin other types of work, there's been some compression there. But again, it's not like there are no increases currently in bill rates. What you see is more a function of mix, a relative mix of resources than the pure same level last year versus same level this year. Kartik Mehta: And then just your comments on AI, obviously, maybe not having as a negative of an impact as people would like to think. But what about on the other side? How could this be a driver? Or how much of a driver could it be, especially for Protiviti and maybe talent solutions in terms of helping your customers? M. Waddell: Well -- and that's an interesting question. A couple of comments on generally before I get to that. I'd say everybody wants to target accounting as being especially vulnerable to AI. And I would argue and I would at least ask everyone to consider that AI -- or the accounting even at SMBs is already fully automated. Even the smallest companies use QuickBooks and NetSuite. They have tax software, et cetera. And so I think you need to think about the starting point as to how impactful AI would be as much as what the impact itself going to be. I also would suggest that you need to think about that accounting is very precise and accuracy sensitive, which matters because, currently, GenAI, LLMs are nowhere near as accurate as they need to be to be trusted in accounting. And so as you think about AI adoption, particularly in accounting, particularly for SMBs, I think those are factors that need to be considered that typically aren't when people kind of race to accounting is particularly vulnerable. As to upside, AI is actually making it harder for our clients to hire. It's now easier for job seekers to mass apply, which overwhelms our clients. Further, over half, according to Gartner, job seekers today are using AI to tailor their resume to the job requirement, which makes it harder for our clients to distinguish one candidate from another. Further, LLM hallucinations in that process of tailoring resumes are actually creating fictitious work histories to improve the match. To prove this, we did a little test with our data science group. We took 25,000 job descriptions. We took 50,000 resumes. We gave those to the top 3 LLMs, and the prompt was while staying true to the original resume, tailor the resume to the job requirement. And what we found was one of the LLMs frequently fabricated and created fictitious work history. One of the LLMs never did that, and one was in the middle. But the point is it's harder than ever for our SMB clients to trust what a resume shows, particularly as to work history, which makes our services, our vetting even more valuable. And for us, the gold standard for vetting is having performance ratings for how candidates actually performed on prior assignments. And so as AI makes it harder for our clients to hire, we play a bigger and more important role, which is good for us. Operator: And the next question will come from Tobey Sommer with Truist Securities. Tobey Sommer: I wanted to just ask you a question about what incremental margins historically looked like in a recovery and then maybe you could point out any nuances or differences that you would anticipate as revenue improves here versus that historic norm. M. Waddell: I guess the easiest way to think about it for us is and hopefully a conservative way to think about it is we retrace on the way back up what happened on the way down. And as we delevered cost on the downside, we'll relever those costs on the upside. And while everybody wants to first attribute the headcount deleveraging to our recruiters and salespeople, quite frankly, it's much more related to corporate services and field management. And I would argue those are easier to relever than would necessarily be the case with recruiters and salespeople. And so I would say the conservative thing to do would be to retrace the path up similar to the path down. Tobey Sommer: Understood. If I -- if you could dig into Protiviti, what are the industry verticals that are sort of growing and contributing the most versus those that may be lagging? In your answer, I'd love it if you could touch on financial services and where that falls. M. Waddell: Well, clearly, FSI is Protiviti's largest industry group. As I said earlier, in the United States, the regulatory environment has become more benign. Examiners are more flexible, particularly with deadlines and dates, which means clients have more time to do it themselves, which comes at some expense to all of the third-party providers, Protiviti included. And so there's a modest headwind, modest headwind there. That's being offset by tech modernization, all the data optimization, platform modernization, everything related to that, that Protiviti is participating in nicely. Further, they're starting to see traction in the PE IPO transaction market, which there's also a tailwind coming from that. And so when you look at Protiviti's pipeline, it is disproportionately tech related as we speak, and we feel good about that. Tech consulting is Protiviti's largest solution area across their solutions. And it's been that way for some time, and it's becoming even more so as all this demand related to tech modernization, data optimization in advance of AI are prevalent. Operator: And the next question will come from Mark Marcon with Baird. Mark Marcon: A follow-up with regards to the margin improvement as you relever. If we take a look at 2025, we did $5.375 billion in terms of revenue with EBITA margin of 3.4% for the full year. And obviously, that included a charge, so we could strip that out. But what I'm wondering is, back in 2018, 2019 pre-COVID, we were able to generate 10% EBITA margins in the -- doing $5.8 billion to $6 billion in revenue. And so I'm wondering, is that a more appropriate way to think about the level of revenue growth that we need to get as it relates to the incremental margins? Or do we need to get back into -- we obviously had a post-pandemic boom in 2022 and parts of 2021. Do we need to get back to those revenue levels in order to get back to double-digit margins? M. Waddell: I haven't done the specific math that you're referring to, but I would say the biggest difference would be, between pre-pandemic and now, has been the cumulative inflation since then. And so we've had to pay our workforce that cumulative inflation. And that has to be offset as part of getting back to those margins, those EBIT margins. Mark Marcon: Got it. And then... M. Waddell: And then internal staff, right? Mark Marcon: Yes. M. Waddell: The contractor staff, it's a pass-through that we've covered nicely with gross margin. Mark Marcon: And this level setting, you mentioned the normal seasonal trends occur. Then, we may end up inflecting to positive year-over-year growth in the third quarter. If that ends up occurring, what would be kind of a realistic margin assumption around if we were just modestly up 1% to 2%? M. Waddell: Well, again, I started with Protiviti will be disappointed if they don't get another 100 to 200 basis points. Mark Marcon: I heard that. Yes. M. Waddell: Talent solutions, I think, with a continuation of the trend that we're talking, we would have modest improvements in the short term for that incremental revenue. But again, it would certainly be nice to see positive year-on-year growth of kind of low to mid-single digits in the third quarter. Mark Marcon: Certainly would. M. Waddell: Okay. So that was our last question. We appreciate you joining us today. Thank you very much. Operator: Thank you. This concludes today's teleconference. If you missed any part of the call, it will be archived in audio format in the Investor Center of Robert Half's website at roberthalf.com. You can also log in to the conference call replay. Details are contained in the company's press release issued earlier today.
Operator: Good afternoon and welcome to Arthur J. Gallagher & Co.'s Fourth Quarter 2025 Earnings Conference Call. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during today's conference call, including answers given in response to questions, may constitute forward-looking statements within the meanings of the securities laws. The company does not assume any obligation to update information or forward-looking statements provided on this call. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the information concerning forward-looking statements and risk factors sections contained in the company's most recent 10-K, 10-Q, and 8-K filings for more details on such risks and uncertainties. In addition, for reconciliation of the non-GAAP measures discussed on this call, as well as other information regarding these measures, please refer to the earnings release and other materials in the Investor Relations section of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Jr., Chairman and CEO of Arthur J. Gallagher & Co. Mr. Gallagher, you may begin. J. Patrick Gallagher: Thank you. Good afternoon, and thank you for joining us for our fourth quarter 2025 earnings call. On the call for you today is Doug Howell, our CFO, and other members of the management team. We had an excellent fourth quarter and a terrific year. Our two-pronged revenue growth strategy, that's organic and M&A, delivered revenue growth of more than 30% during the fourth quarter. That includes organic growth of 5%. Adjusted EBITDA growth was 30%, marking our twenty-third consecutive quarter of double-digit growth. So a great quarter, highlighting our durable value creation strategy that drives consistent double-digit growth in revenue and profits. Moving to results on a segment basis, starting with the brokerage segment. Reported revenue growth was 38%, Organic growth was 5%, in line with our December commentary. Adjusted EBITDAC margin was 32.2%, and ahead of our expectation with underlying margin expansion of 50 basis points. Let me provide you with some insights behind our brokerage segment organic. America's retail PC organic was up 5%. UK and EMEA up 7%, APAC up 3%, specialty and wholesale up, US wholesale up 7%, reinsurance up 8%, and benefits up 1%. So we continue to deliver organic growth across retail PC benefits, wholesale, and reinsurance. And Doug will further unpack organic in his comments. Next, let me provide some thoughts on the global PC insurance pricing environment. Fourth quarter insurance renewal premium change, which includes both rate and exposure, continued to increase in the low single digits. Once again, property decreases were more than offset by increases across most casualty classes. Let me break that down further. Property lines were down 5%. Casualty lines, which includes general liability, commercial auto, and umbrella, up 5%. Overall, with US casualty lines up 7%. Package up 3%, D&O down a point, workers' comp up a point, and personal lines up 5%. So many lines are still seeing increases outside of property. In fact, excluding property renewal premium change, we would be up about 3% during the quarter. With that said, premiums are ultimately determined by loss experience, and good accounts will get some premium relief. While accounts with poor loss experience will see greater increases. Moving to reinsurance. Let me provide you with some thoughts on the one-one renewal season. With the strong underwriting results posted by carriers during 2025, which was helped by a quiet US wind season, there was plenty of reinsurance capacity to support client demand. The property reinsurance market saw rate decreases in the teens with lower layers holding up better than the top end of reinsurance towers. We saw some continued demand for more cover and increased purchasing by clients. In fact, despite double-digit price declines for property cat globally, property reinsurance premiums were down only mid to high single digits relative to last year. Within specialty lines, marine and energy experienced increased carrier competition. Pricing across casualty lines continued to be broadly stable because most reinsurers remain very cautious of US-focused casualty risks. Looking ahead, we expect the buyers' market will persist through 2026 absent any outsized current year or prior year loss activity. While clients are comfortable with their purchased reinsurance programs at one-one, we believe it is likely that some carriers will explore buying additional protection to further reduce earnings volatility or support growth throughout 2026. Moving to employee benefits. We continue to see strong demand for our services as clients manage rising health insurance costs. Medical costs are expected to be up high single digits again in '26 driven by increased utilization, provider consolidation, and newer high-cost treatments and therapies. We are engaging with employers to help them implement innovative solutions such as telemedicine programs, wellness initiatives, and tailored benefits packages to alleviate these cost pressures. Additionally, talent retention strategies remain top of mind for many of our clients given the resilient US labor market, so we're expecting another strong year of growth. Moving to some comments on our customers' business activity. Our proprietary data, which has been a valuable indicator of the economy, continues to show solid client business activity. Fourth quarter revenue indications from audits, endorsements, and cancellations remain nicely positive and were more favorable compared to both fourth quarter 2024 and third quarter 2025. And through the first three weeks of January, these favorable trends continue. We're watching our customers' business activity daily, and we are just not seeing signs of economic weakness. Regardless of market and economic conditions, I believe we are very well positioned to grow. Our global resources, data and analytics, expertise, and unique product offerings put us in a spot to compete and to win. So as we sit here today, we continue to see brokerage segment full year '26 organic growth of around five and a half percent. Moving into the risk management segment, Gallagher Bassett. Fourth quarter revenue growth was 13%, including organic 7%. We saw another quarter of strong new business growth and excellent client retention. Looking ahead, we are well positioned to drive new business production and believe full year '26 organic growth will come in around 7%. Fourth quarter adjusted EBITDAC margin was 21.6%, a bit better than our December expectations. Looking ahead, we see full year '26 margins in the 21 to 22% range. Shifting to mergers and acquisitions, starting with some comments on Assured Partners. We are already seeing a lot of success with the AP team leveraging our products, data and analytics, insights, and tools. Our teams are hard at work integrating the 300 plus tuck-ins, agency management system conversions, and training of our middle office will be in full swing during 2026. Additionally, a little more than a week ago, all of our US retail operations were rebranded Gallagher. When it comes to our back-office integration, we are ahead of plan, including going live on our general ledger, HR, payroll, treasury, and T&E system. So we remain firmly on track with our integration plans and are confident we will be able to deliver on our synergy targets. Moving to fourth quarter merger activity, we completed seven new mergers representing around $145 million of estimated annualized revenue. This brings our full year '25 annualized acquired revenue to more than $3.5 billion. That's fantastic. For all of our new partners joining us, I'd like to extend a very warm welcome. Looking ahead, there are thousands of brokerage firms across our footprint, and Gallagher is a great home for entrepreneurs looking to grow their business, add more value to their current clients, and further advance their employees' careers. Our M&A strategy is about being better together, so that one plus one can equal three, four, or even five. Shifting to let's see. Today, our pipeline is showing more than 40 term sheets signed or being prepared, representing around $350 million of annualized revenue. Good firms always have a choice, and it would be terrific if they chose to partner with Gallagher. With a strong close to the year, let me reflect on our full '25 financial performance for brokerage and risk management combined. 21% growth in revenue, 6% organic growth, 26% growth in adjusted EBITDAC, and more than $3.5 billion in acquired annualized revenue. Another fantastic year driven by our talented colleagues and our Bedrock culture. Frankly, our culture is unstoppable. And it drives our success year after year. That is the Gallagher Way. I'll stop now and turn it over to Doug. Doug? Douglas K. Howell: Thanks, Pat, and hello, everyone. Today, I'll first walk you through our earnings release and provide some brief comments on organic growth and margins by operating segment, and also on our corporate segment results. Next, I'll move to the CFO commentary document we post on our IR website. I'll walk you through our typical modeling helpers and our outlook for '26. Additionally, this is where I'll spend a little more time on organic and margins. Then I'll conclude my prepared remarks with my usual comments on cash, M&A, and capital management. Okay. Let's go to the earnings release, to page three. Brokerage segment fourth quarter organic growth was 5%. That's right in line with the information we provided you at our December IR day. Since then, we've received really positive feedback from the investment community for levelizing for the quarterly noise caused by the timing of large life sales and deferred revenue accounting assumptions. That's a fantastic reflection of our sales culture to post 5% in this quarter and 6% for the year. Flipping to page five of the earnings release to the brokerage segment adjusted EBITDAC table, the top half of the page. We told you in December that our fourth quarter '25 headline margin would not be comparable to fourth quarter '24 because, as the footnote to that table explains, we are no longer earning investment income on funds we were holding to buy Assured Partners, and there would also be a rolling impact of 130 basis points. So the quick math shows levelizing for that gets you to 50 basis points of underlying expansion. Right at the midpoint of our 40 to 60 basis points of expansion we estimated during our December IR day. That's really terrific work by the team. So I'll give you some more information on brokerage margins when I get to page eight of the CFO commentary document, because there's headline noise will happen in the '26 again. Sticking on page five. Fourth quarter risk management segment organic growth was 7%, right in line with our December expectations. That reflects strong new business revenues and excellent client retention. Looking to full year '26, we continue to see organic around 7%. And then when you flip to page six, the risk management adjusted EBITDAC margin of 21.6% was a bit better than our December expectation. And as we look forward, we see full year '26 margins in the 21 to 22% range. So turning to page seven of the earnings release and the corporate segment shortcut table. For the adjusted interest and banking, clean energy and acquisition lines, all were very close to the midpoint of our December expectations. The adjusted corporate line was a couple pennies less than our midpoint estimate partly due to a noncash unrealized FX remeasurement loss and a small tax item. Also, while we adjusted out, we wind down and annuitization of our long ago frozen pension plan. Creates a noncash gap expense here in the fourth quarter and will again in Q1 '26. But those reverse through OCI, so it nets to zero. But more importantly, we hit the market just right and didn't have to inject any cash into the plan. Alright. Let's leave the earnings release and go to the CFO commentary document. Starting on page three, these are typical modeling helpers. Most of the fourth quarter '25 actual numbers were close to what we provided back in December, so there's nothing new here. Looking at '26, as you build your models, please use these helpers. In particular, the estimated impact from FX, and the forecasted depreciation and earn out payable expense. Turning to page four of the CFO commentary document. This page breaks down organic performance by business and it's like what we provided for the first time at our December IR day. This view helps you see four things. First, it removes the quarterly comparability impact caused by the large life sales. And second, removes the comparability income impact caused by revenue estimates. These two items were causing a lot of quarterly noise. But as we've said it as we said in December and you can see here, they are really a no never mind on a full year basis. Third thing this view does is it shows you the quarter seasonality of our business. And four, that gives you organic growth another level down. In the table. Two callouts in this page. First, in total, our fourth quarter and full year actuals in blue were in line with our IR day thinking as shown in the gray column. Second, when you move to the pinkish column, we've wrapped up our full year '26 organic budgeting, and our outlook is unchanged. We continue to see '26 brokerage segment organic growth of around 5.5%. That would be another fantastic year. So when you turn to page five in the corporate segment, just two small items. Our full year '26 estimate is unchanged from six weeks ago. And we're now providing a first look at our quarterly estimates. That said, we do have a little more work to do on the corporate segment quarterly budget but full year is done. So maybe a tweak here or there between quarters, and we'll update you during our March IR day. Turning to page six, the investment income table. Three comments here. First, our '26 forecast reflect current FX rates and changes in fiduciary cash balances. Second, our forward estimates continue to assume two future 25 basis point rate cuts over the course of the year, one in April and another in September. Third, the second line of this table shows you the amount of interest income we earned on funds that we are holding to buy AP. Clearly, that has gone away, and you can see it won't repeat here in '26. More on the impact of this on our headline margins when I get to page eight. Staying on page six, but shifting down to the page to the rollover revenue table. The fourth quarter '25 column subtotal of $145 million for brokerage came in pretty close to our December estimate. Looking forward, the pinkish columns to the right include estimated '26 revenues for brokerage M&A closed through yesterday, but you'll see that clearly excludes Assured Partners. We provide a separate page on page seven for Assured Partners. And finally, you'll see the same info for our risk management segment below that. And then to this, you must make your picks for what you think might be unknown M&A that hasn't closed yet throughout 2026. Moving to page seven, this is the same page that we have provided several times before. It shows you how we view AP. Both now it includes third and fourth quarter '20 results and our full year '26 outlook. A few comments here. AP's fourth quarter revenues were in line with our expectations. For the fourth quarter, while expenses came in a little better than expected. Some of that is a little timing between now and throughout '26. Next, the second item, there could be some small refinements in the '26 numbers because we're still a week or so away from having AP budgets locked down. That said, we don't expect anything significant and, of course, we'll update you in the March IR day. Third, be careful when rolling an AP into your '26 models. You can use first and second quarter columns as is, but for third and fourth quarter, it is the delta between the pink numbers and the blue numbers. Fourth, I'll also ask you to closely read the footnote. You're gonna read three things in there. This table reflects the midpoint of our estimates and does not include any revenue or expense synergies. The noncash figures shown on this page, which reflect depreciation and earn out payable, are included within our estimates on page three, so don't double count there. And finally, you'll read that we still see annualized run rate synergies of $160 million by the '26 and then up to $260 to $280 million by early '28. I'm also more and more comfortable there could be upside to these numbers. But give us a little more time before we update our estimates. So this is a page of really, really good news. Moving on to page eight. This is a new page to help you better understand items that impact the comparability of our brokerage segment adjusted EBITDAC margins. In the past, I've done a bridge in my verbal comments to get you past the noise from the impact of FX, changes in interest income, income from cash we're holding on Assured Partners, and then when M&A, that naturally runs lower margins rolls into our numbers. We think these tables paint a better picture than all the words we're using before. Hopefully, this will be more helpful when you build your '26 models. Since this is the first time we've provided this page, let me make a few comments. First, the upper blue table. The punch line is we improved fourth quarter by about 50 basis points. That's all due to the incredibly hard work by the team to control our costs. The lower table gets you started on modeling '26. Blue section first level sets '25 by removing the investment income on funds, we were holding to buy Assured Partners. And also resets for estimated FX at current rates. FX will likely change, but at least it gets you something as of today. The pink section of this table has ranges and margin impact commentary from what we see today. The punch line is nothing has changed since our December IR day, we still see underlying margins expanding 40 to 60 basis points in '26. And we will also begin to benefit from synergies by being better together with AP. You'll also see that we've added a line called unknown M&A with no estimate provided. This is more of a placeholder for you to just think about other factors that could impact margin comparability. Alright. Let's go to page nine to our tax credit carry forward page. At December 31, we had $73.013 billion of tax credit carry forwards. And you'll see in the footnote there that says that we have another billion dollars of future tax benefits related to our purchase of AP. The punch line from this page is the same. It creates a nice cash flow sweetener to fund future M&A. As for some modeling thoughts, when you're modeling cash flows, just assume our cash taxes paid will be about 10% of EBITDAC for the foreseeable future, and that should get you close. Alright. Let's move to cash, capital management, and M&A funding. When I look at available cash on hand, expected free cash flows, and future investment-grade borrowings over the next two years, we might have close to $10 billion to fund M&A before using any stock at attractive multiples. And this was an important point. Well, we talk about our organic a lot. It's worth a reminder that our M&A strategy creates immediate shareholder value through a nice price arbitrage. And it also creates long-term shareholder value through additional sales talent, niche expertise, and further scale. So those are my comments. An excellent '25 for our combined brokerage and risk management segments. Organic growth of 6%, more than $3.5 billion of estimated acquired revenues, adjusted EBITDA growth of 26%, adjusted EBITDAC margin of 35%, up 70 basis points this year on an underlying comparable basis. Now it might be worth a reminder that since COVID hit us, every year our margins have marched higher. We're up over 400 basis points since then. And we still see many more opportunities to improve. Those are fantastic results. So we're on to '26. We have unstoppable momentum driven by an amazing culture. I see '26 being another terrific year. Okay. Back to you, Pat. J. Patrick Gallagher: Thanks, Doug. Operator, let's go to questions and answers. Operator: Thank you. The call is now open for questions. If you have a question, please pick up your handset and press star 1 on your telephone at this time. If you are on the speakerphone, please disable the function prior to pressing star 1 to ensure optimum sound quality. You may remove yourself from the queue at any point by pressing star 2. Additionally, we ask that each participant limit themselves to one question and one follow-up question. Again, that is star 1 for questions. Our first question is from Rob Cox with Goldman Sachs. Please proceed. Rob Cox: Hey, thanks. Good afternoon. J. Patrick Gallagher: Hey, Rob. Douglas K. Howell: Hey. First question for you. You know, there's been a lot of talk about digital infrastructure. And, you know, I think some industry participants have commented that growth in the economy, excluding digital infrastructure, like data centers, is not all that inspiring. Could you just talk about how you're positioned to take advantage of digital infrastructure build-out and somewhat related, I'm just curious how your construction practice has been performing recently. J. Patrick Gallagher: Well, first of all, our construction practice is our largest practice. And as you know, we emphasize our vertical capabilities at every production opportunity. We have very strong vertical capabilities, and about 90% of our new production around the United States, actually around the world, falls into those niches. As Doug made in his comments, when we do an acquisition, one of the benefits of that is we pick up people that add to our vertical capabilities. And, of course, one of those, everybody's focused on data centers as we are as well. We have the ecosystem to do the job for clients across the entire span of what needs to go into a data center construction site. You've got real estate issues. You've got supply chain issues. You've got energy issues, etcetera, etcetera. In fact, our head of construction, Brian Cooper, was just recently quoted in Leader's Edge, which is the broker's magazine, about all the things that we're pulling together in that ecosystem to be able to take advantage of that opportunity. And a great bit of that opportunity is just the subs and all the activity that has to go into the whole process of building it. There's a huge drain on capabilities locally just for the construction expertise. And so I think every one of us that has contact with those types of clients that are gonna be building those centers out, leasing them, renting them, whatever, is gonna need an awful lot of cover. You're gonna need an awful lot of capability in simply placing the huge amounts of cover needed, and we're right there in the middle of that mix. Rob Cox: Thank you. That's helpful. And then I just had a follow-up on casualty pricing and your outlook for RPC. Embedded in, you know, your organic growth outlook for 2026, which is unchanged. It just seems like, you know, the RPC for casualty has dropped a little bit here versus the high single-digit levels earlier in the year. Just curious if you think that's a trend. I know there's been some companies out there talking about loss trend behaving a little bit better in more recent periods? J. Patrick Gallagher: I think that, basically, we're not—I mean, I'm talking from a street perspective now. I'll let Doug comment on what we're seeing in our actual data. But no, we're not seeing, you know, people jumping on the casualty bandwagon here like they are. Property is softening. There's no question about it. I think that casualty still has a heavy focus from the underwriting community, both on the re side and the primary side. I'm not so sure that they're confident in past years' reserves. And so I'm not seeing the same kind of activity there that we see on the property side at all. Douglas K. Howell: Yeah. Rob, if I read across my page on casualty renewals, you know, maybe at '22 or at 8.4 and 2023 is somewhere between 8.4 and 8.7. '24 was 8.05. This year is 8.01. So, I mean, this is—we're just not seeing in our numbers any big pullback in casualty pricing. And all the systemic factors that are out there that are naturally pushing casualty rates higher, like Pat said, some and all of them that you read about, I just don't see softening coming in the casualty. So what do we assume for next year as we're thinking about it? We're assuming that category rates will be up in that 7 to 8% range. Rob Cox: Appreciate that. Thank you. J. Patrick Gallagher: Thanks, Rob. Operator: Our next question is from Andrew Kligerman with TD Cowen. Please proceed. Andrew Kligerman: Good evening. First question is around talent retention. We've all been hearing about the coaching and, you know, it seems to be a big challenge for a lot of brokers out there. Could you talk about Arthur J. Gallagher & Co.'s ability to retain its producers in particular? And, you know, how you see that playing out on your organic revenue both this year and— J. Patrick Gallagher: Well, I think—yeah. I'm happy to talk about that. I mean, I'm very pleased about the fact and just our retention of producers is not changed against historical norms in any way literally over the past number of years. If you take a look at the machine that we built that does acquisitions, I think we bring people in. Last year, we've recruited through the acquisition process over 2,000 new production talents. And we're lighting them up with tools and capabilities. We like to tout the fact, frankly, that we're a brokerage firm run by brokers. We understand the sales process. Everybody from myself on down is involved in that sales process. People know that they can reach out and get that kind of support. Everybody understands how important production is. And, frankly, we pay our people to produce and they get a piece of that. We're very happy with that. I'd have to tell you that our retention rates remain strong. Do we ever get poached? Of course, we do. And I think that there are right ways to hire people, and there's wrong ways to hire people. We're very defensive and we'll litigate where we feel somebody has done it the wrong way. And we also do recruit from other competitors. And we always try to do it the right way. So I think that my answer to your question is I would simply say, number one, very stable. Number two, adding to that capabilities with headcount from acquisitions. As well, let me mention, let's not forget, about 600 young people in our internship every single year will recruit half of those or even sometimes more. That internship continues to grow. It has a huge impact on the sales firepower that we bring into the company and has been a very big part of our success as an organization. So I'm pleased where we are. I'm not naive to the fact that there are people in the field trying to wave a magic wand that somehow their deal's gonna be better and bigger? I would caution any of those that are enticed by that to take a hard look before they make the jump. Douglas K. Howell: Yeah. Just on a number basis, the percentage of producer retention is exactly dead flat. It has been that way since I've got it here going back to 2019, and it's dead flat on it. So we're not having any real change in our producer retention statistic. And, also, you're right at the nub of it. This still is a business that needs producers to grow it and to sell it. So we think that being a broker run by brokers and having a sales and marketing mentality inside of our company is critical to maintain. We wake up every day. We work on it. We also invest a ton of money in sales tools, illustratively. Within two weeks, our cutting-edge Gallagher Drive program, which is the digital experience that our producers can use with our clients on the desk of every single salesperson at AP. They're using it. We're winning together already. So the answer to this is we need people to sell, need people to produce, and we need to keep fueling them with tools and capabilities to make them better at the point of sale. And I gotta tell you, if you look at who's trying to poach people right now, they just don't have it. We do. And I think you'll see some headlines that come out about it. That's a drop of water in the Pacific Ocean. It doesn't even cause a riff. So, we're pretty proud of our culture. We're pretty proud of the hundreds of millions of dollars that we're investing every year in technology and data and analytics to make our folks realize that this is the very best place that they can toil and work and produce better than any other place. So we're gonna lose a few people that can't see that, but we haven't seen any change in our retention. J. Patrick Gallagher: I agree on the culture, Andrew. I mean, every chance I get an opportunity to talk about the culture, I do. It's, I think, one of the most important aspects of our success. And, again, it's a sales culture driven by salespeople who honor the fact that selling insurance and risk management services to people is a very honorable profession. Andrew Kligerman: That's very helpful color. My follow-up question is around AI. And disintermediating the intermediaries. I've been getting that a lot. And it's around kind of small commercial. Could you talk to what your thoughts are out on the horizon, how that might affect your small business production? And one thing I wanna layer on to the last question, Assured Partners. I'm assuming that Assured Partners is aligned with everything you just answered in my first question, retention is very similar. Right? Very stable. Coming aboard. J. Patrick Gallagher: Very happy. We've probably met in person now, 90% of the population of Assured Partners. We've done an outreach. We're about 20 of our executives traveled the field, visited offices, did town hall meetings. We attended their sales meeting in Indianapolis before the close and met over a thousand people there. And we've had six sessions in Rolling Meadows with three to 500 of their people at each session. And I'm telling you the excitement. There wasn't one of those where I didn't meet someone who came up to me and said, Pat, I can't tell you how I'm excited. We wrote an account together because I had this and you had that. I'm like, there it is. That's the magic. So, yes, I think it clearly played. In fact, the nice thing about AP is that all these toys are now new things still. They're shiny objects. And it kinda builds a lot of excitement and momentum. So let me go to the AI question because I'm the old man in the room. Yeah. Andrew Kligerman: Okay. Address the same thing when we had the dawn of the Internet. J. Patrick Gallagher: Goodbye, intermediaries. This is all gonna be done by me at home on my computer. And that showed just not to be true. Well, why is that? And in particular, in the small end and in personal lines, guess what? Everybody has a need for some really good counsel. And they want to talk to a person about what they should do. And I could turn the question right back to the investment community. Why would anybody use you guys? Why don't they just go to AI and say, pick my portfolio? Because guess what? People make a difference. So when that person who's a small account with five trucks and he or she is trying to make sure people are on the job and someone got sick and they're replacing that person, but they've got a commitment to build this building by a certain date. You think they've got the confidence to pick their insurance online? Even if ChatGBT says, this is the way to go, it's just not happening. The trusted adviser is more important today because of AI than it was before AI because everybody's confused because AI tells that it knows exactly what you should do and we all know it lies. So if you're comfortable doing that on your own, good luck. Douglas K. Howell: Yeah. I'll turn it another way on it. I think that we stand to benefit from it. Because if there is a product that can be sold with AI, we will likely be the ones that can put it out there. And then put it out there, have AI, get it to the point of sale, and then have a producer do the final piece of it. Second thing is, remember, onboarding a customer is different than servicing a customer too. So it might tell you what the best product to buy is, let's just say that works. But then you gotta service that policy. And then you've gotta handle the claims on it. And then you've gotta interface with the carrier. I doubt that there's an AI tool that will sell a policy to somebody who has a serious issue in their bar or restaurant and then AI is going to tell AIG to pay the claim. It just doesn't work that way. There's gonna have to be an adjuster there. There's gonna have to be a counselor called the producer that helps them how to claim to pay. Maybe they can put some policies on the books, but the service load that will come along with that. Now on the other hand, we see AI as being a terrific benefit for us to get better, faster, at lower cost. We have spent twenty years working on standardizing our processes, centralizing them in our low-cost centers of driving the quality very high. AI is going to help us automate a lot of that. So the service layer, I think that we're going to be able to deliver a better, faster, and less expensive service offering. But when it comes to actually onboarding the customer, maybe a little bit actually servicing the customer long term, that product's got a long way to go if you don't have a customer service rep between the technology and the customer. So we're spending a fair amount of money on AI, we're getting some really terrific results, especially, like, in our Gallagher Bassett unit for on the claims adjusting side, the claims resolution side. Seeing some nice speed to market that we can do. You know, just a lot of our back-office functions could really benefit for us. And honestly, there's only three or four of us in the industry that are gonna be able to devote the money into this that will actually deliver benefits. So it's a terrific tool. It's not a replacement for production. Will improve service, and I think that service will help us improve our retention rates. So, you know, but actually selling insurance, I think it's gonna be a long time for that to happen. Andrew Kligerman: Thanks for the helpful insights. Operator: Our next question is from Mike Zaremski with BMO Capital Markets. Please proceed. Mike Zaremski: Hey, great. Good evening. For Doug first, on page three of the press release, you know, you showed $882 million and $171 million of M&A divestitures and other, you know, for 2025 versus last year. Think that includes life sales, assumption changes, etcetera. I mean, do we need help breaking this out for us to help model the life sales and changes in future periods? Or I know that's something maybe we could take offline, unless you wanna think it's worth helping us here. Douglas K. Howell: Yeah. I think maybe since this is more of an annual impact, and there is, but this quarterly impact is the bigger thing. Maybe we do take it offline, but maybe the punch line on this is we think about all this change from the life sales and then our deferred revenue assumption changes. When you boil it all down, and you look at it, what does it all mean? What does it all mean is that had we had exactly the same level of life sales throughout '25 as we did in '24. And if we had had the same level of service quality improvement in '25 as we did '24. We've improved our service considerably, just not as much as we had done in '24. It's all gonna boil down to $25 million of EBITDA. So on, you know, $4.8 billion of EBITDAC this year, that's the kind of magnitude of what we're talking about. In here in a lot of these quarterly ones. So we've tried to put that in a bucket, try to exclude it from our organic growth because it was clouding the true underlying organic growth, but because of these things bouncing around, especially on a quarterly basis. So as you unpack it with Ray after this call, you're gonna find that all nets down to a very small number. Mike Zaremski: Okay. Understood. Thank you. I guess, my follow-up is, just on the pricing environment and how it impacts your organic. I think you guys have some good charts showing, you know, the industry's pricing levels versus your organic, you know, going back thirty plus years, you can see that when pricing goes to very high levels, there's kind of like a decoupling. Right? Your organic doesn't go to, you know, fifteen or twenty, but, you know, it improves. But I think more importantly, when pricing falls like it is today, your organic actually decouples and it stays, you know, usually positive. So I'm just curious in a market that you're describing of properties very soft and casualty might stay harder. Is there any—does that dynamic still hold, or is there any nuances to kind of given with this it's a tale of two markets, property versus casualty as we think about 2026 and further. J. Patrick Gallagher: Well, I'm gonna try to get a better head around that. So if I don't, please give me some help. But, first of all, as prices are running up, you're exactly right. Of course, our revenue tracks directly with that. Our job, what we sell to our clients, is mitigating that increase. So that's where we counsel them on when they should opt in on coverage and opt out. And, you know, our background and our history is the whole concept of risk retention. That's the birth of Gallagher Bassett. And when you see rates go up, the alternative market, I guess we still call it that, is one of the fastest-growing aspects of the market where people like ourselves counsel our clients and don't pay the premium. Take the risk yourself. And then, of course, when it comes down, we don't tend to migrate the other way as quickly either because there is a portion of opting in. Our prepared remarks, we talked about the fact that in the reinsurance side, we are likely to see this year off-cycle some additional purchases of reinsurance. That's exactly the kind of thing I'm talking about. That translates into the retail market as well. So in this cycle, I do think what we've been saying for the last number of years, which I think is holding true, is that you can't talk about the cycle. We're very clear on what's happening in the property line. By the way, our clients deserve that. Property went up through the roof, and underwriters needed the premium. And now they're getting a decrease on that because it's been a benign loss year. But if you take a look at the other side, casualty, we're still seeing increases there. Because maybe the capital that's been deployed isn't necessarily adequate at this point to give discounts. So what we're seeing is cycles within the cycles. So D&O, as you might recall, over the last three or four years, came down quickly. Capital flowed into those rates three or four years ago and brought the price right down. And now you're seeing it maybe bottom out and start to increase again. Workers' comp, interestingly enough, has been pretty flat for a decade, which I find very interesting given that medical indemnity is such a big part of that product. Shows you what managed care has done for the line. And then you have casualty separately and property. So I don't know if I actually got my head around your question, but you add all those together, and what you've seen in the past will probably reoccur this time as rates go up and down and all these lines. Mike Zaremski: Okay. You know, I think you helped. I was just trying to see if maybe this cycle could play out differently. But sounds like it will be similar to— J. Patrick Gallagher: It will play out differently because you gotta look at the individual lines. So every quarter, we report pay attention to what we're seeing in casualty, we're seeing in comp, in property. And sometimes the property will break between the cat-exposed property and just general property. We'll break that out when that happens. Douglas K. Howell: Yeah. We tend to talk a lot about cat property rates. If you throw it all in a bucket with all the other property rates and let's not discount the impact of fire and convective storms, etcetera, our property book is down. The pricing is down four or 5% overall. So this isn't a 20% down market. When you look at what was happening and but when carriers didn't have the deep insights into their loss cost trends as they do now, you add a little more volatility. I believe that this sales folks that have the tools that we do if they're going in and trying to talk to your customer about a 30% rate increase, now I'm gonna talk to you about kind of a flat renewal. You can see our wares. You see what other services you get from here. You get more from Gallagher. So I think that our customers will be wise. They'll opt back in for more covers and that coverage, and that will stump the decrease a little bit in property rate declines. Mike Zaremski: Thank you. Operator: Our next question is from Elyse Greenspan with Wells Fargo. Please proceed. Elyse Greenspan: Hi, thanks. Good evening. My first question is on margin, right? I know, Doug, you went through the new page in your CFO commentary. It seems like the margin, if I add up the pieces, it right. Around, you know, 60 basis points in '26. Appreciate, like, the underlying component has been unchanged. Obviously, a lot of pushes and pulls. When we think beyond '26, obviously, M&A and interest rates, I'm pretty sure you could always come into play. But is it right to think that just from a forward modeling perspective beyond that, that we kind of be back into the thinking of, right, like, 4% plus organic and kind of, you know, that 50 basis points of underlying margin expansion or something within that ballpark? Douglas K. Howell: Yep. Your recollection is right. That's what we've said, and we still believe that. We believe that you can start seeing some margin expansion at 4%, and then, you know, you go up five, six, 7%, you get more margin spent. The other thing too is that I think you'll really see we're gonna have noise in the first two quarters of next year with the lost interest income on funds we're holding for AP. So that's gonna cloud the headline story. So a little patience with us so you can, you know, cull that down and not really get to the underlying expansion. But, also, we're gonna start seeing the synergies come through from that AP acquisition. And that's going to also—we'll break the pieces out. Probably can do that pretty well in '26. By the time we get to '27, it might be hard for me to tell you whether that savings and did we get better because of legacy Gallagher? Did we get better because of legacy AP coming together? To your question about looking out for '27, the numbers there get you to a pretty good spot. But just remember, could be another $100 million, $120 million of cost savings that we get out throughout '27 so that by the time we get to early '28, we're kind of at that $260 to $280 million additional profits or additional EBITDAC on it. So you're looking at it the right way. Your recollection is this that. We still see that this is the same environment that we can improve margins starting at 4%. So answer to your question, I think is yes to your question. But with all that background, I think that we've got two levers that are gonna be pulled. Or just the natural increase, as we grow more, then also the role in synergies of AP. Elyse Greenspan: Thanks. And then my second question, I guess, goes back to organic and maybe a slight follow-up on Mike's question, right? So you guys, you know, change the definition, right, to tie to what you outlined in December. But I think, like, the two pieces, right, the life and revenue assumption changes probably would have been a negative three. In the fourth quarter, which feels large. I guess it would have been kind of net breakeven in the other three quarters. So it feels like from what you've said, Doug, it's like $25 million of EBITDA. So things are like $70 million of revenue and maybe more pronounced in the Q4. Just want to make sure I'm thinking about this correctly, and I guess maybe it was the higher end of you guys had guided in December. And I guess if these things bounce back, right, they'll stay in the core commissions and fees and be backed out, and there shouldn't be backdate of, I guess, overall EPS and revenue noise. Douglas K. Howell: Yeah. Let me see if I can unpack that a little bit for you. But first of all, you know, the life sales in the fourth quarter came in at negative one and we were guiding zero to one. And then the deferred revenue came in at negative two versus a negative one to two. So, we were—it was kind of within the range of estimation that we had there. Think it's important to understand that, you know, the 2% for the deferred revenue assumption changes. If we updated our deferred revenue assumptions pro rata throughout the year versus doing it on a quarterly basis, kind of like annual reserve reviews that the carriers do. It's a very laborious process. Takes a long time. There's lots of surveys. You'd spread that, you know, the 1% for the full year across four quarters, and it would have been 25 basis points of impact. So the way you have to think about it, this table plumbs and gets you to what do we believe our underlying organic growth is. What's the business running? And we saw it running 5% in the fourth quarter, and we see it running in about the 5.5% range for 2026. 6% for '25 in total. So you have to think about this as a quarterly discussion, not an annual one. Elyse Greenspan: Okay. Thank you. That's helpful. Operator: Our next question is from Tracy Begley with Wolfe Research. Please proceed. Tracy Begley: Thank you. Good evening. Sticking with organic revenue, there were some areas within brokerage on the fourth quarter where you were ahead or below your plan, even though Investor Day was in late December. Can you add some color on your experience within specialty U.S. Wholesale? You're somewhat ahead in reinsurance, where you were behind. And sticking with reinsurance, if you could add commentary on how one-one renewals may play into organic revenue for 2026. Douglas K. Howell: Alright. Let me tackle that. First of all, when you talk about the reinsurance number, we were forecasting about 10% or, you know, organic growth, and it came in at eight for that fourth quarter. It's an extremely small quarter in terms of dollars. The difference between that 8% and that 10% is $1.5 million. So when you think about the degree of estimation that can change on a percentage, that's what's causing it. I think you had another question about specialty, that came in a couple points better. You know, I think that we had a really good wholesale month and it came in strong at the end of the year as we were putting some placements to bed. So, you know, again, it's probably another $45 million of revenue or something like that. So the degree of estimation risk around a percentage point on some of these is pretty small. I think notably, though, you know, we thought we were gonna do 5% in the retail P&C. Well, that's a $3 billion business. And we came in at 5%. So what we thought on the big business, there's not—the law of large numbers helps us get those numbers a little bit more accurate, so to speak. Tracy Begley: And just to follow-up as well, I think the one-one reinsurance renewals were a little bit worse than what was expected at Investor Day. So, like, how does that play into your guide for '26? Douglas K. Howell: I don't know where you picked that up in our commentary. Is there something you heard? That's wrong. Yeah. I don't think it gets softer, but I don't think our performance is weaker. Okay. Are out in and buying some more coverage. That's—I just wanna make sure we said it right. Tracy Begley: Okay. So that piece is helpful. You reiterated your prior remarks $10 billion to deploy towards M&A without the need to issue stock. So what I thought is I looked at the bottom of the top 100 brokers, and we estimated that it would take more than 65 deals to get to exhaust that full $10 billion of funds. And that number rises if you focus on real micro targets with than $20 million of annual revenue. So that's just a lot of deals. The playbook is great, but I'm wondering how feasible it is to close on a large volume of deals. And if that doesn't transpire, how would you deploy any dry powder? J. Patrick Gallagher: First of all, let me address the deals. One of the things that I think we have that a lot of other firms don't is we've got people in the field who have done deals already. We now have hundreds of offices around the country organized in regions and zones, both on the property casualty side and the benefits side. And they're out talking every day to that exact population that you're talking about. And the ones that are a million, $2 million, we don't even announce them. And we bring deals to the table like that literally every week. And so what we've got in terms of the ability to vacuum up, hoover up a lot of these littler brokers, is, I think, a very unique opportunity as they begin to realize that they don't have the tools. They have one or two big accounts they wanna take care of, and we're a great place to build their career, their family's career. At an IR day sometime, I might be able to address actually the people that have taken advantage of that opportunity. And then we're ready and willing to talk to the big ones. And when you take about when you take that dry powder, having just spent $13.5 billion and realize that there aren't that many people in the marketplace that can do that, I think we've got both ends of the spectrum covered better than anyone else in the market. Douglas K. Howell: Yeah. Let me give you some other stats. So you go back to 2014, we did a total of 59 deals. 2014 when we were half as big as we are. You know, we can do acquisitions in Canada, in the UK, in all in every single line of business. So being able to do 60 deals, we did 59 in '14. We did 58 in '12. We did 46 in '18 and '19. So, you know, and these that doesn't include the million or $2 million, the smaller ones. We kinda target. But these are just on the sheet that I have here of anything that size. So I believe that we have substantial opportunity to continue to clip off 50 to 75 deals a year and not even blink. J. Patrick Gallagher: And Doug mentioned it's a global practice. Douglas K. Howell: A global opportunity. There's $7 trillion of premium floating around this globe spreading risk. Those are Swiss Re numbers. We touch about $250 billion. Do you think the opportunity is? J. Patrick Gallagher: Huge. The other thing too is, you know, so many of these agencies are owned by baby boomers. That don't have succession plans in place. I think that we're going to get our fair share 60,000 of these brokers around the world. We can clip off 75 a year. I have confidence in the team that we'll be numbers that are put out by—I can't do them all. J. Patrick Gallagher: Because I may have a note having—we're probably approaching over 900 acquisitions this year that have been announced. And pick those up from Marshberry and Optus Partners and others. Tracy Begley: Very helpful context. Thank you. Operator: Our next question is from Gregory Peters with Raymond James. Please proceed. Gregory Peters: Hey, good afternoon. So I ordinarily wouldn't do this focusing on the fourth quarter numbers. But I am getting some inbound emails on it. So I think it's worth spending a minute on it. And there's just some confusion over what the street consensus has if they're doing the old definition or the new definition. You know, the 5% looks great. We're just trying to—and I know is inside my numbers. I don't know what's inside the consensus and maybe the consensus has different numbers. I wouldn't ordinarily do this, guys, but I'm getting inbound emails asking me about it. So I thought I'd throw it out there for you to comment on it. Douglas K. Howell: Alright. Let me hit a couple things on consensus. Let's start with EPS. Consensus, I think, was around $2.68 or 69¢. For brokerage, we posted $2.74. Risk management was 21. We posted 22. And corporate segment, the midpoint of what we told the street was 56. I think the street may have had 55, and we were a couple pennies less than that. So when it comes to EPS, I can comment on the consensus. On it. When you look at down within the organic growth models, I think that I would hope that what's in the models would have been the 5% we told you in December. To compare when you ferret out the noise or the noise from life sales in that. So I don't know if I have it either, Greg. So I don't know—I'm kinda digging through some papers while I'm talking. Maybe I can come back to that question. But, I mean, if consensus listened—if the sell side we said in December, we posted exactly that. Gregory Peters: Well, it is consistent with what you said, but I don't have a—I don't have visibility on consensus. I wouldn't have asked you this unless I was getting questions. Have the information in front of me. I can probably dig it out what each different analyst has. But even our transparency into that isn't all that great. So— Douglas K. Howell: Yeah. Gregory Peters: That's fair. Hey. Can we—can you go to the page seven, the Assured Partners disclosure? And as you were walking through that table, you said, hey. Be careful about the '26. And what I'd like you to come back is reexplain that. When one of the line items that caught my attention in there is if I look at the fourth quarter '26 projected pretax income, from Assured Partners at a 194 down from the 201 in the fourth quarter '25. So I was just—I know there's a reason behind it, but there—do you—some other comments were on this table, and I just wanted to go back and revisit that, please. I got you. Right. I understand. Douglas K. Howell: First, when you build your models, we think you should be adding in rollover revenues from back on page six. Because of our acquisition program. We've talked about that for years. Right? Yeah. When you get to page seven, what I was fearful of is that you would pick up the pink section and you would add in $745 million of revenue out in fourth quarter '26 when the fact is we already have Assured Partners in our numbers for fourth quarter '25. So there is no rollover impact. So if I would've changed this table to be a rollover revenue table, it would say rollover revenues are $880 million in the first quarter, $755 million in the second quarter, $509 million. That's the delta between $815 million and $306 million and that would be $40 million in the fourth quarter. Right? So— Gregory Peters: Got it. Douglas K. Howell: What we're trying to do is the pink section here is showing what a full year would be, not necessarily the rollover impact. And so that's why I said careful. You can use exactly the first and the second quarter numbers, drop them into your models, but take the delta between third quarter '26 and third quarter '25 and drop that into your models for the rollover impact of Assured Partners. That doesn't have, you know, synergies in it. This is a midpoint of the range, so there could be some, you know, some numbers around that that go one way or another. You know, we're doing our budgets of Assured Partners here, and so it could change a little bit by quarter. But this gets you started as you're trying to project, you know, next year. I just was fearful you would add $775 million in the fourth quarter to— Gregory Peters: I got that. But they keep—can you go—can you just address—now I'm hung up on this fourth quarter '26 number, the 194 versus the 201 in '25. Why would that be lower in the fourth quarter '26 pretax than it was in the fourth quarter '25? I'm sorry to beat this one up. But a static table that we provided to you before— Douglas K. Howell: That number will likely change when we get to March. And also, maybe another way to think about it is 201 million. When I said there was a little bit of timing in that one, I wouldn't expect that timing to repeat when we get out to 2026. In a perfect world, it would say 201 over there. It says a 194 million versus 201, kind of the same number, but a fair question. Gregory Peters: Thanks for your time. Douglas K. Howell: Yeah. Hope that helps. Hope it helps everyone. Operator: Our next question is from Andrew Andersen with Jefferies. Please proceed. Andrew Andersen: Hey. Thanks. Maybe just back on M&A, if I think about some of the disclosures around term sheets and annualized revenues, it does seem to be coming in a little bit over the past few quarters, and I think part of the idea with AP was it would give you access to some new M&A pipeline. Is the right way to read this maybe that new pipeline just hasn't materialized yet or the quality of these term sheets is better than they were in the past? Douglas K. Howell: You know, here's the thing. I think there's a natural slowdown as we've been sitting here. You know, it took nine months for us to get this approved to the DOJ. That freezes people in their behavior. We've been together now. Let's call it arguably five months now. I think the teams are starting to gel. They're starting to understand that they have a two-pronged growth objective as a branch manager. They gotta grow their branch organically, and they gotta find good merger partners. What I really love about it is we got 300 more—90% of our acquisitions are sourced at the local level. It's not like we've got a team of bird dogs that are running around trying to call out 400 opportunities, but we've got a thousand different branches around the world now. Maybe more than that, that every day they're talking to their competitor down the street about how we can be better together. And that's where we get all of these, you know, and Tracy was asking me, can we do 75 of them? Boy, I would think that a thousand different voices out there will do a pretty good job sourcing out of 60,000 opportunities. I think that our M&A program will be alive and well. I also believe there's a—this may be a little systemic slowdown here as sellers come to the realization that maybe valuations are coming down, and it takes a while for people to realize there's a new norm in that. Andrew Andersen: Thanks. And then just on that margin table, as you think about the AP synergies in '26, is that including both revenue—I guess, that's included both revenue and expense synergies. But I would think the revenue synergies are coming online pretty quickly since it's just changing some contracts. And the contingents and supplementals. There. Is that the right way to— Douglas K. Howell: Actually, no. I think that they'll both be at a steady pace throughout the next two years and everything. But remember, revenue synergies can be from cross-sell. They could be trading with ourselves, wholesale, London markets doing that. Joint selling could be some of the revenue side. And then you got the carrier contract that still take—it takes us a couple years to get those rolled out and have the combined value proposition that, you know, the communicated with the carrier. So probably not as fast as maybe you have in your mind, but not in your mind. So—but I think expense and revenue synergies are gonna grow kind of at equal pace over the next two years. Andrew Andersen: Thank you. Operator: Our next question is from Alex Scott with Barclays. Please proceed. Alex Scott: Hi. Just wanted to go back to Assured Partners and see if you could comment a bit about, you know, how their growth is coming in. I know we can, you know, see some of the numbers you disclosed in revenue and so forth, but I'd just be if you talk about, you know, their organic growth and, you know, how that's progressing relative to your plans. And I—you know, what does sort of underline and underpinning your estimates. Douglas K. Howell: Alright. So let's go back when we bought Assured Partners. We merged—we thought that they were running organic about a point, point and a half less than us. Terrific sales culture, terrific producers out there. And I'm seeing that still about the same. Therein lies the opportunity. I think that us being able to deploy our tools across their terrific sales folks is going to get them back, their organic growth close to ours as we go forward. So I would say there'd be no dilutive impact to their margins we hit 2027 when they start being in our organic numbers. J. Patrick Gallagher: And I can tell you from the visits that we've had, as I mentioned earlier, we've had a whole bunch of them come to basically trade fairs in Chicago in Rolling Meadows. They are really turned on by the opportunities. And so it's put a big push behind them, a wind behind their back, if you will, to go out and talk to people that maybe they didn't write before. Stories change. We've got more resources. Let me bring something to see you. It's pretty exciting. Alex Scott: That's all helpful. Thank you. And on the M&A pipeline, could you comment a bit just around how you're seeing valuations and maybe if there's any difference between larger versus smaller acquisitions and just if there's been any move. Douglas K. Howell: Yep. They're coming down. J. Patrick Gallagher: I can't remember the last time I saw an ask for 16. Yeah. These are over 10 on the nice tuck-in acquisitions, and, you know, you're down in that, you know, 12 to 13 times when you're talking about the bigger ones now. Alex Scott: Got it. Okay. You. Douglas K. Howell: One heads up for everybody on the phone. We have got—you know, this is a great call. I'm gonna—we're gonna try to answer the next five or six questions a little faster. Just because there's a line of folks that wanna get some questions in. So if we seem like we're just giving you a yes, no, or whatever, it's just out of fairness to the other folks that are in the queue. Operator: Our next question is from Paul Newsome with Piper Sandler. Please proceed. Paul Newsome: I'll be a good citizen to just ask one question. And I apologize if I missed it, but Brown & Brown was talking about movement from admitted and non-admitted. Any thoughts on if that's happening in a material way for your book? As well? J. Patrick Gallagher: It's not. Paul Newsome: There you go. Next question. Douglas K. Howell: Short, Paul. What can I do? J. Patrick Gallagher: I'm really not seeing a movement, but I mean, I was trying to be funny here, Paul. But the fact is, no. We're not seeing a lot of it. We have the data on that. And the wholesale markets are doing a pretty good job of renewing their business, which is good for our clients and good for us, good for our PS. But we are not seeing the kind of movement in a softening market. Now part of that is you're dealing here in a softening market with primarily property. Well, guess what? That found its way to the E&S markets for a reason, and it sure it certainly wasn't about 5% increases or decreases. So, no, there's not a big jump back into the primaries at this point. Paul Newsome: Fantastic. I'll let somebody else ask a question. Douglas K. Howell: Thanks, Paul. Operator: Our next question is from Mark Hughes with Truist Securities. Please proceed. Mark Hughes: Yes. Thanks. Pat, you'd previously given pricing by customer size. You happen to have an update for that? J. Patrick Gallagher: Basically, across the book right now. Talked about that before we did this. There's no sense to put it in my prepared comments. So, really, what we're seeing on the large accounts and the small accounts is they're basically—you recall, we were seeing large accounts get a bit more discount as the market changed a bit. And now both big, medium, and small accounts, all three are getting about the same decreases. And increases, interestingly enough, on the casualty book. Mark Hughes: Thank you. Operator: Our next question is from David Motemaden with Evercore ISI. Please proceed. David Motemaden: Hey. Thanks. Good evening. Just had another question on the organic and the deferred revenue assumption changes that were 2% this quarter and 1% for the year. I know you guys have the new definition now of organic, but just on these assumption changes, is that something that, you know, you guys can sort of, you know, implement any sort of process improvements or anything in terms of, like, assumptions starting at the beginning of the year to just have less of a potential drag in the future? Anything there that you guys are looking at? Douglas K. Howell: Well, listen. When I look at it, when you look at the last three years of this, for the full years, it's zero and zero, zero and zero, zero and negative one. So doing a wholesale change in our process because of a 1% change. I understand the quarterly noise, and we—you know, that's why we spent so much time on it in December, and we're talking about it beforehand, and we're signaling it. That's why we're trying to do it. If this were just an annual, if we only reported results annually, you would never ask us a question about it. It would be so minor. And so I think that, you know, in a new process, and, of course, we'd take a look at it. But to have, you know, hundreds and hundreds of people update surveys and their time studies and everything, you know, every three months. I just think it adds a burden of cost that it's probably not worth it. So I guess my ask for you is to try to look past the quarterly noise, look at it on an annual basis and say, you know, we've done a good job of making sure that you didn't cloud the fact that we're running a 5% organic growth business right now. And we see that going forward. David Motemaden: Got it. So you would think that would be a zero for 2026? Douglas K. Howell: Well, I would actually like it to be a positive number year as we improve our service quality. If we can improve it a little bit more next year, but we've done a really great job of getting our service to the point where we just don't make mistakes anymore. Provide certificates of insurance over, you know, within 99.9% accuracy within twenty-four hours. You know, it's just that, you know, but years ago, that was taking a little bit longer, several days to do, and our auto ID cards and our policy review. So we're getting to the point where the chassis is so industrial strength right now. And the bigger we get, the impact would be much smaller on that. David Motemaden: Thank you. Operator: Our next question is from Meyer Shields with KBW. Please proceed. Meyer Shields: Great. Thanks so much. And I'll try to be quick too. To the extent that there is disruption in the London wholesaling market as one of the major players there builds a retail platform in the US. Is that an opportunity for RPS? Or does the fact that Gallagher has retail operations itself make that a tougher sell? J. Patrick Gallagher: It's a big opportunity. The answer is yes. Meyer Shields: Okay. Perfect. That's what I wanted to know. Thank you. Operator: Our next question is from Katie Sakys with Autonomous Research. Please proceed. Katie Sakys: Hi. Just one for me. I wanted to zoom in really quickly on the benefits brokerage and consulting outlook. You know, looks stable versus 2025 at 4%. Health inflation doesn't seem like it's incrementally changed this year relative to last, and maybe that's gonna be less of an uplift to employee benefits organic. Can you kind of walk us through what you're thinking on what's going to keep that 4% organic growth rate unchanged this year? Douglas K. Howell: You crackled at something there, 37 words before you finished. Can you just ask the nub of the question again one more time? Because we just got a crackle from somewhere. Katie Sakys: Yeah. Sorry about that. You know, it doesn't seem like health inflation might be as much of an uplift to employee benefits organic this year as it may have been last. Can you walk us through what you're thinking on keeping the 4% benefits brokerage organic growth rate stable? Douglas K. Howell: Yeah. Here's the thing is that, you know, truthfully, a lot of our services are priced on a per employee month basis. So as rates go up, it doesn't necessarily follow that like you would see in the P&C side. But what it does do is it does cause—it does present many opportunities for more advisory projects. That come in as they see increasing medical costs, increasing premiums of how do they change their programs, how do they change their deductible, gives us more pharmacy benefit review engagement. So we feel pretty good about the fact that as you have pressure on your labor force, benefit cost, it leads to more opportunities for us to go in and consult and give some advice. So that's why we feel pretty good about it. I also feel like it's gonna give our consulting operation a boost. J. Patrick Gallagher: Because I believe everyone is going to shop their employee benefits. I think everyone is fed up with employee benefit with health care cost inflation. And while they like the people they've been consulting with and it's a very sticky business, I think they're open to the kind of marketing efforts that we have now, the size, the scope, and our capabilities, even in the smaller side of the market, people are, I think, just a little bit more willing to listen right now. And we do have some creative solutions. There are things that we're doing in telemedicine, as I said in my prepared comments and what have you. That are different than what the small local broker. We just—when we closed on AP, what we found is we'd have over the last twenty years most benefits in PC people were housed together and embedded in the same P&L. And we, literally, thirty years ago, decided that we would break those apart certainly looking for cross-selling synergies working together, not changing it to not be Gallagher, but to work together in a truly separate benefits capability, separate benefits operation and company. I think that's been very, very successful for us, and it proves the point, I think, to the buyers that we do look at it as a different practice, as a different profession in the sense of its advisory nature. And they should be listening to us now. And I think there's a lot more opportunity to build our pipeline than there has been in the—even in the last few years. Katie Sakys: Thank you very much for the color. Operator: Our last question is from Ryan Tunis with Cantor Fitzgerald. Please proceed. Ryan Tunis: Hey, thanks. So, yeah, we got the Super Bowl next weekend. So in the spirit of that, Doug, I'll put you on the spot a little bit here. Was five-eight helpful? A little bit confusing. Can you just give us an over-under in 2026 EBITDA margins, what you're thinking about? Douglas K. Howell: Oh, alright. So you do have a little bit of a bad connection on it. And so let me see if I can repeat what you say. You're saying where do I think of EBITDA margins are going to land for full year '26. And taking over-under. Ryan Tunis: An over-under. An over-under. Douglas K. Howell: It's a guess. We're gonna be over. Ryan Tunis: Over one. What's not here? Douglas K. Howell: The numbers—you guys gotta—we're putting the reins. We're gonna try to tighten down these ranges there that are on page eight of the CFO commentary document. But I think that I feel—I told you, think we have some upside in synergies, and I think that our teams are gonna be really focused on continuing to get better at everything we can do. J. Patrick Gallagher: Get Doug off the hot seat and call FanDuel. We— Douglas K. Howell: No. No. No. So, yeah. So, like, my follow-up—I've been wrecking my brain. I'm on the numbers. And, I mean, Pat, you can help me. But should I give the four and a half? In the—you guys think? J. Patrick Gallagher: Four and a half and what? Broke up what? The box. Ryan Tunis: Yeah. Oh, I made a point to the CER. I know. Bears are out of it. We're not as focused on that as David should be. Ryan Tunis: Alright. Thanks, Dan. J. Patrick Gallagher: Thanks, man. Well, thanks, everybody. I think that's our last question. I wanna thank you again for being with us this afternoon. As we said, we had a great quarter and a great '25. We're very excited about '26. Our new colleagues that have joined us, just from Assured Partners, but Woodrow Sawyer and dozens and dozens of others around the world. Thank them. There's a lot of competition out there for acquisition and I think they made the right choice. We've got 71,000 plus colleagues. I wanna make sure I say thank you to them. I do believe we have the most talented team in the industry, and it shows. So we look forward to speaking with the investment community again in March. During our Investor Day, and have a good evening. Thanks very much for being with us. Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time.
Operator: Welcome to the Fourth Quarter and Full Year 2025 Stryker Earnings Call. My name is Leila, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question and answer session. This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release as an exhibit to Stryker's current report on Form 8-K filed today with the SEC. I will now turn the call over to Kevin Lobo, Chair and Chief Executive Officer. You may proceed, sir. Kevin Lobo: Welcome to Stryker's fourth quarter earnings call. Joining me today are Preston Wells, Stryker's CFO, and Jason Beach, Vice President of Finance and Investor Relations. For today's call, I will provide opening comments followed by Jason, with the trends we saw during the quarter and some product updates. Preston will then provide additional details regarding our results and guidance before opening the call to Q&A. Our 2025 results were outstanding for both Q4 and the full year across all key financial metrics. Against double-digit comparatives from the prior year, organic sales growth was 11% for Q4 and 10.3% for the full year, surpassing $25 billion in sales. Globally, for the full year, our neurocranial endoscopy instruments, and trauma and extremities businesses all delivered double-digit organic sales growth, demonstrating continued robust demand across our product portfolio. Full-year U.S. organic sales growth was an impressive 11.2%, and international organic sales growth was 7.5%. International results were led by strong performances in our emerging markets, South Korea, and Japan. These countries and our other international markets continue to represent significant growth opportunities for us, and we look forward to launching products internationally that have already demonstrated success in the United States. We also had excellent earnings and cash flow performance in 2025. While managing tariff headwinds, our teams delivered a second consecutive year of at least 100 basis points of adjusted operating margin expansion. This performance demonstrates strong operational execution and earnings power that we have been building up over time. Preston will cover cash flow, which was also a standout for us in 2025. Overall, our financial results reflect the durability of our high-growth offense, with the following structural components: exceptional talent and culture, active M&A, a steady cadence of product launches, and systematic specialization by creating new business units and splitting sales forces. The new SmartCare business unit within medical combines Vocera and Care AI, and we have split multiple sales forces in the past two years. One example is the new breast care sales force within endoscopy, that launched in 2025 and has contributed to their terrific growth. We have momentum entering 2026 and expect to continue delivering growth at the high end of medtech, which is reflected in our full-year 2026 guidance. Our financial position remains strong, providing firepower to execute on M&A in 2026. I would like to thank our teams for another terrific year fueled by their commitment to our mission and unwavering dedication to our customers. With that, I will now turn the call over to Jason. Jason Beach: My comments today will focus on providing an update on the current environment as well as a few other highlights. Procedural volumes remained healthy in the fourth quarter, and we continue to expect the markets will remain strong in 2026, underscored by the continued adoption of robotic-assisted surgery, favorable demographics, and durable demand for our capital products. Our U.S. capital-related businesses delivered robust performance in the quarter, helping to drive double-digit organic sales growth for Q4 in our instruments, medical, and endoscopy divisions. Hospital CapEx budgets remain healthy, and our capital order book continues to be elevated as we enter 2026. Next, powered by Mako 4, we delivered a stunning quarter and year of Mako installations with yet another record quarter both in the U.S. and worldwide. Our installed base now includes more than 3,000 Mako worldwide. Alongside our record number of installations, we also continue to see steady increases in utilization, bolstering our number one position in U.S. knees and hips. As we exited the year, over two-thirds of our knees and over one-third of our hips were performed on Mako in the U.S. Globally, utilization rates were approximately 50% for knees and over 20% for hips. We have significant momentum heading into 2026 and continue to receive very positive feedback on the latest Mako applications, including advanced primary with revision hip, spine, as well as shoulder, which will launch on Mako 4 mid-year. Finally, Inari, which is now known as our peripheral business, had a strong finish to the year, highlighted by robust procedural growth in the high teens that was partially offset by destocking, which will be minimal in Q1. We are set up for success in 2026 as the business approaches its one-year anniversary as a part of Stryker. As a reminder, peripheral vascular is reported as part of our vascular division results. With that, I will now turn the call over to Preston. Preston Wells: Thanks, Jason. Today, I will focus my comments on fourth-quarter financial results and the related drivers. Our detailed financial results have been provided in today's press release. Organic sales growth was 11% for the quarter compared to 10.2% in 2024, with the same number of selling days in both periods. Pricing had a slightly favorable impact, and additionally, foreign currency had a 1% favorable impact on sales. For the full year, our organic sales growth was 10.3% against a strong comparable of 10.2% in 2024. The impact from price was favorable by 0.4%, while foreign currency had a 0.5% favorable impact and 2025 had one fewer selling day than 2024. Our fourth-quarter adjusted earnings per share of $4.47 was up 11.5% from the same quarter last year, driven by sales growth and operating margin expansion, partially offset by tariffs, higher interest expense, and a higher effective tax rate. Foreign currency translation had an unfavorable impact of $0.02. Our full-year adjusted earnings per share of $13.63 was up 11.8% from 2024, driven by our outstanding sales growth and a return to pre-COVID adjusted operating margins with a second consecutive year of at least 100 basis points of expansion. Our margin expansion included improvements in gross margin from business mix and cost improvements despite the impact of tariffs. For the year, foreign currency translation had a favorable impact of $0.01. Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had an exceptional organic sales growth of 12.6%, including U.S. organic growth of 13% and international organic growth of 10.9%. Instruments had U.S. organic sales growth of 19.1%, with high teens growth from both our organic orthopedic instruments and Surgical Technologies businesses. Performance was fueled by strong capital demand in power tools, SteraShield, smoke evacuation, and Neptune waste management. Endoscopy had U.S. organic sales growth of 11.1%, led by robust double-digit performances in our sustainability and sports medicine businesses and high single-digit growth of our core endoscopy portfolio. We continue to see strong demand for our sports medicine shoulder in the 1788 video platform. Medical had U.S. organic sales growth of 13.6%, that included strong double-digit performances in acute care and Sage businesses. From a product perspective, Medical's fourth-quarter growth was driven by 35, Procuity, Oceara, and Sage products. We do not expect the supply constraints we experienced in 2025 to negatively impact growth rates in 2026. Vascular had U.S. organic sales growth of 4.3%, reflecting a strong double-digit performance in our hemorrhagic business that was powered by the recent launch of our Surpass Elite flow diverting stent. This performance was offset by competitive pressures in our ischemic business. As a reminder, Vascular's organic sales growth figures do not include our Peripheral Vascular business. And finally, Neurocranial had U.S. organic sales growth of 9.9%, led by an outstanding double-digit performance in our IBS business and near double-digit performance from our cranial maxillofacial business. Internationally, MedSurg and Neurotechnology's organic sales growth was 10.9%, led by double-digit growth in our endoscopy and neurocranial businesses. Geographically, a slower capital environment in Europe during the quarter was offset by robust demand in other international markets, including very strong performances in Australia and New Zealand, our emerging markets, and South Korea. Orthopaedics had organic sales growth of 8.4%, including U.S. organic growth of 9.6% and international organic growth of 5.4%. Our U.S. Knee business grew 7.6% organically, reflecting our market-leading position in robotic-assisted knee procedures and continued momentum from recent Mako installations. Our U.S. Hips business grew 5.6% organically, highlighted by the enduring success of our Insignia HipStem and continuing adoption of our Mako robotic kit platform with expanded ability to address more difficult primary hip cases as well as hip revisions. Our U.S. Trauma and Extremities business grew 8.5% organically in the quarter, led by double-digit growth in our upper extremities business as our multiyear strong shoulder growth trajectory continued throughout the year. Additionally, our core trauma business had solid high single-digit growth against a very high prior year comparable. Core Trauma's performance continues to be driven by Pangaea, our differentiated plating portfolio, as well as our market-leading position in nailing. Our U.S. Other ortho business grew 28.7% organically, driven by robust installations in the quarter led by momentum from the successful launch of Mako 4 in the U.S. Internationally, orthopedics had an organic growth of 5.4% against the double-digit comparable in the prior year. Growth was led by strong performances in Canada and many of our emerging markets. As a reminder, our international results include a nominal amount of spinal implant revenue because of previously accepted tenders that we are fulfilling before exiting those markets. Now I will focus on certain operating and non-operating highlights in the fourth quarter. Our adjusted gross margin of 65.2% was 10 basis points lower than the fourth quarter of 2024, reflecting the impact of tariffs that were mostly offset by business mix and cost improvements as we continue to optimize our supply chain and manufacturing processes. Our adjusted operating margin was 30.2% of sales, which was 100 basis points favorable to 2024, driven by lower adjusted SG&A as a percentage of sales primarily due to our ongoing focus on operational excellence and margin expansion. Adjusted other income and expense of $107 million for the quarter was $56 million higher than 2024 due to increased interest expense from debt issuances early in the year and lower interest income. For 2026, we expect our full-year other income and expense to be approximately $420 million. The fourth quarter had an adjusted effective tax rate of 16.1%, reflecting the impact of geographic mix and certain discrete tax items. For 2026, we expect our full-year effective tax rate to be in the range of 15% to 16%. Turning to cash flow, our year-to-date cash from operations was $5 billion, an increase of $820 million from 2024 that was primarily driven by higher earnings and year-over-year working capital improvements. As a result, we delivered free cash flow as a percentage of adjusted net earnings this year, 81% compared to 75% last year. Consistent with the long-range plan we presented at our Investor Day, we will continue to target a range of 70% to 80% for free cash flow as a percentage of adjusted net earnings. And now I will provide full-year 2026 guidance. Given our strong exit from 2025, our presence in healthy end markets, sustained procedural volumes, and strong demand for our capital products, we expect 2026 organic net sales growth to be in the range of 8% to 9.5% and adjusted net earnings per share to be in the range of $14.90 to $15.10. Our full-year 2026 sales guidance includes a modestly positive impact from price. Additionally, if foreign exchange rates hold near year-to-date levels, we anticipate a slightly favorable impact on both sales and adjusted earnings per share. Compared to 2025, we will have the same number of selling days in each quarter during 2026. Finally, we expect the seasonality of our sales to be similar to 2025. In addition, we expect full-year tariff impacts to be approximately $400 million, which includes an incremental $200 million compared to 2025 that will be realized in the first half of the year. With that, I will now open up the call for questions. Operator: At this time, we will open the floor for questions. If you would like to ask a question, please press 5 on your telephone keypad. You may remove yourself at any time by pressing 5 again. We would like to remind callers to please limit themselves to one question and one follow-up question so we can accommodate as many participants as possible, and we'll pause just a moment. Okay. Our first question will come from Larry Biegelsen with Wells Fargo. Your line is now open. Please go ahead. Larry Biegelsen: Good afternoon. Thanks for taking the question, and congratulations on a really strong end to the year and a strong 2025. Kevin, you're guiding to 8% to 9.5% organic growth for 2026 versus 8% to 9% to start last year. You know, what's giving you the confidence to start this year slightly higher? And at the Investor Day in November, you seemed to believe it was possible to grow in 2026. 10% given the market conditions at the time. Is that still the case? And I had one follow-up. Kevin Lobo: Thanks, Larry. As you saw, this is our fourth consecutive year of double-digit organic sales growth. At some point, you start to think maybe the comparatives will catch up to us. But given the order book, given the strength of the Mako performance we had in the fourth quarter, which, of course, then contributes to implant growth in the future, we really feel more positive, I'd say modestly more positive this year than we did one year ago, which gives us the confidence to start the year with that range. Little wider range, but a little on the higher end. And as I said at this call a year ago, 10% is certainly possible. But it does depend on a lot of things that are in the macro environment procedure growth. But we do have a strong order book. We do feel good about procedures, and certainly possible that we could do our fifth year in a row. Larry Biegelsen: That's helpful. And for my follow-up, Kevin, you elevated Spencer Stiles to president and chief operating officer in December. It's not the first time, you know, Stryker has had a president. I think, you know, Tim Scannell had that role until 2021. So can you please talk about, you know, why this was the right time for this change? Know, what it means for Stryker? You know, and perhaps, you know, what it means for you going forward. Thanks for taking the question. Kevin Lobo: Yeah. Yeah. Thanks, Larry. As you as you know, we did it before. And I think Spencer clearly is ready for a challenge. He's been a group president for some time now. It provides him really a tremendous platform to lead our global commercial organization. It also enables a cascade of other promotions, including Dylan Crotty, to head up orthopedics and then a ripple down throughout the organization. So this is really a great chance for our fantastic leaders to assume more responsibility, and I look forward to partnering with Spencer to lead the company as we continue to grow. $25 billion in sales and clearly, with momentum behind us, does enable us to have additional leaders running large businesses. Operator: Your next question will come from Robbie Marcus with JPMorgan. Your line is now open. Please go ahead. Robbie Marcus: Oh, great. Thanks for taking the questions. I'll add my congratulations on a nice quarter. Two for me. Maybe to build on Larry's question on just sort of the confidence going forward, clearly, the capital equipment market ended on a really strong year in '25. Kevin, how are you thinking about pricing both for your capital business and your implant business in 2026 and your expectations for the capital environment capital in 2026, U.S. and outside the U.S.? And then I have a follow-up. Preston Wells: Yeah. Hey, Ravi. Just on the pricing piece of it, you know, we talked about pricing before. It's something that we certainly have been focused on the last few years, and I think you've seen that reflected in our price gains that we've been able to deliver over the last couple of years. And now as we see the numbers, we're building, you know, price gains on top of price gains from before. And so expect that to be something that continues in the next year just given the muscle that we've developed and the focus that we have. So if we think about 2026, we expect 2026 to look pretty similar a price standpoint to 2025. Jason Beach: Hey, Ravi. It's Jason. Just as it relates to kind of the overall capital environment, I mean, you said it well. We had a strong finish to the year if you think about our capital businesses. And then if you just consider similar to what I said in some of my prepared remarks, from an elevated backlog perspective, the environment's pretty good. And so we feel really good about the capital environment as we go into 2026. Robbie Marcus: Great. Maybe looking at the quarter, there were a couple of businesses that did particularly well. You mentioned Mako, the other number was particularly strong as was endoscopy and instruments. And one that stood out on the opposite side or two, trauma and extremities and vascular. I was hoping you could just give us a little more color on what happened there. Is there stocking, destocking, and, you know, just a little more? Appreciate it. Thanks. Kevin Lobo: Yeah. Well, that was a lot of questions, Robbie. So let me just say on the positive side, endoscopy and instruments and Mako were absolutely on fire at the end of the year. I mean, instruments included power tools as well as the products Preston mentioned in his remarks. And OSFI was a really amazing performance if you think sports and sustainability did well, but the camera has is a few years into its launch. And unlike prior years, if you look at our prior launches, our growth would start to wane a little bit. Our camera is just phenomenal. With fluorescence imaging, we're continuing to solve that very, very well. And Mako was this transition to Mako 4 has been incredible. This is the first time we've had a change of the actual robot to a new robot. Since we bought Mako. And to be honest, coming into the year, I wasn't sure how this new transition would go, and the team has done a phenomenal job. But the extra application certainly helps. The feedback has been terrific. On the other side of the fence, I mean, I'm still extremely bullish on trauma extremities. We had a monster comp from the prior year because Penguin was really gaining steam. And we still don't have Pangaea in Europe and some other markets. Shoulder continues to be on fire. Our foot and ankle business was a bit soft this year, and we are now on a new total ankle called Encompass. With much better reimbursement from CMS, which is pretty exciting. That we won't see much of that impact in the first quarter, but starting in the second quarter, that will start to really kick in. So I don't feel in any way, shape, or form as that business is slowing down. It's just a question of comps and over the course of the year, you're gonna see them have another really strong year in 2026. On the vascular side, I think we commented that the ischemic sector has been tough for us. It's not just new for the fourth quarter. That's been going on for the last couple of years. We did launch a new large bore catheter called Broadway. It's a point zero eight four lumen. That was a big gap in our portfolio. That feedback has been very positive, but it's the early days of that launch in the U.S., and then we'll be launching that around the world. So I think over time, that'll start to improve somewhat. But our hemorrhagic business continues to be very strong, and we are now the largest neurovascular player in the marketplace. We took over leadership roughly about a year ago. And have continued to be the largest player. Operator: Your next question will come from Joanne Wuensch with Citi. Your line is now open. Please go ahead. Joanne Wuensch: Good afternoon, and thank you for the quarter. There's a number of different pieces of the competitive landscape that's changing for you, and I'd love to get some commentary or thoughts, the number being bought Boston Scientific, J and J announcing the spinout of their ortho business. How do you think about either those moves specifically or just sort of generally on how the land may or may not be changing? Jason Beach: Hey, Joanne. It's Jason. I'll take a run at this. But I would say first off, you know, in terms of our strategy and how we go to market, absolutely no change. We have tremendous teams on both of those businesses, and certainly like our chances here in 2026. Joanne Wuensch: Okay. My second question, not quite a follow-up, is there's a fair amount of concern about patient volumes sort of, with changes in the Affordable Care Act coverage. Is there anything that you can comment on that or what you're seeing or what you expect for patient volumes throughout the year? Thank you. Jason Beach: Joanne, it's Jason again. What I would say is, as we ended the year and certainly starting off 2026, volumes continue to be robust. Tough to speculate, obviously, as you go into later in the year, but we continue to believe, as you think about the ortho markets, are gonna be mid-single-digit growing markets, and we're gonna outperform the markets in 2026 just like we did last year. Operator: Your next question will come from Ryan Zimmerman with BTIG. Ryan Zimmerman: Thank you. And let me echo congratulations on the quarter of the year. So this may be a little in the weeds, but there's actually a local coverage determination this morning around total joint arthroplasty and robotics. I think specifically with CGS. It wasn't very impactful, but it would appear to me that there's been some efforts to get incremental reimbursement for the use of robotics. I could be wrong in that assumption. And in the response, some of the MACs argue that the evidence may not be sufficient to warrant this. I'm curious if you have any thoughts about what's going on here whether this does create any risk in your view from payers or, alternatively, you know, an opportunity to get incremental reimbursement for robotic usage, specifically for specific robotic systems. In the market in orthopedic. Kevin Lobo: Well, I'm not familiar with that particular case that you're citing, but what I can say is in other parts of the world, there is extra reimbursement for robotic procedures, whether it's in Japan, or in other markets around the world. We have examples where we do get extra reimbursement. And we love the opportunity for that. In fact, in Australia, there are studies that are showing that Mako outperforms other robotic systems as well as navigation as well as manual. So it kind of stands on its own in Australian data that has been peer-reviewed and published. So we love our chances of being able to demonstrate that data. We've been in the market for long enough now. That the data is starting to come out and would support potentially extra reimbursements. I can't imagine or don't foresee any reduction in reimbursement. And certainly, you can see with the uptake of robotics and over two-thirds of our knees being done robotically, surgeons aren't gonna be going backwards. It's only gonna continue. Ryan Zimmerman: Yeah. Okay. Fair enough, Kevin. And I'll maybe zoom out a little bit then. I on operating margins and turn this to Preston. But 150 basis points, I think, through 2028 was the target, Preston. At the Analyst Day not too long ago. You know, as you sit here today, just given the performance, that we have seen, you know, how would you characterize that trajectory would you characterize your confidence to achieve that? I think if I look at kinda where numbers are, you know, that was kind of in the range of possibilities. But I think we are still kinda left wondering kind of the pace at which you may have achieved that tar those targets. Thank you. Preston Wells: Yeah, Ryan. Good question. So as we think about it, the confidence is the same. You know, we gave you those that guide for the next three years. Because we believe very much in the ability to go out and achieve it based on the activities and actions that we have going on internally. Focused on operational excellence, particularly with areas like lean and other elements with regards to, like, shared services and things of that nature. But, you know, when we think about what we gave you for '26 here, we gave you a lot of the different pieces in terms of our overall growth of what we expect from an EPS standpoint. I think if you plug that in, you'll see it's a healthy margin that we're planning for '26 that really leads you down that path. For that expectation of delivering one fifty and above potentially as we go through the next three years. Operator: Your next question will come from Travis Steed with Bank of America. Travis Steed: Hey. Congrats on a good quarter. I wanted to focus on MedSurg. Kind of bigger picture. Like, if you put the numbers against all the markets in med tech, your med surg business actually is probably one of the fastest growing medtech markets. At the moment. And just curious, like what's driving that growth? How do you have the confidence to keep doing that longer term? Like, it's just, like, surprising how good the growth is in that med surg business. Kevin Lobo: Yeah. I kind of alluded to some of that in my prepared remarks. And I think it's something that's not fully understood. First, it starts off with our tremendous market share. So we have incredibly high market shares across our Medford portfolio, very strong position. We are constantly upgrading these products, launching next generations, of each of these products. And then we fill in little acquisitions that are very fast growing. If you remember, acquisitions like Nico, that just continues to fuel extra growth of our business. And on and on, and then we specialize sales forces and split sales forces continually. A couple of examples. We split our CMS Salesforce a couple years ago. Into an oral maxillofacial sales Salesforce. And a neural Salesforce. We split our Sage Salesforce into an infection Salesforce. And an injury Salesforce. And I can go on and on. We created a separate Salesforce for law enforcement within our emergency care business. So we don't talk about all these publicly for competitive reasons. But this is part of the offense is we bring those constant innovations add in little tuck-in acquisitions, split sales forces, and then that just fuels continual growth. And we already have a number of Salesforce splits that we're contemplating for the next couple of years. We had the if you think about the Virto's deal, that enabled us to add specialized pain salespeople. Because today, the IVS business sells to interventional oncologists as well as pain docs. So that's really part of the formula, secret sauce, if you will, high market shares, continual internal innovation, constant tuck-ins, which enable us sometimes to even create separate business units. If you recall, we split surgical a while ago back in 2019-2020, into orthopedic instruments and surgical technologies. And surgical technologies crossed a billion dollars this year. So it just would have never happened if we had not split the business units. So those are the kind of things we do in med surg, and it's totally continually sustainable. As you look over the last five, six, seven years, this is our offense, and we expect that to continue going forward. Travis Steed: That's helpful. And, Kevin, how do you think about tuck-ins in 2026 or maybe chunkier tuck-ins? And then Preston, how do you think about protecting margins with potential deals in 2026? Kevin Lobo: Yeah. We have really a strong balance sheet right now. And so we're on offense right now looking at deals. The deal pipeline is very healthy. Of with tuck-ins and even looking at other adjacencies as we always do. So we're excited about the potential to do acquisitions in 2026, but I'm not gonna say more than that right now. Preston Wells: Yeah, Travis. From a tuck-in standpoint, you know, we've generally said that tuck-in type deals, those are elements that we try to build into our margin expectations. But as we do each of these deals, certainly, it's something that we would communicate back to you all in terms of what our expectations are. Operator: Next question will come from Vijay Kumar with Evercore ISI. Your line is now open. Vijay Kumar: Congrats on a nice sprint here. Kevin, maybe one on innovation for you. I think in the past, you've spoken about product super cycles. What are you excited about when you look at '26? Feels like some of these super cycles were probably in second or third year. So what is incremental? What are you excited about? Kevin Lobo: Yeah. Thanks, Vijay. I'd say, look. There's a ton of innovation always going on in this company. And even if you think of something like Procurity, that's in its, whatever, third or fourth year, but it's still ends our long-term cycle. That it we that still behaves like a new product. In our hands because it's just a long buying cycle. But we have a number of other exciting launches. We have the Mako RPS, the handheld robot. Initial cases started this month. They're going extremely well. That's a brand new segment for us. Between our manual power tools and Mako. We have the Vocera sync badge that launched, you know, towards the latter part of last year, which is getting you know, tremendous feedback. We have all kinds of OptiPly PVNA and IVS. The encompass total ankle, which I talked about. We have Artyx, which is a new arterial product within Inari. I can go on and on. Could go on for another ten minutes, but there aren't, right now, this let's say, the new power tool the new camera. Those are sort of flagship products in the past that we would always focus on. But the reality is as we become much more diversified, even those launches become a little bit less important to the overall company as the split of CMF is driving CMF to double-digit growth and all these other tuck-ins like Aniko and all these all these little products contribute to really high growth. And then when you have those other new bigger platforms launch, that gives you just an extra jolt. But the fact that Endoscopy posted these kind of numbers with a camera that's three or almost three to four years into its cycle, is really impressive. And, of course, we do have eighteen eighty-eight in development. And you'll be hearing about that at the right time. But I would tell you, I feel great about the health of our R&D pipelines across the company. Vijay Kumar: Yeah. That's helpful, Kevin. And maybe one follow-up on, you know, you did bring up some destocking. So just talk about visibility on, you know, what gives us the constant destockings or any Salesforce disruption, you know, that perhaps impacted numbers here in Q4? Jason Beach: Yeah. Vijay, it's Jason. As it relates to the sales disruption, I would tell you we are beyond that at this point. You know, and I even made the comment in my prepared remarks as it relates to destocking. Minimal in Q1. I will tell you Q4, we had a little bit more destocking than maybe we anticipated. But good visibility as we move into 2026 knowing it'll be minimal in Q1. And then, obviously, we start to get to organic growth rates as you get into late Q1 into Q2. Operator: Next question will come from Matthew O'Brien with Piper Sandler. Matthew O'Brien: Thanks so much for taking the questions. Just I'd love to double click a little bit on the Mako commentary. Just given how strong it was. If you wouldn't mind talking a little bit about the U.S., OUS strength on the record placement side. And is it fair to think after a period of trialing, with some competitive systems that it's kind of over in terms of some of that trialing or even thoughts about using something outside of Mako and that you guys are winning a disproportionate number of these RFPs and, you know, I guess what I'm really trying to get at is the durability of your implant strength, which has been great for several years. I do have a follow-up. Kevin Lobo: Yeah. Thanks. Listen, Mako-four is been an absolute home run. We already felt like we had the best robot on the market, and we've just only added to that with these additional applications that the feedback on revision hip one surgeon actually told me he thought it was a cheat code. For revisions. Those were his words. It just makes a very hard procedure very easy to do. Providing tremendous value to the surgeon. So these extra applications make it totally compelling a great investment for a hospital, I think we're in, obviously, a clear leading position. And there's still a lot of hospitals that only have one Mako, and they're starting to add more and more and more. I think we're up to 30% to 40% now have more than one Mako, but that every operating room for us is an opportunity for a Mako to be installed. And we have clearly the wind on our backs on that. And we're seeing it start to take off in international markets, Japan being the most important one where it took a while, first of all, to get the regulatory approval. They're obviously very data conscious there. But now Japan is really starting to take off. In fact, even other countries in Asia Pacific are starting to really drive the incremental growth. So we're very bullish on this. I think the shoulder is going to be really exciting. When we bring that to the market. Our limited launch has been on the Mako three robot. But we so that's why we're staying in a limited mode because we really wanna get that on the Mako four robot, which, again, will be sometime in the middle of the year. And, obviously, the shoulder business continues to grow exceptionally well without Mako. But, again, hard procedure to do. Every time, the harder the procedure is, the more Mako brings value. So we are we're in the pole position, and we're gonna continue to press our lead. Matthew O'Brien: Thanks for that. And then you mentioned RPS. Kevin, why go with an X-ray the imaging versus CT? It's just been so successful with traditional Mako? And how do we frame up how big that could be for you guys between ASCs, international, etcetera? Thanks. Kevin Lobo: Yeah, look. This is a really great solution for some surgeons that aren't ready to go through the change management of Mako. Mako requires a lot of change for the surgeon, as well as for the staff. And if you think about this handheld, it really is very simple, very easy use. Doesn't require the surgeon to go through that type of transition. This launch is just for total knee. So if you want a robot that can do multiple applications, obviously, that's not possible with this. If you think about in the ASC some surgeons not wanting the complexity of Mako, I think it's gonna open up new customers for us that weren't ready for Mako but want something better than using the manual instruments. And have the visualization. And we're using the intellectual property from Mako to provide some haptic boundaries, and the feedback has been incredible. From the surgeons using it, like, this is easy to use. It provides tremendous value. So I do believe this will be an extra accelerator for our knee business. And something that will live between Mako as well as our manual instruments. And it will be sold by the same Salesforce that sells Mako. So that positioning it's really about meeting the surgeons where they are, and providing the value that they're looking for. And right now, we understand our customers very well, and we believe there is a home for this. And it's under the Mako name, so you can believe we feel very good about the performance. We would never wanna tarnish the performance of the Mako brand, so we know this product can sing. Operator: Next question will come from David Roman with Goldman Sachs. David Roman: I wanted to be at the analyst meeting, you introduced, I think, in video form the form factor for a handheld version of Mako or that I think you had planned to provide more details on over the course of this year. Maybe any latest thinking on just your robotics strategy from a portfolio standpoint as you roll out Mako four and any updates you can provide on the handheld instrumentation? Kevin Lobo: Yeah. I think I just mentioned that we started cases on the handheld. They're going very well. It will be on display at Academy. So it'll be in the booth. You'll be able to see it. You'll be able to talk to our people about it. That's the coming out party. Mako RPS will be AOS. It's not very far from now. So I'd say just stay tuned. You'll get the chance to really see it in full color. David Roman: Okay. Then maybe just a follow-up. As Spencer moves into this role as president, and I think you kind of talked about this in Larry's question. But as he takes on perhaps more some of the day-to-day operational responsibilities, Kevin, are there priorities where you can now allocate more time or that might require more of your focus or that's on the strategy, M&A, or long-term growth side? Kevin Lobo: Of the business? Yeah. Obviously, you know, when you have somebody in this role that can handle the overall commercial part of the business, it allows me, frankly, to spend more time with our operations team, spend more time with our we have a brand new leader for information technology and AI. I really wanna make sure we are an AI forward company. We've done a terrific job on AI for customer solutions, but we really haven't made a lot of progress yet on productivity with AI. We've done a great job on lean and a much better job on inventory, but there's a lot of work we can do to drive productivity in AI. And that, I can now spend a bit more of my time engaging in those other parts of the business that, in the past, would sort of gravitational pull would be towards the commercial size of the business. So I'm excited about the division of labor that we're gonna have in this job and the freedom that'll afford me to spend on these other areas. And, of course, looking at adjacencies, BD will always be a big part of my job. But having Spencer involved in that as well will be terrific for when he's running ortho group, his head is down running ortho. And for him to be able to have a little bit more bandwidth there together with me will be, I think, will be excellent for Stryker. Operator: Your next question will come from Caitlin Roberts with Canaccord Genuity. Caitlin Roberts: Hi. Thanks so much for taking the questions, and congrats on a great quarter. You know, as you end the year, any update on the percentage of hips, knees, shoulders, flowing through the AC channel for you guys? Jason Beach: Yeah. Kayla, it's Jason. As you know, we did not disclose that in our prepared remarks. I think we've said recently that hips and knees are kind of in the high teens. And we've, you know, ticked up quarter after quarter in that. So very happy with the ASC performance. Caitlin Roberts: Great. And then just some more color on Triathlon Gold and if that has launched already. Kevin Lobo: Yes. Triathlon Gold is in limited launch right now. Feedback is extremely positive. You can do it both cemented and cementless, which is a huge draw for surgeons. As you know, so many of our knees are now cementless, and that percentage of cementless continues to grow and the ability to do both is really tremendous. And that will also be on display at AOS. You'll be able to see that and be able to interact with our people as they can explain that product to you. But we are extremely pleased with the design. Again, it's an unlimited launch. We always like when these implant launches, we want to have a limited launch for the number of surgeons. Make sure everything's going smoothly with the instrumentation and the actual performance. But so far, so good. This should be a winner for us. Operator: Your next question will come from Matt Miksic with Barclays. Matt Miksic: Hey. Thanks so much for taking the question and congrats on a really, really impressive performance, everybody. So one on growth and one on margins for Preston, if I could. So on the growth side, you know, was hoping you could maybe talk a little bit about the differences in the way you know, the growth drivers in the U.S. and the growth drivers OUS. Obviously, U.S., you've got, like, you know, bigger contribution of ASCs and maybe robots or making different kinds of contributions, different part of the life cycle in U.S. versus OUS. And then maybe just as part of that, I get the question sometimes about the recurring nature of your business, some of the you know, I don't know if you've ever carved it out and talked about it, but there's clearly parts of the business roll up being one of them where you're if it's a recurring model, you know, any color you can give us as to how big or important or where the strengths are there? And as I mentioned, one quick follow-up for Preston. Thanks. Kevin Lobo: Sure. I'll start with that question. The dynamics internationally are not different than the United States. We have premium products that we sell through specialized sales forces. The reason that we're experiencing higher growth in the U.S. right now versus these markets primarily is because of the timing of launches. So we get these approvals early in the U.S. Europe, in particular, with EU MDR, has been extremely frustrating, and it's taking us Insignia, Pangaea. These life packs just got approved. These products aren't yet on the market, and they're really important products. And then Mako has taken longer for us to really get that going, and that's not unusual where these international markets tend to want to wait to see more data. Before they'll start to grow. But aside from the last two years, we had about five years in a row where international was growing faster than the U.S. We've now stepped up our U.S. growth rate really significantly but the opportunity in international is significant. And as these products do reach these markets, you should expect to see a pretty similar dynamic as to what you see in the United States. Obviously, pricing and margins can vary by country, some being as good as the U.S., some being a little less. But we don't see the growth opportunity being really much different outside the U.S. than it is in the United States. Jason Beach: Was helpful. I'll take the Any kind of recurring. Yeah. I'm gonna I'll take that. No. No. No problem. This is Jason. I think the way I would characterize that, and you've heard us kinda say this in the past, is you know, 25% ish of our revenue is capital related. And of that split, 15% of the capital is more closely tied to procedures, so the smaller capital. And then the 10% revenue, the larger capital, so booms, lights, beds, etcetera. And then kind of that 75% I would say, you know, procedurally driven, whether it's reoccurring in disposables, the implants, etcetera. Matt Miksic: Got it. Thank you. And then for Preston, just you know, there's a couple of questions on margins, the one that we often wonder at this point in the year is, is you've got a range for the top line and a chance to beat the top end of the range. You know, how should we think about the flex in the model if in possibly when you break through the higher end of the range where, you know, thinking about OpEx investment versus drops to the bottom line. Thanks. Preston Wells: Yeah. Absolutely. So we have a range on the top, as you said. And, certainly, as we deliver that if we were if we're able to deliver towards the top end of that range, it does drop some additional margin or additional profits down. It also remember, there's some costs that come with that in terms of obviously, tariffs are fluctuating with our business. And then also just the investment that it takes for us to put back in to have those growth rates. So it's something that we balance as we look at the entirety of our P&L and obviously with both the growth rates, but then funding for future growth rates as well. When we look at what we drop down from a margin standpoint. Kevin Lobo: But I think you could look at this year as a good example. Right? So we moved up our top line this year. We also moved up our bottom line. This year. So that could be a good proxy for you to see that if we start moving the top line up, we're not gonna just reinvest all of it. There will be an amount that we drop through. If we see some opportunities for we're always looking to sort of self-fund reinvestment but this is a good you could look at 2025 as a good proxy for what hopefully will happen in 2026. Operator: Next question will come from Chris Pasquale with Nephron Research. Chris Pasquale: Thanks. And then one on pricing and then one on Inari. So the pricing benefit you reported for MedSurg this quarter, I think it was the smallest we've seen since 2022. Was there anything, sort of quirky about this quarter that drove that? And since MedSurg has been the primary driver of the net, positive price across the broader business, are you expecting to see that go back up here as we go '26? Preston Wells: Yeah. There was one deal in particular outside the U.S. that drove some negative pricing on the MedSurg side. But overall, the fundamentals still remain the same, and we would expect to continue to see a pretty steady cadence of price coming through from that business in 2026. Chris Pasquale: Okay. That's helpful. And then on Inari and the clinical pipeline there, we saw one competitor's pulmonary embolism trial readout back at TCT. Gonna see another one at ACC in late March. Clinicaltrials.gov right now has Peerless two wrapping up this year. Is that still accurate? And when should we expect to see your data? Jason Beach: Hey, Chris. It's Jason. No. It's actually gonna be closer to the middle of next year. In terms of results. Operator: Next question will come from Danielle Antalffy with UBS. Danielle Antalffy: Hey. Good afternoon, guys. Thanks so much for taking the question. Congrats on a really strong 2025. Just following up on excuse me, Chris' question on pricing. I just at a higher level, curious. I know you guys had talked about, you know, broadly speaking, that you saw over the last two years starting, you know, you're expecting that to wane. It sounds like that's reflected in guidance. But I'm just curious about how you're seeing potentially your hospital customers, ASP customers are they changing the way they're contracting at or on price? I'm just curious because, obviously, one of the narratives is with ACA subsidies expiring. You know, hospitals could be more constrained from a budget perspective. And as we move further away from the change in purchasing patterns during COVID. Thanks so much. Preston Wells: Yeah, Daniel. Thanks for the thanks for the question. In terms of price, I mean, price has always been something that's been a negotiation in terms of where we've been trying to gain price, and it's something we, quite frankly, have gotten better as we've talked about. Over the last few years. And, certainly, as we look at contracting, that's an element of where we've really improved over the last few years. And so I think our ability to go out and make sure that we are working those contracts appropriately across our entire book of business has really helped us in terms of that pricing element and we expect that to continue into 2026. And as you said, it built into what our expectations are from a top line and guidance standpoint. Kevin Lobo: See, I think overall, for the full year, you should expect a pricing result that's not that different than what we had in 2025. You know, from quarter to quarter, it may move a little bit. But we expect something pretty similar in '26 as we experienced in '25. Danielle Antalffy: Okay. Thank you. Operator: Your next question will come from Patrick Wood with Morgan Stanley. Patrick Wood: Beautiful. Thanks so much for the question. ASCs, obviously, we've all talked about hips and knees a fair bit, but you know, CMS moved the back end of last year to really delete all the rest of the inpatient-only list. And it seems kind of clear what the direction is going. From your perspective, like what are the implications for that if any, with an endoscopy and everything else? Is your share in some of these categories high enough that it's like, hey, it's just a change of side of care or is this like a marginal change that actually matters business? Kevin Lobo: Yeah. I think you answered it well. Our high market share just it's just a new it's just a new site for us. But I think what really can help us is, again, if they're to have new construction of ASCs, it just gives us, if new procedures are added, and start being done in ASCs, procedures where we have implants, that only helps us to provide a more full offering to the ASC. We already have the broadest offering by far in the industry, which is why we win at a very high rate, new construction and big rebuilds of ASCs. So the more procedures that go, the more that provides we provide that full service, and they need financing for their capital equipment in these ASCs, unlike hospitals that have the capital, balance sheets to be able to provide to buy capital. So, we look forward to this change as things move to the ASC, which I think will continue clearly. You can see CMS is pushing it. We've seen this trend happening. Our sports business tends to be a big beneficiary, and they had an absolutely phenomenal year. Again. They continue to grow extremely well and benefit from this push to the ASC because if they're doing orthopedics, hips and knees, they always do sports as well, and they tend to be a big part of these contracts. So we look forward to the change of procedures moving to AAC, and I think it only helps Stryker just given the breadth of our portfolio. Patrick Wood: Great. And then just very quickly on the M&A side of things. If I remember correctly, when you guys did NARE, you sort of referenced it as part of a maybe a launch pad or something to that degree. It was clear that channel and vascular in general was something you wanted to continue to build out. Is that still the case? Would you look at things like calcium management and other things that are sort of ancillary to that? Is that still a key focus area or not so much? Kevin Lobo: Yeah. Listen. Whenever we buy a business, that enters a space, we never are one and done. We're gonna continue to build all around that business and fortify the PV business and obviously, that links to a broader vascular set. Of customers that, once we start to get to know a customer, we wanna help solve their problems. So, yes, that's now part of our acquisition set. That previously wasn't the case. And then same thing with HIT. So we did Dosera, then we did Care AI, Don't be surprised if we do more acquisitions in the health IT space. So we're constantly on the hunt. Every time we buy something, it opens up new windows for us. And, we are definitely looking, in at the broad universe in that vascular world. Operator: Your next question will come from Mike Matson with Needham and Company. Mike Matson: Yes. Thanks for taking my questions. You know, just a couple more on Mako's. So with Mako four, are you getting pricing increase relative to the older version? And then, you know, similar question with as you start to launch Mako shoulder and spine, are there I seem to remember you talking about some upgrade fees the customer would have to pay even if they have an existing Mako system that they wanna add that capability to. And are these things that could become, you know, meaningful drivers for that part of the business? Kevin Lobo: Yeah, listen, we're not going to get into pricing for competitive reasons. We're not going to disclose our pricing at least for the base robot. But every time you have extra applications, you have to pay software fee or license, if you will, be able to use the new software. So every if they buy the Mako four, for knees and hips, but then they wanna add shoulder, then there is a charge for that a one-time charge that upon the installation of that software. That's been consistent throughout our makeover approach. Mike Matson: Okay. Got it. And then just on the tariff impact, the $200 million this year. Last year, you said you would fully absorb that. Is that the case again this year? And, you know, is there any ability to mitigate any of the impact so that, you know, the $200 million, can that come down over time with mitigation efforts? Thanks. Preston Wells: Yes. So what you see with that $200 million really is the net result of mitigation activities that we've been taking for the past year as this whole tariff item has really come to bear over the last year. So that is reflective of the annualization, really, of all the work and activity that's been done. And as you'll look at our guidance that we gave, you can see when you do the work around the margin pieces of it that we have, in fact, built that into our expectations. Kevin Lobo: Yeah. A total of $400 million and we're still driving margin expansion. We drove it a significant amount this year with $200 million. We've got another $200 million and you'll do the math your models. You'll see we're gonna drive meaningful op margin expansion in the face of this extra $200 million. So our margin muscle is really good. This is not something I could have said, you know, seven, eight years ago. I think if we had had this level of tariffs, you would not be seeing us continue to drive expansion to the level that we are. So we have built some earnings power in our company. Operator: Your next question will come from Shagun Singh with RBC. Shagun Singh: Great. Thank you so much. One on Mako, you guys shared some metrics two third, one third of knees and hips on Mako, and then utilization rate, and 20%, respectively. Where do you think these metrics go over time? And what are the key drivers there? And then as we think about market penetration of Recon Robotics, anything you can share with respect to, you know, where we stand from a procedure and then a capital placement standpoint? Thank you for taking the question. Kevin Lobo: Well, as it relates to robotics, I don't think there's any limit. I think robots can become standard of care at some point in time. I don't it's not like cementless where you know, I don't think cementless knees will get to a 100 because of bone quality. In the case of robotics, I don't see a limit. To how much can be done. And we're over two-thirds in the U.S. and over a third. And then what I like is I see the hips starting to inflect upwards. So with the launch of Mako four, that the new software is called the five-point o software for hip. Which is really amazing for revisions. But once the surgeon starts to Europe for revisions, they start to realize it could be very good for primaries also. So, very bullish on that potential. Is there a second question, Jill? Okay. Thank you. Operator: Your next question will come from Richard Newitter with Truist. Richard Newitter: Hi. Thanks for taking the questions. I just wanted to go back to the price comment. I hear you loud and clear, Kevin, your overall price assumption is not dramatically different from last year for 26. But just within the components, so just want to kind of reconcile with some comments I think I've heard you make in the past between med surg and ortho. And just tell me, if you can, if this is directionally correct, my understanding was that med surg is, you know, over the long-range plan, I would presume in 'twenty-six as well. About positive 100 to 200 basis points. And then your ortho, I think, has tended to be in a negative 1% to negative 2% range. And maybe that's a little bit more towards the negative 2% part of that range. Then you net those two out. They're somewhere you know, you're somewhere similar ish to last year. Is that the right way to think about it? Sorry to get so specific, but I think it would be helpful to investors. Kevin Lobo: Yeah. Look. I'm not gonna be that specific. I think your outer ranges are probably a little high on both sides. On both the implant side as well as the med surg side. But med surg will be positive. The orthopedics will be slightly negative. And the two will net to something similar to what we experienced this year going forward. It's you know, I'm not excited or worried at all about our price. We have a really good offense. We understand what happens quarter by quarter. We feel like we're in a pretty stable pricing environment. And keep in mind, these are just like-for-like products. Right? So this does not include when we launch a new product, we obviously launch at a higher price. And those products don't show up in price for at least another year. Until it anniversaries. So I just wanna make sure you remember that as well. Richard Newitter: Got it. And then maybe just on Triathlon Gold. This sounds like a pretty interesting incremental opportunity for you to kind of gain back some share in an area where you just didn't have a product. Could you just quantify kind of what percentage of the market this potentially just gives you reaccess to and, you know, how we should think about that and if that's the right way to think about it. Kevin Lobo: Yeah. Look. It's an important product that is actually premium priced versus a standard implant. It's roughly 5% of the market, but we didn't have an offering. So we would have Stryker loyal surgeons that would actually switch to a competitor to be able to do this if they had a metal-sensitive patient. And frankly, what my hope is, that you can do this cementless and if the product performs really well, that 5% might actually grow. It's not just for metal sensitivities. This is let's call it, an advanced bearing implant. So I'm not gonna promise that, but there is the potential for this to continue to grow and grow the market beyond 5% of the total implants. It's really a wonderful product. The feedback so far has been very positive. But it's roughly 5%. We were not playing at all. Stryker surgeons were not using our products. So this was an important gap in our portfolio that we've now filled. Operator: Your next question will come from Johnson with Baird. Johnson: Preston, just one question. You pointed in your prepared remarks to a softer capital environment in Europe. Could you flesh that out a little bit, number one? And number two, Kevin, you pointed to some of the challenges of the MDR stuff. In Europe. Obviously, that's not new for you guys. Did that have any impact on the med surg business in Europe? And with the new proposal to simplify some of that MDR stuff. I know they're not going to vote on it in Europe until later this year, but could that accelerate some of your product approval there? Thanks. Kevin Lobo: Yes. I'll take the second part of the question on UMDR. Yeah. We're really excited. Europe has woken up. To the reality that they are stunting innovation and not giving patients access to products in a timely manner they, in many ways, overreacted to some a couple of safety issues that occurred in Europe. So we welcome the changes, and that will help us accelerate the launch of our products. It's frankly a little bit even more important on the implant side than it is on the med surg side. With products like Insimia and Pangaea taking longer to get to the market. But it affects the entire portfolio, not just for us, but for the entire industry. Jason Beach: Yeah. Jeff, it's Jason. On the capital environment in Europe, I'm not gonna get overly specific here. But what I would say you know, like our capital businesses in the U.S., there are some, you know, quarter to quarter where you get ups and downs in the capital business just based on purchasing cycles. So as we move into 2026, look, the order book here is healthy, and I think we'll have a good 2026 there in. Operator: Next question will come from Matt Blackman with TD Cowen. Matt Blackman: Hi, everyone. It's Drew Ranieri on for Matt. Just a couple questions, one for Kevin and one for Preston. Kevin, you brought up the breast care opportunity. That you have a specialized sales force. Can you just talk about what that might mean for the Endo business? Are you going to be able to push more through your installed base? Or is this about utilization? Kevin Lobo: Yeah. Thanks. First of all, the breast care Salesforce is within our endoscopy business. So we were already calling on them, but we didn't have a focus. And the acquisition of Moly, the marker in addition to NOVADAF, the exoscope, in addition to the tissue from NOVADAQ, in addition to the Invuity retractors, we the Invuity was bought by our instruments business, but we moved it over to endoscopy because it's absolutely perfect for those procedures, breast reconstruction procedures. So a combination of acquired products and our obviously, our internal products within endoscopy created enough of a basket to have a dedicated sales force. It was really successful in year one. And, yes, we look to continue to expand within breast care. We could potentially do additional acquisitions. To fill out the bag continue to add more specialized salespeople. But this is what we do at Stripe. You know, we did this in GI, if you recall, when we launched Neptune s. We created a GI Salesforce. We did the acquisition of the palm, the mask, procedural specific mask. As well to add into that Salesforce. We do this all the time in our med search business. As it's part of the fuel for growth, and that's why we stay so high in our growth rates is we just don't sit still. We either bring in these tuck-in acquisitions, cobble them together, create a specialized sales force, at some point, if we do a big enough deal, we could create a separate business unit as we've done with SmartCare and as we've done with other business units in the past. Drew Ranieri: Thanks. And appreciate that. And maybe Preston on the free cash flow, really great growth this year. Hear you on the conversion range, but can you just talk about what you're expecting for CapEx? It was flat year over year. Expecting a 26. Like, holdback on spending? Preston Wells: Yeah. So from a free cash flow standpoint, I said before, I mean, we're still gonna in that same range of 70 to 80. That's been the range that we've been targeting for the last few years. We feel like that's a good place for us so we can balance investment with also, obviously, being more productive with from a cash perspective. When it comes to capital, I mean, really, our capital focus is around how do you support growth. So whether that's investments we're making in our plants or all investments we're making in our IT systems restructure as well as in terms of how we run our business. So there's really no change in our overall approach that we're thinking about from a cash flow standpoint. We are looking at how we improve areas like working capital, which give us even more flexibility from a cash standpoint as we move forward. Operator: Your next question will come from Jason Bedford with Raymond James. Jason, your line is open. Please feel free to proceed. Well, we have no further questions after Jason. So now hand the call over to Kevin Lobo for closing remarks. Kevin Lobo: So thank you all for joining our call. As you can see, we have strong momentum entering 2026, and we look forward to sharing our first-quarter results with you in April. Operator: Thank you. This concludes the fourth quarter and full year 2025 Stryker earnings call. You may now disconnect.
John O'Reilly: Good morning, everyone. A little video there of the Vic, Victoria Casino, Vic as we know it, now complete with 80 gaming machines and performing very strongly too. It's a fabulous casino. Thank you for joining Richard Harris and me this morning for the Rank Group interim results for the half year from July to the end of December 2025. Thanks to those of you who are here with us. Great to see you. And thanks also to those of you who are joining us online. Now very sadly, this is my last set of results after what has been a hugely enjoyable best part of 8 years as CEO of the Rank Group. Some of you already know I'm retiring today. I'm super sad to be leaving as this is a very special business with some very special people and I shall miss it enormously. And I would like to thank all my colleagues within the group for their talent and for the commitment that they have in delivering huge amounts of fun and excitement to Rank's customers. I'd also like to thank our shareholders for their personal support to me over the past 8 years. However, while sad to leave, I'm absolutely delighted to be passing the baton to Richard, who is doing and will continue to do a superb job on behalf of the Rank Group, its colleagues, its shareholders and of course, its customers. So for today, I've just carved out a very small speaking part for me, a quick overview of half 1 performance, and then I will fully hand over to Richard, who will take you through the detailed first half financial numbers and talk some of the key trends, the strategic challenges and the opportunities ahead. And notably, of course, how we're still on track to get the group to an operating profit of GBP 100 million and beyond. Right to business, and we've had another good half in terms of our commercial and financial performance with revenue and profit growth across all of our businesses. So here are the headlines. Like-for-like net gaming revenue was up 6% at GBP 419.8 million. Underlying like-for-like operating profit rose 15% to GBP 40.6 million. The group's underlying operating profit margin was 9.7% and that was up from 8.9% in half 1 last year. Our return on capital employed continues to progress, up 2.6 percentage points, to 15.9%. At a group level, our employee engagement score, which is -- has always been very important to us, has risen again and is now at 8.2, that's out of 10, which reflects the level of energy and drive within the Rank business. Within the Grosvenor Casino business, average weekly net gaming revenue was up 6% to GBP 7.8 million per week, which has been supported by the rollout of 850 additional gaming machines following the legislative change last summer, a rollout that commenced in late August and completed in December. In the Mecca Bingo business, net gaming revenue was up 4%. And in Enracha in Spain, net gaming revenue was up 6%. Digital revenue grew 8% with Grosvenor growing 17% and Mecca Bingo was up plus 5%. And the Yo business in Spain was back into growth for the half as we had expected. And in terms of current performance, we've had a very strong Christmas and New Year trading period and that has continued through January with trading very much in line with our expectations. So another good half year period for the group, reflecting the strategy we have in place, the priorities we've set and the quality of execution by our talented colleagues. And on the strength of the performance and the confidence in the business, notwithstanding the very significant increase in digital gaming taxes we faced from April, the Board has recommended an interim dividend per share of GBP 0.01. Richard, over to you. Richard Harris: Good morning, everyone. And for one final time, thank you, John. I'll spend a bit of time taking you through the key drivers of performance as well as updating on that plan to deliver at least GBP 100 million operating profit in the medium term. So starting with the operating profit improvement in the half. Like-for-like revenue growth of 6% contributes GBP 14.5 million of additional profit after deducting all direct costs. That's partially offset by higher employment costs of GBP 6 million, which have grown 4% on the prior year due to the higher national minimum wage and the impact of higher national insurance contributions. Over the full year, employment costs are expected to increase by a similar percentage. Depreciation costs were higher in the year due to the capital investments we've been making in the business, and the higher statutory levy also impacted performance in the half. However, overall operating profit is up 15% on a like-for-like position from last year. Net free cash flow in the period was GBP 3.8 million. And within this, we've continued to make targeted investments with strong expected paybacks. Capital expenditure was GBP 27.6 million as a result. For the full year, we've adjusted the CapEx guidance to be in the range of GBP 50 million to GBP 55 million. And the change from the previous expectation of GBP 60 million is just a timing point with the reduction being deferred into next year. There was a working capital outflow of GBP 5 million in the period, which was in line with expectations and you can expect working capital to be broadly neutral for the full year. Cash flows in relation to separately disclosed items were GBP 5.5 million. So that includes income and outgoings associated with closed venues, but also the GBP 6.5 million impact of the Spanish payment fraud. It's worth dwelling on that for a moment because it's not something we expect to happen and we have taken the issue extremely seriously. As soon as we became aware of the matter, we put in place additional preventative measures with immediate effect to ensure no further risk to the business. The investigation has concluded and we've made some further improvements to the group's payment controls as a result. Returning to the slide. In the table on the right-hand side, you can see how the net free cash flow has converted through into closing net cash of GBP 39.4 million. There's deferred consideration of GBP 1 million received from the business disposal that concluded in December 2024. Some shares have been bought for the outstanding LTIP schemes. And last year's final dividend of GBP 9.1 million was paid in the period. Including lease liabilities, net debt was GBP 165 million. As a reminder, in the second half of last year, we extended the leases on a number of key strategic properties in Grosvenor that will come into the end of their lease term and that materially increased our lease liabilities. As reported in today's announcements, we've also capitalized gaming machine leases onto the balance sheet in Mecca. Lease payments in the cash flow increased to GBP 23.4 million for the same reason. So moving into the business unit detail for last year -- the first half, I should say. Grosvenor venues grew by 6%, driven by visit growth. Following growth of 8% in Q1, revenue in Q2 was up 4%, impacted by lower consumer confidence in the run-up to and immediately after the November budget. Subsequently, trading over Christmas and the New Year period was strong. Gaming machines were the fastest-growing product vertical with revenues up 11% due to the early benefit of the new machine rollout. I'll go into more detail on that in a moment. Table gaming revenues grew 2% and electronic gaming was up 6%. London performance has particularly benefited from the refurb of the Vic, where total revenues were up 13% on the same period 2 years ago. So that's prior to any refurb disruption. And over that same 2-year period, gaming machine revenues are up 26% with additional machines and gearing in mid-November. So I'm very pleased with how that's performing. Employment costs were the main headwind for Grosvenor, growing GBP 3.8 million in the period. And as a result, like-for-like operating profit was up marginally at GBP 20.9 million. Colleague engagement scores in Grosvenor remain excellent as we continue to reap the benefits of our cultural change program, "From Like to Love." At the Capital Markets event we held in October, we laid out our plans to deliver average weekly NGR of GBP 9.5 million and to improve operating profit to over 13.5%, an increase of at least 500 basis points. A critical part of that plan is enabled by the casino reforms, where we can increase the number of gaming machines from 20 per license to 80 per property. 850 additional machines were rolled out before Christmas, an increase of around 65%. That's in line with our planned timetable. In casinos where we've only been able to increase machine numbers from between 20 to between 30 and 40, revenue growth has generally been very strong with examples of casinos in which the average revenue per machine has increased with additional supply. Where we've significantly increased the available machines from, say, 20 to 80, the revenue per incremental machine has inevitably been lower and we're working to increase the customer awareness and stimulate demand. Demand levels are gradually building as customers become aware of the better availability and choice of both machines and content. And just as a little reminder, here's the maturity curve that we expect the casino estate to go through. We're currently early in the launch phase and in the venues that have received additional machines, we've been able to satisfy the unmet demand as expected. Considerable focus has now been applied to optimize machine mix, product layout and service levels at an individual casino level. In H2, we'll also launch a new gaming machine rewards scheme that enables customers to earn and redeem rewards directly onto the gaming machines themselves. Grosvenor now has 6 machine suppliers, an increase from the historic position of 2 primary suppliers, providing a much broader choice for customers. And further suppliers and game packs are being trialed in the second half of the year. The speed, focus and direction of the next phase in machine rollout will be shaped by customer and performance data. Player behavior, player preferences and demand curves will inform investment into our estate, ensuring we continue to deliver strong return on investment. The second component of the land-based reforms is the ability to offer sports betting in casinos. We're trialing a full sports betting proposition in Luton and Leicester as well as a reduced offering in Reading South. Learnings from the trials will determine the options for wider estate rollout. And over time, sports betting has the opportunity to broaden the appeal of casinos. We're excited to understand how our customers respond to these trials. In table gaming, we continue to add more innovative side bets and progressive jackpots into our live table proposition. We've completed the rollout of our table management system across the whole estate and that uses AI-led real-time recommendations and data to optimize table opening and pricing across the estate. There's much more performance upside to come from that. The ongoing refinement of our approach to safer gambling revolves around the better use of data and technology, improved processes for identifying and addressing potentially harmful play, developing the skill sets of our colleagues and supporting colleagues in improving their interactions with customers. In H2, we're trialing facial recognition technology in a number of our venues to more quickly identify customers who may present a higher risk. Turning now to digital. The first half of the year saw further progress with like-for-like revenues up 8%. Within this, the U.K. business was up 9%, driven by strong growth in average revenue per user, reflecting the appeal of our products and our service to the regular customers that we serve in our business. Improvements in data science, enhanced customer journeys, efficient and effective customer incentives, all played a part in driving growth. And those levers will continue to be a focus as we move into a higher tax environment. Grosvenor revenue was particularly strong at 17% and Mecca grew by 5%. Again, revenue growth was slower in Q2 as we faced into tougher comparatives and the lower consumer confidence. However, in absolute terms, we continue to make further progress. Performance in the Spanish digital business also improved with growth of 4% in the second quarter, contributing to growth of 1% for the half year. Improvements in customer proposition, including performance marketing, launch of new apps for Yo and enhanced rewards programs have all contributed to the turnaround after a flat year in FY '25. We successfully became the first licensed bingo operator in Portugal with a soft launch in November. And the important next step is to build liquidity as part of the full customer launch at the end of February. And we're really excited about the opportunity that that presents. At a total level, operating profit for the digital business grew 12% to GBP 17.8 million and that's despite the impact of a higher statutory levy and maximum slot staking limits. As we reported at the time of the November budget, the impact of 40% RGD on the bottom line of the U.K. digital business is GBP 46 million before mitigating actions. Since then, we've already taken a significant cut to marketing spend that's further away from the customer transaction, including canceling above-the-line spend and TV sponsorship deals. We've also started negotiations with suppliers with the main benefits expected by the beginning of April and there are further efficiency improvements also expected by that date. So the majority of the heavy lifting in terms of mitigating actions has been done. However, it is reasonable to expect that the U.K. digital gaming industry will change significantly with higher taxation. We're already seeing operators planning to exit the market and it's inevitable that there will be reduced competition in the license market over time. In a world of higher taxation and lower competition, we'll take an agile approach to promotional investment, performance marketing and customer incentives. Our base plan does not see us reducing spend in this area as they are critical levers to driving long-term growth, albeit from a new lower profit base. We believe that going forward, the strength of our casino and bingo brands, the billboard effect of our venues and the attractiveness of our cross-channel experience will be key to driving growth. They will enable our digital business to rebuild profitability over the coming years as the market stabilizes with less competition and lower marketing investment. With that in mind, our focus on improving the customer proposition remains steadfast. In the second half of the year, we'll deliver a unified membership scheme to Mecca customers across venues and online. It will allow us to deliver an improved and more personalized experience across channels. The live casino experience also improved in the second half of the year with new live slot streaming products, improved venue-led casino content and again, enhanced customer journeys. The new bingo platform goes live in Spain this quarter, removing the capacity constraints we faced over the last 12 months or so. Moving to land-based bingo. Revenue growth in Mecca was 4% in the half, all driven by an increase in spend per head. Main stage bingo revenues were down 1% off the back of investments we've made in additional prize money, which we believe is key for the long-term health of the business. We introduced 600 new Mecca Max tablets across the estate as customers increasingly embrace the appeal of electronic bingo via tablet-based play. 59% of customer visits were played on electronic terminals, with those Max customers now accounting for 75% of main stage bingo revenue. Gaming machine revenue in Mecca grew by 9% and now accounts for 43% of our NGR. We're committed to providing the best gaming machine proposition in the industry and completed 5 gaming machine area upgrades in the half. We've also continued to focus on modernizing our external profiles with 5 new signage schemes. As with Grosvenor, the largest cost in Mecca is employment costs, which were up 2.9% due to the impact of national living wage, employees national insurance, but partially offset by cost efficiencies. As a result, like-for-like operating profit was up GBP 2.7 million from GBP 0.7 million last year. And in Spain, there was further revenue and profit growth from our estate of 9 well-invested flagship Enracha venues. Revenue was up 6% on a constant currency basis. And similar to Mecca, spend per head was a key driver of revenue growth. The ongoing investments in product, service and environment has seen gaming machine revenues in Enracha grow 10% and this included the initial benefit of an upgrade to the gaming machine area in Cordoba. In the first half, we also completed the refurbishment of our Sabadell venue in Catalonia and that's opened this week to customers. Underlying like-for-like operating profit in Enracha grew 5% to GBP 5.9 million. The abolition of the current 10% bingo duty effective from April this year provides a much more sustainable platform for Mecca's future, delivering an annualized benefit of GBP 6.5 million. This means the target of delivering double digit operating profit is now expected to occur next financial year, alongside much improved cash generation. Unified membership will materially improve the data quality we have in our Mecca venues. It allows customers to use their app as their membership card and receive personalized offers and rewards, something that's not been possible so far. We'll continue the rollout of signage schemes and gaming machine area upgrades. These low-cost investments are delivering returns in under 18 months and will help to further improve Mecca profitability. Further legislative reforms are on the horizon for Mecca and the future looking much brighter than it has since before the pandemic. On Enracha, we're trialing an immersive bingo experience called Bingo Boom in Seville, targeting a younger demographic in an enlarged venue. This is just one great example of the propositional improvements we're trialing in Enracha. So bringing all of that together, the group is well placed for further revenue growth in the second half of the year. We had a strong Christmas and New Year period. Performance in January has been in line with our expectations and we have a strong pipeline of initiatives to drive performance. In Grosvenor, the early results from the launch of the additional gaming machines reaffirm our confidence in the medium-term opportunity. It's great to be up and running. On digital, we have a clear plan to deliver average weekly NGR -- sorry, in Grosvenor, we have a clear plan to deliver average weekly NGR of GBP 9.5 million and 500 basis points margin improvement in the medium term. On digital, we have taken the financially responsible actions needed to significantly reduce the impact of RGD at 40%. The plan is in place to reset the business, but without impacting the attractiveness of our customer offering. We've got clear strengths that allow us to continue growing revenues in what is seismic shift for the industry. And as I mentioned, the abolition of bingo duty will see us deliver the target of double digit operating profit in Mecca next year. So the group retains a clear path towards delivering its target of at least GBP 100 million annual operating profit in the medium term. And as we continue to execute that plan, we'll also focus on the strategy required to grow shareholder returns beyond the medium-term ambition. So that concludes the formal part of the presentation. But just before I move into Q&A, it would be remiss of me not to take this opportunity to register my own thanks to John as he prepares to retire from his role as CEO of Rank. He's suitably embarrassed, I hope. He's been great to work with. I've learned plenty from him and he leaves us, as you've hopefully heard today, with a really strong foundation on which to build. I personally owe him a great deal. I know that Rank owes him a great deal. But perhaps most of all, the entire U.K. gambling industry owes him a debt of gratitude because as you all know, he's been a tireless advocate for the industry that he loves. So thank you, John. And now, we'll move to Q&A. Richard Harris: Please, can I ask that before you ask your question -- one hand has gone up already -- you give your name and your company? We'll start with questions in the room and I'm sure there will be some questions online, so we'll take those as well. Ivor Jones: Ivor Jones from Peel Hunt. You talked, Richard, about adding reward schemes into the gaming machine offering Grosvenor. In terms of profit -- in terms of revenue consequences, is that going to be marginal? Or is it like a big dip in terms of marketing spend, which we should watch out for and then you'll see recovery? How will it work? Richard Harris: I'm glad you're asking questions one at a time, Ivor, because there's only me to answer them today. So thank you for that. So is it -- are you going to see a big increase in marketing spend? No. But what this is, is a tailoring of approach to each individual venue based on their competitive environment to other gambling venues they've got around them. And it's trying to give us the best possible rewards incentives based on the customers that we want to attract to our venues going forward as well as the customers that come to us today. So is it a big marketing spend? No, it's not. But is it an enhancement of the offer as we gradually build revenues in game machines? Absolutely. Ivor Jones: On digital, in Grosvenor digital, why was -- I probably asked this before, but why again was Grosvenor digital revenue growth so strong? Was there something in the extra marketing cost push that drove that? What was driving it? Richard Harris: Yes. So Grosvenor at 17% was particularly pleasing because the second half compared to last year was particularly tough as we had a higher win margin at that point in time. So to grow 17% on that, we were delighted with that. It's a number of factors, I think. So we've been making good consistent improvements to the customer proposition in Grosvenor for quite some time. So roll back 12 months or so ago, we were launching new Grosvenor apps. So the performance from that has continued to benefit results. As a consequence of RGD, we've definitely had a shift from some of our smaller brands aren't cross-channel brands, so everything other than Grosvenor and Mecca in the U.K. We've diverted some of the marketing spend towards Grosvenor because we're seeing greater returns there and we expect to see greater returns in the future. So undoubtedly, that's played a contributing factor as well. Ivor Jones: You didn't mention cross-sell from the venues. Is that because it's not important for driving Grosvenor digital? Richard Harris: It absolutely is. I'd say in terms of the progress we've made on that in the last 12 months that has contributed directly to performance, not so much at the moment. There's some additional stuff on there around venues content that will improve the offer. But I wouldn't point it out as being a single contributing factor to performance in the first half, but it is a much greater contributory factor to our growth in the future. Ivor Jones: And can you carry on and talk about the proprietary brands? What's the future for them in an RGD, 40% RGD world? Richard Harris: Yes. So with Grosvenor and Mecca, the opportunity we still think to grow the business is significant because of that billboard effect, the venues experience, the cross-channel experience. When you piece all that together, Grosvenor and Mecca have got a very strong future. And we'll continue to invest in customer incentives, free bets, et cetera, to make sure that that offer is as attractive as possible as it can be. For the smaller brands, we're working through exactly what they will look like in RGD world of 40%. But the role they play is likely to be different. We're likely to invest less in marketing because the returns aren't anywhere near as great. Tax has gone up by almost double. So the returns are going to be less, but we still think they'll play a role from a casino and bingo perspective in supporting the Grosvenor and Mecca brands. Are they going to be big drivers of growth? Probably not. Ivor Jones: Let me pass the microphone, maybe come back at the end if there's time. Richard Harris: Fighting over who gets the next question. There we go. Richard Stuber: It's Richard Stuber from Deutsche Bank. Just a couple for me, please. First of all, I guess, given the increase in RGD, do you feel that some of your venues may now be slightly more marginal in terms of the ability to cross-sell into a -- sort of a valuable customer? I guess from the Mecca side, less so because you've got the abolition of bingo. But in terms of any growth in casinos, are there some which are slightly more marginal, or are you rightsized? And the second question is, I guess, also on the back of RGD, does -- because of the returns you get from U.K. customers, does that maybe sort of change your view in terms of where the incremental spend may go? So in other words, would you invest maybe more in Spain now or other parts of Europe versus the U.K.? Richard Harris: So taking the first one, actually, I think probably the opposite. So I think the importance of cross-channel in a 40% RGD world increases because the lowest cost of acquisition that you'll find is from customers that are playing with you in venues. So the role and the relationship between the venues and the digital proposition, they've been a big focus for us in the recent past. They'll continue to be a big focus for us going forward. So I don't think RGD at 40% changes the dynamics of a venue in the Grosvenor estate. The point about switching returns, I'll be a little bit careful about saying this because historically, we haven't capped out what the marketing spend is with a fixed budget in either of our Spanish business or our U.K. business. What we're trying to do is drive performance and maximize returns. If we're getting very strong returns, there is more money to be spent on marketing. So when I talked about customer incentives, free bets, performance marketing earlier and how that will be critical going forward, could there be a chance that we increase investment there because that's the right thing to do to drive growth and drive returns? Absolutely. So I don't see it as a decision between U.K. and Spain -- or U.K., Spain and Portugal going forward. But the teams have got the responsibility to maximize the returns that we're getting from any investment spend. David Brohan: David Brohan from Goodbody. Just 2 questions from me. Firstly, in light of the RGD changes in the U.K., would you potentially consider M&A to scale up your digital presence there? And then secondly, just on the GBP 100 million-plus operating profit target, could you help us out a bit in terms of the time line and the building blocks there, again, given the changes to RGD? Richard Harris: Yes. So taking the first one on M&A, David. So I think it's inevitable there will be operators in the kind of long tail that leave the market. From our perspective, the kind of primary focus, we've done the heavy lifting around mitigating actions that we want to take at this point in time. We've got a clear plan to delivering a profitable business in U.K. digital going forward and also a clear plan that allows us to grow going forward. So it's not just about surviving and being viable. It's about having a healthy, strong business that will be able to grow in the future. So right now, I wouldn't want to kind of commit either way to M&A. It's kind of a bit early to tell really. Nobody really knows how this is going to play out. We've got other examples around the world of how things change where tax rate goes up, increased consolidation and so on. But I think from our perspective, right now, we're focused on delivering the best possible results we can do in our brands. And from there, we'll always consider what the next move are -- what the next move is strategically. In terms of the GBP 100 million operating profit, so as you know, the kind of key levers within that, the additional gaming machine opportunity, that is a key part of getting Grosvenor to GBP 9.5 million per week, but also a key part in improving the operating margin by at least 500 basis points. So that is #1 priority within the business. We're pleased with how that's gone so far. But as you've seen from the growth curve, there's a long way to go and we need to gradually work hard to drive that performance over a period of time. It won't be an overnight thing. It's going to come over a period of time. The second part is, as you kind of rightly pointed out, RGD -- having a profitable business that you can grow going forward, that's going to be critical. But also, I think the abolition of bingo duty gives us some options around Mecca. So that's going to materially improve in terms of profitability. Some of the things that might not have been good investment choices in the past in Mecca might now become good investment choices. I don't think it's going to radically change the amount of money we're making -- change the amount of money we invest into Mecca, but how we think about that business, I think, does change. And we'll continue to kind of drive the Enracha business because it's a great little business and there's still further room for improvement. So from a -- realistically, you can't take a GBP 46 million unmitigated hit to the bottom line without that changing the shape of your plan going forward. So inevitably, there's probably a 12-month lag from where we were prior to RGD at 40%. But internally, super focused on that GBP 100 million and beyond, I'm very confident we can get there. Unknown Analyst: It's [ Rebecca Chacha ] from Investec. Just one question for you, Richard. You mentioned before in your speech that you believe that the market after the RGD changed, the licensed market will be less competitive. What do you think about the potential evolution of the unlicensed market? And what do you think that are the actions that the government will take or... Richard Harris: Yes. So in the run-up to the budget, I think we were relatively clear that we thought the risk around increasing online taxes was that there would be a shift to the unregulated market. And that still feels like that thesis holds. What we do know is that the government have kind of channeled some money to the Gambling Commission to increase enforcement on unlicensed operators. But they need every penny of that investment because it is a growing part of the market and an area that needs increasing focus. So I talked about the license market, particularly in the speech, but we are also very cognizant of we're not just competing with the license market. So free bets, customer incentives, all of that needs to be targeted to drive the best possible performance in our business. Of course, yes, we've got some questions online as well, but we'll finish off all those in the room first. Ivor Jones: Very good. Ivor Jones, Peel Hunt. Could you just remind us of your plans for the cost of the launch in -- the hard launch in Portugal next month? Richard Harris: Yes. So there is relatively significant investment -- in the context of our international digital business, relatively significant investment upfront in this financial year, particularly in order to kind of get -- build that liquidity and grow that business from a standing start. As I mentioned earlier, we did the soft launch in November and the number of customers that we have coming back to our site, without doing any marketing, is encouraging, but it's still very, very early days. So we've got to build liquidity. And in order to build liquidity, that really involves marketing spend. So in the current financial year, based on the level of marketing spend that we intend to put behind that and the level of revenues that we expect, I would expect that Portuguese business to be loss-making this year, but to the tune of small single digit millions. And that's captured in -- I think that's pretty much captured in all analyst forecasts. So that shouldn't be a surprise to people, I don't think. Ivor Jones: Okay. In relation to Mecca venues, you mentioned 2 things, reasonably good growth in machine gaming revenue and the rollout of additional tablets. Is the machine gaming revenue increase on physical devices, or was it partly driven by virtual machines on the tablets? And does that lead you to invest in more tablets because it drives up the machine revenue growth? Richard Harris: So the vast majority of machine revenue income comes from physical cabinets, not on the tablets. So that's where all the growth is coming from. And I would pin that to the fact that we have invested heavily in the proposition, whether it be upgrading machines -- upgrading machine areas, the audiovisual, the whole lot is much enhanced. So I put that down to what's driving the revenue growth in gaming machines. On the tablets, customers that play on tablets spend more money with us. They have more fun. They're more regular players. So will we continue to invest in tablets, making sure they're of the best quality, best reliability? Absolutely, because that is a strong part of the offering, 75% of revenues are coming from -- 75% of main stage bingo revenues are coming from those customers. So we want -- they're our best customers. We want them to be well looked after. Ivor Jones: When you replace old tablets with new tablets, do they deliver an uplift in revenue because of improved functionality? Or are you only talking about people going from being paper players to electronic players? Richard Harris: It's both. So every 1% of customers that we can transfer from paper-based to electronic tablets, that is worth -- they're worth more money to us. So they spend more money as a consequence. But also, it's the reliability, the delivery of the service, to make sure you get that proposition right for regular bingo players. And it's about, at peak times, have you got the capacity to deliver everything you need to, to make sure everybody there that wants to play electronic bingo can do so. I think we've probably got some questions online. [ Matt ]. Unknown Executive: Yes. Thank you, Richard. We've got 3 from Greg Johnson at Shore Capital. Can you provide some granularity on the slightly softer Q2 period, especially around the budget and the uplift over the festive period and into January? And are these recent trends more consistent with Q1? Richard Harris: Yes. Good question. So performance -- so revenue growth in the first quarter was 9%. Revenue growth in the second quarter was 4%. I think 2 main factors I'd kind of call out. So we did have a tougher comparative in the digital business in the U.K. in particular, which I mentioned earlier and also the impact of consumer confidence running up to and after the budget. It was pleasing to see that over the Christmas and New Year period, when we're absolutely our best, revenue growth was really, really strong. And then that strength of growth has also continued into January. So really pleased with January performance so far. In both the Christmas and New Year period and January, performance was better than what we saw in Q2 and more in line with what we saw in the first quarter of the year. So appreciating it's early days, we're only 4 weeks into a new financial year -- sorry, a new financial half, but relatively satisfied with our performances at the moment. Unknown Executive: Machine income growth has been much stronger in those casinos which have benefited from installation of additional machines. Given the phasing of the rollout, what was the growth in machine income during Q2, please? Richard Harris: So first quarter gaming machine income was 12% up and it was broadly similar in the second quarter of the year. As you know, we started to launch machines from the middle of August and that rollout continued with a large proportion of the machines coming in at the end of December. So overarchingly, at 16%, we're really, really pleased with that performance. It compares with 4% for gaming machine revenue growth in those venues that didn't have the investments, that [ factor ] of 12, I think, is relatively material and relatively important to us. But from this point onwards, we have to kind of continue to build that growth. So this is about improving the product layouts, improving supplier mix, improving content, improving promotional rewards. The whole gambit is kind of being constantly reviewed in a casino-by-casino level in the context of their competitive environments. So we're supporting the best customer proposition we can in each casino. Unknown Executive: And just a follow-on, have you seen any cannibalization following the rollout of more machines? Richard Harris: Not obviously. Actually, no. So do you feel implicitly that there might be some money that might have been put down on the table that now goes into a gaming machine because you've got -- previously, they were all taken and you weren't able to satisfy that demand. So intuitively, it feels like there might be a little bit. You don't see it in the numbers. So there's no material crossover from gaming machines to table gaming. Unknown Executive: That's it for online questions. Richard Harris: Great. In which case, we'll draw the presentation to a close. Thank you very much.
Operator: Welcome to Visa Inc.'s fiscal First Quarter 2026 Earnings Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would like to now introduce your host, Ms. Jennifer Como, Senior Vice President and Global Head of Investor Relations. Ms. Como, you may begin. Thank you. Good afternoon, everyone. Jennifer Como: And welcome to Visa Inc.'s fiscal first quarter 2026 earnings call. Joining us today are Ryan McInerney, Visa Inc.'s Chief Executive Officer, and Christopher Suh, Visa Inc.'s Chief Financial Officer. This call is being webcast on the Investor Relations section of our site at investor.visa.com. A replay will be archived on our site for thirty days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and our actual results, outcomes, or timing could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent annual report on Form 10-K and any subsequent reports on Forms 10-Q and 8-K, which you can find on the SEC's website and the Investor Relations section of our website. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. Our comments today regarding our financial results will reflect revenue on a GAAP basis, and all of the results on a non-GAAP nominal basis unless otherwise noted. The related GAAP measures and reconciliation are available in today's earnings release and related materials available on our IR website. And with that, let me turn the call over to Ryan. Thanks, Jennifer. Ryan McInerney: In our fiscal first quarter, we delivered strong financial results with net revenue up 15% year over year to $10.9 billion and EPS up 15%. Payments volume grew 8% year over year in dollars to nearly $4 trillion, and processed transactions grew 9% year over year totaling 69 billion, demonstrating resilient consumer spending. We continued to build and deliver innovations and scalable technologies across the Visa as a service stack, acting as a payment hyperscaler to enable anyone in the ecosystem to build, launch, and scale money movement and payments businesses across the globe. Let me share some more detail on the recent progress we have made in the services and solutions layers of our Visa as a service stack. More specifically, in the evolution of Visa credentials, AgenTik Commerce, stablecoins, as well as in B2B and P2P money movement, issuer processing, and risk and security. The core of our consumer payments business is the Visa credential. It is much more than a physical card; it can be digital, in a wallet, online, mobile. It's the connection point to the Visa network on top of which we're able to layer all types of services, solutions, and access now totaling more than 5 billion Visa credentials. We have continued to enhance Visa credentials in a few important ways this past quarter. Tap to pay, Visa Flex credential, and tokens. Our Tap to Pay penetration has now crossed the 80% mark of all face-to-face transactions with the US at nearly 70%. Transit acceptance remains a key enabler with our recent launches in San Francisco and more than 10 other systems globally this quarter. In our first quarter, we have continued to enable tap to pay use cases for the different form of the credential. For example, in Europe, we recently announced new digital wallet enablement of iOS wallets such as Klarna in 14 countries, and Vips MobilePay in The Nordics. We also will soon launch a pilot in Italy with the domestic scheme Bancomat. In addition, we enabled Apple Pay for Visa cards issued in China for cross-border face-to-face, in-app, and online transactions. This spans eight issuers representing nearly 60 million Visa credentials, supporting the many Chinese consumers traveling or living abroad, with more issuers coming soon. Our tap to phone capability, which has helped to grow our acceptance locations to more than 175 million globally, has added more than 20 new markets and more than doubled transactions in the last year. A second important area of progress enhancing Visa credentials is enabling multiple funding sources from one single credential with our Visa Flex credential. This past quarter, Block announced the pilot launch of a new Cash App Visa debit card, which enables Afterpay as a feature for their customers to pay over time anywhere Visa is accepted, and leverages Visa's DPS issuer processing solution for the debit component. Globally, we have about 20 million Visa Flex credentials, just a small fraction of our total credentials but growing fast. They are offering funding sources such as debit, credit, multicurrency accounts, rewards, installments, and more. And we expect to expand to more than 20 additional issuers this year. The third and maybe most revolutionary credential technology is the Visa token. Our token technology delivers a digitally native payment credential designed for the unique characteristics and needs of digital commerce. We have more than 17.5 billion tokens globally, over three times the number of physical cards, which means that the solution has been embraced broadly across the ecosystem. We continue to make progress on the tokenization of e-transactions to our ultimate goal of fully replacing card-centric PAN technology, further improving Visa's competitive positioning against cash, check, and legacy forms of digital payment. We utilize a variety of tools such as incentives, sales-oriented case studies, performance compliance programs, and enhancements, to encourage tokenization and enhanced data sharing to make the e-commerce environment as safe as it can be. Issuer enrollment efforts are underway across Europe, CEMEA, and LAC, as we expand the click-to-pay directory to enable credentials to be always digital. Globally, we have also been working with acquirers and payment facilitators to ultimately eliminate the guest checkout that occurs today, which we have reduced from 44% of all Visa e-transactions in 2019 to about 16% in fiscal 2025. And among our top 25 sellers, it's less than 4%. This means that at our top 25 sellers, 96% of transactions now require only a simple click or biometric authentication and do not require a burdensome and error-prone form filling. We continue to build new capabilities on top of our token service platform, positioning our credentials and tokens as the fundamental building blocks for the future of payments. One of those that is enabled with Visa tokens is an important area of innovation, AgenTik Commerce. Our Visa Intelligent Commerce solution utilizes tokens and their configurability as the core underlying foundation for AgenTik payments. We're working to enable AgenTik Commerce with more than 100 partners across the commerce ecosystem globally. Over 30 partners are actively building in our sandbox, with multiple agents and agent enablers running live production transactions and more partners expected in the future. Just this quarter, we expanded into B2B AgenTik payments with Ramp, streamlining corporate bill payments, enabling their business customers to capture cash back on card payments, and optimizing working capital. We also reached an agreement with AWS to make Visa Intelligent Commerce available on AWS Marketplace to support developers building AgenTik Commerce solutions connecting secure automated payment workflows at scale through blueprints for workflows such as travel bookings or retail purchases. In our CEMEA region, ALDAR, a leading real estate developer, investor, and manager, is integrating Visa Intelligent Commerce to make recurring payments such as property service charges on their Live Alder app. Our Visa trusted agent protocol continues to help define the connectivity and data elements required to bring trust to the agentic environment. In Q1, we announced partnerships with leading Internet security players, first Cloudflare, and then Akamai, who collectively serve millions of businesses globally, including nine of the world's top 10 retailers. In addition, we are building interoperability between key elements of Visa Intelligent Commerce and Google's new universal commerce protocol as part of our global effort to help ensure that Visa transactions are securely supported as different protocols evolve. Our AgenTik solutions are live in the US and CEMEA, and we are initiating pilot programs in Asia Pacific and Europe. LAC is soon to follow, where we have already begun token enrollment for AgenTik commerce with issuers. We believe that we are well positioned to be the infrastructure provider and key enabler in AgenTik Commerce, so that every agent interaction is trusted and secure. Like AgenTik Commerce, stablecoins have tremendous growth and disruption potential but are still in the very early stages of adoption for payments use cases. As new stablecoins and blockchains continue to emerge and show the promise of true utility, Visa's goal remains clear: build the secure and seamless interoperable layer between stablecoins and traditional fiat payment at scale across the world. This past quarter, we expanded our capabilities across several fronts. First, we added Stablecoin card issuance in nine additional countries in Q1 to surpass 50 countries worldwide, and payments volume continues to grow at a fast rate as we enable more consumers and businesses to spend stablecoins with Visa. This quarter, we also expanded our stablecoin settlement capabilities with USDC into the US, improving speed and liquidity for banks and fintechs, and providing interoperability to modernize treasury operations for our clients. And total stablecoin settlement has reached an annualized run rate of $4.6 billion globally, as demand has grown among both stablecoin native and more traditional clients. We're finding that more and more participants in the payments ecosystem—financial institutions, merchants, acquirers, and consumer-facing technology companies—are looking to develop and refine their stablecoin strategy. As such, we recently launched our stablecoins advisory practice globally, where we are working closely with our clients providing access to training, strategy, and market entry planning and technology enablement. In addition to being a design partner with the Tempo Layer One blockchain initiative, we recently announced our participation in the Testnet of ARC, a Layer One blockchain from Circle. With both, we see Visa's role in supporting both transaction processing and delivering value-added services. Finally, we are piloting Visa Direct stablecoin payouts, allowing platforms and businesses in the US to send payouts directly to users or workers or employees' stablecoin wallets. This innovation expands the reach of Visa Direct by providing creators, freelancers, and marketplaces with a stable store of value and faster access to funds, even in markets facing currency volatility or limited banking infrastructure. The stablecoin opportunity remains additive to what Visa is doing today, and we will continue to invest where we see the greatest demand. On ramps and off ramps, settlement, money movement, consulting, and other value-added services. We believe that Visa is well positioned as a global trusted technology provider to deliver a full stack of bank and enterprise-grade infrastructure that our clients need to build the future of their business on-chain. Stablecoin is just one way that we are enabling money movement. We also have continued to make enhancements to our Visa Direct and commercial solutions capabilities. In Visa Direct, we have continued to deepen relationships with existing partners like acquirer Nuvei, who has expanded their agreement to include Visa Direct to account in addition to card more than 30 countries. After initially enabling Visa Direct in 25 markets in 2023, PayPal's Zoom recently expanded its Visa Direct cross-border reach to more than 60 markets. In our B2B or commercial solutions, we continue to create compelling purpose-built offerings with a number of our services. In Europe, we've expanded our partnership with Revolut to launch Titan in the UK, an ultra-premium card designed for high-growth companies that attracted thousands of business customer sign-ups on day one. Also in Europe, Eden Red Paytech has chosen Visa as its strategic partner to expand across multiple B2B use cases with our solutions, including open-loop workplace benefits, open-loop fleet and mobility, B2B travel, insurance payouts, and procure-to-pay. Another area of innovation and expansion in the services and solutions layers of the Visa as a service stack has been issuer processing. Visa has been in the issuer processing business for over thirty years. We have continued to invest in this space by enhancing DPS, but also through the acquisition of PISMO. Many issuers around the world are seeking to upgrade their technology stacks to ensure they can deliver for customers in a digital age. Visa's issuer processing capabilities enable clients to have one connection to Visa from which they can access our other solutions and services such as network products, value-added services, tokenization, risk products, and more. One of the two agreements I would highlight this quarter is Pismo's first commercial offering since the acquisition with Banco Bisse in Chile. In collaboration with expense management platform Mendel, we will offer a business credit corporate issuer processing program for Bisse and their large and middle market B2B clients. The second agreement is Pismo's first fleet card offering with FinanceNow in New Zealand. Visa will also provide fleet card issuance, tokenization, and risk services as well. We will continue to look for ways to invest in to both modernize and enhance payment systems globally and accelerate the adoption of our value-added services. The final area I want to highlight is our risk and security solutions. As you know, we closed on our acquisition of FeatureSpace just over a year ago, and we have continued to invest in this platform to provide a holistic AI-driven solution for our clients, before, during, and after a transaction. Nets, part of Nexi Group in Europe, has chosen FeatureSpace to expand fraud prevention for 150 banks across Nordic and Central Europe regions, leveraging cloud hosting and advanced fraud models. Another AI-powered solution, Visa Account Attack Intelligence, was announced in 2024 in the US to help clients prevent enumeration attacks, which are when bad actors systematically initiate e-commerce transactions to obtain valid payment credentials. The results of this solution in the US have been impressive, with over 60 billion transactions scored and nearly 600 million suspicious transactions identified in the last twelve months. We are now investing in its market expansion with launches in the rest of our regions where we are also seeing strong results. In LAC, for example, in just six months, have almost 90% of clients already activated and have prevented more than $10 billion of fraud. We have brought our network-agnostic risk solution, Visa Advanced Authorization, to more countries as well, including recently securing the business from Morocco's national switch, Switch Elmarib, to score all domestic transactions. We have also expanded our A2A risk solution, Visa Protect for A2A, to two more countries this past quarter, with a half a dozen more planned by the end of the year. Of course, these represent just a small set of examples, and throughout the quarter, we have developed many more solutions that will help us drive long-term growth. Collectively, all of our efforts produced 15% year-over-year net revenue growth, with our growth pillars continuing to deliver very strong results. Commercial and money movement solutions constant dollar revenue grew 20%, with 10% constant dollar commercial payments volume growth and 23% Visa Direct transaction growth. Value-added services constant dollar revenue grew 28% and represented around 50% of our overall revenue growth in the first quarter. These results and our feedback from our clients give us confidence that our strategy is working and we are investing in the right capabilities to position Visa and our clients and partners for the future. Visa is delivering breakthrough innovations that redefine what's possible in payments as we enable our partners to achieve global scale quickly and securely. Now to Chris, where he will discuss our financial performance. Thanks, Ryan, and good afternoon, everyone. We had a very strong start to our 2026 fiscal year, driven by strong driver growth, a strong holiday season, and continued execution of our strategy across consumer payments, commercial and money movement solutions, and value-added services. Business drivers remain strong. In constant dollars, global payments volume was up 8% year over year, and relatively consistent with Q4. Cross-border volume, excluding intra-Europe, was up 11%, and total processed transactions grew 9%. Fiscal first quarter net revenue was up 15% year over year, with the outperformance largely driven by stronger than expected value-added services revenue, lower than expected incentives, and stronger than expected commercial and money movement solutions revenue. Christopher Suh: These three factors more than offset lower than expected currency volatility. First quarter revenue was up 13% in constant dollars. EPS was up 15% year over year, better than expected, primarily due to stronger than expected net revenue growth. EPS was up 14% in constant dollars. Let's go into the details. US payment volume was up 7%, with e-commerce growing faster than face-to-face spend, reflecting resilience in consumer spending. Credit was up 7% and debit was up 6%. The slight step down in USPV throughout the quarter was driven by debit, primarily as a result of a Visa Direct client moving the remainder of its volume to its own solution, and a number of other small factors including the loss of some interlinked volumes, to the Capital One debit migration and severe weather that affected certain spend categories. Growth across consumer spend bands remained relatively consistent with Q4, with the highest spend band continuing to grow the fastest. We did not see a deterioration in the lower spend band, and across our volume, both discretionary and nondiscretionary spend remain strong. Honing in on the holiday season specifically, which we define as the period from November 1 to December 31, I would note a few items. In the US, consumer holiday spending growth was in line with last year, reflecting continued strength in retail, an improvement in fuel, and some moderation in other spend categories. Focusing on retail, holiday spending growth was slightly better than last year, driven by strong growth in e-commerce, which continues to take on a greater share of consumer retail spend. In several key countries around the globe, we saw similar trends, with consumer retail holiday spending growth up from last year led primarily by e-commerce growth. First quarter total international payments volume was up 9% year over year in constant dollars, generally consistent with the growth we've seen over the past several quarters. Now to cross-border volume, which I'll speak to in constant dollars and excluding intra-Europe transactions. Q1 total cross-border volume was up 11% year over year, consistent with Q4. Cross-border e-commerce volume was up 12%, slightly below Q4 primarily from lower growth in cryptocurrency purchases. Travel-related cross-border volume was up 10%, consistent with Q4. We saw continued strength in commercial volumes and we started to see improvement in US inbound from Canada. With that as a backdrop, I'll move to discuss our financial results, starting with the revenue components. Service revenue grew 13% year over year versus the 9% growth in Q4 constant dollar payments volume, primarily due to pricing and card benefits. Data processing revenue grew 17% versus the 9% growth in processed transactions, primarily due to pricing, strong value-added services performance, and higher cross-border transaction mix. International transaction revenue was up 6%, below the 11% increase in constant dollar cross-border volume growth excluding intra-Europe. Even with the favorable FX, we saw a much lower than expected volatility, with additional negative pressure from mix and hedging. Other revenue grew 33%, primarily driven by growth in advisory and other value-added services, and pricing. Client incentives grew 12%, lower than our expectations due to one-time true downs related to client performance and deal timing. Now to our three growth engines. Consumer payments revenue was driven by strong payments volume, cross-border volume, and processed transaction growth. Commercial and money movement solutions revenue grew 20% year over year, in constant dollars. CMS revenue was better than expected, driven primarily by our commercial solutions business. Commercial payments volume grew 10% in constant dollars, consistent with Q4 and faster than Visa's overall payments volume growth, primarily due to strong client performance driven by both new wins and continued cross-border strength. Visa Direct transactions grew 23% to 3.7 billion transactions, with strength in both domestic and cross-border. Value-added services revenue grew 28% year over year, in constant dollars to $3.2 billion, driven by strength across all portfolios. Value-added services revenue growth was better than expected, primarily due to greater demand for our advisory and other services, especially in marketing services. Operating expenses grew 16%, above our expectations, primarily due to an unfavorable FX impact from balance sheet remeasurement and higher than expected marketing from both timing of marketing spend and marketing services related expenses, some of which are associated with the stronger value-added services revenue I just mentioned. Non-operating expense was $4 million, better than our expectations, primarily due to investment income. Our tax rate for the quarter was 18.4%, slightly higher than expected due to the timing of the resolution of a tax matter. EPS was $3.17, up 15% year over year, with an approximate one-point benefit from exchange rates and a minimal impact from acquisitions. In Q1, we bought back approximately $3.8 billion in stock and distributed approximately $1.3 billion in dividends to our shareholders. We also funded the litigation escrow account by $500 million, which has the same effect on EPS as a stock buyback. At the December, we had $21.1 billion remaining in our buyback authorization. Now let's look at drivers through January 21, with volume growth in constant dollars. US payments volume was up 8%, with credit up 9%, and debit up 6% year over year. For constant dollar cross-border volume, excluding transactions within Europe, total volume grew 11% year over year, with e-commerce up 12% and travel up 10%. Processed transactions grew 9% year over year. Moving to our guidance. Now that a quarter has passed since our initial FY26 commentary, I would note the following on our key assumptions. As we regularly say, we are not economic forecasters, so we're assuming the macroeconomic environment stays generally where it has been and consumer spending remains resilient. So no change. On pricing, we also have no material changes, with the benefits of new pricing expected to be similar in magnitude as last year and the majority in the back half. What that means from a cadence perspective is Q2 would see a relative step down in the year-over-year growth pricing contribution from Q1. On incentives, we had true downs and deal timing that helped in Q1, that we do not expect will carry into Q2. As such, this implies a step up in the growth rate from Q1 to Q2, with Q3 continuing to have the highest year-over-year incentive growth rate and the full year remaining relatively unchanged. On volatility, it has been much lower than we expected so far this year, and we are assuming that that volatility continued at current levels for the rest of the year, implying a larger drag for the rest of the year than in Q1 and with Q3 having the toughest comparable to last year's higher levels. We pull these assumptions together on an adjusted basis defined as non-GAAP results in constant dollars and excluding acquisition impacts. You can review these disclosures in our earnings presentations for more detail. For the full year, we have no material changes in our expectations for our adjusted and nominal net revenue growth. We still expect our full year adjusted net revenue growth to be in the low double digits, reflecting anticipated weaker volatility environment the rest of the year, that's offset by the Q1 outperformance and higher utilization of our products and services. On the expense side, we have no material changes to our prior full year guidance, and still expect adjusted operating expense growth to be in the low double digits for the year. As a result of Q1, our expectations for non-operating expense are now between approximately $101 million and $125 million. On our tax rate, as a result of the claim of right tax benefits related to recent and anticipated legal settlements, we now expect our full year rate to be lower than we guided, between 18% and 18.5%. I should reiterate that we still expect our long-term tax rate to be between 19% and 20%. This implies adjusted EPS growth in the low double digits, albeit a bit higher in the range than previously guided, primarily due to the change in tax rate. Moving to Q2 financial expectations. We expect Q2 adjusted net revenue growth in the low double digits. The primary reasons for the step down from Q1 net revenue growth include the lower contribution from pricing, lower volatility, and higher incentive growth. We expect adjusted operating expense growth in the mid-teens, about a point above Q1 adjusted operating expense growth. This reflects the step up in marketing-related expenses primarily due to the Olympics and FIFA. And you may recall that Q2 last year had lower than expected operating expense growth due to timing. Non-operating expense is expected to be about $30 million, and our tax rate in the second quarter is expected to be around 16.5%, primarily as a result of the claim of right benefits I mentioned previously, that we expect to realize in the second quarter. As a result, we expect adjusted second quarter EPS growth to be in the high end of low double digits. As always, if the environment changes, and there are events that impact our business, we will remain flexible and thoughtful on balancing short and long-term considerations. It's an exciting time in payments, and we're confident in our strategy and investments to fuel Visa Inc.'s future growth. And now, Jennifer, I'll hand it back to you. Jennifer Como: Thanks, Chris. And with that, we're ready to take questions. Operator: Thank you. If you would like to ask a question, please press 1 and clearly record your name. You will be announced prior to asking your question. To ensure all questioners are heard, we ask that you please limit yourself to one. Once again, to ask a question, please press 1. To withdraw your question, press 2. Dan Perlin with RBC Capital Markets, your line is open. Dan Perlin: Thanks. Good evening, everyone. I just wanted to dig in a little bit on the opportunities around value-added services, but specifically, around purpose-built offerings for events. So here, we're really talking about the Olympics and World Cup. Given the value-added services is a much bigger part of the business today than the last time that occurred. Ryan McInerney: Yeah. So you see if I hit the core question then. So we first of let me just start with these sponsorship assets that we have. They're obviously marquee sponsorship partnerships. Talking about, for example, this year, FIFA. This year, Winter Olympics. You know, global, very, very global in nature. And what we have through our sponsorships is the ability to pass through those rights to our clients and partners all over the world. And that's what we do. Our value-added services sales teams go to market. They sit with our clients many, many months in advance of these programs. And they design programs that are bespoke and custom-built for our clients to help them grow their business. So for some clients, those might be advertising campaigns that we develop together with them in support of maybe a sweepstakes for their cardholders. Things like that. For other clients, they might want to create client events for their private banking clients at one of the FIFA Games in the US, Canada, or Mexico. So in that example, our team works with them to build bespoke events, obviously branded for the bank or financial institution and those types of things. It's a very busy time of year for us. It's a very, very busy year for us. There is a ton of demand from our clients, and the great thing about this is not only are we helping our clients, not only are we generating revenue from these services, we're deepening our partnerships with our clients. And so, you know, we get more renewals because of them. We get more business because of them. And so we feel really good about it. Jennifer Como: Next question, please. Operator: Our next caller is Darrin Peller with Wolfe Research. Your line is open. Darrin Peller: Thanks, guys. Maybe we just touch on what you're seeing strength and that's actually it seems like it's offsetting the lower than expected FX volatility such that you're able to maintain your full year for revenue growth. I know VAS and CMS seems to be standing out pretty well. And just if I could just throw one more about capital return. Have you guys thought through any changes given where the market is placing valuations now over capital allocation, buybacks maybe is picking up a notch? Thanks, guys. Christopher Suh: Okay. Hi, Darrin. Well, yeah, let me jump in. Value-added services in particular, we saw in Q1 really great performance, strong execution, strong client demand. Ryan talked about some of that around some of the events, but the strength was really quite broad-based. We saw strong growth year over year in all four of the portfolios that we talk about. Issuing solutions, acceptance, risk and security, and advisory. The team continues to do very well across that. And so when we think about the performance and then, of course, CMS had a very high growth quarter as well, performing above what we expected. So when we think about the full year expectations, those are the moving parts that we talked about. We said, volatility, it you know, obviously, it's hard to determine where that's gonna go, but given the persistent low that we saw in Q1, if we extend that throughout the rest of the year, that does provide for more downside than the momentum that we have in the business that we anticipate will continue throughout the rest of the year, those two become largely offsetting. To your second point around capital return, as you know, Darrin, our approach to capital return and share buyback has largely been programmatic. We've executed on that very consistently throughout our history. But at the same time, you know, we do take advantage when we see opportunities, when we think the market is underpricing our stock and we see an opportunity, we'll lean in as well, and we'll continue to look for opportunities to do that as well. Jennifer Como: Next question, please. Operator: Thank you. Will Nance with Goldman Sachs. Your line is open. Will Nance: Thanks for taking the question today. I wanted to ask just the advisory question on the regulatory environment. CCPA has been and then there's quite a bit. Just if you could share your updated thoughts on how you're thinking about I guess, the risk to the business from that potentially going forward as well as how you're thinking about recent conversations on the Hill and know, the likelihood of that. Becoming a reality. Thank you for taking the question. Ryan McInerney: Hey, Will. You cut a little out when you asked about specific thing. Was it CCTA you mentioned or something else? Will Nance: Yeah. It was it was CCCA kind of effects of implementation as well as, you know, recent conversations on the hill and likelihood of passing. Ryan McInerney: Yeah. So as you'd expect, we're very engaged. On the hill. We're very engaged with members. As you know well, there's many things floating around. And, you know, we view it as our job to educate elected representatives on the impacts that the various policies that are being floated around could have. In the case of CCCA specifically, we've talked extensively, in this call and other places about our view and it's you know, it hasn't changed. It's very harmful. And it's just simply not needed. So, you know, when I have a chance to talk to elected officials and the rest of my leadership team does, like, they're listening. They're understanding. Know, these people don't live in our industry every day. So, you know, they they they do need the time to understand it. You know, when we talk to them about why it's not necessary, we explain the competitive environment in this business. It is intense. We have new players entering all the time. You know, we talk on this call about crypto stablecoins, BNPL. Obviously, all the competition in the credit card and debit card markets. You know, wallet players, A2A. We take them through an explain, you know, this competitive environment. And we also explain why the market is working so well. And there's no need for government intervention. And the second thing we explained was just how harmful it would be. I mean, this legislation would have far-reaching negative consequences. At a time when, you know, the economy certainly doesn't need that. Consumers and small businesses would see reduced access to credit, you know, rewards would be eliminated entirely. There'd be fewer credit card options. And, by the way, weaker security protection. Less innovation, all these things, and we explain why. I think this is just gonna be this is gonna be part of what we all do regularly because there's elections. You have new elected officials. They're very busy with lots of other things, and so we just have to continue to remind them of the impacts whether it's CCCA or anything else for that matter. Jennifer Como: Next question, please. Operator: Adam Frisch with Evercore ISI. Your line is open, sir. Adam Frisch: Thanks, guys. Nice results. Could you double click into the much better than expected growth in commercial and what you saw there? It was just a great quarter? Or did something unlock in a market with immense potential but I think previously, was supposed to be a little bit more slow and steady. And then would appreciate if you could provide just a quick perspective on spending trends around the world, maybe some color on what you're seeing in the major regions and to the extent you can, some insights on affluent versus mass. Thanks, guys. Ryan McInerney: Hey, Chris. Let me start a little bit on commercial from a business perspective, then you can follow-up on the numbers, and then you can hit the other questions that's fed in trends. I think what you're seeing in commercial is the results of the strategy we've been talking to you about now for, really for a few years. And you know, I I think just, credit to our teams, like, we've been shipping great product. Our sales teams have been engaging with players all around the world. We've been winning. You know, we we talk when we think about the commercial space, we've been talking with you all about three different types of opportunities, and we're having great success across all three of them. You know, we talked about converting more small business and medium business spending. And, you know, what's an example I'd point to there? I you know, point to, the Chase Sapphire reserve for business product. You know, that was a portfolio win that we announced a great product in the market that's doing exactly that. And the second opportunity we talked about is scaling large and middle market. Card and virtual payables use cases. And, again, that's an area where we've been shipping some great product and having some great client wins. I'd point to our trip.com global virtual travel card issuing business I think it's a great example there. And then the third opportunity, the third leg of this strategy, and we've been talking to you all about is delivering product innovation and network flexibility to help our partners reach underpenetrated spend. And, you know, I I I think it was maybe the last call or call before that I mentioned, you know, our win at at BMO up in Canada where we launched our network agnostic enhanced spend management capabilities with them. And, you know, that's gonna allow them to to really capture some of that underpenetrated spend. So I think it's the strategy. It's the results. Been shipping great product. Having great client wins, you know, like the the ones that I mentioned. And then you wanna pick up on some of the numbers? Sure. I think Ryan covered CMS and VCS. So let me just hit on some of the question you had around some of the regional volume numbers. So when we look at our international volume in total, which was 9% this quarter, that was largely in line with what we saw last quarter. And if you think which was 10%, if you think about the difference in that in we did see some idiosyncratic things that sort of helped the in Q4, the international volume growth to be 10%. And so when you normalize for some of those things, we we see a lot of stability. As you click into each of these regions, some of these things do show up in in some of the regional stories. So if I if I, you know, do sort of a tour around world and and give a little bit of a high level commentary, in Europe, payments volume was relatively consistent. With Q4. We continue to to execute well, and and we're seeing the benefit of some of the wins that we've had there. In SAMEA also, you know, that was down maybe a couple points from Q4, and that's being impacted by some of those idiosyncratic things that I talked about. But still very strong growth. Very strong growth. Let me be very clear about that. One of our fastest growing regions, but it was really related to the timing of promotional campaigns that we saw in Q4. And maybe the last one I'd call out is AP as well. AP is growing, low single digits. A little bit slower than Q4. But that was one that we also called out before in terms of timing of tax payments that we saw. In Asia. And so when we normalize for some of these timing differences, we're seeing a relative stability across international payments volume. Jennifer Como: Next question, please. Operator: Sanjay Sakhrani with KBW. Your line is open, sir. Sanjay Sakhrani: Thank you. I know you talked about VAS a decent amount already, but just curious if that 28% growth this quarter can sort of sustain itself for the remainder of the year? Or do you think there's some specific factors in the quarter that drove the strength and that may not reoccur? And then just Chris, you mentioned that there were some expenses that were higher as a result of the stronger VAS revenue growth. I'm just curious, is that a variable component? Or can that be leverageable in the future? Thanks. Christopher Suh: Sure. Hi, Sanjay. Let me try to address it. Yeah. You know, just building on what I said earlier about the strong start to the year in VAS. Obviously, we don't guide to growth pillars, but you know, a lot of the things that we've talked about, you know, Q1 being 28%, that is above where we expected it to go in, but it's also you know, in line with the momentum that we've seen. We were we've seen growth in the 25-24, mid-twenties for for some period of time. It's really a reflection of you know, similar to what Ryan was saying about CMS. It's a reflection of the fact that we're executing against our strategy. We're investing behind it. We, you know, we have a clear strategy and a clear address market that we're going after. The teams are certainly, doing a really, really great job of about that. You know, some of the things also just tie into some of the other conversation we've been having, the first question is around events. And this year is a unique year that we do have two events. Both FIFA World Cup and the Olympics. We've talked about how that's gonna benefit marketing services in particular, which lands in sort of the other revenue line. That is a business where, you know, clients are super excited to engage with us and activate and have access to these sponsorships, and and we're excited about that. But that does also contribute to some of the revenue, some of the expense reasoning that that we talked about. And so let me talk about that real quick. So with both those two big events, you know, it from an expense standpoint, we see a little bit more quarterly variability this year than a normal, let's say, a typical year. When we went into the year, we said the expense associated with these two events will be in primarily peaking in Q2 and Q3. And so, therefore, as we look at sort of Q1 and Q2, we do think half one expense is a little bit higher than half two as a result of that. It really is associated with incremental revenue that we're capturing. Related to these two events. And so, you know, we're happy to do that and, obviously, clients are thrilled as well. Jennifer Como: Next question. Operator: Andrew Jeffrey with William Blair. Your line is open. Andrew Jeffrey: Thank you. Good afternoon. Appreciate you taking the question. I wanted to ask a question on the Flex credential, which is really intriguing. And and recognizing it's very small as a percent of your total credentials today, could you maybe sort of frame out a growth trajectory for us? Is there a point in time when you think about Flex really bending the growth curve for Visa? And and just I'm just trying to dimensionalize what it can mean over the next, say, three, five, seven years for your revenue growth. Ryan McInerney: You know, it's still early in the development of Flex. I talked about, you know, some of the wins we had this quarter and others. I also talked think, in my prepared remarks, about some of the expansion opportunities we have in the pipeline. Clients are very excited about it. You know, we if you just step back for a sec, you know, we think about the Flex credential like the Swiss army knife of payments. You know, it like, it's got multiple funding options that are all packed into one card. And that resonates with different players across the ecosystem. You know, you look at a SMCC in Japan who you know, they're they're more of a traditional bank, and they launched this product to to bundle know, credit, debit, rewards, etcetera, all into, you know, one product. You know, I've mentioned on this call in the past, BNPL players like Affirm and Klarna, and now as you heard in my prepared remarks, Block, who are able to take BNPL offerings that they used to have to go build out merchant by merchant by merchant around the world, which is obviously very difficult, time-consuming, and costly. Now they can offer their users a Visa Flex credential and they can go use the the BNPL offering anywhere where Visa is accepted, which is you know, all over the world. And and, you know, kinda goes on and on. So in terms of, like, the growth impact it's gonna have, we're still early in sales cycle. Like you said, these numbers at this point, you know, are small in the context of our 5 billion credentials. But you know, when you look at other things that we've done, like tokenization, when you look at Visa Direct, you look at some of the other innovations that we brought to market, it you know, we follow a similar strategy and path. Build great product, get it out there in the ecosystem, and then and then go at it year after year after year to ultimately help serve our clients and grow the business. Jennifer Como: Next question. Operator: Thank you. Tien-Tsin Huang with JPMorgan. Your line is open, sir. Tien-Tsin Huang: Thanks so much. Hi, Ryan, Chris, and Jennifer. I want to ask on the issue of processing side, if that's okay. Just I heard there's some good wins in DPS like Block, and you you talked about the Pismo expansion. So it's got just got me to thinking, how much have you invested in both of these assets from a tech perspective especially it it feels like there's some momentum on the on the processing side and maybe can you discuss if the TAM has changed around issuer processing? Love to hear just an update. On that. Thanks. Ryan McInerney: Hey, Tien-Tsin. No change in the TAM. It's enormous. I mean, you think about you think about the the opportunity, every bank on the planet except a few, needs to go through the process of modernizing their tech stack. Whether that be you know, debit issue or processing, which is where DPS is focused in the US in a more narrow place. But more broadly, their their whole entire issue of processing stacks and their core banking stacks. And yeah, we've been, we've definitely been investing, product and engineering resources into both. I think we've been shipping some great products in both. Which is, you know, what's driving the wins both with, you know, more traditional financial institutions, and with fintechs like you referenced. And PISMO especially. You know, our thesis, when we bought Pismo was that our clients were facing big decisions on how they could modernize their tech stacks and ultimately move into the cloud. And that's know, that's what that's what's proving out. Is we're we're having great sales interactions with financial institutions all around the world. And when we're able to take them through the PISMO capabilities and show them that it's cloud native, you know, provides issuer processing, core banking. It does it for all products. You know, debit, credit, commercial. You know, current accounts, DDAs, etcetera, we're getting a lot of uptick. Now, you know, these are long sales cycles. You know, the you know, a a bank kind of changing out its its, you know, its core banking infrastructure moving from on-prem into the cloud. Like, these are big decisions. They take time. And we knew that going into to buying Pismo. And, you know, we'll continue continue at the sales cycle, continue to ship great product on it, and we're very excited about the space. Jennifer Como: Next question, please. Operator: Thank you. Ramsey El-Assal with Cantor Fitzgerald. Your line is open. Ramsey El-Assal: Hi, thank you for taking my question this evening. I wanted to ask about your commentary on stablecoins of $4.6 billion of settlement. It's a small number, but it's ramping seemingly quite quickly. Do you expect more growth in stablecoin flows to be related to settling payments? Or do you see the bigger opportunity for Visa on sort of the disbursements money movement side of things? And just one quick point of clarification for Chris. You said there was some pressure on cross-border revenues from low FX hedging and mix. What did you mean by mix? Thanks. Ryan McInerney: Yeah. So let me let me just try to to frame this. I I think the short answer is the latter. But let me let me unpack that. You know, in terms of stablecoins, the areas where we see product market fit are generally the areas around the world with significant TAMs and areas where we're actually underpenetrated today. Know, what is that? So one is you know, it's countries around the world where there's high currency volatility or hard to access US dollars. And we've had great success issuing Visa credentials I think I said in my prepared remarks, I I I talked about this now in more than 50 markets, around the world to provide on and off ramps, for stablecoins. And, you know, that's that's an area where there's great product fit. Product market fit. The second area where we see, good product market fit is around cross-border, whether that's remittances, at the consumer level or whether that's B2B payments, or even B2C payments for disbursements. Another area of opportunity another area where we're generally under underpenetrated, another gigantic TAM. And then coming back to the beginning of your question, we're seeing a lot of interest. As you noted, the numbers are still small in the big scheme of things. But the growth rates are very high. Settlement on our network with stable coins. When we have partners that settle on our network with stablecoins, they're able to get access to seven-day-a-week settlement. For example, because, you know, with stable coins, we can settle on Saturdays, and we can settle on Sundays even when, correspondent banking, is not generally available. And that creates more liquidity for partners and clients. They're able to get access to settlement flows faster. In the case of some instances where they might otherwise have to hold collateral, during a weekend, they don't have to do that. So yeah, I mean, we're we're very excited about the opportunities. I guess just to be very clear about it, to the beginning of your question, we don't see a lot of product market fit in developed digital payment markets like The United States or like, you know, The UK or Europe. For stablecoin payments. You know, as I said before, in The US, if a consumer wants to pay for something using a digital dollar, they have ample ways to do that today. They can pay from, you know, their their checking account or their savings account. It's it's become quite easy to do. So we don't see a lot of product market fit for stablecoin payments and consumer payments in digitally developed markets. Christopher Suh: Hey, Ramsey. I'm gonna tackle the second part. I'm glad you asked the question about the commentary, the prepared commentary on international transaction revenue. And that's the first place I'd start. I'd differentiate. Because of the way you ask questions, you cross pressure on cross-border yields. International transaction revenue does not equal one to one cross-border revenue. Cross-border revenue lands in all of our service lines. It lands in it contributes to the 15% growth we saw across the business. It contributes to the 17% growth in data processing. And it also obviously contributes to the international transaction line. And and I will say when we look at the cross-border business in total, obviously, the volumes have remained strong and stable. This business remains high yielding and very profitable. And so it it remains a very healthy business. Now to your specific question, around, you know, the commentary around the difference between international transaction revenue, I I called out three things. I won't go through them all. But the first one and the biggest one was volatility. And we talked about, you know, sort of the low currency volatility. The second one was mix, which is the one that that you've talked that you brought up. As we've talked about mix in prior quarters, and, really, this is talking about the composition of yields across our business. Different clients, different products, different regions have different yields. As growth rates across these different items vary, then it, you know, it can have a mix impact. This quarter, the one I doubt is Visa Direct, which continues to grow fast. And also very profitable, but typically has a lower yield than carded transactions. So to the extent Visa Direct cross-border transactions are growing faster than carded, then that's gonna mix the yield down. And so that's an example of of mix. Jennifer Como: Next question. Operator: Got it. Thank you. Dan Dolev with Mizuho. Your line is open. Dan Dolev: Hey, guys. Great quarter. Thanks for letting me ask a question. I just have a follow-up on the PISMO update. It sounds like it's off to a really good start and you're making a lot of progress. Can Ryan, can you maybe update us on how PISMO is trending you know, in terms of wins with large versus small banks? And and how much bigger do you think could be in two to three years? Because it sounds like it's a great business here, and you're making a lot of getting a lot of traction. Thank you. Ryan McInerney: Yes. Thanks, Dan. Yes. As I mentioned, we remain very excited about it. You know, the large versus small bank question, it's really both. You know? The the the smaller players tend to be the fintechs. You know? And I you know, the other part of our thesis, when we bought PISMO beyond what I said earlier was fintechs are limited in their capabilities that they have to drive international expansion in many markets around the world. Often, fintech will, you know, grow up in one country and then wanna expand, and what they quickly run into is a challenge. They can't find a a technology partner that can help them scale to the next five, 10, 15 countries. So on the smaller fintech side of things, that's where PISMO has been a great fit. Right? Because it's cloud native, we're able to move with fintechs and help them expand broadly around the world. By the way, that helps the fintech. That's great news for PISMO because it it drives revenue. But it's really good news for Visa. Because we're able to help more fintech scale more broadly into markets that are underserved with Visa credentials. So it's a real win-win-win in that sense. On the more traditional financial institutions and and the bigger banks as as you referred to them as, it's more about kind of engaging with clients on this journey that they're embarking on, moving from on-prem legacy technology stacks to the cloud. And that's for, you know, that's for visual processing. That's for core banking. And know, what we're finding is that when these big sophisticated large clients really dig through the PISMO capabilities, they're extraordinarily impressed. And they find what we found, which is when we found PISMO, that it really is the best cloud native issuer processing and core banking stack on the planet. Jennifer Como: Alright. We'll take one more question, please. Operator: Thank you. And our last caller is Harshita Rawat from Bernstein. Your line is open. Hi, good afternoon. I want to ask about tokens. Harshita Rawat: As you said, they've grown to over 17 billion, three times the number of cards you have. We know the authorization rates and fraud deduction benefits, which are meaningful. It's also using the agentic capabilities. My question is, how does this proliferation of tokens and the benefits it brings changes the conversation you have with your issuer customers and merchants and merchant acquirers? Does it further change the nature of those conversations from network fees to the value of ringing? And I know there could also be more opportunity for pricing for value here. Thank you. Ryan McInerney: Thank you. As I mentioned in my prepared remarks, we're the progress, that we've made with 100% tokenized transactions. I wanna before I answer your question directly, I wanna go back to something I alluded to, earlier. You know, to get to the point where we are right now, with 17.5 billion tokens and 50% plus of transactions. It has been a multiyear journey. You know, our teams in in countries around the world have had to go you know, client by client, both the issuers and the the acquirers and merchants as you asked about. Get them to embed the tokenization into their tech stacks, help them understand the value of it, and and do that work for many, many years, which has led us to where we are. The nature of the the dialogue both with issuers in a with merchants and acquirers, has been great. You know, if, you know, if you're a if you're a retailer, big or small, like, your number one goal is more sales. And when we're able to show the sales uplift that tokenization provides, it's a real moment. You know, the the other thing that is very much on the minds that you alluded to of, merchants and acquirers all around the world is fraud reduction. And when we're able to show them the impact that tokenization can have on their fraud rates, they're very very impressed. So what we're doing right now is we're just continuing that journey. We're engaging with merchants and acquirers and issuers on case studies and showing them the impact like I described in my prepared remarks. We're really focused on merchants who have large stored credentials, cards to file. And we're showing them the benefits of converting those cards on file to Visa tokens. We're focused on checkout. You know, I mentioned in my prepared remarks the enormous progress we've made reducing guest checkout, but it's still 16% of Visa e-commerce around the world. That means 16% of the transactions, our customers aren't as delighted as they could be if those were as simple as a a tap or a biometric authentication using a Visa token. So we're working with those merchants to try to put in place the the the Visa token solutions to to improve those user experiences. We're also focused on new markets. You know, bringing tokens to new markets, both with issuers and acquirers in places like Europe and CEMEA and Latin America. So we're we're excited about the progress, but we still have a lot of work ahead of us, and we're very focused on it. Jennifer Como: And with that, we'd like to thank you for joining us today. If you have additional questions, please feel free to call or email our investor relations team. Thanks again, and have a great day. Operator: Thank you all for participating in Visa Inc.'s fiscal first quarter 2026 earnings conference call. That concludes today's conference. You may disconnect at this time. And please enjoy the rest of your day.
Stephanie: Thank you for your Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. Team will be happy to help you. You for your continued patience. Your meeting will begin shortly. Member of our team will be happy to help you. Good afternoon. My name is Stephanie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation December Quarter 2025 Earnings Conference Call and Webcast. All participant lines have been placed in a listen-only mode to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead. Kevin Kessel: Welcome to the December 2025 quarterly earnings call. I'm joined by our CEO, Richard Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our March and calendar 2026 outlook, which we released after the market close and is available on our website along with supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. All full-year references we make refer to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future investor events, presentations, corporate governance information, and links to our SEC filings. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings. Any forward-looking statements, including those we make on the call today, are subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. We will begin the call with Rick providing commentary on the business environment and our quarter, followed by Bren with financial highlights and our outlook. Before I turn the call over to Rick, I wanted to remind everyone that we are hosting our Investor Day on March 12, and invitations were recently emailed out. Now over to Rick. Richard Wallace: Thank you, Kevin. I will summarize KLA's overall performance for 2025 and the December quarter, as well as cover the current industry landscape. For 2025, KLA continued to deliver relative growth outperformance along with strong profitability, free cash flow generation, and return to shareholders. For 2025, revenue grew 17% to a record $12.745 billion, with our process control systems business outpacing the industry growth by several points. Earnings per share grew 29% year over year, demonstrating the strong leverage in our model. And KLA maintained industry-leading gross margins and operating margins of 62% and 43.6%, respectively. The company also grew free cash flow 30% to $4.4 billion and returned $3 billion in a combination of dividends and share buybacks. KLA's process control system revenue grew 19%, and our service business grew 15% for the year. And 2025 is expected to be another year of process control share growth for KLA. The demand for AI infrastructure, coupled with KLA's industry leadership and process control, positions the company well in supporting all major growth vectors in semiconductor manufacturing, including advanced logic, high bandwidth memory, and advanced packaging. In the December quarter, KLA delivered strong results across the board, with revenue of $3.3 billion, non-GAAP diluted EPS of $8.85, and GAAP diluted EPS of $8.68. Highlights contributing to this performance include 17% year-over-year revenue growth fueled by investment in leading-edge foundry logic, high bandwidth memory, and DRAM. AI remains a core driver of KLA's performance and a key factor in our growing industry leadership. As KLA solutions enable our customers to deliver products needed for AI, our systems are also applying AI-driven analytics to deliver actual insights that streamline chip manufacturing and accelerate innovation and time to yield for next-generation AI applications. We believe that our experience reflects the compelling capabilities, cost, and power consumption available with GPU-based compute architectures and is fueling the ongoing HPC infrastructure build-out. Looking ahead, KLA's innovations with AI will produce data for our customers that accelerate system performance, reduce the cost of ownership, and improve their return on investment in KLA systems. In the December quarter, KLA continued to grow in advanced packaging, the rising demand for more powerful systems of chips is driving advanced packaging and increasing the value of process control in the chip package, which has fueled significant growth in this expanding market for KLA. KLA continues to see strong momentum in advanced packaging revenue growth and market share, with calendar 2025 total systems revenue of $950 million representing over 70% year-over-year growth. And as we look forward to calendar 2026, we expect this momentum to continue with year-over-year percentage growth expectations in the mid to high teens driven by faster than market growth for our process control products. The daily services business grew to $786 million in the December quarter, up 6% sequentially and 18% year over year. This was the sixteenth consecutive year of annual service revenue growth with a compounded annual growth rate greater than 12% over that timeframe. Finally, the December quarter remains strong for both free cash flow and capital returns. Quarterly free cash flow was a record $1.26 billion. Total capital return in the December quarter was $797 million, comprised of $548 million in share repurchase and $250 million in dividends. Total capital returns over the past twelve months were $3 billion. The industry dynamics to support the demand for AI infrastructure reinforce KLA's growing relevance for our customers, and our broad product portfolio plays a critical role in enabling customer success. Additionally, the emerging and fast-growing advanced packaging market further strengthens KLA's relative position. Finally, rising semiconductor content across diverse end markets, coupled with strategic investments in legacy nodes, remains a key driver of dependable long-term growth for KLA and the semiconductor equipment industry. With that, I will turn the call over to Bren, who will discuss the quarter's financial highlights. Bren Higgins: Thanks, Rick. KLA's December results reflect strong year-over-year growth with an industry-leading margin profile. The results also exemplify our market leadership, consistent business execution, and the dedication of our global teams in meeting customer commitments. Revenue was $3.3 billion, above the guidance midpoint of $3.225 billion. Non-GAAP diluted EPS was $8.85, and GAAP diluted EPS was $8.68, each above the midpoint of the respective guidance ranges. Gross margin was 62.6%, sixty basis points above the midpoint of guidance due to stronger than modeled service performance and manufacturing efficiencies. Operating expenses were $653 million and included $384 million in R&D and $269 million in SG&A. Operating margin was 42.8%. Other income and expense net was $32 million. The quarterly effective tax rate was 15%. At the guided tax rate of 14%, non-GAAP earnings per share would have been $8.99. Non-GAAP net income was $1.17 billion. GAAP net income was $1.15 billion. Cash flow from operations was $1.37 billion, and free cash flow was $1.26 billion. The company had 132 million diluted weighted average shares outstanding for the quarter. The breakdown of revenue by reportable and end markets and major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet, KLA ended the quarter with $5.2 billion in total cash, cash equivalents, and marketable securities, and debt of $5.9 billion. The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all three major rating agencies. KLA generates consistent strong free cash flow driven by our high-performing operating model. Over the past five years, cash flow has grown at a 20% compound annual growth rate, above the 16% revenue compound annual growth rate over the same period. This growth, coupled with resiliency across business cycles, helps enable a comprehensive capital return strategy that features double-digit dividend growth and share repurchases to support long-term shareholder value creation. Turning to the outlook, the industry outlook for 2026 has strengthened over the past few months. We expect the core WFE market to grow in the high single to low double digits, reaching the low $120 billion range, up from approximately $110 billion in 2025. In addition, we expect the advanced packaging component of the market to grow at a similar rate to approximately $12 billion, for a total market forecast in the mid-$130 billion range, an increase in the low double digits versus our forecast for 2025. The customer spending profile is expected to broaden across all major end markets. Given KLA's strong business momentum, expanding market share, and higher process control intensity at the leading edge across all segments, we begin 2026 well-positioned to outperform and increase our share of the overall market. We are experiencing strong customer momentum that has accelerated over the past three months, as reflected in our system backlog and sales funnel. Our view today is that 2026 revenue will grow mid-single digits compared to 2025, with accelerating growth in the second half of the calendar year. Customer lead times for our products are increasing due to supply constraints, limiting first-half growth potential across many of our products. KLA's unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps, and ensuring yield entitlement and high-volume manufacturing. The market environment and the complexity of our customers' technology roadmaps are compelling, presenting both challenges and opportunities for KLA to maintain its relative outperformance. In this industry environment, we remain focused on supporting customers, investing for the future, executing product roadmaps, and driving productivity across the enterprise. KLA's March guidance is as follows: Revenue of $3.35 billion, plus or minus $150 million. Foundry logic revenue from semiconductor customers is forecasted to be consistent with the December quarter at approximately 60%. Memory is expected to be approximately 40% of semi-process control systems revenue to semiconductor customers. Within memory, DRAM is expected to be roughly 85%, and NAND the remaining 15%. As always, these business mix approximations pertain solely to our semiconductor customers and do not reflect our total semiconductors process control systems revenue. Gross margin for the quarter is forecasted to be 61.75%, plus or minus one percentage point. Although volume levels are relatively consistent quarter to quarter, product mix is modestly weaker versus the December quarter. This guidance also includes the incremental impact of the rapidly escalating cost of DRAM shifts used in the company's image processing computers that ship with our systems, creating a headwind to our gross margin expectations. This pricing environment has changed profoundly over the past two to three months and has been highlighted regularly in industry press and analyst reports. While we expect this pricing environment to be transitory, current modeling suggests that this situation will persist through 2026 and have a roughly 75 to 100 basis points negative impact on gross margins for the calendar year. As DRAM capacity additions accelerate over the next several quarters, we expect this cost dynamic to improve as we exit the calendar year, and we are modeling a return to a normalized pricing environment for our memory requirements in our longer-term business forecasts. Considering this impact, coupled with product mix and volume expectations, we expect gross margins to be approximately 62%, plus or minus 50 basis points in calendar 2026. Operating expenses are forecast to be approximately $645 million in the March quarter. For 2026, we continue to prioritize next-generation product development and company infrastructure investments to support expected revenue growth over the next several years. And we anticipate these expenses to grow by roughly $15 million sequentially throughout the year. Our business model is designed to deliver 40% to 50% incremental operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense net of approximately $25 million for the March quarter, and expected to remain at this quarterly level for the calendar year. For taxes, our established practice is to provide an effective tax rate assumption for the calendar year when providing guidance for the March quarter. Given expectations of geographic distribution of revenue and profit, pillar two adoption, and recent tax changes in the United States, the planning tax rate for 2026 is 14.5%. We would expect some quarter-to-quarter tax rate variance due to discrete items. For the March quarter, non-GAAP diluted EPS is expected to be $9.8, plus or minus $0.78, and GAAP diluted EPS is expected to be $8.85, plus or minus $0.78. EPS guidance is based on a fully diluted share count of approximately 131.7 million shares. In conclusion, our near-term revenue guidance reflects consistent growth and relative strength. We expect to outperform the market in 2026, driven by multiple tailwinds driving rising process control intensity and growth in advanced packaging. KLA continues to focus on delivering a differentiated product portfolio that addresses customers' technology roadmap requirements and production efficiency objectives, which are driving our longer-term relevance and growth expectations. The KLA operating model guides our best-in-class execution. Our focus on customer success, innovative solutions, and operational excellence drives industry-leading financial performance, enabling us to return capital consistently and predictably. KLA's business is uniquely positioned to capitalize on today's technology inflections and growth drivers. We are encouraged by strengthening customer confidence and engagement, which informs our business forecast. The long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relative performance opportunity for KLA over the next several years. KLA's business has gone from being primarily indexed to leading-edge R&D investment and fab capacity ramp to now addressing all growth phases in WFE and advanced packaging, enabling leading-edge process development, time to results in fab capacity ramps, and optimizing yield in a high-volume production environment. In addition, the growing investment in custom silicon, particularly among hyperscalers developing their own custom chips, has led to a proliferation of new higher-value design starts and increased demand on our customers to deliver performance, volume, and time to market. As the design mix and complexity grow, so does the need for advanced process control. As a result, KLA is seeing consistent growth in process control intensity as each new chip design requires rigorous inspection, metrology, and yield optimization solutions. KLA is uniquely positioned to benefit from these trends as we expand our market leadership and deliver differentiated value to our customers. That concludes our prepared remarks. Kevin, please begin the Q&A. Kevin Kessel: Thank you, Bren. Operator, can you please provide the instructions and begin the Q&A session? Stephanie: Thank you. We'll now take our first question from Vivek Arya with Bank of America Securities. Vivek Arya: Thanks for taking my question. For the first one, your forecast for WFE for this year. Yesterday, your peer reported and suggested that WFE could grow over 20%. I think they said 23%, and you're suggesting something in the high singles to low double. I was hoping you could clarify what is kind of the apples-to-apples inclusion or exclusion? And then part of that, you're suggesting advanced packaging only grows, I think, at that same pace. High single to low double. But that's very surprising given how fast the AI market is growing and just the correlation of that advanced packaging market to AI. So basically, if you could just give us apples-to-apples, you know, why such a big disconnect between your view of WFE growth versus what your peers suggested yesterday? Bren Higgins: Vivek, it's Bren. So I did talk about this a little bit in the letter, but I think one of the issues that has become a little bit noisy over the last couple of years has been the rise of packaging as a market. And the inclusion of it in WFE forecast, and I think you and I talked about this in your conference, back in June, was that, you know, that, you know, who what do people exactly include in these numbers? And it varies a little bit across analysts and across companies. If you look at our forecast, our view on consistent traditional core WFE in 2025 was approximately, and we'll see how people report, but approximately $110 billion. And that the advanced packaging market, we look at it, the total market, is roughly in that $11 billion range. So we'll call it the low one twenties. As we look at 2026, looking at it in the same way, we see advanced packaging growing somewhere in excess of $12 billion. So, you know, it'll probably be in double digits, we'll see. It tends to be a quicker turn business, so we'll see how that plays out. And that core WFE is rising from one ten, as we said, to about one somewhere in the low one twenties. So I think when you add the two together, you end up in the mid one thirties. Which is I think consistent with what Lam said yesterday. But that's how to think about the market. I don't know how they think about it and what they include and what they don't. We try to capture all elements of the market as it relates to process and process control and so that's how we look at it overall. In terms of what happens on the wafer film frame, advanced component, and so on. So that's how we see it. Hopefully that helps. And one of that Rick just to add one part of that, the question on the growth of packaging. We're talking to our customers they are frustrated with the shelves that they have available. So part of what's slowing down the growth this year is their ability to have their factories built to support packaging because of the growth. So that's why we see it more we'll see a lot more growth in '27 as a result that. There is demand, but I think it's a matter of getting the facilities ready, which is a theme generally right now with our customers. So I think on the go forward, we're just gonna aggregate it. And I think maybe that helps. But what I tried to do is provide over the last several months or so some disaggregation disaggregated view of what's traditional core WFE, the same WFE we've looked at over the last multiple decades, and what the advanced packaging market looks like as you add the two together. And you get to the mid 30 one thirties as we look at 2026. Vivek Arya: Okay. And for my follow-up, just kind of two clarifications. One is what's your assumption of China, WFE kind of absolute percentage growth? How much was China WFE as part of that $120 plus billion in your definition kind of all in WFE? How much was China? And then what are your assumptions about what China would do this year? And then how much are your supply constraints limiting your growth? Is there a way to quantify right, how much growth you're kind of leaving on the table because of your where are those supply constraints? And how much are they limiting your growth this year? Thank you. Bren Higgins: All right. There's a lot in there. For China, our expectation is that China is flattish, maybe slightly positive. Modest growth in 2026. It was modestly negative in 2025. For the company, as a percent of as a percent of our revenue, we think it'll be somewhere in the mid 20% to high 20% range. As we look at it. I think if you look at the total China WFE inclusive of the restricted fabs, We see China somewhere in the, we'll call it in the mid maybe mid $30 billion range mid to high $30 billion range in 2026. Vivek Arya: Anything on supply constraints? Bren Higgins: Look, think as it relates to the first half, we're virtually sold out across most of our products. Given the lead time of our products, our decisions that were we're driving in the first half or decisions made in the 2025 generally. As we move into the second half and as we talked about in the prepared remarks we see the second half accelerating versus the first half. We have a little bit more flexibility. But there are constraints in terms of what our customers are asking for. We're seeing our lead times extend. There are facility readiness dynamics that will be play a role in terms of timing of shipments. The one good thing is that given the all the new facility or greenfield visibility we have is it give us pretty good confidence as we look out into 2027 and most of our conversations today about new orders are for deliveries late in '26 and into '27. So, it's it's pretty clear from a visibility point of view we feel pretty good about our ability to ramp the business. I think if you look back to 2022, I think we did a pretty good job in terms of ramping to support a pretty robust environment. And so I think that those practices and our investments and how we manage our supply chain will play through in terms of our ability to satisfy demand as we look out over the next twelve to twenty four months. Vivek Arya: Thank you. Stephanie: Thank you. We'll take our next question from Harlan Sur with JPMorgan. Harlan Sur: Hey, good afternoon. Thanks for taking my question. Your core process control systems business delivered yet another strong year of WFE outperformance. I think it grew 20% versus 2025 WFE of like, plus 10 to 12 within this inspection, outperformed yet again for, like, the third or can't remember fourth consecutive year growing 25% patterning growing 12%, How are you guys thinking about the growth in inspection and patterning relative to WFE view of sort of low teens growth this year? Given the focus on yield and manufacturability, would you expect a similar level or more of outperformance in control for calendar 2026? Richard Wallace: Yeah, Harlan. It's Rick. Thank you. I think recognizing the outperformance, I think we're feeling really good about the trends that we're seeing especially in inspection and especially as they relate to the BB BBP products. And to Bren's point, I think we've been trying to add capacity in that product line. And probably we're going to need it based on our conversations with customers. I think there'll be continued growth and everything about what we're seeing in the build-out for AI, Bren talked about the increased designs, the larger die, And now what we're seeing in HBM, which has become a huge driver In many ways, a bigger story is the change intensity around memory. Has been pretty dramatic in terms of if we look back the last couple years, and they have a heavy usage of advanced inspection to support that. So it's good. I mean, we're looking at a modeling as we go forward and our customers have told us '26 is expansion and setting the stage for even more expansion than '27. And so we think we'll continue to see strong growth associated with that. I think that the capacity I mean metrology is historically a little closer tied to some of the capacity. So we'll see some relative recovery and then reticle is going to be very strong because it's so tied to the number of design starts and the challenges associated with advanced mounts. Bren, am I missing anything? Bren Higgins: Yeah, I think to your question about relative performance, I think despite the more mix related to memory as Rick talked about our performance in HBM is changing the intensity profile. So, we feel pretty good about our ability to sustain multi-year outperformance that we've seen. So I think it's pretty exciting. The portfolio is in a really good place from an overall share point of view and we're seeing intensity rise in a number of a number of markets. We feel pretty good about it. Harlan Sur: Great. Thank you for that. And for my follow-up, it's pretty well understood that on all these new sort of advanced technology transitions, you do need a lot more inspection and metrology capabilities. Right? But on top of that, given the industry's chip supply tightness, your customers are looking to even further squeeze more supply for a given sort of current installed base I'm wondering is this and so their focus you know, just as much on technology transition, but on the existing capacity footprint trying to drive more supply via yield improvements, better manufacturability, I'm wondering if this is also driving incremental demand for your process control solution? Richard Wallace: Yes, certainly. I mean, we have seen in some cases back penetration of technologies once the recognition was that two things have happened in some cases. You know if you go back in time they'd move from one to the next and not really pay much attention to the prior. Now there's more demand at the prior and if they're getting advantages and the capabilities in the latest technology node, we see back penetration to squeeze out, to your point, more yield. Right now because of the constraints and I think if you when we talk to all our customers we hear a common theme is they're constrained by the ability to build new fabs and new shelves. But to your point, they're for the most part, trying to do everything they can, to optimize. And then the pricing environment is such for them that that additional yield is worth And so that's the other factor that's that's driving them. Harlan Sur: Thanks, Rick. Thanks, Bren. Stephanie: Thank you. We'll take our next question from Joe Quatrochi with Wells Fargo. Joe Quatrochi: Yes. Thanks for taking the question. Maybe just kind of understand the supply constraints that you're seeing in the first half. Any way that you can kind of help us understand just what could growth has potentially kind of been first half or second half if you didn't have those supply constraints? And then is it mostly just DRAM? Or is it also other components like optics and things? Bren Higgins: Well, Joe, the biggest long lead time aspect of our build of materials and optical components. So to my earlier point about the lead time for that tends to be pretty long. So that does like I said, we were making decisions last summer that was affecting what we expect to ship in the first half of the year. So that's probably the biggest factor. We don't really look at what we could have done. Certainly in the last few months, we've seen a strengthening from customers for more demand in the first half. And so mean, good thing about our differentiation in our market position is that we can balance pretty well across our customers to make sure that we're trying to meet their needs. At the same time, we're not missing business or losing business. So our lead times are extending. Our customers know that. And so we're managing it accordingly. So I don't but I don't think, you know, I go, oh, I could have done this or could have done that. It's, you know, what can you And so, you know, I think that that's the nature of our conversations with customers and then we look to improve as we can. As we move into 2026, we will see the business accelerate would expect second half to cap high single maybe low double digit type growth. As we move into the second half of the year. Richard Wallace: I think as an industry you have to remember if we moved independently if we could supply everything everybody wanted right away it still would be a limit. There are other factors that limit their ability to ramp these fabs. So our customers when we talk to them are having the same conversation with our peers that they're having with us. Collectively they need all the equipment in order to be able to ramp And so the frustration for a lot of them now is they've got demand and in some cases they don't even have the ability to build the shells as fast as they want. And then fill it out. So to Bren's point, collectively we're all being asked to accelerate equipment delivery, but it's not really because we don't have VBP that we're missing out. It's part of their overall solution. So when we talk to them they really want to prioritize when they get that equipment to be able to facilitate it. But we're not going to lose share because Joe Quatrochi: That's that's helpful. And then as follow-up, just trying to understand like the kind of trajectory of gross margin I mean, it seems like maybe based on the guidance, March is is kind of the bottom and we move higher from here. And anything you can share on just the ability to, like, pass through higher component costs or rep reprice your backlog? Bren Higgins: Yes. So I think you're right. It looks like March is probably the low point for the year as that goes. And as we move across the year we'll see it increment up. We're going to be our first priority as it relates to memory supply is securing supply to ensure that we can meet our delivery commitments and support our customers. That's our primary focus. We'd also would expect that the tariff burden as we progress through 2026 given some of the the process things we're doing within the company will will also diminish in terms of its impact. I talked about a 50 to a 100 basis point impact related to tariffs. We're closer to the top end of that range today. And we'll see that come down I think over time. So as it relates, I thought it was important to give you some sense of it in terms of the expectations for the year. 62% plus or minus 50 basis points. We think the memory situation is transitory And and really as it relates to how we we price our products, it's much more of a a value oriented pricing model and less about cost movement particularly around commodities. So, it's important that we continue to maintain the product cadence that we have in terms of launching new products and variants of new products. And that gives us an opportunity to to enhance our cost of ownership offering to our customers add new capability and also take into consideration some of these dynamics around cost that we've been dealing with for some time starting with some of the pretty significant inflation just a few years ago to this issue today. So that's how we're thinking about it right now. Joe Quatrochi: Helpful. Thank you. Thanks, Joe. Stephanie: Thank you. We'll take our next question from C. J. Muse with Cantor Fitzgerald. C. J. Muse: Apologies. Thank you for taking the question. I guess first question on gross margins. How are you thinking about the progression through the year, given the overall guide of 62%? And then more importantly, I guess, are your thoughts around 2027 and the ability to kind of pass along the higher DRAM cost, which I I don't assume will will go away anytime. Soon. And and I guess as you deliver kind of newer products, what impact would should that have on incremental gross margins into next year? Bren Higgins: Yes. So, over the course of the rest this year, I think that margins look product mix is probably the biggest factor in quarter to quarter variability, but I would expect gross margin to trend north, part of it being our expectations around mix here, but also expected increases in overall volume. So I think that there's some scale benefits that we'll see that will flow through. Over the long run, I feel pretty comfortable with as we talked about our our model that we presented at our last Investor Day of 63% plus type gross margin profile I feel still very good about that. And given the the mix of our business, the the the growth rates of service and so on. So I think as we look into 2027, I would expect to see gross margins continue on kind of an incremental cadence from where they are. And I feel pretty good about 63% plus as we go forward and we see some normalization in some of these cost areas. C. J. Muse: Very helpful. And then I wanted to focus on DRAM. I think your share of wallet historically has been kind of 789%. Depending on the year. But curious now with HBM, particularly as we evolve to HPM4 and 4E, how do you see that share kind of progressing in 2026 and 2027? Thanks so much. Richard Wallace: Sure. I think technologically, there's a lot of reasons to explain why we're seeing higher adoption. One, we talked about before is less redundancy, the value of these devices is higher, so there's a less willingness to give away real estate to redundancy. There's because you got to move so much data in and out, there's more metalization layers which require more inspection. And then there is the increased use of the advanced lithography, which requires an EUV more inspection. So all those things are driving up the intensity of DRAM and it looks much more similar to what logic did not that long ago. So, think all those issues are driving that. And we feel really good about the that going forward as we're engaging with customers and they're seeing the benefits of for many of them, haven't they haven't been employing a lot of process control like this in in most of their working lifetime. So we're seeing them getting used to that in coming to us for more capability. Bren Higgins: I think the other thing is the process variability flexibility in the past depending on end market but something that customers could bend devices and it with high performance compute they don't have the ability to do that. So that's that's driving more rigor around ensuring that each of the devices in the stacks performs pretty tight specs. The demand environment is also driving opportunities in our service businesses customers look to keep these tools up to have maximum uptime to ensure good performance where in the past with redundancy you might see less contract penetration. We think it's a growth opportunity here moving forward given the nature of these devices. Their requirements. C. J. Muse: Thank you, CJ. Stephanie: Thank you. We'll take our next question from Shane Brett with Morgan Stanley. Shane Brett: Thank you for letting me ask a question. My first question, I just wanted to follow-up on CJ's question earlier, but you've previously talked about DRAM process control intensity increasing 100 basis points with EUV. Another 100 basis points with HBM. But is there a world in which DRAM process control intensity just really gets close to advanced logic? Thank you. Richard Wallace: Well, it's still a ways away from advanced logic given the high mix of designs. And so that's I think, the biggest issue that you see in advanced logic that's that's different than than memory. So we're pretty encouraged by what we're seeing. We'll see how this plays out with with more EUV layers, and so on in DRAM devices. So we think that it's just the the the market requirements are driving more inspection, more metrology, and we think that will be a positive trend. Not sure I'm ready to commit to to something that that looks like advanced logic given the nature of those devices and and and the the differences in a logic fab versus memory. Shane Brett: Got it. And my follow-up is on foundry logic. So you've called out a broadening of foundry customers over the last year. And it's clearly materializing with your customers CapEx announcements. But you talk about the process control intensity at these customers? And just how good can leading edge logic for you be this year? Thank you. Richard Wallace: I'll start and then let Vern fill in. We are seeing the broadening We're definitely seeing the intensity I think to Bren's point, there's a couple of factors that you have to look at. Maybe three really. One is the technology node, and big factor is die size. And then another one is the mix. And and so if you have a a company that's doing advanced logic, but they're not on large die and they're not high mix, that intensity is just not going to be as high. If you have somebody that's doing all three. But it's higher than it's been, and in order to be competitive, they're increasing it. So we kind of model that going forward, and that's and we'll lay this out in a lot more detail when we look at our 2030 conversation at the Analyst Day. But we are seeing it going up for this year. And there's when we talk to our customers, in advanced logic, even they are talking about it depends. It depends on if they get more customers, it depends on how much more capacity they need. Their investments will follow based on that. So it's a little hard for us judge what that's going to end up being. Thank you. Shane Brett: You, Shane. Stephanie: Thank you. We'll take our next question from Timothy Arcuri with UBS. Timothy Arcuri: Good single digits half on half versus the back half of last year. I think you made a comment answering a question about high single digits of Bren Higgins: Yep. Timothy Arcuri: Tim, do you mind starting over? I think when you began your question, you were kind of, like, right in the middle, so we didn't pick up the start of the question. I didn't want you to finish and then have to do it again. Timothy Arcuri: You don't mind. Perfect. Okay. Okay. Perfect. So, Brent, we know you said the first half of this year, is gonna be at mid singles versus the back half of last year. So so we know what June is. June's, like, three six and change. I think in answering a question, you said high singles to low doubles. And I think you meant the back half of the year. Is that a half on half comment? Because that would sort of imply that this calendar back half would be something like $7.5 billion. And I like I asked because that's not up that much versus the 3.6 that you're saying for June. Bren Higgins: Tim, yes. So there was a half to half statement I said. So we'll see how it plays out, right? I'm not going going to guide specifically with more detail. I tried to give you a sense of this our expectations of growth in the second half of the year. And, you know, I think it's, you know, likely in that, you know, that sort of high single low double range. For now. So we'll see how things play out as we move forward. Timothy Arcuri: Okay. And then advanced packaging, I think unless I I looked back through the transcripts, I saw last quarter on the October call, I thought the expectation was that the advanced packaging market this year would grow more than 20%. And now I think you're saying mid to high teens. Did the market downtick, or did stuff pull in? Or, you know, maybe I'm just parsing numbers, but I'm just kinda wondering if, something changed. Thanks. Bren Higgins: No. We're pretty encouraged by what we're seeing in the market. It It's not a large market, so the percentages can can move around a fair amount. We're very encouraged by what we're seeing from a a share point of view across the market. So we'll see. I tried to provide some context. Think it's it's likely in that we'll call it 10% to 20% range. And so that's why we said what we said. What's interesting about our process control position in that market, if you go back 2021 and process control, we were roughly 10% of that market. That overall market was what I call the rounding error in terms of how you thought about WFE. Now as you look at the size of the market, and the opportunity that's there, it is now becoming part of what's called what I think is the core overall equipment market. Our share was down in the 10% range think when you look at 2025, close to half the market and share. And I think in 2026 we feel pretty good about our prospects moving forward. So it's a great opportunity There's a lot of advancements that's happening there. Sampling, rates are high. So we have a broader portfolio that we think customers will start to leverage more as we move forward. So it's a pretty I think exciting market and we have great drivers within what I call traditional WFE, and we have this evolving SAM that we think will augment our growth here moving forward. Timothy Arcuri: Okay. Thanks, Ben. Stephanie: Thank you. We'll take our next question from Chris Caso with Wolfe Research. Chris Caso: Yes. Thank you. I guess first question would be characterizing the relative growth of memory versus foundry logic for this year. And I recognize that a lot of that probably has to do with clean room space constraints as you said. But what do you how do you think it shapes up for this year and then particularly in the second half of the year as some of the revenue starts to improve? Bren Higgins: Well, we think that certainly the DRAM part of the market will grow faster than foundry logic will grow. It's driven mostly by the demands for HBM but also as we talked about the challenges in conventional memory as well. So the way we're modeling is you know we think overall foundry logic is a 10% to 15% for the year from a WFE point of view. And that the DRAM part of the market is probably 15% to 20%. Versus last year. Flash, a little harder to pin. I think it's slower than DRAM. It's off a lower it's it's a lower base, so, you know, lower number. But I I think the biggest, at least from our point of view, I mean, certainly, biggest drivers for the for WFE this year and from a growth point of view overall is what's happening in advanced logic and what we're seeing in the DRAM market. Chris Caso: Thank you. As a follow-up, think you've talked about 12% to 14% kind of normalized service growth. Given the rising utilization rates, the fact that the folks are a bit tight now, how does that affect the service growth for both '26 and as you kind of start into '27? Bren Higgins: Well, there's a number of factors that are driving gross certainly to your point, I mean higher utilizations. I mean our tools tend to to stay very well utilized no matter where customer overall utilizations are because it's the best way to manage capital even in downturns is to drive yield. So our customers in terms of how they buy our systems is they they buy them, they run them at very high uptime, And the value is in the performance of the systems and matching performance in terms of information on defectivity and metrology and so on. So, the growth expectations of the growing install base this install base living longer, Opportunities for work where things are tighter in the market opportunities around memory, as I talked about earlier, opportunities in packaging. And then growing streams in our acquired businesses where we think we can leverage the infrastructure of KLA to drive drive revenue growth and service out of acquired businesses. Those are all our our vectors for growth here moving forward. So we feel very confident about the 12% to 14% go forward target model for service revenue and I think there are a lot of drivers that suggest we can operate at the higher end of the range versus the lower. Over time. Chris Caso: Thank you. Thank you, Chris. Stephanie: Thank you. We'll take our next question from James Schneider with Goldman Sachs. James Schneider: Thanks. Good afternoon and thanks for taking my question. I was wondering if you could maybe provide a little bit more precision following on the last question. Do you expect that I mean, you expect DRAM to be stronger in the short term, but do you expect the growth in foundry logic to actually expand substantially into the back half of the year such that growth those growth rates would be closer to matched or not? I'm just trying to think about how that plays out in terms of process control intensity for you over the course of this year? Thank you. Bren Higgins: Yes. So I can't comment exactly on where the overall industry levels will be. I mean, certainly as it relates to KLA's business, would expect the foundry logic part of our business to be kind of stronger in the second half. Than the first half right now. But it is I think it's pretty fluid and there's I think kind of consistent growth expectations half to half across both segments. Richard Wallace: Well, and we know from public comments some of our customers have made they are definitely facility constrained. Right? So their ability to ramp I'm sure they're going to do everything they can to pull that in, but I think we're going see in the foundry logic space you know, setup for 27 is pretty remarkable. We'll see more I think late in '26 as they have the opportunity. But they're 's a lot of discussions already about preparing us the equipment supply companies for '27. James Schneider: That's helpful. And then maybe as a follow-up, relative to the China market, you outlined your expectations for WFE growth there. But I'm wondering in terms of your competitive landscape, you have a very, very strong portfolio sort of across the board in your your product space. Have you heard any kind of incremental interest from your customers in China or from the government in terms of promoting more onshore solutions there? Thank you. Richard Wallace: Well, I think that know, to the degree where we can compete, we continue to offer capabilities that our customers want. I think biggest constraint we have and the biggest challenge we have sometimes in China is when we're not permitted to sell but alternative non US companies are permitted to sell to the same And those are conversations we've had with the government We're not going to opine on those decisions overall, which companies are on that list. In terms of competition from China, I think the there's been more progress made quite a bit more in the process tools than there has been in either lithography or in process control, partly largely because of the technology required to do that. So we feel pretty good about competing anywhere in the world including China and we push for in the cases where we've had some unfair disadvantages, we just want a level playing field as it pertains to actions taken by the government. James Schneider: Thank you. Stephanie: Thank you. We'll take our next question from Krish Sankar with TD Robert Burns: Hi. This is Robert Burns on the line for Krish. Thank you for taking my questions. I know you've talked a good amount on some of the previous questions. But, just in terms of these capacity constraints, are there any areas of the market that are larger pain points in your ability to ship tools to? And, any areas where potentially you could be constrained, and would need more capacity once, foundry and logic takes off, more in in, calendar year '27. Richard Wallace: I mean, if you think about this is Rick. If you think about our portfolio we by and large ship the same products same kind of products for advanced technologies whether it's memory or foundry logic. So not like we're constrained on a to support the memory guys or the logic guys. It it's it's more the thing Brent talked about where optics is an example where you only have so much capacity over time and you can you can add it, but you can't add it quickly because it takes a lot of work to to increase number of the output of very complex optics. So it's more product specific to our products than it is customer specific. And I guess the only other thing I'd add to that is what's driving the mark today is really leading edge demand. And so it isn't like we when we went through 2023 and 2024 with more legacy products where you had a broader mix of products, what customers want today are leading edge solutions. And so that's that's where where most of the focus is. Robert Burns: Got it. Thank you. And then your DRAM shipments were particularly strong this quarter. I think you had mentioned in the last call, you expected them to be up. But were there any shifts in your view over the quarter? And what sort of demand visibility do you have into that market for this year? Bren Higgins: Yeah. As as we said earlier, I mean, certainly over the last few months, we've seen fundamentals of overall equipment spending strengthen and certainly a desire by our customers to get tools sooner rather than later. So we've tried to manage our way around that and and the demand is is broad based. So I would say that overall demand has strengthened in last few months in that part of the market. The whole part of all markets frankly. Robert Burns: Got it. Thank you. Stephanie: Thank you. We'll take our next question from Stacy Rasgon with Bernstein Research. Stacy Rasgon: Hi, guys. Thanks for taking my questions. My first one, I want to ask Tim's question a slightly different way. So you gave the guidance for the first half, which kind of gives me June. And again, if I'm modeling, said high single to low double. The second half would be up you know, call it 10%. That would put us my math suggests that kinda total revenue is up I don't know, 12, 13%, which is about what you're suggesting the whole WP market is growing. So like, I you you said you're gaining share, so why wouldn't that number be be higher? Like, where is the share gains? Given that half over half in the second half that you're talking about? Bren Higgins: Well, so Stacy, I mean, part of this is is the blended numbers, right? So you're getting that when we talk about share gain overall, we're looking at our our semiconductor process control business in terms of its relative performance against total equipment market. So there is that. Again, I I I allow that allow you to do the work. I'm not gonna I'm not gonna guide the full year to to that level of precision. I will say that we feel very good about our ability to grow, grow faster than than than the market. And, you know, you've got service element, you've got our non-semi elements that are you know, are also factors in our growth rate. Stacy Rasgon: Okay. Because, I mean, services is growing about that much as well. You said 12 to 14%, and I just I just feel like that that half over half, and maybe there's just conservatism built into but it feels like like I said, call it 10% or whatever, feels light. Anyways, So my second question, just around China, The last time you reported it was after the affiliate rule been put in place and before it was taken off. What are your thoughts on, I guess, recovery of that revenue? And, like, how does that bake in to your thoughts on China revenue next year? Because I to my mind, like, you're I don't know if your China guidance for next year now is higher than it was last quarter or not, but presumably some of that affiliate revenue should be coming back? Bren Higgins: Yeah. I I would have Yeah. I think that three months ago, we thought China would be, you know, modestly down and now I think it's it's going to be up for us. This year. So that business has come back in and feathered through within our forecast. And some of the commentary we provided here. Stacy Rasgon: And how much was that again? Was I can't remember. $3.3 billion or 350? I can't remember. Bren Higgins: Yeah. In that ballpark, I mean, some service elements, but yeah. That ballpark. Stacy Rasgon: Got it. Okay, that's helpful. Thank you, guys. Stephanie: You. We do have time for one additional questioner. We'll take our final question from Tom O'Malley with Barclays. Tom O'Malley: Hey, guys. Thanks for taking my question. As I look out you talk about more share gains. Where should I be paying attention Is that more on the leading edge foundry logic side? Is that more in the advanced packaging side? Just because to Stacy's question, right, you're talking about a core WP that you're growing in line with, maybe you're being a conservative to start the year and end up beating that as we go along. But I would imagine if you include advanced packaging as well, that's an area where you had a lot of strength. So imagine that would accelerate the growth rate. Maybe explain where you're seeing those share gains? Is it more so on the AP side or on the leading edge foundry logic side? Bren Higgins: Well, we're certainly seeing share gains in as I talked about earlier. I think there's a lot of positive momentum there. I think we've we've done extremely well with logic and I think there's a lot of momentum on the memory side. As it relates to the overall business, I wouldn't say our share is pretty consistent. Across the different segments. I mean, so it really comes down to our products. Reticle inspections had a really strong year. We think that that's part of the markets inflecting. We're doing pretty well there. We see some positive momentum in our electron beam businesses. And so we think that that's a positive here moving forward as well. So I think between happening in packaging, what's happening in e beam, what's happening in reticle, and our our largest, you know, businesses like our broadband plasma business or high end pattern inspection It's a market that's growing faster and we have a strong share. So we'll influence the overall share numbers just because of the relative growth rate of that segment versus other parts of the market. So those are the areas we feel pretty good about our share position here in 2025. In terms of gaining share and we think that we'll continue to increment what is that it was a really strong share position we'll continue to increment here moving forward given the nature of the portfolio and our ability to compete meeting customers technical requirements and their cost requirements being able to leverage the network effect across the systems. So we think that that is enhances our competitive offerings and positions us well here moving forward from a share point of view. Tom O'Malley: Super helpful. And if I may, just a really quick follow-up. Your competitor talked about the different vectors of market growth into their guidance for WFE in 2026 and said, foundry logic, good growth DRAM, good growth, but NAND a bit below that. I was curious if you agree with that assessment when you look at the broader market. And then obviously, you're hearing some NAND guys report tonight maybe talking a bit more aggressively about spend. Do you think that as this year goes along, maybe that view can change if you see an acceleration a bit more quickly on the NAND side from a technology transition perspective or some greenfield I know it's a smaller business for you, but interested in your thoughts. Richard Wallace: I think the challenge given the constraints in the industry around how much can actually be supplied, any new demand that's showing up today, as I said earlier, in terms of our conversations with customers, is more about 27 deliveries. Also, they're not a competitor. They're a peer. We have enough competitors. Thank you. Bren Higgins: Thanks, Tom. Kevin Kessel: Thank you, Tom. All right. I wanted just to thank everyone for time. I know it's a very busy earnings season and a very busy earnings day. We look forward to seeing hopefully many of you at our Investor Day in New York on March 12. And with that, I'll turn it back the operator for any final instructions. Stephanie: Thank you. This concludes the KLA Corporation December Quarter 2025 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.
Andrew Angus: Good morning. My name is Andrew Angus. I look after Investor Relations for Fluence Corporation. Welcome to the Fluence Corporation Q4 FY 2025 Quarterly Results. With me today are Ben Fash, CEO and Managing Director; and Osvaldo Llanes, CFO. Ben, over to you. Benjamin Fash: Yes. Thank you, Andrew. Good morning, everyone. As Andrew said, my name is Ben Fash, CEO of Fluence. And I'd like to welcome everyone today to our Q4 and fiscal 2025 business and financial update. As always, thank you for your time today and your interest in Fluence. With me, I'm pleased to introduce Fluence's new CFO, Osvaldo Llanes. At this time, I would like to give Ozzie a moment to introduce himself as this is his first quarterly business update, and then I will be providing an update on our business activities for the fourth quarter and fiscal 2025. Ozzie, the floor is yours. Osvaldo Llanes: Sure. Thanks, Ben. Good day, everyone. I'm Ozzie Llanes. A little bit about myself. I spent most of my career in senior finance leadership roles, partnering with management teams and boards to support profitable growth, capital allocation and cash flow discipline. A significant part of that experience has been in the global water industry, working with project-driven businesses and recurring service models. Water is also important to me personally. It's a sector defined by long-term demand and reliability, where the work we do has a tangible impact on our communities and customers and where strong financial stewardship is critical to delivering sustainable outcomes. That combination is what attracted me to Fluence. I'm excited to be here, and I look forward to supporting the team as we continue our journey to execute and create value for our shareholders. Back to you, Ben. Benjamin Fash: Thank you, Ozzie. Three years ago, I sat in front of all of you as the newly minted CFO of Fluence, knowing that we had a challenge in front of us to turn this business around. I believe Tom compared it to turning around an aircraft carrier. Fluence was always a business that had tremendous potential, an undeniably strong portfolio of water and wastewater treatment products and technologies that also had a unique geographic footprint and operated in some of the highest growth regions in the world. Yet the company was never able to turn that potential into results. I believe Q4 2025 shows that, that aircraft carrier has finally been turned around and the financial results reflect the progress that we have made as a company. You may recall that in fiscal 2023, we decided to make a strategic shift and realign the Fluence business to focus on our SPS and Recurring Revenue products through 4 core business units, as shown here. In fiscal 2022, SPS and Recurring Revenue represented only 38% of our total revenue. Fiscal 2025, that number is now 65%. Further, our gross margins have grown from 23.9% in fiscal 2022 to 29.9% this year, and we expect that, that will continue to expand. Our realignment also allowed us to rationalize and cut SG&A costs by approximately 25% in fiscal [Technical Difficulty]. We also determined that Fluence needed to operate like the global company that it was, leveraging our existing enviable geographic footprint as well as focus on growing its presence in North America. Our One Fluence approach initially led to a significantly expanded sales pipeline, which is now converting into record SPS and Recurring Revenue orders. Our core business units started selling into new markets to them, but they were existing markets for Fluence overall. Today, our global teams are now regularly working together to secure and execute orders that cross borders and product lines, and that is leading to expanded growth opportunities. We've built a strong, experienced global management team that is laser-focused on execution, improving cash flow, contract management, controls and costs, all of which helped to lead to the strong results in Q4 in fiscal 2025 that we are delivering today. I will leave you with this before launching into the financial results. While the job is not done, I truly believe that Q4 2025 represents an inflection point in the business and that Fluence has moved beyond many of the historical challenges it has faced to embrace the potential and take advantage of the growth opportunities that lie ahead. With that, I will turn to our results. Following a strong Q3, Q4 did not disappoint and delivered even stronger results consistent with our forecast. The combination of double-digit growth in SPS and Recurring Revenue, progress on the Ivory Coast Addendum project that contributed meaningfully to revenue, continued expansion of gross margins and strong cost controls resulted in Fluence delivering fiscal 2025 EBITDA of $4.0 million on revenue of $78.4 million, meeting the midpoint of its EBITDA guidance. As noted, fiscal 2025 revenue was $78.4 million, which was $26.9 million or 52% higher than fiscal 2024. Q4 itself contributed $26.0 million in revenue, which was 22% higher than Q4 of 2024. SPS plus Recurring Revenue continued to show healthy growth of 15% compared to the prior year. However, contributions from the Ivory Coast Addendum were the largest contributor to the increase as revenue from that project was $20.4 million higher than fiscal 2024. The growth achieved in our SPS and Recurring Revenue products and services is having the intended effect of improving gross margins. Those margins finished in fiscal 2025 at 29.9%, which was flat compared to 2024. That in spite of the fact that we had significantly more revenue contribution from the lower-margin Ivory Coast Addendum project. This was really a result of strong execution by our teams and outperformance of bid margins on projects across our core business units, with all the Southeast Asia and China delivering meaningful increases in gross margin. More specifically, Municipal, Industrial Water & Reuse and Industrial Wastewater & Biogas all exceeded gross margins in fiscal 2025 by an average of more than 6% compared to the prior year. As a result of the revenue growth and margin expansion in our SPS and Recurring Revenue segments, EBITDA was $4 million, as we noted earlier, which was a dramatic increase of $8 million compared to the loss of $4 million in 2024. And all business units saw EBITDA increases in fiscal 2025, which we were the most proud of. Just to run through a few, the Ivory Coast Addendum contributed $3.4 million of EBITDA compared to $0.2 million in 2024. Industrial Wastewater & Biogas saw an EBITDA increase of $1.8 million based exclusively on revenue growth of $5.0 million as well as gross margin improvements. Municipal Water & Wastewater saw revenue and EBITDA growth of $1.4 million and $0.9 million, respectively. Southeast Asia and China revenue growth was $2.8 million in fiscal 2025, and it was able to reduce its EBITDA loss by almost $1 million compared to 2024. Industrial Water & Reuse saw an EBITDA increase of about $0.5 million, and that despite modestly lower revenue, but driven by significantly higher gross margins from positive project variances. And lastly, we were able to achieve corporate cost savings of about $0.5 million that also contributed positively EBITDA. On the cash flow side, the company had another strong quarter. Fluence ended the year with $16.6 million in cash and $4.1 million in security deposits. Operating cash flow in Q4 and fiscal 2025 was $3.8 million and $10.9 million, respectively. This is certainly higher than forecasted, and it was due to a number of Ivory Coast payables not getting settled prior to year-end. As a result, the company anticipates negative operating cash flow in Q1 2026, but forecasts resuming the trend of positive cash flow in Q2 through Q4 of 2026. It's also notable that Fluence repaid $2.5 million in debt during fiscal 2025 as a result of that strong cash flow generated by the business. And here's another good story. New orders in Q4 2025 were $24.5 million, which is an increase of $15 million or almost 158% compared to Q4 of last year. More importantly, I check back in the records, and we believe that this was Fluence's largest order quarter on record for SPS and Recurring Revenue. For fiscal 2025 overall, new orders were $64.2 million, which was an increase of $14.2 million or 28.5%. Municipal North America and Industrial Wastewater & Biogas certainly led the way with increases of 98% and 76%, respectively. Backlog closed the year at just under $75 million, of which approximately $53 million is forecasted to be recognized in fiscal 2026. The core business units of Municipal Water & Wastewater, Industrial Water & Reuse, Industrial Wastewater & Biogas in Southeast Asia and China saw an increase in backlog of $14.8 million or well over 40%. Combined with our expectations for Recurring Revenue, this gives us a very strong foundation for growth in fiscal 2026. Given the strong performance and positive momentum of the company, Fluence will not be issuing discrete guidance for fiscal 2026. Nevertheless, the company expects double-digit revenue growth even with the significant reduction in revenue from the Ivory Coast Addendum project, driven by continued momentum in SPS and Recurring Revenue segments in our core markets. Additionally, we expect continued expansion of gross margins, all of which will contribute to strong growth in EBITDA and EBITDA margins. I also want to give a brief update on the Ivory Coast project given its contribution to the company in 2025 and beyond. Through Q4 of 2025, the company continued to make progress on the addendum works. A number of activities were advanced around road construction, earthworks and drainage works. Pipeline installation has progressed to approximately 2.2 kilometers. Overall, the Addendum Works are progressing well through Q4 and revenue was in line with our forecast for the year. The project is expected to be completed in Q3 2026 with no significant deviations at this time from budget. As noted in prior updates, the Addendum Works are critical for connecting the Main Works water treatment plant to the broader distribution system, enabling treated water to reach the population of Abidjan. Fluence continues to pursue a long-term O&M contract for the plant and preliminary steps have been taken, negotiations are expected to begin soon after the technical proposal and business plan, which we have provided are reviewed by the government. Fluence is currently maintaining the plant on an interim basis, which positions us very well to be awarded the long-term O&M contract. And on the cash flow side, as of December 31, 2025, the company has collected 6 milestone payments under the Addendum contract totaling EUR 35.4 million or approximately 73% of the total payments. I also wanted to provide several additional updates on the business, including developments in our Egypt business and enhancements made to our executive management team. Just a little bit of background on Egypt itself. IWS was established in 2018 as a joint venture with several Egyptian partners, whereby Fluence was and remains the 75% majority owner and leads the business operationally. Minority partners were set up to support project acquisition, government relations and operational support where required. Since 2018, IWS has successfully executed a number of municipal and industrial water treatment projects, including the $20 million New Mansoura water treatment plant that was commissioned in 2023. IWS continues to support the New Mansoura project through an ongoing O&M contract. Unfortunately, despite efforts of local and executive management, IWS has not been fully successful in collecting outstanding amounts owing on accounts receivable across a number of accounts, most notably at New Mansoura water treatment plant. And the accounts receivable remain substantially in arrears despite the plant being operational for more than 2 years. Fluence's minority partners have provided limited support with local and national government support to support collections. As a result, Fluence has determined at this time that it is necessary to take a reserve of $4.5 million of accounts receivable at IWS. This reserve will be taken as an extraordinary item in other losses and is not expected to impact cash flow as management has not been forecasting collections from these accounts for some time. However, we will continue to take all actions available to us to collect those amounts owing. Fluence management continues to review the future of the IWS operations, including the attractiveness of the market opportunity relative to other markets where Fluence operates. Fluence is considering all available alternatives for the IWS business. Now a few updates on enhancements made to our executive management team. Earlier, you met our new CFO, Ozzie Llanes, who started with Fluence in December. We're very fortunate to have been able to attract such an experienced finance executive that brings very relevant industry experience with him from his time at Xylem. Ozzie will work directly with me to drive capital efficiency, Investor Relations and the integration of global financial processes to support Fluence's long-term growth and profitability objectives. Additionally, we bolstered our business unit leadership group when Anda Cao joined us in December. Anda brings significant water industry leadership experience from his time at De Nora, Xylem and Energia with a focus on delivering sustainable double-digit growth through operational excellence and driving a performance-driven culture, which fits perfectly with Fluence's strategy. Rick Cisterna and Spencer Smith are also taking on refined and expanded roles within the business as Chief Growth Officer and Chief Talent and Legal Officer, respectively. Rick's key areas of focus will be global key account management, rep and agent management, marketing and ensuring consistent reporting and incentives for our global sales team. We will also be responsible for establishing a global water services business unit. We'll be focused on driving growth of operations and maintenance, parts and consumables, build-own-operate and rental service models across all Fluence's product lines and geographies. And he will also take ownership of the Ivory Coast project as we look to transition it from a CES project to a long-term O&M project. Spencer will now be responsible for defining and driving Fluence's global people and culture strategy in addition to responsibility for legal affairs, compliance and risk management. This role will be a strategic enabler of growth through leadership development, organizational design, talent acquisition, training and total rewards to ensure that Fluence attracts, develops and retains the best global talent in the water industry while fostering a One Fluence approach across all our regions. Lastly, I'd be remiss if I didn't express my sincere gratitude to Tom Pokorsky, Fluence's recently retired CEO. Tom's extraordinary leadership was on full display during his time with Fluence, and he helped set the foundation from which we can now grow responsibly and profitably. He will remain on as a trusted adviser to the company and to the Board, and we will lean on his tremendous experience on a regular basis. However, we will try to allow him to enjoy his well-earned retirement after a pretty remarkable 50-year career in the water industry. To conclude, the strength of Fluence's Q4 and fiscal 2025 results demonstrate the progress that the company has made over the past few years. More importantly, while delivering a strong year was a critical step in demonstrating the revised strategy has gained traction, record orders in Q4 and a strong backlog have positioned us for an even stronger fiscal 2026. Combined with expanding gross margins, a lower cost base and better cash management practices, management is optimistic about the ability to build sustained profitability and positive cash flow into 2026 and beyond. At this time, I think we can open it up for questions from webcast participants. Thank you again for your time and your continued interest in Fluence. Benjamin Fash: So I will read out some of these questions and try to answer them as best I can. A question came in. As Applegreen is the only USA project mentioned in the recent wins, could you elaborate more on Applegreen and if there is further significance to this win? Nothing really further to elaborate on the Applegreen win. We continue to make progress as we've discussed in our organic growth strategy in Municipal USA. It was one of the stronger growth areas in terms of orders in fiscal 2025, as mentioned, with growth -- order growth of almost 100%. So we continue to make progress, and this is just another example of that. Congratulations on the Q4 results. This is just a comment on the result with Q4 EBITDA at $2.6 million and a contribution from IVC at $800,000. Does this show that we are now positive EBITDA even without the contribution from Ivory Coast? I think that's a really good question. And the answer is yes. If you look at the entirety of the year as well as in Q4, what we demonstrated was profitability even without the contribution of the Ivory Coast Addendum project. The growth -- that has really come from the growth in our SPS and Recurring Revenue from our core business units and expanded gross margins combined with a lower cost base, all of which has really contributed to a business that can and will be profitable even in the absence of the Ivory Coast Addendum project as we demonstrated in 2025. There's a question on Fluence's operating -- the plant -- the Ivory Coast plant on an interim basis. What is the ongoing revenue from this on an interim basis? At this moment in time, there has not been any revenue recognized on the interim maintenance work that has been done. We have been incurring costs through this period. We have a commitment from the client -- from the government to be reimbursed at standard market rates during -- for the maintenance work that's been done during that period. But during fiscal 2025, we did not recognize revenue as we did not have a contract in place. Question to clarify, the company expects double-digit growth on total revenue of $78 million. The answer is yes. Are we expecting more legacy write-downs in addition to IWS? Will PDVSA be any issues? So those are 2 very different questions. We do believe that IWS likely represents the -- I'll say, the last of the major legacy write-downs. We don't expect any additional ones from existing operations at this moment in time. PDVSA is a different issue altogether and obviously has become -- brought back into the limelight with the current geopolitical situation with Venezuela. At this moment in time, there has been nothing that has changed with regard to the sanctions environment and OFAC and their position on our ability to negotiate with PDVSA. So at this moment in time, there are no changes to that situation and none envisioned at this moment in time until there's more clarity provided. You have target EBITDA margin for 2026, noting your medium-term targets are noted at 10%? We are not providing specific EBITDA margin guidance at this time. Any update on the rental division? This is a good question. We are working diligently on building out our rental strategy. There'll be more updates that we can provide through the course of 2026, but there are no specific or material updates that we need to share at this moment in time. Any traction on Dow City, MABR pilot with regards to approval from the Iowa DNR. No specific updates on that other than we are leveraging that pilot and have been able to generate some opportunities around that in the Iowa area. So Iowa has sort of become one of the states that we have now put on our approved list to be able to market and develop new business. There's a question around -- there's a lot of discussion around the water usage by data centers under construction. Is this an area of interest or opportunity for Fluence? This is an excellent question. And obviously, there is a lot of buzz around AI and the water needs for data centers. And I would say both directly and indirectly, we are interested in this market and are tracking it very closely. However, what I would say is in the early days right now, the biggest opportunity that we see available to us is actually in the power generation market. You've seen that through several recent orders over the past 12 to 18 months in areas like Saudi Arabia, South America, where power generation is becoming the, I would say, the leading edge of that AI boom. The demand for power is actually going to be what leads the way, I think, in the AI build-out. And those power plants require significant amounts of water. In fact, significantly more water treatment required in those power plants than in the AI data centers themselves. There are some questions around how -- what the water need truly is in these AI data centers. There's some good research that's been -- that's come out recently on the true water requirements, which we are evaluating and have numerous commercial discussions ongoing. But I'd say where we're having some early success right now, where we're seeing the most growth is actually in the power generation market, which is kind of following on those -- the AI growth boom that we are seeing. Okay. There were a couple of questions on that around data centers. So I believe I've answered that, and there were a few other questions on guidance for fiscal 2026, which I believe I've answered. So I think at this time, I don't see any additional questions coming in. So I think at this time, we will move to conclude the Q&A and the presentation at this time. I truly appreciate your interest and tuning in, as always. If you do have any additional questions, please feel free to send them along to Andrew Angus, and we will do our best to address them. Thank you, and have a great day.
Operator: Good morning. This is Laura, welcoming you to ING's 4Q 2025 Conference Call. Before handing this conference call over to Steven van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Steven. Over to you. Steven van Rijswijk: Thank you very much, operator. Good morning, and welcome to our results call for the fourth quarter of 2025. I hope you're all well, and thank you for joining us today. As usual, I'm joined by our CRO, Ljiljana Cortan; and our CFO, Tanate Phutrakul. And today, I'm proud to walk you through another year of outstanding commercial growth and financial performance driven by [audio gap] and I will also share our updated and upgraded outlook for 2027, which further underlines the strength and resilience of our business. After that, Tanate will give you more insight into our income and cost expectations for 2026 and present the quarterly financials. And as always, we will be happy to take your questions at the end of the call. And with that, let's now move to Slide 2. This slide highlights the continued commercial momentum we saw in the fourth quarter with outstanding growth across all key markets. We added more than 350,000 mobile primary customers during the quarter, bringing total growth for the year to over 1 million, fully in line with the ambitious target we set at our Capital Markets Day. Loan growth was also robust with absolute growth doubling versus the prior year and resulting in an 8.3% increase since the start of the year. In the fourth quarter alone, Retail Banking delivered EUR 10.1 billion in net core lending growth, driven mainly by residential mortgages. Wholesale Banking added EUR 10.3 billion, supported by strong demand in lending and working capital solutions as our clients' financing needs increased. We also saw healthy deposit development. Core deposits rose by EUR 38.1 billion for the full year or 5.5%. In the fourth quarter, Retail Banking contributed EUR 11.3 billion, benefiting from targeted campaigns and normal seasonal inflows and Wholesale Banking recorded a small net outflow, mainly due to lower short-term balances in our cash pooling activities. Fee income also continued the positive trends. For the full year, fees grew by 15%, supported by continued customer growth and increased cross-sell, essentially doing more business with more customers. And the fourth quarter also included a one-off benefit of EUR 66 million. All of this translated into very solid financial results. Our return on equity for 2025 was 13.2%, well above the guidance provided at the start of the year. And finally, we remain fully committed to supporting our clients in their sustainability transitions. Our total sustainability volume mobilized reached EUR 166 billion for the year, representing a 28% increase versus 2024. Now let's move to the next slide to look at how the commercial momentum drove our financial performance. On Slide 3, you can see that commercial NII remained very strong at EUR 15.3 billion. This result was supported by the significant increase in customer balances, both on the lending side and in liabilities. The volume growth largely offset the expected margin normalization. Fee income was also strong, increasing 15% compared to 2024, and they now account for 20% of total income. And this reflects structural drivers such as customer growth and increased cross-sell. Investment products performed particularly well with strong increases across all metrics, the number of customers, assets under management and the number of trades. And taken together, the strong NII and fee performance fueled total income growth, which reached a record level for the third consecutive year. And with that, let's now move to Slide 4. On this slide, we highlight actions taken to strengthen operational leverage, reinforcing our disciplined approach to cost management. We continue to invest in growth and diversification while increasingly leveraging new technologies. We were able to offset these investments by enhanced operational efficiency as the model becomes more scalable. In 2025, for example, we reduced customer friction by increasing the share of customer journeys handled without any manual intervention. We also introduced our chatbot in several retail markets, providing customers with faster and more accurate answers in their questions and resulting in annual savings as a large part of the chats are resolved without any human support. These improvements have contributed to a customer experience that is highly appreciated as reflected in our strong NPS positions across all markets. In retail banking, we maintained our #1 position in 5 out of 10 markets. And in Wholesale Banking, we achieved an NPS of 77, demonstrating both the quality of our client service and the value of our continued investments in expertise and sector knowledge. And our investments in scalability are also translating into higher efficiency, and this is visible in our FTE over customer balances ratio, which has improved by more than 7% since 2023. Then we move to Slide 5, where we show how our robust commercial growth, strong development of total income and proactive cost measures have resulted in strong capital generation. Over the past year, we delivered more than EUR 6.3 billion in net profit, contributing almost 2 percentage points to our CET1 ratio. And of this EUR 6.3 billion, 50% is distributed as a regular cash dividend, offering shareholders an attractive and predictable cash yield. Around 50% of the capital we generated has been used to fund profitable growth across our markets, and this percentage would even have been higher without the steps we took to optimize capital efficiency in Wholesale Banking, such as the 2 SRT transactions completed in November. Finally, we announced additional distributions to a total amount of EUR 3.6 billion, which also helped bring our CET1 ratio closer to our target level. And on the next slide, I will show how these distributions have resulted in a higher, highly attractive shareholder return. And then we move to Slide 6, where we summarize the total distributions to shareholders, and I will build on what I just discussed. In line with the distribution policy, we have consistently paid cash dividends and have been executing share buybacks for several years. Together, these actions have consistently delivered a highly attractive yield, including in 2025, a year in which our share price increased by almost 60%. The share buyback program we announced in November is currently underway and is expected to be completed in April 2026. And in addition, we paid out EUR 500 million in cash earlier in January, which helps us to meet the cash hurdle for this year, now finalized at EUR 3.3 billion. Looking ahead, we remain fully committed to delivering strong shareholder returns, and we will provide an update on our capital planning with our first quarter 2026 results. And now starting on Slide 8, I will guide you through how our strategy continues to accelerate growth, increase impact and deliver value. Now on this slide, I'm talking about Slide 8, we highlight our key strategic priorities supporting our Growing the Difference strategy, building on our successes over the past years. Firstly, we will continue to grow and diversify our income by adding more customers and doing more business with them. And a good example is the further expansion of our investment product offering. We have also introduced a subscription model for retail clients in Romania, and we will roll out this concept in other markets as well, which will help grow income from daily banking services. Our affluent customer base continues to grow rapidly, and we see further growth potential, and we're targeting this with dedicated propositions designed specifically for their needs. We're also stepping up our engagement with younger generations. For example, we introduced new products for Gen Z, including an investment fund focused on improving financial awareness within this group. And in business banking, we successfully launched our propositions in Italy and Germany, where we are seeing strong and ongoing customer growth. And in Wholesale Banking, we are expanding our range of fee-generating capital-light products to support sustainable and diversified revenue growth. Now secondly, we will further improve our operational leverage by scaling processes, people and technology while maintaining strict cost discipline to further utilization and scale of Gen AI will enhance efficiency and will help us to reach our FTE over customer balances target ahead of schedule. Finally, we remain firmly focused on generating strong capital going forward, and our allocation priorities are well defined in that regard. We will maintain an attractive shareholder return supported by a 50% payout policy. Secondly, we will continue to invest in value-accretive growth, diversify income streams as fund the loan book and a capital-efficient way and consider M&A opportunities that meet our criteria. And thirdly, we will return any capital structurally above our CET1 target to shareholders. We will also further increase the capital we allocate to retail banking and optimize the capital usage in the Wholesale Bank and note that we have already increased the capital allocated to retail banking to 54%. And with our strategy, we are confident in our ability to become the best European bank. And with this confidence, we have raised our expectations for the coming years. And then we move to Slide 9. And then I'll present our outlook for '26 and '27. And for 2026, we expect total income of around EUR 24 billion, and this outlook is supported by continued volume growth and an anticipated 5% to 10% increase in fee income. Total operating expenses, excluding internals -- sorry, incidentals are projected to be in the range of EUR 12.6 billion to EUR 12.8 billion. We will continue to manage our CET1 capital ratio at a target of around 13%. And in addition, we will transition from a return on equity metric to return on tangible equity. And for the full year 2026, we expect an ROE of 14% and ROTE to be higher than 14% and note that the delta between the 2 metrics was around 40 basis points, 40 basis points in 2025. Then looking ahead at 2027, we are introducing a new outlook for total income. We now expect it to exceed EUR 25 billion, which is at the upper end of our previous target range. This income number includes a higher fee income outlook, which we now expect to exceed EUR 5 billion in 2027. And we've moved away from the cost/income ratio and instead provide a clear hard outlook for operating expenses, again, excluding incidentals of around EUR 13 billion, 13. And this reinforces our continued focus on cost discipline and operational efficiency. And taken together, this outlook translates into a return on equity of 15% and a return on tangible equity of more than 15%. And now I'll hand over to Tanate, who will give more insight on our outlook for 2026 and who will walk you through the fourth quarter financial results in more detail, starting on Slide 10. Tanate Phutrakul: Thank you, Steven. As this is the last time I'll talk you through these numbers as the CFO of ING, I'm very pleased that I can close on such a strong result and provide you with an upgraded outlook. On Slide 10, let's start with commercial NII, which will benefit from increasing support from the replication portfolio. We also assume continued customer balance growth of around 5% per year, above the guidance that we gave at Capital Markets Day and reflecting the commercial momentum in our franchises. The liability margin is expected to be at the lower end of the 100 and 110 basis point range, while the lending margin is assumed to remain stable compared to the fourth quarter. Fees are expected to grow by a further 5% to 10%, building on the strong performance we achieved in 2025. All other income is expected to be around TRY 2.8 billion, excluding incidental items. This is driven by continued strong performance in financial markets, while in treasury, we expect less income from foreign currency hedging given the current lower interest rate differential between the euro and other currencies such as the U.S. dollar and the Turkish lira. Based on the current rate environment, taking 2024 last quarter as a run rate would be a fair starting point. Taken together, total income is expected to reach around EUR 24 billion in '26. And then on the next page, I'll walk you through the drivers behind the expected cost development. We expect total annual cost to be in the range of EUR 11.6 billion to 11.8 billion, excluding incidental and regulatory costs. The main driver of the increase remains inflationary pressure, which will again predominantly impact staff expenses. We will also continue to make selective investment to support business growth and further improve efficiency, as Steven highlighted earlier. These investment costs will be more than offset by operational efficiencies driven by increased scalability of our processes, people and technology, further utilization and scaling of Gen AI and continued optimization of our footprint. Given the strong income outlook, this modest cost growth results in a positive jaw for the year. Now let's move to the quarterly financials starting on Slide 13. On Slide 13, you can see that our commercial NII increased driven by very strong volume growth and a slightly higher lending margin, while the liability margin remained stable. Fee income continues its upward trend, driven by customer growth and strong performance in investment products and insurance. This is more than offset by lower fee income in wholesale lending. As a reminder, fee income in the fourth quarter included a EUR 66 million one-off in Germany. All other income was supported by continued strong results in financial markets, although seasonally lower compared to the previous quarters. As a whole, total income came in 7% higher than the same period last year. Now moving to Slide 14, where we will show the development of customer balances. As you can see, we delivered another quarter of strong loan growth across both retail and wholesale banking. Net core lending increased by EUR 20 billion. Retail banking contributed EUR 10.1 billion, driven by continued mortgage growth. increases across both business lending and consumer lending portfolios. Wholesale Banking also posted strong growth of AED 10.3 billion, reflecting strong performance in lending and somewhat elevated client demand in working capital solutions. On the liability side, core deposit increased by 9.5 billion. Retail banking drove the bulk of the growth, particularly in the Netherlands, Spain and Poland, which benefited from targeted campaigns and seasonal inflows. Wholesale Banking saw a small net outflow as increased deposit volume in PCM were more than offset by lower short-term balances in our cash pooling business. The other category of deposits were impacted by seasonal reductions in treasury. On Slide 15, you can see that the commercial NII grew by more than EUR 100 million quarter-on-quarter and was almost 5% higher than last year. Lending NII was up EUR 75 million in the fourth quarter, driven by volume growth and a 1 basis point improvement in lending margin to 126 basis points. The liability NII also increased by EUR 30 million, supported by sustained volume growth in retail banking and higher net interest income from our cash pooling business and PCM in Wholesale Banking. Turning to Slide 16. Fee growth remained strong, increasing 22% year-on-year. Excluding the EUR 66 million one-off retail banking fees in Germany, fees grew by 17% compared to last year. This was driven by structural factors such as continued customer growth, significantly higher insurance fees and increase in daily banking fees. Investment products also performed really well across several metrics. For example, 9% growth in customers, 16% growth in assets under management, of which roughly half came from net inflows and 22% more trades. Although wholesale banking fees decreased sequentially, wholesale still delivered a strong quarter, supported by solid results in Financial Markets and Corporate Finance. Slide 17 shows the development of all other income. Income in Financial Market is mostly driven by client activity. We continue to support our clients through volatile market conditions, mostly with foreign exchange and interest rate management. Treasury was impacted by lower results from foreign currency hedging. Next, Slide 18. Expenses, excluding regulatory support growth. The decrease is mainly driven by structural savings from previous restructuring and VAT refunds recognized in the fourth quarter. These effects more than compensated for wage inflation and ongoing investments in customer acquisition and product development, including expanding our offering for new customer segment. Regulatory costs include the annual Dutch bank tax, which is always fully recognized in fourth quarter and then allocated across segments. Incidental item related mostly to restructuring provision for planned FTE reductions in corporate staff and retail banking. Once these are fully implemented, these measures are expected to generate approximately EUR 100 million in annualized cost savings. When excluding these incidental items, we ended the year with expense below the outlook range we provided earlier. Now let's move on to risk costs on the next slide. Total risk costs were EUR 365 million in the quarter, equivalent to 20 basis points of average customer lending. This is in line with our through-the-cycle average. Net addition to Stage 3 provision amounts to EUR 389 million, mainly driven by individual Stage 3 provisioning for a number of new and existing funds in the wholesale bank. This was partly offset by releases of existing provision due to repayments, secondary market sales and structural improvements. As a result, the Stage 3 ratio increased slightly. For Stage 1 and Stage 2, we recorded a net release of $24 million, reflecting a partial release of management overlays and updated macroeconomic forecast. Overall, we remain confident in the strength and quality of our loan book. On Slide 20, we show the development of our core Tier 1 ratio, which declined compared to last quarter. Core Tier 1 decreased, reflecting the 1.6 billion distribution that was partly offset by the inclusion of our quarterly net profit. Risk-weighted assets increased by USD 4.5 billion this quarter. Credit risk-weighted assets rose by 1.5 billion, excluding FX impact, driven by volume growth. This was offset by the risk-weighted asset relief from 2 SRT transaction executed in November. Operational risk-weighted asset increased by EUR 2.2 billion, while market risk-weighted asset increased by EUR 0.5 billion. We'll pay a final cash dividend of EUR 0.736 per share on the 24th of April 2026, subject to our Annual General Meeting's approval. Now I hand back to Steven to wrap up today's presentation. Steven van Rijswijk: Yes. Thank you, Tanate. And for the ones who have been here longer with us, this is Tanate's last analyst presentation. We have been knowing each other today for more than 25 years, and we've been in the Board together already for 7 years and more. So thank you very much for working with us all these years. Tanate will still be with us until the AGM of 2025, which will take place in April. But I just want to take the opportunity also here to thank Tanate, also for the friendship, also for the leadership and the sharp mind that you have here with us. And I'll come sure visit you when you're back in Thailand at some point. So prepare for that. Now we move to Q&A, but let me recap the key takeaways from today's presentation. We have delivered another strong quarter end year, successfully executing our strategy, accelerating growth, increasing impact and delivering value. We achieved a record total income for the third consecutive year. We maintained cost discipline and operational efficiency gains, and they more than offset our investments in business growth. And we delivered another strong year of capital generation and returns, enabling continued attractive shareholder distributions. And with our strategy, we remain confident in our ability to stay on track to become the best European bank. And with this confidence, we have upgraded our expectations for the coming years with a very strong outlook for 2026 and a more ambitious but realistic outlook for 2027. And with that, I would like to open the floor for Q&A. Operator, back to you. Operator: [Operator Instructions] We will now take our first question from Benoit Petrarque of Kepler Cheuvreu. All the best. I guess you will not miss the Dutch winter, but in Thailand. Benoit Petrarque: So it's an interesting time to live actually. It's the first quarter I actually see the volume growth benefiting fully the commercial NII as the negative effect of lower interest rates is getting smaller. I was wondering on the guidance of EUR 25 billion total income, what type of assumption do you take on growth? I think you've put somewhere in the slide 5% volume growth. I was wondering if that's the right number, given you are growing actually more than 5%. And also second question is on liability margin assumptions in your more than EUR 25 billion total income. Wondering where you stand on '27 on liability margin. And then maybe on Wholesale Banking, where are you on the risk-weighted assets growth plan for the wholesale? I think you were planning some optimization there. But I do see wholesale growing quite sharply again in the fourth quarter. So where do you see growth in wholesale going forward? Steven van Rijswijk: All right. I'll take -- thanks, Benoit. And yes, Tanate, for sure, will not miss the Dutch winter. Neither would I, by the way, if I would go to Thailand. But in any case, I'm here. If we look -- I will talk about the question about RWA and Wholesale Banking and also -- and then Tanate will talk about the NII and the growth for '26 and '27. So if you look at Wholesale Banking there we have been seeing good lending growth in the second half of this year, and the pipelines are also filled well now. So we want to continue to grow there as well. At the same time, to your point, we did 2 SRTs in November that had an impact of around 12 basis points on our CET1. For '26 and '27, by the way, we want to continue to do these SRTs. So we have just started with our more improvements that we have been making. So the first ones we did at the end of last year. This year, we continue to do SRTs, and we expect that to have an impact -- a positive impact on CET1 of 15 to 20 basis points, so a bit higher than we realized over 2025. Tanate? Tanate Phutrakul: Yes. Thanks, Benoit. I think in terms of the major assumptions we use in terms of giving out outlook, we have assumed 5% balance growth, and you say that, that is potentially conservative given what you see in Q4. I think what Q4 shows us is it gives us more confidence in achieving our target. That would be the first answer. The second one is really what curve did we use in terms of our projection. We use the December curve to do that projection, which is quite constructive in our view. And then the third margins. I think the 3 impacts that you see is really the continued reduction in the short-term replication negative impact on our results, the continued positive accretion because of long-term replication and the effect of deposit rate cuts that happened in 2025 that affects '26 and will continue to be accretive going into '27 as well. Our forecast for liability margin is on the lower end of the 100 to 110 basis points. Benoit Petrarque: This is also for '27? Tanate Phutrakul: I think we don't give that outlook there. But I think if you see the replication on Page 30 that we show, the momentum continues to accrete in '26 and '27. Operator: And we'll now take our next question from Benjamin Goy of Deutsche Bank. Benjamin Goy: My first question is on loans versus deposit growth. So another strong quarter of loan growth in particular, and I think it's the third quarter where your core lending growth has clearly outperformed core deposit growth. Is that something that you need to work on to be more balanced? Or are you happy to increase your loans faster as there are opportunities? And then secondly, on the costs, for the underlying cost guidance, but there has been historically a bit of incidentals every year. Should that now be smaller than in '25 going forward? Or what's best to assume for the incident that come on top of the cost guidance? Steven van Rijswijk: Yes. I think that on the loans versus deposit growth, I mean, if you look at 2025, the loan growth was about 8%. The deposit growth was about 6%, so EUR 57 billion against about EUR 38 billion. We've also seen years where that was the other way around. In the end, you want to balance the balance sheet. So long term, we want to approximately have same growth over a longer period with loans and with deposits. But 1 year can be a bit higher in loans and 1 year can be a bit higher in deposits. I think on both sides of the balance sheet, we see continued good growth with people continuing saving. Also, if you look at the deposit growth projections macroeconomically in the markets in which we are active, we continue to see that. And we do see significant loan growth in the different segments in which we're operating, most notably mortgages. But there, in the end, we want to balance the balance sheet, and we will always work on that. When we talk about the incidentals, yes, look, we will -- we continue to work on our cost discipline as we do. So on the one hand, we want to grow our customers, and we want to grow and diversify the activities in which we are active. And you've seen us doing that. We invest in more specific segmentation in existing retail segments. We have been rolling out business banking, for example, in Germany and Italy. We have been investing in diversifying our capital-light income in wholesale banking and transaction services and in financial markets. At the same time, we have seen since 2023, our FTE over balances decreased with 7%, and we believe we can reach our target that we gave in the Capital Markets Day in '24 of a decrease of 10% earlier than we anticipated what we then said in 2027. So we'll work towards this year. So we will work on both levers. But we always do this in a buy-side thing. So what you've seen, for example, with restructuring costs in 2025, those restructuring costs should deliver us a benefit of EUR 100 million in 2026. And each time that we have a process or area where we can realize better servers, better process optimization, better digitization, better use of Gen AI, then we will announce it because I just want to make sure that front to back, once we announce it, we can execute and we can execute while continuing to grow, and that's how we have been operating for the past 5 years, and we will continue to do so. Operator: And we'll now move on to our next question from Giulia Miotto of Morgan Stanley. Giulia Miotto: Thank you for your patience answering our questions and all the best for the life after ING. But now I have 2 questions, please. So the cost outlook beyond '26, '26 looks quite a bit better. I think it's encouraging to see operating jaws being able to grow the costs much less than the revenues. Should we expect this trend to continue also in 2027? Consensus has got 3% year-on-year growth. I guess, I don't know what we are seeing could suggest something better than that. And then separately, Steven, I wanted to pick your brain on M&A. We have seen some headlines on Romania, but also Spain and Italy have been in focus in your comments, although we don't see much actions. So any comments on what you're thinking strategically on the M&A front? Steven van Rijswijk: All right. On M&A. So look, we show good growth. You see that both in existing activities and also in diversification on the various fronts, both in lending and in fees, by the way, on investment products and insurance. Still, and I've said this before, we've also started with filling in the blanks in countries where we don't have all activities, such as business banking and private banking and certain types of investments in asset management in certain countries. Still, if we can accelerate that growth by means of acquisitions, then we will look at it. You've seen us taking a financial stake in private banking of [indiscernible] last year. In the fourth quarter, we announced buying the majority and thereby in the end 100% of an asset manager in Poland, integrating that asset manager into ING, we bought that from Goldman Sachs, the 55%. And we continue to look. We don't comment on individual markets. Also in Romania, what I can say is that the business is successful. We have been increasing the numbers of customers that we serve. We have been growing, again, also lending deposits and fees. And we have a very strong return on equity there. We consider ourselves one of the most successful, if not most successful bank in that country. But also there, if we can have opportunities to increase scale or add segments that we do not have, we will look at that as in any other market. And then the caveat, it needs to fit. It needs to add to that local scale and diversification, and we want it also to be accretive for shareholders, and that's the construct in which we're working and which we are willing to consider M&A. Tanate, the jaws. Tanate Phutrakul: Yes. I think given the outlook, we have now turned the corner in terms of positive jaw for '26, and we're confident that we'll continue that positive jaw in 2027. If you look at the 3 drivers of our cost growth in '27, the first one is inflation impact, which we expect that the stickiness of inflation impact should moderate in '27 compared to '26. We will continue to invest in our franchise in client acquisition. In fact, if we can do more, we would do more in terms of accelerating our client acquisition. We have some big programs in terms of investment, financial market infrastructure, payment capabilities, investing in segments that we are not currently present, as Steven has mentioned. And if you have seen in our '26 guidance, we upgraded our ambition in terms of cost reduction from 2% to 3%. So that trend is expected to continue into 2027 as well. Giulia Miotto: So I take away that probably growth will be more modest than what is to be expected in '27? Tanate Phutrakul: You can do your analysis, Giulia. We've given our guidance. Steven van Rijswijk: Tanate Didn't even blink when he asked that question. Operator: And we'll now move on to our next question from Tarik El Mejjad of Bank of America. Tarik El Mejjad: Tanate, thanks for the very interesting interactions we had all these many years and good luck for what's to come. Just from my side, 2 quick questions, please. With a follow-up one on the liability margins more in 2027. I mean just trying to back solve a bit what market expects, assuming asset margin are quite stable or growing a bit the volumes, we can put your assumptions with even some extra buffers and replicate portfolio, we kind of understand now how it works and so on. It's just the -- in my view, is it fair really to think that the gap between -- I mean the downside potential risk is for the market expect consensus is too optimistic, perhaps, assumptions of rate cuts or no rate raise in the core saving deposits in '27? Because if you use the forward curve as of December, clearly, you would also take a view on what's your ability to navigate the core savings deposits in Netherlands and other markets. And the second question is on costs is more really to want to understand how you think about the investments because, I mean, you have some headroom now created on the revenue side, higher growth and very comfortable to reach your targets. And then on the cost, the pressure from salary negotiation should come down with inflation. So that extra headroom, I want to understand how you think about the next 2 years in terms of investments in AI and tech. I mean, yes, you have the machine learning and with the compliance aspect, the Gen AI that you've already started to roll out with some early benefits we see. But what about the next step in AI and tech? And how much of more investments needed to deliver your ambition on that front? Steven van Rijswijk: Let me take the question, Tarik, on AI and then Tanate will talk about the margins. Look, I mean, we do clearly see benefits of AI coming through. I mean we have been working with AI already for a decade and then with Gen AI, we work with that in the last couple of years. But there, you see both on, let's say, the -- on the client side and on the operational leverage side benefits coming through. And let me give you a few examples. If you look at [ PI ] onboarding, the STP increased last year from 66% to 79%. So that means that close to 90% of our private individual clients were onboarding through STP. We do end-to-end [indiscernible] delivery. We increased that approvals with 11% last year. So the time to [indiscernible], therefore, improved. We do about 60 million in customer lending without manual intervention. So you see a number of customer benefits coming through. When we talk specifically about GenAI and also in chatbot, we have better scores, CSAT scores, which are sort of satisfaction scores for our customers. So we do see benefits coming through for GenAI, both on the revenue side, doing more with our customers and having more satisfied customers and on the operational leverage. We do that in 5 areas at current. So we took the 5 big wins that we see starting with contact centers, in IT, coding, in lending, in personalized marketing and in KYC. So those are the big areas. We do these benefits, we see them coming through. Every quarter, you see announcement, you've seen announcements whereby we say, okay, what impact does it have on our staff, what impact does it have on our operations? And you see it also coming through in FTE over balances. And we're actually quite optimistic on the impact it will have on our operational leverage going forward for '26 and also in 2027. And we will make announcements as we move along and when we can say this is now the next step that we will take, including, of course, good reskilling of our staff and making sure we can grow and continue to grow our franchise sustainably. Tanate Phutrakul: And Tarik, to your second question, I think we also see based on the December curve that the accretion and replication in '26 going to '27 and '28 are quite strong. The real debate is what -- how do you balance that additional revenue in terms of margins and in terms of mix, right? And what we see is that we are looking at the dynamics of maintaining growth in customer growth in volumes and making sure that we take into account the level of competition we see in the market. And if you look pre negative rates environment, ING operated on a liability margin of around 90 to 100 basis points. We have updated our guidance to 100 to 110. And we think we're comfortable with that rate given the balanced dynamics of growth, competition and to be remaining competitive while at the same time, being accretive to our shareholders. Tarik El Mejjad: I mean I don't want to put words in your mouth, but basically, to deliver on the consensus or market numbers means that market has to be much more bullish on the volume growth and lending and probably be less positive on the margin side. But I'm just trying to reconcile a bit what your guidance outlook, which is very helpful versus where market is positioned. Operator: And we'll now take our next question from Delphine Lee of JPMorgan. Delphine Lee: Also I want to take the opportunity to send my best wishes to Nate, thank you for everything. So my 2 questions. First of all, sorry, I just want to follow up on Tarik and other questions around NII. But -- so if we look at your guidance for 2026, which implies about EUR 600 million increases for liability margins. But if you look at the repricing actions that you've done in '25, I mean, the impact on '26 is already EUR 700 million. And then on top of that, you have some small benefits from -- well, your replicating income as well on '26 more, but like still. So I'm just kind of wondering like what is your current assumption and in terms of the deposit cost and deposit pass-through from 42% in Q4? And if you could just sort of elaborate a little bit on what are you seeing on competition on deposits at the moment? What do you expect for '26 and onwards? My second question is on cost. So you've done a good job of trying to kind of contain a little bit of inflation with the savings. I'm just trying -- just trying to understand a little bit if 2%, 3% is really kind of like the run rate that we should expect like even beyond '27. Is that something that you're trying to achieve in the long run? Yes, just trying to understand a little bit the moving parts of that cost number, you've provided this for '26, but even beyond that, like what are the savings? You've mentioned a couple of benefits from FTE reductions, but just kind of trying to quantify a little bit what else can we expect in the long run? Steven van Rijswijk: All right. Thank you very much. I think that on the costs, you see the effects of our digitalization and scalability now really seeing take shape. And we saw that now also in the fourth quarter, but also I'm pointing again at FTE over balances. You also now see that when we look at 2026 about the operational leverage and efficiencies that we have compared to the increase in investments. So the operational efficiencies are higher, and that's where we want to be. We want to make sure that when we make additional investments, we can have operational leverage that is higher than that. So that's maybe a little bit of direction to give you or guidance to give you in terms of where we want to end up. And indeed, therefore, you will see in '26 and '27 improved cost to income to what we have been showing and positive jaws territory that we have now been gotten into and I want to stay in that territory. And at the same time, we continue to want to grow our investments where we can grow our clients for long-term clients and shareholder benefit. But that's a bit of guidance towards the cost. Then Tanate, on the deposit cost of margins? Tanate Phutrakul: I think we gave a bit of detail on Page 20 of our presentation showing the movements in terms of commercial NII. I think the lending NII is driven by basically stable margin and approximately 5% loan growth. And similarly, for liability NII, we also assume 5% liability growth. Of that EUR 600 million we show, part of it is due to volume, about half. The other half is through the improvement in margins. As you say, the replication is getting better, but there's some short-term impact that still need to feed through our numbers and the EUR 700 million is factored into that guidance. Operator: And we'll now take our next question from Namita Samtani of Barclays. Namita Samtani: The first question I have is on German retail. There's quite a lot of cost growth in 2025 there. I think it's around 11% year-on-year, and it's a lot higher than other regions. So I wondered what are you exactly spending on in Germany? And is this defensive spend given the new players entering the market? And then I think about your liability margin, which is, of course, at group level, but are you telling us that we're at peak earnings for Germany in retail given high expense spend and [indiscernible] spend to gather deposits? And my second question, based on your updated '27 targets today, the cost to income implied in '27 is maybe 51%, 52%. It's hardly a standout amongst European banks, even ABN is now going to below 55%. I just wondered, given the digital model ING has or aspires to have and the use of AI, what's holding the group back from delivering a better cost to income target? Steven van Rijswijk: Yes. Thank you very much. On the cost to income side, our main opportunity is to grow our revenues, our revenues over our client balances, our diversification in Wholesale Banking, our revenues over RWA and as a result, but that's then a consequence of it also that will have a positive impact on our cost to income. But what we need to do, that's why our strategy is called Grow the Difference is grow our revenues because that's where we can make the biggest difference in further improving our returns and then indirectly also our cost to income. And so the digital model has brought us a lot in terms of presence in markets, but that's why we're talking about doing new activities in these markets or doing more with customers in these markets because that is the next step in our evolution, what we're currently doing. Tanate? Tanate Phutrakul: Yes. The German cost/income ratio is a robust one despite the increase in investments that we make in Germany. One thing that you have to remember is that the client growth that we have, 1 million customer per year, a very significant portion comes from Germany, which is our main market. So that's why the investments in client acquisition, in creating new products, creating new segments is very strong in Germany. very, very much like the rest of ING seeing a turnaround in terms of the momentum in terms of revenue and cost in Germany. And we do expect that the positive jaw will return to Germany in 2026, while continuing to invest in our franchise, both in terms of the fundamental platforms as well as client acquisition. Operator: And we'll now take our next question from Cyril Toutounji of BNP Paribas. Cyril Toutounji: So I've got 2. One on lending margin. So we had an improvement this quarter, which is welcome and I think pretty good news. And you're saying it's due to mortgages. I'm just curious in which market has happened? And if you can give us more indication whether this can continue maybe a bit? And the second one would be on deposit campaigns. Can you update us on the ongoing campaigns right now? And I don't know if you can give this indication as well, but should we expect more or less campaigns versus the 2025 run rate? Steven van Rijswijk: Yes. Thank you, Cyril. I'll take the question on deposit campaigns and Tanate talks about the lending margin. So yes, about the deposit campaigns, look, we have these campaigns regularly. We had them also in the fourth quarter with Black Friday in some markets or in Germany, as they call it Black Friday. So we will continue these campaigns, and we typically see that there's a good response in getting either new money from existing clients or getting new clients in. And then typically, we see that we get money to stick to around 2/3 of the money that after campaigns will stick with ING and therefore, we can gain new primary customers and increase our deposit levels. So for us, that works well. And what we work on every time is we make them more bespoke to certain customer segments and we make them more data-driven, so we can target them more and more. So we are very happy with the approach we've taken. We are confident about what we are doing, and we will keep on having these campaigns and we make them more bespoke about a year. Tanate, about the margins? Tanate Phutrakul: Yes, So I think we are also pleased to see that we have stabilized our lending margin and that it's improved by 1 basis point. And to your specific questions on mortgage margin, it's been stable or increasing across the board. I think some of the markets where the new production margins are improving is in Belgium, increasing in Germany, increasing in Italy and Spain. So it's quite widespread in terms of margin improvement, but we do see a bit of pressure in terms of new production margin in the Netherlands. Operator: We'll now take our next question from Johan Ekblom of UBS. Johan Ekblom: Thank you for everything, Tanate, and best of luck. Just most questions have been answered. But at the Capital Markets Day, we spoke a lot about the business banking opportunities, and I guess, in particular, in Germany. How should we, from the outside, try and measure your success there? Because it's very difficult to track where you are in terms of the rollout and I guess also when you are expecting to see volumes start to come through in a more meaningful way. So any update on kind of how the business banking rollout in Germany is going would be much appreciated. Steven van Rijswijk: Yes. Thank you very much, Johan. Indeed, business banking is one of the levers that we pull to diversify. To give you a few data points, we -- the third largest growth we had in business banking customers in terms of number of customers this year was Germany. So that already shows you that we're starting to grow quite well in Germany. It starts from a very small base, obviously, because we started from virtually 0. So that's one. Two, we also get very good deposits in from our business banking customers in Germany, so also there. So increasingly, that will become more sizable. But compared to our business banking franchises in the Netherlands and Belgium, for example, of course, it is very minimal because we have EUR 114 billion business banking lending book. And in Germany, we're just starting. So that will take time. But it is almost like you saw with the insurance fees there you see in the fee income line, as an example, it was not even a separate fee line. And there you see step by step by step, it's almost like a snowball. We do more and more and more. And at some point, it will become a sizable business, and that's also what we see happening in business banking in Germany. Operator: And we'll take our next question from Shrey Srivastava of Citi. Shrey Srivastava: Thank you, Tanate, for answering all the questions over the previous quarters. I just want to look more top down because obviously, following on from previous questions, we've talked about the upside on the replicating income versus your guided liability margin still at 100 to 110 basis points. A, is your sort of 5% volume growth guidance predicated on further deposit campaigns to get you within this 100 to 110 basis points? Or is any sort of upside to volume growth from that incremental to the 5%? And secondly, what are sort of the hurdle rates you have in mind when thinking about going forward with a new deposit campaign? Because obviously, as you've heard sort of many of us to get from the assumptions we have when plugging your replicating income into the model to the liability margin of 110 basis points would require some sort of pretty significant deposit campaigns. So what are some of the things you think about when deciding to give up that short-term upside for sort of longer-term growth? Steven van Rijswijk: All right. Tanate, can you give the elements of our replication income or lease liability margin again? Tanate Phutrakul: Yes. I think the 5% deposit growth, I think it's a good base number, right? And I think you look in the context of 2025, where the growth is around 5%. So that trend line, we expect to continue despite competition, despite quantitative tightening. So I think it's a good number to assume 5% growth. Does campaign play a big role in that? It continues to be the case, right, that we have campaigns in many markets we operate in. We continue to use that as a tool, but we also get additional flows coming into the bank all the time. And what I look at really is the growth in our primary customer, the intensity of which we have a relationship with our customer is there. And I think looking at the replication, it's still the 3 moving parts, right? It's really the impact of the short-term replication still having a tail impact is continued accretion of long-term replication coming through and the actions that we would take in terms of rate increases or decreases over time. And I think we like to reiterate that we don't give guidance for '27 in terms of liability margin, but we expect it to operate in '26 at the lower end of the 100 to 110, and we're comfortable that we can achieve our target with that guidance. Operator: And we'll take our next question from [ Seamus Murphy ] of [indiscernible] Seamus Murphy: Sorry, I'm coming back again to a lot of the questions that have been asked in one sense just in terms of the guidance. So I suppose you've guided 16 to -- sorry, EUR 16.3 billion to EUR 16.5 billion for commercial NII in 2026. But in Q4, it was [ EUR 3.928 ] billion. So that suggests an exit rate of just over EUR 4 billion into Q1 2026. That's already in the bag. And if I annualize that, I'm kind of getting EUR 16.2 billion at the start of the year, just before anything else happens and the upper end of your guidance, therefore, only needs 2% growth to achieve the 16.5%. And obviously, we have -- so I suppose question one, is there anything wrong with the math as you start the year that you have kind of EUR 16.2 billion of NII heading into the -- sorry, EUR 16.2 billion into this year at the start? And the second question then is, obviously, we have growth, so there's only limited growth needed. But the second question then is, you mentioned earlier on the call that the long end of the replication portfolio is a positive further into '26 and '27. Two things have happened. Your current account balances have grown EUR 5 billion, I think, to [ EUR 175 billion ] now. And secondly is that, obviously, the curve has deepened. So it would be super useful if you could tell us how much the long end of the replication portfolio will contribute in '26 and '27. And the last question, I asked this also on the Q3 call because it's becoming more and more important for banks, I think, is that do you expect FTEs to fall as we look into '27 and '28 at the group level? Steven van Rijswijk: Thanks, Seamus, for your questions. Well, we do expect FTE over balances to fall. So this is about, of course, a continuous focus on growth and then on a marginal basis, doing that with less marginal cost. And that's why we use the metric FTE over balances, whereby we continuously accept -- sorry, see an improvement or expect an improvement based on our digitalization and AI and GenAI and better process management as we have been doing over the past years. And that trend we see continuing. At the same time, we want to grow because we need to diversify and grow our revenues over our balances and our RWA. But from an FTE over balancing perspective, we should see further improvements. Tanate, how does it work with that? Tanate Phutrakul: Yes, Seamus, we will see each other in London, so we can go into a bit more detail. But I think it's a dangerous game to take Q4 and then extrapolating it. But I think if I look at full year to full year, the impact is over EUR 1 billion, right? That's a 7% growth in net interest income, which I think is a strong number and strong guidance. And I also -- we don't give replicated income in such details of how much the long end would contribute, except that we have disclosed in our presentation that 55% of our replication is long dated. And I also noted the fact that the drive of our primary customer is driving increasing current account and that increasing current account means better margin. So we do recognize that. Operator: [Operator Instructions] And we'll now move on to our next question from Anke Reingen of RBC. Anke Reingen: But firstly, thank you very much, Tanate,and all the best. And then to questions. So firstly, can you just talk a bit about your expectation on lending volume growth in 2026? I guess the 5% applies here as well, but I suppose, Q3, Q4, you've seen very strong growth. So where do you see sort of like the mix falling into 2026? I mean I hear your margin comment, but maybe just more a bit in terms of the mix. And then you commented earlier on about the SRTs of 15 basis points benefit. Can you just clarify, is that per year? Or is that over the 2 years, '26 and '27... Steven van Rijswijk: Thank you very much, Anke, for your questions. If you look at the SRTs, the impact in '25 was 12 basis points and that impact remains there. So once we have taken, let's say, the first loss piece of our balance sheet, it will remain [indiscernible] of our balance sheet. But in '26, we're going to do an additional number of SRTs that should benefit an additional 15 to 20 basis points on our CET1. And we, of course, will then also continue for '27 and thereafter. But on those years, we haven't yet given guidance. When we talk about lending growth, we see good growth across the board, like you've seen in the third and the fourth quarter that both in and mortgages and in Business Banking and Wholesale Banking, we continue to see good growth. The pipelines are good. Clearly, especially with the underlying macro drivers, there is shortage of housing in many of the markets in which we operate, in this case in the Netherlands, that is the case in Belgium, that is in Germany. That is the case in Spain. We are -- we have a total mortgage book of EUR 370 billion. So we are a top 3 mortgage provider in the region in Europe. And in many of the markets in which we are active, we see there are good macroeconomic fundamentals to continue that growth, low unemployment levels, good salary increase over the past couple of years, shortage of housing, lower number of people in individual households, so an increase in the number of households and those fundamentals continue to be there. And that's why that is going to be a significant driver of the loan growth in 2026 and '27. Operator: And we'll now take our next question from Matthew Clark of Mediobanca. Jonathan Matthew Clark: So firstly, coming back to this EUR 25 billion target for 2027 revenues or greater than EUR 25 billion. I mean, are you trying to talk down consensus there, which is EUR 25.8 billion, I think? Or do you think that's still consistent with the greater than component of that target? So I just want to understand your thinking for framing that target that way against the context of a higher consensus? And then secondly, on wholesale lending, why is now the right time for you to be putting your foot down on wholesale lending? What's changed in terms of risk reward, et cetera? And I guess asking that in the context of an uptick in credit losses on wholesale this quarter. Steven van Rijswijk: Yes. Thank you very much. Well, let me put it this way for 2027. So we said that the revenues are larger than EUR 25 billion. So we are confident about our growth, and we're also confident about '27. So don't forget the larger then sign in EUR 25 billion for '27, but yes, that's where we currently are. And we're very comfortable with that level. When you talk about Wholesale Bank lending, well, look, we had slow quarters in the first half of 2025, and then it picked up very well in the second half of the year. In the end, what we want to realize in Wholesale Banking is higher revenues over RWA and a higher return over RWA. And in that regard, we have been investing and we are continuing to invest in Transaction Services and Financial Markets. That will help us to drive the diversification in Wholesale Banking and do more with our customers next to lending, but lending, of course, is also good. And secondly, we're attacking, let's say, our capital there. Our capital was about 50-50 in '24. Now we said for '27, we had a target of 55% in retail and then 45% in Wholesale Banking. It's already at 54% for retail and 46% for Wholesale Banking. So we're on a good path quicker than we initially anticipated. And that's why we continue also to work on the SRTs to make sure that also on the capital side in Wholesale Banking, we can do more with less capital to help with return going up. So it's not a particular focus on lending alone. In the end, we're focused on return. Operator: And we'll now take our next question from Farquhar Murray of Autonomous. Farquhar Murray: Obviously, congratulations, Tanate and best wishes for the future. Coming back to the day job though for now, 2 questions, if I may. Firstly, please, can you reconcile the indication of EUR 0.4 billion of hedging tailwinds into '26 of 4Q with kind of flat replicating income on a year-on-year basis on Slide 29. Is that simply a matter of how things came through in the quarters? And perhaps can you just flesh that out through '25 and into '26? And also, is there a quarterly pattern to that hedging impact and also maybe the short-term effects you mentioned earlier? And then secondly, if we look last year, lending outpaced deposits, if we look at the 8% versus the 5% I know you said the kind of planning assumption as a kind of balanced 5%, but what's your general sense about where customer demand is at present? Steven van Rijswijk: I think that -- so on the customer demand at present, I mean, we -- actually, we do see continued good mortgage growth, again, because we see the macroeconomic elements that we saw in there, we see them continuing. And therefore, if you look at the number of houses being sold last year in a number of our main markets in the Netherlands, Belgium and Germany, they all have increased. And also, we see increases in a number of these housing markets to continue in 2026 and '27. So again, we're very positive towards that end. I think in business banking, we have also been improving our processes, and therefore, we've made it easier for our customers to borrow with us. So I think there, it's also an improvement of capabilities that we have had and by the way, rolling out business banking step by step by step in Germany, Italy and potentially also in other markets that we're looking at. We've spoken about Spain before. And then in Wholesale Banking, it's always more lumpy, funny enough, whereby you do see geopolitical uncertainty on the one hand and the PMI index being relatively low, we've seen sort of a catch-up demand of Wholesale Banking lending in the third and fourth quarter. The pipeline is still good. Yes, probably that Wholesale Banking in that sense is always a bit more choppy in terms of growth than the other elements. But the main consistent element in the lending growth sits in the mortgage side. Then on the hedging tailwinds, there, I want to give the floor to Tanate. Tanate Phutrakul: Thank you very much, Farquhar. I think what we see is that if you look at our quarterly commercial NII, it reached a trough in Q2, improved from EUR 3.7 billion to EUR 3.8 billion and from EUR 3.8 billion to EUR 3.9 billion during the course. So you already see signs of that replication impact. I think what the EUR 400 million refers to is the fact that the short end pressure that we see is decreasing. We see the fact that in Q4, we also have the benefit of the rate cuts already materializing into the numbers and that 55% of the long end is already positive. So it's a combination of all these 3 factors that drives the EUR 400 million tailwind. Operator: And we'll now take our next question from Chris Hallam of Goldman Sachs International. Chris Hallam: I just have one question left. And obviously, good luck, Tanate. I'm sure you're going to miss all these questions on replicating income and liability margins when you're relaxing in Thailand. But just on this question on the corporate side, you talked about increasing levels of working capital lending and lower deposits. Are those 2 points linked, i.e., are corporate customers building up working capital and therefore, draining their cash balances in anticipation of higher activity later in the year? And if so, how long should that working capital cycle last for? And would we notice any impact on NII through this year as and when it reverses, either on the lending margin or on the liability margin? Steven van Rijswijk: Yes. Thanks, Chris. And yes, Tanate will miss those questions. But luckily, we have Ida Lerner, our new CFO, and she already told me yesterday, said she's really looking forward to all these questions. So next quarter, you can expect her to answer these. On the working capital side, yes, I mean, on the wholesale side, you saw that EUR 10.3 billion lending and working capital solutions growth. So part was indeed working capital solutions. That had to do with a couple of large deals, very large companies doing very large deals, and we were leading those deals. So that doesn't necessarily have a link with each other that those are, let's say, seasonal swings that sometimes you have and sometimes you don't have. Clearly, those working capital solutions deals because they are typically short term and self-liquidating or collateralized or they have a borrowing base behind it. They have lower margins. But we have many of these. And so that doesn't have a particular big impact on the lending margin. When we talk about the cash pooling business, that's the pooling both in our payments and cash management and the notional pooling business, typically, clients at the end of the year, they will consolidate their positions and net them off. And because they net them off, they net them off in our accounts, and therefore, you see a lower amount coming in there. So a seasonal pattern. Operator: There are no further questions in queue. I will now hand it back to Steven Van Rijswijk for closing remarks. Steven van Rijswijk: Yes. Thank you very much. I think we can -- we are very proud of our 2025 numbers and also very confident about '26 and '27, hence, the improved and heightened outlook. And I want to thank you for all your questions and observations today, and again, Tanate, for the fantastic collaboration, and you are a great friend and a great colleague. Thanks very much, everybody, and I hope you have a great Thursday. Operator: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to Banco del Bajio's Fourth Quarter and Full Year 2025 Results Conference Call. My name is Anna, and I will be your coordinator today. [Operator Instructions]. Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. Please note that this video conference is being recorded. Joining us today from BanBajío are Mr. Carlos De la Cerda, Executive Vice Chairman of the Board of Directors; Mr. Edgardo del Rincon, Chief Executive Officer; Mr. Joaquin Dominguez, Chief Financial Officer; and Mr. Rodrigo Marimon, Investor Relations Officer. They will be available to answer your questions during the Q&A session. For opening remarks and introductions, I would now like to turn the call over to Mr. Rodrigo Marimon. Mr. Marimon, you may begin. Rodrigo Marimon Bernales: Good morning, everyone. Thank you for joining us to discuss BanBajío's results for the fourth quarter and full fiscal year 2025. Today, we will review our quarterly and annual performance, analyze the key drivers and financial trends and share our strategic outlook for 2026. The industry data cited today throughout the presentation is based on CNBV's information as of November 2025, which is the most recent publicly available data. Without any further ado, let's start with the presentation. Starting on Slide 3 with a look at our key financial highlights for the quarter and full year 2025. It was a year of solid execution despite the challenging operating environment with a stagnant GDP growth and a lower interest rate. Turning to credit performance. The total loan portfolio expanded by 4.6% year-over-year. This was primarily driven by the company loans portfolio, which grew at a rate of 5.2%. On the funding side, total deposits saw a robust increase of 10.5% compared to the previous year. Regarding asset quality, our NPL ratio improved significantly to the end of the year at 1.49%, supported by a strong coverage ratio of 126.5%. This trend also drove an improvement in our risk profile with the cost of risk for the full year at 0.96%, while in the fourth quarter, it decreased further to 0.75%. In terms of profitability, we achieved an efficiency ratio of 39.8% for the full year and 43.5% for the fourth quarter. Our return on average equity stood at 19.4% for the 12-month period and 18.1% for the quarter, while the return on average assets was 2.4% and 2.2%, respectively. Net income for the full year 2025 reached MXN 9.1 billion with the fourth quarter contributing MXN 2.2 billion. Finally, our preliminary capitalization ratio as of December 2025 stands at a solid 15.5%, composed entirely of common equity Tier 1 capital. Moving to Slide 4. We examine our 2025 performance against the guidance provided to the market. We are very proud to report that BanBajío met or outperformed most of the targets established for the year. Starting with our balance sheet, loan growth stood slightly below our range, reflecting disciplined growth in a challenging year. Conversely, deposits outperformed expectations with a 10.5% increase, well above our 6% to 9% target. Our net interest margin landed right on target at 6%, while noninterest income, the combination of fees and trading income grew by 4.4%. Operating expenses grew 8.2%, close to the bottom of the guided range, reflecting our ongoing commitment to cost control. This led to an efficiency ratio of 39.8%, outperforming our 40% to 42% guidance. The significant improvement in our portfolio mentioned earlier resulted in a cost of risk that our target range of 1% to 1.1%. As for our bottom line results, the delivered net income of MXN 9.1 billion significantly exceeded the high end of our guided range. This drove a strong return on average equity, which reached the upper bound of our target. Finally, regarding our asset quality and solvency, we exceeded our guidance for the NPLs, coverage and capitalization ratios. Moving to our loan portfolio growth details on Slide 5. The total loan portfolio reached MXN 278 billion at the end of the fourth quarter, leading to the mentioned year-over-year expansion of 4.6%. This growth was primarily driven by our core business, company loans, which include both corporate and SME segments, increasing by 5.2% and now representing 86% of our total loan book. Consumer loans continued with a double-digit growth trend reported in the past quarters, growing 11.4% year-over-year. The 12.1% expansion in the government portfolio was driven by a specific exposure originated in December with good levels of interest margins, an opportunity aligned with our focus on profitable growth. This trend, coupled with a 11.4% contraction in financial institutions, underscores our strategic reallocation of capital towards our higher-margin business line. On Slide 6, I want to highlight the strategic evolution of our sales force as we move into 2026. This initiative is an enhancement of our existing business model and our competitive edges, designed to further accelerate loan growth by deepening our segment specialization and sharpening our operational agility. We are reinforcing this through 3 strategic pillars. First, we are optimizing our credit process to ensure we improve our speed and responsiveness. Second, we are increasing our regional presence in major cities with an important growth in our sales force and executive bankers. This allow our bankers to focus exclusively on the specific needs of their respective segments, ensuring a higher level of expertise and tailored service. Third, we are scaling our successful SME centers. We recently opened a new hub in Mexico City, and we have 3 more scheduled for the next quarters in Querétaro, Guadalajara and a third location in Mexico City. We expect to conclude 2026 with 11 specialized centers, keeping us on our path to 20 centers by 2030. Turning now to Slide 7. Let's examine our asset quality and risk profile. Notably, our NPL ratio improved significantly to 1.49%. This performance significantly widened the gap with the system average of 2.25% Similarly, our adjusted NPL ratio stood at 2.84% compared to the system's 4.45%. This marked improvement in portfolio health allowed us to optimize the cost of risk to 0.75% for the fourth quarter. Regarding coverage, we maintain a prudent ratio of 126.5%. And as of December 2025, we continue to hold MXN 330 million in additional reserves, which we plan to absorb over the next 6 months. These improvements allow us to enter 2026 with a healthier loan portfolio, ensuring BanBajío's position to support a more active lending environment in the upcoming year. Turning to the funding side on Slide 8. Total deposits reached MXN 273 billion in the fourth quarter, representing a robust 10.5% year-over-year increase. This performance was underpinned by an 11.6% rise in demand deposits and a 9.4% increase in time deposits. Over the last 4 years, we have maintained a resilient 10% compound annual growth rate in total deposits, a track record that remarks the strength of our franchise and the deepening of our core customer relationships. On Slide 9, our current funding breakdown shows that demand deposits remain the core of our strategy, representing 40% of our total funding mix. Notably, zero-cost deposits saw a significant increase during the period, now accounting for 19% of the total breakdown. This robust growth in noninterest-bearing funding was the primary driver behind the market decrease in our overall cost of funds in the quarter. This highlights the reversal of the upward trend observed in third quarter 2025 and the widening of the gap with the reference rate. Our cost of funds for the fourth quarter reached 4.94%, a 169 basis point decrease compared to the same period last year and 50 basis points below the previous quarter. Likewise, our cost of funds as a percentage of TIIE dropped to 64.7% in the quarter, a positive divergence from the system average that saw funding costs climbing closer to the reference rate. Moving to Slide 10. The net interest margin for the fourth quarter was 5.77%. This represents 100 basis points contraction year-over-year, primarily driven by the lower interest rate environment, which contributed 68 basis points to the decline and changes in the portfolio mix, which accounted for the remaining 32 basis points. Through active balance sheet management, we maintained rate sensitivity at around 20 basis points throughout 2025, effectively cushioning the impact of the accelerated rate cycle on our margin. While our expansion into zero-cost deposits drove a temporary uptick in sensitivity during the final quarter, we have already seen a normalization in early 2026, and we expect this stability to prevail throughout the year. You will see the overall stable performance of BanBajío's revenues on Slide 11. Total revenues for 2025 stood at MXN 25 billion, a minor 2.6% decrease despite the significant pressure on margins. This stability was underpinned by the successful execution of our diversification strategy as normalized noninterest income grew a robust 26.2% for the full year. Net fees and commissions increased 16.3% year-over-year, driven by a 39.8% surge in cash management fees and a 38.4% increase in revenues from our digital platform, Bajionet. Additionally, normalized trading income rose 18.2% during the same period. These results validate our intentions to grow recurring fee-based income, limiting the impact of economic and interest rate cycles on our long-run performance. Moving to Slide 12. Our efficiency ratio for the full year 2025 stood at 39.8%, successfully outperforming our guidance range. For the fourth quarter, the ratio was 43.5%. Despite this quarterly uptick, BanBajío continues to be one of the most efficient banks in the industry, maintaining a significant gap against the system's average of 46.3% and demonstrates the operational discipline and strict cost control that we have been anticipating to the market. Turning to profitability on Slide 13. It is important to highlight that despite the quarterly compression seen throughout the year, we successfully exceeded the upper end of our net income 2025 guidance. This performance drove a robust full year return on average equity of 19.4%, effectively reaching the top of our target range, where return on average assets stood at a sound 2.4%. Finally, on Slide 14, we closed 2025 with a preliminary capital adequacy ratio of 15.5%. This level stands significantly above our 14% commitment and well exceeds regulatory requirements. Our robust capital position provides the bank with substantial flexibility to continue with the sound levels of return of value to our shareholders while supporting our growth objectives. Lastly, on Slide 15, we introduced our guidance for the 2026 fiscal year. Beginning with macroeconomic assumptions, we estimate GDP growth at 1.3%, stable inflation at 4% and a 50 basis point decrease in the reference rate from current 7% to 6.5% by the end of 2026. Based on these drivers, we are forecasting loan growth between 8% and 10% and deposit growth from 10% to 11%. We target net interest margin between 5.4% and 5.5%, and we expect fee and trading income to continue to grow at a sound pace of 13% to 15%. Our cost control efforts will prevail. And operating expenses are projected to increase between 7% and 9%, maintaining our efficiency ratio within a 43% to 45% range. We forecast that these factors will lead us to a net income of MXN 8.25 billion to MXN 9 billion and a return on average equity between 16.5% to 18%. This guidance reflects a transition towards a more normalized interest rate environment while maintaining our revenue diversification strategy and top-tier cost efficiency. Regarding our risk profile, we anticipate a cost of risk between 80 and 100 basis points, while keeping our NPL ratio below 1.7% and a coverage ratio above 1.1x. Furthermore, we maintain our commitment to a capitalization ratio above 14%. In summary, our fourth quarter and full year results report BanBajío sound fundamentals and solid balance sheet. We are pleased to have met most of our targets for the past year and remain fully committed to delivering on the guidance provided for 2026. With this, I conclude my presentation, and we can open the call for the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Ernesto Gabilondo. Ernesto María Gabilondo Márquez: Ernesto Gabilondo from Bank of America. My first question will be on asset quality. You were mentioning that you still have excess provisions of around MXN 400 million and that you expect to consume in the next 6 months. Looking to your guidance, you're expecting cost of risk between 0.8% to 1%. So even that you are consuming the excess provisions, you're expecting that range of cost of risk. So would that be explained because you are going to have a more credit risk appetite this year as you were saying in your now -- your new strategy for the year? And my second question is on your guidance. When looking to your ROE expectations for the year, what is the dividend payout ratio we should be assuming? And when could we have more color of a potential special dividend this year? And lastly, I would like to pick up your brains and to see in which lines of your guidance do you see upside and downside risks? Edgardo del Rincón Gutiérrez: Thank you, Ernesto. Regarding asset quality, NPL, as you saw, at 1.49%, a very similar level that we reported a year ago. So we are very happy with the improvement compared with previous quarters. And also cost of risk, actually, cost of risk was the best cost of risk reported during 2025. So yes, we have not MXN 400 million, Ernesto, we have MXN 333 million of additional reserves. The idea and the commitment with the CNBV is to use them during the following 6 months. So as we mentioned in previous calls, we are going to have a coverage ratio that is equivalent to the regulatory reserves that we need to have. So for this year, we expect more stability. As we mentioned in 2025, we have several isolated cases that we already -- several of them we write off during the fourth quarter because of the low probability of recovery. Of course, we continue with the legal actions regarding those cases. But for this year, we feel comfortable with the level of cost of risk between 0.8% and 1%. We believe we are going to have less important cases transitioning to Stage 3. Actually, the 0.75% that we had during the fourth quarter in part because we didn't have any important case transitioning to Stage 3. Regarding risk appetite, we are not considering increasing our risk appetite. Actually, asset quality remains a cornerstone of the strategy. So we will have additional risk appetite. The name of the game, of course, for us is to bring customers to BanBajio. And that's why we are increasing -- I mean, we are increasing the business units we have in several places, mainly in those cities like Mexico City, Guadalajara, Monterrey in which the financial system is very, very concentrated. So that means additional bankers and additional business units. So that's why we are forecasting to recover growth and to grow the loan portfolio between 8% to 10%. Regarding dividend, Carlos, please? Carlos De la Cerda Serrano: Ernesto and everybody. Yesterday, the Board of Directors approved a proposal to be made in April to the stockholder meeting of a 50% payout dividend on the 2025 net profits to be paid half of it in May and the other half in September. Later on, depending on how the year is developing, the growth in the loan portfolio and so forth, we will consider an additional dividend, but that will be probably considered during the third Q. Edgardo del Rincón Gutiérrez: Regarding your latest question, Ernesto, about opportunities in the guidance, we are very happy with the expense level that we reported during the year. You remember in the guidance that we provide to the market in January, we were expecting between 10% to 12%. So reaching 8%, it was very good. So we feel comfortable with the expense level of 7% to 9%. The plan, let's say, is based in the middle of that range with 8%, but we could have some opportunity there. But this expense level includes also new branches and all the new positions because of the new business units we are implementing. And of course, all this additional expense will be through mainly the first semester because in getting that talent in place is not something that you do immediately. It's going to take a few months. I could say also we are very happy with the results in fees and trading income. Last year, we didn't have the volatility in FX, so we can have more volumes and better margins. we expect this to have a recovery during 2025. And I could say also that the mix of the portfolio that we are expecting in terms of growth is related to having the corporate portfolio growing between 8% to 10%, SMEs that have a better margin around 15% and the consumer portfolio between 15% to 20%. So this could provide an additional yield and better margins because of the mix of the assets. So I could say those could be some opportunities in the guidance. Joaquín Domínguez Cuenca: This is Joaquin Dominguez. Another upside risk could be in case of the sale of some disclosure assets and the recovery of some loans that we had in past due loans during the last few years. Ernesto María Gabilondo Márquez: Super helpful. Just a last question. We continue to see a super peso and a weak dollar. So what would that imply for your loan portfolio that is denominated in dollars and to your loan portfolio related to exporters. I just wanted like to understand if this could have an impact on NIM or in asset quality, for example, we have the peso at 16.5% if reaching a USMCA agreement. Edgardo del Rincón Gutiérrez: Yes. Actually, we had an impact in the loan size because of the exchange rate. The impact was a little bit more than MXN 4 billion, representing 1.6% of the loan book. So this means that instead of having a growth of 4.6% with the stability in the exchange rate, it would be 6.2%. So that impact is already in place. And we don't see additional impact in 2026. Actually, that could be an opportunity. Regarding exporters, those customers represent about 10% of the loan book, the loan portfolio. Until today, what we are seeing in the financial statements, of course, is bringing challenges, but we don't see past due loans because of that. Of course, they need to strategy looking for better expenses and better efficiency. But until today, those customers are reporting good numbers. Operator: Our next question comes from the line of Danele Miranda. Danele Miranda de Abiega: Just a very quick one from my side on loan growth guidance. I was wondering if this 8% to 10% is assuming all positive scenarios already. I mean is this your base case with potential upside? I don't know with USMCA private investment reactivating? Or is this already your positive scenario? And also, is this guidance seasonal? I mean, can we expect acceleration in the second half of the year? Or will it remain in this 8% to 10% level all year? Edgardo del Rincón Gutiérrez: Thank you, Danele. What we are seeing is, I mean, we made several changes in the organization to provide more focus. And as I said, to have additional business units. We are talking about 4 new regional corporate banking offices, one in Guadalajara. I mean, 2 in Guadalajara, 1 in Mexico City that is going to be the tier regional director and additional one in Monterrey. Of course, all of them with additional bankers. And in terms of the SME centers, we currently have 8 SME centers. Those units are to attend companies with loan sizes between MXN 30 million to MXN 100 million. We have 8 because we opened an additional one, the second one in Mexico City last December. And we are planning to open Guadalajara, Querétaro and in the second semester, an additional one in the satellite area in Mexico City to end that year with 11 SME centers. All of this will provide support to attract more new customers to BanBajío. We are talking about between 50 to 70 additional bankers for those 2 important segments that is the core business of BanBajío. So we feel confident with the pipeline that we are seeing today that we can reach the guidance between 8% to 10%. Maybe it's too soon to say if we have an upside risk, an upside opportunity in loan growth. Operator: Our next question comes from the line of Yuri Fernandes. Yuri Fernandes: Yuri Fernandes here from JPMorgan. I have a follow-up regarding margins. And I think the explanation was already a little bit more positive one. But when you think about the implied margin decrease, this year, you mentioned that some 30% of the decrease was mix, right, and 70% was rates. For 2026, for sure, we have like maybe 50, 100 bps lower rates and the average rate in Mexico should be even lower than that. But you mentioned FX volatility maybe should be less and this can help. And then the growth of the loans, they also should help, right? I think you're growing less on the financial sector, SMEs, you mentioned around 15%. Consumer portfolio also growing a little bit less. I know it's small, but it should grow more. So the question is the following. For 2026 for your guidance, how you are viewing the decrease on NIMs? Is this purely rates? Do you have some kind of mix inside that or funding was good this quarter, maybe you are baking in some funding deterioration. Just trying to understand a little bit like the drivers. I know rates is the big part of the answer. But if you can help us build the blocks for the margin decrease, that would be helpful. And then I can ask a second question. Joaquín Domínguez Cuenca: Yuri, thank you for your question. This is Joaquin Dominguez. Well, first of all, our sensitivity remains around 20 basis points for each 100 basis of change of the TIIE rate. For the 2026, maybe the impact of the mix will be more important than last year's in deposit side because as you saw, we grow much more on deposits than in the loan portfolio. That means that we accumulate some investment in the treasury with lower interest rates. If our plans of growing in terms of loan growth, we do deliver as we expected, we will change the mix in assets. We will have more loan portfolio instead of securities in the treasury, and that will provide us an improvement in the total assets. In terms of the loan portfolio, the market we are focused on has a higher interest rate than the average of the total loan portfolio. So if we do well with these SME centers, we will improve the mix of assets, and that will help to improve the NIM. And in the other side, we have been doing well in terms of deposits and increasing and especially at the end of the last year, the demand deposit accounts not bearing interest. So if we maintain that mix of the growth in demand deposits without cost, that will improve the margin, but will increase the sensitivity. And all those factors have a different result in the NIM. But at the end of the day, what we are looking for more than a specific objective in terms of margins is improve all the lines, the mix of total portfolio, the mix of loans and the mix of deposits. And what we did for this guidance is that we maintain the composition of the assets and the deposits as they were at the end of the fourth quarter. So any change of that mix could affect positively or negatively the guidance about the sensitivity and the margins. Yuri Fernandes: No, super clear, Joaquin. So let's do the blocks. Like the average rates in 2025, I think the average Banxico rate was around 8.4% maybe rates go to 6%. I'm not sure what is your estimate there, like 6%, 6.5%, maybe the average rate will decrease some 200 bps with a 20, 23, 24 bps sensitivity. This is like 40, 45. Your guidance is implying a 50 to 60 bps decrease, right, from 6% to 5.4%. So what I'm trying to get here is, is your guidance too conservative? Maybe if the mix plays well, as you mentioned, maybe the margin decrease is higher than -- it's less than the guidance is implying at this point? Joaquín Domínguez Cuenca: I could say that it's not exactly conservative. It's just the result if you make the account considering the balance sheet in the fourth quarter, not the average. I mean, there is something that you should consider that the last reduction in the interest rate was at the end of December of the last year. That impact was not captured in the fourth quarter. It will be reflected in the first quarter of this year. And that effect runs for the rest of the year. So probably that would explain what you're saying. But we are maintaining the NIM sensitivity in our forecast and in our guidance without change. Yuri Fernandes: No, no. Super clear. Just a second one on another topic, asset quality, just going back to Ernesto's questions on this. When we go to your new NPL formation, your new Stage 3 formation putting all together, right, the NPLs and the higher write-offs this quarter, it was a very good formation. It was lower. Just checking, like could we have hopes that maybe there could be a surprise on this because I think Edgardo mentioned before that you had very few cases going to Stage 3 this quarter. So just checking if there was something specific you did something different on renegotiations, reprofile of debt and this explain or sale of portfolio because it was a good number on formation. And when I look to your guidance, the guidance implies 0.8%, 1% cost of risk, slightly higher NPL. So just trying to understand if there was any kind of a one-off in the new NPL, new Stage 3 formation for the fourth quarter. Edgardo del Rincón Gutiérrez: Thank you, Yuri. Actually, no, what we saw in the fourth quarter is a reduction in the balance of Stage 3 loans and the write-off that we did is preparing us to, let's say, to clean up the portfolio. Our criteria is always those loans with low probability of recovery. We'd rather write off them and of course, continue on the recovery actions. But the level that we have at the end of the fourth quarter, let's say, is a more normalized level of NPL. And we expect to be around those levels during that year. As I mentioned before, during 2025, we have several important but isolated cases from different sectors that transition to Stage 3. And during the fourth quarter, we didn't see any important case. Of course, that could happen in '26. We don't have, in our view, any important case at this moment. But we feel well with the 0.8% to 1% that is a more -- also more regular or normal level of cost of risk for the bank. So of course, the -- as we transition and grow more the SME portfolio and the consumer portfolio that normally have higher NPLs, that could change in time. But with the guidance that we are providing, we feel very comfortable. Operator: Our next question comes from the line of Eric Ito. Eric Ito: This is Eric Ito from Bradesco BBI. I have 2 here on my side as well. The first one, I'd like to touch basically on a more strategic point here on your new sales force structure. So you are deploying a lot -- investing a lot. You have this plan of 2030 of 20 branches. So I just want to get a bit sense for, let's say, beyond 2026, 2027, what can we think about efficiency here if that should be one of the points that could continue pressuring OpEx going forward? So this is my first one, and then I can ask my second later. Edgardo del Rincón Gutiérrez: If we want to have a good efficiency ratio and a good ROE, the best strategy that we can follow is to grow the loan portfolio. That's why we decided to increase the business units and sales force of the bank at the end of the fourth quarter. So as I mentioned already, we are adding 4 regional directors for the corporate segment in Mexico, Mexico City, Guadalajara, and Monterrey. And also the SME centers, we are very happy with the results we are having. Each SME center has more than MXN 1 billion in loans. And as I mentioned, is dedicated to a segment, let's say, with loan sizes between MXN 30 million to MXN 100 million. The idea for the following 4, 5 years is to get to 2030 with more than 20 SME centers. We have 8 to date. So we are developing, let's say, a new strategy with new business units to attend that segment that is very, very profitable. But in the corporate area, we have a lot of room to grow. Our market share in commercial loans portfolio is a little bit more than 6%. So we continue with huge opportunity to attract new customers. So that is the idea. Regarding branches, during 2025, we opened 9 branches. And we already have 10 branches that is I'm completely sure we're going to open this year. That number could increase up to 15 if we have the right location, et cetera. So those, let's say, new branches are already approved, but the number of new branches is between 10 to 15 this year. And the idea for the following years is to continue with a similar number of about 10 to 15 branches. So the bank has a lot of opportunity to grow, and we need to grow also our branches and our bankers, et cetera, to capture that opportunity. Joaquín Domínguez Cuenca: Just to complement in the efficiency ratio side, we -- in our projections, we made the exercise considering the maximum number of branches and SME centers to open. So they will not surprise us in terms that we will be expanding more than we budget. So there is no downside risk in terms of not delivering the guidance in terms of expenses. Eric Ito: Okay. Super clear. And then my second one is just maybe a follow-up here, especially on the strategy to grow SMEs, which is a portfolio that you are investing a lot. How can we think about your portfolio mix? Currently, you have 50% of your book in corporate and 29% in SMEs. I don't know if you guys have a target that you could share with us, but I feel like we can continue having this much higher CAGR on SMEs. Edgardo del Rincón Gutiérrez: Yes. With the internal definition of SMEs, we have an SME portfolio or more than MXN 40 billion. That is important because, I mean, we are growing very well. But the margin that we have in that segment is much better than in the corporate segment. It's about 1.5% more margin in the loan book. But more important than that, it is easier to bring the customer and to engage the customer to all the rest of the services regarding cash management, FX, et cetera. So the revenue coming from that portfolio proportionally is very, very important. So that is the, I would say, the main segment for the bank. And I believe with these SME centers, we are putting in place a competitive advantage of BanBajío, we feel that the business model that we are implementing is working very, very well. Then that's why we are accelerating the number of SME centers in the following years. Operator: Our next question comes from the line of Neha Agarwala. Neha Agarwala: This is Neha Agarwala from HSBC. First one on the loan growth, which stands out as a bit on the higher side, especially when compared to some of the peer numbers that we have seen. What is the expectation in terms of USMCA agreement? In your budgeting, when do you expect that to be finalized as that could be a kicker in terms of loan growth? I'll go to my second question after. Edgardo del Rincón Gutiérrez: Thank you, Neha. Of course, loan demand has been affected by the uncertainty coming from the USMCA agreement and the negotiation that will happen during this first semester. In the loan growth, we are forecasting a more conservative growth during the first semester and a better second semester. So that is implied in the business plan that we are guiding. But our scenario is that we reach an agreement with the U.S. We believe that dependency that we have in those 2 markets is very important. And the best scenario for both countries is to reach an agreement. So that is the best scenario. Neha Agarwala: Okay. My second question is on the branch expansion that you've mentioned. With all of this investment to drive up the loan growth, could you compare the NIM profile for the large corporate segment and the SME segment? Because if the mix shifts more towards the SMEs, how in the next 2, 3 years should that impact your NIMs and your cost of risk? And given the expansion plan, it seems like the cost growth will probably be on an elevated level, not just in '26, but in '27, '28 as well, which could pressure the cost-to-income ratio. So how should we think about the evolution of cost-to-income ratio in the next 2, 3 years given the expansion plan? Edgardo del Rincón Gutiérrez: We don't have the NIM by segment at this moment. What I can tell you is the margin in the loan book is better, but also the mix of deposits has a better margin. And also nonfinancial income person at the size of the customer or the loan is more important. So profitability is better. The cross sale ratio in SMEs is more than 5 products and services. And the corporate is a little bit more than 3.2. So as a result, let's say, the SME is much more profitable than the corporate segment. Neha Agarwala: Perfect. And cost to income, if you could give some color on that, the impact on cost to income and how should it trend given the cost growth should be slightly higher? Joaquín Domínguez Cuenca: Neha, well, that cost to income maybe is one of the most important drivers we follow month by month. And what we saw in the last quarter is a quite increase in the cost of risk, but also an improvement in the generation of net interest income. So what we are considering for this year is that the growth on noninterest income that is well supported by a very diversified lines of products that we are offering to our clients will support the increase on expenses, even the reduction of the NIM. So we feel that we can very well supported and control the efficiency ratio due mainly to the growth of the net interest income. Operator: Our next question comes from the line of Brian Flores. Brian Flores: Brian Flores from Citi. I have 2 questions. The first one is on your NIM sensitivity because the cost of funding as a percentage of TIIE has been improving, and you've mentioned the efforts you have made on the asset side. I just wanted to maybe understand how you're positioning yourself, not for 2026 because we understand what is likely to happen. But the sensitivity for further ahead, I mean, when maybe Bajio becomes a bit more stable in the policy rate. Would you be willing by design to reduce the sensitivity for further cycles? I just wanted to understand. And also, I think in the last call -- last 2 calls, maybe you have mentioned a sustainable ROE of high teens. So do you think this guidance actually shows the, let's say, structural level ROE where we should see Bajio going forward? And then if I may, just a second one on GDP growth. In your presentation, I think you have 1.3% as a base case here. One of your peers was a bit more optimistic maybe on tailwinds from the World Cup and internal consumption in Mexico. Do you see if a scenario more similar to them, which is around 1.6% in terms of GDP plays out that there is upside on the loan growth side? Joaquín Domínguez Cuenca: Regarding the NIM sensitivity, what we are seeing is that we do not have a specific target of NIM sensitivity because that by itself do not necessarily reflects an increase in the income or the value of the bank. What it is important for us is to maintain a healthy growth even if the NIM have a reduction, it doesn't matter if the volume of business is higher. So it is quite difficult to say that we have a specific objective of reducing the NIM sensitivity because if we just have the idea to reduce it to 10 basis points, it probably will have high cost to make -- or to create that reduction and would reduce the net income. So it's not directly the relation between lower NIM sensitivity and higher income. So our focus is increased total income and margin income despite what happens with the NIM at itself. So what we are focusing is in improving the mix of assets and deposits, but not having a specific target of NIM sensitivity. Edgardo del Rincón Gutiérrez: Regarding -- thank you, Brian. Regarding ROE, as you saw, we are considering here an additional decrease in rates of 50 basis points to get to 6.50%. And we believe we are getting closer to the floor in rates with all the geopolitical situation and inflation in Mexico, we feel that we are getting close to the floor. And with that, sensitivity will be less important. We are sure that we feel comfortable in providing a sustainable ROE in high teens that is reflected in the guidance. And regarding GDP, we consider the average of the analysts. Actually, that bank that you are mentioning is one of the highest forecast in GDP growth, but the median of the different analysts in that analysis is 1.3%. Of course, if we can have a potential additional growth, more GDP growth that will help a lot in growing the loan portfolio, of course. Brian Flores: And just, I mean, do you have any sensitivity in terms of, let's say, this could add 4 bps to your base case scenario here in terms of loan growth? Edgardo del Rincón Gutiérrez: If you can repeat, it was the transmission connection. You can repeat, Brian, please? Brian Flores: Sure, sure. No problem. No, just wondering if you have a sensitivity measure as to the multiplier. So for example, if we have some upside risks here on GDP, where could we see your loan growth compared to your base case scenario? Edgardo del Rincón Gutiérrez: Actually, the multiple that we are using already in the guidance with a GDP growth of 1.3% is higher than previous years. And what we are planning to do is to gain market share and to bring more customers. So of course, with additional growth in the economy, that will help. But it's maybe difficult to forecast at this moment an upside opportunity regarding that. Operator: Our next question comes from the line of Ricardo Buchpiguel. Ricardo Buchpiguel: This is Ricardo Buchpiguel from BTG Pactual. Just have one question here. How do you see the competitive landscape in the corporate lending environment evolving? We see that BanBajío and other peers have been expanding a lot of their branches network you also have Banamex, is a big bank in Mexico came out of a change in control and eventually could become a bit more aggressive. And at the same time, as we have been discussing in this call, you have a lot of uncertainty mainly in the first half of the year because of this USMCA deal, right? So my question here, with a lot of uncertainty regarding how much the size of the market will grow and a lot of banks including ourselves increasing the number of branches and people, are you concerned in any way for potential pressures in rates? Edgardo del Rincón Gutiérrez: I believe that is a situation that always happen in this market. Competition is important. Of course, we try to compete more with service than with price. Of course, we need to provide a competitive price to the customer. But our business model is more to be really close to the customer, have a very good communication with them, understand very well the opportunity and risk that they are seen and try to help them in all the cycles. So -- but competition is huge. And I believe with the potential IPO of Banamex and they recover, let's say, the strategy that they used to have several years ago, competition will increase. But I mean, that is always happening. Normally in the corporate segment, we are always competing with at least one bank. We have less competition in the SME segment. But I mean, that is part of the regular scenario in this market. And I believe it's good for the market evolution and also for customers. Ricardo Buchpiguel: That's very clear. And just one quick follow-up. If you look at the last few months, not only in Q4, but a little bit in Q1, have you seen any changes in terms of competition, the pressures on rates or is overall stable? Edgardo del Rincón Gutiérrez: It's a huge competition environment. And I believe the fourth quarter was similar with the rest of the previous quarters during 2025. And of course, all the banks are trying to grow and to bring the best customers possible to those banks. So -- but I feel that the environment is stable. It's the same. Operator: Our next question comes from the line of Lindsey Shema. Lindsey Marie Shema: Lindsey Shema here from Goldman Sachs. I just have a quick question following up on the increase in write-offs in the quarter. Given the increase in write-offs this quarter, do you see any impacts from the change in regulation to the ability to be able to deduct write-offs from your taxes, and that's why you moved them ahead? Or is that completely separate? Edgardo del Rincón Gutiérrez: Thank you. We're expecting really the same level. If we consider write-off of 2025 plus the reserves associated with past due loans minus recoveries, we are talking about MXN 2.8 billion during 2025. And actually, that was the same number for '24. For '25 and with this NPL and cost of risk that we are expecting, we could have a small reduction in write-off during 2026. Regarding the new regulation, it will have an impact in the P&L, but will delay the capacity of the bank to deduct those write-offs. It will take at least 2 years starting in the moment that we start the legal action, let's say, to recover that loan. In terms of small loans lower than 30,000 UDIs is going to be 1 year. So it to have the P&L really, but the deduction of those write-offs will take longer. Operator: Our next question comes from the line of Federico Galassi. Federico Galassi: Federico Galassi from The Rohatyn Group. Two questions, if I may. The first one is last year, in the last part of the year was very vocal from the government that could be some caps on fees. I don't know if you have any comment on that. And the second one, maybe you mentioned that, but if you can repeat me what is the Mexican peso that are using in your guidance from the loan growth? Edgardo del Rincón Gutiérrez: Thank you, Federico. The only initiative that is on the table today is regarding interchange fees. There is not a decision yet, but it's an important reduction in interchange fees. Actually, the plan that we are proposing today to the market is not including any impact of this. But the revenues coming from interchange fees represent about 1.8% of total revenues of the bank. And as you saw in the initiative, they are putting a cap in interchange. That means that the discount rate that we are -- that the banks are charging, let's say, to the merchant, that acquiring bank will pay less interchange to the issuer. So on that regard, our acquiring business represent about 3% of total revenue. So that could imply in the short term, a benefit for the bank because of that difference, let's say, in percentage of revenue. Nevertheless, we see this initiative as negative for the market. And let's see what is going to be the final decision regarding that. But with the initiative as it is today, it has a potential positive impact in our numbers. Joaquín Domínguez Cuenca: Federico, this is Joaquin Dominguez. Regarding the second question, we have approximately $1,450 in loan portfolio. And what we are expecting is FX rate pretty close to MXN 80 per dollar at the end of the year. And that would imply a very marginal impact in the valuation of that loan portfolio. MXN 18. Operator: Our next question comes from the line of Andrew Geraghty. Andrew Geraghty: This is Andrew Geraghty from Morgan Stanley. Just a small question to clarify. When you guys said that you plan to open between 10 to 15 branches this year, does that consider the regional corporate banking offices and the SME centers? Or is that separate? Just wanted to clarify. Edgardo del Rincón Gutiérrez: Thank you, Andrew. And it's separate branches, it's that regular branch to make transactions and to sell products and services and the SME centers and the corporate regional offices are business units mainly with bankers to attend those segments. So it's completely different. Operator: Our next question comes from Brian Flores. Brian Flores: Just very quickly here, I was checking here my notes. I think one of the upside risks you mentioned here was probably a recovery of some loans, which I understand. And I think you mentioned sales of assets. Could you just give us examples as to what were you meaning by these sales of assets? Joaquín Domínguez Cuenca: Brian, as we have mentioned in several cases, we used to take warranties in most of our collaterals in more of the loans. So during the years, not specifically last year because it takes many years to recover assets. We have some disclosure assets. We should have a MXN 0 valuation in the balance. And if we sold those assets, we will have immediately an income due to that sales. And also, there are other cases also thanks to the guaranty collaterals that we are negotiation recovering before going the next step in the judicial process. So we have some cases in the pipeline in order to see that we can affirm that we will have some recoveries in this year due to the advanced process we have for those recoveries. Operator: We have not received any further questions at this point. So I would now like to hand the call back over for some closing remarks. Rodrigo Marimon Bernales: Thank you very much, everyone, for joining us today. We remain available to address any follow-up questions via e-mail and any meeting request. We look forward to speaking to you again in April 2026 when we release our first quarter 2026 results. Thank you very much, and have a nice day. Operator: That concludes today's call. You may now disconnect.
Francoise Dixon: And welcome to the Mach7 Q2 FY '26 Results Briefing. My name is Francoise Dixon, and I'm Head of Investor Relations for Mach7. Today, our CEO, Teri Thomas; and our CFO, Daniel Lee, will provide an overview of our Q2 FY '26 results. We will then open it up for questions. If you have a question, please submit it by the Q&A text box at the bottom of the screen. I'll now hand over to Teri. Teri Thomas: Thank you, Francoise. All right. Before I speak about the quarter, I want to briefly ground everyone in who we are and what we do, particularly for those who are newer to Mach7. So we complete the patient's picture with the patient's pictures. We get the right medical images to the right people in the right places at the right time. We do it fast and with diagnostic quality. We operate in a growing and important industry. And in my frequent conversations with our customers, I'm reminded regularly just how mission-critical our work is. While the health care industry has seen pretty solid progress organizing text-based clinical data over the years, imaging data, which goes far beyond x-rays, remains quite fragmented. Many types of images are locked in proprietary systems spread across multiple departments, stored in lots of different formats, and that causes fragmentation. That fragmentation represents opportunity and this opportunity Mach7 is well positioned to address. So our ambition is for Mach7 to become the world's imaging EMR. That ambition, big, it underpins our strategy of moving from archive to architecture, connecting imaging across the enterprise and enabling AI, improving interoperability with EMRs like Epic and Cerner and closing the gaps that still well exist to create comprehensive and unified patient records. Now turning to what you all are looking for the quarter. So today, Mach7 is providing a business update and quarterly cash flow report for the quarter ending 31 December 2025, our 4C. The quarter reflects continued and deliberate execution of the reset we outlined last quarter, sharpening our strategy, strengthening discipline and aligning the organization for sustainable and profitable growth. The quarter marked an inflection point, the strategy that we designed in September and October, and we announced on Halloween is now in motion. This is no longer about planning. It is about execution. The reset has been comprehensive. We've taken a top-to-bottom look at our structure, our processes, our technology, our commercial model, our culture, and we've brought this together into a dynamic operating model that links strategy, execution and accountability. This is hard work. As part of that work, we are taking a disciplined look across our customers, partners and contracts to ensure they support long-term profitability and strategic alignment. That includes being more selective about who we work with and in some cases, stepping back from low revenue relationships that create competitive conflicts or long-term risk to our growth and profitability. The outcome with the VHA, it was disappointing, but it also allows us to focus our resources on opportunities that better align with our core platform, our operating model and path to sustainable profitability. The VHA program required a level of custom development and service intensity that would have continued to weigh on margins over time. Now not all of these changes show up immediately in the numbers, but the foundations are now in place. We are building a performance-driven culture that values top talent, measurable outcomes and disciplined execution while balancing innovation with rigorous cost management and a respect for shareholder capital. So with that context, I'm going to hand it over to Dan, our CFO, to walk you through the financials for the quarter. Dan? Daniel Lee: Thanks, Teri. Looking at our financials for a moment, the second quarter reflects continued execution against the reset strategy that we did outline last quarter with improving discipline and operating performance. Our annual recurring revenue run rate was stable at $23 million on a constant currency basis, reflecting the underlying resiliency of our subscription and maintenance revenues. Our contracted annual recurring revenue or total CARR, closed at $26.1 million, representing a net reduction of $2.9 million over the quarter. This was primarily driven by the removal of the NTP project from our CARR backlog, partially offset by net new CARR sales. Sales orders totaled $6.8 million in the second quarter, including $3.1 million of new sales, reflecting industry confidence in Mach7's value proposition and the effectiveness of our strategy to date. Operating cash flows improved significantly over the prior quarter. Cash receipts from customers were $7.9 million, reflecting a catch-up of the majority of timing-related renewals and invoices that were delayed into Q1 and driving positive operating cash flow for Q2. On the cost side, total payments were $7.9 million, down 9% compared to the same quarter last year and 6% lower than the first quarter, reflecting the benefits of our efficiency and cost reduction initiatives. Advertising and marketing spend was $0.4 million, consistent with the prior year and higher than Q1 due to targeted investment in our primary marketing and lead generation event, RSNA. All other expense categories were on par or lower compared to both the prior quarter and prior year. We ended the quarter with $18.5 million in cash and 0 debt, maintaining a strong balance sheet that positions us well to continue executing on our strategy. Overall, the fundamentals remain very sound, and we continue to operate efficiently as we move into the second half. With that, I will hand it back to you, Teri. Teri Thomas: Thank you very much, Dan. All right. I'll now share a little bit more progress about the progress we're making on executing on our strategy. So first of all, commercial transformation, a big focus for me. It is well underway. During the quarter, we continued simplifying how we operate and lowering our cost base while selectively investing in areas that directly support commercial momentum and customer outcomes. Our primary focus has been strengthening our commercial engine. Today, our sales organization has grown, is more focused and is better supported than when I began 6 months ago with clear ownership across new customer acquisition, expansions, partners and services. We have reenergized the sales and marketing model, and we're strengthening our partner engagement through a more proactive and structured approach, including expanded partnerships with AWS, Dell and Ingram. Our new commercial leadership team is currently with me in California, translating strategy into execution plans across pipeline quality, revenue discipline, partner leverage and demand generation. Now RSNA 2025 was an important commercial activity for us. We showcased our move from archive to architecture with the launch of Flamingo, and we generated some high-quality sales leads through a more customer-grounded marketing approach, and we deepened engagement with more than a dozen partners, an increasingly important growth lever for us. We celebrated a significant product and commercial milestone this quarter with our first Flamingo architecture customer in Q2 fiscal year '26. This was our first contract for the new product and our first brand-new direct customer relationship since July 2023. It is an important signal that our refreshed commercial engine has begun executing. Expanding our commercial opportunities, Flamingo is modular by design, allowing customers to adopt capabilities incrementally, whether for existing Mach7 customers or those entirely new to us. It can be deployed alongside our VNA, our eUnity Viewer with both or independently. And over time, we will continue to expand the capabilities under the Flamingo's wings, strengthening clinical impact, AI integration, EMR connectivity and delivering seamless imaging access to complete the patient's record. While this extends beyond the quarter, January has been busy, and it represents a solid continuation of our execution. We achieved a key regulatory milestone with the eUnity Viewer receiving a new CE certificate under the EU medical device regulations, supporting continued access to European and critical Middle Eastern markets. We initiated platform expansion in Malaysia by hiring a developer, including also an experienced API integration developer, who is now fully onboarded and leading our first development work from that region. Development is underway supporting our global customer base and strengthening Flamingo's integration capabilities. We've established an intern program in both North America and Malaysia for access to fresh graduates with fresh ideas. These new staff are part of a deliberate expansion of our Asia-based team with plans to continue scaling as execution progresses. Operating discipline does remain a core focus. As Dan outlined, the organizational reshaping completed during the quarter delivered cost savings from reductions in IT, operating costs and infrastructure changes, also licensing optimization and contract renegotiations. We're moving and shaking things in a good way. Execution quality with customers also improving. Early gains in eUnity Viewer KLAS scores reflect the initial benefits of our flight crew customer engagement operating model and a renewed focus on accountability, responsiveness and consistency. This remains a top priority area as we continue to refine our model and raise that bar on the customers' experience. As we continue to shift from strategy definition into execution, leadership alignment continues to evolve. We've commenced a search for an experienced Chief Technology Officer following the departure of the Chief Innovation Officer in January. This reflects our focus on strengthening our engineering leadership, delivery of technology, platform scalability and execution excellence. We are also recruiting additional sales staff across Asia and North America to support expected demand from our expanded marketing activity, but we are doing this selectively and in alignment with demand. Looking ahead, Mach7 enters the second half of FY '26 with a clearer strategy, stronger operational foundations and improving commercial momentum. We remain focused on disciplined cost management while selectively investing in growth critical capabilities across sales, product development and platform scalability. As we shift away from the high effort Veterans Health Administration Teleradiology program, we're increasing our emphasis on capital deals in Asia and the Middle East. Over the past 2 weeks, I visited 4 customers across these regions, including one of our largest customers and was encouraged by the innovation we are seeing with Mach7 in production overseas. A parallel focus is continuing to build our transformed commercial engine. Expanded marketing initiatives are in planning and officially launched in February. The industry will see us showing up differently, and we intend to get more visibility with our target customer types. Now I'd like you to know, we are expanding our marketing capability in a disciplined way. Rather than materially increasing spend, we're partnering with an external marketing provider that brings stronger tools, deeper capabilities and greater scale. And this allows us to significantly expand our marketing output as well as our market presence and branding while keeping our investment essentially flat. The same approach applies to how we're expanding our development capability. By hiring developers in Malaysia, we can bring on 3 to 4 engineers for the market cost of 1 in the United States. Paired with our deeply knowledgeable engineering team on the ground in Malaysia, this approach allows us to expand our innovation capacity and accelerate the development of Flamingo as well as other innovations without a matching increase in our development cost base. While our industry sales cycles of 1 to 2 years means it will take time for these initiatives to produce the expected growth in revenue, we are digging in and we are doing the hard work with urgency and with focus, emphasizing not just growth of pipeline, but improved sales conversion rates. We expect Flamingo-related opportunities to begin contributing more meaningful to our ARR in the second half of fiscal year '26 and into fiscal year '27. I will provide further updates at our half year results, including additional insight into execution progress as we continue to build and gather momentum. Before I close, I want to thank our Board for their guidance and support, our employees for embracing change with energy and optimism and our shareholders for your patience and your continued belief in the company. And now time for questions. Francoise Dixon: Thanks, Teri. We have received several questions via the live chat, and I'll commence with the first one from Max. He asks, in dollar terms, what was the contribution to sales orders from renewals and separately, add-on and expansions? Teri Thomas: [indiscernible]. Go Dan. Daniel Lee: I'm happy to take that one. Thanks Teri. Thanks, Max, for that question. Renewals represented around 40% of our sales orders for the quarter. In dollar terms, that was $2.9 million. And add-ons and expansions were just over $0.9 million or 14% of total sales orders. Francoise Dixon: Thanks, Dan. Our next question comes from Andrew Stewart. I noted the comment of improvement in KLAS. Where do we sit at the moment? Teri Thomas: The best-in-KLAS results come out on February 4. And so I cannot tell you it's a few days away what they're going to look like. I do look regularly at KLAS myself as well as several of our other team members, and we put it on our corporate vital signs dashboards. Our eUnity numbers have been improving and looking great. They were tops, they went down. They're coming back up. Our VNA isn't where I wanted to be quite yet. Even this morning, I got a very nice positive comment from one of our VNA customers. So the positive comments are starting to trickle in. However, it's going to take a while before we work through some of the comments that brought our score down over time. So we're targeting the VNA. KLAS is a little challenging because it is a lagging indicator. So I see the VNA not where we want it to be yet, but we're systematically going through our customer base to engage with them in a different way than we've done before. We're executing a systematic engagement and assessment process, which will take several more months for us to complete. With the KLAS reporting lag, we expect it will take up to a year to see the benefits come through fully. So while we've had some fantastic early comments and feedback, including the comments KLAS publishes, but also the direct engagement and feedback from the KLAS staff themselves. And in fact, by the way, I'm going to share one of the most recent comments, they said they are very pleased with the results of our restructure. They love having a cockpit of people, and they're finding those people to be responsive and knowledgeable. The last part of the comment, I feel extremely confident in their ability to fix problems, which I would not have said a year ago. That's the profile I want to see from all of our KLAS comments, but it will take a while for KLAS to get a hold of those people and also for us to orient those customers to the changes underway. Francoise Dixon: Thanks, Teri. We have another question from Max who asks, can you expand on how some of these low revenue relationships were creating competitive conflicts? Teri Thomas: Yes. I'm not sure I'm comfortable sharing the actual names of the companies as that could create some legal risks. Therefore, I'm not going to name any names. However, when we acquired eUnity, some of the eUnity customers had a competing VNA and used our viewer. And that's a delicate situation. Do you want to enable a competitor to better compete with you with your own technology? So we've gone through and prioritized our partnerships, and we've looked at them carefully based on how much revenue they currently bring in, but also how strategically are they aligned with our growth expectations and the quality of the relationships. And there are a small number of those relationships that essentially cost more to maintain than they bring in for revenue and also carry some business probably not best practices. So we are doing a little bit of cleaning up the closets. Francoise Dixon: Thanks, Teri. We have another question from Max. What have you learned from customers around mission criticality? Teri Thomas: Now I've been in health care technology since 1989, and I'm a nurse. And so I understand the pain if a customer goes down or if the system isn't responsive. However, one thing I've learned is that I need the whole team to feel that pain, not just the flight crew, not just the support person. So one of the biggest things I've learned is how incredibly important it is to make sure that our staff really fully understand the impact on patients' lives and clinicians who are just trying to do their best work if our software isn't performing. And in fact, even this morning, I had a call with our team about a customer, and I said, forget the flow charts. If a customer is in trouble, you all get on the phone with them together right away. And if it means a developer is on, a developer is on. So it's creating that strong understanding across all of the roles and living our culture code, which starts with customers drive all of our decisions. So as a leader, I regularly prompt and ask the question, how would this answer feel to the customer? What does this mean to the customer? And what is the impact to the customer and training our company to think about that, not just in the customer-facing part of the business, but also product management, development and even the simple thing that we executed in our strategy, which is having someone answer the phones. Francoise Dixon: Thanks, Teri. Our next question comes from Darren who asked, if you could only focus on one weakness at Mark7 as a business right now, what would it be? And how would Mark7 fix it? Teri Thomas: That's a tough one. I do regularly sit back and think what is the most important thing for us to do. And I actually have a meeting next week to get alignment on big hairy audacious goals for the quarter because I do believe that can be an effective approach to rally our customers or rally our staff around our customers. That's actually the theme of what we're talking about. So I think what -- that last question is actually the answer to this next question. I think somehow Mach7 over time did a good job with taking care of its staff, organizing the business, but stepped away from that deep understanding of the customers' world, and we need to build that back. So in a great intentioned way, let's protect developer time, for example, developers stopped engaging with customers. They started operating on specifications that might have come from a customer to a support person to a product person to a development ops person to a developer. And it's a little bit like the phone game. You actually need to get people on the phone talking directly to be effective and not only do better quality development, but also it teaches people to really care. And it's a different level of caring when you talk to the customer than you're writing to a spec. So if I would say biggest weakness, that's the one we are attacking most heavily that I think will have the most profound impact on the work that we do as a company from top to bottom. Francoise Dixon: Thanks, Teri. Our next question comes from Scott Power who asks, can you expand on your plans to sell Southeast Asia and the Middle East? Teri Thomas: Sure. Yes, I had a whirlwind tour there last week. We have a fantastic team on the ground in Malaysia and Singapore. They're deeply knowledgeable. They actually don't have that Mach7 weakness in that they're really closely connected to the customers there, good understanding of the products. And the customers are really happy. I -- they were proud to show off what they're doing with our software. I visited 3 hospitals in Hong Kong. And I was amazed. They were telling me they were doing things that I heard from the North American team we couldn't do. And I'm like, well, are you doing this with our software? And I validated that, yes, in fact, they are. And so I thought build on where you've got success, and so my first visit there, I was impressed. This last visit there, I was even more impressed. And that's part of why I brought our founder, Ravi, back into the business. He lives in Singapore. He sees Mach7 kind of like a child of his. He wants us to grow up and be all we can be. And so he has this infectious enthusiasm and this energy and this just deep caring about the technology itself that carries a massive amount of credibility in Asia, a high context culture that really values founders. And between the new sales hire that we've got, another person that we're looking to hire, Ravi and that really strong technical team on the ground, we have several prospects in the pipeline that I think we have a great chance of closing as well as some expansion opportunities with our current customers, primarily in Qatar, in Hong Kong, but also even in Malaysia. People like to see their software being used in their country. And so there -- it's not super high profit compared to other areas, but they're right there and it makes a lot of sense. So we haven't done a lot of work on prospecting and trying to build the pipeline deliberately yet, but that will be one of the first things for both the new hire that just began and the open position that we hope to fill soon. So it's a great team. It's happy customers. That's a great recipe for that sales marketing flywheel. So I want to get that thing rolling. Francoise Dixon: Thanks, Teri. Our next question from Max is actually for Dan. Dan, what attracted you to the opportunity? Daniel Lee: Yes. Thanks again, Max. Well, I was drawn to the opportunity because really a combination of the company's reset mission, the stage of growth that the company is currently in and the mission to turn around the culture of the leadership team. The company had a very strong balance sheet. Fundamentals look very sound. And truthfully, it just felt like the kind of environment where I could make the most meaningful contributions and impact as well as continue to grow professionally. Francoise Dixon: We have no further questions on the chat, but I'll just pause a moment in case there are any final questions that crop up. Last chance for people. No, nothing has come through. I'll hand you back to you, Teri, for closing remarks. Teri Thomas: All right. I do believe in setting expectations correctly and then delivering, whether it's with customers, staff or even our investors. So with that in mind, I'm going to close by noting that we are driving a fundamental change in culture, in operating model and in execution, and that kind of change does not happen overnight. While we're pushing hard to accelerate sales cycles, the reality is the full impact on revenue, and as we mentioned, the KLAS scores will likely take 12 to 24 months to be fully visible in the form of our growth of ARR. So progress will be steady, but that kind of transformation and that acceleration of growth and profitability will take time. I'm very proud of the progress we've made, and I'm super excited by the opportunities ahead of us. I'm confident in where we're headed. Our strategy is pretty clear. The market opportunity, very real, and our balance sheet is strong. Delivery is what matters now. So I appreciate your patience as Mach7 evolves. It changes for the better, and we realize our immense potential. And with that, I thank you, and I look forward to sharing more with you soon. Thanks for joining us.
Operator: Ladies and gentlemen, welcome to Roche's Full Year Results Webinar 2025. My name is [ Henrik, ] and I'm the technical operator for today's call. Kindly note that the webinar is being recorded. [Operator Instructions] One last remark. If you would like to follow the presented slides on your end as well, please feel free to go to roche.com/investors to download the presentation. At this time, it's my pleasure to introduce you to Thomas Schinecker, CEO of Roche Group. Mr. Schinecker, the stage is yours. Thomas Schinecker: Thank you very much, and good morning, good afternoon and good evening. I'm really, really excited to share with you the update for the full year because we had an amazing fourth quarter, not only in terms of financial results, but also in terms of pipeline news. So let me get started on the normal overview slide. So group sales in 2025 grew with 7%, Pharma at 9%, Diagnostics at 2%. Again, this was due to the China healthcare pricing reforms. Without that, Diagnostics actually grew with 7% last year with a very strong operating performance with a core operating profit of plus 13% and a core operating margin plus 1.9 percentage points and core EPS plus 11%. So you may ask what's the difference between EPS and OP? Why is there a deceleration there? This is basically mostly driven through higher taxes. On the full year LOE impacts, we had impact of about CHF 700 million. Now I come really to the exciting part. We had truly an outstanding Q4 when it comes to pipeline news. From a pharma regulatory perspective, the EU approval for Gazyva in lupus nephritis, U.S. and EU approval for Lunsumio as subcut solution in third-line plus follicular lymphoma. And U.S. filing for giredestrant in post-CDKi ER-positive HER2-negative metastatic breast cancer. Now come the many positive readouts that we had. Phase III, FENtrepid and FENhance, so 2 positive studies in fenebrutinib, 1 in PPMS, the other one in RMS, a positive Phase III study just already this year in Enspryng in MOG-AD, positive Phase III lidERA giredestrant study in adjuvant ER-positive HER2-negative breast cancer, a positive Phase III PiaSky in aHUS and a positive Phase III in Gazyva in INS and another positive Phase III Gazyva in SLE and positive Phase II in CT-388 in obesity. And I know Teresa will go through a lot of these details with you, but you can see with very, very busy newsflow, and I think there are more exciting things to come also this year. On the diagnostic side, regulatory approval of the Elecsys dengue test, Matt will talk about that, the cobas BV/CV test and also the mass spectrometry extension of our menu. So exciting launches there as well. There is significant newsflow ahead in 2026. We are awaiting the second fenebrutinib study in RMS. We are awaiting persevERA, so the giredestrant in first-line ER-positive, HER2-negative metastatic breast cancer. We have other studies reading out in -- for Itovebi, but also for our divarasib KRAS medicine and further in Lunsumio and Gazyva. So again, I think very exciting. And we have a number of Phase II readouts coming. So it could again be a very busy year in terms of transition from Phase II into Phase III. And of course, everyone is talking about it, our next-generation sequencing solution. And we promised it for many years. Now here it is. So I'm super excited also personally that we are now coming with this very exciting solution to the market. And yes, I think it will cause a couple of [ waves ] in the market. Now let me go through the growth rates. And I don't think I have to cover too much on the left-hand side. But what you can see on the slide is that we have consistently strong growth in the last 2 years. And even before that, when we had the washout of COVID-19 tests and the medicine, we had a good underlying growth. So we always said we will deliver and we delivered. Now on the 2025, Pharma kept growing at 9%. Diagnostics, we did have the healthcare pricing reforms impact in China. Without that, Diagnostics would also have been growing consistently at 7% over this time period. Again, here, we just look at the full year, 9% growth, again by Pharmaceuticals division, 2% by Diagnostics. Again, without the China effect, it's 7% and the Roche Group has 7% growth. And this is really driven across our entire portfolio. I think Diagnostics, I already explained, and I know Matt will go into that further. Vabysmo, we have continued strong global growth. We do expect that we will see even more uptake in the next year when it comes to the U.S. market now that we are also supporting more on the co-pay assistance foundations, and Teresa will go into that. Also Xolair keeps growing significantly. Gazyva, we have now launching in lupus nephritis, but you will see also the other indications really contributing to the growth in this business. Oncology growing well at 6%. For Phesgo, we are now at the global conversion rates above 50%. Tecentriq, returning to low single-digit growth, Alecensa growth driven by U.S. and Japan. On the Hematology side, Polivy strong now. We are reaching a U.S. patient share of 36%. Columvi/Lunsumio, growth driven by second-line plus launch and third line plus DLBCL, strong third-line growth in follicular lymphoma. So you can see also in the Ocrevus franchise, we see now a strong uptake of the subcut solution, as we also discussed, and Evrysdi is the leading SMA solution and medicine now with more than 21,000 patients on treatment. So overall, we've achieved the upgraded guidance. On mid-single-digit sales growth, we had 7%. And you may remember in the QR -- in the IR call in Q3, you asked why are we not upgrading the guidance on sales? And my answer was because 7% is still mid-single digit, and we delivered 7%. So we delivered on what we also communicated. On core EPS, we upgraded the guidance from high single digit to high single digit to low double digit. And why did we do that? Because we already knew that we would land in double-digit range. So we wanted to include it in that range, and that's why we upgraded it at the time. And we further increased the dividends in Swiss franc. So I can say we, for the second year, upgraded the guidance during the year, and we ended up on the upper end of these 2 guidances every time in '24 and in '25. Now what's super exciting is the growth outlook. And the growth outlook has fundamentally changed based on some of the Phase III readouts that we have seen in Q4. Giredestrant, our SERD has had 2 positive readouts, one with evERA and the second one with lidERA, lidERA reading out early. We expected the readout only next year. But based on the very significant results, it read out early already this year. We're now waiting for the persevERA data, but we clearly see that we have a very active and very good molecule in hand. Not only is it going to replace the standard of care and it's going to become the new backbone in this field but it's so safe and tolerable that we do believe that this will become the standard of care. Fenebrutinib in MS, we had 2 positive studies here in RMS and in PPMS, and now Teresa will go into that. We're still waiting for the second, the FENhance 1 study in RMS in order to be able to file this. You will see the data in not-too-distant future. But again, we are very excited with the data that we have seen. Gazyva, the same. We've had already positive data in lupus nephritis. Now we have 2 more additional Phase III data, again, something that will give us momentum in the midterm. On vamikibart and in Enspryng, we had 2 trials each. And each of the 2 trials, we always had 2 arms and 2 different doses. In one trial, in both of those, it was fully positive trial. In the second trial, one dose was positive, the other one was negative. Now this was always a very close call. And based on the conversations we had with the FDA, we do believe that the FDA will support filing here. So this is the midterm. And in the long term, what's also exciting is that we had 10 NMEs moving into Phase III. That's a record for us. We've never had 10 NMEs moving into Phase III. And these are all NMEs with substantial revenue and patient impact attached to them. Now we know the other part or a topic that's on your mind is our agreement with the U.S. government. Now the agreement we reached with the U.S. government is not an LOI, it's a contract with the U.S. government. And based on this contract with the U.S. government, which is terminated for the next 3 years, we get an exemption from tariffs, and we get an exemption of the demo projects. In return, we agreed to the Medicaid rebates in some of our portfolio. We agreed to the encouragement of other wealthy nations to reward biopharmaceutical innovation and to pay their share to contribute to innovation. And we also support the direct-to-patient medication access with our influenza portfolio, Xofluza and Tamiflu and also future medicines with which we can go direct to patients. Also, we agreed to invest in the United States $50 billion over the next 5 years. This includes R&D and PP&E investments. And for example, on the red dots on the right-hand side, you can see where these investments are happening. In North Carolina, Holly Springs, we are investing $2 billion in manufacturing for our CVRM portfolio. In Indianapolis, we're investing in CGM manufacturing. And in Boston, we're investing in our research hub as well as we're going to invest more in Genentech in San Francisco. But we already have a very strong manufacturing and R&D network present in the United States. Now it's all about delivering on the next innovation cycle. So I think we have good growth momentum. We do believe we can sustain the good growth momentum and how do we keep that beyond 2030. Well, one is we've made substantial progress on our initiatives in order to prepare the company for future success. For the last 3 years, we've been talking about high-performing organization, about delivery and about execution. And I do believe we've delivered on that. We've introduced the bar so that we focus on those medicines with the highest impact. We have an intentional focus in terms of TAs and also -- and disease areas. And we look at the portfolio as an overall investment portfolio with certain risk and reward profiles that we want to balance to have the right portfolio. We're expanding into new technologies, not only in Dia, but also in Pharma, and we're implementing AI across the value chain. And we've made good progress in R&D. Now more than 60% of the NMEs are post bar, 66% of the late-stage projects have best-in-disease potential. We want to get to 80% and 60% more average peak sales per pipeline project. If you actually take not end of '23, if you take end of '22, it's even higher. And the same for the total portfolio value. Since end of '23, it's about 45%. If you look at end of '22 as a comparator, we are more than 60% higher, and this is a risk-adjusted value. So we do believe we've made a significant move when it comes to our pipeline in terms of higher rewards and also manageable risk. We have a strong on-market portfolio. In the midterm, we have great readouts that are going to help us sustain our growth, but we have many, many NMEs that will read out before the end of this decade. And many of them can be significant contributors to the sales of our company. And here, you can see the prioritization that we have done over the years in our portfolio, really taking out high-risk, low-value projects and adding higher-value projects with very strong data as a foundation that gives us more confidence into Phase III. And this has resulted in a significant shift in our portfolio value. As mentioned, this is year-end '23 as a baseline. If you take year-end '22, it's even significantly higher. And on the Diagnostics side, as I mentioned, we have been experiencing the headwinds in China from the healthcare pricing reforms. These headwinds will become a lot less in 2026 and will be gone in 2027. We will continue to grow significantly. This year, we expect mid-single-digit growth, but then back to mid- to high single-digit growth. And these products that you see here can each contribute additional CHF 1 billion when it comes to sales per year. And again, very excited about the sequence of that's coming. Now let me go through the outlook. For 2026, we again have an exciting year when it comes in terms of pipeline readouts. But then after that '27, '28, '29, we will have many different NMEs that will have Phase III readouts. In '26, I just want to highlight a couple, persevERA for giredestrant and fenebrutinib, Itovebi, divarasib, a number that can also continue to drive our growth in the next years. And of course, we have a number of Phase II readouts in obesity, 2 of them already have been positive this year. So we had a very good start. So the year ended well in terms of readouts and the year started well in terms of readouts. So we are very positive in terms of the momentum that we have and that we can continue this momentum. And these are the 19 medicines that we can launch by the end of the decade. Now it's clear that not all 19 ultimately will make it. But these are really substantial contributions that they can deliver to the future business of our company and to patients out there. So I'm very excited about what's ahead for us. Now let me talk about the 2026 guidance. In group sales, again, we expect mid-single-digit sales growth; in core EPS, high single-digit core EPS growth, and we do believe that we can continue to further increase the dividend in Swiss francs. With that, I hand it over to Teresa or to Alan, yes. Alan Hippe: Yes, welcome from my side as well. As Thomas said, great pipeline progress. And that really then combined with great financial results. I think that's really -- that's a great setup, and thanks to the whole Roche team for delivering that. So let's go into the results right away. And here's the overview. And I will focus on the right-hand side, so really the changes in constant rates. Sales plus 7%. Matt and Teresa will go into this, 9% on the Pharma side, 2% on the Dia side. As said, I think on the Dia side with the impact from China. Matt will highlight this. The core operating profit, plus 13%. So you see really good cost containment, but at the same time, we have invested where it really matters. And I will lead you through this. And then Thomas mentioned it, slower momentum on the core net income and the core EPS, yes, driven by a higher tax load, roughly CHF 600 million, CHF 579 million more taxes that we had to pay, which brought the momentum a little bit down. IFRS net income up 58%. And you know where it comes from. It comes from a base effect from last year. We had 2 goodwill impairments accounted for CHF 3.2 billion negatively. If you adjust for that, I think it would be a plus 20%, which, in my opinion, mirrors very well the operational performance. Well, now I come to the cash flow. And we can now debate quite a bit about the cash flow. I think you see it, CHF 16.2 billion, down from CHF 20.2 billion. Let me say here, we had really a very strong December when it comes to sales and quite an increase in accounts receivables. They will convert into cash. So automatically, what I'm saying, I'm expecting quite a strong cash year 2026. The other piece here is in the net trade working capital inventories. We had the situation that we had to deal with the tariffs. So we brought inventories up a little bit. That contributed to this. And last but not least, we have invested more into intangible assets, roughly CHF 600 million. I come to this, but I think that explains the number very well. As I said, I think we will recover quite well on the cash flow side in 2026. Let me say, I will also highlight this net debt came down at the same time. I will lead you through this. Good. I think when you look really at the bridge here for the sales, in constant rates, 7% up, as you can see. When you go from the left-hand side to the right-hand side, it's a plus 2% because we have the currency impact in, which is quite significant with minus 5 percentage points. Let me focus on the middle. You see Pharma and the loss of exclusivity of minus CHF 745 million, in total, a plus 9%, as mentioned. And then you see the situation in Dia, where we have a 7% growth, excluding China. And we have then an impact of minus CHF 579 million coming really from the healthcare pricing reform in China, which means a minus 24% of sales in China itself. Good. With that, let's go through the P&L. I talked about the sales growth. Other revenue, I think on one hand, we had a lower milestone income compared to last year, minus CHF 87 million, but we also had higher royalty income. That's why this is very, very stable and really looks good. Cost of sales, both divisions increased their cost of sales by 7%, but with very different dynamics. I think we in -- from a volume point of view in Pharma, plus 13%. So very, very clearly, I think here a driver for the plus 7% growth on the cost side. I think that growth was also a little bit supported by royalty expenses. And the Dia division, plus 4% on the volume side compared now to a plus 7% growth on the cost side. So what is that triggered by? Well, very clearly, the healthcare reform plays a role here, so China once again, but also higher costs related to placing of machines, which certainly fuels our future growth of diagnostics, so well invested here. We had certainly investments into the new technologies like CGM, Lumira, et cetera. And last but not least, we had a tariff impact on the Diagnostics side of CHF 64 million half year impact. So it's also something we potentially have to deal with in 2026. Core operating profit up 13%, a nice margin increase. When you look at the margins itself, I think really in constant rates, overall, plus 1.9 percentage points for the group. You see a nice progression on the Pharma division. You see a decrease of minus 1.1 percentage points in CER on the Diagnostics division side, which is explainable given that here, a significant portion of the sales in China went away. When you look at the core financial results, and really here, interestingly, I think really in CER, we have an increase. When you look at Swiss francs, we have a decrease. And I think really what that speaks for is, well, the U.S. dollar is weak, hurts us a little bit in the P&L, but helps us with the financial result. That's one conclusion here. You see the equity securities with minus CHF 88 million. I think the market has recovered, but we have some investments in the Roche Venture Fund where we wait for data. So hopefully, a better year ahead. Net interest income, we had less cash available, led to less income here. Interest expenses was plus CHF 69 million; in concentrate, it would be rather flattish. But let me say here, certainly, the weak U.S. dollar helped. And then we have really here other, and these are predominantly less hyperinflation impacts compared to last year. So with that, let's go to the tax rate. And Thomas mentioned it, I mentioned it already. Let's focus on the middle of the slide. First, you see really the effective tax rate full year 2024, excluding the resolution of tax disputes, 18.1%. And then you see really the effective tax rate full year 2025, excluding the resolution of tax disputes, 19.5%. So you really see the increased momentum here. Both years were really mitigated by the resolution of tax disputes. In 2024, that was a positive of CHF 263 million, representing a minus 1.4 percentage points. And in 2025, it was a lower effect, plus CHF 185 million in constant rates, resulting in minus 0.9 percentage points, leading to the effective tax rate full year 2025 with 18.6%. Well, for 2026, I think we will hover more to a 20% tax rate. Core EPS. On the core EPS side, this is the bridge here. I think for me, the most important point to say is it's driven by operations. The increase in core EPS is driven by operations. And I think there's nothing better to say here. Look, I think the product disposals, you've seen in the P&L, I think less income coming from that. Financial income and expenses are negative in constant rates, the slides in constant rates, that's a negative. It's roughly CHF 60 million. And then effective tax rate changes, as said, this is the once again mentioned increase on the tax side that we have seen here. So operations was the major driver. All other effects on that slide worked against us. When you look at non-core, and the IFRS income, I've mentioned the IFRS income, see it on the right-hand side, plus 58%. Core operating profit, I've mentioned as well with plus 13%. Perhaps 2 points to mention on that slide. One is the global restructuring plans. You see really the restructuring charges have increased by roughly CHF 300 million. I would argue that's a positive because that gives us savings in the future. And then I think you see the impairments of intangible assets, as mentioned, not a lot of impact in 2025. In 2024, with CHF 4.6 billion negatively, an enormous impact, very much driven by the 2 goodwill impairments for Spark and Flatiron accounting both together, minus CHF 3.2 billion. With that, let's go to the cash. And here's the story. And look at the left-hand side, CHF 20.2 billion, I've mentioned that already in 2024. And then you see in constant rates, full year 2025 with CHF 17.7 billion. Well, you see really when you go back to the left-hand side, the operating profit, net of cash adjustments. I think that's the positive momentum coming from operations, really positive. And then you see the net working capital movement. And out of that net working capital movement's, minus CHF 2.2 billion comes from net trade working capital. And as I said, predominantly driven by accounts receivables. Let me mention here that has nothing to do with extended payment terms for certain products and nothing to do with Vabysmo. This is really we have for -- especially for Vabysmo payment terms for a longer period for the last couple of years, and we have not changed them. So this is really because we had a strong December and that brought the accounts receivables up. We have the higher inventories on the Pharma side. That explains the minus CHF 2.2 billion. We have the investments in PP&E, placements in Diagnostics for the positive site investments that we have done. And then we have the investments in intangible assets, the increase of CHF 645 million, very much driven by Zealand and the deal we have done there. Then foreign exchange kicks in with minus 8 percentage points quite significantly leads us to an operating free cash flow of CHF 16.2 billion. Well, I think when you look at the margins, I think that tells the same story here. When you look for it, I can just really point back to the fact that we will recover in 2026. Now when I talk about cash, I have to talk about the net debt development and debt in total as well. And as said, I think interestingly, when you look really at net debt at the end of 2024 with minus CHF 17.3 billion. If you compare that on the right-hand side with the net debt position at the end of 2025, we have reduced by CHF 1.1 billion. So you might ask yourself, okay, the cash flow was not so strong. How is that possible? Did they invest less, especially on the M&A side? No, we didn't. I think that the numbers are really on the lower part of the slide. As you can see on the right-hand side, you see what we've invested in intangible assets and in M&A is pretty equal, CHF 4.6 billion in 2024 and even more in 2025 with CHF 5.1 billion. One driver here is the weaker U.S. dollar. And you see it really when you look really on this bar, minus CHF 10.7 billion, dividends, M&A and alliance transactions and other, there is the currency translation point with plus CHF 1.8 billion. That is a major driver here and helps us on the debt side. By the way, we have decreased gross debt by CHF 3.1 billion. And certainly, as 70% of our gross debt is in U.S. dollar, the U.S. dollar helps in that sense to bring the debt down, at least when we report in Swiss francs. Good. With that, a quick comment on the balance sheet. Not too much to say. When you look really on the left-hand side, where we have the assets, I think cash and marketable securities went a little bit down. Nothing to mention here, paid the dividend, all of that. When you look at other current assets, well, higher trade receivables, as mentioned already, mostly coming from the Pharma side. And when you look really at the noncurrent assets, that was driven by higher intangible assets of CHF 4.1 billion, mostly acquisitions accounting for plus CHF 2.5 billion. On the right-hand side, you see the liabilities and the equity. The current liabilities increased mainly due to the higher accounts of payables and bank creditors, some loans here. And the noncurrent liabilities decreased slightly due to the decrease in long-term debt. I've mentioned the CHF 3.1 billion already. Leads us to an equity increase quite nicely and now an equity ratio of 38%. Good. Leads me to the currencies. Well, yes, I think really, the volatility is certainly disturbing. And the weak U.S. dollar is something we're fighting against. You see really the result for the full year, minus 5 percentage points on sales and minus 8 percentage points on core operating profit, a minus 7 percentage points on core EPS. To be honest, if you apply today's rates, that would be basically the same picture for 2026 if we keep all that rates from today until the end of the year 2026. So I think it would be basically the same impact. When you compare at year-end 2025 and you keep these currency rates stable until the end of 2026, you see it really on the box down low. The impact would be minus 4 percentage points on sales and minus 6 percentage points on core operating profit and core EPS. This topic remains in 2026. Good core EPS. I think really we want to set the base right for you for the core EPS and what is the starting point because we have currency effects in the core EPS. So let me lead you through this. You see on the left-hand side, the CHF 19.46 per share as reported. And then I think really, we adjust for CHF 0.37 to get to the CHF 19.83 per share, which would be the starting base for your calculations in -- or if you like, for the core EPS in 2026. So let me explain now the CHF 0.37. What you see here, these are the exchange rate effects. This is a result of dividing the 2025 currency losses of minus CHF 273 million as well as the 2025 losses on net monetary position in hyperinflationary economies of minus CHF 48 million. This is shown in Note 4 of the consolidated financial statements on Page 64. So on Page 64, you find these 2 numbers. Net of taxes and noncontrolling interest by the number of diluted shares of 803 million, and this number is outlined in Note 29 of the finance report on Page 126, just to confirm that, which is, I think, quite a positive because it sets the higher bar for us, so to say. So hopefully, a little bit of a positive for the projections for 2025. Here's the guidance again. Thomas has alluded to it. Let me mention to it, the loss of exclusivity impact that we have estimated or actually that we expect of roughly CHF 1 billion for 2026. So relatively narrow to what we had for 2025 and well in line between the CHF 1 billion and CHF 1.5 billion that we've indicated to you that we will have on an ongoing basis. And with that, I have the pleasure to hand over to Teresa. Teresa Graham: Fantastic. Thanks, Alan. So I'm going to hand it back to Alan. Alan Hippe: You hand it back to me. Teresa -- it's hard to bring it to you. But let me make a last comment here. We have a change in our income statement presentation for 2026. Let me say very clearly, has nothing to do with the group in itself. So really, when you look at sales, group core operating profit and the core EPS, the metrics are unaffected. This topic is between corporate and the divisions. And basically, what we're doing is we are centralizing the legal department. That's what we're doing. And that has quite an impact. When you look at Pharma, we reduced SG&A costs in Pharma by CHF 250 million, roughly, I think, certainly in constant rates, which represents roughly 0.5 percentage point in core operating profit margin. So you should adjust for that in your calculations. On the Diagnostics side, that's roughly CHF 50 million less for the SG&A costs, which represents 0.4 percentage points in the core operating profit margin in CR. Corporate equally then would increase by CHF 300 million. Just to point that out, as I said, for the group accounts, nothing changed. This is between the divisions and corporate. Just to remind you when you project your margins forward for 2026, especially for the divisions. And now, yes, I have the pleasure to hand over to Teresa. Teresa Graham: I'm going to move forward really quickly in case they try and take it away from me again. So let's jump right in. So as Thomas shared the group perspective with you a little earlier, I wanted to provide some additional color on the key priorities for the Pharma division, starting with our focus on delivering the on-market portfolio. Q4 2025 marks our eighth consecutive quarter of growth. So today's on-market portfolio continues to deliver strong performance with 16 blockbusters across our 5 therapeutic areas. We expect this momentum to continue until 2028. And thereafter, we expect that sales become stable to fully compensate for generic erosion. Importantly, we do not expect a patent cliff. As Thomas mentioned, though, in the near term, we are expecting to deliver multiple key launches, which come on top of today's on-market portfolio. This includes Gazyva in immunology, giredestrant in breast cancer, fenebrutinib in MS, vamikibart in UME and Enspryng with additional indications in both neurology and ophthalmology. We expect that these products are going to continue to extend our growth momentum until well beyond 2028. We are currently in the process of updating our mid- to long-term outlook, and we'll be sharing that with you a little bit later this year. And so while we're very excited for these upcoming launches, we are just as excited about the progress that we've made on our pipeline. As Thomas mentioned, through R&D excellence and rigorous application of the bar, we have successfully rejuvenated our pipeline. With our post-bar NMEs, we have the potential to enter new disease areas like Alzheimer's and obesity, and we aim to bring multiple new transformational medicines to patients. As I mentioned at Pharma Day, all of our activities are really driven by 2 key tenets: discipline in the business and rigor in the science. Discipline in the business, we remain committed to keeping our COP at least stable. And rigor in the science, optimizing how we spend our R&D budget and applying our bar criteria to each and every asset progressing in the pipeline or entering it, including from partnerships or acquisitions. I am truly excited and confident for the future of Pharma, delivering transformative medicines and sustaining our growth momentum. So now let's take a closer look at how this momentum played out in 2025, and we'll start with the full year sales. So as you heard from both Thomas and Alan, Pharma sales grew at 9% at constant exchange rates, reaching CHF 47.7 billion. All regions are delivering strong performance, led by our international region with 14% growth. And overall, our volumes were up by 13%. As Alan mentioned, COP increased by 13% versus that 9% sales increase with a COP margin of 49.2%, so a slight increase over last year. Clearly, COP grew ahead of sales, which we mainly attribute to effective cost management, particularly in R&D, but I am going to drill down on the individual line items in a little more detail. Other revenue slightly decreased by 1% with higher profit share income from the higher sales of Venclexta in the U.S., which was offset by lower income from our out-licensing agreements. As Alan mentioned, cost of sales increased 7% against a 13% volume growth. R&D costs declined by 3%. This was mainly driven by savings in Flatiron as well as some other operational efficiencies. But let me say that this reduction was very thoughtful and deliberate as it gives us the oxygen that we need for the upcoming CVRM Phase III trials. SG&A costs increased by 8%, and this is primarily for 2 reasons. It was driven by some investments in our growth drivers, particularly Ocrevus and Xolair, but also increased donations to multiple independent co-pay assistance foundations. As part of our broader corporate philanthropy strategy, Genentech doubled its donations to those independent co-pay assistance foundations in 2025 versus 2024. Our corporate giving strategy is focused on supporting the patients most in need across multiple therapeutic areas, including oncology, neurology, immunology and ophthalmology. And we continually evaluate the strategy to ensure that it remains aligned to patient needs. And finally, other operating income and expenses decreased by 43%, and this is primarily due to lower gains on the disposal of products. And so now let's look at our individual growth drivers. So as always, first, I have to comment on the graph. These are all absolute values and year-over-year growth rates are presented at constant exchange rates. At full year, our top brands, Phesgo, Xolair, Ocrevus, Hemlibra, Vabysmo and Polivy generated roughly CHF 3.6 billion in new sales at constant exchange rates. For the fourth quarter in a row, Phesgo is our #1 growth driver with 48% growth, closely followed by Xolair, driven by the continued outstanding uptake in food allergy. You'll also notice the strong performance of Xofluza. And I just want to talk for a minute about that here, which is driven by the strong flu season that we saw in Q1 of 2025 in China. This may create a bit of a base effect for Xofluza in 2026, especially considering that we haven't seen a similarly strong flu season in China this year. So now let's dive into our TAs, starting with oncology. Oncology sales increased by 2% to CHF 15.3 billion, primarily driven by our HER2 franchise. As I mentioned, Phesgo posted an impressive 48% growth and the global conversion rate keeps climbing. We're now at 54%, well on our way to our new goal of 60%. This, of course, also means that Perjeta conversion to Phesgo continues to impact Perjeta sales, which is to be expected. Kadcyla growth continues to be driven by uptake in adjuvant breast cancer. Looking forward to the HER2 franchise overall, and as I've said previously, we expect the HER2 franchise to peak this year at about CHF 9 billion at 2024 exchange rates, followed by a steady decline through the end of the decade with a solid tail of around CHF 4 billion. And that CHF 4 billion is primarily Phesgo, about CHF 1 billion for Kadcyla and a bit of HMP. We do not foresee a biosimilar in the U.S. for Perjeta until the end of 2027. And let me also confirm again that we do not expect a cliff situation for the HER2 franchise. For Itovebi, we see good launch momentum in our first-line PI3 kinase HR-positive breast cancer population, and we expect 2 Phase III readouts this year with INAVO121 and 122, which could enable further indication expansion. But of course, the highlight of Q4 was the positive Phase III lidERA result for giredestrant. I am going to cover this in more depth on the next slide, but let me give you a few quick updates on giredestrant in general. We presented the lidERA data at San Antonio Breast, and we have already filed the evERA results with the FDA that happened at the end of last year, and EU filing is expected for 2026. Therefore, we expect evERA U.S. approval later this year, lidERA results will be filed with the U.S. and EU regulators this year. In the first half of this year, we expect the readout of persevERA in first-line ER-positive, HER2-negative metastatic breast cancer. Moving on to Tecentriq. Tecentriq exited 2025 with 3% growth and actually quite a nice Q4. For 2026, we expect low single-digit growth for Tecentriq, driven by the positive studies that we shared last year, such as IMforte in small cell, IMvigor in MIBC and ATOMIC in dMMR colon cancer. And finally, before I move to the next slide, let me just briefly mention that we expect the first Phase III readout for our KRASG12C inhibitor, divarasib, later this year. So now let's take a closer look at the lidERA results for giredestrant. So here are the giredestrant-lidERA results in adjuvant ER-positive HER2-negative breast cancer, which we presented last December. As you can see, giredestrant demonstrated a statistically significant and clinically meaningful improvement in invasive disease-free survival versus standard of care endocrine therapy, achieving a hazard ratio of 0.7. Let me emphasize here that this is the first oral SERD to show superior IDFS versus endocrine therapy in the adjuvant setting. And in terms of overall survival, the data was still immature, but clearly, a positive trend for giredestrant was observed with a hazard ratio of 0.79. Giredestrant safety profile remains favorable as we've seen in previously -- previous studies. And importantly, we saw a lower discontinuation rate with giredestrant versus the comparator arm. This is a significant improvement in this setting, and it indicates the improved patient experience on giredestrant compared to standard of care. So taken together, these results further underline giredestrant's potential as a next-generation best-in-class endocrine therapy in ER-positive breast cancer. To expand on this, let me dive a little bit deeper into the giredestrant development program. So now given the positive evERA and lidERA results we just discussed and the upcoming readouts, we're very excited for the future of giredestrant. Giredestrant has the potential to replace standard of care endocrine therapy in ER-positive breast cancer and become the new backbone of choice in this setting. As you can see in the treatment paradigm on the left, our clinical development program for giredestrant covers different lines of treatment and risk groups with the readout of persevERA in first-line expected mid-first half of this year. Please note that the giredestrant plus CDK4/6 combination in lidERA relates to a single-arm substudy that's still being evaluated. That's in combination with [ abema ]. We have also started a sub-study in combination with [ ribo ] as well. As you would expect, we are working at speed to complete filings and collaborate with regulators to ensure that this transformational medicine gets to patients as fast as possible. And just to reiterate, we have already filed evERA in the U.S. and expect lidERA filing in Q1. Beyond giredestrant, we also have a strong pipeline of potentially best-in-class molecules in breast cancer that give us the opportunity for numerous future combinations. For instance, our highly potent CDK4/2 inhibitor, which may overcome some of the limitations of currently available CDK4/6 inhibitors. And as I mentioned, we believe giredestrant has the possibility to become the new backbone of choice in ER-positive breast cancer. And therefore, we're exploring many combinations with some of the internal assets, as I just mentioned. Additionally, our phone keeps ringing as we are getting calls from potential partners interested in combination studies with giredestrant. We look forward to sharing future updates on our breast cancer pipeline with you in the near future. But for now, let's move on to hematology. The hematology franchise delivered strong growth of 15% in 2025, achieving CHF 8.6 billion in sales. Hemlibra closed the year with strong growth, 12% (sic) [ 11% ] driven by increasing adoption in the non-inhibitor patient population. For 2026, we expect low single-digit growth, and that's partly driven by competitor launches, which are anticipated later in the year. Polivy's growth momentum continued in 2025, reaching U.S. patient sales of 36% in first-line DLBCL. But in fact, we reached 2 significant milestones with Polivy last year. First, it is now the most prescribed regimen for IPI 2-5 patients in the U.S. And second, we have officially hit more than CHF 1 billion in sale in the first-line DLB setting alone. Shifting to Columvi and Lunsumio, our CD20, CD3 bispecifics. Launch performance remains on track for Columvi in third-line plus DLBCL with second-line DLBCL launches gearing up. For Lunsumio, we're happy to report that the subcutaneous formulation has been approved in both the U.S. and the EU. And just a reminder that, that new formulation reduces administration time from hours down to actually under a minute. Additionally, we expect 2 key events for Lunsumio later this year. We expect U.S. approval for Lunsumio plus Polivy in second-line DLBCL based on the positive SUNMO results, and we expect the readout for the Phase III CELESTIMO in second-line plus follicular lymphoma. So now let's move on to neurology. Our neurology franchise achieved CHF 9.8 billion in sales in 2025 with a strong growth of 11%. Ocrevus continues to have good momentum, delivering 9% growth globally and crossing the CHF 7 billion milestone in annual sales. We're excited to see the increasing growth momentum of our subcutaneous formulation known as Zunovo in the U.S. In Q4, more than half of global Ocrevus growth was driven by the subcut formulation. And importantly, in the U.S. and many other early launch countries, roughly 50% of Zunovo patients are naive to an Ocrevus. This represents that acceleration that we've been talking about. U.S. uptake continues to be driven primarily by community practices, which emphasizes how Zunovo is actually expanding the addressable market and can help overcome healthcare system restraints like IV capacity limitations. Overall, we now have more than 17,500 patients on Ocrevus now globally, and that's roughly 5,000 more than we had at Q3. For 2026, we expect to hit high single-digit to low double-digit growth for Ocrevus. And as a reminder, we upgraded our peak sales expectations for Ocrevus for the Ocrevus franchise to CHF 9 billion by 2029. This includes CHF 2 billion of incremental sales from Ocrevus subcut. But of course, there's also going to be some switching from IV to subcut. Staying with the MS franchise, you've seen the exciting news regarding the positive 3 results for fenebrutinib. We're going to cover that more on the next slide. But for now, let's take a minute on Evrysdi. The global rollout of the tablet formation continues, and we see great pickup from that as well as very positive feedback from the patient community. As Thomas mentioned, this remains the leader in SMA. Quick note that Q4 performance for Evrysdi in international was boosted by a tender-related buying pattern, but we are still expecting double-digit growth for Evrysdi next year. Earlier this week, you saw positive data from Elevidys in DMD. We continue to believe in the positive risk-benefit profile in the ambulatory DMD population and more than 1,050 patients have already been treated globally in this setting. Furthermore, the latest 3-year data from EMBARK shows the durable efficacy and slowing of disease progression for ambulatory DMD patients treated with Elevidys. We are working with EMA continually to find a viable path forward for EU patient access here. Quickly stopping over prasi, a quick update here where we have achieved both FPI for the Phase III study as well as we have been able to materially accelerate site activation. So we're a number of months ahead of schedule with the prasi trial, which is great news for patients. And let me close quickly by speaking a little bit about Enspryng in MOG-AD. So MOG-AD, if you are not aware, is a rare antibody-mediated autoimmune condition of the central nervous system, which causes inflammation of the brain, optic nerve and spinal cord. The Phase III study METEOROID read out positively. And we're looking forward to presenting that data at an upcoming medical conference later this year. We expect to file these results with the U.S. and EU regulators in 2026, and this additional indication could unlock an upside of approximately CHF 500 million for Enspryng. So now as promised, let's take a little bit of a deeper look at fenebrutinib. We are very excited about the positive Phase III readouts for fene. This includes FENtrepid in PPMS and FENhance 2 in RMS with the FENhance 1 readout expected mid half of this year. These results make fenebrutinib the only BTK inhibitor with positive Phase III results in both RMS and PPMS, and it has the potential to be both first and best-in-class in RMS and PPMS, which would also make it the first and only high-efficacy oral treatment for both relapsing and progressive multiple sclerosis. We see fenebrutinib as an opportunity to increase high efficacy treatment rates amongst MS patients and expand the footprint of our franchise. Ocrevus and now Ocrevus subcut have brought transformational impact to people living with MS, and we believe fenebrutinib has the potential to be that next transformational medicine for these patients. Let me also briefly remind you that fenebrutinib is differentiated by design from other BTK inhibitors. It is the only noncovalent binding BTK in Phase III development for MS and has a highly optimized PK profile that allows it to reach its target, including in the brain. So stay tuned for the FENhance 1 readout in half 1. And until then, we look forward to presenting the FENtrepid results in PPMS at ACTRIMS, where we are also inviting you to attend our IR event on the 9th of February. And so with that, let's move on to immunology. Our immunology franchise grew at 12% at constant exchange rates and reached CHF 6.7 billion in sales. Xolair's strong growth momentum continues, driven by uptake in food allergy. In 2025, we achieved 32% growth in sales of CHF 3 billion. We are also happy to celebrate a key Xolair milestone in 2025, which is more than 100,000 patients have now been treated for food allergy since launch. Regarding the 2026 outlook for Xolair, we expect around 20% growth, and this includes the impact of an expected first biosimilar entering the market in the second half of the year. You will have seen that Xolair was selected for the latest rounds of IRA negotiations. So let me provide a little bit of extra information on this. Xolair's inclusion on this list, as you know, does not change patient access or pricing at this time. Any potential pricing impact, if applicable, would not take effect until 2028 at the earliest. But CMS' final guidance provides that a selected drug will no longer be subject to negotiation and will cease to be a selected drug if CMS determines that a generic or biosimilar has been marketed by November 1, 2026, and we do expect that a biosimilar for Xolair will be launched before that date. Actemra sales declined by 2% in 2025. As predicted, we are now seeing increased biosimilar impact in the U.S., which resulted in a 10% decline in growth in Q4. This is aligned with all of our previous communications of an accelerating biosimilar impact in the second half of 2025, which will obviously continue into 2026. Just like in Q3, Gazyva is one of our key highlights for the quarter. Following the FDA approval in Q3, we achieved EU approval in lupus nephritis, and we announced positive Phase III readouts in both SLE and INS. In both indications, Gazyva has first-in-class potential. SLE results have been submitted for presentation at SLE Euro in early March, and the INS results have been submitted to WCN in late March. Both indications, as I mentioned, I think, previously, will be filed in the U.S. and EU later this year. And I'm also very happy to share that the FDA has granted breakthrough therapy designation for Gazyva in childhood onset idiopathic nephrotic syndrome, which is INS based on the positive ENSURE results. And we are not quite done with Gazyva just yet. There's one more Phase III trial, which is expected to read out in 2026, and that's MAJESTY in membranous nephropathy. And as a reminder, we see up to a CHF 2 billion opportunity for Gazyva in kidney disease. And just finally, I'd like to mention the upcoming Phase III readout for sefaxersen in IgAN, which is expected later in the year. Now let's move on to ophthalmology. Ophthalmology grew by 10%, achieving CHF 4.2 billion in sales. Vabysmo performance, as you know, was impacted by the contraction of the U.S. branded market. It landed at 12% growth for the year, which is still quite strong. We had mentioned this contraction previously. And through 2025, we saw a decline in the branded IBT market in the U.S. of about 15%. Nevertheless, Vabysmo continues to gain market share in the branded IBT market in the U.S. and across early launch countries globally. In the U.S., we now see that more than 60% of Vabysmo patient starts are from treatment-naive patients, and this further solidifies Vabysmo's position as the standard of care. Looking forward, we would expect the U.S. branded market to gradually recover in 2026. And taking this into account, we expect a growth acceleration in 2026, driven by the ex U.S. continued growth and U.S. recovery. In fact, as Thomas mentioned, there is a lot to look forward to in ophthalmology this year. We have 2 potential new medicines entering our ophthalmology portfolio. That's the vamikibart in UME, which is expected to be filed in both the U.S. and EU. Enspryng in thyroid eye disease will be filed in the U.S., and we are currently considering ex U.S. filings with the appropriate regulators. Now let's jump into our CVRM pipeline. This is one slide with a whole bunch on it, but I am very happy to share with you the key developments in our pipeline as well as provide a perspective on a very newsflow-rich 2026. So earlier this week, we shared positive final Phase II top line results at week 48 for the once weekly CT-388 in people with obesity. This is study 103. For the efficacy estimand, we achieved a placebo-adjusted weight loss of 22.5%. As a reminder, the efficacy estimand includes patients who dropped out from further analysis, so the effect size measured represents the true efficacy of the medicine tested. For the treatment regimen estimand, we achieved a placebo-adjusted weight loss of 18.3%. The treatment regimen estimand reflects a more real-world outcome, acknowledging the fact that not all patients will be able to adhere to treatment. In this case, data after treatment discontinuation, either in the treatment [ or ] placebo arm are included in the analysis. So for example, it includes data from patients who discontinued treatment early and have regained weight. Now this is a question we received a number of times over the last week. So I'm just going to take another minute here to reiterate. Generally speaking, the difference between the efficacy and treatment regimen estimands is usually driven by treatment discontinuation, either due to patients on the active treatment arm who regained weight after discontinuing treatment or patients on placebo who go on a weight loss therapy after discontinuation. There are many ways to potentially address this phenomenon in our future Phase IIIs from a more flexible dosing regimen, which allows patients to stay on lower maintenance doses in case of tolerability issues to the incentive of a long-term extension to retain more placebo patients. But these kinds of measures should serve to improve the discontinuation rate and eventually reduce the gap between the 2 estimands. In that context, I should also point out that in most of the recent Phase III trials in obesity, marked differences between the estimands greater than 5% have been observed. Let me also highlight 2 other key points in terms of the efficacy achieved in the study. First, we saw a clear dose-dependent relationship on weight loss. And secondly, and most importantly, we are pleased by the absence of a visible efficacy plateau at 48 weeks for the highest dose tested, which was 24 milligrams. Taken together, this clearly indicates that further weight loss can be achieved after 48 weeks, and it gives us confidence in CT-388's potential to deliver best-in-class efficacy for obesity. In terms of safety and tolerability, CT-388 was well tolerated and the tolerability profile was generally consistent with incretin class. The majority of gastrointestinal-related events were mild to moderate and total treatment discontinuations due to AEs in all arms were low at 5.9% for CT-388 versus 1.3% for the placebo arm. Let me also highlight here as we received this question a number of times as well, the discontinuation rate due to AEs at the highest 24-milligram dose was similar to the total discontinuation rate observed. We look forward to sharing more detail on the Phase II results with you at an upcoming medical conference later this year. Similarly to 388, we saw positive results for CT-868 in the Phase II 004 study in type 1 diabetes. And just like for CT-388, we will share the final results at an upcoming medical conference in 2026. So speaking of the outlook for the rest of the year, let's start with our Phase II and Phase III study initiations. As a reminder, we announced for both CT-388 and CT-868 that we will move them into Phase III development in 2026. For CT-388, we can now provide a first update. The Phase III trials for CT-388 named Enith1 and Enith2 are now scheduled to start in Q1. In addition, you can see that we plan to initiate the first Phase II studies for petrelintide in CT-996 as well as a Phase II combination study for CT-388 with petrelintide. In addition, we have a number of other CVRM readouts scheduled for 2026. There are multiple Phase II readouts to look forward to. For CT-388, we have data for patients with obesity and with type 2 diabetes, which will come later this year. We also expect the first Phase II readout for CT-996, our oral GLP-1 and for petrelintide, ZUPREME 1 and 2 trials in obese overweight patients with and without type 2. And finally, emugrobart and tirzepatide combination data in obesity are expected towards the end of the year. So as you can see, we continue to progress our CVRM pipeline at pace, and we are excited to share updates with you throughout the year. So last but not least, let's go to the next slide to bring us home. Here, we have the 2026 pharma key newsflow. We start the year with 4 green check marks, certainly a good omen for the year ahead. And we have discussed everything else on previous slides, so I won't go into more detail here. For any of you who are feeling the lack of the 2025 newsflow table, we have moved that to the appendix. And with that, I would say, I'll give it back to Alan but I'll be crazy and I'll give it over to Matt. Matthew Sause: That's wild. Teresa Graham: Wild. Wild times. Matthew Sause: All right. Thank you, Teresa. Good morning, good afternoon, everyone. It's my pleasure to present the full year 2025 Diagnostics division financial results. So with sales, as you heard from Alan and from Thomas, sales in diagnostics were CHF 13.8 billion. We grew 2% or CHF 292 million compared with 2024 at constant exchange rates. But as you heard from both Thomas and Alan earlier, excluding the sales in China, which I would reiterate is our second largest market, was impacted by health care pricing reforms. The growth of the diagnostics business was 7%. So now let me walk you through these results by each of our customer areas. So sales in our largest customer at Core Lab were flat, again, driven by this previously mentioned health care pricing reform. Excluding this effect, sales were plus 10%. Sales in the Molecular Lab increased 4% due to growth in our blood screening business. Now this was partially offset by reduced sales growth in the infectious disease segment, which grew at 1%. This was impacted by the USA funding stop in Q1 that caused a corresponding decrease in HIV testing, which I covered last year. Sales in our Near Patient Care customer decreased at minus 3%, mainly driven by the decline of our blood glucose monitoring business at minus 2% due to the market shift to continuous glucose monitoring as well as a decline in respiratory molecular point-of-care testing due to the late start of the 2025 respiratory season. And again, back to what you heard earlier from Thomas, we expect the CGM product to really be a driver for this customer area in the future and we continue to invest in expanding and preparing for this. Finally, sales in the Pathology Lab grew strongly at plus 14%, mainly driven by sales of advanced staining at plus 10% and our companion diagnostics business, which grew at plus 25%. So now I'd like to show the geographic performance that's behind these results. Taking through the regional view, North America, the business grew at plus 9%, well ahead of market. You saw good growth in EMEA at plus 6%, again, ahead of market. Latin America, strong growth at plus 11%. Now Asia Pacific, again, as we discussed, minus 12%, driven by the minus 24% decline in China. Excluding the effect of China, APAC grew at plus 4%. Now as you heard earlier, our consistent ambition in the Diagnostics division is to grow our sales at mid- to high single digits. However, given that we anticipate diminished but continuing headwinds in China for 2026, we would set our ambition this year at mid-single digits for 2026. Again, our consistent ambition is to grow this business at mid- to high single digits. Now I'd like to walk you through the P&L line by line. As previously mentioned, sales grew at plus 2%. Cost of sales, as you heard from Alan, grew at plus 7% but this was mainly driven by that unfavorable impact of the China health care price reforms, half a year impact of tariffs and the production ramp-up of our new technologies such as CGM and sequencing and the placement of a significant number of instruments in 2025. And I would highlight that we saw growth of some of our key platforms like our immunoassay at strong double-digit increase. And for example, our molecular workstation, the 5800 grew at over 40%. So very strong placement of instruments. R&D costs decreased at minus 2%. Now this is a result of significant and focused cost containment measures across the organization in response to China impact. As mentioned previously, we are ensuring delivery on all our key priorities, especially our investment in the key new product areas such as CGM and our AXELIOS Sequencing Solution and LumiraDx. SG&A decreased by 2%, again, reflecting focused cost containment measures across the organization. This resulted in a core operating profit of approximately CHF 2 billion, declining at 4% at constant exchange rates, which reflects the cost control initiatives. So now I would like to transition to some of the innovation that we launched in last year and really specifically focus on our cobas Mass Spec 601, which as you heard from Thomas, these are CHF 1 billion opportunities that we're very excited about and their potential to really deliver growth to the Diagnostics division. So as I mentioned before, current mass spec primarily relies on lab-developed tests and lack automation, are highly manual and require highly skilled labor. With the launch of our mass spec solution in 2024, we've introduced the first fully automated IVD platform for clinical mass spec. So throughout 2025, we received CE mark for all of our wave 1 menu composed of 39 analytes spanning the key parameters used in mass spec testing, including therapeutic drug monitoring, steroid and hormone analysis as well as vitamin D testing. These comprise the majority of parameters used in a routine clinical mass spec lab and we are going to follow that with a second wave of additional parameters. I would add that this system, which integrates with our existing serum work area platforms, strengthens our leading position in the Core Lab. And now I'd like to talk about some of the high medical value content that we launched last year for our serum work area, specifically our dengue antigen test, which received CE mark in October. Dengue is the most common mosquito-borne viral disease globally and represents a major global health burden. It accounts for an estimated 390 million infections per year. It has shifted from being a seasonal illness to a year-round risk with locally transmitted cases shifting from historical geographies such as South America to now in Europe and North America. Diagnosing dengue can be challenging as patients are often misdiagnosed due to overlapping conditions with other febrile illness. With our Elecsys antigen test, we will enable health care systems to diagnose dengue more reliably and efficiently by providing all 4 dengue virus serotypes differentially diagnosed with a rapid test that takes only 18 minutes. This will add one more test to our leading immunohistochemistry platform -- or excuse me, immunochemistry platform, which comprises of approximately 120 different parameters. So now I would like to move on to a customer who're very near and dear to my heart, the Molecular Lab and switch to discussing our cobas BV/CV assay, which we received CE mark in December. Sexual health diagnostics market is valued at CHF 1.1 billion with a yearly growth rate of 11%. Vaginitis is the primary growth driver within this segment showing a yearly growth rate of 26%. With our cobas BV/CV assay, we will provide a multiplex assay designed for the direct detection of bacterial vaginosis and candida vaginitis and expand our molecular STI offering. With the addition to our STI portfolio, we will continue to enable testing the most commonly sexually transmitted infections using a single tube and a vaginal swab. In the future, we plan to continue expanding our offering in this area with home collection solutions as well as novel molecular point-of-care assays. Transitioning to our point-of-care portfolio, I would like to discuss our recent CE mark and FDA clearance with a CLIA waiver for our liat Bordetella panel. Pertussis is a highly contagious disease that causes more than 24 million estimated yearly cases, resulting in 160,000 deaths with the majority of those in children. Diagnosing pertussis can be particularly challenging as its symptoms often overlap with those of common colds, leading to underdiagnosis. Our liat Bordetella panel offers a reliable point-of-care solution, delivering results in just 15 minutes between 3 Bordetella pathogens and again, delivers lab-like performance. This will enable health care providers to act quickly and prevent severe complications, especially in vulnerable populations such as children. As you can see from this slide, this launch, we further expand our cobas liat menu of lab equivalent point-of-care testing and we will continue to expand this in the future. And with that, I would like to transition to our key launches in 2026 and call out a few highlights. Again, I would really want to emphasize that 2026 is the year that we will launch our AXELIOS Sequencing Solution. This is a groundbreaking high-throughput solution that will deliver high accuracy, high throughput and flexible sequencing based on our proprietary Sequencing by Expansion technology. And would also again highlight that this represents a potential blockbuster opportunity for us with sales potential and above the CHF 1 billion range. I would also like to call out the expansion of our neurology menu, including the Elecsys pTau 217, which is a blood-based diagnostic for Alzheimer's disease and Elecsys Neurofilament light chain for detection of disease activity in Multiple Sclerosis, greatly expanding our offering in neuroscience. Additionally, I would like to -- I would really like to particularly mention our TB IGRA test, our assay to detect latent tuberculosis infection, which remains a global health care challenge and a significant commercial opportunity and I'm very convinced that we will offer a very differentiated, highly competitive solution here. And overall, this 2026 is going to be a very exciting year of launches and I look forward to keeping you updated over the course of the year. Thank you and now I hand it to Bruno. Bruno Eschli: Thanks, Matt. And with that, we open our Q&A session. The first question goes to Sachin Jain from Bank of America. Sachin Jain: Two, please. So firstly, on Vabysmo, I don't think you've guided to growth for this year beyond acceleration. So any color on what you're assuming within the guide? And perhaps, Teresa, you could just provide a bit more color on your funding comments. What does that doubling in '25 versus '24 mean relative to historic levels? Like where is that funding relative to sort of a 3-, 4-year average? And any color on how that flows back to patients? When we should see an impact on sales? The second question is on persevERA, if I may. It's a topic that I think has come up on prior calls but just to reiterate as we approach data. If the study hits, is any hit clinically meaningful for you, would you need to see a certain hazard ratio or absolute PFS benefit -- you used that wording in the press release. The reason for the question is, there's been speculation since your San Antonio call around passing an interim. Those are my 2 questions. Teresa Graham: Yes. Great. So in terms of Vabysmo, I'm not going to give you specifics on the amount of money that we contributed because as you have heard me say many, many times before, our charitable giving is not in any way related to our commercial expectations for the product. So those 2 things are and have to be completely separate. I can tell you that we doubled our donations last year and that was a significant increase for us over the last couple of years as you sort of alluded to. We do believe that 2025 represented sort of a rebaselining of the branded market in the U.S. And so what we are hopeful is that 2026 will now allow the underlying growth of Vabysmo to actually be more visible. And so we would expect an acceleration in 2026. I don't believe we've been more specific than that. In terms of persevERA, so clearly, the fact that we've now seen positive data from giredestrant in a number of important settings, both neoadjuvant, adjuvant and in a complex late-stage population, sort of underscores our belief in this molecule and that clinically, it is potent, it's active and it's combinable, it's tolerable. It's given us great confidence that we do have the opportunity to be really impactful for many different patients and to really become a new standard of care in hormone receptor-positive breast cancer. Reading through though, to different settings is complex. And so thinking about how we would read through to persevERA, happily, we don't have too long to wait to actually get the answer to that question. In terms of what would be clinically meaningful, we have designed the study to yield a clinically meaningful result. And so generally speaking, a 20% reduction would be considered clinically meaningful. Did I answer your question? Sachin Jain: Perfect. Bruno Eschli: Okay. Very good. Then we move on. Next one in the row would be Peter Verdult from BNP Paribas. Peter Verdult: Pete Verdult from BNP. Two questions. Teresa, just on obesity. We understand from Zealand that the amylin data is in-house and the market seems to have set the bar at sort of being low to mid-teens weight loss. Forget the market for a second. Can we just focus on Roche? What is the minimum target profile you are looking to demonstrate for amylin in obesity? And then secondly, on BTK, you sound very confident about the approvability despite recent CRLs elsewhere in the BTK class. You know the efficacy in the first relapsing-remitting study in PPMS, which we don't. Just wanted a sense or kick the tires with you. Is your confidence based on a highly skewed benefit risk profile? Or is it more because you think the 2 cases of Hy's Law that you've seen in the data set can be attributed to other or nondrug causes? Teresa Graham: Yes. So I'm going to start with your second question first because I think we've gotten a lot of questions over the last couple of weeks about tolebrutinib and read-throughs to fenebrutinib. And I think we have to be very, very cautious here. If you actually read that CRL, it is incredibly specific to the risk benefit that was seen with tolebrutinib. And unfortunately, they had a number of failed trials. They had a number of Hy's Law cases. So I think it is very difficult and inappropriate to actually take the language that was applied to tolebrutinib and actually put that forward on to fenebrutinib. Let me be really clear because I think there have been some -- there's been some confusion about what we've actually seen in terms of Hy's Law cases for fenebrutinib. We had 2 cases of elevated liver enzymes with bilirubin, which was what put us on clinical hold with the FDA. Both of those cases were in FENhance 1, which currently is a study that still remains blinded. When we looked at those 2 cases, only one case was deemed by the FDA to be a Hy's Law case. The other one was confounded due to alcohol use by the patient. And so right now, in fenebrutinib, we have only one case and it is in FENhance 1. So we are sort of blinded to any more detail. It's also really important to note that since we put liver monitoring in place in the clinical trials, we have not seen any more cases. And so I think we feel very good about the overall benefit risk profile that we have with fenebrutinib, particularly when you consider the other half of that coin, which is the benefit. When you look at the Phase II trials for fenebrutinib, you saw a significant amount of clinical benefit to patients. And the data that we've seen are sort of very consistent. And so I think when you look at that very high efficacy with a very -- what looks to be a very manageable safety profile, I think we're just in a totally different situation than what you saw with tolebrutinib. So hopefully, that kind of provides a little bit more perspective there. So in terms of petrelintide, so as a monotherapy, we believe that petrelintide holds the potential to be a foundational therapy for weight management. We are looking forward to being able to deliver a weight loss that the vast majority of people are actually looking for, which is something more in that sort of 10% to 20-ish percent with the potential to be a much more improved tolerability profile compared to the GLP classes as well as just a better patient experience in terms of titration, quality of weight loss, et cetera. So obviously, we don't, again, happily have long to wait. We'll see that data soon. You mentioned the data being in-house. We remain blinded to that data. So we have not seen it but we do -- we expect to see it very soon. Bruno Eschli: Peter, did this answer your questions? Peter Verdult: Yes. Bruno Eschli: And we move on then. Next one would be Simon Baker from Redburn. Simon Baker: Two, if I may, please. Firstly, just continuing on Pete's question about fenebrutinib. I just wonder if you could give us some idea about how we should be thinking about the relative tolerability profile of fenebrutinib versus Ocrevus ahead of the ACTRIMS data? And how do you see in light of that fenebrutinib being positioned relative to Ocrevus? And then secondly, a question for Matt. It's a little while since you unveiled to us the new sequencing offering. I just wonder if you could update us on the market feedback you've had in terms of levels of demand and where that demand is coming from, whether it's smaller scale or larger scale applications or indeed both? Teresa Graham: You want to go first? Matthew Sause: I would be delighted to go first. Teresa Graham: And I would be happy to yield the floor. Matthew Sause: Super. Wow. So yes, and I would maybe give a plug for our Dia Day in May, which will talk quite a bit more about this and Bruno will mention that at the close. Maybe I'll just say that first. But yes, we've seen a high level of demand for the sequencer, I would say in, more than we had originally anticipated ahead of launch. We're already starting commercial activities with select customers. And the feedback from our early evaluators has been extremely positive. So when you talk about applications, we're really seeing interest in a broad variety of applications from translational, such as single cell but then on to more focused clinical applications such as whole genome sequencing and germline. So what we're really seeing is the potential of an instrument with that kind of flexibility, throughput and accuracy and a dual assay format with the longest reads of Simplex as well as the very high accuracy Duplex format to have a broad applicability really across the spectrum of sequencing applications. And I think we're very confident in the potential for this technology as well as the launch. Does that answer your question? Bruno Eschli: Simon? Simon Baker: Perfect. Teresa Graham: Yes. Great. So when we think about where fenebrutinib sits, I mean, we believe that it has best-in-class potential. And together with OCREVUS, OCREVUS subcut and potentially further on -- down the line, OCREVUS high concentration, we believe, ultimately, we are going to have a range of highly efficacious and very tolerable therapies that meet every patient with MS exactly where they're at. Right now, 30% of patients are on a less efficacious oral therapy. And so that's sort of an easy place to imagine fenebrutinib starting. But I think ultimately, we believe that this is -- the combination of these 2 therapies gives us the opportunity to really sort of revolutionize the entire patient journey for MS patients. And I think we're feeling very confident about our ability to do that. Simon Baker: [indiscernible] Very clear. Bruno Eschli: Next questions go to Matthew Weston from UBS. Matthew Weston: Hopefully, you can now hear me. The first one on giredestrant. Teresa, there's a lot of debate about how the commercial potential in the adjuvant setting could be impacted by the data from persevERA. Can you give us your thoughts as to whether or not you see adjuvant as independent of that frontline metastatic result? And also, there's a lot of debate about the peak sales potential of giredestrant.. So when do we -- when should we expect to hear what Roche thinks the potential of this medicine is? And then secondly, if I can just pick up on biosimilar erosion. So Q2, Q3 of last year, you made a number of comments about delays to the entry of Xolair and now similar comments about potential delays to the entry of biosimilar Perjeta. Clearly, there are multiple patents, so you can do deals with biosimilar companies. But do you think investors should get used to a more gradual erosion of some of these biosimilars at the beginning of generic entry? Or should we still continue to expect to see like a minus 40% that has been kind of the underlying trend so far when we actually see biosimilars enter the market? Teresa Graham: Yes. So I'll take -- thanks, Matthew, for your questions. I'll take your second one first and I have a very definitive answer for you, which is that it absolutely depends. So it depends on the therapy. It depends on the part of the world. I mean, I think it -- this is one of those things where biosimilar impact is not a one size fits all. So in some parts of the world, with some therapies, you are going to see an immediate decline. With some others like Xolair, we just do expect that to be a smidge more sticky because you're dealing ultimately with a very allergic patient. And so physicians might be a little bit more tentative about switching so quickly. And so I think this is one of those areas where we are constantly monitoring the environment. We're constantly talking to treating physicians to get a sense of how they may think about the utilization of biosimilars and we give to you our best knowledge of how we believe those erosion curves will happen. But it's very difficult to give you one answer because I think it is actually quite variable, again, by therapeutic area and by geographic area. When it comes to giredestrant, so this market is somewhere between a $20 billion and $30 billion opportunity. Adjuvant is about 2/3 of that between initiation and maintenance therapy. We do think that adjuvant and first-line is pretty separate. And we think that giredestrant has the opportunity, as we said, to really be establishing itself as a new standard of care. When are you going to get a better read-through from that? Q1 is a very data-rich -- here, so the first half is a very data-rich time for us. We're in the process of updating our own assumptions. And as soon as we have a clear read-through, we will share that with you. Thomas Schinecker: Maybe just to answer your question on Perjeta as well because you had this question. So we don't expect the biosimilar for Perjeta until '28 in the U.S. and '27 in the EU. Teresa Graham: Correct. Thomas Schinecker: Just to clarify that. Bruno Eschli: Matthew, did we answer your questions? Matthew Weston: That's perfect. Bruno Eschli: Then we move on. Next one would be James Gordon from Barclays. James Gordon: James Gordon from Barclays. Two questions, please. One would be on giredestrant, actually 2 subparts. One would be, the slight delay in persevERA readout timing and I think it's now more likely to be Q2. Is that because the event rate is a little bit slower? Or could you be getting a few more events in and could that actually help the [ powering ], which has been a concern some people have had? And also on giredestrant, the lidERA Study, the [ side ] study of about 100 patients, I think they're getting on top of the CDK. How will you communicate that? And it sounds like you're filing ahead of that because you're filing the data in Q1. So is that something that then gets added to the filing package and you hope to have on the initial label? Or how does that work? And then the other one was on fenebrutinib. So you sound very confident talking about the Vabysmo upcoming launch, which is great. And there's been some talk about liver already. But in terms of other tolerability issues, I saw the comment in the original release about additional safety data that is further being evaluated. So could there be some other off-target BTK side effects you need to think about? And just on the side effect point, though, if you're comparing it to something like Ocrevus, so you've got the advantage of oral but could you have to have liver monitoring or something like that? Could that be a barrier to becoming a very big drug? How would you think about that? Teresa Graham: Great. Okay. So we'll start with the second question first. So we intend to assess the safety of fenebrutinib when we have the -- all of the studies read out and we look at -- when we look at the pooled safety. So obviously, we only have 2 of the 3 studies. So we need to wait a little bit in order to be able to step back and look at that. The data that we've seen so far, we haven't seen anything that is different than what you would see in the background rate of the overall MS population. In terms of liver monitoring, as is typical, when you get your label, usually for things like monitoring, you get what you studied in your label. So we would anticipate that we would have the same liver monitoring in our label that we had in our clinical trial. And again, I think when you look at the efficacy and the risk-benefit profile that fenebrutinib has, I think this still -- this is going to be a meaningful medicine in MS. So more to come as we get FENhance 1 data. For persevERA, just to be really clear, the timing on that has not changed. We have consistently been messaging, the first half, mid-first half of this year and that has not changed. So that is remaining consistent. And again, we do plan to file the lidERA data first. We get the [ abema ] data, I believe, the substudy data comes, is that also in Q1? Guys, someone is going to have to remind me of that. And then the [ ribo ] study, which is a 200-patient substudy is just kicking off, so that will come later. So those are data pieces that clearly, as soon as they are available, we will be making public. But the adjuvant filing is going in -- into Q1 as planned and it looks like end of 2026 for the substudies. Bruno Eschli: James, all questions answered? James Gordon: That's great. Bruno Eschli: Yes. Then next one is Sarita Kapila from Morgan Stanley. Sarita Kapila: So you addressed the study approval risk and I guess others have touched on it. But what is underscoring the confidence in the commercial potential? What's the initial feedback from the physician community being? So we've seen orals with LiverTox launch post CD20 approval, which have struggled to reach 1 billion. So I guess why is fenebrutinib different? And how are you viewing risk from Novartis' remibrutinib in RMS data in Q2 and they've had no signs of LiverTox so far? And then the second one is just on persevERA. It's also been touched on but how confident are you that you have enough patients in the trial to hit stat sig? And how should we think about the [indiscernible] study and the potential read across to persevERA? Teresa Graham: Great. So let's start with fenebrutinib. So obviously, the data have not yet been presented. So the PPMS data goes to ACTRIMS shortly, and then the RMS data will be packaged together when we have FENhance 1 as well. That having been said, we've obviously shared it with those physicians who are part of the trial. And I think people have been really impressed with the data that we've seen. And in particular, people were really impressed with the Phase II data that we've seen. So what we're talking about is the ability to get OCREVUS like efficacy in an oral treatment. And for many patients for many, many different reasons, that's a very attractive option. So again, I think in this market, a lot of it comes down to the overall efficacy that we're able to deliver. And based on the Phase II data, we believe we have a highly efficacious molecule on our hands. In terms of the Novartis data, I mean, it's important to remember, we haven't really seen anything in MS from Novartis yet. This is a dose that I think is about 4x higher than the existing dose. They had sort of second mover advantage and they started their trial with liver monitoring. So I think it's very difficult to compare because we just really haven't seen anything. We have first-mover advantage here. We've had robust Phase II data. And yes, I mean, I think we're -- it's very difficult to say anything until we actually see data. It's also, I think, important to remember that fenebrutinib is a non-covalent molecule. And in a chronic indication, that noncovalency really matters because it means that even though you're taking it chronically, if you need to stop for whatever reason, it does leave your system more quickly. And I think that really in a chronic care environment is a benefit. So in terms of read-through for persevERA, it's clear when breast cancer is dependent on the endocrine receptor for viability, giredestrant can perform very well. And we've seen that in a number of settings. So all of these patients are, by definition, dependent on ER signaling and it's worked really well here. So clearly, in the front line, the likelihood that it's successful hasn't gone down. And we should always be really cautious with cross-trial comparisons. And so I think we are -- again, as I mentioned, the benefit is, we don't really have long to wait. So we'll know really soon. And yes, persevERA is designed to show improvement over palbo plus letrozole. Bruno Eschli: Sarita, all questions answered? Sarita Kapila: Yes. Bruno Eschli: Yes. And the next one in the queue is Richard Vosser from JPMorgan. Richard Vosser: Two questions, please. First question, just to go to diagnostics for a little bit. Margins obviously hit by ramp-up of mass spec sequencing and the machine placements. Could you give us a bit of color on how to think about the margins from here? Those placements seem likely to continue as you ramp those 2 businesses up. So how should we think about '26 and then the improvement in the margins from there? And then second question back to pharma. Just going back to Vabysmo -- thanks for the comments on the foundations. Could we go a little bit further out and think about the future competition potentially from less frequently dosed injectable products? I think ocular has one half yearly. How you think about that sort of competition? And also closer to today, the biosimilars are really starting to come. They're having some impact in Europe as far as we can see. So just what's the thoughts globally, U.S., Europe on biosimilars from Eylea on Vabysmo? Matthew Sause: So in this case, maybe... Teresa Graham: No. Go ahead. I can use a break. Matthew Sause: Thank you. So maybe starting with diagnostics. So we talked about a couple of effects. There's the new technologies. There's the tariffs of which Alan said we had half the year and we'll have a full year this year. But the biggest effect on what hit us last year on the margin was really the China effect. And as you heard from Thomas, we expect to see this meaningfully diminish this year. 2027, again, we expect to decline but it will be small enough that it won't really be meaningful. And then we expect to see a recovery. In terms of specific ambition on margin this year, I think I would refer you back to the group position that Alan mentioned earlier. But I would say our consistent ambition is to grow profit faster than sales. And that is once we really get ourselves to the headwinds this year, that is our ambition going forward. And it's also our continuous ambition to improve the margin in diagnostics. That's something that is a goal for the entire organization. What I would call out, though, in 2025 is you had our second largest market with a 25% reduction. So obviously, there was an impact but that's something that you can see with our discipline on the cost line that you can also expect to see continue again in 2026 but we expect the gradual washout of that. Anything you would add to that, Alan? Alan Hippe: Well, I think for '26, I think, well, we expect kind of a stabilization. I think that's a little bit here. But we will give that additional information. Matthew Sause: Absolutely. Yes. So I would maybe just refer to what Alan said. Our goal really this year is going to be that we stabilize the margin. Thomas Schinecker: And I think on a group level, you have seen that our intention is to expand margin in 2026. And what I've said in the past still holds, which is that also going forward, we will at least keep margins stable also for the coming years. Matthew Sause: Perfect. Does that answer your question? Bruno Eschli: I think so. Matthew Sause: You go ahead. Teresa Graham: Yes. Great. So I'd like first just to start by talking about Vabysmo. So I mean, Vabysmo is highly efficacious therapy with a very well-defined safety profile where patients and physicians do have a lot of good experience in extending doses. And so -- and it is designed to do just that. When you look at -- you asked specifically about ocular, I mean, this drug is going into Phase III with a very small safety database and really no known data on long-term safety. And when you talk about something that's going to be used intraocularly over a long period of time, I think long-term safety is incredibly important. So I think it's very difficult to think about how these -- how something like that is a threat to something that has such good efficacy, such good safety and where you do actually have the ability to extend doses. So I think from a future competition perspective, just like in other disease areas, sort of the bar is high here to unseat Vabysmo. And you had one other question. Oh, biosimilars. So far, what we see is that the Eylea biosimilars are taking from Eylea. And so for those patients who are really benefiting from a new and novel treatment, Vabysmo, they were just less impacted. So yes, I mean I think we saw Lucentis take from Lucentis. We're seeing Eylea biosimilars take from Eylea and we're seeing high-dose Eylea take from low-dose Eylea. So there's a lot of trading within that space. But I think for new patients who are going on therapy, physicians are picking the best available therapy out there available to them and that is Vabysmo. Thomas Schinecker: And on ophthalmology, I would like to add that we have an amazing pipeline in ophthalmology. So when you look at all the different validated targets, I think we're the only company that actually has all the different validated targets in-house. And so if you look at our pipeline, we have trispecifics, tetrapecifics, [indiscernible] et cetera. So if I look at our ophthalmology pipeline, I think the one that's going to succeed surpassing Vabysmo, is then hopefully us. Bruno Eschli: Very good. Richard? Richard Vosser: Yes. Perfect, everyone. Bruno Eschli: And next one in the queue is James Quigley from Goldman Sachs. James Quigley: Hopefully, you can hear me. Just a couple of quick questions from my side left over. So firstly, again, on giredestrant and revisiting lidERA. What's the KOL reaction been from your side? So some of the KOLs we spoke to have been a little bit more cautious than the presenter at your SABCS event, given the more limited follow-up versus the CDK4/6 class. So how do you think this could impact the giredestrant trajectory, of course, assuming approval? Would it be more of a step up -- stepwise ramp or more a stepwise ramp as more data comes? Or do you -- or do your feedback suggest the potential for a faster, more optimistic ramp on giredestrant? So that's the first one. Second one, more a financial question. So underlying pharma growth has been pretty strong in recent years, driving operating leverage. So how is Roche balancing R&D investment with profitability? So how long can R&D expenses stay flat? This half seem to show that Roche has a strong ability to reallocate costs in R&D. But how long can this go on to support operating leverage? Teresa Graham: I mean I think what we're hearing from the KOL community regarding where they would use lidERA is pretty bullish. I mean I think what we hear from -- the lidERA population is 55% of the adjuvant breast cancer population. That's 10% more than what we saw on the NATALEE trials. So I think you are really seeing physicians believe that this could have very broad applicability in their practice. And so I think that would -- that's what leads us to be fairly bullish about the opportunity. There's a 74% overlap with the population in NATALEE and monarchE. And so I think we're very -- yes, I think we're very confident that we have something on our hands here that is quite a game changer based on the data that we've seen. Thomas Schinecker: Yes. Let me answer the second question. But first, something to add on giredestrant. I mean you look at the hazard ratio of 0.7. You can see that, that's, I would say, highly competitive to also some of the CDK4/6 trials that you've seen. But what you have on top of that is the tolerability. If you look at CDK4/6, you have quite a high amount of patients that actually stop using it simply because they cannot take the tolerability. So I think these are all the right arguments for SERDs to be used. So I do believe that the pickup will be strong. Unfortunately, I wasn't at the Congress in San Antonio but I heard there was standing innovation from the clinicians there. Then the second question on R&D. So we're working very hard to be a high-performing, very cost-efficient organization. There are still opportunities, in my view, to continue to work on that. AI, by the way, plays a big role in that. We're using AI throughout the entire development process where we want to, on the one hand, speed up using AI but also reduce costs doing that. Regarding R&D expenses, also for 2026, I would say it will be broadly flat. Again, really focusing very hard on making sure that we put the money to work in the best possible way for the sake of patients in our company and for our investors. Alan Hippe: And it all goes back to the margin point that you've made before. Thomas Schinecker: That I made before, which is, it's clear for '26, expand margin. And as previously always said, at least stable for the long term. Bruno Eschli: James? James Quigley: Thank you very much. Bruno Eschli: Okay. Then we move on to Graham Parry from Citi. Graham Glyn Parry: So one on lidERA. Thanks for clarifying the filing time line as being Q1. Just wondering if you could comment on whether you expect priority review or to use a priority review voucher or not. And when exactly do you think you would expect to see the [ ribo ] combo substudy data, 200 patients, how long does that take to recruit? And could we see something by the end of this year? Is that a next year event? And then on fenebrutinib, could you just confirm how important you think confirmed disability progression is versus annualized relapse rate reduction in showing a risk-benefit profile and differentiation versus Ocrevus to the regulator, just given the -- it's a very brain-penetrant molecule and has potentially, therefore, the ability to work on disability progression where CD20 doesn't? And then the final question is, you're technically still on clinical hold with FDA. So does that have to be lifted before you can actually file or receive approval? And what are the steps to doing that? Teresa Graham: Okay. So we expect the [ abema ] substudy by the end of the year. We would expect [ ribo ] in 2027, that is really only starting now. So we've got a little time. That's 100 patients in the [ abema ] arm. And in [ ribo ] it's 200 patients. The FDA hold will be addressed as part of the planned [indiscernible] filings, but we've obviously been in consistent conversation with the agency over time. So there -- we've been in very close contact. I won't comment on our filing strategy only to say that we plan to bring lidERA to patients as quickly as possible. In terms of confirmed disability progression, I think we are -- the annualized relapse rate is also a very good endpoint here. And we are confident that, that is giving us what we need in order to proceed. Bruno Eschli: Graham, any additional questions or -- all good? Then we move on. And I hand over to Rajesh Kumar from HSBC. Rajesh Kumar: Two questions, if I may. First, on CT-388, thanks for clarifying discontinuation rate in the highest dose was similar to the overall group. You also mentioned that you could consider a flexible dosing in Phase III trials as an option. So could you give us some color on how you're thinking about Phase III progression? Would flexible dosing or an active comparator be something you might consider? Or is it at the moment, too early to comment on that? Second, just on giredestrant, quick follow-up. You highlighted the overall TAM this class is targeting to be quite a large number. You are filing with a few -- some persevERA data is about to read. So just in terms of the market segmentation, how much of the market you think it have been risked -- derisked to some extent and how much we still depend on the data in your assessment of the market would be very much appreciated. And because I'm an analyst and I cannot count, the third question would be just on the clarification on Vabysmo. Appreciate the working capital impact has gone up and that sort of reflects a very strong December. So should we consider the exit rate of December close, the indication of how you're thinking about growth in 2026? Or should we take an overall slower growth rate going forward on Vabysmo? Teresa Graham: So I would just go back to my earlier comments. For Vabysmo, we expect to see an acceleration of growth in 2026. So more to come on that. In terms of the dosing for CT-388, so what we have disclosed is that CT-388, it will be administered once a week and we're aiming to develop it at 3 maintenance doses. We are not disclosing at this time the details of that dosing strategy. But just to avoid any misunderstanding, we have not indicated that we will be doing flexible dosing within the trial. So -- but right now, the details of that Phase III design, that specifically have not been disclosed. And then in terms of giredestrant and the market segmentation, so -- and how much do we feel like has been derisked? Well, 2/3 of the market is adjuvant and we have a positive adjuvant trial. So I mean, I think a significant portion of the -- we have a significant portion of the market that has been derisked. Bruno Eschli: Okay. And then next questions are from Michael Leuchten from Jefferies. Michael Leuchten: A question for Matt, please. Abbott said last week that the Chinese may be pursuing VBP for Core Lab oncology. Just wondering whether you've heard that and how that may or may not have been reflected in your outlook and the margin commentary you made earlier? And then sorry, Teresa, just going back to Vabysmo, just your comment about 2025 in the U.S. being reset. Q4 was still soft. It didn't really improve upon Q3 sequentially. So when you say you think that's now stabilized and it can grow from here, just wondering how you look at that Q4 versus Q3 dynamic in the U.S. Matthew Sause: Okay. 3. Wow. I know what 3 is [indiscernible]. So what I would first start off by saying is, as you may know, there was VBP for Core Lab oncology reagents last year. And so that was what you see, our China effect last year significantly represented a decrease in our Core Lab oncology reagents, which were down about 50%. So some of that effect is still pulling through this year. But I can't speak for what was said on that call but we are seeing the effect of the VBP last year and the national reimbursement reduction. So we don't anticipate additional Core Lab oncology VBP this year. Teresa Graham: So in thinking about Vabysmo, Q4 -- so 2025, we saw a big reset in the branded market in the U.S., right? With the closure of the co-pay foundations, fewer patients were put on branded drugs, more patients were put on Avastin and biosimilars. And you saw a big just sort of reset in how many new patients and continuing patients were actually going on a branded therapy and that constricted the market by about 15%. That constriction went all the way through Q4 because normally, when donations are given or grants are given, they're given 4 years' worth of therapy. What's happening right now in the oncology world is something called the blizzard. It's where every retinal specialist in the U.S. goes and reverifies the benefits for every single one of their patients. And it's at that point in time that patients actually determine what -- will they be continuing on their current medication, will they be switching, et cetera. And so over the course of the next couple of months, I think we're going to get a real sense of what is the trajectory of the branded market going to look like in 2026. But because that underlying base effect of 2024 is now washed out, you should be able to see the actual branded growth of people going on to new therapies actually come through. So I think there's a reason why we didn't see Q4 look any different than what the rest of the year looked like. I think we had sort of hoped that we might see some early signs of recovery but I think those signs of recovery really are going to come -- become a little bit more evident as we get towards the end of Q1. So Michael, I hope that addresses your question. Thomas Schinecker: Yes. And I mean, we -- the co- assistance foundations, they are separate, right, so nothing that -- in terms of influence. But what we can say is in general, that our donation was towards the end of Q4. Teresa Graham: Yes. And then again, we don't link those 2 things. It is interesting to know though that in Q4, we did see a 4% growth. So we saw... Thomas Schinecker: Quarter-over-quarter. Teresa Graham: Yes, quarter-over-quarter growth. We did see a 4% growth. So we did see a little bit of an uptick. Bruno Eschli: Michael, any follow-on? If not, then I would hand over to Paul Kuhn from Cowen. Paul? Paul Kuhn: Thanks, Bruno. This is Paul on for Steve Scala. Two questions, please. What feedback have you heard from U.S. oncologists and how they plan to initially use giredestrant in the adjuvant setting? And secondly, how did the change in Xolair biosimilar entry from end of 2026 to before November 2026 come about? Was this a change in the settlement with generic manufacturers? Teresa Graham: So with regards to Xolair, I think we have long said sort of second half of 2026 is when we expected the first biosimilars to come in for the U.S. So I don't actually think that that's a change. Bruno Eschli: I think mentioning November was just related to IRA. So that is really, we need to have a biosimilar place -- a payer in the market before the 1st of November. So then we cannot get negotiated. Teresa Graham: That is correct. So my reference to the 1st of November was purely around CMS guidance that says if you have a marketed biosimilar by November 1, 2026, then you will be removed from the negotiated basket. So that's where that date comes from. But we've always said second half of 2026, we would expect to have a biosimilar in the market. And then feedback from oncologists on where they intend to use for adjuvant. I mean, again, just to continue to reiterate, 55% of the adjuvant population was covered by the lidERA trial. And so I think you see a high degree of confidence in an oncologist to use in a very significant portion of their patients. And again, what we saw here was a very efficacious, seemingly combinable and well-tolerated therapy that I think has the opportunity to really become a new standard of care in this setting. So what we're hearing from oncologists in general is that they're pretty excited to have this in their hands and we're excited to get it to them. Bruno Eschli: Paul, if we answer all your questions? Paul Kuhn: Thank you. Bruno Eschli: Then next one would be Justin Smith from Bernstein. Justin Steven Smith: Two, please. Pharma, #1, NXT007, just wondered if you could share some thoughts on when the Phase III design head-to-head versus Hemlibra will hit ct.gov. Second one, diagnostics, Matt, just wondered if you could talk a little bit about CGM and when the finger prick recalibration will be removed and the impact that might have? Matthew Sause: Wow, 4 is new territory. So I want to first thank Teresa for generosity. But -- so starting with your question on auto calibration, which is the comparison of the CGM device with a blood glucose lancet, what we are planning to do is have that launch happen this year. I won't say exactly which quarter but that is an improvement that we expect to deliver this year. Teresa Graham: And with regards to NXT007, we would expect those trials to start in Q1, Q2 with clinicaltrials.gov entries at around that time frame. And again, these are 2 studies, one, head-to-head and one, versus [indiscernible] and one Hemlibra. Bruno Eschli: Justin, all questions are answered? Justin Steven Smith: Yes. Great. Bruno Eschli: Then I would maybe read here loud 3 questions, which I got from Luisa Hector. She had to drop off and I promised her I will go through them. There is one question on Ocrevus [indiscernible]. So the split of naive versus switch patients that we are capturing and what is the target switch rate for 2026 and at peak? What I think we have been communicating that we have 2 billion in incremental sales for Ocrevus but this is true incremental sales. And on top, basically, we would have revenues coming from switching. So we have not yet provided a detailed outlook on what the ratio, IV to subcutaneous would be at around 29%. We might do that at a later point in time. There's then a second question I found interesting on the pipeline. 66 NMEs now on the pipeline. Is this rightsized? And what we have seen now with the turnover in the fourth quarter with 4 molecules added, 5 going out -- so 5 added, 4 going out, is this now -- is there still cleansing ongoing of the pipeline? Is this now the regular run rate and the turnover? Or would we target more NMEs overall? Thomas Schinecker: Yes. I mean I can answer that question. So overall, you apply the bar not only once, you apply the bar constantly based on data that you generate but also data that you get from the outside. So clearly, I think we are at a point where we'll continue to bring in additional NMEs. We have actually -- when you look at the very early stage of our research organization, we've actually doubled the amount of molecules moving ahead there. So we do believe that we'll continue to expand on the amount of NMEs that we have in our portfolio beyond the 66. But this kind of, I would say, prioritization is just something that you have to do constantly based on just availability of data. Bruno Eschli: And then the final question here would be on capital allocation. Given your positive pipeline progress, pharma deals with the U.S. administration and with competitor developments in obesity, are there any changes to your M&A objectives and R&D investment plans? Thomas Schinecker: No, I can say there is no fundamental change. I think what we have really shown over the last couple of years that we've been very disciplined, very disciplined in terms of financials but also in terms of really screening the market for interesting molecules with good data. If you look at the amount of money that we spent compared to other companies and the kind of pipeline we've built doing that, I think we've been pretty efficient. And our intention is to continue to do the same and just continue to be quite disciplined on that. The good thing is, we are not in a situation where we have a huge patent lift, right? So we are not in a situation where we have to do late-stage deals, which are very costly. I think we are in a very good position when it comes to our late-stage pipeline. But obviously, I mean, if you look at the amount of innovation that's ongoing outside, you look at what's happening in China, we need to continue to screen the market and look at everything that's out there. I mean I looked at a statistic, for about 1,000 companies that we look at we do 1 deal. And I think that's also what I expect of our organization that we know exactly what's going on outside so that we can make data-driven good decisions. Bruno Eschli: Very good. I think with that, actually, we are at the end of our Q&A session. Let me just remind you of the 2 upcoming IR events we already have flagged. I assume there might even be more. There's on February 9, our neurology call, we will cover up the PPMS data for fenebrutinib presented at ACTRIMS. And then on May 12, we again will have our Diagnostic Day as a live event in London, where we will take you through the entire portfolio and highlight this year, I think, will be SBX sequencing. As we are now in the global launch phase, I think there is the next steps to come with pricing and so on. So I think it will be an exciting event. And with that, I hand over to Thomas for the final remarks. Thomas Schinecker: Thank you very much, Bruno and huge thanks also to the team. I would say, quite exciting times. I mean, if I see all the discussions that we've had as a team over the last 3 years and the progress we made, I think it's significant. And it's not only that, it's also a lot of fun because we get to talk about what we like to talk about, which is science, which is about progress for patients. And with people like Alan and myself who like math, also we can talk a lot about financials. So I think there's a lot of good things that are going on. And we have a good momentum both on financials and pipeline. So very proud of the team. And I do believe we've always done what we said that we are going to do and you will continue to see that going forward. We continue to move with focus. We continue to move with speed. And as always, you can count on us because we will deliver.
Operator: Greetings and welcome to the Five Point Holdings' Fourth Quarter and Year-End 2025 Conference Call. As a reminder, this call is being recorded. Today's call may include forward-looking statements regarding Five Point's business, financial condition, operations, cash flow, strategy, acquisitions and prospects. Forward-looking statements represent Five Point's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Five Point's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in today's press release and Five Point's SEC filings, including those in the Risk Factors section of Five Point's most recent annual report on Form 10-K filed with the SEC. Please note that Five Point assumes no obligation to update any forward-looking statements. Now I would like to turn over the call to Dan Hedigan, President and Chief Executive Officer. Daniel Hedigan: Thank you, Vaughn. Good afternoon, and thank you for joining our call. I have with me today, Kim Tobler, our Chief Financial Officer; and Leo Kij, our Senior Vice President of Finance and Reporting. Stuart Miller, our Executive Chairman; and Mike Alvarado, our Chief Operating Officer and Chief Legal Officer, are joining us remotely. On today's call, I will review our fourth quarter and full year 2025 results, which marked another important milestone for Five Point. I'll discuss our operational progress during the year, highlight several major accomplishments across our communities and outline our strategic priorities as we move into 2026. Ken will then walk through our financial results in more detail and review our outlook. We'll open the line for questions following our prepared remarks. Turning first to our results. I'm very pleased to report that 2025 was another record year for Five Point despite challenging market conditions. In the fourth quarter, we generated $58.7 million in net income, resulting in annual consolidated net income of $183.5 million, exceeding our prior record set in 2024. Our net income for the year exceeded the revised guidance we issued in Q2 2025 by roughly $6 million, reflecting our team's expertise and consistent execution across our platform, disciplined capital management and continued pricing strength at the Great Park. Beyond our strong financial results, we also obtained critical entitlement approvals during the fourth quarter at both Valencia and the Great Park. I'll provide additional detail later in the community updates. These entitlements will enhance our near-term cash flows by creating a foundation for the company's future development. It goes without saying that we could not have hit these operational and financial milestones over the past few years without the dedicated and focused efforts of our small and efficient hard-working team. During the 3 months ended December 31, 2025, we were able to close meaningful land sales of both of our active communities. In Valencia, we closed an industrial land sale consisting of 13.8 acres for a purchase price of $42.5 million. At the Great Park, the venture closed 3 new home programs with 187 homesites on 19.7 acres for an aggregate base purchase price of $181.5 million. As a result of Great Park operations during the quarter, we received $73.6 million in distributions and incentive compensation payments from the Great Park Venture. Let me now talk about the market. 2025 unfolded against the housing market that remained challenging, shaped by economic uncertainty, elevated interest rates and affordability constraints. Even so, our results underscore the resilience of our assets, which in part derived from the consequences of operating in supply-constrained California markets. At the Great Park, homebuyer and builder demand remained strong throughout the year, allowing us to close the sales on 13 different programs consisting of 920 homesites while maintaining -- while also maintaining pricing discipline. In Valencia, although home sales volumes were more modest and we like to delay residential land sales to our guest builders, the long-term value of the asset was significantly enhanced by securing major entitlement approvals that will support the next phase of our residential and industrial development activity. As a number of public homebuilders have recently noted, homebuyer demand nationally has continued to be tempered by ongoing affordability headwinds. We have seen this impact more in Valencia than in the Great Park, but we believe that demand will continue to be supported by the persistent undersupply of housing in our core markets. As we look ahead, we expect that despite intermittent challenges from interest rates or other factors that affect consumer sentiment, we should see growing buyer confidence and moderating interest rates translate into improving demand for well-located homesites. Against this backdrop, in 2025, we significantly strengthened our company. From a financial perspective, during the year, we materially enhanced our balance sheet and capital structure. We refinanced our senior notes, issuing $450 million of 8% notes due October 2030 and repaying another $75 million, which will reduce our annual interest expense by approximately $20 million. Since January 2024, we have paid down a total of $175 million in debt. Additionally, we expanded and extended our revolving credit facility to $217.5 million with a new maturity of July 2029. These actions greatly reduced our near-term refinancing risk while preserving substantial liquidity. We ended the year with cash of $425 million and total liquidity of $643 million. Importantly, our balance sheet and liquidity provide us with exceptional flexibility around capital allocation, including the ability to engage growth opportunities, which I will discuss later, as well as the ability to potentially return capital to shareholders over time. To be clear, however, our first priority is to pursue our growth strategy as we seek to expand recurring revenues. From an operating standpoint, 2025 was defined by securing critical entitlement approvals in Valencia and the Great Park, steady demand at the Great Park, continued progress on land development activities for the next phase of infrastructure at Candlestick and the successful closing and integration of the Hearthstone land banking platform, which added a pivotal new earnings stream to our business. Before turning to community updates, I want to briefly review our operating and growth strategy, which continues to guide our decision-making. Our strategy rests on 4 core pillars. First, maximizing the value of our existing communities. This means aligning land sales with builder demand, pacing development appropriately and maintaining the flexibility to be patient when market conditions warrant it. Second, maintaining a lean operating structure. Even as we've grown earnings and expanded our platform, we remain disciplined in managing overhead and fixed costs. Third, matching development spending with revenue generation, ensuring capital is deployed efficiently and not too far in advance of monetization. And fourth, expanding our platform through targeted growth initiatives, most recently through the addition of Hearthstone and its short-term land banking business. Let me now provide you with some updates on our communities, starting first with the Great Park Neighborhoods. During the fourth quarter, builders in our Great Park community sold 78 homes versus 187 in Q3. This decrease in sales is primarily attributable to seasonality and reduction in available home supply as existing collections sold out. We currently have 12 actively selling programs in the Great Park Neighborhoods with 8 additional programs planned to open later this year. These current and upcoming programs will ensure our guest builders can continue delivering a wide variety of housing options throughout Great Park Neighborhoods. During the year, we closed multiple large residential land sales, many of which incorporated price participation structures designed to balance near-term certainty with long-term upside. The 3 programs we closed in the fourth quarter utilized this price participation model. An average base purchase price for these fourth quarter sales was $9.2 million per acre before taking into account potential price participation. These transactions spoke for our ability to adapt structure without sacrificing value. We currently are in the bidding process with builders for 4 new residential programs totaling approximately 27 acres. We expect to complete the bidding process and close these land sales by the end of this year. Importantly, we also received approval from the City Council for new entitlements that will allow us to convert approximately 100 acres of commercial land into additional market rate homesites, further advancing the value of this community. Next, I'll move to Valencia, our other active community. Valencia is still in the early stages of its development and has many future phases of land delivery ahead of it, which will enable us to provide much-needed housing in the Los Angeles market. Home sales showed improvement during the quarter as our guest builders sold 70 new homes versus 50 in Q3. During the fourth quarter, 2 programs sold out in Valencia, and we now have 10 builder programs open and actively selling. Additionally, we anticipate 6 new programs will open during 2026, offering prospective homebuyers additional home product options. As I mentioned, we closed our first significant industrial land sale in over 15 years at Valencia during the fourth quarter, consisting of 13.8 acres for a purchase price of $42.5 million. In order to optimize land values, we elected to delay residential land sales in 2025. We are currently talking to our guest builders about potential land sales in 2026. Although we did not complete any residential land sales, 2025 was a transformational year for Valencia as we received unanimous approval from Los Angeles County Board of Supervisors for the Entrada South and Valencia Commerce Center entitlements. Like California and Valencia, in particular, have a long history of land use litigation, challenging new housing projects, which unfortunately, we've had to build into our business planning, we're happy to report that no litigation was filed to challenge the approval of these communities, an outcome that will allow us to accelerate our development time line. Entrada South is expected to consist of approximately 120 net acres of residential land, over 1,300 market rate homesites and approximately 40 net acres of commercial land, while Valencia Commerce Center is expected to include approximately 110 net acres and will cater towards industrial-focused uses. We're also pursuing approvals for 3 additional villages. When approved, these villages, combined with existing entitlements will provide over 10,000en titled homesites, creating a deep pipeline for future land sales to help meet demand in the county's chronically undersupplied housing market. These approvals will substantially enhance the long-term value of Valencia and will position it to become an increasingly meaningful contributor to our results. Turning to San Francisco. We're finalizing engineering for the next phase of infrastructure and we're working with local agencies and ministerial infrastructure permits for the initial site work. We still expect to begin this initial site work at Candlestick in the first half of 2026. Now let me discuss Hearthstone. We closed the acquisition in Q3 of 2025 and the Five Point and Hearthstone teams hit the ground running. I want to reiterate how excited we are to have this incredible talented and experienced group from Hearthstone as part of Five Point. At closing, Hearthstone had approximately $2.6 billion of assets under management and that figure has since grown to approximately $3.4 billion. Additionally, we anticipate securing $300 million to $500 million of newly originated capital commitments in the first quarter. In 2025, Hearthstone contributed $11.8 million of management fee revenue and $3.5 million of net income to Five Point's consolidated results. Beyond the near-term financial contribution, Hearthstone considerably expands our relationship with institutional capital partners and builders and provides a scalable platform for fee-based earnings growth. With Hearthstone, Five Point now participates in both long-duration master planned community development and shorter duration land banking, creating a more balanced and diversified earnings profile. Now that we are well into the process of integrating Hearthstone, we're exploring additional revenue growth options available to Five Point. We're currently evaluating middle duration opportunities in the land ecosystem in order to grow a durable platform for the future. While I can't provide further information at this juncture, our management team is focused on leveraging our experience, balance sheet and capital relationships to pursue opportunities utilizing outside capital partners to create additional fee-based revenue streams using an asset-light approach. We expect to have more to report on these initiatives on future calls. Before I wrap up, let me provide an outlook for 2026. Based on what we have seen today, we expect consolidated net income in 2026 to be approximately $100 million. We expect our earnings will be weighted more heavily towards the second half of the year as land sales and fee-based income accelerate. The volume and timing of our planned land sales are largely a reflection of our strategy of matching sales to absorption of homes in our communities in order to optimize land value. Let me conclude by saying how proud I am of what our team accomplished in 2025. We delivered record earnings, strengthened our balance sheet, advanced major entitlements and expanded our platform in a meaningful way, all while maintaining a disciplined and patient approach to capital deployment. Five Point enters 2026 with exceptional liquidity, a deep pipeline of entitled land and a broader set of tools to create value across the land development cycle. We believe this positions us well to continue delivering consistent performance and long-term value for our shareholders. With that, I'll turn it over to Kim to walk through the financial details and outlook in more depth. Kim Tobler: Thank you, Dan. As Dan shared, we finished a challenging year strongly and are positioned to effectively bring land in our existing communities to market, grow our Hearthstone land banking platform and seek other growth opportunities in coming years. I'm going to review our fourth quarter and annual results for our fiscal year ended December 31, 2025. I will then conclude with some guidance on what we are expecting in 2026. In the fourth quarter, we recognized $58.7 million of net income. This is made up of the following components: we added $42.5 million industrial land sale at our Valencia community and reported a 31.25% gross margin. We also had $33 million of management services revenue, $24.6 million associated with our management of the Great Park Venture and $21.2 million of which is incentive compensation. And finally, $8.4 million associated with Hearthstone. Our fourth quarter SG&A was $16 million. We recognized $44.9 million of equity in earnings from our unconsolidated entities, $44.2 million of which was generated by the Great Park Venture. The equity and earnings from the Great Park Venture resulted from net income of $128.2 million, which was largely attributable to land sales revenue of $181.5 million from closings in the quarter, for which we reported a 75.5% gross margin. Finally, we recognized $8.9 million of tax expense. As previously noted by Dan, our results for 2025 improved relative to 2024, demonstrating the impact of the sustained focus and operational discipline we have maintained over the past several years. For the year 2025, we recognized $183.5 million in net income that is made up of the following components: our fourth quarter industrial land sale at Valencia that I previously mentioned. We also had $65.3 million of management services revenue, $53.5 million associated with our management of the Great Park Venture, $40 million of that, which is incentive compensation, and $11.8 million associated with Hearthstone's 5 months of activity. 2025 SG&A was $60.6 million, which was more than 2024 SG&A of $51.2 million. That increase was largely attributable to the Hearthstone acquisition costs, increased share-based awards granted over the past 2 years, and performance-based awards reaching established goals. We recognized $203.6 million of equity in earnings from our unconsolidated entities, largely made up of $201.3 million from the Great Park Venture. The equity in earnings from the Great Park Venture was attributable to Five Point share of the venture's net income of $584.5 million, which was derived from revenues of $825.7 million. Additionally, we recognized $28.9 million of tax expense. In addition to what Dan shared about our cash and liquidity, I also want to add that at the end of the year, our debt to total capitalization was down to 16.3% compared to 9.6% at the end of 2024. Now a few words about our Hearthstone operations. As Dan mentioned, we ended the year with approximately $3.4 billion of assets under management, which is tracking with what we had expected. In the fourth quarter, Hearthstone generated revenue of $8.4 million and net income of $3 million. For the 5 months of 2025 that Hearthstone was part of Five Point, it generated revenue of $11.8 million and net income of $3.9 million. I'd like to note that included in calculating that income was intangible asset amortization associated with the purchase accounting of approximately $800,000. We are expecting to exceed $4 billion of assets under management before the end of 2026 and expect revenue and net income to grow commensurately. Last year, I recounted the financial progress that Five Point had made since 2022. I'd like to review that again while including our 2025 results. At the end of 2022, we reported a $34.8 million net loss and finished the year with $131.8 million of cash and senior notes outstanding of $625 million. For 2023, we reported $113.7 million of net income and finished the year with $353.8 million in cash and senior notes still of $625 million. For 2024, we reported $177.6 million of net income. We paid our senior notes down by $100 million to a balance of $525 million and ended the year with $430.9 million of cash and total liquidity of $555.9 million. This year, we are reporting $183.5 million in net income. We paid our senior notes down by an additional $75 million to a balance of $450 million and are now ending the year with $425.5 million of cash and total liquidity of $643 million. We are confident in the actions we have taken to strengthen our financial condition as well as the successes we have recently reported with additional entitlements at the Great Park and Valencia. I'd like to conclude by giving some context to the guidance that Dan shared in his remarks. At the beginning of 2026, we have total -- we have a total of approximately 155 net acres of residential land remaining at the Great Park. We also have approximately 55 net acres of residential land, 11 net acres of retail land and 13 net acres of industrial land available at Valencia. These numbers do not include the recently approved entitlements at Entrada South and Valencia Commerce Center that Dan mentioned. We expect to start generating sales from these recently approved entitlements early in 2028. In 2026, we currently expect to sell 20 acres of land in Valencia and 50 acres of land in the Great Park. These sales, together with the contribution of the Hearthstone activities, is expected to result in approximately $100 million of net income for 2026. We expect the majority of the income to be earned in the second half of the year and are expecting a small loss in the first quarter of the year since we are not planning to close land sales in that quarter. In closing, our guidance reflects a challenging housing market, and our strategy remains focused on discipline. By aligning land sales with home absorption, we are projecting -- protecting value, managing risk and positioning the business for normalized demand over time. We believe this approach balances near-term caution with long-term opportunity. With that, let me turn it back to the operator, who will now open it up for questions. Operator: [Operator Instructions] Our first question comes from Alan Ratner with Zelman & Associates. Alan Ratner: Congrats on all the progress in 2025, really impressive results in a tough market, tough housing market, at least. So a lot to run through. I guess just thinking about '26, and I appreciate the guidance there, especially on the revenue and the income generation. I'm just curious when you think of your... Kim Tobler: Alan, we lost you. Can you repeat the question? Alan Ratner: Can you hear me okay? Can you hear me now guys? Kim Tobler: We couldn't hear Alan. Alan Ratner: Can you hear me now? Kim Tobler: Hear you, but we could not hear Alan. Alan, is that you? Operator: Alan, can you hear the speakers? Alan Ratner: I can hear the speakers. Can you hear me? Kim Tobler: We hear you now, Alan. Alan Ratner: Okay. Sorry about that. I don't know what happened. So I will start over. And first off, just congratulating you guys on all the great progress you made in '25. So what I was hoping to get, and I appreciate the guidance on the income drivers for '26. When you look, I guess, specifically at the 2 wholly owned projects, Valencia and San Francisco, I was hoping you could walk through a little bit what the expectation is for development expenditures in '26 and beyond. I know you mentioned the new entitlements on Valencia. So curious if we should expect to see a ramp in development spending there. And in San Francisco as well, if you can kind of quantify the ramp there now that you're expecting to begin some work there. Kim Tobler: Thanks, Alan. Just as it relates to San Francisco, we're in the process of permitting right now, which is requiring a great deal of capital. And we also have permitting that's going to be done at Valencia as well. What I'd suggest you use is for both of those projects, about the same as the capital we spent in the current year, which is about $125 million. So that will be spread between the projects and continue at that pace. We're trying to keep that pace constant as we increase the development in both places. Alan Ratner: Got it. That's helpful. And then I think -- I just want to make sure I'm understanding the entitlement approvals that you guys got. You walked through the Valencia one. I think you also have a reference to approvals in Great Park as well. And I wasn't sure, is that additive to the acreage that you guys have previously disclosed as far as what remains saleable in Great Park? Or is that just part of the main... Daniel Hedigan: Alan, Dan here. Can you hear me? Alan Ratner: I can. Yes. I can hear you. Operator: Alan says he can hear you. Daniel Hedigan: Alan, can you hear me? Alan Ratner: Yes, I can hear you. Daniel Hedigan: Alan, are you there? Alan Ratner: Yes. I am. Daniel Hedigan: We're having a little audio problem here. Okay. On your question on -- I think I heard most of your question on Great Park. So Great Park, I think we've been talking about it. We have 100 acres of land that was identified for commercial uses. But we have worked with the city because they were also identified in their RHNA plan. These sites were identified for RHNA units. So we have actually worked with them to convert that commercial to residential uses. So that is -- I think you're asking, that's really additive to anything we had before. Alan Ratner: Got it. So it was 100 acres and now you're up to what you said 150 based on this new approval? Daniel Hedigan: I'm sorry, I missed part of that, Alan. Alan Ratner: You were at 100 acres and now with this RHNA approval, you're at 150. Is that correct? Daniel Hedigan: No -- I'm sorry, yes. So what that is when -- we have land that we have -- we have existing residential land that we have not transacted on. So we still have additional original entitlement. The 100 are additive to that. And so Kim... Kim Tobler: Alan, just to be clear, we have 155 acres left at the Great Park. The 55 was already residential. And that's what was left of the residential that we were working our way through. The 100 was commercial land that has now been redesignated as residential as a result of the entitlements. Operator: There are no further questions at this time. That concludes our question-and-answer session. I would like to turn the floor back over to Dan Hedigan for closing comments. Daniel Hedigan: Well, first, I apologize for that audio problem we're having. So I appreciate everyone's patience. On behalf of our management team, we thank you for joining us on today's call, and we look forward to speaking with you next quarter. Operator: Ladies and gentlemen, that concludes today's conference. Thank you for your participation. Please disconnect your lines and have a wonderful day.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the DXC Technology Third Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Thank you. And I would now like to turn the conference over to Roger Sachs, Vice President, Investor Relations. You may begin. Roger Sachs: Thank you, operator. Good afternoon, everybody, and welcome to DXC Technology's Third Quarter Fiscal 2026 Earnings Conference Call. We hope you have had a chance to review our earnings release, which is available in the IR section of DXC's website. Speaking on today's call are Raul Fernandez, our President and CEO; and Rob Del Bene, our Chief Financial Officer. Here's today's agenda. First, Raul will update you on our strategic initiatives. Rob will then cover our quarterly financial performance as well as provide thoughts on our fourth quarter and fiscal full year guidance. Raul and Rob will then take your questions. Please note, certain comments on today's call are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from those expressed on the call. Details of these risks and uncertainties are in our annual report on Form 10-K and other SEC filings. We do not commit to updating any forward-looking statements during today's call. In addition, when we refer to year-over-year or quarter-over-quarter revenue growth rates, we will be discussing organic revenue changes on a non-GAAP basis, which exclude the impact of foreign exchange and any inorganic activity. We will also be discussing certain other non-GAAP financial measures that we believe provide useful information to our investors. Reconciliations to the most comparable GAAP measures are included in the tables included in today's earnings release. And with that, let me turn the call over to Raul. Raul Fernandez: Thank you, Roger. Last quarter, we committed to a dual-track strategy to stabilize our heritage businesses while building new AI native revenue streams. For the first time, DXC has a clear unified strategy and the infrastructure to deliver it. This quarter, we moved from design to deployment, launching our refreshed brand, standing up our first centralized sales enablement function and advancing our Fast Track initiatives. On the core track, we launched a refreshed brand in Q3, a clear story and new visual identity that articulates why customers choose DXC and stay with us. This wasn't cosmetic. We retooled our solutions positioning, rebuilt our sales materials and created a consistent message across every customer touch point. The early signals are encouraging, where our teams are using these new tools and leading with our differentiated message, we're seeing it resonate. Customers and influencers respond positively when we lead with clarity and confidence about what makes DXC distinct. To scale that message across the organization, we've established a high-impact sales enablement team, the first centralized function of its kind at DXC. They've rebuilt our onboarding process, created integrated sales plays for priority offerings and established baseline metrics we're now tracking across regions. That said, we are a company of considerable scale and driving consistent execution across a global sales organization takes time and discipline. But where we've deployed the new approach, it works. At a recent ISG Provider Summit, third-party advisers told us DXC showed up differently than expected, clear story, strong presence, memorable and distinct from competitors. Our focus now is making that consistent across the organization. What's not changing is what our customers consistently tell us, DXC delivers. Our delivery excellence remains a competitive advantage and the foundation we're building upon. The opportunity in front of us is helping our sellers translate that operational credibility into more transformative conversations, moving from trusted partner to strategic adviser in our customers' AI innovation agendas. A good example of how our go-to-market strategy is working is a significant new logo win with the London Metropolitan Police, a master vendor engagement to lead their enterprise transformation. We're replacing core ERP and resource management platforms, integrating modern SaaS and AI into mission-critical operations. We won this engagement because of deep public sector expertise, disciplined execution and a repeatable blueprint we can scale across U.K. police forces. We're closing the gap between our best performers and the broader organization through these targeted talent and enablement investments, and I'm confident we'll generate results from these initiatives. Conversely, our Fast Track initiatives are progressing well with development time lines and early client interest tracking ahead of our initial plans. Fast Track is about acceleration. It's focused on AI-infused solutions, repeatable IP and productized offerings that deliver higher growth, higher margins and durable differentiation. Fast Track is possible because of how we've architected AI inside DXC. Our approach starts with a fundamental insight. Legacy systems aren't liabilities. They're assets. They contain decades of battle-tested business logic and institutional knowledge. Rather than ripping them out, we connect them to AI through an intelligent orchestration layer that roots work across multiple providers, enforces security and governance and maintains complete audit trails. We built this approach for ourselves first. We've deployed AI at scale across all 115,000 employees, integrating every major AI provider and routing work to the best model for each task, giving us full technical portability, and we're putting 60 years of institutional knowledge to work, pricing, contract intelligence, competitive insights, project data, all surface through roll-aware platforms that deliver the right information to the right people at the right time. This approach lets us move from idea to production in weeks, not months, and we're applying the same architecture we're building for clients to accelerate our own product development. As customer zero, we prove it works inside DXC before we offer it to the market. Here's how that customer zero experience is translating into fast-track offerings. In security, our agentic security operations center powered by 7AI protects DXC from 4.5 million threats daily with over 90% resolved automatically. We're now offering this proven capability to banking, health care and government clients who are overwhelmed by alert volume. They see our operational results as proof it works. In banking, we own and operate Hogan, one of the most trusted core banking platforms in the world. It processes over $2.5 trillion in transactions per day across 300 million accounts. Rather than forcing customers into risky multiyear core replacement projects, we built Core Ignite. Core Ignite embodies our enterprise AI philosophy, connect, don't convert. Core Ignite allows banks to connect to fintechs, launch new digital products and modernize customer experiences while preserving the security and performance of the mainframe underneath. We know our banking customers want to innovate, but when the stakes are this high, they cannot risk their core ledgers. We are bringing the innovation to them through a curated ecosystem of partners. We partnered with Ripple to integrate enterprise-grade blockchain digital asset custody and real-time global payments directly into Hogan. We partnered with Euronet to bring the Ren payments platform to our clients, enabling instant card issuing and payments. We partnered with Aptys to give our banking partners immediate access to FedNow and real-time payments, and we partnered with Splitit to allow banks to offer buy now, pay later options. We believe our Fast Track initiatives can achieve 10% of our run rate revenue by the end of Q2 fiscal 2029. We are deliberately structuring our Fast Track products and contracts to preserve strategic flexibility that gives us multiple paths to create shareholder value as these businesses mature, including scaling them inside DXC, partnering or pursuing other value-enhancing outcomes. The focus is straightforward, build high potential businesses and retain the flexibility and choose the option that delivers the strongest return for shareholders. For decades, this industry operated on a linear equation. To grow revenue, you had to grow headcount. That era is ending. AI allows us to build and deploy solutions faster with lower incremental capital and less dependency on labor growth. Our strong free cash flow allows us to self-fund these initiatives while maintaining balance sheet discipline. We're excited to share more about these opportunities at our upcoming Investor Day in New York City, the second week of June. Specific details will be announced shortly. The strategy is clear. The architecture is in place. The work ahead is delivery, and that's exactly what DXC does best. One final note, this script was written by me, but delivered using my custom AI voice model built with ElevenLabs. We can now share translated versions in Spanish, French, German, Portuguese and Arabic instantly. This is exponential in action, AI that amplifies human capability and it's a preview of what we're bringing to clients. Let me turn it over to Rob to review the third quarter results. Robert Del Bene: Thank you, Raul, and good afternoon, everyone. Today, I'll go over our third quarter results and provide guidance for the fourth quarter and our updated full year fiscal 2026 outlook. Now starting with the third quarter results. Total revenue was $3.2 billion, declining 4.3% year-to-year within our guidance range with all 3 business segments performing consistently with the first half of the year. From a geographic perspective, we experienced declining performance in the U.S. with the rest of the world improving from the first half of the year. As expected, our bookings improved from the levels we saw in the first half with a book-to-bill ratio of 1.12, which brings our trailing 12-month book-to-bill to 1.02. This marks the fourth consecutive quarter with our trailing 12-month ratio above 1. As a reminder, last year's third quarter bookings were our strongest in several years at $4.3 billion, which creates a more challenging year-to-year comparison. As we mentioned last quarter, we had a robust list of new large opportunities in the pipeline, 3 of which closed in the quarter, and we have good line of sight for others to close in the months ahead. We attribute the building pipeline of opportunities to our foundation of delivery excellence and deep engineering skills, coupled with our investments in new offerings and AI-based solutions, deepening our relationships with third-party advisers and our new brand positioning. All of these factors are repositioning DXC as a strategic partner to the market. Adjusted EBIT margin was 8.2%, coming in slightly above the high end of our guidance range, driven by continued disciplined spending management and the timing of onetime benefits that were not included in our guide. On a year-to-year basis, adjusted EBIT margin declined 70 basis points, primarily reflecting planned higher investment levels in offering development and marketing initiatives to support future revenue growth. Non-GAAP EPS was $0.96, above the high end of our guidance range, consistent with our adjusted EBIT performance and up from $0.92 in the third quarter of last year, largely driven by a lower share count, net interest expense and taxes and partially offset by lower adjusted EBIT. Now turning to our segment results. The CES book-to-bill for the quarter was 1.2, which brought the trailing 12-month book-to-bill to 1.13. Bookings continue to be strong in long-term strategic projects with continued pressure on short-term discretionary engagements. CES revenues, which represent 40% of total revenue, declined 3.6% year-to-year. This reflects the discretionary booking dynamic I just mentioned, which has been impacting revenue for the last several quarters. Our expectation is that the strength of the longer-term bookings will lead to improved CES revenue performance in fiscal 2027. In addition, as we have mentioned, we are investing in building AI-based offerings such as Core Ignite, AMBER and our new AdvisoryX consultancy. As these new offerings scale, they will contribute to the performance of CES. Driven by large deal wins, the quarterly GIS book-to-bill ratio improved to 1.09, up from the first half of the year. The trailing 12-month book-to-bill is now just below 1. GIS, which represents 50% of total revenue, declined 6.2% year-to-year, which is in line with our full year expectation. Insurance, which represents 10% of total revenue, grew 3.2% year-to-year, largely due to growth in our software business. This growth has been driven by strategic customer migrations to our cloud-based Assure software platform and associated offerings. We are also continuing to invest in our software capabilities. For example, we have introduced a suite of AI-enabled smart apps that help insurers drive revenue growth and productivity without changing their core systems. While these investments have near-term margin impacts, they will drive incremental revenue growth over the long term. In addition, in 3Q, we anticipated closing a couple of large BPS opportunities that have now been delayed to 4Q and will impact our 4Q revenue forecast for insurance. Now turning to our cash flow and balance sheet. We generated $266 million of free cash flow during the quarter, bringing our year-to-date total to $603 million, up from $576 million during the same period last year. We're on pace to deliver our full year guide of approximately $650 million. During the quarter, we took proactive steps to further strengthen our balance sheet. We refinanced our EUR 650 million bond that was scheduled to mature in January of 2026. In addition, we prepaid $300 million of our $700 million bond due to mature in September, consistent with our commitment to maintain a strong balance sheet with the appropriate debt levels. While continuing to strengthen our balance sheet and fund investments for long-term growth, we have been returning capital to shareholders following a disciplined and balanced approach. Year-to-date through the third quarter of fiscal '26, we repurchased $190 million worth of our shares, including $65 million in Q3. We also remain focused on our commitment to lower our capital lease liability. During the quarter, we paid down $47 million, which brings total reductions to more than $450 million since the start of fiscal 2025, which is when we amended our financial practice to significantly reduce new lease originations. In that time frame, we held new originations to $33 million. With these efforts and after accounting for currency movements on our euro-denominated bonds, our total debt declined by $465 million to approximately $3.6 billion. Our ability to consistently generate strong free cash flow enabled us to increase our cash balance by more than $500 million since the start of fiscal 2025, bringing it to $1.7 billion. As a result, we have reduced our net debt by approximately $970 million. Looking ahead to Q4, we expect to repurchase $60 million worth of shares, bringing our full year total to approximately $250 million, up from our initial guide for the year of $150 million. With strong free cash flow and expected proceeds from asset sales, we anticipate exiting 2026 with approximately $1.7 billion in cash. Given this projected cash position, we are providing an early perspective on capital allocation for the first half of fiscal 2027. Along with continuing to make growth investments in our business, we expect to deploy $400 million to retire the remaining U.S. dollar bonds that come due in September. We also plan to repurchase $250 million worth of shares in the first half of the upcoming fiscal year, which is equal to our total projected share repurchase in fiscal 2026. I'll provide further details on our full year fiscal 2027 capital allocation expectations during our year-end call in May. Now let me provide you with our fiscal 2026 fourth quarter guidance. We expect total organic revenue to decline 4% to 5%. From a segment perspective, we expect CES revenue to decline year-to-year at a similar rate to the past couple of quarters. Previously, I had commented that we would see slight improvements in CES revenue performance in the fourth quarter. While our bookings for the quarter were strong, short-term project bookings were below expectations and have delayed revenue improvements to fiscal 2027. For GIS, we expect revenue to decline mid-single digits, in line with prior quarters. And finally, insurance revenue growth is expected to be consistent with the prior quarter results, which is a reflection of continued software growth and flat insurance business process services performance impacted by the delay of bookings we experienced in 3Q. We anticipate adjusted EBIT margin in the range of 6.5% to 7.5%. And finally, our non-GAAP diluted EPS of $0.65 to $0.75. This fourth quarter outlook implies updated full year fiscal 2026 guidance as follows: total organic revenue decline of approximately 4.3% and at a segment level, we expect CES to decline at a low single-digit rate. GIS is anticipated to decline at a mid-single-digit rate and insurance is expected to grow at a low single-digit rate. We expect adjusted EBIT margin to be approximately 7.5%, and we expect non-GAAP diluted EPS to be approximately $3.15. Our full year free cash flow expectation remains at approximately $650 million. And with that, let me turn the call back over to Roger. Roger Sachs: Thank you, Rob. We'd now like to open the call for your questions. Operator, would you please provide the instructions? Operator: [Operator Instructions] And our first question comes from the line of Jamie Friedman with Susquehanna. James Friedman: Clearly, a lot of creativity and work going on here, and it is welcome by the investment community. I'd like to get your perspective, Raul, about the fast-track attributes that you're contemplating. So if you look at one of the engagements you currently have or prospectively have, when you say things like repeatable, scalable IP, could you go in a little bit to what sorts of services it is that you're providing or how the platform works? I know it's early, but I feel like at this point, some sort of more detail about what it is that you're doing would be helpful. Raul Fernandez: Yes. No, great question. So let me just start that the key to doing this is obviously being in a position to understand where we have some value, existing value in the work that we do with our customers. So Hogan is a great example. It's been around for a long time from the '80s, really wasn't invested in, cared for, nourished. And our customers, some of them stayed on, some of them left, but there's still a tremendous amount of a user base there. And so as I've brought in new product teams, these are more entrepreneurial focused teams that have an ability to quickly look at an opportunity and now with AI scale from Sandbox to MVP in a fraction of the time that it was before. We've been targeting the areas that we want to invest in because, again, I think the biggest limiter I have is product teams that can execute. So we've chosen where we have some legacy leverage, where there is something in what we do and what we did that provides some sort of defensible moat on the defense side and then gives us some offensive capability that somebody just can't enter and leapfrog us. So Hogan is a great legacy platform. This CoreIgnite is a great light layer, call it a gateway that connects new products that banks want in a very technology, easy, friendly way to connect. And then from a standpoint of value, we are creating value and we are sharing that value in a nontraditional way. So this is not rates times hours. This is not services. This is -- in this case, it will be sharing transaction fees. And in this scenario, transaction fees are at a high rate, click rate, right, per day, per customer per item that we are bringing to the table, meaning financial product that we're bringing to the table. And so the attributes are replicability, scalability, IP, some defensive and offensive IP and architecture. And then frankly, having the right team with the right background to quickly build and prototype and launch. And I think this is a great example where we have started building, we've started talking to our customers. We've started engaging with partnerships. We've started announcing those partnerships before the product is ready to go. But we're talking quarters, not years. We're talking months, again, not years. And so the attributes across the board, and that's one in CES. There's another offering within GIS called Oasis that we're going to launch. Our June Investor Day will be a day that we go into heavy detail. We will have demos there. We will have product teams there. We'll have customers there. And then Rob and I, in June, we will have a much more detailed look at the next 24 months or 28 months, whatever is left in the 36-month time line and be able to give you a better sense as to the revenue ramp. Personally, as I look back and I look at the development schedules that I originally approved and funded and I look at where they are today, a, they're running ahead of schedule from a development standpoint, again, use of AI tools to get things done. and b, their time to revenue is faster than I originally thought. And so the time between now and June will let us fine-tune the model, let us look at what the ramp-up is going to be. But I think everything that you see in terms of the AI high fliers of incredible fast penetration and growth, we have an ability if we select, if we invest and if we build the right AI products to benefit from that much stronger rise in revenue and adoption. And again, I think we've targeted really well. We've got 6 right now. There's another probably 3 to 4 that are in the queue. Again, the biggest issue I have is the right teams to execute on this and picking the right projects, right? So we're going to -- they all have a shot at being super successful. As long as 4 out of 6 are successful, it's a win for us. And even if some aren't, we're going to learn along the way. James Friedman: Okay. I'll drop back in queue. I'm going to come back if there's room at the end. Raul Fernandez: Yes. And I'm happy to go into -- this is a higher gross margin or net margin profile, how we're pricing it. So happy to follow up on questions there as well. Operator: And our next question comes from the line of Bryan Bergin with TD Cowen. Bryan Bergin: Maybe start on the guide. Just curious on the underlying drivers and assumptions you made on the growth rate within the underlying segments and businesses as far as CES, GIS and insurance. Just how much of the CES improvement is in hand already? And then just talk about as far as the insurance side of the equation, just what may have changed there in some of those ramps? Robert Del Bene: Yes. Brian, it's Rob. Thanks for the question. So our guide for all 3 segments, pretty consistent from a quarter-to-quarter perspective. Now we did -- I mentioned last quarter that we were expecting a little bit of an improvement in CES in the fourth quarter. The booking dynamics, as I said in the recorded remarks, the booking dynamics in CES were strong in strategic longer-term projects, different duration profile than the short-term projects. And that -- based on the beginning pipeline for 3Q, we expected to do a little better there. And the pattern of the first half of the year continued into the third quarter. So that delays the improvement. In the insurance business, where software is growing nicely consistently all year, the business process services segment of insurance is about flattish range in terms of revenue for fourth quarter. That's the prediction. Now we -- again, coming into the quarter, we had a robust pipeline. A couple of deals we expected to close that would have driven incremental revenue in Q4 has got pushed to booking in Q4 instead of booking in Q3. So that is also a bit of a delay, which dampens the growth rate we had previously expected in insurance for Q4. Bryan Bergin: Okay. Understood. My follow-up just on the margin side. So maybe talk about the performance in 3Q and the guide for the 4Q. Is there any kind of expense timing shifts there? And as you think about drivers for margin improvement and cost takeout and maybe even beyond the 4Q, just as you ramp deals that you do win, how should we be thinking about that as you get into the early part of next fiscal, too? Robert Del Bene: Yes. So we -- in the quarter, we did a little better than we had expected. We had good resource management and savings from that. And then we had some onetime pennies that we didn't exactly know the timing. We didn't have it in our guide and they hit in 3Q. So that is the part of the decline from quarter-to-quarter going into fourth quarter. And then the absolute revenue comes down a little bit quarter-to-quarter, and that's the remainder of the quarter-to-quarter underpinning of the guide. Now we have -- extending out into fiscal '27, the 4Q guide is a good launching point heading into '27. And we are going to be pulling together all of our cost takeout as we normally would do, all of our cost takeout plans heading into the new year during the next 60 days or so. And we'll have a much better picture of the cost takeout detailed plans in 60 days. But I would say that we have plenty of room for cost improvement and spending management. We are utilizing our AI capabilities internally, which will help us drive cost reductions next year and into the future. So we feel confident in our margin profile heading into next year, but the particulars, we'll know more in 90 days. Operator: And our next question comes from the line of Jonathan Lee with Guggenheim Partners. Yu Lee: What have you seen across your client conversations in January as it relates to calendar '26 spending intentions? And how does that compare to last year? And in those conversations, what gives you confidence around any potential improvement in pipeline conversion going forward given some of the deal delays you've highlighted? Raul Fernandez: Yes. Let me hit it first, and then I'll let Rob comment. One thing that has been a factor that we've noticed in the last quarter is that we are getting a lot of opportunities that are driven by corporate spinouts, restructurings and breakups. We have existing customers and new customers that are going through the business rationale and then the actual execution of those spinouts. Those spinouts require a tremendous amount of support from a system standpoint. And we are getting a good amount of opportunities, both existing clients and new clients. And again, that is a step-up that I think is reflected by the macro environment where it's easier now to potentially do deals and get things approved in various governments around the world. If you remember, April last year, the tariff, we started the year with a lot of hope and promise. Then we had the tariff issue. I think those have been internalized as kind of a normal operating mode where people understand that their tariff situation is what it is, and it will change over time, but it is almost like a volatile factor that is now factored in as part of a normal planning. That definitely provided some pause last year in the spring and summer. We're beyond that. I think that the realization that AI has a huge unlock of economic value and potential far beyond anything that we've been through before is absolutely resonating across C-suites. And -- but they're also being thoughtful about how to take the right approach with the right parts of the business with the right partners. So while I think in some instances, it may delay some decision-making, the delay isn't about stopping any sort of investment in innovation. not that whatsoever. It's really about thinking how big their AI agendas will be rolled out and at what pace and sequence. Robert Del Bene: And just, Jonathan, to add to what Raul just described, just looking at the data, our pipeline for 4Q is robust. The win rates we experienced in the third quarter were very stable with the rest of the year. Pricing is -- I'll describe that as stable as well. So indicators are pretty consistent for the 3 quarters of this year. There was definitely this mix impact of longer-term projects versus shorter-term projects, which the longer-term projects are -- I think the close rates have been pretty stable. So the shorter-term projects, they haven't. The closed, there's been more delays and there's been more carrying over from one quarter to the next in the pipeline. So that pattern, which has existed for all 3 quarters, we see it -- I see it continuing into the fourth quarter, and that's what's baked into the guide. Yu Lee: That's really helpful context. And just as a follow-up, I want to dig into the Connect and Converge strategy. On that and sort of connecting the AI and solutions, how do we think about any risks or potential client hesitancy there? And how do you convince clients around the benefit of essentially not modernizing their tech stacks? Raul Fernandez: I think it's about optionality. Many clients have tried to do big lifts and shifts and have failed. I think a lot of factors are now coming together. One, much better AI-based tool sets for code conversion, which does 2 things. One, allows you to revisit the old legacy systems. And of course, we could be players in that scenario. But more importantly, being able to build lightweight offerings that are AI-based that can be delivered very quickly that can also be priced from our standpoint in a more disruptive and value-based way. I think it's a win-win. I think that the era of rates times hours is ending, and now we're moving into a new era of value-based pricing. It will take longer than we all think because we have huge organizations, purchasing organizations, procurement organizations that have grown up doing that. So I think it's less of a tech challenge than it is a bid process challenge and a procurement and thinking challenge in terms of who do you want your partner to be and how do you want their business model to work side-by-side with your business model. But we're taking a very creative, innovative and disruptive approach to all of this. As you know, we've had a history and we own it of having since these companies came together, a decline in revenue. We are committed to solving that issue to getting it to 0 and then to growing again. And we think AI is an incredible tailwind for us to do that if we position ourselves correctly. And the investment that we're doing in Fast Track is exactly that to position us as great partners in their AI journey. Operator: And our next question comes from the line of Brendan Biles with JPMorgan. Brendan Biles: Thanks for sharing the results with us today. I love the refreshed look and the branding in the slides. It looks awesome. Question for me is on free cash flow. It seems like you outperformed versus at least what we had penciled in for free cash flow in the quarter. So I just want to confirm, is that consistent with your expectations? Or did you outperform your expectations as well? And then what's the thinking on the full year number staying at $650 million, I take it to the extent you outperform, is that just going -- allocating that cash flow into these kind of these fast-track initiatives to the extent there was outperformance? Robert Del Bene: Yes. Thanks, Brendan. I'll take that one. So we did a little bit better than we anticipated in the quarter. And just to step back, for the full year, our pattern of quarterly free cash flow this year is different than the last several years in that we normally would have flat free cash flow in the first half and produce 90% of our free cash flow in the second half of the year. We pulled -- and that was because of working capital dynamics. This year, we pulled forward the benefits of working capital into the first half of the year. So it changed our normal SKU. In the third quarter, we did -- also did a little better than we anticipated in a couple of areas, not materially. And I do think that is more of a pull forward from 4Q into 3Q rather than adding to our full year guide. Now we always try to do better, right? So we will keep working all elements of free cash flow and try to outperform. But right now, what I can see is we'll be on our original guide. And the deployment -- to answer your question on deployment, we were really clear in our script where we're deploying our cash in the first half for the fiscal year. So we gave color on both repurchase and debt repayments. Operator: And our next question comes from the line of Antonio Jaramillo with Morgan Stanley. Antonio Jaramillo: I want to go back to your comments on the pricing environment. How does pricing vary for like each of the business segments? And where do you see like the most change? Robert Del Bene: Our pricing dynamics are different in each segment depending on the profile of the engagement. So let me just take it step by step here. In GIS, where there are longer-term commitments, including at some engagements have capital, some engagements don't. So the pricing would vary depending on the level of upfront commitment being made by DXC. Some engagements require more transition and transformation. So the pricing structure of those contracts would look very different than a consulting contract, right, where it's people related and skills related and the value you're bringing to that engagement. So really, the -- and the same the insurance business is different even within insurance, you have a software component to insurance, which is priced as typical software providers price their products. And there's a BPS component to insurance that's priced more typically like an outsourcing contract. So each of the 3 segments have different dynamics and the level of upfront investment will determine part of those pricing dynamics. I will say that for all 3, this year, our pricing has been stable for all 3 segments. Antonio Jaramillo: Got it. That's helpful. And then I wanted to follow up on the cap allocation priorities. It looks like the share buybacks will be ramping up in the first half of fiscal year '27, which is matching what you guys are going to do for this fiscal year. Yes. Like how do you balance that with investment as well? Robert Del Bene: Yes. So our first priority is investing to grow the business. So that is our #1 priority. We've also -- the other 2 priorities are equally important to us, maintaining the right debt profile, strong balance sheet and return to shareholders. So we -- once we set our investment levels that we require and determine how much incremental cash we have to deploy to the other 2 priorities, we will balance the right debt profile with what we feel like is the appropriate return to shareholders. So it's judgment. So you could see from all the actions we've taken for the last 2 years that we've been applying judgment along the way. And we -- with our cash balances we currently have and project to have through the end of the year -- fiscal year, we feel confident in those -- in the cash generation and the cash projections. So we thought it was appropriate this year to give guidance for the first half of next year, which is a little unusual for us, but that should be a signal of confidence in our cash projections. Raul Fernandez: And let me just give a little bit of color. As investors and builders of AI products and services that we're bringing to market, we are benefiting from the incredible amount of compute that is available to us. I think what's happened in the last 2 years is that you've got a democratization, small D of compute and an ability to have access to that -- for anybody to have access to that as a user, as a consumer and as an enterprise. We clearly see the benefit and value and the fact that you can build incredible solutions in a fraction of the time at a fraction of the cost. And so we are super confident in our ability to continue to invest. And as I said before, the issue isn't the ability to invest in these, the issue is about having the right number of teams ready to go out and build them, sell them and deliver them. So I think it's just the backdrop of the environment today as a big company building solutions or as an entrepreneur and a start-up building solutions in an AI world, it's an incredibly faster, cheaper way of bringing value to market. Operator: And our next question comes from the line of Keith Bachman with BMO Capital Markets. Keith Bachman: I wanted to go back to some of the initiatives to try to stimulate growth. And a couple of questions. One is, how do you think about promoting Core Ignite and others while also balancing margin expectations. And as you mentioned, you have to build it, you have to promote it, and that usually means an investment profile. And I think it is the right thing to do to try to stimulate the top line. But how do you balance those initiatives? And I think, Rob, you started to address some of these new initiatives. How are you pricing them? Are you moving into consumption-based models? And then I have a follow-up, if I could. Raul Fernandez: Yes. So I think, first and foremost, the ability to build these, again, in a very quick and capital-light and investment-light way kind of underpins our financial flexibility in terms of how we price and how we capture value. I think we're moving towards value-based pricing. We're moving towards an ability, and we are absolutely going to be doing that. The other thing to not forget is that these start-ups inside of DXC have the benefit of a $12 billion company with 115,000 colleagues around the world with fully spun up marketing and sales organizations. So we are investing in product. We are investing in solutions that are new and AI-centric, but then they get to benefit from the new branding, the new positioning, all the human capital that we've built around it. So those shared services that are here to support the corporation as a whole also support these new initiatives. So we're benefiting from being large and from being legacy, but we're also benefiting from being fast and then the ability to go and use these tools to quickly build solutions and bring them to the marketplace. And frankly, it gives us an ability to be more disruptive versus our competitors in pricing and to think about this as long-term value capture for ourselves and for our customers. Keith Bachman: And then as you think about -- you guys have done an admirable job certainly on lowering your net debt and some trade-offs have existed. And at this juncture, I think part of it was also you wanted to clean up the business. But at this juncture, I appreciate the capital allocation description you've given in the slide deck. But how do you think about M&A to try to also use as a source to spur growth within that context of capital allocation? Raul Fernandez: So we've said that we'd be open if we have the infrastructure that's ready to be able to have an accretive acquisition of a company that would help accelerate the business goals of 1 of our 3 offerings, we would absolutely look at it. We are looking at it. But the ability to create products and services inside of our organization and bring those to market, a, we control more of it. There's less risk, there's less friction, and we just have more control on all sides of the equation. To the extent we can find a company with a solution or value proposition that clearly adds value to one of our offerings and clearly adds value to where we want to double down and invest in, we will absolutely look at that anywhere in the world, and we have active teammates that are working on that every day. But I'm -- a, I want to make sure that the foundation that we bring anything into is solid and good and accretive and it will grow faster than it did independently. I'd say we're probably 80% of the way in that journey from an organizational structure standpoint. And b, we have an ability to create new offerings. we should continue to fully do that and then selectively look at where M&A can help us accelerate our business [Audio Gap]. Keith Bachman: Okay. And I'm going to get in trouble with Roger, but I'm going to ask a third question in terms of asset dispositions, you guys did make a comment on during the course of the prepared remarks. Is there -- are these smaller type of things or anything more material that you would think about? I know you don't want to get specific, but just broadly speaking. Robert Del Bene: Yes, Keith, they're small. It's older data centers, office space that we -- that are -- everything that's underutilized, we put on the market and try to sell. So it's -- they're really small problems. Raul Fernandez: Nonstrategic. Robert Del Bene: Yes, nonstrategic, yes. Operator: And our next question comes from the line of Darrin Peller with Wolfe Research. Paul Obrecht: This is Paul Obrecht on for Darrin. Rob, you mentioned the improvements in the rest of the world, but declining performance in the U.S. Can you just provide a bit more color on what you're seeing geographically? Robert Del Bene: Yes. Yes. The results in the U.S. are -- have decelerated a bit, and you could see that in our Q. So you could see that over the course of the year. The rest of the world has been on an improving trajectory across the board. And so that is true of all 3 segments improving, again, on an improving trajectory in the rest of the world. So we're very encouraged by that. The phenomena of longer-term projects being the focus is more pronounced in the U.S. So the short-term projects have been slower in the U.S. And so it's partly the market, partly execution on our part. But there is a pronounced difference in performance between the U.S. and the rest of the world. And by rest of the world, I should add that Europe and our APAC region are both on the right trajectory, have both done better. Paul Obrecht: That's really helpful. And then as a follow-up, you've discussed the continued discipline around cost management. Can you provide a bit more detail on the productivity and cost savings you've seen over the last year as you've increasingly embedded AI internally? Robert Del Bene: Yes. And that -- and Paul, that -- we have seen benefits internally. Our resource reductions, our headcount reductions have kept pace with the revenue profile of the company. So good discipline management that we've had in prior years has continued. I'd describe AI as an enabler to let us continue that good profile and disciplined management. And we see that accelerating in the future, not slowing down because specifically because of AI, we will see that trajectory accelerate. Operator: Our next question comes from the line of Jamie Friedman with Susquehanna. James Friedman: So if you were to look, Raul, at Hogan engagement before and after the AI say Core Ignite migration or do you think of this as an add-on to the current installation, like a totally new de novo type work? Or is it more a new delivery or engagement mechanism? How should we be thinking about the before and after as this initiative evolves? Raul Fernandez: So I think you should think about it is we have an installed base of customers, and there's a kind of run rate set of professional services and limited other services that we provide for them around the Hogan product. This is all net new. This is all additive. This is all accretive. This is absolutely no negative impact to anything that we're doing today. The other thing I want to point out, as I said, we're building on some legacy assets. We also have some very favorable IP rights and contract rights in many of these instances where not only do we know the code, do we have proprietary hooks and APIs, et cetera. But in many cases, we're the only ones that can touch the code. So it's a great position to be in. You keep all the business you have, you create a new set of products and services on top of that old legacy and you create new revenue opportunities for DXC in a more value-based way, and you create new products and offerings for our bank partners, our bank customers that have invested and have been with this product for many, many years, and you're giving them more things to sell. So it's an absolute win-win. James Friedman: In terms of the architecture of Hogan, my assumption, correct me if I'm wrong, is that probably a lot of that is still either mainframe or client server on-prem. And if that's wrong, just stop me. But is that an obstacle to an AI transformation? Like don't you need to modernize it before you apply it? Raul Fernandez: No. No, that's the beauty of this, that it's a light layer gateway that sits on top of the existing infrastructure regardless of where it's housed, on-prem, off-prem, hybrid cloud or any combination. The way we've architected the ability to add new products to our bank customers. Essentially, what we're doing is we're creating a gateway where on one side, we connect to our bank customers, 300 DDAs. On the other side, we sign up new products and offerings that people -- that the bank wants to offer to its consumers, you name, stablecoin, buy now, pay later. And by enabling it without having to touch that core infrastructure, it's a total win-win, win-win for us and a win-win for the bank customer. James Friedman: All right. All right. I'll back in the queue because this covers -- I'm sure you have a lot to talk about. Raul Fernandez: I'm looking forward for you to come to demo day because you'll see it all there on our Investor Day, and we can go as deep as you want. James Friedman: Yes, me too. Operator: [Operator Instructions] And our next question comes from the line of Rod Bourgeois with DeepDive Equity Research. Rod Bourgeois: You mentioned earlier that AI can help you drive better revenue growth. I just wanted to see if you could point us to what are your main AI solutions that you're currently driving revenue at clients? And if you can give us any sense of what your overall AI revenue mix is at this point? Raul Fernandez: Yes. So look, there's AI revenue that is infused, and I'll use insurance as an example. A lot of the applications and capability that we are building for our insurance customers are built on top of a ServiceNow AI infrastructure that we can add more value by adding business process, business flows, business logic to that underlying AI code. In other cases, we're using other language models and putting those in place. So if you think about it as a layered cake, we play at all layers of the cake. -- and we have an ability to do so. Each offering is different. So Core Ignite within CES is, again, a lightweight layer that sits on top of a legacy system. We are building within GIS an ability to have an orchestration and visibility platform that we call Oasis that we're just about to start in pilot phase with a few lighthouse customers. So we will monitor and we will report on our Fast Track metrics, and we'll give more color on that in the June Investor Day. But today, throughout all of the organization, we are using AI to do many different things to port code, to write code, to check code. So the ability to go, okay, what part of this bill is AI and what part is not, that becomes more and more difficult as you're using AI for every part of the life cycle. But specifically, what we want to call out and especially on the 10% reference that I had before, those are going to be tied directly back to these very specific offerings that are branded, that you'll read a lot about and that the offerings and all of those project teams will have a chance to discuss in further detail in our June Investor Day. Operator: And that concludes our question-and-answer session. I'll now turn the conference back over to Mr. Roger Sachs for closing remarks. Roger Sachs: Thank you, everybody, for joining us today, and we look forward to speaking with you again next quarter and at our June Investor Day. Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good afternoon, and thank you for standing by. Welcome to Western Digital's Second Quarter Fiscal 2026 Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Now I will turn the call over to Mr. Ambrish Srivastava, Vice President, Investor Relations. You may begin. Ambrish Srivastava: Thank you, and good afternoon, everyone. Joining me today are Irving Tan, Western Digital's Chief Executive Officer; and Kris Sennesael, Western Digital's Chief Financial Officer. Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations, which are subject to various risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends and our future financial results. We assume no obligation to update these statements. Please refer to our most recent annual report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. In our prepared remarks, our comments will be related to non-GAAP results on a continuing operations basis, unless stated otherwise. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website at investor.wdc.com. Lastly, I want to note that when we refer to we, us, are or similar terms, we are referring only to Western Digital as a company and not speaking on behalf of the industry. With that, I will now turn the call over to Irving for introductory remarks. Irving? Tiang Yew Tan: Thanks, Ambrish, and good afternoon, everyone, and thank you for joining us today. The growth and impact of AI continues to accelerate across numerous industries. As generative AI models become the norm and agentic AI scales to drive business productivity, it is clear that AI is becoming a true strategic enabler of business transformation. AI inference has also begun to take hold in many ways becoming the true AI workload with deployment to chat bots and virtual assistants and customer relationship management tools. Further innovations in physical AI are also accelerating quickly, generating increasingly larger multimodal models propelled by advancements in autonomous vehicles and robotics. In all cases, it is data that is needed to fuel the entire AI process from training to inference to enable stronger models and sharper inference results. And as more data is generated and the value of data increases, the demand to store it is expanding at a rapid rate. As AI capabilities expand, cloud continues to grow as well, and both are driving the surge in demand for higher-density storage solutions. In this new era where AI and cloud dominate, Western Digital has taken a customer-focused approach to managing the strong demand by working closely with our hyperscale customers, ensuring that we deliver reliable, high-capacity drives at scale to give them the best performance and total cost of ownership. We are doing this by continuing to focus on increasing our drives areal density and accelerating our HAMR and ePMR road maps as well as upshifting our customers to accelerate adoption of higher capacity drives and UltraSMR technology. This last quarter, we shipped over 3.5 million units of our latest generation ePMR products, offering up to 26 terabyte CMR and 32 terabyte by UltraSMR capacities, representing strong confidence and adoption by our customers. We have also started qualification of our HAMR and next-generation ePMR products, each with a different hyperscale customer. These drives will offer our customers the higher capacity and improve total cost of ownership that they are looking for. In addition, we continue to accelerate our HAMR innovation. To support this, we recently acquired intellectual property assets and talent that will help us in the development of our internal laser capabilities. Also this past quarter, in partnership with software ecosystem partners, we announced our UltraSMR-enabled JBOD platforms, expanding UltraSMR adoption to a broader customer set. These platforms deliver significantly higher storage density compared to conventional drives. giving customers hyperscale-like performance and make mass scale data analysis more sustainable and efficient. We are truly seeing our approach resonate with our customers, and this is reflected in longer-term agreements and better visibility into their requirements. We have firm purchase orders with our top seven customers through calendar year 2026. We also have in place robust commercial agreements with three of our top five customers, two through calendar year 2027 and one through calendar year 2028. These agreements indicate a strong trust that we have built with our customers and confidence in our ability to meet their exabyte needs. We are hosting an Innovation Day on February 3rd in New York next week, where we will share updated road maps for our HAMR and ePMR products as well as further details on core innovations that we are developing to improve our drives performance, energy efficiency and throughput. We will also provide an update on our financial model. In keeping with our strategy to incubate new growth vectors based on our intellectual property and core capabilities, last month, we announced a strategic investment in Qolab, which combines our expertise in material science and precision manufacturing with Qolab's breakthrough approach to quantum hardware design. Working with Qolab, we aim to advance next-generation nanofabrication processes that improve qubit performance, reliability and scalability. Looking ahead, we see our positive momentum continuing and we will remain focused on supporting our customers' exabyte storage requirements while completing qualifications and launching our next-generation HAMR and ePMR drives. I will now hand it over to Kris to share our Q2 results and outlook for Q3. Kris Sennesael: Thank you, Irving, and good afternoon, everyone. Western Digital delivered another quarter of strong financial performance, reflecting disciplined execution across our organization and our ability to meet the customers' growing demand in the AI-driven data economy. During the second quarter of fiscal 2026, revenue was $3 billion, up 25% year-over-year, driven by strong demand for our nearline drives. Earnings per share was $2.13. Both revenue and EPS were above the high end of the guidance range. We delivered 215 exabytes to our customers, up 22% year-over-year. This includes over 3.5 million drives or 103 exabytes of our latest generation ePMR with capacity points up to 32 terabytes. Cloud represented 89% of total revenue at $2.7 billion, up 28% year-over-year, driven by strong demand for our higher capacity nearline product portfolio. Client represented 6% of total revenue at $176 million, up 26% year-over-year. Consumer represented 5% of revenue at $168 million, down 3% year-over-year. Gross margin for the fiscal second quarter was 46.1%. Gross margin improved 770 basis points year-over-year and 220 basis points sequentially. The improved gross margin performance reflects continued mix shift towards higher capacity drives and tight cost control in our manufacturing sites and throughout the supply chain. Operating expenses were $372 million. As a percentage of revenue, operating expenses declined 120 basis points sequentially, primarily due to operating leverage in the model. Operating income was slightly above $1 billion, translating into an operating margin of 33.8%. Interest and other expenses were $45 million, and our effective tax rate in the fiscal second quarter was 15.1%. Taking into account the diluted share count of 378 million shares, EPS was $2.13, an increase of 78% year-over-year. Turning to the balance sheet. At the end of our fiscal second quarter, cash and cash equivalents were $2 billion and total liquidity was $3.2 billion, including the undrawn revolver capacity. Debt outstanding was $4.7 billion, translating into a net debt position of $2.7 billion and a net leverage EBITDA ratio of well below 1 turn. Operating cash flow for the fiscal second quarter was $745 million, and capital expenditures were $92 million, resulting in strong free cash flow generation of $653 million for the quarter, which reflected a free cash flow margin of 21.6%. During the quarter, we made $48 million of dividend payments and increased our share repurchases to $615 million, repurchasing 3.8 million shares of common stock. Since the launch of our capital return program in the fourth quarter of fiscal 2025, we have returned $1.4 billion to our shareholders by way of share repurchases and dividend payments. Also, today, we announced that our Board has approved a quarterly cash dividend of $0.125 per share of the company's common stock, payable on March 18, 2026, to shareholders of record as of March 5, 2026. I will now turn to the outlook for the third quarter of fiscal 2026. We anticipate revenue to be $3.2 billion, plus/minus $100 million. At midpoint, this reflects a growth of approximately 40% year-over-year. Gross margin is expected to be between 47% and 48%. We expect operating expenses in the range of $380 million to $390 million. Interest and other expenses are anticipated to be approximately $50 million. The tax rate is expected to be approximately 16%. As a result, we expect diluted earnings per share to be $2.30, plus/minus $0.15 based on a non-GAAP diluted share count of approximately 385 million shares. To wrap up, Western Digital achieved another strong quarter with performance ahead of expectations. Our guidance for the next quarter underscore continued favorable trends in our business alongside our disciplined approach to free cash flow, capital returns and long-term value creation for shareholders. With that, let's now begin the Q&A. Ambrish? Ambrish Srivastava: Thank you, Kris. Operator, you can now open the line to questions, please. To ensure that we hear from as many analysts as possible, please ask one question at a time. After we respond we will give you an opportunity to ask one follow-up question. Operator? Operator: [Operator Instructions] Operator? Our first question today comes from Aaron Rakers with Wells Fargo. Aaron Rakers: And I will stick to one, Ambrish. On the gross margin line, the guidance that you're giving for 47% to 48%, I guess the back of the envelope math would suggest that you're maintaining what looks to be like a 70%, maybe 75% incremental margin flow-through. So, I guess, my question is, how do you think about the durability of that incremental margin? Or maybe taken another way, how do you think about the cost curve down on a per terabyte basis as we look out over the next, call it, several quarters? Kris Sennesael: Yes, Aaron, thanks for your question. And so, first of all, I'm really happy with what's going on with the gross margin. We delivered 46.1% gross margin, up 220 basis points quarter-over-quarter, up 770 basis points year-over-year. And we are guiding to 47%, 48%, so 47.5% at the midpoint, which is up 740 basis points on a year-over-year basis. And Aaron, I think your math is working. The incremental gross margin is on or about 75%, depending on how you look at it on a year-over-year basis or a quarter-over-quarter basis. So I've stated before, I'm very comfortable with an incremental gross margin higher than 50% and definitely 75% is higher than 50%. I mean in gross margins, there's two sides to the equation. On one hand, you have pricing environment. On the other hand, you have the cost environment. In pricing, I've talked about that before. We see a stable pricing environment with prices on a price per terabyte kind of flattish to slightly up. Actually, last quarter, it was up 2%, 3% on an ASP per terabyte basis. So that clearly demonstrate the value that we continue to deliver to our customers. And on the cost front, the teams continue to execute really well. We continue to upshift our customers to higher capacity drives, which gives us a cost benefit. And then there is great execution as well on driving down the cost in our manufacturing assets as well as throughout the supply chain. And when you look at it last quarter, the cost per terabyte was coming down on or about 10% on a year-over-year basis. And so when you put this all together, we continue to drive further gross margin expansion. And we believe in the next couple of quarters and beyond, we will continue to be able to do that. Operator: The next question is from Erik Woodring with Morgan Stanley. Erik Woodring: Irving, just given the tightness of the HDD market and kind of the significant inflation that NAND is going through right now, can you maybe just talk about maybe your patience in being able to sign purchase orders further into calendar '27 to extract better economics just relative to maybe how you were approaching signing POs last year? Is that making any difference in the economics you're able to extract? And then -- thank you. Tiang Yew Tan: Yes. Thanks, Erik. As we highlighted, we're pretty much sold out for calendar '26. We have firm POs with our top seven customers. And we've also established LTAs with two of them for calendar year '27 and one of them for calendar year '28. Obviously, these LTAs have a combination of volume of exabytes and price. And in relation to pricing, I think first, it's important to recognize that our customers actually have value that there's actually a structural shift in the value that we deliver to them, especially in the impact that we have to their total cost of ownership as the business moves more and more towards inference where monetization is happening. So, in this case, the pricing that we've provided there reflects the value that we're delivering to them. And so as Kris mentioned, we continue to see going forward, a stable pricing environment that gives us an opportunity to continue to extract more value as we deliver both better TCO value to our customers and to better support their supply-demand needs as well through higher capacity drives. Ambrish Srivastava: Do you have a follow-up, Erik? Erik Woodring: Sure. Just very quickly, Kris, would just love to know how you're approaching the SanDisk share ownership. Do you still plan to monetize before, I think it's the February 21 deadline? And more importantly, how do you expect to leverage those proceeds? Kris Sennesael: Yes, Erik. As you probably know, we still have 7.5 million SanDisk shares, and it's our intention to monetize those shares before the one-year anniversary of the separation. likely in a similar transaction that we have done before, meaning it's a debt for equity swap. And so the proceeds will be used to further reduce the debt. Operator: The next question is from C.J. Muse with Cantor Fitzgerald. Christopher Muse: I guess could you speak to how customer engagement and contracts are evolving in this very tight environment? Tiang Yew Tan: Yes, C.J., this is Irving. Thanks for the question. One of the things that we've been very focused on over the last year is really develop a much more customer-centric approach. As we've shared in the past, we've really pivoted our organization to be centered around our big hyperscale customers with dedicated teams for each of them. That's really deepened the relationship that we have with them in terms of both technology road map development, in terms of getting better visibility of their demand requirements, and you see the result of that in the longer-term LTAs we've been able to structure with them. We're also looking forward to sharing with all of you the innovations that we are going to be delivering to support the AI needs -- workloads needs going forward at our Innovation Day next week. But definitely, the relationship has improved, as I highlighted, they definitely see the value and the structural -- that's resulting in the structural change that we're seeing in terms of pricing with them that's also resulting in the longer-term contracts that we have. Ultimately, what we want to do is to be able to ensure that it's a fair value exchange, deliver predictable pricing to them because one of the things that they are concerned about is the high volatility of some tiers of the storage space, right, and to ensure that there's sustainable value creation, both for them and for us along the way. Operator: Do you have a follow-up, C.J.? Let's go to the next. Sorry, C.J., go ahead. Christopher Muse: Yes, sorry about the numbers. I guess just to follow on the SanDisk share comment. Can you talk about your plans thereafter? Are you going to focus more so on share repurchase or other? Kris Sennesael: Well, we are already focusing on share repurchases since we've announced the $2 billion share repurchase authorization in May of 2025. We already have repurchased $1.3 billion or we have used $1.3 billion of that program, repurchasing on or about 13 million shares, and there is no hesitation. We will continue to use that program. Operator: The next question is from Wamsi Mohan with Bank of America. Aisling Grueninger: This is Aisling Grueninger on for Wamsi. Congrats on the results, guys. Just one question for me. minds on the mix of UltraSMR. Just given your order book LTAs, how is this mix trend on UltraSMR trending? And how does this mix shift play a role kind of as a driver of gross margins moving forward? Tiang Yew Tan: Yes. That's a really great question, Aisling. Thank you for that. Well, last quarter, we crossed on the nearline portfolio, 50% mix on UltraSMR, and we actually see that increasing. As we've highlighted, one of the things that we're doing to better support the growth in demand from our customers is really to upshift them to higher capacity drives. A big part of that is the upshift to UltraSMR-based drives, and we see more and more customers adopting UltraSMR. We have our top three customers fully on board. with UltraSMR drives already today, and we have another two to three more that are moving into a process of adopting UltraSMR. So we are likely to see the UltraSMR mix of our total nearline exabyte base continue to increase going forward. That's actually very important for us because, one, we are better able to serve our customer demand needs. As you recall, UltraSMR gives a 20% capacity uplift over CMR and a 10% capacity uplift over the standard -- industry standard SMR. But equally important from a gross margin standpoint, UltraSMR is a software-based solution. So it's very accretive for us from a margin standpoint as well. So a higher shift higher mix of UltraSMR is definitely going to be beneficial both to our customers and to our ongoing profitability as well. Ambrish Srivastava: And Aisling, one thing in Irving's prepared remarks, we mentioned the JBOD that we have launched, which also expands our UltraSMR customer reach beyond what we have been targeting so far. So thanks for your question. Maybe we go to the next question, please. Operator: The next question is from Asiya Merchant with Citigroup. Michael Cadiz: It's Mike Cadiz at Citi for Asiya today. So I have a question and perhaps a follow-up. So the first is, could you provide any color or additional color on yields and reliability? I know that is -- those are a couple of points that Irving has brought up over the past couple of quarters in relation to the multiple rollouts. Is there any implication to cost per bit declines that we can think of? Tiang Yew Tan: Yes. Thanks for the question, Mike. So our yields on our ePMR products continue to be very, very they continue to be yielding very well in the low 90s percentage yield range. And obviously, from a reliability and quality standpoint, we received very good feedback from our customers. The fact that we've been able to, last quarter, deliver over 3.5 million units of our flagship ePMR drives is a testimony to the confidence that they have in terms of the reliability and the quality. In terms of the cost related to the cost down, obviously, as we get yields up, cost continues to decline as the UltraSMR mix goes up within those new products as well, that's also going to be a driver of cost down as well. Ambrish Srivastava: Okay. Do you have a follow-up? Michael Cadiz: I did. So can you talk more about any progress or the progress from your Rochester test and integration site how you're leveraging perhaps those efforts to accelerate maybe in the existing customer transitions? Tiang Yew Tan: Yes. One update that we shared in the prepared script is actually we -- last quarter, we indicated that we would start HAMR qualification. We pulled it forward to the first half of calendar '26. We actually have started qualification of those drives already this month for HAMR. On top of that, we've also started qualification for our next-generation ePMR drives as well. And obviously, our Rochester SIT Lab plays a critical role in ensuring that we have a very smooth, quick qualification. And equally important, as they move into production environments that they deliver the same reliability and quality. that our customers have been used to our previous generations of products. Again, on this one, we look forward to sharing a lot more on the 3rd of February in our Innovation Day, we'll be highlighting the updated road maps for both our ePMR and HAMR portfolio. And so we look forward to sharing more of that exciting news next week. Operator: The next question is from Amit Daryanani with Evercore. Hannah Liu: This is Hannah on for Amit. I was just wondering, are there any notable investments related to HAMR that are currently flowing through COGS or operating expenses? And should we expect those costs to roll off or normalize as HAMR begins to ramp? Kris Sennesael: Yes, we have been working on HAMR for the last 10 years, and the engineering teams are making good progress. So there is no change there. We will continue to work on those programs, and we will, in general, continue to innovate and make performance improvements to our programs, continue to drive higher capacity drives and those investments will continue. As it relates to the gross margin, we haven't started the HAMR ramp yet, but we are confident once we start ramping HAMR that will be neutral to accretive to our gross margins. Tiang Yew Tan: Yes. Maybe just to add on to what Kris said, even with the HAMR ramp that we anticipate will happen at the start of calendar year '27, our CapEx as a percentage of revenue on a run rate basis will still be within the 4% to 6% range. Ambrish Srivastava: Did you have a follow-up? Hannah Liu: No. Operator: The next question is from Karl Ackerman with BNP Paribas. Karl Ackerman: Rose mid-teens in 2025 and is projected to advance double digits again in 2026 as agentic AI is supposed to drive a cyclical recovery in front-end conventional servers. But in your case, because hard drive units are highly correlated to demand for conventional servers, and you're also seeing a content uplift from these new drives. Do you believe Agentic AI demand can enable you to exceed your long-term exabyte growth CAGR of low 20s? Tiang Yew Tan: Yes. Thanks for the question, Karl. Well, I think we've definitely seen exabyte growth over the last few quarters in the low 20s, as you've highlighted. Actually, we see as the AI value changes from model training to inference, more data is going to get created as a result in order to enable the inference delivery, more data needs to get stored as a result of that data getting generated as well. And if you look at the economics of being able to deliver inference at the right cost structure to drive mass scale adoption, again, a lot of that data that's getting generated and require storage will be delivered -- will be stored on hard drives as they are, as we've highlighted in the past, where hyperscalers really are masters of managing the economics and moving data across the different tiers of SSDs HDDs and tape as well. So from our perspective and the conversations that we've been having with our customers, inference is definitely going to drive a significant amount of data storage requirement, and that's really positive for HDDs going forward. Ambrish Srivastava: Do you have a follow-up, Karl? Karl Ackerman: If I may, Ambrish, just going back to HAMR, it sounds like you've pulled in the progression of HAMR, at least your first primary customer. Can talk about the interest beyond your initial customer given the robust hyperscaler demand for exabyte capacity? Tiang Yew Tan: Yes. Thanks for the question, Karl. As we've mentioned, we are starting qualification in the first half of this year. We've already started that with one hyperscale customer already this month, and we will be initiating another one -- initiating qualification with another hyperscale customer relatively soon. Operator: The next question is from Thomas O'Malley with Barclays. Thomas O'Malley: Just a follow-up on some of the comments from the preamble about acquiring some IP, I think, on the laser side. Could you maybe give us a little more detail on that, maybe the size of the purchase? And then what in particular you needed to add on the laser side that you felt like you need to go out and do a deal? Tiang Yew Tan: Yes. Thanks for the question. Well, unfortunately, the terms and conditions of the deal are confidential. So we can't really share too much about that. But we are excited about acquiring this technology. We'll share again more of that next week at our Innovation Day. But what I will say is it's definitely going to give us the benefit of taking much less real estate in the drive, right? And that will actually help with manufacturability in terms of reliability. And we also see that with this innovative technology, energy requirements to support the lasers will also be reduced compared to the conventional laser diodes. So we're quite excited about the -- both the IP and the capabilities that we've acquired. Ambrish Srivastava: Do you have a follow-up, Tom? Thomas O'Malley: I do. With NVIDIA's addition of the KV cache offload and the NAND attach that's thought to go with that, I was curious if you guys have been engaging with any large hyperscalers or any large procurers of storage for any kind of solution that would maybe attach on to custom silicon deployment, say, something that brings the hard drive a little bit closer to some of the accelerators, if there's a road map for those or if you're engaging in that way with any customers? Tiang Yew Tan: Yes. No, thanks for the question. Again, I think the initiative that NVIDIA has been driving is really to help accelerate inference capability. And as I've highlighted, as a result of that, the velocity and the volume of data is going to get generated much more rapidly. And the benefit from us, obviously, will be able to require -- it will require a lot more storage, which obviously HDDs are well suited with the superior economics. We are working on, as we've highlighted in the prepared remarks on interesting innovations to improve both our bandwidth and throughput of our drives. Again, something we are looking forward to be sharing with all of you next week as well. Operator: The next question is from Vijay Rakesh with Mizuho. Vijay Rakesh: Kris, pretty phenomenal numbers here. Just a quick question on the HAMR side. Are you expecting to pull in the HAMR road map time line given how tight supply is, et cetera? Tiang Yew Tan: Yes. We've pulled in the qualification already by half year. And we've started the qualification process with one customer. As I just mentioned earlier to Karl's question, we will be starting a qualification with a second customer imminently on qualification. Obviously, getting HAMR and higher capacity drives to our customers are a key part of the approach that we're taking to meet the strong demand for exabytes from our customers on HDD. But it's also very important to remember, we also have started the qualification of our next-generation ePMR drives. And those products have shown the ability not to only deliver very high capacity per drive, but also to be able to support a high degree of scalability and manufacturability where we are able to deliver large volumes of drives to our customers. So, last quarter, we delivered over 3.5 million drives. And this quarter, we're looking to deliver close to 4 million drives. Vijay Rakesh: Got it. And then on the gross margin trajectory, I guess, with the incremental 50% drop-through, when you look at HAMR ramps, any thoughts on how we should look at those margins? I guess you might call it on the Innovation Day, but any preliminary thoughts there? Tiang Yew Tan: Yes. I mean, as we've consistently highlighted, we see the transition once HAMR gets to the same scale as our ePMR portfolio, the gross margins for HAMR will be neutral to accretive from what we have with ePMR. Operator: The next question is from Steven Fox with Fox Advisors. Steven Fox: I was wondering if you could maybe talk about the revenue per exabyte in the quarter compared to last quarter and a year ago in the sense that how much of the change quarter-over-quarter and year-over-year is related to change in mix? And then I had a follow-up, if I could. Tiang Yew Tan: Yes. Maybe I can start off here, and Kris might want to add in. Look, the big driver of our sort of revenue per exabyte both year-on-year and quarter-on-quarter is related to our cloud segment. So, our big hyperscale customers, we see very strong demand from that segment. So, obviously, that's driving a lot of the bits and the revenues associated with that. And in that segment, as Kris has highlighted, the pricing is stable. So, in fact, it was up single digit last quarter and year-on-year as well. So that's a positive trend that we continue to see, and that's going to be a growth driver for the business for the year and probably for the next two years as well. Steven Fox: And if I could just quickly follow up. Can you just -- is there any commentary on how successful you were in terms of maybe getting out more exabytes during the quarter than originally planned for or whether through quicker customer qualifications or your own efficiencies? Any update there would be helpful. Tiang Yew Tan: Yes. Well, last quarter, we delivered 215 exabytes, right? That was up 22% year-on-year. And again, a lot of it is being driven by our cloud portfolio. As we've highlighted, we shipped over 3.5 million units of our current ePMR products that go up to 32 terabyte. So it's a clear recognition of the stability, quality and scalability of that product. So we will continue to do that, and we look forward to ramping the next generation of ePMR and HAMR in the coming quarters to better support the customer demand. Operator: The next question is from Ananda Baruah with Loop Capital. Ananda Baruah: On cost down, you mentioned that I think, Kris, December quarter was 10% year-over-year down. And with UltraSMR becoming a larger portion of the ship and then with HAMR coming on sort of margin neutral to positive, do you think that cost down, I think it's classically been about 10% year-over-year. Do you think that can increase in coming years, cost out increasing per exabyte ship? Kris Sennesael: Yes. So, currently, it's on or about 10% cost per terabyte or exabyte reductions. Obviously, we will continue to innovate, continue to push to higher capacity drives, continue to upshift our customers to adoption of those higher capacity drives, including UltraSMR. And all of those actions will lead to further cost reductions on a cost per terabyte. I think it's fair to say that's on or about 10% is a good number. And as we potentially accelerate our road maps, we could potentially drive that higher. Ananda Baruah: That's super helpful. Ambrish Srivastava: Do you have a follow-up, Ananda? Ananda Baruah: Yes, quick. This may be one for next week actually. But just interested in understanding how far up the areal density stack do you think you can get CMR and UltraSMR before you really get HAMR going? Tiang Yew Tan: Yes. I think that's something we are looking very much forward to sharing with you next week. So we look forward to seeing you there. Operator: The last question is from Krish Sankar with TD Cowen. Hadi Orabi: This is Eddy for Krish. You mentioned you had three LTAs for 2027 and 2028 that are volume and not price based. I do wonder what is the reason these contracts are not locked in price, especially given the very tight supply? Is it the customer who prefer not to lock in price? Or is it you guys who prefer to have the flexibility? Any high-level color would be helpful. Tiang Yew Tan: Yes. Thanks for the question. Just to clarify, we have two customers that have LTAs through calendar year '27, one customer that has an LTA through calendar year '28. These LTAs have both price and volume conditions in them. Hadi Orabi: Okay. Noted. That's great color. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing first quarter 2026 results. [Operator Instructions] As a reminder, this call is being recorded Thursday, January 29, 2026. I would now like to turn the conference over to Mr. Peter Goldmacher, Vice President of Investor Relations. Peter, please go ahead. Peter Goldmacher: Good afternoon, and welcome to Dolby Laboratories First Quarter Fiscal Year 2026 Earnings Conference Call. Joining me today are Kevin Yeaman, Dolby Laboratories CEO; and Robert Park, CFO. As a reminder, today's discussion will include forward-looking statements, including our fiscal 2026 second quarter and full year outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today, including, among other things, the impact of macroeconomic events, supply chain issues, inflation rates, changes in consumer spending and geopolitical instability on our business. A discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Forward-Looking Statements as well as in the Risk Factors section of our most recent annual report on Form 10-Q. Dolby assumes no obligation and does not intend to update any forward-looking statements made during this call as a result of new information or future events. During today's call, we will discuss non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings press release and in the Interactive Analyst Center on the Investor Relations section of our website. With that, I'd like to turn the call over to Kevin. Kevin Yeaman: Thanks, Peter, and thanks to everyone for joining us on the call today. FY '26 is off to a good start. Revenue and non-GAAP earnings came in above the high end of the range of guidance. We are making meaningful progress on the growth initiatives we discussed last quarter, and we're raising our guidance for the year. Robert will share more details on the financials and guidance in a few minutes. Just a few weeks ago at CES, we showed how Dolby Atmos and Dolby Vision are shaping how people watch, listen to and enjoy their favorite entertainment content across movies, TV, music, sports and user-generated content. We hosted hundreds of customers and partners at Dolby Live, where we had demonstrations primarily focused on the in-car entertainment experience and Dolby Vision 2 for TVs. Automotive has become a major focus of CES, and we were excited to have partners highlight how Dolby is helping them transform the future of in-car entertainment. Attendees were able to experience Dolby Atmos in cars ranging from a 2-seat Porsche, 911 to a Mercedes SUV, an Audi e-tron and a full-size Cadillac Escalade. We also showed how Dolby is playing an important role in expanding the scope of high-quality entertainment in the car. SmashLabs demonstrated its immersive multichannel games in Dolby Atmos vehicles and attendees got a chance to listen to Audible's fully immersive Harry Potter audiobook series featuring Dolby Atmos. The Neon Horizon featuring Dolby Atmos and Dolby Vision demonstrated how the bar is being raised on the in-car experience well beyond music to include movies, TV, gaming, audiobooks and more. In addition, we announced that we are partnering with Qualcomm to integrate Dolby Atmos and Dolby Vision into Qualcomm's Gen 5 Snapdragon Automotive platform, further extending our reach into the auto ecosystem. Also during the quarter, Mahindra released the first SUV in India with Dolby Atmos and Dolby Vision, and Hyundai launched its first car with Dolby Atmos, a crossover SUV in China. Overall, we continue to be excited about the momentum in automotive, where we now have partnerships with over 35 OEMs, up from 20 OEMs this time last year. Moving on to TVs. Dolby Vision 2 was on full display at CES and was met with enthusiasm from partners, press and attendees. Building on the success of Dolby Vision, Dolby Vision 2 is designed to meet the evolving expectations of today's viewers and unlock the full potential of modern televisions from mainstream sets to top-of-the-line models. Dolby Vision 2 has a variety of features that are designed to enhance all the content consumers enjoy, including movies, sports and gaming with even more vivid pictures and brighter colors. When you see it, it just looks better. We got an enthusiastic response at CES from the content providers with Peacock announcing its support for Dolby Vision 2 across movies, originals and live sports, joining Canal+ as an early launch partner. TP Vision, the maker of the Philips brand, announced support for Dolby Vision 2 across a variety of upcoming models, joining Hisense and TCL as launch partners. The first Dolby Vision 2 TVs will be available by the end of the year, increasing our revenue opportunity from TVs. Additionally, in the quarter, we continue to make progress on our other growth initiatives, including mobile, our video distribution program for imaging patents and OptiView. Meta, which announced support for Dolby Vision on Instagram in November, has now begun supporting Dolby Vision on Facebook. Douyin, the Chinese version of TikTok has been supporting Dolby Vision on iOS and started rolling out support for Android devices this quarter. Content captured and played back in Dolby Vision drives higher engagement for social media providers and in turn, increases demand for Dolby Vision on mobile phones. In imaging patents, Roku became a licensee of the video distribution patent pool, marking the first U.S.-based streamer to sign up for the pool. As we discussed last quarter, this pool increases the addressable market for imaging patents by expanding the available licensees from device manufacturers to also include streamers of content. On Dolby OptiView, we continued our partnership with the NFL with OptiView delivering RedZone through the NFL+ app and achieving record levels of streaming quality for the service. And we continue to bring customers onto the service. including Veikkaus, Finland's national lottery and sports betting operator and SIS, short for Sports Information Solutions, a service provider of about -- over 300 sports betting companies. Veikkaus is using Dolby OptiView to reduce latency for live horse racing improving the real-time betting experience and strengthening customer engagement. SIS has adopted our video player and has made the ability to deliver content in subsecond latency available to its customers. We're encouraged by how Dolby OptiView is enabling our partners to increase audience engagement and revenue. So to wrap up, we have continued momentum in automotive, new growth drivers for Dolby Vision and TVs, and growing adoption of Dolby Vision and social media, an important use case for mobile devices. And while it's early days, we continue to expand our addressable market to new customers with Dolby OptiView and the video distribution program. We're confident in our ability to grow Dolby Atmos, Dolby Vision and imaging patents at 15% to 20% per year over the next few years. And now that Dolby Atmos, Dolby Vision and imaging patents is approaching 50% of our licensing revenue, it is having a greater impact on our overall growth rate. We remain excited about our position in the market and confident in our growth opportunities. With that, I'll turn it over to Robert, who will take you through the financials in a bit more detail. Robert Park: Thank you, Kevin, and thanks to everyone joining us on the call today. Revenue for the quarter came in at $347 million above the high end of the guidance we shared last quarter, primarily driven by the timing of deals coming in earlier than expected and a $7 million favorable true-up for Q4 shipments. Non-GAAP earnings per share was $1.06 and also above the high end of guidance, driven by higher revenue and lower OpEx. Licensing revenue was $320 million and Products and Services revenue was $27 million. We generated approximately $55 million in operating cash flow repurchased $70 million of common stock and have approximately $207 million remaining on our share repurchase authorization. We declared a $0.36 dividend up 9% from our dividend a year ago and ended the quarter with cash and investments of approximately $730 million. GAAP operating expenses in Q1 included a $10 million of restructuring charge as we continue to streamline operations and align resources with our business priorities. Detailed licensing performance by end market can be found on our IR website. As we share with you every quarter, trends are typically smoother on an annual basis as the timing of recoveries, minimum volume commitments and true-ups can drive quarterly volatility. In terms of end market performance for the quarter, it's worth noting that Mobile grew by over 20% year-over-year and Broadcast revenue was down mid-teens year-over-year, both primarily driven by timing of deals. We still expect Mobile and Broadcast to be up mid-single digits for the full year. Turning to guidance. For full year fiscal '26 guidance, we are raising the revenue range to $1.4 billion to $1.45 billion. This reflects the Q1 true-up and some of our deals coming in earlier and stronger than forecasted, partially offset by slight revisions to our outlook for the year, including potential impact of memory pricing, which varies by end market and customer. We expect fiscal year '26 licensing revenue to be between $1.295 billion and $1.345 billion, and we are targeting non-GAAP operating expenses between $780 million and $800 million. This guidance implies operating margin improvement of between 50 and 100 basis points. We expect non-GAAP earnings per share to be between $4.30 and $4.45. Our expectations for foundational in Dolby Atmos, Dolby Vision and imaging patents full year growth rates are relatively unchanged from what we communicated at the beginning of the year. With Dolby Atmos, Dolby Vision and imaging patents growing roughly 15% and comprising nearly half of our licensing revenue, we expect foundational revenue to be down slightly. We also expect end market growth rates for the full year to be similar to what we communicated last quarter with growth in other Mobile and Broadcast and declines in PC and CE. For Q2 '26, we expect revenue to be between $375 million and $405 million. Within that, we expect licensing revenue to be between $350 million and $380 million and includes a large recovery that settled in Q2. Gross margin should be approximately 91% on a non-GAAP basis and we expect non-GAAP operating expenses to be between $195 million to $205 million. Non-GAAP earnings per share is expected to be between $1.29 and $1.44. In summary, we are off to a strong start in Q1, and we are encouraged by the progress we are making across our growth initiatives. Our financials remain solid with organic revenue growth, high gross margins, expanding operating margins, healthy cash flows and a strong balance sheet. With that, we'll open the line for your questions. Operator: [Operator Instructions] Your first question comes from the line of Steven Frankel with Rosenblatt. Steven Frankel: So on this notion of some of the upside was driven by deal timing, with deals coming in earlier than expected. Do you read into that? Any change in the environment or customers' sense of urgency? Or this is just the other side of the coin that you experienced over the last couple of years where deals tended to slip? Kevin Yeaman: Yes. Thanks, Steve. I wouldn't extrapolate to any generalization in the macro. I think that we're pleased to have had some of our deals come in earlier. It has the effect of kind of derisking some of the outlook for the year. But things are coming in about what we expected, raising guidance some to reflect the true-up in Q1, one of the deals coming in a little bigger and that's -- all the normal adjustments we typically do as we come into a new quarter. Steven Frankel: And on that large true-up, could you help us understand, was that in Mobile and that's part of the Mobile upside? Or was it another area? Kevin Yeaman: The true-up was about $7 million. And Robert, do you want to cover? Robert Park: Yes, it was primarily gaming and broadcast, Steve. Steven Frankel: And the strong growth in Mobile, was that in part due to signing of new deals or renewals that drove that? Robert Park: Steve, yes, the Mobile -- you tend to want to look at these end markets for the full year because the timing of deals, recoveries, minimal volume commitments, particularly in Mobile, can fluctuate quarter-to-quarter. We still expect the full year for Mobile to be up slightly? Steven Frankel: Okay. And then one big picture question, Kevin, the spin-off of the Sony TV venture into a partnership with TCL, does that present an opportunity over the next couple of years for you to gain some material share if Sony ends up behaving like TCL, where you're basically on every SKU? Kevin Yeaman: Yes. I mean I don't want to comment on their pending transaction or where they might go with it, but we have very strong relationships with TCL. We also have a strong relationship with Sony. So they're both good partners. And of course, we're really focused across the board on increasing attach for televisions and yes, we're very excited about Dolby Vision 2 and the reception it got at CES from content providers, OEMs, really everybody who came by and we're looking to bring those first Dolby Vision 2 televisions to market by the end of this fiscal year. So as we go into next year, that's when we see that adoption cycle beginning and that's a good opportunity for us as adopting Dolby Vision 2 for those who already have Dolby Vision that's increased royalties. But we also think that it's a real opportunity to bring Dolby Vision 2 and the Dolby experience to those midrange TVs because there's a lot of discrete features of Dolby Vision 2, which upgrade the experience. But when you see two midrange TVs again at CES, we had $300 TV side by side, it's just significantly better. So we're excited about that as we approach the end of the year here. Steven Frankel: Great. And one more quick one for Robert. Cash flow generation, this Q1 looked more like Q1 of 2024 than 2025? Is this just timing and we shouldn't read anything into it. And the expectations for full year cash flow generation should be what we're used to? Robert Park: Yes. That's a good question, Steve. And you're right, our cash flow -- particularly our operating cash flow can fluctuate quarter-to-quarter depending on the timing of deals, the terms, patent pool collections and distributions. What you need to look at if you want to is go back to the last 4 quarters, it tracks very closely the non-GAAP net income. And if you look at the trailing 4 quarters, it's right about 100% of that, and that's what we continue to expect for the year. So if you want to peg a proxy for operating cash flow, look at our non-GAAP net income, and that should be a good proxy for operating cash flow. Operator: Your next question comes from the line of Ralph Schackart with William Blair. Ralph Schackart: Kevin, maybe if you could just give us an update on the new sort of patent pool monetization strategy. I think last time on the call, you said it could be 10% of revenue from a collection made within 3 years. Just maybe kind of confirm if that's still the current view? And maybe more importantly, Roku is obviously a nicest customer to have. They're largely $100 million or so active accounts. Maybe kind of give a sense of after you have Roku here, how those conversations progress as you look to commercialize with other partners? And then I think there might be some discounts available, if I'm not mistaken in the market up until midyear, maybe June 30 from recollection. And how is that sort of influencing some of the conversations you're having along those lines? Kevin Yeaman: Yes. Thanks, Ralph. Let me start with the reference to the 10%. So remember that one of the things that we're excited about is the opportunity to expand our addressable market to content service providers -- for 60 years, we provided technology know-how, experience to content creators, content distributors and OEMs monetizing, of course, at the OEM level. And so we have a couple of areas where we're adding new value that we're providing to content service providers, and that's based on more of a consumption-based revenue model. So it was the combination of the video distribution program, which is reported in imaging -- image patent licensing, which your -- the rest of your question is about. And Dolby OptiView which is the 10% of revenue coming from content service providers in 3 years. Now as it relates to your -- the video distribution program question, so yes, so remember that the pool was introduced because of the growth of the streaming industry and the recognition that modern video codecs are critical to the future success of these providers. And we feel it's off to a good start with a handful of licensees last quarter, including some large ones in China. As we said this quarter, the pool signed its first U.S. streamer in -- with Roku. So that is -- we've obviously seen a lot of these patent pools develop over the years. So we feel good about the progress, good engagement across the industry. And yes, it sounds like you've maybe been doing some good research on our website or elsewhere. There are some pricing incentives to -- that the pool that we go through is -- offers to incent early sign-ups. Ralph Schackart: Great. Maybe just one for Robert. Just in terms of the guide being at the high end, was that just a combination of good stuff going on in the quarter as well as the favorable true-up? Or was that maybe tilted a little bit more in favor of the favorable true-up getting the revenue to come in towards the high end of the guide? Just trying to get a sense of that. Robert Park: Are you talking about the full year, Ralph? Ralph Schackart: For the quarter, yes. Kevin Yeaman: The quarter, Robert? Oh for Q2? Q1 -- or it was in Q1 or Q2. Now I guess I don't know. I'm not sure... Robert Park: Yes, Q1 is the $7 million of favorable true-ups and deals coming in earlier than expected, as we talked about before in terms of the performance for Q1. I'm sorry. I thought you were talking about guidance. Ralph Schackart: No, I said guidance, but maybe just give a sense outside of NVIDIA favorable true-up and how about [indiscernible] was relative to expectations of [indiscernible] was in the quarter? Robert Park: So Ralph, you were a little bit choppy on that. Can you repeat that question? Kevin Yeaman: Yes, could you? Ralph Schackart: Can you give me a sense of -- yes, sorry. Can you just give me a sense of how the quarter progressed relative to expectations as the true-up? Just kind of want to get a sense from a macro. I know Kevin said, much hasn't changed, but it would just be helpful, just a little bit more color there if you could please. Robert Park: Yes. I would say it's fairly small. It's nice that it's favorable in terms of units being a little higher than we estimated for last quarter. But the deals coming in earlier than expected, deals can ebb and flow, but it's always nice to have them in earlier. As Kevin said, it does derisk our pipeline for the full year and gives us a little more confidence about our ability to execute for the rest of the year. But I'd say other than that, it's pretty close to what we thought it would be, and that true-up of course is something we don't plan for. So that's more so for the full year. Operator: Your next question comes from the line of Vikram Kesavabhotla with Baird. Vikram Kesavabhotla: I guess I'll start first on CES. I'm curious if you can just talk more about your takeaways from the event this year. Obviously, you talked about all the demos that you had available there. I guess what was some of the feedback from the partners and customers throughout the event? And what do you think resonated the most from some of your latest innovation? Kevin Yeaman: Yes. Well, first of all, it's just a great opportunity for us to engage with partners from across our ecosystem. I mean, of course, we had OEMs coming through, but also our content service partners and content creators. And, as you know, we're -- we have our own space at Dolby Live, which is pretty well equipped to demo the Dolby experience. And it's just a great opportunity to show them what are -- what's new and we were really focused on the automotive in-car entertainment experience in Dolby Vision 2. But of course, it's also an opportunity to talk to them about what they're seeing, what their -- how they see their opportunity and how we can partner together. So we had hundreds of groups of customers and partners coming through. On the floor, it was mostly about the automotive experience, a lot of energy, a wide variety of cars and use cases. We also saw at Dolby Atmos, Dolby Vision car. So whereas we started with -- our story several years ago when we started was music in the car. Now it is fully the complete in-car entertainment experience with Dolby Atmos, early days of Dolby Vision, but you're seeing examples of gaming content in the car, TV and movies. Audiobooks is also a really attractive use case for our Atmos partners. Dolby Vision 2 was just -- has just been -- we were already getting a good reception. We got to show it to a lot more people. And as I said earlier, you can just really see the difference. So there's a lot of excitement about that. So we're heads down, working with our partners to get those first TVs out the door toward the end of this year so that we can then begin to increase the availability of that in the marketplace. So that's some of what we were -- that's kind of what we say good -- it was a really good show for us. Vikram Kesavabhotla: Okay. Great. And then I also wanted to follow up on some of the recent announcements that you highlighted in the press release. So first on Peacock, you said that's the first streaming service to integrate your full suite of premium picture and sound innovations. Could you talk more about the significant -- significance of that announcement? I mean, what do you think moves the needle in that conversation with Peacock? And what does this mean for your future relationships across the streaming landscape. And then similarly, you also highlighted Meta now supporting Dolby Vision on Facebook following the announcement on Instagram recently as well. I guess, could you talk more about how that's influencing your broader efforts in social media and your discussions with the mobile OEMs? And I'll leave it there. Kevin Yeaman: Yes. Thanks for the question. So yes, so Peacock did announce that they're embracing the entire suite of Dolby technologies AC-4, Dolby Atmos, Dolby Vision 2, they've become one of our first two launch partners for Dolby Vision 2 which obviously will come to -- you'll be able to experience when TVs are available later this year. And with Peacock, that's, of course, across movies, it's across TV, it's across sports, they've started with Dolby -- starting Dolby Atmos, so you'll be able to experience the Super Bowl and the Winter Olympics in Dolby Atmos through Peacock. So we're really excited about them leaning into the full Dolby experience. And yes, on Meta, we shared last quarter that they had adopted Instagram for iOS users. They've now expanded to Facebook. And that's important to us for a couple of reasons. I mean, first of all, obviously, it's a primary use case on mobile devices. So having the ability to experience Dolby Vision over your favorite social media and video sharing websites, applications are -- that creates demand for Dolby on mobile devices. We also mentioned last quarter that Douyin in China began supporting Dolby Vision and that they are now expanding support to their Android users. So that's also a really strong development. But yes, we're very excited about Instagram and Facebook, and we're excited about our relationship with Meta. I mean, they now have embraced Dolby Atmos and Dolby Vision on the Oculus headset and it's just being able to engage with them across multiple aspects of their business. It is just a great opportunity to learn where we can help going forward in terms of new opportunities. Operator: Your next question comes from the line of Patrick Sholl with Barrington Research. Patrick Sholl: Maybe just another question on the guidance. Can you talk about like whether on the foundational of the Atmos and Vision side of things. Just how you're seeing OEMs respond to any kind of the macro issues, whether it's on tariffs or on memory in terms of how they're kind of adjusting their time shipment views? Kevin Yeaman: Yes. Yes, thanks for that. I think -- look, I think everybody is probably on a daily basis trying to find the signal through the noise because there's obviously a lot of things going on. As it relates to our adjustments, there weren't -- not material adjustments, but we update our outlook every quarter. The reference to memory pricing, in particular, obviously, that's a hot topic. I would say -- that was some -- like I said, it wasn't a significant adjustment, and we ended up raising guidance given the true-up and some of the strengths in the pipeline. As it relates to memory pricing and our end markets, it looks to us like the Mobile end market is the one that's most directly impacted. As that relates to us, it varies quite a lot by customers. Some customers have done more forward purchasing or other things to kind of hedge the impact. And then, of course, most of our Mobile business is driven by minimum volume commitments. So the timing of renewal cycles also plays into that. So it's not a material effect overall, but there were some adjustments there. In terms of TVs, memory is not as much of a percentage of the bombs. We don't see a lot of impact. And one other area where we've heard more noise around what the impact would be, would be PC and that's one of the markets that Robert highlighted as being down for the year for us. Patrick Sholl: Okay. And then you addressed in the press release that the continued progress on adoption in audio manufacturers. So I'm just kind of curious with changes around U.S. policy, if you're seeing any sort of impact and how that flows through to -- like around EVs, if that has any impact on the adoption of the various in-car offerings? Kevin Yeaman: Well, because of the stage of the opportunity we're at, which is getting a lot of new wins and getting a lot of new models. We haven't noticed any impact. It's still -- it's one of -- it's our highest growing area and within, the other is licensing. And I would also say that we are beginning to see more diversification geographically. We were -- we started very strong in China with EVs. We've expanded to Mercedes, Audi, Porsche, Cadillac and the top 3 manufacturers in India, and we're also beginning to see more gas-powered vehicles coming with Dolby Atmos as well. So far, that's not been top of mind for us. We're continuing to focus on getting more manufacturers, help them get deeper into lineups. And as I said earlier, really excited about the opportunity now to expand into the full in-car entertainment experience with Dolby Vision and all the types of content that people are going to enjoy in their car. Operator: Ladies and gentlemen, that does conclude our question-and-answer session, and that does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good afternoon, and thank you for joining the Fourth Quarter 2025 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are Chief Executive Officer, Rich Steinmeier; and President and Chief Financial Officer, Matt Audette. Rich and Matt will offer introductory remarks, and then the call will be open for questions. [Operator Instructions] The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website, investor.lpl.com. Today's call will include forward-looking statements, including statements about LPL Financial's future financial and operating results, outlook, business strategies and plans as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to the disclosures set forth under the caption Forward-Looking Statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For a reconciliation of such non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I'll turn the call over to Mr. Steinmeier. Richard Steinmeier: Thanks, operator, and thank you to everyone for joining our call. It's a pleasure to speak with you again. Before touching on our fourth quarter results, it was a milestone year for LPL as we significantly advanced our key strategic priorities. To reflect on a few of our key accomplishments, we delivered industry-leading organic asset growth of 8%, including the onboarding of the retail wealth management businesses of Wintrust Financial and First Horizon, which collectively support over 200 financial advisers managing roughly $34 billion in client assets. We completed the onboarding and integration of Atria Wealth Solutions, converting 7 distinct broker-dealers to the LPL platform. We signed and closed our acquisition of Commonwealth Financial Network, marking the largest deal in LPL history, welcoming their home office staff and approximately 3,000 advisers to the LPL family. We launched a national marketing campaign to elevate our brand with advisers and their clients. We significantly advanced our employee experience, resulting in our highest employee engagement scores in nearly a decade. We made meaningful progress driving improved operating leverage. And finally, our collective efforts resulted in record adjusted earnings per share of $20.09. Okay. Now let's turn to our Q4 results. In the quarter, total assets increased to a record $2.4 trillion, driven by organic growth and higher equity markets. We attracted organic net new assets of $23 billion, representing a 4% annualized growth rate. Our fourth quarter business results led to strong financial performance with record adjusted EPS of $5.23, an increase of 23% from a year ago. Next, let's turn to our strategic plan and progress across our organic and inorganic initiatives. Our vision is clear. We aspire to be the best firm in wealth management. To do that, we are focused on 3 key priorities: One, maintaining the client centricity the firm was built on; two, empowering our employees to deliver exceptionally for our advisers and their clients; and three, delivering improved operating leverage. Effectively executing on these focus areas will help us sustain our industry-leading growth while advancing the efficiency and effectiveness of our model. With that as context, let's review a few highlights of our business growth. In Q4, recruited assets were $14 billion, bringing our total for the year to $104 billion. Throughout the quarter, our pipelines continued to build and are near record levels. Recognizing that many opportunities are in the early and mid-stages, we expect the pull-through to improve over the course of the year as we reignite our industry-leading growth engine. In our traditional markets, we added approximately $13 billion in assets during Q4 as we maintained our industry-leading capture rates of advisers in motion. With respect to our expanded affiliation models, strategic wealth, independent employee and our enhanced RIA offering, we delivered another solid quarter, recruiting roughly $1 billion in assets. Turning to overall asset retention. It was 97% for Q4 and over the last 12 months. This is a testament to the continued efforts to enhance the adviser experience through the delivery of new capabilities and technology and the evolution of our service and operations functions. As for Commonwealth, we are thrilled to be working closely with our new colleagues to develop the target operating model and positioning for the Commonwealth value proposition within our suite of offerings. The work is well underway, and we remain on track to onboard the Commonwealth advisers in Q4. In parallel, in partnership with our Commonwealth colleagues, we remain focused on helping their advisers understand the benefits of staying with Commonwealth, ensuring each adviser has everything needed to complete their diligence and make an informed decision. We continue to expect roughly 90% retention of client assets. As we get closer to onboarding later this year, our estimate will continue to firm up. In closing, the fourth quarter was a capstone on an outstanding year. This is a result of the dedication of our team and their unwavering commitment to our advisers. So I want to thank everyone at LPL for their efforts. As we look ahead, we remain well positioned to serve as a critical partner to our advisers and institutions to continue delivering industry-leading organic growth and to maximize long-term value for shareholders. With that, I'll turn the call over to Matt. Matthew Audette: Thanks, Rich, and I'm glad to speak with everyone on today's call. As we reflect on 2025, it's been a year of meaningful progress for LPL as we continue to execute against some of our key strategic priorities, which include advancing our efforts to drive improved operating leverage through a combination of increased efficiency in our business and refinements to pricing to ensure it is aligned with the value we deliver and driving further improvements to the adviser experience by removing friction through investments in automation across our service, operations and supervision. As we look ahead, we're encouraged by the opportunities in front of us to better serve our advisers and continue strengthening our industry-leading value proposition. Now turning to a few highlights from our Q4 business results. Total advisory and brokerage assets were $2.4 trillion, up 2% from Q3 as continued organic growth was complemented by higher equity markets. Total organic net new assets were $23 billion, an approximately 4% annualized growth rate. For the full year, total organic net new assets were $147 billion or an approximately 8% growth rate. As for our Q4 financial results, the combination of organic growth and expense discipline led to adjusted pretax margin of approximately 36% and record adjusted EPS of $5.23. Gross profit was $1.542 billion, up $62 million sequentially. As for the key drivers, commission and advisory fees net of payout were $453 million, up $27 million from Q3. Our payout rate was 88%, up 53 basis points from Q3 due to the seasonal build in the production bonus. With respect to client cash revenue, it was $456 million, up $14 million from Q3 as the sequential growth in balances more than offset the impact of lower short-term interest rates. Overall client cash balances ended the quarter at $61 billion, up $5 billion sequentially, a strong outcome even when considering the typical Q4 seasonal build. Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 55%, within our target range of 50% to 75%. Looking more closely at our ICA yield, it was 341 basis points in Q4, down 10 basis points from Q3, driven by the impact of the October and December rate cuts. As we look ahead to Q1, we expect the full quarter impact of the Q4 rate cuts to lower our ICA yield by roughly 10 basis points. As for service and fee revenue, it was $181 million in Q4, up $6 million from Q3 as the full quarter of Commonwealth was partially offset by lower conference revenue and IRA fees. Looking ahead to Q1, we expect first quarter service and fee revenue to increase by approximately $25 million sequentially. This is driven by 2 factors: first, a seasonal decline in conference revenue of approximately $10 million. This is more than offset by the impact of the fee changes we announced last quarter, which will provide an ongoing quarterly benefit to service and fee revenue of roughly $35 million or $140 million annually. Moving on to Q4 transaction revenue. It was $75 million, up $8 million from Q3, driven by increased trading volumes. As we look ahead to Q1, trading activity levels remain roughly in line with Q4. However, I would note there are 3 fewer trading days in Q1, so we expect transaction revenue to decline by a few million sequentially. Now let's turn to our acquisition of Commonwealth. As Rich mentioned, the transaction is progressing well, and we remain on track to onboard in the fourth quarter. As for the financials, accounting for current client assets and cash balances as well as interest rates, we continue to estimate run rate EBITDA of approximately $425 million once fully integrated. Next, let's move on to expenses, starting with core G&A. It was $536 million in Q4, bringing our full year core G&A to $1.852 billion, below the low end of our outlook range, reflecting progress we've made driving greater efficiency and lowering our cost to serve. For the full year, prior to the impact of Prudential, Atria and Commonwealth, 2025 core G&A increased by approximately 4%, our lowest level of growth in several years. In 2026, we plan to continue to invest in the business to deliver greater efficiencies and drive operating leverage as we scale. Prior to Commonwealth, we expect core G&A growth of 4.5% to 7% or $1.775 billion to $1.820 billion. In addition, we'll have the full year impact of expenses related to Commonwealth, which adds roughly $380 million to $390 million. This brings our overall expectation for 2026 core G&A to be in a range of $2.155 billion to $2.210 billion. And to give you a sense of the near-term timing of the spend, as we look ahead to Q1, we expect core G&A to be in a range of $540 million to $560 million. Next, I want to highlight a minor update to our management P&L this quarter, where we separated TA loan amortization from promotional expense. While this is not a new disclosure, we hope the updated placement allows you to more easily analyze our results. So looking at TA loan amortization, it was $133 million in Q4, up $28 million sequentially, driven by Commonwealth-related transition assistance as well as our ongoing recruiting. As we look ahead to Q1, we expect TA loan amortization to increase by roughly $5 million, primarily driven by Commonwealth. Turning to promotional expense. It totaled $76 million in the fourth quarter, down $21 million sequentially, primarily driven by lower conference spend. Looking ahead to Q1, we expect promotional expense to be roughly flat sequentially. Turning to depreciation and amortization. It was $105 million in Q4, up $5 million sequentially. Looking ahead to Q1, we expect depreciation and amortization to increase by $5 million. As for interest expense, it was $106 million in Q4, roughly flat sequentially as increased usage of the revolver was offset by lower short-term interest rates. Regarding capital management, we ended Q4 with corporate cash of $470 million, down $99 million from Q3. As for our leverage ratio, it was 1.95x at the end of Q4, near the midpoint of our target range. Moving on to capital deployment. Our framework remains focused on allocating capital aligned with the returns we generate, investing in organic growth first and foremost, pursuing M&A where appropriate and returning excess capital to shareholders. In Q4, we continued to deploy capital in line with our priorities, investing primarily in organic growth and M&A, where we advanced the Commonwealth integration and continue to allocate capital to our Liquidity & Succession solution. Specific to share repurchases, a reminder that we paused buybacks following the announcement of the Commonwealth acquisition with a plan to revisit following the onboarding. As we look ahead, we are ahead of schedule with leverage already at the midpoint of our target range and the operational work to onboard Commonwealth well underway, there may be an opportunity to refine the timing of resuming share buybacks later this year. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we have to continue to drive growth, deliver operating leverage and create long-term shareholder value. With that, operator, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Steven Chubak from Wolfe Research. Steven Chubak: Rich and Matt, thanks for taking my questions or one question. So I did want to ask on Commonwealth retention. There's been a fair amount of press coverage in recent weeks, suggesting the retention was running well below that 90% target. So certainly pleased to see the 90% target reaffirmed. I was hoping you could speak to what gives you confidence that you could still achieve that 90% asset retention figure. And just given the near record recruiting pipeline that you cited, just speak to some of the actions that you're planning on taking to get core recruiting ex Commonwealth back on track. Richard Steinmeier: I'll start or do you want to start? Matthew Audette: Yes, I'll start with the retention, Steven. I think when you look at retention, right, and it's based on assets, right? The assets we expect to land on our platform after the onboarding in Q4. And that's our methodology. We consistently do that on our acquisitions. So I think when you and others that are speaking here that are reading headlines about headcount departures, just to give you a little color on that, when you look at the advisers who have signed to stay with LPL so far, we're now just over 80%. And you look at those, on average, they are larger, they are faster growing, and they are higher producers than those that have decided to go elsewhere. So I think when you get some noise when you look at those headcount departures. But when you look at the advisers that have committed to stay with LPL, with Commonwealth, it is an impressive group, and we are really excited to welcome them on the platform as we onboard in the fourth quarter. Richard Steinmeier: So maybe just to augment that just briefly, as Matt, I think, made it very clear on the asset retention and that we're retaining the larger advisers. I think there are still advisers who are making their decisions over the course of the balance of the next couple of months and maybe even through the next couple of quarters. And we are deeply connected between Commonwealth and LPL to help educate them on the continuing of value proposition of Commonwealth. And we are very confident that by keeping the community intact, safeguarding their experience, their culture, their capabilities and their leadership, that will ultimately win the day. And quite honestly, those are the conversations that we're having as folks have gone through a very elongated due diligence process, they're coming back to having much more productive conversations now than we were even having at the beginning. And so maybe parting shot on that, Steven. Overall, we are thrilled with this transaction. We love the way the teams are coming together. We are excited about the prospects for our go-to-market strategy and the integrated firm. Now you mentioned -- and maybe one last thing, I will mention that, as Matt said, last quarter, we updated you that we had advisers representing nearly 80% of assets have signed their agreements to stay with Commonwealth. And as of today, that has improved to the low 80% range of advisers representing low 80% range of assets have signed agreements to stay with Commonwealth. As for achieving -- getting back on track in recruiting, I think it needs to be noted that many of our top recruiters have been focused on Commonwealth retention efforts. And as we approach the conversion, with more Commonwealth advisers completing their diligence signed, our recruiters are getting back to their organic recruiting efforts. So looking ahead, we should gradually return to more normalized recruiting outcomes driven by increased in -- increased win rates in traditional markets with our unmatched value proposition, further penetrating the wire and regional employee adviser space where there is growing awareness of our solution, and we continue to narrow the gap on capabilities. And of note there, over the last couple of years, we have grown our capture of wirehouse and regional employee advisers from 9% of all advisers in motion to now up above 11% of all advisers in motion. And augmenting that, our Liquidity & Succession solutions create an important part of the value proposition for new advisers to join, so they'll have an option when they're ready to transition their business. If you couple that with low attrition and steady contribution from same-store sales, it sets us up really well to sustain mid- to high single-digit growth over the long term. Operator: And our next question comes from the line of Alexander Blostein from Goldman Sachs. Alexander Blostein: Maybe building on that a little bit, Matt, I heard you reaffirm your EBITDA contribution of $425 million once everything is onboarded. Maybe help unpack that a little bit because given just the assets have grown due to market largely and you're still on track to $90 million, and you highlighted you're running, I guess, in the low $80s million now. Why isn't the $425 million higher? Are there other puts and takes we need to consider? Or you guys are just looking to revisit that once the -- once the assets are fully onboarded? I just want to kind of better understand the mark-to-market impact on all of that. Matthew Audette: Yes. There's just -- yes, you've got assets have gone up a bit, Alex, but you've also got another interest rate cut. And when you look at the cash sweep bet at Commonwealth that built up in December, that's already gone back into the marketplace. So those things kind of net offset each other, and that's why we're still at roughly $425 million. Operator: And our next question comes from the line of Dan Fannon from Jefferies. Daniel Fannon: So I wanted to follow up just on the growth outlook. And Rich, you had mentioned reigniting the growth engine at LPL. So is it just time and the timing of this in terms of getting back to regular recruiting? Or can you talk to the industry dynamics and advisers in motion and kind of the recruiting backlog today versus where it maybe was a year ago? And just kind of thinking more about the acceleration, whether that could be more of a first half dynamic or you think it's really closer towards that onboarding of the Commonwealth assets? Richard Steinmeier: Yes. I appreciate it, Dan. There's a lot in there. So maybe let's start with the recruiting environment first. I will tell you, we pay very close attention to the advisers in motion. And relative to historic norms, we still see that adviser movement remains tempered relative to historic levels. Now look, truth there is that there are events in the marketplace that can drive that churn to higher levels. And that one right now is probably the acquisition of Commonwealth. And so we're participating there, obviously, dedicating recruiters. A recruiting event where you're trying to educate 3,000 advisers is a very large event for us. And so we dedicated and ring-fenced a set of our most sophisticated and most senior recruiters and working against that. And as I alluded to and as you referenced, as we get more signs and you mentioned where we're at, those recruiters get the chance to pivot back to their organic recruiting pipeline. But as I noted earlier, when you start building those pipelines, you're going to build into the earlier stages as you think about a stage progression pipeline. And so while our pipelines continue to build through Q4 and they are near record levels, they're loaded towards that early and mid-stages. And so that takes time, and we've alluded to on calls in the past, you get different durations of how long a cycle time is for a recruiting event, and they vary from independent adviser 1099 direct to our supported models in strategic wealth and Linsco have longer lead times. And so when that will pull through is a function of the mix of those advisers and how they get through their diligence and decision-making. But we expect that pull-through to continue to improve over the course of the year. And maybe if we think about the environment that we're in, I think you've heard it on some of the other calls as well, it's a competitive environment right now. Competitors remain aggressive. We've seen TA levels spike up, most notably right after the Commonwealth announcement. And we see those TA levels staying elevated in the marketplace. And so typically, in the wake of several interest cuts, we would have expected some moderation in TA, and that really hasn't happened. Rates have remained high in absolute terms. And so from our perspective, nothing about our approach has changed. We stayed disciplined on returns with TA being a part of the conversation but really not the driver of decisions. And as a reminder, advisers in motion's priorities continue to be: One, capabilities, technology, service, culture; two, ongoing economics; and then third, upfront economics. So as you put that all together, I think as recruiting activity normalizes, we'd expect organic growth to pick up as those pipelines convert, positioning us to reignite and sustain industry-leading organic growth over time. Operator: And our next question comes from the line of Craig Siegenthaler from Bank of America. Craig Siegenthaler: My question is on footnote 15 from the historical file. You disclosed purchase money market funds there, and it looks like they might be finally at a ceiling. So I'm wondering, do you expect liquidity to start to run there with a few more Fed cuts? And where does that go? Is there an opportunity to generate more ROA on that, maybe in alts, insurance and probably eventually back in the cash sweep? Matthew Audette: Kudos, Craig, on the detailed historical file there. Richard Steinmeier: I thought he would have called on historical footnote 14, 15. Matthew Audette: Yes. We'll cover that. We'll cover that. But I think -- yes, there you go. I think -- so what you're hitting on is the kind of the cash equivalents and how much money they're in either purchase money markets or short-term bond funds and treasuries. And I think we saw those build throughout this cycle. Those balances collectively are in excess, so purchase money market plus those other categories, treasuries, short-term bond funds in excess of cash sweep balances overall. And I think as the rate environment comes down, as you see those things advisers get their clients back into the marketplace. I think it's very natural that those are the types of funds that will go back into play. So there's more than just purchase money markets in that category, but I think it gives you a good sentiment on where advisers are putting their clients as cash yields come down and the equity markets and other opportunities even on the brokerage side, like annuities and things are opportunistic. So I think that's what you see driving the movements there. Operator: And our next question comes from the line of Michael Cho from JPMorgan. Y. Cho: I just want to touch on Commonwealth as well, just more from an, I guess, an integration perspective. I mean you closed the deal maybe 4 or 5 months ago. I was just wondering, can you just talk through the progress of the integration and preparing for the onboarding ahead? Any key takeaways you'd highlight or anything that might influence priorities for the broader LTL organization looking ahead? Richard Steinmeier: Thanks, Michael. It's good to have you. So integration is going really well. And I would note here, one of the things that over the last 5 to 7 years, we have done a lot is major integration events. If you think through M&T, BMO, TruStage, Waddell & Reed, Atria. There is a number of large events that we have gone through and Prudential that have critical builds across in many of those instances, above $100 million in dev, sometimes above $200 million in dev. And so as we look into Commonwealth, we have scoped -- before we went into this transaction, we had scoped all of the capabilities that we needed to build that would benefit not only Commonwealth advisers as they come on to the platform, but all of our advisers and institutions. The scoping of that work is completed. We have our model build. We've begun dev already. And some of the complexity of the dev there is what actually drove an elongated time frame for the conversion. We're feeling really good about our ability to deliver against that capability development and for our advisers to experience it. And I think we've referenced some of this before but Commonwealth is exceptional in the delivery of their service experience. And some of that is -- a large part of that is informed by the way they receive feedback. That is a difference from the way our construction of our workstation was set up. And so we're building an incredibly robust feedback ingestion engine that allows us to actually get feedback from advisers, prioritize that, disposition it to folks to work on that, and then execute against that, making it a frictionless environment kind of one day at a time. One of the other things they have is a fantastic single relationship agreement across multiple account structures that we've had to go through a pretty significant build, and we're in the middle of that build to build that, which will be benefited by all of our advisers. And so there is a list, and that includes householding, repricing -- restructuring the pricing construct of some of our advisory platforms as well. So we have a good understanding of the build that's there. We have a great understanding of the capabilities that will be delivered. And now part of that is now moving into the definition of that target state operating model, which I alluded to earlier, we are in the middle of the articulation of that target state operating model, working deeply with Wayne Bloom and his team to make sure that we are keeping Commonwealth commonwealth, that we are keeping the folks who serve the Commonwealth advisers the same people and giving them the tools and capabilities to deliver the exceptional service that has resulted in 12 consecutive J.D. Power Awards for independent adviser satisfaction, a record in the industry. Thought is that we build those capabilities so that they can keep going to #13 and #14 and 15. And while they do that, we increase our ability to serve with distinction just like Commonwealth does today. So all of that taken together, we feel really good about our understanding of what needs to be done. We feel good about our ability to execute and deliver, and we feel great about the combined value proposition that will result from the 2 firms. Operator: And our next question comes from the line of Ben Budish from Barclays. Benjamin Budish: I think earlier in the Q&A, Rich, you were talking about an increased win rate of advisers in motion coming from the wires. Just curious if you could unpack a little bit more what's going on there. It seems like some of the -- both the media coverage and commentary from some of the bigger banks is that they're looking to get more aggressive, whether it's on recruiting TA packages, whatever it may be. So what do you attribute to sort of the recent success? How important do you see some of the pieces that are being built out, securities-backed lending and the alts platform, things like that, that are expected to be in place by the end of the year is improving that position? And again, you talked about competition broadly, but how would you describe the state of competition with that group of competitors specifically? Richard Steinmeier: Yes. Thanks, Ben. So if we go back, what underpins that movement of us improving our capture rates in that wire and regional employee channel. The first is that on balance, you've got a macro tailwind there for you. We have seen a crossover that as advisers move out of wires and W-2 channels more broadly, historically, had been that they move from W-2 channel to -- one W-2 firm to another W-2 firm. What you have seen is increasingly year in and year out, the percentage of advisers that are in a W-2 channel when they're making a move that has crossed the threshold of more than 50% of advisers that are in W-2 channels making a move actually move to an independent construct. For us, we are the leading player for folks who want to run their own independent business because we have multiple affiliation models. The second stage in our journey was that we introduced affiliation models several years ago that made it more attractive for folks who are in a W-2 construct to move to independents with support on their side. So that was the theory to the case in the construction of our strategic wealth offering that helps 1099 advisers set up, move and have a support mechanism around them with incredible support as well as our W-2 channel introduction Linsco. Now beyond that, what we had was, and we referenced this kind of pretty consistently in the quarters, is we still had some capability gaps relative to product set, lending and some high net worth capabilities. And we are steadily knocking those down one at a time, and our consideration rate continues to go up. So what we find is that advisers are increasingly willing to get into conversations with us. And they may be getting there because of the Linsco channel, they may be getting there because of Strategic Wealth. And ultimately, they'll land across the gamut of either establishing their own RIA, which we support in our own independent employee W-2 channel and a supported independence channel or in a direct 1099 affiliation on our corporate RIA. So we have more affiliation landing spots than any other firm. And maybe lastly, to leg into that, we have added a national brand campaign that highlights and makes more clear to end investors, and we've seen an improvement of aided and unaided brand awareness, both of our firm for both end investors as well as advisers. Lastly, Commonwealth is a very validating event to our position in the marketplace. They are a premium brand. They have premium capabilities, and they have the best advisers in the industry. The leadership of that firm chose us as the best firm to support those advisers, and that made more W-2 advisers stand up and take notice of this firm as a leading firm in wealth management. Operator: And our next question comes from the line of Brennan Hawken from BMO Capital Markets. Brennan Hawken: I had sort of a 2-parter here. So I know that Commonwealth is in focus. You've got -- you spoke to allocating your best recruiters to task. And of course, it takes time for net new asset pipelines to rebuild. So how long do you think it would take to start to see regular way net new assets revert to the rates that are more in line with your strong track record of growth? And then do you think it's possible we could get maybe a mark-to-market on how net new assets are progressing here to start out the year and maybe an update on cash balances. Matthew Audette: Yes. I'll start -- Brennan, I'll start with how January has gone so far. When you look at -- maybe start with organic growth. And I think as I mentioned in the prepared remarks, and I think you know well, January is usually one of the slowest months of organic growth for the year for 2 factors or 2 reasons. The year-end slowdown that you see in December -- second half of December, there's really no recruiting that could come on board. And then it takes a couple of weeks into January to ramp up both recruiting, same-store, et cetera. So January is usually pretty low. And then you get -- as you move into February and March, it builds. And then you also have advisory fees that hit primarily in the first month of the quarter. And as we're getting bigger and bigger on the advisory side, 58%, 59-ish percent advisory now, that's a bigger number that hits in the first quarter. You put all that together, and we're around 2.5% organic growth in January, again, with the expectation that then February and March builds. On the cash sweep side, I'd say there's a couple of days remaining, but I'd give you the headline that January is shaping up a bit better than you would typically see. You do have that same seasonal on advisory fees, which are around $2.5 billion. So that comes out of cash directly during the month. But outside of that, the Q4 buildup that we saw largely in December largely remains. So cash balances beyond fees are down roughly $1 billion. So you put all that together and balances are down around $3.5 billion, which would put overall cash sweep at roughly $57.5 billion. And just to give context, if you look at that Q4 build that largely happened or almost entirely happened in December, we're sitting right now $3 billion above November levels. So hopefully, that gives you a sense as to kind of how sticky the cash has been this year as opposed to prior years. Maybe, Rich, I'll give it back to you on the timing of organic growth question. Richard Steinmeier: Yes. So I think, Brennan, the way to think about this is, as we alluded to, we sit in the low 80s in terms of AUM assets that are committed to join. And that's not a complete proxy, as Matt had alluded to, for the actual number of advisers based on the fact that we have larger advisers joining. But what you'd see there is as we started in April, we had a real shift of our recruiters into that event. And we are now moving towards the tail end of that event. The issue that you have at hand is that the lead times for recruiting for an independent adviser going from one firm to the next usually sit between 3 to 6 months. And so once you enter pipeline, you can think about that as the time frame for most center of gravity decisions to make to move from firm to firm. But as you get into larger advisers, especially as they're considering supported models like Linsco, if they're establishing their own RIA as well or our strategic wealth, you're oftentimes with those larger teams looking at pipeline decision-making to conversion that sits center of gravity between 6 months to a year. So it really does depend on the mix makeup of what we have in pipeline. As we alluded, we've seen really nice pipeline build, especially into the first couple of stages of our pipeline. And what it takes is a little bit of time, especially with those seasoned recruiters to progress those through the pipeline. So as we alluded to, it's going to occur during the course of this year, and I'm probably giving an answer that is more precise than that at this moment in time, I probably can't do that. Operator: And our next question comes from the line of Devin Ryan from Citizens Bank. Devin Ryan: I want to shift to the enterprise channel and Prudential specifically now that we're a little bit over a year past that integration. And just would love to dig in a little bit more around some of the learnings. I'm sure you have a lot more data today on how that's going. So it would just be great if you could give any proof points to us on how it's going? What type of acceleration in growth are you are they seeing? And then just how it sets you up for maybe more in the insurance channel. I'm curious if you're seeing interest from other parties as these maybe positive anecdotes start to make their way to the market. Richard Steinmeier: Thanks, Devin. So just as a reminder, we brought on Pru 2024 in November, where they added about $67 billion in assets. And we knew as we were in discussions, Pru has a fantastic wealth franchise, and they were always bullish on their outlook for the wealth management business, and they were looking for ways to further advance the business. We got into that partnership, and we had quite a bit of build to build in terms of the capability sets. And as we built those capability sets, it positions us well to be able to work with other insurance firms and/or product manufacturers. But I actually do have the ability to be a little bit outspoken here, mostly because we would never break news for our partners. But in the fourth quarter, Prudential announced that their adviser headcount growth had accelerated 9% year-to-date, and they had roughly $3 billion in NNA. And that was in the fourth quarter and not the completion of the fourth quarter. And I can tell you, I was with them over the holidays. They are incredibly bullish on their franchise. They have a fantastic sales infrastructure. Their leadership structure is very strong. They develop new advisers really well and their backlog of other insurance-based advisers looking at Prudential continues to grow. We have had really great results as we partner with them in recruiting to their franchise. In terms of our pipeline, I think this is where you get -- I mentioned this a couple of times before, a signature event and a signature partnership, I would call this very akin to our M&T Bank, where M&T plowed and took a leap of faith with us to plow into new territory of a larger bank wealth outsourcing that really moved from why are you doing that to why aren't you doing that? And I think those are the discussions we're beginning to get into. But I think there just needs to be a recognition. We have a recognition that other firms, there's some trepidation to get into those conversations because Prudential really broke the mold in how they partnered with us. I think I can speak pretty clearly for them when we both are incredibly happy about the results and think that their franchise is very strong and positions them incredibly externally. I'm so proud of being able to be a partner of Pru. And we're looking forward to having further conversations with -- I think a number of firms have begun exploratory conversations but more progressed conversations. Operator: And our next question comes from the line of Bill Katz from TD Cowen. William Katz: And happy anniversary since no one else has said that. Just a couple of maybe interconnected questions. Matt, you alluded to possibility of accelerating the sort of capital deployment that you're running a little bit ahead in terms of operationally and your leverage ratios. Can you give us a sense of what mileposts we should be looking at to potentially think about maybe starting to reincorporate capital return? And then just on the interest rate management side of the equation, you're sort of running at the lower end of your fixed to float. How are you thinking about that shape as you look into the new year given the forward curves are relatively stable from here? Matthew Audette: Yes. What anniversary, Bill? Richard Steinmeier: I know what he's talking about. So first off, he's super generous. Like that's a very thoughtful person. We always knew that about Bill but I appreciate it, Bill. He's -- he thinks that this is 1-year anniversary of my first earnings call, I think but it was actually Q3, a couple of weeks after. Matthew Audette: Was that it, Bill? William Katz: It was. Matthew Audette: Look at you. Super thoughtful. Richard Steinmeier: My anniversary was in August. So my wife would... Matthew Audette: Well, very good, Bill. All right. So on your 2-part question. So I think on share repurchases, I think in -- just to level set on our expectations initially when we announced the acquisition of Commonwealth, it was about making sure that we got our leverage down -- back down to 2x. And at that point, we would revisit capital returns. And given the timing of Commonwealth onboarding in Q4 that implied we'd look at it in Q4. And I think as we've talked about today, being ahead of plans on the deleveraging side, which is good. And the Commonwealth onboarding, while the time line hasn't changed, the prep is going well. I think I would take this as we're looking at whether we can start those share repurchases earlier. I would range that and say maybe a quarter earlier is what we're thinking. But I would just underscore, we've still got some work to do to really refine that. And we'll give an update in a future quarter. But I think just given where leverage is, I wanted to at least give an indication as to where our thinking was. With respect to the second part of your question on fixed rate sweep, no change in plan and approach there. It really is about that year-end build that you see in Q4. That's really what drove that down. As the stability of those cash balances really lands in this quarter and as I talked about for January so far, it's being a little bit stickier than it has in prior years, then we'll kind of move into the fixed rate market, typically landing in that low to mid-60% where we typically are. So that would be the plans for Q1. That being in that 55% zone or mid- to upper 50% zone was really about just the year-end buildup in December. Operator: And our next question comes from the line of Michael Cyprys from Morgan Stanley. Michael Cyprys: Just wanted to ask around core G&A. I think that your guide implies underlying core G&A growth of 4.5% to 7%, which is a bit of an acceleration from the underlying 4% you put up in '25. So I was just hoping you could elaborate on what's driving that acceleration into '26. Maybe speak to some of the areas you're investing in across '26 here. And maybe if you could also just update us on some of the initiatives that you have across expanding technology capabilities, broadening out the platform for advisers. Just what are your priorities here in '26 around that? Matthew Audette: Yes, you bet. I mean I think just to build a little bit of context on -- or reflect a little bit on 2025 because our initial outlook for 2025 was 6% to 8%. And even that range would -- if you look back at the last 4, 5 years, would have been the lowest growth rate. And to the premise or the point of your question, we ended up landing much lower than that at 4%, which has that next year's guide, 4.5% to 7% be a little bit of an increase. But I'd underscore that, that is about what we're able to deliver in 2025. That is the lowest growth rate in quite some time. And it really was driven by the cost efficiency work that we were able to deploy and things that are recurring savings and structural improvements to how we operate. And I think getting to your question on 2026 and that 4.5% to 7%, I think we're focused on doing a lot of the same but I would say balancing making sure we're continuing to drive investments or make investments that really improve our offering and drive growth and at the same time, continuing to make additional investments that can really drive efficiency and scale in the business. I think we are in the early stages of the opportunity set we have to make investments that not only allow us to scale better but also improve the client experience. And I think what you see in that range, even if you look at the midpoint of the range, that still would be one of our lowest growth rates in quite some time. And I think what it reflects is the opportunities that we have to really drive that growth. And I think even when you look at the range, it is a little bit wider than we typically do, 4.5% to 7%, so 2.5 points versus 2. And that's also just reflective of the number of initiatives that we have from an automation standpoint, from an AI standpoint and the precision with which you can predict when those hit, right? Those things could shift out something that's going to come in Q2, maybe it comes in Q3. That could impact the current year a little bit. But I would just underscore our confidence from a run rate standpoint of the opportunity set we have in front of us to continue to drive efficiencies that improve the bottom line, but also improve our client experience. It's a long list. We're excited about it. And I think that's what you see reflected in that guide. Operator: And our next question comes from the line of Jeff Schmitt from William Blair. Jeffrey Schmitt: For the Liquidity & Succession solution, and I think you spent a little over $50 million in the quarter. How do the returns on that look compared to traditional M&A and recruiting? I mean, are the multiples a lot lower in M&A? I know recruiting, you've kind of pointed to that being maybe 3, maybe 4x in this environment. So where does that sort of shake out? Matthew Audette: Yes. Jeff, on L&S, like from our target M&A range that we typically operate in is that 6 to 8x. And L&S operates right in that range. But I think a couple of things that I think are a little bit different. When you think about L&S, not only the quality of earnings, right, the economics that you're acquiring for 6 to 8x in L&S is 100% recurring noncash sweep earnings. So there's a higher quality there. And then I think the strategic benefits of just really when you think about the life cycle of something that goes through L&S from acquiring it to helping transition to the next generation, helping them get to a place where they've grown and earn back the ability to buy back that practice, and during that entire time, working with them in our Linsco model to really position them to really use us as a leverage point on nearly everything except for focusing on their clients and being able to grow them. When you just think about the practice in any L&S opportunity, the practice we acquired versus once it is now fully in the hands of the next generation, they're set up to be more efficient, faster growing and a higher-quality adviser practice as well. So there's a lot of benefits that just go beyond the pure economics. But to underscore the economics, it's the same range, 6 to 8x but it's a higher quality earnings because there's -- that's 100% noncash sweep economics that you're acquiring. Operator: And our next question comes from the line of Wilma Burdis from Raymond James. Wilma Jackson Burdis: Do you think there's some level of short-term interest rates where we'll start to see more cash build? And if so, are we starting to approach that level? And maybe you could just talk a little bit about the rate cuts in 4Q '25 and how that may or may not have contributed to build in the quarter. Matthew Audette: Yes. I think when you look at cash balances, and I think we have been -- when you think about the operational nature of them, and we're just looking at the fourth quarter in that build that you typically see and you saw in December, kind of putting those dynamics aside, like when you look at the average balances per account, they've been quite stable for quite some time and rounding to about $5,000, which I think when you think about the cash necessary to manage an account, we've really reached those levels. And I think that's why you saw that bigger than typical build in the month of December. So to get to your point, I think when we look ahead, as rates come down and kind of where do we think cash sweep is going, I think there is a bias to being stable to up just given it's at the levels that are really necessary to manage the account. We've seen that stability for a few quarters. Last couple of quarters, that average balance per account has actually grown. So I think that's the dynamic there. The individual rate cut or 2 in the quarter, Wil, I don't think that typically would really drive that. I think what moved cash balances in the quarter is that seasonal build for rebalancing and tasks, loss harvesting and things like that. Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Rich Steinmeier for any further remarks. Richard Steinmeier: Thank you all for joining us. We look forward to speaking with you again in April. Have a good night. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good day, and welcome to the OSI Systems, Inc. Second Quarter 2026 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Alan Edrick, Chief Financial Officer. Please go ahead. Alan Edrick: Good afternoon, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. And I'm here today with Ajay Mehra, OSI's President and CEO. Welcome to the OSI Systems Fiscal 2026 and second quarter conference call. We are pleased that you can join us as we review our financial and our operational results. Earlier today, we issued a press release announcing our fiscal second quarter financial results. . Before we discuss these results, I would like to remind everyone that today's discussion will include forward-looking statements, and the company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. All forward-looking statements made on this call are based on currently available information. and the company undertakes no obligation to update any forward-looking statements based upon subsequent events or new information or otherwise. During today's call, we will be discussing the company's results using both GAAP and non-GAAP financial measures. For more details on these non-GAAP measures, their comparable GAAP measures and a quantitative reconciliation of the 2, please refer to today's earnings press release. I will begin with a high-level summary of our financial performance for the second quarter of fiscal 2016 and then turn the call over to Ajay for a discussion of our business and operational performance. We will then finish with more detail regarding our financial results and a discussion of the increased non-GAAP EPS guidance for fiscal year '26. We delivered strong second quarter financial results. setting Q2 records across multiple metrics, and we are excited about the momentum across our biggest divisions. The company's revenues increased 11% year-over-year to a Q2 record of $464 million. Our 2 largest divisions achieved double-digit top line growth with Security up 15% and Opto up 12%. This top line performance is particularly impressive, given that last year's Q2 included substantial revenue from large security programs in Mexico. The solid revenue growth led to a record Q2 non-GAAP adjusted EPS and of $2.58. These results included a step-up in R&D, reflecting our commitment to innovation. Additionally, cash flow was solid as we generated $62 million in operating cash flow, and while this number is notable, we believe calendar 2016 cash flow may be even stronger. Before diving more deeply into our financial results and discussing our outlook for fiscal 2016. I will turn the call over to Ajay. Ajay Mehra: Thank you, Alan, and thank you, everyone, for joining us today. I'm excited to discuss our business and share our Q2 fiscal '26 results with you in more detail. We had another record-breaking quarter in Q2, and with revenues of $464 million, representing 11% year-over-year growth and strong earnings reflecting our continued momentum. Our Security division performed well. and our Optoelectronics and Manufacturing division delivered another solid quarter. Overall, we continue to see nice demand across many of our markets, and our backlog remains healthy providing confidence for a strong second half of fiscal '26 and visibility going beyond that. Let's discuss each division's performance, starting with security. In our Security division, we delivered overall double-digit revenue growth, driven by increases in both product and service revenues as we continually innovate to drive market leadership. We also continue to introduce new innovative product features. Security bookings were lower than expected during the quarter, primarily due to delays in receiving anticipated orders in part due to the U.S. government shutdown and some pushout from international customers. These high probability opportunities are still in the pipeline. During the quarter, we announced a $20 million award to deliver a comprehensive radiological threat detection solution to an international customer. This project involves deploying a wide are radiation monitoring network that operates continuously to detect and track radioactive threats. Also, while the formal announcement came after the quarter, we were informed in Q2 that we were selected to support security screening at a major global sporting event in Europe this winter. These wins further reinforce OSI's position as a trusted global printer of critical security infrastructure supporting national security and high-profile mission-critical environments worldwide. Switching to RF. We announced shortly after the end of the quarter and international order valued at approximately $30 million to deploy advanced RF-based communication and surveillance systems for naval operations. We are also gaining traction on Golden Dome, the U.S. initiative to create an integrated missile defense system. To that end, our RF business was selected to participate on a massive U.S. missile defense agency contract, known as Shield. This is a multiple award, indefinite delivery, indefinite quantity contract to support the development of Golden Dome. The contract has a ceiling value of $151 billion over a 10-year period making it one of the largest IDIQ contracts ever issued by the U.S. Department of Defense. We were one-off 2,400 awardees and believe delivery orders from the Shield IDIQ could be received in the foreseeable future. As a result of the Golden dome potential and other growth opportunities for RF solutions, including the recent International naval order, we're enhancing our RF operational footprint. We are expanding into new facilities in Texas, which significantly increases production capacity improves operational efficiency and further demonstrates our commitment to our customers and long-term innovation in this space. Our overall security pipeline includes a wide range of opportunities, both internationally and domestically, and we are well positioned with a broad range of security offerings. Moving on to Optoelectronics. This division delivered another impressive quarter with double-digit top line growth, achieving a second quarter record for revenues and adjusted operating income. This performance was driven by broad demand across our diversified product and customer base. We are seeing growth across industries ranging from medical diagnostics to semiconductors, driven by the breadth of our offerings. Opto also had a strong book-to-bill ratio this quarter. This division continues to see an expanding opportunity pipeline as OEMs are active in diversifying away from China and derisking their supply chains by shifting to other low-cost manufacturing regions. By expanding our production capacity with our newest manufacturing facility in Mexico and leveraging our operations across Southeast Asia, India and North America, we are poised to meet rising global demand and continue benefiting from this trend. Given strong bookings and consistent performance, we believe Opto is well positioned to build upon this momentum. And finally, let's discuss the Healthcare division. While Q2 was a challenging quarter for our Healthcare division, we remain focused on long-term value creation. We have intensified our sales efforts and are focusing our pipeline of new products by continuing to invest in next-generation product development. While it will take time to regain our footing. We are confident that these actions, along with the broader market recovery will improve health care's performance in the coming quarters. Overall, we are pleased with OSI's Q2 and first half results. We grew revenues and profits significantly and continue to drive efficiencies in our business. I will now return the call to Alan to discuss our financial performance further before we open the call for questions. Thank you. Alan Edrick: Thank you, Ajay Now I will review in greater detail the financial results for Q2 and then discuss our increased fiscal 2016 non-GAAP EPS guidance. As mentioned, our Q2 revenues were up 11% compared to the second quarter of the prior fiscal year, with strength across our 2 largest segments. Security division revenues in Q2 were $335 million, an increase of 15% year-over-year. This growth was driven by significantly higher service revenues, increased revenues from the RF business, which continues to be effectively integrated into our overall operations and increased aviation product revenues. As expected, and directionally similar to last quarter's trend, revenues related to our large Mexico security contracts decreased 50% to $27 million in Q2 fiscal '26 from $54 million in Q2 of the prior year. Excluding the Mexico contracts, securities revenue surged 31% year-over-year reflecting healthy demand across the broader security portfolio. Meanwhile, our Optoelectronics and Manufacturing division had another excellent quarter. Opto sales, including intercompany increased 12% year-over-year to $113 million, which is a new Q2 record for this division. This was driven by growth across our diversified product and customer portfolios and as a just suggested, Healthcare division sales were soft. Our Q2 fiscal 2016 gross margin was 33%, and down from the same quarter in the prior year as a less favorable revenue mix on product sales, outweighed an increase in gross margin from higher service revenues. Our margins can sutuate based on product and service mix and volume, supply chain costs, FX, tariffs, among other factors. Moving on to operating expenses. Expenses in the second fiscal quarter were $70.2 million, down 1% from the prior year Q2 and representing 15.1% of sales compared to 16.8% of sales in Q2 of last fiscal year. We continue to work diligently across all of our divisions to manage our SG&A cost structure efficiently. R&D expenses in Q2 were $19.8 million or 4.3% of revenues, up from $18.3 million in the same quarter last year. This increase stems from our commitment to investing in innovation, resulting in market-leading offerings, particularly in security and positioning OSI well for the future. We expect to continue our heightened R&D efforts to advance key initiatives through the remainder of the fiscal year. Even with these investments, our combined SG&A and R&D expenses as a percentage of sales have decreased annually for each of the past 8 years. and this trend is anticipated to continue for fiscal '26, underscoring our ability to drive operating efficiencies while still funding growth initiatives. Now moving below the operating line. Net interest and other expense in Q2 was $10.7 million, up from $8.6 million in the same quarter of the prior year, while net interest expense decreased from $8.6 million to $6.4 million on reduced borrowing costs, this was offset by a $4.4 million nonrecurring cost for a retirement plan amendment of the former CEO. Our effective tax rate under GAAP was 19.5% in Q2 of fiscal '20 and versus 23.3% in Q2 last year. However, excluding discrete tax items, our normalized effective tax rate, which is the rate used in calculating non-GAAP EPS was approximately 23.3% this quarter compared to 24.0% in the same prior year quarter. On a non-GAAP basis, our Q2 FY '26 adjusted operating margin of 14% and was up sequentially from Q1, but down from the prior year second quarter as expected due to the tough comp. The Security Division's adjusted operating margin was 17.8% in Q2 of fiscal '20. And compared to 19.9% in the same prior year period. Strong growth in higher-margin security service revenues was offset by a less favorable mix of product sales and the growth in R&D. The Opto adjusted operating margin increased 100 basis points to 12.9% from 12.8% in last year's fiscal Q2. We continue to anticipate efficiencies in our newest manufacturing facility in Opto to contribute to expanding margins in the second half of the fiscal year. Lastly, the adjusted operating margin of our Healthcare division was rather negligible given the sales level. Moving to cash flow and the balance sheet. Our operating cash flow improved in fiscal Q2 on a year-over-year basis. DSO in Q2 decreased 17% from Q1 and is expected to further decrease by the end of the fiscal year. We continue to receive payments from a significant Security division customer in Mexico during the quarter, marking progress, albeit at a slower pace. We expect substantial cash inflows in the second half of fiscal 2016 and beyond as we continue to collect on the Mexico receivables, which should lead to sizable operating cash flow and strong free cash flow conversion. In Q2 of this year was $7 million, while depreciation and amortization expense in the quarter was $9.6 million. Our balance sheet remains solid. Our net leverage at the end of Q2 fiscal '26 was approximately 2.2 as calculated under our credit agreement. We completed a highly successful convertible notes transaction in November in which we raised $575 million at a coupon of 0.5%. This transaction increased our liquidity and financial flexibility for future growth initiatives while simultaneously reducing interest expense through the pay down of our revolver. In connection with the transaction, we bought back approximately 547,000 shares at an average price of $267 per share under our stock buyback program. Now turning to our updated guidance. We are raising our fiscal 2016 guidance for non-GAAP EPS and while maintaining our revenue guidance. We now anticipate non-GAAP earnings per diluted share to be within a range of $10.30 to $10.55 and which would represent 10% to 13% year-over-year growth. This updated outlook factors in a challenging comp from a significant reduction of revenues from our Mexico contracts in fiscal 2016 in our Security division. This should be more prevalent in Q3 than Q2 with an expected Q3 revenue headwind of over $50 million to year-over-year revenue growth which is expected to be the highest quarterly variance of fiscal '26. Based upon the expected timing of the backlog conversion, Mexico and other factors, we anticipate the growth in our fiscal 2016 Q4 and to be significantly stronger than the growth in Q3. We note that this fiscal 2016 non-GAAP diluted EPS guidance excludes any impact of potential impairment, restructuring and other charges, amortization of acquired intangible assets and their associated tax effects and discrete tax and other nonrecurring items. We currently believe this guidance reflects reasonable estimates. The actual impact on the company's financial results of timing changes on the expected conversion of backlog to revenues, new bookings, timing of cash collections, tariffs and potential future government shutdowns, among other factors, is difficult to predict and could vary significantly from the anticipated impact currently reflected in our guidance. Actual revenue and non-GAAP earnings per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings. In summary, we are committed to operational excellence. As we continue to grow our businesses and provide innovative products and solutions to our customers. We are pleased with our performance in the first half of fiscal 2016, and we expect a solid second half as we continue to generate significant cash flow and utilize our financial strength to invest in key strategic areas with the goal of driving long-term value for our shareholders. Once again, we thank the entire global OSI team for their dedication to supporting our customers and partners, their efforts are what make our results possible. And at this time, we would like to open the call to questions. Operator: [Operator Instructions] And we do have our first question from Mr. Jeff Martin. Jeff Martin: I wanted to dive into the orders activity in Security comment, softer than expected. The overall backlog was essentially unchanged at $1.8 billion. So is it better to phrase it as the orders were not as strong as you expected rather than soft? Ajay Mehra: I think -- this is Ajay. The best way to describe it, I think we said it that we expected strong orders. And some of them got pushed to the right because of the government shutdown and a little bit some internationally, but all those are very much alive in our pipeline, and we expect a strong next 6 months. Jeff Martin: Great. And then I was curious if you could expand on the IDIQ contract of Golden dome. It sounds like you're expecting something could materialize in the relatively near future. Is this something you could theoretically see orders start to come in, in fiscal '26? Ajay Mehra: A lot of this is dependent, obviously, the funding came in for the big beautiful bill, and there's a substantial amount of funding in there. Like I said, it's the largest contract one of the largest contracts out there at $151 billion, but there are 2,400 people there. But we feel that we're in a good position with the products that we provide, especially our over the horizon radar. And we are talking to customers. We are actively pursuing opportunities really can give you a feel for when this will happen. Obviously, timing, dealing with the government sometimes takes longer. But we feel good about the foreseeable future that we'll get some orders and -- like I said, we have also expanded our facilities in Dallas, Texas, and we feel -- we feel positive. Jeff Martin: Excellent. And then Alan, how should we think about interest expense on a quarterly basis going forward from here? Alan Edrick: Yes, Jeff, good question. With the paydown of our revolver mid-Q2, we would anticipate that the level of interest expense will decrease from Q2 to Q3 a little bit. We got some of the benefit, about half a quarter benefit in Q2. And then Q3 and Q4 should be relatively comparable to one another. Jeff Martin: Okay. And then you're going to have quite a bit of excess cash comp on the balance sheet, particularly with Star anticipated free cash flow over the next 12 months, call it. What's the potential for additional share reports received from here? Alan Edrick: Well, Jeff, you're right. We have a strong balance sheet. We have nice cash on the balance sheet as of 12/31. And and with the strong expected free cash flow over the period of time you mentioned, that should only increase. Our capital allocation has always consisted of kind of 3 things: M&A, stock buyback, and any paydown of revolver, which we've already done at this point in time. And they're not mutually exclusive necessarily. So stock buyback is certainly an option for us. We did a sizable buyback in Q2 of about 546,000 shares, but the opportunity to buy back further shares is certainly available to us. Operator: And one moment for our next question. And that will come from the line of Josh Nichols with B. Riley Securities. Josh Nichols: Great to see the strong cash flow during the quarter. Just want to dive in a little bit. Obviously, we have the government shutdown that impacted things a little bit. But can you provide a little bit more detail about what you're seeing in terms of the big beautiful bill and RFP timing? Are you seeing some RFPs already in calendar '26? Or do you expect the award activity maybe pick up in like calendar 2Q or 3Q or some of those like procurement time line shifted a bit? Ajay Mehra: So I think that the shutdown definitely move stuff to the right. We are starting to see some money flow in. We expect some money will flow in, in the first 6 months of this year. But I would say most of it will be towards the latter part of calendar '26 and beyond. So it's really been more of an effect of timing than anything else. Josh Nichols: Got it. That makes sense. And then, Alan, I know you mentioned, look, the receivables on the DSO have been improving. You said Mexico was part of that. Like can you just elaborate a little bit more maybe on where we stand in terms of Mexico DSO? Or is that going to continue to be a significant free cash flow driver in the fiscal second half relative to where the rest of the business is? Alan Edrick: Yes, Josh. Good question. And you're absolutely right. though we collected some nice payments from Mexico in Q2, it still represents, by far, our largest receivable at the overall company. And we would expect, based on the due dates and when we think cash is coming in, that really over the course of the balance of fiscal '26 and really part of fiscal '27 to kind of have some potential outsized free cash flow conversion as the Mexico receivable normalizes, which will drive down our DSO quite significantly, resulting in the cash flow. Josh Nichols: And then last question for me. I know the comps aspect, right, with Mexico for the margins have been a little bit challenging, but they are easing. I think by the time we get to like the end of this fiscal year, you're probably in a pretty good position, particularly with the service revenue trajectory that we have seen. Any more detail you can provide about like the guidance outlook in terms of the margin and the growth potential for the service revenue relative to hardware from where we stand today? Alan Edrick: Yes, Jeff -- excuse me, Josh, this is Alan. Good question again. Absolutely. We're highly encouraged about where we're heading on margins. Our service revenues growth has been outstanding. Of course, we started seeing real strong service revenue growth in the third quarter of last fiscal year. So we'll start coming on to a little bit more difficult comps on the service revenue growth. but we still expect it to be growing at a much faster rate than that of products in most cases. And the service revenues carry a higher margin than our product revenues. So as a result, we see some real nice room for operating margin expansion. We see that more tilted to Q4 for the reasons I outlined during sort of the prepared remarks. But yes, we see some good opportunity for operating margin expansion in Q4 and beyond. Operator: Thank you. One moment for our next question. And that will come from the line of Christopher Glynn with Opheimer. Christopher Glynn: Alan, just was hoping you could revisit that kind of tilt to 4Q that you just referenced outlined in the prepared remarks. I missed a little bit of it. And then just in terms of a finer point, the midpoint of your guidance basically gives us exactly $1 billion revenue in the back half. Should we think about that as like 55% across the remaining 2 quarters? Or is that a little extreme. Alan Edrick: Good question, Chris. Really kind of what's driving a much stronger Q4 than Q3 are a couple of things. One, of course, is the U.S. government shutdown, which pushed a few things a little bit to the right. But the much bigger impact is Mexico. I had mentioned that the Mexico revenue variance between last year and this year of the 4 quarters is most prevalent in Q3 itself. So there's a big headwind, if you will, on the Q3 revenues related to Mexico. That then begins to subside substantially in Q4 and of course, as we move into the next fiscal year. So yes, I would anticipate when you're looking at the splits, the revenues being significantly higher in Q4 than Q3, and therefore, the same would hold true to the bottom line. Christopher Glynn: Okay. Great. And then on the expected strong second half bookings, is that essentially a CBP factor that we're talking about there? Ajay Mehra: Well -- this is A.J. Obviously, CBP is one of them. We get a lot of orders from the rest of the government. And like I said, we're pursuing a lot of international orders as well. So it's a combination of a few customers. Christopher Glynn: Okay. Great. And then I know you don't announce everything. But aviation orders, I think if we're tracking correctly been a little bit quiet. So just wondering if you could comment on the pipeline for the aviation market. And might there be some announcements in the second half in that vertical? Ajay Mehra: Well, the aviation market remains strong for us. The pipeline remains strong. And just bear in mind with Aviation. Sometimes it takes a little longer. The airport sometimes are not ready because of construction, et cetera. But we feel good about the pipeline right now. Alan Edrick: And maybe to add on to that, Chris. This is Alan. The aviation business has been very good for us. The aviation orders, we tend to get a large volume of aviation orders but sometimes they're of a lesser amount, not necessarily to the rise to the level of a press release, if you will. But the overall business has been [indiscernible]. Christopher Glynn: Okay. And sorry, if I could fit in a bookkeeping one. Someone already asked about the interest expense bridge from the refi there and the converts. Could you level set the shares, how to think about those or even give us a plug for the third quarter? I know option exercise is probably up a little bit with the really strong stock performance. Alan Edrick: Yes. So from the diluted shares perspective, with the stock buyback, it came down a bit in Q2. We'll probably see a little bit more impact of that in Q3 and then stabilize. Of course, with the rising stock price, that will have a little bit opposite effect countering that a little bit on diluted shares. But overall, we would anticipate the diluted share count will be reducing a little bit in Q3 and Q4 should be pretty comparable to Q3. Operator: One moment for our next question. And that will come from the line of Mariana Perez Mora with Bank of America. Mariana Perez Mora: Thank you so much. Good afternoon, everyone. I wanted to touch base on the radio frequency business. And you mentioned opportunities for Golden dome, and investments being made to expand to new facilities in Texas. Like could you mind given us some color around like how large is that business today? And how should we think about when we look at that business like 3 to 5 years from now? Ajay Mehra: Well, great question. I think the best way for us to answer that is you've heard in the news, what they're looking to do in Golden Dome. We have a portion of it. So we think we have a good opportunity over the next 2, 3, 4 years to really get some very good solid growth as this program continues. So I can't really get into specifics, maybe 6 months down the road, 3 months down the road, whatever as we get more color on what they're doing, we'll be able to answer that question. But right now, we feel very good about the growth prospects in that business, and that's one of the reasons we decided to expand and move into a brand-new facility that gives us the opportunity to be able to meet that demand and really showcase to the customer all the innovative technologies that we have. Mariana Perez Mora: And then I wanted to tap or like dig a little bit deeper as well on CBP opportunities. there has been like all this government accountability office reports about like how CBPs lagging in their effort to have large noninterest inspection systems, putting like the land ports. And they are -- they have been progressing just like, I don't know, 40% over the last 10 years on a goal that was like due next year. And they say that there is a problem with the civil works and that's why they have a lot of like systems in inventory. Like how that affects orders for you guys, how that affects your market share as you take care of both the systems and the civil works, how should we think about like opportunity from those efforts in the next couple of years? Ajay Mehra: So great question. I mean, keep in mind, if you've been down to the border, how complicated the border crossings can be and civil works is not an easy thing. You need to go through as far as the government is concerned, a lot of different agencies and through GSA and others. Having said that, we have been, I think, the most efficient supplier to the CBP in terms of equipment. We continue to see some of that equipment orders that we think are going to come in, not just for water crossings, but for ports for other areas, such as airports. And so we think it's going to continue. Is it going to speed up. The best way to put it is, as you put new systems in on both sides, not just from us, but from the government, you learn. So things get things get more efficient. And that's what we're hoping as we move forward. Mariana Perez Mora: Great. And last one from me is sports event. So you mentioned a European one and an award on that end, but could you mind reminding us how is the pipeline of opportunities for the FIFA World Cup this summer? And then how should we think about the Olympics as well. Ajay Mehra: So we definitely are a premier player over there, and we feel very good about the announcement we made. We feel very good about the upcoming major events in the U.S. and internationally. And as you know, we won the -- we did another major event 1.5 years ago in the summer in Europe. So we feel very good. And I think that we are uniquely qualified to do it because we've done it so many times, number one. And number two, we have a breadth of technology that is really unmatched with other people. Operator: One moment for our next question. And that will come from the line of Seth Seifman with JPMorgan. Christopher Barbero: This is Rocco on for Seth. There's been a lot of conversation of increasing international demand for the security products. Are there any specific kind of regions or countries that are leading the pack on either urgency or size of the opportunity? Ajay Mehra: Well, U.S., obviously, is one. We see a lot internationally and, frankly, in the Middle East. And we're seeing a lot of countries starting to pay more attention, especially with some of the trade issues that are going on to see can they scan more, to be able to potentially if they want share information with the U.S., so the trade becomes a little easier. So it really -- it's really across the board, but it varies depending on year by year, one country might do it and another country will do it. But it's all -- it's still in the second, third inning. It's not in the -- it's not a mature market yet. Christopher Barbero: Great. That makes sense. And then funding around DHS and CBP has become a bit more contentious after the events of last weekend ahead of the CR expiration on Saturday. Does the near-term funding have a notable impact in either the revenue or cash outlook heading into the back half of the year? Ajay Mehra: No. I think the issues there are, I'm not going to get into it, but it's really not a by border security. It's about other things related to ICE and other issues. Operator: [Operator Instructions] One moment for our next question, and that will come from Larry Solow with CJS Securities. Lawrence Solow: All right. Just a couple of follow-ups. So the bookings and security, was that essentially close to flat, about 1%. Is that about right? I know it feels like it. Do you actually give a number there. . Alan Edrick: Larry, this is Alan. They were -- it was a bit below 1.0 this quarter. Lawrence Solow: Okay. And I'm just curious, and you kind of -- I think I answered my question in your remarks, but does the somewhat less-than-expected orders and it sounds like timing related. Does that actually impact your sales in the back half, I guess, a little bit because you had a strong quarter, but you didn't raise guidance and your -- you kind of mentioned a little slower Q3, Q4 year-over-year because of Mexico, but also what you already knew about, but maybe a little bit because maybe some of these bookings would have trickled through that fast? Or I'm just kind of curious if the if there's any slower -- you have your guidance the same on a revenue basis, but would you have increased it at all if bookings matched your expectations? Alan Edrick: Yes, Larry, we -- this is Alan. We might have. We just thought it was prudent to maintain our revenue range at this time given the items that you just mentioned with some things moving a little bit to the right and any potential shutdowns and the like. But yes, overall, we feel very strong about our business. Lawrence Solow: And just the margin -- I know mix -- there's a lot of moving parts there. But I guess, is it fair to say that Mexico obviously is a driver of that. Is that the substantial driver Mexico is just better, higher-margin revenue? I know last year, Q2, you had a substantially good quarter. So I'm not necessarily looking year-over-year, but just curious with a nice revenue jump, service revenue up really nice, and you're still below full year margins from last year versus this quarter. So curious, is it really just Mexico? Are there a lot of factors? Any way you could kind of help with that? Alan Edrick: Larry, it's Alan. Yes, there are multiple factors, but Mexico plays a role in it. Of course, given the size of that contract and when we are manufacturing the same product over and over and over again, there's inherent operational efficiencies, which drive the margin up quite nicely, which is fantastic. And we recognize coming into the year that we'd be facing that sort of margin headwind. And despite that, the company has been growing quite nicely. That big impact of Mexico year-over-year comparison subsides after the third quarter, so really after the March quarter. So as we move forward in Q4 and beyond, I think that's really where you see the real opportunity for margin expansion for the business again. So only 2 months away from that. Lawrence Solow: That's fair. And on the Golden dome age, I know you can't really give much specifics and maybe there's some things you just don't know. But it feels like -- I mean, is this something that could be a over a 3- to 5-year period, a several hundred million dollar potential opportunity for you. Obviously, the $151 billion divided by 2,400 would be but I'm sure we can't do that math. But -- any color there magnitude potential size without you actually -- without putting words in amount? Ajay Mehra: Yes. I mean I think that we feel it's a substantial opportunity that's going to be meaningful overall to the company. What that number is going to be. I mean it's substantial. I don't want to get into specifics, but you may not be that far off. But at the end of the day, we'll give more color on that as we get closer on what those opportunities are. Lawrence Solow: Got you. And just switching gears real fast, if I may, just on Opto. I think it was up like 9% externally. You said the book-to-bill was greater than 1. Is it -- the same driver still onshore and companies getting out of Mexico out of China, excuse me. Is that the drivers? Any color there would be great. Alan Edrick: Yes, Larry, it's Alan. The drivers remain similar to what you just mentioned. Just a good diverse customer base, strong demand from business within our existing customers and new business within our existing customers as well as gaining traction with some new customers who are trying to move out of different parts of the world and into the manufacturing locations that we have. So we're really pleased with seeing overall 12% revenue growth in each of Q1 and Q2, which included the 9% external that you mentioned in this past quarter, and we see strong demand continuing in this business as we move forward in the next couple of quarters, the balance of the fiscal year. Lawrence Solow: Great. And just cash flow, obviously, a nice quarter. and it sounds like you have expectations for the nicer quarters in the back half. Do you think on a full year basis that could come close or even exceed net income? Alan Edrick: Larry, I think that's entirely possible. in the event that the DSOs come down to the place that we believe it could, that could very well be the case. And yes, we think there's every opportunity for that to occur. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any closing remarks. Ajay Mehra: Well, I want to thank our shareholders, of course, our customers. And last but not least, all our employees for everything that we've been able to accomplish the last months and looking forward to the next 6 months. And once again, thank you all for participating in our conference call. We look forward to speaking with you at our next earnings call. Thank you. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Greetings, and welcome to the ResMed Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Salli Schwartz, Chief Investor Relations Officer. Please go ahead. Sallilyn Schwartz: Thanks, Kevin. I want to welcome our listeners to ResMed's Second Quarter Fiscal Year 2026 Earnings Call. We are live webcasting this call, and the replay will be available on the Investor Relations section of our corporate website later today. Our earnings press release and presentation are both available online now. During today's call, we will discuss several non-GAAP measures that we believe provide useful information for investors. This information is not intended to be considered in isolation or as a substitute for GAAP financial information. We encourage you to review the supporting schedules in today's earnings press release to reconcile these non-GAAP measures with the GAAP reported numbers. In addition, our discussion today will include forward-looking statements, including, but not limited to, expectations about our future financial and operating performance. We make these statements based on reasonable assumptions. However, our actual results could differ. Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. I'll now turn the call over to Mick. Michael Farrell: Thank you, Salli, and good morning, good afternoon and good evening to all of our shareholders, and welcome to all to ResMed's second quarter fiscal year 2026 earnings call. We delivered another strong quarter with 11% headline revenue growth or 9% growth on a constant currency basis. We drove operating leverage leading to margin expansion sequentially and year-on-year, and we achieved GAAP EPS growth of 16%, strong double-digit bottom line growth. I'm very proud of our global team of 10,000-plus ResMedians, who continue to innovate and evolve the digital sleep health pathway to expand access to our life-changing technology across over 140 countries worldwide. Our team drove high single-digit growth in global devices revenue and double-digit growth in global masks, accessories and other revenue. Last quarter, I expressed confidence that we would reaccelerate our Europe, Asia and Rest of World masks, accessories and other category to high single-digit growth in the second quarter. The team from EMEA and APAC has delivered, and we achieved 8% growth on a constant currency basis across Europe, Asia and Rest of World, driven by continued strategic expansion of our mask portfolio, including our new fabric masks, a focus on improved mask resupply through education, awareness and execution as well as targeted initiatives and focus in some of our direct-to-consumer markets around the world. And I'll spend a little time on that later. So well done to our EMEA and APAC teams. Last quarter, I also talked about our portfolio management work that we're doing in ResMed's residential care software or RCS business. We are making strong progress with that work, and I remain confident that we will be back to sustainable high single-digit growth and double-digit operating profit growth in fiscal year 2027. For this March and the June quarters, we expect to continue our portfolio management process and maintain mid-single-digit growth across our RCS business as we go through that portfolio management. This software business, this RCS business remains a key synergistic enabler of our sleep health and breathing health business, particularly through Brightree in the Americas and through MEDIFOX DAN in Germany, and it remains a core part of our long-term growth strategy. During the quarter, we also continued to drive operating leverage. Our global supply chain team delivered 310 basis points of year-over-year gross margin expansion, incredible result. These results, along with our disciplined approach to business investments in both R&D and SG&A translated to another quarter of strong mid-teens earnings per share growth. A huge thank you to the entire ResMed global team for their ongoing commitment to serving patients across 140 countries worldwide. ResMed continues to build the world's leading digital health ecosystem, encompassing sleep health, breathing health and health care technology that's delivered in the home. Over the recent quarters, I've been highlighting 3 key themes: 1, that ResMed is an operating excellence machine and an innovation machine. 2, that ResMed is a compelling investment opportunity, especially amidst global macro uncertainty; and 3, that ResMed has an excellent free cash flow and a very strong balance sheet, and they both position us well to invest in the business as well as to return capital to our shareholders. So let me cover these 3 themes briefly in these prepared remarks. On the topic of operational excellence, I've shared with you ResMed's pipeline of margin improvement drivers. These efforts helped deliver 310 basis points of year-over-year gross margin expansion in the second quarter and 30 basis points of sequential gross margin expansion. We will continue to execute on these opportunities over the remainder of fiscal year 2026 and beyond. As I shared at a recent health care conference earlier this month, I have challenged our supply chain team to deliver double-digit basis points improvement in gross margin every year through 2030. I've also highlighted the evolution of our global manufacturing footprint. We're making very good progress on our newest U.S. distribution center in Indiana. We recently signed lease and started construction in that state, and we are on track to be up and running during calendar year 2027. Once this facility comes online, ResMed will be able to ship to around 90% of our U.S. customers in less than 2 business days. This is in addition to our recently announced expansion of our Calabasas, California plant, which doubles our U.S. manufacturing capacity. Ultimately, ResMed will be able to deliver the only made in America CPAP, APAP, bilevel and mask systems. ResMed remains an innovation machine. Our R&D investments in the next generation of market-leading masks, cloud-connected medical devices and digital health care software position us to keep delivering the world's smallest, quietest, most comfortable, most connected and most intelligent therapy solutions for sleep apnea and expansions into insomnia, respiratory insufficiency and beyond. We recently launched the F30i Comfort as well as the F30i Clear range of masks. These are the first compact full-face fabric masks available from ResMed. And they're in select key markets now, and we will continue to roll them out around the world as we get regulatory approvals. Patient and provider feedback on these new fabric masks has been incredibly positive. It's still early days into the launch, but we expect strong adoption of these masks over time. These latest variants expand ResMed's AirTouch portfolio of fabric-based mask offerings, which not only deliver advanced comfort, mobility and interchangeability for patients, but they also change the basis of competition for masks and for ResMed. Artificial intelligence is another vector for our product innovation. At ResMed, we view AI as a resource that will amplify and personalize care. Last quarter, I talked about our limited beta launch of Comfort Match, an AI-enabled comfort setting recommender within the myAir software platform. This is ResMed's first FDA-cleared AI-enabled medical device. Comfort Match is intended to help people become more confident and more comfortable with CPAP, APAP and bilevel therapy. What I expect to see is having an AI algorithm that is effectively a sleep coach to help you start therapy that can really help you improve not just short-term adherence, but also long-term adherence as you get used to therapy. There are a bunch of comfort settings on these devices and many people do not adjust them. With help from AI, we think this technology will unlock decades worth of comfort features that have been underutilized by consumers and patients alike. Moving on to ResMed's SG&A initiatives and investments. We remain focused on demand generation, demand capture and demand curation as critical components to our long-term growth. We continue to drive selected targeted direct-to-consumer campaigns to build sleep apnea awareness as well as to drive ResMed brand awareness globally and to drive patients into the funnel. This past quarter, we supported various holiday-related campaigns. We focused on 11/11 or Singles Day in China, and we also had some promotions around Christmas holidays and Black Friday within the U.S. markets. I can tell you, we've successfully encouraged consumers to give the gift of great sleep, and we highlighted our portable travel AirMini device, which is lightweight and compact size as perfect for travel, and we had good success in the December quarter. We also are driving awareness in the clinical community. Earlier this year, we expanded our offering of Continuing Medical Education or CME programs that review sleep medicine guidelines, including the benefits of gold standard CPAP, APAP and bilevel therapy. It's the frontline treatment for any patient diagnosed with sleep apnea, and we're educating PCPs around the U.S. on this fact. To date, these CME programs have been completed nearly 60,000 times. That's a 50% increase from our first quarter 2026 earnings call numbers that we shared with more than 35,000 unique clinicians completing the CME training. That demonstrates that actually many of these health care providers have taken multiple courses, so not just sleep 101, but sleep 201, sleep 301. Surveys at the end of these courses now show 77% of these providers intend to change their clinical practices related to sleep apnea and sleep health and breathing health based on what they learned. On the clinical research front, we continue to stay abreast of important studies that highlight evidence of sleep health and how it impacts the body and the brain and overall health. One important area of analysis is the link between sleep apnea and sleep health and brain health. A recent study published in JAMA Neurology looks at a cohort of more than 11 million U.S. veterans, where researchers found that Obstructive Sleep Apnea, or OSA, was associated with a higher incidence of Parkinson's disease over time. The authors of the study also found that early treatment of OSA with CPAP may reduce the risk of developing Parkinson's disease in the first place. The study's findings align with prior evidence linking OSA with cognitive disease, gait instability and fall risk. Growing evidence also now shows that OSA may meaningfully alter dementia risk. Adherence to CPAP appears to counteract several of the biological pathways that link disrupted sleep to neurodegeneration. A large cohort studies have shown that untreated moderate to severe OSA increases the likelihood of developing dementia by 30% to 45%, while patients who remain adherent to positive airway pressure therapy experienced substantially lower risks and rates of Alzheimer's disease and cognitive decline over time. Mechanistic studies reinforce this signal. CPAP use has been shown to partially restore lymphatic clearance as well as the brain's oversight waste removal system that becomes impaired during OSA, and this reduces a key Alzheimer biomarker. Even short-term CPAP adherence around 5 hours a night can improve memory, attention and executive function in older adults with mild cognitive impairment, suggesting that consistent early intervention with CPAP may help stabilize some cognitive trajectories. Watch this space for more on this front between sleep health and brain health. It's increasingly clear that treating OSA, getting on, staying on CPAP, APAP and bilevel has implications to brain health as well as cardiovascular health, diabetes health and beyond. In fact, it is literally a matter of life and death. Research published last year in the Lancet Respiratory Medicine Journal found that CPAP therapy significantly reduces the risk of overall death for people with obstructive sleep apnea. More specifically, this study showed that CPAP therapy lowers the overall chance of dying by 37% and the chance of heart-related or cardiovascular-related death is reduced by 55%. The study, which analyzed data from more than 1 million sleep apnea patients worldwide, underscores the importance of consistent CPAP therapy for improving survival outcomes in OSA patients. So this therapy saves lives, but also improves quality of life. We're also excited to announce that our medical affairs team has launched the ResMed Science of Sleep Apnea Advisory Group, bringing together leading external physicians in various specialties from around the world to provide strategic clinical and scientific guidance to our innovation efforts. Watch this space for results of their work. Before I move on, I'd like to spend a minute on our latest real-world evidence that we shared during a recent health care conference. As you know, we've been tracking claims data now reflecting more than 1.95 million patients. What we've consistently seen is patients, who have scripts for both a latest generation GLP-1 or GLP-1 and CPAP prescriptions are 10% to 11% more likely to start their CPAP therapy than patients who only have a script for CPAP. These patients that have a combined script, they are also 3% more likely to have a resupply event at 1 year, meaning they're buying a new mask, a new accessory of some type, a hose, filter and beyond. But that doubles, and we see more than 6% likelihood to have a resupply event at 3 years. This is the first time we had 3-year data to share, and we shared that. It's encouraging to see that the motivation of these patients lasts and even accelerates over time. Ultimately, what we're finding is patients on a GLP-1 get on CPAP more and stay on CPAP therapy longer. Even as we've continued our investments in both R&D and SG&A, ResMed again delivered strong operating profit growth in the first quarter. Indeed, ResMed remains a compelling investment opportunity amidst global macro uncertainty. That's my second key message I'll spend a couple of minutes on and then get to Brett and we'll get to the Q&A. We continue to closely monitor the global trade environment and the evolving regulatory landscape. As you saw in December, CPAP, APAP and bilevel products are not included in CMS' upcoming competitive bidding program. That's the first time in 15 years that's happened, and we're very happy that, that result, we think, will be great for not just U.S. citizens and Medicare recipients, but also for our HME partners and the overall sleep health and breathing health industry. Also, because ResMed's products are used to treat patients with chronic respiratory disabilities such as obstructive sleep apnea and respiratory insufficiency, they've been subject to global tariff relief for decades. This relief has continued in the context of prior Section 232 investigations, and we expect it to remain true no matter what the result of those types of investigations are for medical supplies announced in the late September investigation that's currently underway. So the so-called Nairobi protocol we see in play. We are fortunate to be able to remain fully focused, therefore, on executing on our 2030 strategy, including delivering value to all of our constituents. ResMed remains a very strong free cash flow generation machine. We have an incredibly robust balance sheet, and that provides us with significant flexibility to both invest in our business and return capital to shareholders. This is my third and final key message here. We'll continue to selectively invest in our digital sleep health concierge capabilities, including screening tools, clinical tools, seamless workflows and cloud connected pathways. We'll be looking to expand and speed up the diagnostic funnel to keep up with new patient flow and even accelerate it over time from our own ResMed demand generation efforts. The greater awareness of sleep apnea generated by big pharma medications as well as the consumer wearables from big tech are capable of driving growth of patients into our funnel, if ResMed does the work of curating and helping those patients find a pathway. As I said at JPMorgan earlier this month, I'm predicting that at least 1, 2 or 3 of these wearable companies will follow Apple Watch and Samsung Galaxy Watch to develop and launch sleep apnea detection capabilities that have passed through the FDA workflow. So watch this space on that. So with both big tech and big pharma bringing people into the funnel and primary care education from ResMed driving like never before, we need to be prepared to address this ongoing and growing awareness of sleep apnea as well as other sleep health and breathing health disorders. I spoke a few minutes ago about our CME courses. I also talked about some of our ongoing product innovation, such as our newer fabric masks. You've seen our prior acquisition of companies like VirtuOx and the Nidal product from a company called EctoSense as well as Somnaware, which is the software for pulmonary and sleep medicine physicians. Ultimately, through this M&A and organic developments, we're expanding the ecosystem to help people quickly and swiftly move from sleep apnea awareness through testing all the way to being diagnosed and treated and adherent on our therapy for life. With investing going back into our business is our absolute first priority for capital allocation. We invest over 6% to 7% of our revenues in R&D and 19% to 20% in SG&A. But we're also returning capital to shareholders through dividends, and we've been increasing those, and we've added an increase to our share repurchases. During the second quarter, we returned another $263 million to our shareholders through our quarterly dividend and our $175 million in share repurchases. I noted at JPMorgan earlier this month that we are increasing our share repurchases to more than $600 million for fiscal year 2026. We picked up the pace of our share repurchases in the second quarter, and we'll continue to deploy meaningful capital through our share repurchase program. Quarter-after-quarter, ResMed has and will continue to demonstrate an ability to consistently deliver both financially and operationally. We've established a leading market position globally in underpenetrated markets, and we still have a very long runway of growth ahead. We're in mile 1 of the marathon. This underpins our confidence in our ability to deliver for consumers, for patients, for physicians, for providers, for payers and for our communities that we serve. And of course, to all of you listening here, our shareholders. With that, Brett, I'll hand over to you to go into a deeper dive on our financials, and then we'll open up the floor for your questions. Brett, over to you. Brett Sandercock: I dropped off the call. Michael Farrell: Why don't you speak through Teams and then you can -- we can get you live here. If you just speak through Teams, Brett... Brett Sandercock: Brett Sandercock, I'm in the ResMed call I'm about to speak. Could you get me on, please? Brett Sandercock. Kevin, how are you? Sorry about dropped out, but I'm back now. I'm ready to go, Mick? Michael Farrell: Okay. Brett Sandercock: Right. Great. Thank you, Mick. In my remarks today, I will provide an overview of our results for the second quarter of fiscal year 2026. Unless noted, all comparisons are the prior year quarter and in constant currency terms where applicable. We had strong financial performance in Q2. Group revenue for the December quarter was $1.42 billion, an 11% headline increase and 9% in constant currency terms. Revenue growth reflected positive contributions across our device and mask portfolio and our software business. Year-over-year movements in foreign currencies positively impacted revenue by approximately $25 million during the December quarter. Looking at our geographic revenue distribution and excluding revenue from our residential care software business, sales in U.S., Canada and Latin America increased by 11% other regions increased by 6% on a constant currency basis. Globally, on a constant currency basis, device sales increased by 11%. Masks and other sales increased by 14%. Breaking it down by regional areas, Canada and Latin America increased by 8%. Masks and other sales increased by 16%, reflecting continued growth in both resupply and new patient setups as well as incremental revenue from our VirtuOx acquisition, which we acquired in Q4 FY '25. In Europe, Asia and other regions, device sales increased by 5% on a constant currency basis and masks and other sales increased by 8% on a constant currency basis. Residential care software revenue increased by 5% on a constant currency basis in the December quarter, underpinned by robust performance from our MEDIFOX DAN software vertical, partially offset by ongoing challenges in our senior living and long-term care vertical. During the rest of my commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our second quarter earnings press release. Gross margin was 32.3% in the December quarter and increased by 110 basis points year-over-year and by 30 basis points sequentially. The year-over-year increase was primarily driven by component cost improvements and manufacturing and logistics efficiencies as well as a modest positive impact from foreign currency movements. Our supply chain team continues to work and make progress on our pipeline of gross margin productivity initiatives, and we remain focused on making sustained long-term gross margin improvements. Looking forward and subject to currency movements, we now expect gross margin will be in the range of 62% to 63% for fiscal year 2026. Moving on to operating expenses. SG&A expenses for the second quarter increased by 15% on a headline basis and by 12% on a constant currency basis. The increase was primarily attributable to growth in employee-related expenses and marketing and technology investments as well as additional expenses associated with our VirtuOx acquisition. SG&A expenses as a percentage of revenue increased to 19.6% compared to 18.8% in the prior year period. Looking forward and subject to currency movements, we still expect SG&A expenses as a percentage of revenue to be in the range of 19% to 20% for fiscal year 2026. R&D expenses for the quarter increased by 12% on a headline basis and 10% on a constant currency basis. The increase primarily reflects increases in employee-related expenses. R&D expenses as a percentage of revenue increased to 6.4% compared to 6.3% in the prior year period. Looking forward and subject to currency movements, we still expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% for fiscal year 2026. During the quarter, we recorded a restructuring-related charge of $6 million, reflecting the finalization of our global workforce planning activities, which we initiated in the first quarter of fiscal year 2026. Restructuring charges were comprised of employee severance and other onetime termination benefits. The restructuring charge has been treated as a non-GAAP item in our second quarter financial results. Operating profit for the quarter increased 19%, underpinned by revenue growth and gross margin expansion. Our operating margin improved to 36.3% of revenue compared to 34% in the prior year period. Our net interest income for the quarter was $8 million. Our effective tax rate for the December quarter was 21.1% compared to 18% in the prior year quarter. As we previously noted in our Q1 earnings call, the increase in our effective tax rate was primarily due to the impact of global minimum tax legislation introduced in certain jurisdictions that became effective from July 1, 2025. We still estimate our effective tax rate for fiscal year 2026 will be in the range of 21% to 23%. Our net income for the December quarter increased by 15% and diluted earnings per share increased by 16%. Movements in foreign exchange rates had a positive impact on earnings per share of approximately $0.04 in Q2 FY '26. Cash flow from operations for the quarter was $340 million, reflecting strong operating results, partially offset by increases in working capital. Capital expenditure for the quarter was $29 million and depreciation and amortization for the quarter totaled $50 million. We ended the second quarter with a cash balance of $1.4 billion. And at December 31, we had $664 million in gross debt and $753 million in net cash. We have approximately $1.5 billion available for drawdown under our revolver facility. We continue to maintain a solid liquidity position, strong balance sheet and generate robust operating cash flows. Today, our Board of Directors declared a quarterly dividend of $0.60 per share. During the quarter, we purchased approximately 704,000 shares under our previously authorized share buyback program for consideration of $175 million. We plan to continue to repurchase shares for a total value of more than $600 million for fiscal year 2026. In addition to returning capital to shareholders through a dividend and share buyback program, we will continue to invest in growth through R&D and tuck-in acquisitions. And with that, I will hand the call back to our operator, Kevin, for Q&A. Operator: [Operator Instructions] Our first question today is coming from Jon Block from Stifel. Jonathan Block: Great. Thanks, guys. Appreciate it. Really strong U.S. mask number, I think it was 16%. Maybe if you could just help us out a little bit. Was that -- we're counting roughly a 400 basis point benefit from VirtuOx when you think about that? And then Mick or Brett, any movement or stocking, if you would, from F30, relatively new, good reception. So should we calibrate any sort of benefit or stocking from that dynamic? And then if I could ask a follow-up. Michael Farrell: Yes. I'll go first, Jon, and then hand to Brett to go through the -- with and without VirtuOx. As you said, the mask, accessories and other does include some contributions from the VirtuOx part. And so even taking that out, though, we had very solid growth. I'd say -- I'm going to say double-digit growth in our masks and accessories in the U.S. even taking out VirtuOx. And so really, really solid. Look, yes, I think when we launch a new mask, it can have some good cycles. Our channel doesn't tend to really stock ahead of demand. They tend to buy when a new product comes and they start to see demand, buy more. I can tell you that the new F30i Clear and particularly for me, the F30i Comfort, which has fabric, not just at the nasal interface, but also around the headgear that goes around the head. I think this is changing the basis of competition and I think we're going to see some really good adoption of these masks over time. Obviously, we also have the high deductible health plans and health savings accounts, which are a factor in the U.S. market as they clear at the end of the December there as well. So we will have some seasonality associated with that, I'd say. But Brett, anything to add there specifically to the numbers that Jon mentioned on with and without VirtuOx? Brett Sandercock: No, I think you covered it pretty well, Mick. Even without VirtuOx, it's still double-digit growth, so still really strong. And we had a -- VirtuOx had a really good quarter as well. So across the board, and there's probably -- I think we'd see some seasonality impact from that. I think you're right, Mick. And the early -- I think early days for the mask launches, but off to a good start that's kind of not as bigger impact necessarily, but it's certainly there. It's incremental, I think, really on the new fabric masks. Operator: Our next question is coming from Anthony Petrone from Mizuho Group. Anthony Petrone: Congrats on an excellent quarter here. Maybe, Mick, you gave an update on just the GLP-1 landscape here, the claims data, obviously, holding solid here on the attach rate for CPAP post starting GLP-1 therapy. We now have orals out there, and it's been almost a year, since the initial clearance. Maybe just an update on the impact to the front end of the funnel more specifically in the latest channel checks that we're hearing is that this indeed is actually bringing more patients in and it's resulting in a high CPAP attach rate. So maybe walk through that dynamic a bit and how you see that playing out the rest of the year. Michael Farrell: Yes. Thanks, Anthony. It's a really good question. And as you noted, we're now tracking 1.95 million patients in our claims data analysis there, and that shows that 10%, up to now, 11% higher start rate. So at the top of funnel, as you mentioned, there's just a really -- I would say a motivated patient group. We don't fully understand the psychology. We see the correlation, don't know the causality. But our assumption as we do our channel checks, talk to the doctors, talk to the pulmonary doctors, then the primary care physicians, who are starting to see the patients brought in by GLP-1s, and they're saying these are motivated patients. And so I think that's what gets us at the top of funnel, that sort of inspiration to come back into the health care system with this new class of medicines, whether it's the injectables or the pill, which will go broader market. But then the interesting part, and the new data this quarter is the 3-year data showing a 6% higher, I think, 6.2% higher resupply rate at 3 years. And so this impact it seems to be not only a motivated patient when I show up to the PCP or the pulmonary doc, but that motivation seems to last a long time. And as Carlos Nunez said, Dr. Carlos Nunez is on the stage at the Healthcare Conference earlier this month, it seems to stay -- motivation for our therapy even longer than the motivation for the other therapy. So whether or not they stay on the GLP-1, where the adherence rate often is only 30% or 40% at one year, they're more motivated on our therapy over the long term. So we're watching it very closely. We've now got 3 years of data. We'll continue to watch that. But to your point, it does bring more patients in. They are more motivated and your channel checks confirm what we're hearing with our sleep doctors that this is bringing people in. And now with the primary care doctors, they're getting motivated to get trained, 60,000 CME trainings and many of them are saying 77%, I'm going to change what I do on my screening, referral and pathways and so on, and we'll be there to help them with VirtuOx and all these virtual pathways, we'll also support our pulmonary physicians in our HME industry to scale to the flow that we need to deal with this increased demand. Operator: Our next question is coming from Dan Hurren from MST. Dan Hurren: A question for Brett. Can I just ask about the SG&A. The SG&A growth is uncharacteristically ahead of revenue growth. I'm just wondering if there's any transient expenses in there as you settle these acquisitions? Or is this a rebasing higher with promotional activities in sales force, et cetera? Brett Sandercock: Yes. I mean, there was some impact from the VirtuOx acquisition, Dan. So that -- if you excluded that, you'd get -- we would be at high single digits for SG&A growth. So tracking pretty close on revenue growth. But as Mick mentioned in his remarks, we're also doing some around -- some marketing programs and we've done, for example, China, Singles Day and things like that. So there's some promotions we ran during the quarter as well on that. So overall, if you look at more underlying, it's more tracking to kind of revenue growth on that, I think. Operator: Next question is coming from Laura Sutcliffe with Citi. Laura Sutcliffe: Another one on the patients funnel, if I can, please. Which sort of areas or stage is the patient funnel from -- all the way from an initial visit to a PCP through to their first night with a ResMed device do you think you've had the most impact on in the last couple of years? And where do you think there's most work left to do? Michael Farrell: Yes. Thanks, Laura. It's a great question. It's a complex one because that funnel, obviously, we map every single decision process and step along it from consumer, sleep-concerned consumer, considering diagnostic then prescription therapy and then therapy for life, year one and year x, right, year-end. So I would say the most progress we've made is probably in the top of the funnel area. I think we are being given some I would say, without having to pay for it some extra awareness from big pharma in bringing patients into the funnel with their GLP-1 medicines. They're spending a lot of money on direct-to-consumer advertising with Zepbound and other products to follow. So that brings patients in. And then from big tech, the fact that your Apple Watch or Samsung Galaxy Watch and -- as I predicted at least one more of the others, Whoop, Garmin, Oura Ring, Ultrahuman, someone else is going to add that in. That brings patients in too. So that top of funnel, I think that's moved a lot. Our challenge at ResMed is to partner with our channel to say, "Can we scale home sleep apnea testing?" And so that's why we bought Ectosense, and we have the NightOwl out in the U.S. That's why we bought VirtuOx, which is a home sleep apnea testing service company to help primary care physicians and pulmonary physicians with a very efficient home sleep apnea testing service. And then you saw us buy Somnaware, which is software that can help a pulmonary or sleep clinic be more efficient and more capable. So really focusing on expansion of that top part of the funnel. And then, of course, we're partnering with our HME customers to say, "How can we help you grow?" Now that we're not in competitive bidding, CPAP, APAP, all out, there's no distractions, let's grow our businesses together. And so we're helping them understand how to scale their setup process, to run their business more efficiently with Brightree so that they can cope with the greater flow of patients through the funnel. And I've said this publicly, I don't think this is going to be like some crazy doubling of growth rates of devices in the U.S. But you certainly can see in the numbers we reported today that there is some good improvements there. And I think if the market is growing at mid-single digits on devices and high single digits on masks, we clearly drove extra market growth and/or took share this quarter. And it's our goal to do that every quarter. Will we do it every quarter? No, but will we try? Absolutely. And as Brett said, we invested in some of these programs on Singles Day in China and some D2C work around the holidays in Australia, New Zealand, Korea, Singapore and even in the U.S., we make sure there's an ROI to every program. And if there is, we continue with it and if there isn't, we stop and then reevaluate and try another program. And so watch this space. There's no particular area, Laura, but I would say that top-of-funnel, middle of funnel is the area we're laser focused on now because once they've got that prescription, we are a machine at getting that 87% adherence with our technology at day 90 and keeping them on therapy for life. And also the symptom relief that you get from CPAP keeps them there as well. Thanks for the question, Laura. Operator: Next question is coming from Lyanne Harrison from Bank of America. Lyanne Harrison: I'd like to come back to Anthony's questions on GLP-1. Obviously, you're tracking a lot of patients now and you've got 3 years' worth of data. But with the GLP-1 prices coming now in pill form, we expect more people be on GLP-1 for longer. Are you seeing any changes in compliance or therapy for those GLP-1 OSA patients in the cohort you're tracking who have been with you for 3 years now, in particular, those who have mild or moderate sleep apnea? Michael Farrell: Yes. Thanks for the question, Lyanne. And look, we have those aggregate numbers that we shared. And clearly, at 3 years, we see more purchases. And so these people are motivated and buy more from us. To your specific question of tracking individual patients and where they go through this therapy, what we're finding is patients who have this therapy, even if they have so-called mild to moderate sleep apnea and their AHI might be reduced somewhat. The symptomatic relief that they get from CPAP, APAP, bilevel, you never really -- you don't cure this disorder by lowering your AHI. You can mitigate some of its severity. But what we're finding is the symptomatic relief and the care that patients have on therapy is such that they stick on our therapy full life. The side effects of these medicines are in the early stages, nausea, diarrhea or in some aspects, you have to get used to GLP-1 medicines. For CPAP, it's the opposite. You have symptomatic relief, your bed partner says, "Wow, you stopped snoring. We can now sleep here in the same room together. The sleep divorce is over." We have aspects of the patient themselves, but they wake up refreshed in the morning versus morning headaches. They're not tired in the afternoons at their jobs are in front of the television and movies with friends. And so that symptomatic relief and change of life is very addictive. So even if patients go from an AHI of 40 to 20 or 20 to 10, they are sticking with therapy. And it's out there in those aggregate numbers. But we're actually looking and we'll do case studies around people where the combination therapy which, by the way, was shown in Lilly's SURMOUNT-OSA study to be the best outcome in their own analysis, is one that we would encourage. Weight loss and treating your sleep apnea has always been part of the care of pulmonary doctors. They now have a new injectable/pill to cover with weight loss versus just eat less and exercise more. So it's a combination of all of the above that's leading to these numbers. But yes, no, we're looking at our adherence on the short, medium and long term, not seeing any reductions and particularly within this cohort of patients, we're actually seeing patients that are more adherent to therapy, more motivated to start and stick with therapy. So watching very carefully, but the thesis that this could be a headwind is completely gone. It's a tailwind. And the question is now, how much of a tailwind will it be? How many PCPs can we educate to get combination prescriptions. And when are patients on therapy, how can we meaningfully engage with them, so they stay adherent for life. And we're having good success with this new cohort of patients. Thanks for the question, Lyanne. Operator: Next question is coming from Matt Taylor from Jefferies. Matthew Taylor: Mick, you actually sort of led into what I wanted to ask about, which is you've given a lot of positive stats about how GLP-1s are helping the funnel and your business. I guess I was wondering if you tried to quantify that now with some of the data that you have. Could you help us understand how much of a tail end it is now or it could be in the future? Or if they didn't exist, how much would you be growing? Would it be a material difference? Michael Farrell: Yes, Matt, it's a really good one that we're wrestling with internally to go from the macro and claims data down to the individual. How many basis points -- to your point, how many basis points of that really good U.S. devices growth in the quarter was 8%. How much of that was driven by big tech and Apple and Samsung identifying someone that came to a PCP versus big pharmas advertising a new injectable or pill that brought someone into PCP, so they got the referral to the specialists and prescription. And we've got a lot of that macro data. We also, through myAir, we now have 11 million users of myAir. And obviously, on a voluntary basis, every person who signs up to myAir can tell us how did you hear about sleep apnea? Was it your bed partner? Was it snoring? Was it a big pharma? Was it a GLP-1? Or was it big tech? Was it a wearable? And so we're asking those questions and we're getting early data. We're not prepared to publicly talk about it yet. But I can tell you that it is a contributor, and it's one that we are working very carefully to quantify and also to work out how we can continue to scale with to make sure that our funnel, the primary care physicians, the home sleep apnea testing capabilities, the prescription capabilities of a sleep doctor. Sleep Doctors are very busy. They have a long waiting lists, how can we help them with Somnoware and Brightree to better manage their practice and their DME if they have that part. And then for our DME customers to really help them scale. We're seeing a great demand for Brightree and its ability to lower costs and improve outcomes. And although we are completely out of competitive bidding, our HMEs have other products that are in there. So the more costs we can help an HME take out of their business with Brightree and then we'll resupply, we can help them drive to where a patient wants that new mask or accessory. That's what's going to get us to where we need to be. So yes, thanks for the question, Matt. We are quantifying it, not yet ready to sort of release that. But we may peer review and publish some evidence on this through a scientific part of our business to really get it out there in the peer-reviewed press, and then I can start to talk about it publicly. But it is a contributor, and we'll quantify it over time. But really excited to have this moment, if you like, sleep health is having a very good moment in health care right now, and we're leveraging that. Operator: Your next question today is coming from David Bailey from Morgan Stanley. David Bailey: One of the most frequent questions we get is the potential return of Philips back into the U.S. device market. Just thoughts on any potential timing of that reentry to the extent you've got any thoughts there? Are there potential impacts? And where they have reentered your observations in relation to the competitive dynamics, that would be great. Michael Farrell: Yes. Thanks for the question, David. And I'll just default to what that company's CEO said at a conference earlier this month and what their CFO said at a conference I was at the quarter before, which is they don't know. So if they don't know, then I don't know. But -- and frankly, I don't really look back to the #2, 3 or 4 competitor, which that company is in the various markets, 140 markets we compete in. I look forward to say the last 5 questions, how do we deal with this new flow of patients in. I can say this, though, they're backing over 100 countries in Europe, Asia, Rest of World, and some they've been back for 12, 18, 24 plus months so we've lapped it multiple times in these quarterly calls. And I don't know if you looked into the Europe, Asia, rest of the world device growth in the quarter, pretty solid. They're at 5%, like right in line with market, maybe a little demand gen that we're driving. We're holding share and competing well with that competitor. But more importantly, frankly, in some of those regions, other competitors that have taken that #2 spot that, that competitor you mentioned has to fight with to get back to #4, #3 and even #2 space. So I welcome competition. I think competition is fantastic. I'm not fearful at all about that player that we're going to be making products that I think go in Thailand now and shipping them to the U.S. and Europe. I look forward to that. I think we've got a better product. It's smaller. It's quiet. It's more comfortable, it's more connected and it's more intelligent. And that ecosystem, what we developed with myAir and AirView and Brightree, that ecosystem is very hard to match and none of our competitors really can compete across the board on that. But no, I have no idea of the U.S. devices entry, but they've been in the U.S. for masks and accessories these last 20 quarters, and we've been competing very well against them and meeting and beating their growth and taking share when that's all they could sell in that market. I'm very happy to have them back Monday morning or next year, and it really won't affect us in terms of how we grow to the market. They'll have to fight to get that #3 or #2 position from another player that took it, and we welcome that competition. Thanks for the question, David. Operator: Next question is coming from Davinthra Thillainathan from Goldman Sachs. Davinthra Thillainathan: It's good segue to my question, Mick, on the question about devices for the ex-U.S. markets, sort of 5% constant currency growth. Could you sort of help us understand that growth a little bit better. Clearly, it's a market that is quite lumpy. Was there any sort of pull forward of demand that have been in the previous quarters that sort of weighed on the growth this quarter? How do we think about, I guess, some of the demand generation activities that you are doing? Michael Farrell: Yes. No, it's a really good question. And look, I think 5% growth across Europe, Asia, Rest of World is very solid in where we're at and it's in line with market. There were some -- if you take this quarter a year ago, there was some lumpiness from our Japan market, where it's kind of a fleet management market, and there was sort of increased purchases of devices in the Japan market. But look, the way I look at it is we've got 140 countries we sell in across there. Our job the portfolio of managing all of those is to continue to grow across them. And I think our teams did very well. There were some good promotional work that we did in China and Korea and Australia and New Zealand markets that can help that market and not just in the December quarter, but that's a particularly good one for D2C markets with the holidays and Airmini particularly. But yes, there was some lumpiness in the year before. But look, there are no excuses. Markets are growing mid-single digits. Our team has to grow mid-single digits in devices and high single digits in masks. And I'm very proud of our EMEA and APAC teams that they delivered in the December quarter. And now they're on to March and June, and we'll continue to deliver. And our goal really is to across those 140 countries, emulate our best approach to help be that digital sleep health and breathing health concierge and drive patients in the funnel and through the funnel for their best path to get to therapy. Brett, anything to add on that for Europe, Asia, Rest of World devices? Brett Sandercock: No, we're pleased with that result. And the only thing I'd say is that the prior year comp that you mentioned, Mick, was 9% last year. So it was very strong comparable. But overall, I think -- yes, no, pretty solid, pretty happy with it. Operator: Your next question is coming from Brandon Vazquez from William Blair. Brandon Vazquez: Mick, I wanted to ask, it's been a little bit over a year now that you started kind of stepping up the investments within the PCP channel. Talk to us a little bit about what are you seeing from that channel? How excited are you about it? And what can it mean for growth on the devices side? And what kind of metrics should the investors be looking for as maybe like positive ROI on these investments within the PCP channel? Michael Farrell: Yes, Brandon, it's a great question. Yes, in the prep remarks, I talked about the 60,000 trainings we've done on CME with PCPs or GPs as they're known here in Australia and Europe. What's exciting for that -- for me is that, I mean, it was the #1 downloaded PCP training in the last quarter. And it was up 50% just in the quarter. That's a metric on a very leading indicator, but it's a metric you can think about, which is what's the demand for knowledge about this. A primary care physician, they've got a tough job, they got to do with everything from headaches to [ tenure ], head to toe, every complication. And in general, particularly in the U.S. market, they've got very little time. I think it's on average 5 to 7 minutes with a patient on an annual basis. And that's -- and they've got to assess everything. And so the fact that we can get sleep health on their radar, but maybe a pharma company has told them come in and ask for an injectable that might help with your sleep health and then -- and your breathing health. And then they come in and talk to the PCP. If they've done our education, that PCP knows where to send a patient to a home sleep apnea testing protocol. They know what is gold standard CPAP, APAP and bilevel, the only therapy that can completely eliminate your AHI back to zero, if used perfectly and as directed. And they know what the backup plan is on dental and the backup to the backup plan, which is a pharma solution. And they're writing prescriptions. And so it's happening. As I said earlier, we're not yet quantifying exactly how much that we are seeing that comes through PCPs or from referrals of big pharma and big tech into PCPs versus that are coming sort of organically through our demand generation that we're driving or through the general organic demand that we've seen over the last decades in our space. But we are investing in this PCP channel. We're going to continue to invest in education. What I love about doing it is CME education is it's pure. It's true. Yes, it has the ResMed brand on the last page, we get a little bit there. But it's all done according to the American Academy of Sleep Medicine guidelines. So it's in line with what the doctors are saying on those guidelines, and it just helps the PCP say, "Okay, here's the pathway and here's what I should do." And look, many of you of the sell side here are doing channel checks and talking to everyone. Even ENT surgeons are saying, "No, gold standard, of course." Even though they make money from doing the surgery, they're saying gold standard is this noninvasive, completely reversible incredibly effective positive air pressure therapy. So we're seeing that. The PCP is not, and it's just helping them find a pathway. So here's a screening protocol. Here's a home sleep apnea testing service. And here's a referral pathway to a specialist and a DME, that's going to take care and get very high adherence for you, and you'll get the update on the next physical with this patient through a digital platform into your Epic or your Cerner or your Allscripts, whatever you use because we have API calls going in and out hundreds of times a second into and out of our AirView system to the doctor systems. Thanks for the question, Brandon. And we'll continue to update you on those leading metrics for PCP education and more as we get more comfortable sharing across that new channel that we're developing. Thanks for the question. Operator: Next question is coming from Nathan Treybeck from Wells Fargo. Nathan Treybeck: Great. Congrats on a great quarter. Are you seeing anything that would suggest that U.S. mass strength that you saw in fiscal Q2 will persist at that level into the second half of the year? Michael Farrell: Yes. Thanks for the question, Nathan. Yes, I mean, U.S. markets, accessories and other growth was 16% in the quarter and incredible performance from our U.S. and broader Americas team. Look, I mean market growth is in the high single digits. So we don't expect to outperform by whatever. If you take 9% as high single digit by 700 basis points every quarter. And as Brett said earlier, there was some contribution from VirtuOx, on that accessory side. So even taking out that -- and we've had double-digit growth in VirtuOx, by the way, which is great and does feed the core business in new patient flow. But even taking out VirtuOx, we're still in the high single -- we're still in the double digits. So still beating the high single-digit market growth. And so what do we do? Well, we have promotion campaigns. We talk to people about getting a new mask, and we engage with people through Brightree, through myAir and through our DME partners. And in other parts of the world, we did this as well. And so we're having some success with that. You can't do that every quarter, and you can't drive it every quarter, but I do think we can meet and beat that high single-digit growth of masks every quarter as we go meet and/or beat. And the beat is like this come where we get the brand ROI, we get the demand gen ROI and we have good promotional programs that play out there. So it's a portfolio management, it's a balance, and we're balancing our investments, I think, pretty well, 6% to 7% into revenue and 19% to 20% into R&D from revenue and 19% to 20% of revenue into SG&A, the sort of sales and marketing programs. And I think we're doing a very efficient job. And I can tell you, on the marketing team, now one global team is looking at the ROI of every single program down to the return on advertising spend, the ROI of that individual metropolitan statistical area, what program did we run? How did it go? And if it's profitable, of course, we'll continue to do it. If it's not, we stop and then rejoin. And so it's not perfect and smooth we won't outperform every quarter, but I'm really proud of the team and proud to report these numbers. And I challenged them to outperform every quarter. I just expect them to meet and/or beat that high single-digit growth, and they clearly beat it this quarter. Thanks for the question, Nathan. Operator: We have reached the end of our question-and-answer session. I'd like to turn the floor back over to Mick for any further closing comments. Michael Farrell: Well, thanks, Kevin, and thank you to everyone for joining us on our earnings call today on behalf of more than 10,000 ResMedians serving people in 140 countries worldwide. I'm pleased to say we're able to deliver another strong quarter of performance and continue to build value for all of our shareholders. We'll talk to you -- many of you over the coming days and weeks. And we'll talk to many of you right here in 90 days. And with that, Salli, I'll hand over to you to close out the call. Sallilyn Schwartz: Great. Thank you, Mick. I'll echo Mick's thank you to everyone for listening. We really appreciate your time and interest. If you have any additional questions, please don't hesitate to reach out directly to investor relations at resmed.com or anyone on the ResMed IR team. Kevin, you may now close out the call. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, and thank you for standing by. Welcome to the WM Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Ed Egl, Vice President of Investor Relations. Please go ahead. Edward Egl: Thank you, Olivia. Good morning, everyone, and thank you for joining us for our fourth quarter and full year 2025 earnings conference call. With me this morning are Jim Fish, Chief Executive Officer; John Morris, President and Chief Operating Officer; and David Reed, Executive Vice President and Chief Financial Officer. You'll hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update. John will cover our operating overview, and David will cover the details of the financials. Before we get started, please note that we have filed a Form 8-K that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release and the schedules in the press release include important information. During the call, you will hear forward-looking statements, which are based on current expectations, projections or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including the most recent Form 10-K and Form 10-Qs. John will discuss our results in the area of volume, which unless stated otherwise, are more specifically references to internal revenue growth or IRG from volume. During the call, Jim, John and David will discuss operating EBITDA, which is income from operations before depreciation, depletion and amortization. References to the Legacy Business are total WM results, excluding the Healthcare Solutions segment. Any comparisons, unless otherwise stated, will be with the prior year period. Net income, EPS, income from operations and margin, operating EBITDA and margin, operating expense and margin and SG&A expense and margin have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release and tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 p.m. Eastern Time today. To hear a replay of the call, access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on January 29, 2026, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of WM is prohibited. Now I'll turn the call over to WM's CEO, Jim Fish. James Fish: Okay. Thanks, Ed, and thank you all for joining us. We're pleased to report another year of outstanding results in 2025, including a record performance in operating expenses as a percent of revenue. This performance, combined with our disciplined approach to pricing, drove full year operating EBITDA margin 150 basis points higher in the Legacy Business. Strong operational performance translated to double-digit growth in cash flow from operations and nearly 27% growth in free cash flow. Our results highlight the strength and momentum we built in our business model through operational excellence, scaling sustainability businesses and integration of Healthcare Solutions. You've heard me talk about the strength of our collection and disposal business with our differentiated assets and the best people in the industry. All of these were on display in 2025 as we drove our best ever operating leverage in our collection and disposal business, reflecting the intentional investments we've made in our people, technology and fleet. Better frontline retention and a decreased average age of our trucks delivered improvements in labor and maintenance costs. Meanwhile, we continue to drive organic revenue growth from both price and volume. By using data and analytics, we're offering pricing that reflects the premium value of our service, our leading commitment to environmental sustainability and the strength of our asset network. It's our unmatched network, particularly our transfer and disposal assets that drove volume growth in 2025, more than offsetting the residential volume declines as we shed some low-margin business. In our Healthcare Solutions business, 2025 was a year of teamwork, focus and execution to build momentum to our integration. Our service delivery metrics and customer service scores have improved to levels above our Legacy Business. Customer call volume has been trending down, and the standardization and enhancement of customer-facing processes and invoices are all leading to rising customer satisfaction. Just last week, we received an acknowledgment from one of our largest Healthcare Solutions customers for the improvements we've made on invoicing, which is a great indicator of the significant progress we've made in the last year in our systems and back-office processes. At the same time, we continue to significantly reduce SG&A and operating costs, streamline our operations and greatly improve asset efficiencies. While there's still work to do, the progress we've made to date puts us in a good position to grow the earnings and cash flow from this business with a lean and efficient cost structure, a healthy pricing environment and new opportunities for volume growth through both cross-selling and market share expansion. On the sustainability front, we drove notable strategic expansion in our sustainability businesses. We commissioned 7 new renewable natural gas facilities, expanding our renewable energy network and further positioning WM as a leader in environmental sustainability. We completed automation upgrades at 5 recycling facilities and added facilities in 4 new markets, which are enhancing the performance of our recycling network and creating new opportunities with customers. The value of our recycling investments is clear, particularly when you consider our recycling segment delivered over 22% operating EBITDA growth despite nearly 20% lower commodity prices in 2025. This combination of operational excellence and strategic investment across our business has produced record margin performance and accelerated cash generation. As we enter 2026, we're well positioned to convert more of our earnings into long-term shareholder value. Turning to our outlook. We expect continued strong growth in the year ahead. Our guidance is for operating EBITDA growth of 6.2% at the midpoint or 7.4% when you normalize for wildfire cleanup volumes in 2025. Free cash flow is expected to grow nearly 30% at the midpoint, reflecting structural earnings strength and the benefit of our investments. As announced in December, our Board approved a 14.5% increase in the planned quarterly dividend rate in 2026, our 23rd consecutive year of dividend growth. We also authorized a new $3 billion share repurchase program. We plan to return about $3.5 billion to shareholders through dividends and share repurchases in 2026, representing more than 90% of free cash flow we expect to generate. We will continue to balance these returns with disciplined reinvestment, tuck-in M&A and a solid investment-grade credit profile. Looking ahead, our priorities are clear: first, growing the core business by leveraging our focus on customer lifetime value, operational excellence and network advantages; second, capturing and maximizing returns from our investments in our recycling and renewable energy businesses; and third, driving accretive growth in Healthcare Solutions as we take the business from integration to scalable growth. Finally, executing our disciplined capital allocation plan to deliver compelling long-term shareholder value. Our results reflect the hard work of our entire team who serve our customers with pride every day. Their commitment fuels our performance and sets the foundation for the opportunities ahead. In 2026, we will build this momentum strengthening the core, scaling our growth platforms and creating meaningful value for all our stakeholders. I'm incredibly proud of what we've accomplished and excited for what's ahead. And with that, I'll turn the call over to John to provide more detail on our operational performance. John Morris: Thanks, Jim, and good morning. WM delivered another fantastic quarter to close 2025, driven by disciplined pricing and continued cost efficiencies across the business. In the fourth quarter, operating EBITDA in our collection and disposal business grew more than 8% and operating EBITDA margin expanded by 160 basis points, supported by strong execution and the ongoing benefits of automation and technology across our operations. The strength in Q4 was driven by operating expenses as a percentage of revenue improving 180 basis points to 58.5%, marking our third consecutive quarter below 60%. And for the full year, our cost management is just as impressive. We finished 2025 at 59.5%, which is the first time in company history that operating expenses have come in below 60% for a year with each quarter of 2025 improving sequentially. As I said on Investor Day, we are fundamentally changing our cost structure through the investments we're making in our people, technology and processes. 2025 was a year we proved the change is real and durable, and we're well positioned to continue capturing these benefits for years to come. The improvement in operating cost was led by substantial improvement in repair and maintenance costs on both a dollar basis and as a percentage of revenue, driven by operational and fleet strategies that are yielding tangible benefits. Accelerated investments in new trucks over the last 3 years has improved our average fleet age, significantly reducing unplanned repairs and the need for third-party maintenance support. And at the same time, our disciplined focus on fleet optimization and a more streamlined maintenance model increased technician productivity and reduced reliance on rental units and external services. These structural improvements were complemented by enhanced route automation and resource planning tools that lessen wear on the fleet and improve overall asset utilization. Taken together, these initiatives reflect our strategic commitment to operational excellence and are driving sustained cost efficiencies that strengthen our performance. Our repair and maintenance costs were not the only cost category reflecting the strength of our operating model as we saw a similar story in labor. In Q4, labor costs improved as we continue to see benefits from our people-first culture across our frontline teams. Driver turnover reached its lowest level of the year at 15.7%, demonstrating our ability to sustain our meaningful improvements in frontline retention. We've implemented a people-centric approach to onboarding, training and accountability, which is improving retention, safety and operating efficiency while also reducing overtime hours and training needs. We also benefited from our connected truck platform, which gives leaders real-time visibility into sequencing, downtime and efficiency to help reduce labor dependency while improving service reliability. And it's also worth noting that our connected truck benefits are not limited to cost advantages as the technology enables rightsizing service levels and other revenue opportunities. These people, process and technology-driven improvements extend beyond our Legacy Business. And now that we've successfully integrated the Healthcare Solutions business into our existing field operations management structure, we expect to extend these improvements we've already seen in on-time service delivery, driver turnover, asset rationalization and network optimization. In both the Legacy Business and the Healthcare Solutions business, we are structurally lowering our labor cost base, strengthening day-to-day execution, enhancing service reliability and delivering continued opportunities for long-term operating improvements. Turning to the top line. We delivered another quarter of strong balanced growth. Pricing continues to be a strength for us with core price of 6.2% in the fourth quarter, not just because of disciplined execution, but because of our strong customer focus and the consistent value we provide to our customers. Our asset positioning at scale, service reliability and the investments we've made in technology and automation differentiate our service offering, which all support our pricing. And on the volume front, we've seen notable growth in 2025 in special waste, renewable energy and recycling. In residential collection, intentional shedding moderated in the fourth quarter, and we continue to drive operating EBITDA and margin growth. We anticipate steady residential volume improvement as we move through 2026. In closing, I'll close by thanking the entire WM team for their commitment and execution throughout 2025. We're entering 2026 with strong momentum, an optimized operating model and clear opportunities to continue delivering value to our customers and shareholders. And now I'll turn the call over to David to discuss our 2025 financial results and 2026 financial outlook in further detail. David Reed: Thanks, John, and good morning. Our 2025 performance demonstrates the meaningful progress we're making toward our long-term strategic goals. Operating EBITDA margin expanded 40 basis points to 30.1% for the full year, which is a result that overcame a 140 basis point margin headwind from the combined impact of the acquisition of the Healthcare Solutions business and the expiration of alternative fuel tax credits. This result significantly exceeded the margin outlook we provided at the beginning of 2025 as we outperformed our own high expectations for cost optimization in our Legacy Business and synergy capture in the Healthcare Solutions business during each quarter of the year. Normalized for these known headwinds I just mentioned, our Legacy Business delivered 180 basis points of margin expansion for the year. This was driven by 120 basis points of growth in the collection and disposal business from the benefits of price, cost optimization and improved business mix, particularly growth in landfill volumes and the shedding of low-margin residential business. Margin growth was also bolstered by a combined 60 basis points from lower commodity pricing in the recycling brokerage business, recycling automation benefits, the growth of our high-margin renewable natural gas business and the lower risk management cost. Cost optimization remained a central theme in 2025. SG&A expense for the Legacy Business was 9.2% of revenue for the full year, a 10 basis point improvement compared to 2024 as we continue to rationalize discretionary spending. Within Healthcare Solutions, we are making consistent progress in reducing SG&A expenses as we integrate and optimize the business. Fourth quarter 2025 Healthcare Solutions SG&A of 20.8% of revenue is a notable improvement of 350 basis points from the prior year period and a significant step toward our long-term ambition to get the SG&A of this business in line with the rest of the company. At 10.4% for the full year, it is clear that we are on track to get total company SG&A as a percentage of revenue below 10% in short order. Our strong execution translated into robust cash flow generation in 2025. Cash flow from operations grew more than 12% to $6.04 billion, and free cash flow reached $2.94 billion, an increase of nearly 27%. These results showcase our success in driving margin expansion and disciplined approach to capital investment. For the year, we spent just under $2.6 billion on capital to support the business and $633 million on sustainability growth investments. In 2025, we allocated $1.3 billion to dividends and paid down $1 billion in debt, reaching a leverage ratio of 3.1x. We expect to reach a leverage ratio within our targeted range of between 2.5 and 3x during 2026. We also invested more than $400 million in tuck-in acquisitions to expand our traditional solid waste and recycling footprint. Moving to the outlook. We expect operating EBITDA to be between $8.15 billion and $8.25 billion in 2026. This projection reflects an update to the classification of accretion expense, a change we are making to enhance the comparability with our industry peers and to better reflect operating performance. As a result, our 2026 operating EBITDA guidance excludes projected accretion expense of approximately $150 million. Our plan calls for a typical quarterly cadence of operating EBITDA contributions across the year. Additionally, we expect an effective tax rate of approximately 24% and a share count at the end of the year of about 402 million shares. We anticipate capital expenditures for 2026 to be between $2.65 billion and $2.75 billion, which is inclusive of about $200 million directed towards high-return sustainability projects. Sustainability growth capital includes spending of about $85 million on 2 recently approved renewable natural gas facilities and 1 new recycling growth project, each expected to be completed and to begin contributing operating EBITDA by 2028. These projects are attractive opportunities to extend our network while bolstering WM's industry-leading return on invested capital. In 2026, we expect free cash flow growth of nearly 30% to $3.8 billion at the midpoint of the outlook, which drives our projected operating EBITDA to free cash flow conversion above 46%. Our guidance includes an anticipated benefit from investment tax credits of about $110 million, which is about a $75 million headwind from the prior year. In closing, 2025 underscored the strength of our business model, the resilience of our operations and the discipline with which our teams execute every day. We are proud of our progress toward our long-term strategic goals, driving margin expansion, strong cash flow generation and continued optimization across the enterprise. I want to thank our dedicated team members whose commitment makes these results possible. As we look ahead to 2026, we are confident in our ability to sustain this momentum to continue delivering operational excellence and to generate long-term value for our shareholders. With that, Olivia, let's open up the lines for questions. Operator: [Operator Instructions] Our first question coming from the line of Sabahat Khan with RBC Capital Markets. Sabahat Khan: Just maybe starting with sort of the top line guidance. Can you maybe give us some perspective on the industrial activity has been weak for some time. There's some views just broadly out there that the economy picks up this year. Maybe just what you've embedded in terms of the macro backdrop. Obviously, we see the sort of the directional volume and pricing commentary. But if you can just delve into what you're seeing in some of your local markets? And is the industrial C&D type market picking up at all? James Fish: Yes. Regarding kind of the macro economy, I would say that we've said for the last few quarters that we're cautiously optimistic, and I think that we stay with that. I might even remove the word cautiously. I think we're optimistic about the macro economy. When we look at our own internal figures, and you mentioned the industrial line of business, that's a line of business that has been pretty soft over the last couple of years. I think we've been down 3% or 4% in volume each of the last probably 7 or 8 quarters. And that business actually has bounced back to almost flat. So that's an encouraging sign for us. I think similarly, as John mentioned in his remarks about the residential line of business, that's been negative for some time. That's been much more by design. But he also mentioned that, that is starting to come back to more of a normalized number. And we think by the time we get to kind of the back half, I think, John, of 2026, we should see that down maybe half. John Morris: Yes, half [indiscernible]. Yes. James Fish: So all of those are encouraging signs. If you look at the landfill line of business, that's been a source of strength for us for a number of reasons, special waste, as John mentioned in his remarks as well, has been good. So all of that would tell me that the economy is on pretty firm footing. Sabahat Khan: Great. And then just a follow-up on the health care side a little bit. Can you talk about -- it sounds like the integration is largely there, but can you just talk about for '26, what you're sort of thinking on the pricing front, maybe some of the larger initiatives on the cost refinement, getting that percentage more to where you want it to be on the SG&A side. So maybe you can delve into some of the commentary shared earlier on the initiatives for this year on the health care side? And what could those margins look like sort of over the next 12, 24 months? James Fish: Yes. So a lot with Healthcare Solutions. We've made a ton of progress just in the last quarter. There's a lot going on between Q3 and Q4, even if you look at Q3 to Q4, there was -- we talked about some lost accounts last quarter that would carry forward into this quarter and carry forward into 2026. And so that did, in fact, happen. But as I said in my remarks, we've made a ton of progress on our customer service -- the customer service side of our business. In fact, the metrics that you use to measure those have actually jumped above our Legacy Business, which is very, very encouraging. Similarly, from Q3 to Q4, we saw credit memos, we think they peaked in Q4. And so as you know, those credit memos have been used to, in part, take care of some of these past due accounts that we've had. I think what I would say is we've really kind of built a wall now between all that is continuing to go on, on the back office side of that business and the customer themselves. And that's a real positive. And the result of that, as we think about 2026 is going to be, I think, better price realization. We've been getting price all along, but we just haven't realized as much of it. And a lot of that has been these credit memos that we've been giving that has offset some of that price. I think when you get into 2026, we're expecting 4.2% price in 2026. Top line is going to be 3%, and that is a reflection of those lost accounts that will anniversary for the most part in the back half of '26. So that's the reason why it looks like all of our growth is coming from price. It is, in fact, coming from price, and it's due to those lost accounts. And then when you think about the expense side of the business, John mentioned that we've rolled that in. And I think Rafa last quarter talked about how we've rolled that business into our areas. And so we're seeing the real benefits of that. We're seeing that what we've honed on the Legacy Business over the last probably 10 years, some of it through technology, some of it through process, all of that gets brought to this routing and logistics business, which is WM Healthcare Solutions. So we're really encouraged about what we're seeing as we roll the business into the areas. I guess the last thing I'll mention here is that cross-selling, which we put $50 million of cross-selling in the EBITDA synergy number back in June of last year. And I would tell you that if I were a betting man that I would take the over on that because in talking to our area leaders last week, almost to a person, they were very encouraged by what they're seeing from their sales folks. In terms of cross-selling, I think it's important to keep in mind that some of that cross-selling benefit though, does show up in the collection and disposal line of business. Not all of it shows up necessarily in the Healthcare Solutions business. Operator: Our next question coming from the line of Bryan Burgmeier with Citi. Bryan Burgmeier: I appreciate all the detail in the press release. It was really helpful. I thought that Footnote h seemed to say that maybe discussion on the 2027 financial targets would be put on hold for a little while. I'm not sure if I'm sort of interpreting that correctly. And if I am, maybe from a high level, can you help us understand sort of what went into that decision? I guess there have been sort of some accounting changes. It's a pretty dynamic macro environment, but just kind of hearing in your own words would be really helpful. James Fish: We did debate, [ Tony ], whether we would get a question on Footnote h. So Heather is the winner on this one. But here's what I would say about the 2027 number. On Investor Day, we gave some high-level estimates. I would -- what I would say about those is that they weren't detailed guidance as we're giving today for 2026. And we will give detailed guidance on 2027 a year from now. So I would tell you that those were estimates. They're kind of the best estimates we can make at the time. I mean our business typically about as far out as we can look is 12 months. It's hard to look at things like commodity prices 18 to 24 months out. So those estimates, I wouldn't rely on those as guidance. I would rely on them as what they were intended, which is estimates. But I will tell you this about '27 that we don't see anything on the horizon that's concerning for us. And I would also say that if there's one thing you know about us over the last number of years, the consistency of our performance has been one of our strong suits, and I think that continues going forward. Bryan Burgmeier: Got it. Got it. It's really helpful. And then maybe just digging into the guidance for '26 a little bit more. Maybe, John, can you give us an idea of maybe the level of margin expansion that you're looking for in collection and disposal this year on sort of an apples-to-apples basis? I guess it's kind of noisy with the landfill accretion and the wildfire comps, but John, your thoughts on net price and maybe some key cost buckets could be quite helpful. John Morris: Yes, Bryan, you saw the guidance we gave in terms of yield and core price. And what we've really been focused on and was really shown up well in Q4 and this year, as I mentioned in my prepared remarks, is sort of the -- is the spread between price and cost, and we're continuing to expand margins. So we're really pleased. Directly to your question, there is a little bit of noise in there. We talked about the wildfires being one of those things that really showed up in Q2, but 50 basis points on a same-store sales basis is kind of what we're targeting from a margin improvement standpoint across the portfolio. James Fish: Don't grade me down by calling the wrong name. I think I called you Tony. Operator: Our next question coming from the line of Trevor Romeo with William Blair. Trevor Romeo: First one I had was maybe on the 2026 outlook for Healthcare Solutions, particularly on EBITDA because I know you did give kind of a revenue outlook. You talked about kind of continuing to optimize the business. I was hoping maybe you could level set how much cost synergy capture you realized in 2025 and then how much is baked in for incremental in 2026? And then along with that, how much sort of underlying growth and margin expansion you expect from the business ex synergies? James Fish: Yes. There's probably a couple of us could take this one, but I'll start and then maybe David or John can jump in. But first of all, as far as '25 goes, we did say, at least on the SG&A synergies, we gave a range initially of $80 million to $100 million, and we finished above the top end of that. So we're encouraged by that, and that ends up being a benefit -- a carryover benefit for us. Some of it is -- well, it all carries over, but some of it's happened ratably throughout 2025. So that ends up being a carryover benefit for us as we come into 2026. We -- the original synergy goal of $300 million, and that, of course, mentioned the $50 million that's included in that for cross-selling, we feel very comfortable with that. I think there's a little bit of a scrambled egg happening here with these businesses because some of this, and I mentioned in cross-selling, some of that ends up showing up in collection and disposal. The same thing happens on the cost side, particularly operating cost, but also SG&A. I will say this about SG&A, which is kind of the long pole in the tent here that David mentioned it in his remarks. But as you look at SG&A pre-acquisition, and that's been something that Devina and I spent a ton of time -- all of us, but Devina and I, in particular, were very focused on getting SG&A down. And that number pre-acquisition had gotten down to, I think, the third quarter of last year was -- or of 2024 was 8.9%. And as for a year, I believe 2024 was 9.4%. And then that jumped up after the acquisition to a high of 11% in Q1 of last year, 2025. We have, through the synergy capture, have really kind of chopped away at that. It ended the year at, I believe, 10.3%. But as David said, there's a near-term pathway to getting that -- continuing to get that thing down as a corporation, that includes Healthcare Solutions down to below 10%. And as we've said many times, that business was running at a much higher SG&A. I think it was as high as 25% when we bought it. It has come down to 20%. I think the number that was in our synergy capture was 17%. And then Devina said a number of times, look, we think that there's no reason we couldn't expect that number to be down close to our own number, which is kind of 9%. And as it gets down there, you could expect to see that SG&A number continue to come down. And then maybe, John, on the operating side? John Morris: Yes, I would say from a synergy perspective, cross-selling and internalization, those avenues are going very well. And as Jim mentioned, Trevor, we're seeing a good bit of the benefit right now showing up sort of in the core solid waste business. I commented on our roll-off volume last quarter being a portion of it, about 60 basis points being driven by simply taking that work and putting on WM trucks. That's not something that's going to show per se in the Healthcare segment. And like I said, in terms of internalization and other synergies we're getting out of the business, that's all going extremely well. Trevor Romeo: Yes. Makes sense. Okay. And then I did want to follow up on the RNG business. I don't know if maybe Tara is on the call, but I appreciate the, I guess, the 60% of volumes contracted for 2026. That's encouraging. For the 40% of the uncontracted volumes, I think the comment in the press release was an expectation for $24.50 per MMBtu on the pricing side. I think if you use today's spot prices, that would imply something -- a decent amount higher than that, let's say. So maybe you could just talk about that a bit. Is that kind of where you see the voluntary market right now? Or is there some conservatism built in there? Or just thoughts on pricing? Tara Hemmer: Yes. So I'm here, and we're really pleased with the progress that we've made on selling a portion of our volume, a pretty significant portion, and it's a testament to how we've been managing the risk that's in this business. On the 40% that remains unsold, this is going to be the first year. If you look at it, our volume is doubling year-over-year from about [ 40 million ] MMBtus to now 21 to 22 plus. So we're going to have a portion that is not allocated to our fleet that will be sold in the voluntary market, and that's what you're seeing in there. From a RIN pricing perspective, we're anticipating RIN pricing to hold steady in that [ $2.30 to $2.40 ] range. So that's what it's all based on. Operator: Our next question coming from the line of Tyler Brown with Raymond James. Patrick Brown: I'll reiterate lots of good detail was in the release. But David or Tara, I just wanted to unpack the comments about the approaching $1 billion in sustainability EBITDA by '27. So I think in the release, you provided a baseline now. So I think that baseline is $300 million. And I just want to make sure that I have it right. But are you basically expecting the investments to yield, call it, slightly less than $700 million of incremental EBITDA over the time frame? And can we comp that to the $760 million to $800 million that you laid out at the Analyst Day? And if so, can we just talk about what's driving that delta? Tara Hemmer: So you absolutely have the parts right. And let me just take a step back on 2 key points. First, we're incredibly pleased with the progress on the recycling and the renewable energy investments. It bears repeating what was in Jim's script with 18% lower commodity prices and delivering 22% higher EBITDA on the recycling business. That's a testament to what we're delivering in labor savings, in premium savings, and we've had strong volume growth, which has a halo effect with our customers. And then likewise, really having a lot of momentum on the RNG business. I mentioned before that we're going to be doubling our output. What you can bridge from the $700 million to the $760 million is really just in 2 buckets. The first is a difference in recycled commodity prices. What was in our Investor Day materials was $125 a ton and now what is in the number is $70, which we do view as a low point. So you can consider that there could be some upside if and when commodity prices come back. And that's over half of it. The other piece is, if you go back to 2023, when we had come out with this broader platform, we've learned a lot. And one of the things that we've learned is that there have been some differences in operating costs, primarily related to electricity costs, which is a bit of a headwind, but also in the medium and long term, a potential tailwind for us because we do have a robust landfill gas-to-electricity platform, and that is something that we can lean into as we look at whether or not we expand those types of facilities on our landfill. James Fish: Tyler, this is kind of case in point to my earlier comment about trying to predict things in our business way out. And that Investor Day was the 2025 Investor Day, and you can go all the way back to the 2023 Investor Day about sustainability, just really difficult. So we're kind of dealing with what we have at the time. And so yes, commodity prices have dipped and hence, the $700 million. But I think it kind of makes the point for us that, a, as Tara said, I mean, these businesses are incredibly good investments and the paybacks on them, particularly the renewable natural gas plants. Well, I think we originally said they were [ 2.5 to 3 ], now they may be [ 3 to 4 ], but still incredibly good paybacks. But this -- if anything that's commodity related, as you can imagine, it's just really hard to predict that far out. Patrick Brown: Yes. No. I just was trying to get the delta. That was extremely, extremely helpful. John Morris, a question for you. So if I look at the normal course CapEx, it looks like that CapEx number is running at less than 9.5% of sales. It just feels maybe a bit light. I realize that Stericycle is less capital intensive, so that's part of it. But is this kind of a good, call it, forward capital plan? Is there something unique in '26 that keeps the budget down? I think you and Jim mentioned the lower fleet age, but I just want to just try to level set on where that CapEx will run longer term. John Morris: I think probably a little higher than that, Tyler, probably the 10-ish percent off the cuff. There's a few things to mention. One, 1,500 trucks is what we said is probably normal run rate for the traditional solid waste business. And as Jim mentioned, we've been obviously catching up and advancing some of those investments, which, by the way, are clearly paying off. As I mentioned in my prepared remarks, we got -- we do have some work to do on the fleet with the health care -- on the health care side is because they leased virtually every one of their vehicles. So we are systematically unwinding that where it makes sense and when it makes sense, right? So there's a timing aspect to when we peel back some of those leases. And then lastly, obviously, the sustainability investments, as you saw in the release and the remarks here is coming down by roughly $400 million to $200 million. So there's some puts and takes. But back to where we started, I think that 10-ish percent range is probably a good mile marker in terms of go-forward capital. Operator: Our next question coming from the line of Toni Kaplan with Morgan Stanley. Toni Kaplan: I also wanted to ask about the Healthcare business. You talked about the 3% growth next year, the 4.2% pricing. It sounds like you're still having some of the issues with the Stericycle customers. You mentioned the credit memos. Do you expect all this to be resolved this year? And how are you thinking about growth in this segment for future years? And just maybe if you could talk about market conditions within the medical waste space and if that's proceeding how you sort of saw when the deal was launched or when you announced the transaction where you were talking about sort of a higher market growth for the health space? James Fish: Yes. So fair question here. And one thing I would maybe correct you a little bit is the customer -- that's why I wanted to make sure I mentioned that we're getting to, and I would argue we're there where the customer is getting a good invoice, they're getting a payable invoice. There's a lot going on behind the scenes for that, especially for the larger customers. By the way, there is a lot going on behind the scenes for our larger customers in the Legacy Business, too, and our national accounts. There's a lot of manual effort that is ongoing there. But our intention was to really kind of build a wall between the back office work that is ongoing and will be ongoing through '26 and what the customer sees. And that's why in my remarks, I talked about the improvement in our customer service stats to levels above our Legacy Business. That is all super encouraging and tells us -- and I think I mentioned that one of our customers recognized us for really improving our invoicing. That was a big customer. I didn't name the customer, but a big customer. So all of that tells me that we've done an effective job of putting that kind of wall in place. So the customers, they really don't care what goes on in the background as long as they're getting good service and good invoice. And then we will take care of the system issues, we'll take care of the process issues, all of that. And that is all -- we're making big progress on that. It's all ongoing. So all that's part of the ERP that we've talked about many times. It also gives us the ability to, as I mentioned, and you asked about kind of the growth of this business. Look, I would tell you this, I think we said 5% to 6%. And really, as you think about what we gave for 2026, 4.2% price, but only 3% top line. And that negative volume piece, as I mentioned, is largely related to these accounts that we've lost. And we knew we had lost them, and we knew that it was going to have an impact on Q4, and we know it's going to have an impact on the first half of 2026. As we get to the back half of 2026, that actually turns into potentially a tailwind for us on a year-over-year basis. And then the last thing I'll mention about this -- so I guess to finish that point, we do feel very good about the strategic business case for this. I know there's been some skepticism out there about, well, is this business not going to grow at the 5% to 6%. You take out those lost accounts and you're almost there right now. So when we get to the back half of next year and into 2027, when you look at that -- the pricing power that we have across the entire organization and when you look at the fact that this business demographically, I mean, if I were to ask you what business should you be in over the next 20 years, I would think that health care is one of those with this aging population in the U.S. and in Canada and the U.K. So that has to be a beneficiary of it. So I think my long answer is, yes, we're very confident in the growth trajectory for the business. And we're also very pleased with the progress we've made, not done yet, but we've built this wall, and the customer is now seeing a good invoice and a good service level. Toni Kaplan: Great. And just moving to -- you mentioned some technology and automation improvements that you've made. When you think about 2026, which areas are you most focused on for efficiency or technology? Just anything that to highlight with level of automation that you're able to continue to do and which areas have the most runway for that? John Morris: Maybe I'll start with, and Tara can chime in. On the recycling side, I think you've seen the benefits. Tara commented in some of her answers about the progress we've made from the investments we've made in recycling. A lot of that has driven sort of the middle of the P&L. And that's where technology enablement and AI are paying off already, and we've made a lot of progress there. When you think about the 15,000 refuse vehicles we run and now another -- call it, another 4,500 on the health care side, building out technology enablement as a logistics service is where you -- I think that's paying off too. When you look at the margins and the OpEx in particular and the momentum that we've built in '24 into '25 and into Q4, I think you're going to see that continue to carry forward into 2026. And then lastly, on the post-collection side, we've talked a lot about the value of our network and having strategically placed assets in the post-collection side, whether it's transfer facilities, recycling facilities, landfill facilities. We're taking kind of an IoT approach at our landfills, too, by embedding technology in those facilities that's going to give us visibility to the operation in a much more efficient manner than we traditionally have done. And those are complex operations, as you know. So we still see a lot of opportunity on the post-collection side, particularly landfills to embed technology to really drive down operating costs there as well. Operator: Our next question coming from the line of Faiza Alwy with Deutsche Bank. Faiza Alwy: I wanted to ask about just volumes in the collection and disposal business in the fourth quarter. I thought they came in a little bit light relative to what we've seen. And I know we've had some -- obviously, special waste volumes. And I know earlier in the call, you talked about sort of the industrial business and the macro environment there and that you're optimistic. So I'm just curious, is there anything more to consider as it relates to collection and disposal volumes in the quarter relative to trend other than just special waste? James Fish: Yes. Look, we don't talk much about weather just because we choose to make it up. I would tell you that weather impacted us in December and likely is going to impact us this week when we get to first quarter results. But we make that up. I mean we don't let our area folks say, well, weather impacts me, therefore, I'm going to be coming in under my budget. But it did impact volume a bit. As you see with the numbers, it didn't impact the overall numbers. So we made it up on the EBITDA line. But when you think about volume, it did have a bit of an impact on volume. MSW was a bit soft and much of that was a result of -- the 2 lines of business that are most impacted negatively by weather are MSW and the industrial line of business. And -- so those were clearly impacted by the weather in early December. I suspect that they'll be impacted this week, too. So that would be my answer that may have caused a little bit of softness there, but it doesn't impact the EBITDA line. John Morris: The only thing I'd add on there, Jim, is residential is the one that sticks out. It's been negative for a number of quarters. And I would tell you, while we see that starting to turn into more of a growth engine in 2026, when you look at 2025, we finished the year at high teens on the EBITDA margin side and over 20% for the quarter on residential, which has always been a high watermark for us. So I kind of look at the volume attrition there a little bit different than I would the other pieces of volume. But again, I think it's important we see that -- we see the teams pivoting from using that as shrinking the greatness to now growing to even better margins as we go forward in that particular line of business. James Fish: Well, I think it's been mentioned today, Faiza, but also if it hasn't, we should reiterate the fact that on the volume line, when you look at 2026, we have 50 basis points headwind on volume from that fire volume that we got last year on the West Coast. The tough part about that is that we don't -- look, unfortunately, natural disasters seem to be happening fairly regularly, but we don't forecast them for obvious reasons. So right now, we don't have anything built in. We have asked our field operations to figure out how to make up that. That's a tough makeup because it was a pretty big headwind on volume, also a big headwind on EBITDA, $82 million was the number from last year on the EBITDA line. So when you look at -- whether you look at volume, whether you look at EBITDA, you may say, well, gosh, a lot of the reports were saying a bit soft on guidance. Keep in mind that, that's why I pointed out that 7.4% EBITDA growth, if you take out that onetime impact from the fires. Unfortunately, these things do happen. So something else may happen. It may not be as big. Hopefully, it's not. Hopefully, we don't have anything this year. But if we do, we have the assets, the geographic coverage, the people, we have all of that to take care of our customers. Faiza Alwy: Yes. Understood. Makes sense. And then I was going to ask about just the margin guide for next year. And I was hoping there are a few moving pieces, in particular, with the wildfires and also, I guess, the roll-in of the sustainability projects. So maybe you can help us a little bit around the quarterly cadence of margins at a high level and how to think about that. David Reed: Sure. I'll give you some of the components. This is David. I'd be remiss if I didn't talk just about the records that was mentioned previously, both in the quarter of 31.3% and for the full year of 30.1%, which I do think is a testament to how our team members focus and dedicate on this throughout the year. But as we look to 2026, we're calling for our fourth consecutive year of EBITDA margin expansion of 30 basis points at the midpoint. But as Jim just alluded to, 50 basis points on an adjusted basis. The biggest contributor to that is going to be from our collection and disposal business. So as we execute our pricing programs, while continuing our strategies around operational excellence and leveraging our network, that's a big piece. We also have some business mix, as we've alluded to, continued shedding of some lower-margin residential business relative to our volume growth in the landfill line of business. And then on sustainability, there's about 30 basis points collectively of benefit in '26 in terms of the bridge as we bring new plants online. We've got 4 recycling facilities and 6 RNG facilities coming online in 2026. There is a modest decline in recycling commodity prices year-over-year that will have a minimal impact on margin. And then Healthcare Solutions, as we've been discussing, will contribute to margin expansion overall for the year as we capitalize on our value capture opportunities, execute our pricing plan, continue our cross-sell efforts, even though that will show up most likely in the C&D business and then continue our progress on lowering our cost structure. And then in terms of cadence throughout the year, it's, call it, 47% in the first half, 53% on the back half in terms of mix, but that's in line with our historical averages. Operator: Our next question coming from the line of Adam Bubes with Goldman Sachs. Adam Bubes: Just had one more follow-up on margins, really impressive in the quarter. And I think if you just compare your 4Q margin prior exit rates to where you typically ended the next year, it would sort of imply that this 4Q exit rate points to potential for better than 30 basis points of margin expansion in 2026. So just wondering out of the 230 basis points of margin expansion in this fourth quarter, how much of that expansion was maybe more one-off? I know you called out the outsized RIN sales that were going to happen this quarter. David Reed: I think for the most part, these are sustained initiatives that we've been executing on, and it just highlights our focus on disciplined cost management. And so we're just seeing it come to fruition. I think as Jim alluded to, with the volume, some of it which we can't control, like just the ability of the business to flex accordingly in the environment that we're operating in, it allows us to maintain and sustain that margin going forward. So for most of it, I think we can carry that forward versus a number of one-offs that was idiosyncratic to the quarter. James Fish: So I'm probably going to make his point for him here, but one thing we haven't really talked too much about is the fact that if you look at our core price for next year, 5.6%, it's a 250 basis point delta, and we typically have gotten this question, so we haven't gotten yet today, but a 250 basis point delta to our forecasted cost inflation. I don't know how that measures up historically, but it's got to be one of the bigger ones for us. So I'm kind of making your point for you. But still, we do think that 30 basis points is reasonable considering the 20 basis points of headwind from the fire volumes. So that's where we came out. Adam Bubes: Terrific. And then on the landfill gas side, can you just update us on voluntary offtake discussions? I think eventually 50% of your production will go into voluntary markets. So what's your confidence level that, that 50% will be absorbed by those markets? And how are those discussions going? Tara Hemmer: We're confident that we'll be able to absorb that in the voluntary market. While the U.S. market right now is a bit softer than it had been, there are other markets that are strong. If you look at Canada, the U.K. and some other international markets, we're able to tap into those as well. And then still in dialogue with some larger utility companies across the U.S. as their public utility commissions pass their rule-making that, that should free up more of the voluntary market in the future. Operator: Our next question coming from the line of Noah Kaye with Oppenheimer. Noah Kaye: I'm sorry to beat the margin math, hopefully not to death here, but just I'm a little confused. So the walk here is 50 bps on an adjusted basis ex wildfires. But I think you said that sustainability was maybe 30 bps benefit in the bridge. And then I think just with the synergies capture on health care and the pricing, there has to be another 10, 20 bps or so, at least. So what am I missing here? Because it seems like collection and disposal is going to be positive based off of what Jim and Dave just said. Just trying to understand what moving pieces there are that we're not accounting for. David Reed: Yes. There's some normalization of certain expenses in corporate and other that we've baked into the guide. Those may or may not materialize, but just we felt prudent just based on how we finished the year to adjust for that. There's also some technology costs that show up in there that are for the benefit of other parts of the organization. And so that's offsetting some of the points that you're highlighting. Noah Kaye: Okay. That's helpful. And then just a quick one on the recycling outlook. The basket was $62 a ton in 4Q, and I think we're kind of maybe at or slightly below that. Maybe you can update us. But just the thought around the $70 per ton outlook for '26, can you help us understand that? Tara Hemmer: So 2026, the way to look at it is the first half, second half story. And so exiting 2025 at $62 a ton, what we're anticipating for the first half is in that $60 to $65 range and then ramping in the back half of the year. Why is that? Well, what we're starting to see is a little bit of green shoots on the fiber side. The headlines previously were that a lot of capacity had been taken out of the U.S. market, which is true. That was more inefficient mill capacity. But the larger mills that remain are going to be looking for material, some of the cloud around tariffs has been lifted. So we're anticipating that OCC prices should bounce back a bit in the back half of the year. We're not expecting any material movement on plastic pricing moving forward. Operator: Our next question coming from the line of James Schumm with TD Cowen. James Schumm: For WM Healthcare, can you give us the revenue split between document destruction and medical waste? And then maybe give some color on document destruction profitability and whether you see this as a core business for you going forward? John Morris: So James, I think the answer to your question is about 2/3, 1/3 between health care and the document destruction business. And then sorry, could you repeat the second part of the question? James Schumm: Yes, sure. Just in terms of like the profitability in document destruction, any color there? I think you talked about in the past that maybe you had an advantage here with your recycling business, maybe you got better paper pricing. But do you see this as a core business going forward? John Morris: Yes. I mean, first, to start on the recycling side. I mean, it's interesting. Both of those businesses are collection, disposal and/or processing businesses, right? And I think you heard some of that commentary from us earlier. So from that perspective, it lays nicely over whether it's on the [ SID side ] or on the health care side to what we see as some of our core competencies. The commodity side of it, I mean, Tara spoke to what we're going to see from a commodity side and probably some more green shoots on the fiber side into '26, which certainly benefit that business. And then when you look at the health care side, it is a collection and disposal and processing business. And Jim gave a good bit of commentary on where we're at. I would tell you that the integration into the areas, which has just occurred over the last, call it, 120 days, I think it's going to be a great platform for us to continue to drive some real expansion in margins now that our field leadership teams have sort of a full purview of the business at the local level, which not dissimilar to the WM core business, there's a lot of elements of this from an operating perspective that are local. So we're excited about what we're hearing from the teams. And Jim mentioned, we just had our quarterly business reviews last week and got a lot of good commentary and a lot of positive commentary on where that business is going. James Schumm: Okay. Great. And then Jim kind of touched on this, but collection and disposal core price in 2026 is expected to be like 5.6% at the midpoint, which seems very conservative off of 2025 6.3% level. So just curious like what was the customer churn number in Q4? And what do you see is the right number for churn? What do you [indiscernible]. John Morris: Yes, we see that obviously bounce around a little bit quarter-to-quarter for a litany of different reasons, but we've talked about churn being in and around that 10% range, and we're still bouncing around in that range, although it varies from quarter-to-quarter. And you've heard us comment at times, it's been as low as 8% and change. It's been a little bit as high as 11%. But when you stretch the tape out, that 10-ish percent churn number is kind of what we anchor on. In terms of the price side, when we think about core price and yield and the conversion, obviously, that number has bounced around. It's been the high 50s to high 60s. But I think what I would point to is when we break it down by line of business and the margin profile of those businesses, what you're seeing is our operating expense under 59% in Q4, under 60% for the full year. So that's showing that we're making progress on the middle of the P&L. And then we look at that relative to customer lifetime value and what's the long-term perspective on pricing that we should take with each of those individual customer segments. And I think you're seeing it translate to all-time high margins. I mean the collection and disposal business was 39%, which I think that's an all-time high as well. James Fish: Maybe one last point here on pricing, James. As you mentioned that you thought maybe 5%, 6% kind of conservative. Keep in mind that as CPI or some of these indexes come down, we've talked about this many times, but there is a lag in those index-based price increases that we can take largely on the resi side of the business, but sometimes on other lines of business as well. And so that lag can be up to 6 months. And so we do expect that as CPI has come down throughout 2025 that we will see a bit of a lag there that will negatively impact 2026 pricing. So hence, the 5.6% as opposed to something in the 6s for 2025. But as John just said, look, we're certainly making up for that on the margin line. Operator: Our next question coming from the line of Jerry Revich with Wells Fargo Securities. Jerry Revich: John, I'm wondering if we could just go back to your prepared remarks. You mentioned some benefits from connected trucks and other tech. Can you just give us an update? Are you folks seeing an acceleration in terms of the savings that you're seeing from logistics management? And obviously, you had the session with Caterpillar at the Consumer Electronics Show. Is -- are the returns from your tech investments accelerating as we head into this year? John Morris: Yes. I think, Jerry, starting with connected truck, we've had that technology on all our commercial fleet for some time now. We've actually expanded that to the automated components of our residential business. So we still see that there's runway there. So we'll continue to build on that. And I think to your point about the -- I mentioned connected landfill and in particular, the heavy equipment side, we see plenty of opportunity that we're starting to unpack with this connected landfill. There was a good bit of detail laid out at Investor Day about what that pathway looked like going forward. So if you think sort of late middle innings on some of the connected truck elements that you mentioned, I'd say we're in the early innings on the post-collection side and see a lot of opportunity to drive cost out of that part of the business as well. Jerry Revich: Okay. Super. And then from a margin standpoint, just really impressive performance over the course of '25 even as recycling commodity prices got worse over the course of the year. David, I just want to make sure I'm not missing anything heading into the first quarter because normal seasonality and the accounting change implies that you're going to be at roughly, I don't know, 30.5% margins in the first quarter, which is typically your seasonally weakest margin quarter. So I just want to make sure there are no moving pieces off of the really strong run rate that you folks have achieved as the year unfolded last year. John Morris: Yes. I'm kind of thinking accretion aside, Jerry, to keep this kind of same-store sales. But you're right, Q1 is usually one of our softer quarters. And I don't know off the top of my head whether that's the right number or not. It feels a little bit high to me. I think it's a little lower than that, but we could circle back with you to confirm. Jerry Revich: Well, nice performance with the margin revisions consistently in '25. Operator: Our next question coming from the line of Konark Gupta with Scotiabank. Konark Gupta: Just maybe one question on the top line. For the full year, I guess, you guys are expecting about 5% at the midpoint. Just looking at the puts and takes on the quarterly side, you have probably Stericycle is more like a second half story, Jim, I think you said. And then second quarter, you're expecting or seeing maybe tough comps from the wildfire last year. How should we think about the growth cadence for the year by quarter? I mean, especially in terms of how the volumes kind of shake out on the C&D side. David Reed: Yes. I mean it's pretty balanced over the year, but you do see more of a pickup in the second half of the year. So call it, kind of below -- 5% or below in the first half and then above that in the second half in terms of the revenue bridge across the year. And the Q2, to your point, is the toughest comp with the wildfire volumes. Konark Gupta: And then volumes, do you expect that to be more evenly spread out throughout the year? Or it's going to be more skewed to the second half too? John Morris: I think the one area that will stick out as we mentioned, our residential volume has been negative 4-plus percent [ print ], and we see that ratably declining. And by the end of the year, we should be right around 2%, maybe a little bit south of that in Q4. So that will be a clear tailwind to volume in the second half of the year. Operator: Our next question coming from the line of Seth Weber with BNP Paribas. Seth Weber: Just wanted to go back to the health care cross-selling opportunity. I think on the third quarter call, you guys mentioned that it's largely been focused on small and medium-sized customers. I wanted to see if that's still the case or if you're getting any better traction with the large hospital networks at this point. James Fish: I think this ultimately is going to end up being more of a large customer opportunity for us. We -- what we've heard from our folks on the sales side is when they're going out and talking to the decision-makers at these customers, typically these large customers, it ends up being the same decision-maker on solid waste as it is on health care waste. So that's a positive for us. And the fact that we feel very good about the services that we have now on both sides, that ends up being good for us. I do think it's going to be more of our -- we've stratified our customers, the As through Fs by size. And so you can imagine the As, Bs and Cs are the bigger ones. I think this is going to be more of an A,B,C thing than it is a D,E,F thing. Seth Weber: Got it. Okay. And then kind of related question, just can you update us on your national accounts business just across the whole company? It's been sort of low double-digit CAGR for the last few years. Is that still kind of running at that -- improving at that same level in 2025? James Fish: I mean, look, I would tell you, national accounts has been one of our real success stories. And both on the volume side, but also on the price side. I think we've done well with getting price increases based on really differentiated service and differentiated data and analytics that we provide our customers. So we're really pleased with the results of national accounts. I mean, gosh, I would tell you a decade ago, national accounts was kind of a mess for us. And today, it is one of our success stories. Operator: Our next question coming from the line of Shlomo Rosenbaum with Stifel. Shlomo Rosenbaum: I want to jump back to what you started kind of the questionings with -- on the call just in terms of the healthy economy, and you said that it's -- things are looking, you say, not cautiously optimistic, just optimistic. Can you give us -- just delve in a little bit more into some of the -- like the metrics on that, the service interval trends, what are you seeing on scale report on some of the mature routes? And then on residential also, scale reports on the trucks that are coming through, how is the temp roll-off activity doing and prices and pulls? If you can just go through some of that, then I have one follow-up. James Fish: Yes. So as we look at what might be considered leading indicators because we are kind of at the back end of the cycle, so -- of the business cycle. But we do have some business that tends to be leading indicators. I would argue that the special waste stream is kind of a leading indicator for us because while those jobs have to be done, companies have some discretion as to when they have to be done. And the pipeline, as we talk to our sales team, is good on the special waste stream. So that's a bit of a leading indicator for us that -- and what we're hearing from them is that those jobs, and we heard it from our area folks last week that those jobs are starting to manifest themselves. So that is one of the indicators that we do look at. The roll-off line of business as well, although a portion of roll-off, the permanent roll-off is kind of more analogous to our commercial business. So I'm not sure that's so much a leading as a lagging indicator. But you mentioned temp roll-off and temp roll-off has been pretty good for us. The C&D business, if I look at C&D, and that's been one that has been -- has really bounced around over the years. And C&D for the year was -- what's that, 3.4%. And if I looked at last year, for the year last year, it was a negative number last year. It was bounced around in '23 and '22 as well for some reasons related to the pandemic. But I think C&D is somewhat of a leading indicator as well if you think about the -- about homebuilding. So it's a tough one because I'm trying to read some of the tea leaves that are kind of macro. And as I look at GDP, it looks like it could be strengthening. I don't know. I guess what I would tell you is the business performs well, whether in good times or in bad. And I'm feeling, I guess, a bit more optimistic than maybe I have in the past. Shlomo Rosenbaum: Okay. Great. And then just I wanted to follow up a little bit more just on a question that was -- excuse me, the comment that was made last quarter in terms of suspending kind of the pricing initiatives in the Healthcare Solutions area that would be expected to be done by the end of the first quarter of this year. Are you still on track for that? I mean, obviously, from your commentary, it looks like pricing is going to pick up this year based on your discussion of 4.2%. But is it a matter of like really hitting that end of the first quarter, we're done with those issues that we're having that was preventing the pricing? Or is that going to extend a little bit further? Or have you already started it? James Fish: Yes. So here's what I would say about last quarter's comment. I mean that was not a universal comment. I mean, some customers, yes, we had -- some customers we had suspended price increases. But the large majority of our customers are getting price increases. But as I said earlier, it was really being diluted by these credit memos. And so we believe that those credit memos, which are really just a tool to try and clean up some of these past due receivables, those credit memos, we believe, peaked this quarter or last quarter, I should say, Q4. And those start on a nice downward trend, which ends up being a tailwind for us as we think about the whole year of 2026 versus 2025. So pricing, look, we have, I think, a fantastic price team, and they are definitely looking at the opportunities that are in front of us. But a lot of those opportunities are not so much a price execution as it is just less dilution to the overall gross number. Operator: Our next question comes from the line of Tobey Sommer with Truist. Tobey Sommer: From a capital deployment perspective, are you shifting broadly to share repurchase? Or as you look into '27, '28 sort of a longer period of time, you're supposed to take in about -- produce about $12 billion in free cash over that 3-year period. How do you see it shaking out between acquisitions in the core, acquisitions and investments outside the core and repurchase? David Reed: Sure, sure. Yes. I mean as we alluded to in the last quarter and also with our December announcement on some of our shareholder returns, we do view 2026 as a year of harvest and a balanced capital allocation program. But to your point, the beauty of our business is that it does generate a lot of excess cash flow. And you can expect a pretty balanced approach going forward. We do want to continue to return capital to shareholders. So you should expect that our share repurchase program is not a onetime event in 2026. We'll continue it going forward, but it's going to be governed by kind of what opportunities we have in terms of investment opportunities, both organically and also inorganically. But the key word here, I think, is balanced from a shareholder perspective, and that's what you should expect. Tobey Sommer: And then I'm curious what you're hearing from health care customers about their sort of tolerance for price increase, particularly this year given various declines in federal funding ranging from the exchange subsidies to Medicaid cuts that may come in a year that could pressure hospital margins? James Fish: I guess I would just say I haven't heard anybody say there's an intolerance for price increases. So if that's a good sign, then -- that's what I've heard. John Morris: I think with the handful of customers I've visited with, I would tell you that I think what's encouraging is the fact that when you combine what were WM kind of core services with the ability to integrate those with the additional health care services, I think the value proposition is something that's really resonating with the customers, especially the ones that Jim was referring to earlier. These big hospital networks, we sit here in Houston, obviously, one of the centers of the universe, if you will, on that front. And when you walk in the door with a comprehensive set of capabilities that these combined organizations have now, I think there's a value proposition that is not going to be matched out there. James Fish: Yes. I think these As and Bs that we've talked about As and even Cs, this is going to end up looking like they're similar in so many respects to our big national accounts on the legacy side. So it's going to be -- it's a negotiation that they have a contract. It's going to be a negotiation on price, what's the price increase going to be. And a lot of that ends up on how much they appreciate the differentiated service offering. So I think that's -- going forward, I don't think it will look much different than what we see with other big national accounts. Tobey Sommer: Appreciate that. What are you seeing in the hazardous waste business? Is that industrial optimism that you kind of mentioned already comparable? John Morris: I think probably our special waste line that we've all commented on is probably a good spot to look. And we've said our pipeline is strong. Our results would demonstrate that through 2025. And I think going into 2026, we haven't seen any indications that that's going to solve. And that's probably the one barometer that I would point to that's probably most closely aligned with your question. Operator: Our next question coming from the line of William Grippin with Barclays. William Grippin: I just wanted to come back to some of the incremental disclosure you gave on the sustainability business. So you gave us the parts to kind of get to sort of your $700 million implied sustainability growth EBITDA in '27. Obviously, a little below the target you gave at prior Analyst Days. But if I adjust for this sort of lower recycled commodity price environment based on your sensitivity, it implies that was maybe $150 million EBITDA headwind. And so sort of ex out the commodity headwind, it feels like maybe this business is actually performing well ahead of your initial expectations. Is that a fair characterization? Tara Hemmer: We're really pleased with how the recycling business is performing, absolutely. I think the number that you rattled off was really more for the aggregate of our recycling business versus the $700 million number relates to the growth projects of recycling and renewable energy. But the comment still stands. We've been very pleased with the investments that we've made in automation and everything that we expected and then some is being delivered coming out of those automation investments, whether it's higher throughput at those facilities, whether it's higher price points on the commodities that we sell, whether it's labor, which was huge for us and has been over a 30% improvement. So really pleased with those investments. William Grippin: Appreciate that. And just the follow-up here. You gave the sustainability growth EBITDA breakout or contribution for the 2026 guide, I think, $235 million to $255 million. Have you broken that out between recycling and RNG? Tara Hemmer: We have not. But the way to think about it, including the royalty, it's about 60% renewable energy, 40% recycling. Operator: Our next question will come from the line of Tami Zakaria with JPMorgan. Tami Zakaria: So the sustainability EBITDA growth of $235 million to $255 million, can you help us with the cadence of this as we think about 1Q versus the rest of the year? Tara Hemmer: You're going to -- a similar story, the way to think about it first half, second half. So you're going to have more of a ramp in the second half than the first half when you have the carryover effect of what we brought online in the back half of 2025, and then we're bringing new projects online 3 in the first half of 2026. So you'll see a bigger impact in the second half than the first half. Tami Zakaria: So for modeling purposes, is 40-60 first half versus back half is a good proxy? Tara Hemmer: I think Ed can get back to you on that -- on some of the modeling questions. Operator: Our next question will come from the line of Kevin Chiang with CIBC. Alexander Augimeri: It's Alexander on for Kevin here. So I believe the EPA is set to finalize the renewal fuel blending rules in Q1. I was wondering if you could share any thoughts or insights into potential changes they could make to the volume obligations from their original proposal. Tara Hemmer: Sure. Yes. We had -- we're hoping that they issue it in Q1. We were hoping it would come out in late Q4, but the government shutdown delayed that a bit. What we've seen is pretty much the market has priced in the current RVO. And if anything, we're cautiously optimistic, maybe there might be some changes around the edges that could be constructive for pricing. But we're not anticipating anything dramatic coming out of the RVO. I think that's the most important point. And we've really seen stability in RIN pricing, which is the most important thing for our business, and our team has done a great job in navigating selling our RINs ratably over time. Operator: Our last question in queue coming from the line of Stephanie Moore with Jefferies. Stephanie Benjamin Moore: I wanted to follow up on a prior question that was just asked on capital allocation priorities. I mean I appreciate the commentary regarding keeping a balanced approach. But I also think as we think about 2027 and 2028, just the shared cash flow that's going to be kind of spun off from this business, especially with the RNG investments coming through, you should be back to your targeted leverage this year. So as you think about that balance and maybe looking specifically at the M&A component, you're going to have, again, a lot of optionality. So as you think about that optionality, any areas that are particularly interesting as you think about the next couple of years? James Fish: I mean I think as far as M&A goes, and then David can comment more on the capital allocation piece or the share repurchase and dividend, but those are kind of dividends kind of set. But M&A, look, I guess what I would say, and John can reiterate here, there's still plenty of good strategic acquisition opportunities out there. I wouldn't expect to see us kind of stray outside of that. We have used typically $100 million to $200 million as our estimate for acquisitions throughout the year, and that's the number we have baked in for this year, that range. So it could be at the high end of that range. But I think for the next few years, that's the number I would -- if I were modeling, that's the number I would use is kind of $100 million to $200 million in acquisitions. And then, David, dividend, hard to say what the increase is going to be, but dividends and capital allocation are going to make up the rest because really, the balance sheet, I think, you would say is in good shape. David Reed: Yes. The balance sheet is in great shape. I think the one thing just to your point about now that we have the share repurchase program is going to start back up this quarter. Obviously, we look at acquiring our own shares versus if we're looking at larger opportunities, we have a very biased view on kind of what the value of our company is. And so that's -- I think you're going to see us to continue our share repurchase program just from that point alone. But we're very disciplined in terms of our pricing approach to acquisitions. Operator: And I'm showing no further questions in the queue. I will now turn the call back over to Mr. Jim Fish, WM CEO, for any closing remarks. James Fish: All right. We had a 15-minute closing remark plan. But in light of time, I'll just say thank you all for your great questions today, and we will talk to you next quarter. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.