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Operator: Good morning, and welcome to the Fourth Quarter 2025 earnings call for Annaly Capital Management. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Sean Kensil, Director of Investor Relations. Please go ahead. Sean Kensil: Good morning, and welcome to the fourth quarter 2025 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our fourth quarter 2025 Investor Presentation and fourth quarter 2025 financial supplement, both found under the Presentations section of our website. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Co-Chief Investment Officer and Head of Residential Credit; V.S. Srinivasan, Head of Agency and Ken Adler, Head of Mortgage Servicing Rights. And with that, I'll turn the call over to David. David Finkelstein: Thank you, Sean. Good morning, everyone, and thank you all for joining us for our fourth quarter earnings call. Today, I'll open with a brief overview of the macro and market environment and then touch on our performance for the quarter and the year, following which I'll provide an update on each of our 3 investment strategies and conclude with our outlook for 2026. Serena will then discuss our financials before opening up the call to Q&A. Now starting with the macro landscape. The fourth quarter supported the prevailing narrative of a solid U.S. economy. Although official data flow was disrupted by the government shutdown. Reports received thus far suggest that the expansion continues at an above-trend pace. The labor market remains soft, however, as hiring slowed further in Q4, but limited layoffs and a reduction in labor force growth have muted the rise in the unemployment rate. Fixed income markets exhibited another strong quarter, in turn, helping 2025 register the highest total return in the U.S. aggregate bond index since 2020. The market benefited from continued strong inflows into bond funds and the ongoing decrease in both implied and realized rate volatility to the lowest levels since 2021. This decline in volatility was supported by a more predictable outlook for monetary policy and following 75 basis points of aggregate rate cuts in 2025, markets currently priced nearly 2 additional cuts later this year. The pace and realization of those projected cuts will be dependent on developments in the labor market, stability and inflation, and the composition of the FOMC going forward. The yield curve further steepened during the quarter as short-term yields fell, while long-term yields rose modestly. Swap spreads continue to widen partially driven by a shift on the part of the Fed from quantitative tightening to balance sheet expansion through reserve management purchases and bills, which served to increase the stability in short-term funding markets. And amid this constructive environment, our portfolio generated an economic return of 8.6% for the fourth quarter, with all 3 businesses contributing solid returns. For the full year 2025, we've delivered an economic return of just over 20% and a total shareholder return of 40%, underscoring the strength and resilience of our diversified housing finance strategies. And notably, we've been able to produce these results with a conservative leverage profile and our economic leverage decreased modestly to 5.6x on the quarter. Our earnings available for distribution rose marginally to $0.74 again outearning our dividend And also to note, we remained active in capital markets, raising $560 million of common equity through our ATM in Q4 bringing total equity raised in 2025 to $2.9 billion, inclusive of our Series J preferred stock issuance this past summer. With the capital raised, we were able to accretively grow our portfolio by 30% on the year with each of our 3 strategies demonstrating double-digit growth. Now turning to our investment businesses and beginning with Agency. Our portfolio ended 2025 at $93 billion in market value, an increase of nearly $6 billion in the quarter and $22 billion over the course of the year with Agency ending the year representing 62% of the firm's capital. In addition to MBS benefiting fundamentally from lower volatility in a steeper yield curve, sector has exhibited a highly supportive supply and demand picture as well. In particular, strong and consistent bond fund inflows, REIT equity raises, and GSE portfolio growth of $50 billion through year-end against the backdrop of net MBS supply surprising to the downside, helped fuel spread contraction in the second half of 2025. With respect to our portfolio activity, our purchase is centered on adding 5% coupons evenly split between pools and TBAs. Given the range-bound rate environment and steeper curve, we were comfortable taking on current coupon exposure to drive higher returns in light of the anticipated reduced hedging costs. And we also grew our Agency CMBS portfolio by roughly $1 billion given the sector's relative attractiveness compared to lower coupon MBS. With mortgage rates approaching 6% and recent prepay activity highlighting a more reactive borrower, higher coupons lagged on the coupon stack. However, we have deliberately constructed our specified pool portfolio with enough call protection to withstand a lower rate environment. For example, our 6% and 6.5% coupon pools have prepaid 40% slower than that a generic cheapest to deliver collateral, and we anticipate our holdings in these coupons should provide durable carry for years to come. Now our hedge position remained broadly stable this quarter, consistent with our strategy of maintaining a conservative rate posture. With volatility at some of the lowest levels we've experienced over the past 5 years, our duration management focused predominantly on hedging new asset purchases using a combination of both treasury futures and swaps. Now shifting to residential credit. Our portfolio ended the fourth quarter at $8 billion in market value, up $1.1 billion quarter-over-quarter, representing approximately 19% of the firm's capital. Non-Agency residential credit was relatively range-bound throughout the quarter with AAA non-QM spreads, ending the year marginally tighter at 125 to the curve. Q4 represented another record quarter for our Onslow Bay franchise as we achieved all-time highs across lock volume, fundings and securitization issuance. During the quarter, our correspondent channel locked and funded $6.4 billion and $5 billion, respectively. We settled an additional $800 million of whole loans via bulk acquisitions and we closed 8 securitizations totaling $4.6 billion. And this securitization activity resulted in the creation of $570 million of proprietary OBX assets on the quarter with mid-teens expected ROEs. And throughout the entire year, we locked over $23 billion of loans to the correspondent and funded $16.5 billion exclusively through that channel, representing an increase of 30% and 40% year-over-year, respectively. During 2025, we closed 29 securitizations for an aggregate $15.2 billion, generating approximately $1.9 billion of high-quality retained assets for Annaly in our joint venture while remaining firmly entrenched as the largest nonbank issuer in the residential credit sector. And even with the continued growth in the Onslow Bay channel and securitization program, we remain disciplined on credit with our current locked pipeline representing a 762 weighted average FICO and a 68 original LTV with limited layer risk. Now the first few weeks of 2026 have been marked by credit spread tightening as both the corporate credit and structured finance asset classes have strengthened given the movement in the Agency MBS market. Now this is a supportive backdrop for our business as declining cost of funds and stability in capital markets should keep our volumes elevated. Given our market leadership, Annaly remains well positioned to continue to benefit from the growth and liquidity of not only the non-QM market, but also the broader non-agency market, which is expected to experience the highest growth securitization issuance since 2007 this year. Now turning to MSR. Our portfolio ended the fourth quarter at $3.8 billion in market value including unsettled commitments, representing a nearly $280 million increase quarter-over-quarter and a 15% increase year-over-year, and MSR ended the year representing 19% of the firm's capital. And during the quarter, we committed to purchase $22 billion in principal balance or roughly $330 million in market value of MSR with a weighted average note rate of 3.46%. Now these purchases were across 5 bulk packages in our flow channels, of which $150 million of market value is expected to settle in Q1. And notably, we are the second largest buyer of conventional MSR in 2025, onboarding $59 billion in UPB throughout the year, and we ranked as the sixth largest nonbank agency servicer. Bulk supply was ample this past year, and we expect this pace of activity to continue in 2026 due to increasing origination volumes, coupled with compressed gain on sale margins necessitating MSR sales as demonstrated throughout 2025. Now regarding our flow business, we're focused on expanding our footprint and are now active across all GSE platforms, providing access to current coupon MSR, which we plan to purchase opportunistically. Our MSR valuation multiple increased marginally on the quarter driven by a steeper yield curve, modest spread tightening and lower volatility. Fundamental performance within the MSR portfolio continues to be strong and cash flows remain durable. The portfolio paid 4.6% CPR in Q4, unchanged quarter-over-quarter while serious delinquencies remain muted at 55 basis points. And with a weighted average note rate of 3.28% our portfolio is still 250 basis points out of the money. As we continue to enhance our subservicing and recapture relationships, we look forward to growing our MSR portfolio in the coming year taking advantage of the role we've created as a preferred partner to the originator and servicer community. Now to conclude with our outlook, as we look further into 2026, each of our investment strategies is well positioned to continue delivering strong results for our shareholders. The agency spread tightening following the GSE's recent MBS purchase announcement has been pronounced, but it is important to note that not only are technicals in the market vastly better than at any time since the Fed was actively buying MBS. Also MBS hedging costs should be meaningfully lower given the decline in volatility supporting low to mid-teen prospective returns. And we anticipate the non-Agency market to continue to grow as a share of total origination and Onslow Bay is uniquely positioned to maintain its healthy pace of loan acquisitions and securitization issuance. The non-QM market, in particular, has matured into a more liquid institutional asset class and our early positioning gives us significant competitive advantages in loan selection and execution. And our best-in-class MSR portfolio remains distinguished with an average note rate that is significantly out of the money and an exceptional credit profile which provides our portfolio with a stable cash flow vehicle, supporting our overall yield and returns. And most importantly, we believe our diversified housing model will continue to perform for our shareholders in the year ahead. In an environment where spreads across various asset classes have tightened unevenly, the optionality to invest in the most accretive assets is an important lever to drive returns that monoline peer strategies are not afforded. And accordingly, while Agency will certainly continue to remain the anchor of our portfolio, our non-Agency strategies will likely see additional capital allocation, all else equal. We do, however, have the earnings power and the liquidity to be both patient and opportunistic and the scale to maintain our market leadership across housing finance and our diversification enables us to be resilient across different rate cycles and market environments. And now with that, I'll hand it over to Serena to discuss the financials. Serena Wolfe: Thank you, David. Today, I will provide a brief overview of the financial highlights for the quarter ended December 31, 2025, as well as select full year measures. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. Starting with book value. As of December 31, 2025, our book value per share increased 5% from $19.25 in the prior quarter to $20.21. After accounting for our $0.70 dividend, we achieved an economic return of 8.6% in Q4. This brings our full year 2025 economic return to 20.2%. Strong investment gains drove this quarter's performance. We benefited from spread tightening driven by lower volatility as favorable technical factors. Gains on our interest rate swaps also supported results as swap spreads widened. Earnings available for distribution per share increased by $0.01 to $0.74. And again, as David mentioned earlier, exceeded our dividend for the quarter. This increase in EAD was driven by a 30 basis point improvement in our average repo rate to 4.2% and higher average investment balances resulting from growth in our Agency and Residential loan portfolios. For the full year, average yields rose 26 basis points year-over-year from 5.13% in 2024 to 5.39% in 2025. However, these benefits were partially offset by lower levels of swap income due to lower average receive rates. Net interest spread and net interest margin, both excluding PAA, remained strong and comparable to prior quarters at 1.49% and 1.69%, respectively. For the full year 2025, net interest spread and net interest margin, both excluding PAA, reached 1.4% and 1.7%, an improvement of 18 basis points and 13 basis points, respectively further demonstrating the returns from our disciplined investing and funding teams. Turning to financing. We added $6.7 billion of repo principal at attractive spreads while deploying the proceeds from accretive ATM issuances during the quarter. This led to a Q4 reported ending repo rate of 4.02%, down 34 basis points. Additionally, our weighted average repo days ended the quarter at 35 days, 14 days lower than the prior quarter. Our economic leverage ratio remained historically low at 5.6x, down 1 tick from the third quarter's end. Meanwhile, total warehouse capacity across our residential credit and MSR businesses reached $6.9 billion, with $2.7 billion of that committed. We continue to maintain ample capacity in both businesses with utilization rates at 47% for residential credit and 50% for MSR. As for liquidity, we ended the fourth quarter with $7.8 billion in unencumbered assets, including $6.1 billion in cash and unencumbered agency MBS. We also have about $1.5 billion in fair value of MSR pledged committed warehouse facilities but still undrawn, which can be quickly converted to cash, subject to market advance rates. As a result, our total assets available for financing are approximately $9.4 billion, up $500 million from the third quarter. This represents about 58% of our total capital base and provides significant liquidity and flexibility. Finally, regarding OpEx, our efficiency ratios again improved significantly during the quarter, down 10 basis points to 1.31% and brought the full year ratio to 1.42%, illustrating the efficiencies of our size and scale. Now that concludes our prepared remarks, and we'll now open the line for questions. Thank you, operator. Operator: [Operator Instructions] And today's first question comes from Alyssa DeStefano with KBW. Bose George: This is Bose with KBW. The first question, could you give us an update on mark-to-market book values? David Finkelstein: Sure, Bose. So as of Tuesday, our book was up 4%, inclusive of the dividend accrual so 3% netting that out after yesterday, maybe a fraction of 1% higher than that. Bose George: Okay. Great. And then can you just talk about the portfolio returns or the blended ROEs on the portfolio given the spread tightening since quarter end? And then can you just translate that into a comfort level with your dividend in 2026. David Finkelstein: Sure. So overall, we could still achieve an upwards of mid-teens returns. When we look at the Agency market, obviously, we've gotten a considerable amount of tightening. But versus swaps, you still get there. And we're confident in the durability of the swaps market as a hedge given the fact that the Fed's obviously, as I mentioned in my prepared remarks, much more considerate of balance sheet availability. And we haven't really tightened that much or rather -- sorry, widen that much since that announcement. So we feel like the swaps market is a perfectly good place to hedge and you can get that return. In the resi market, the whole loan channel to securitization is still giving us those returns. MSR is a little bit lighter. But when you consider the hedging benefits and diversification benefits will take that. And then when you look at our overall balance sheet, where we own assets is very supportive of the dividend yield. So we feel good about it. We outearned in Q4. We expect outearned certainly in Q1, and we feel like the dividend is safe here. Operator: And our next question today comes from Jason Stewart at Compass Point. Jason Stewart: Obviously, on the MSR portfolio, the current portfolio is pretty well insulated from modestly lower interest rates. But could you expand on your comment about being opportunistic for coupon MSR and how you're expecting that market to trade as prepays increase? David Finkelstein: Sure. I'll hand it off to Ken for that. Ken Adler: Yes. I mean we've now set up the infrastructure to be fully active in that space. And the primary way we've done that is through the Fannie and Freddie MSR exchange platforms. And we're now active with close to 100 counterparties today, and we provide pricing every day. What's really interesting about new production pricing is it really doesn't move that much with interest rates because it's always set at the current mortgage rate. So really, what it is, is about the value change after you buy it, I think. And given the improved ability to do recapture for the industry, that's been much more insulated than it's been in past regimes. So we're there, and we don't see it as valuable to us at this time based on where we can buy the lower note rate stuff. So to the extent relative value changes and that becomes more attractive, you will see us more active in that area. David Finkelstein: Yes. And I'll just add, Jason, to the extent we're a financial participant, the low note rate MSR has worked well and let the operating platforms, the originators focus on production coupon and their management of the borrower, but we do expect origination obviously, to pick up a lot this year with a 6% mortgage rate. And so as a consequence, you'll see a lot of production coupon MSR hitting the market. And we've gotten comfortable, very comfortable with our recapture partners at our servicers to where we can manage that quite well. So we'll see how the market develops, but we'd like to get more into the production MSR space. Jason Stewart: Okay. That's helpful. And just 1 more point on that. How much would you need to see valuations change for it to hit return hurdles in terms of current coupon production. Ken Adler: Yes. Well, what's going on is when originators sell MSRs, they want to sell the MSR that's least valuable to them. And that is the lower note rate MSR because there's a lower chance that customer is going to become active. So in today's world, when they originate and Dave alluded to this in the prepared comments, when they originate a loan, the profitability on that origination does not allow MSR retention to retain all the MSR. In fact, they have to sell a majority of the MSR to be liquidity neutral. So what we're seeing is originators prefer to sell the lower note rate MSR so that's more valuable to us because that's what they're selling. We expect that flow to dry up and then the relative value shifts to the current coupon. But also, as Dave alluded to, we're well set up based on network of people to buy from and then a network of people to both subservice and perform recapture for us. Operator: And our next question today comes from Eric Hagen at BTIG. Eric Hagen: Lots of speculation out there right now for things the administration can do to lower mortgage rates further, including a potential cut to guarantee fees. I mean can you weigh in on this? And how you think a big G-fee cut could impact the prepayment environment? David Finkelstein: Sure. So obviously, a G-fee cut is something that's been talked about. Our view -- and we've been communicated about this to policymakers is that a G-fee cut on purchased loans is perfectly appropriate. We're concerned that if you do broad G-fee cut and impact existing loans, you're going to damage the MBS market and widen spreads. And I think that there's been an awareness of that. And furthermore, if you can find it to purchase loans, you don't negatively impact the ROEs of the GSEs, and that's certainly a consideration. So perhaps they do something like give it a year holiday on purchased loans, we think that would make sense to help first-time homeowners and new buyers get into the housing market. Eric Hagen: Okay. That's great. You mentioned the cost of hedging should be lower as a result of the GSEs being back in the market, spread volatility being lower. I mean what metric would you use to maybe like compare the cost of hedging over time? And how would you maybe compare the attractiveness of raising capital when spreads are widened kind of more attractive versus an environment of tighter spreads and lower spread volatility? David Finkelstein: Yes. So the first question in terms of measuring spread volatility, like here is our view as it relates to the GSEs and their involvement. We don't have a lot of clarity. We know there's a $200 billion mandate, but we don't know what role the GSEs are going to play. I think it would be highly productive if they evolved into a spread stabilizing force for the MBS market, and that was somewhat of the role they played pre-financial crisis. And it gave investors' confidence that mortgage spreads would remain relatively stable. And as a consequence, it incentivize participation in the market. And then overall, given higher participation, you got a tighter spread as a consequence of others doing the work for the GSEs because you knew that they would be there when they got too wide and provide support for the market. And they also were economically focused and sold when mortgages were tight. That would be a good outcome. They clearly don't have the capacity that they did pre-financial crisis but they got a lot of dry powder. So we'd like to see that evolution, but we'll have to wait to see. In terms of measuring spreads, in volatility, spread vol has been very stable for the last 6 months, and it's been quite comforting. We haven't had to spend a lot of money at all hedging and you see that in our economic return. So we feel quite good about that. And then Srini, you want to dive into your second question again -- second part of your question again, Eric? Eric Hagen: Sure. Yes, we're just looking at how you might compare the attractiveness of raising capital in the different spread environments. David Finkelstein: So look, I'll jump in there, and then Srini can add. When spreads were extraordinarily wide. It was obviously a catalyst to raise capital because there was a tremendous amount of upside. Compare that to today, where spreads are meaningfully tighter, obviously, from a relative value standpoint, it doesn't look as attractive. But when you consider the fact that the stability of spreads is higher, it gives you some confidence. But candidly, if I had to choose between 1 environment or over the other, I'd rather have wider spreads, with a little bit more uncertainty in terms of raising capital. So from that standpoint, I would expect that the pace of capital raising may not be as high as in that environment. But nonetheless, the amount of support for the Agency market, given the fact that you have very strong technicals from obviously the GSEs, but also money managers, REITs raising capital, et cetera. That's quite comforting. And to the earlier part of the question about volatility, where the cycle lows, and that's supported by what we're seeing day-to-day in markets. Another point to note is that the Fed is shoring up balance sheet, as I talked about in my prepared remarks and in Bose's question, the fact that the Fed went from QT to adding reserves in the system is a very good sign for balance sheet intensive products, whether it's treasuries or Agency MBS, the ability to finance is key. And I think it's been a little bit underappreciated. So the Agency market is a safe place right now. It's just that spreads are obviously at the tight end of the range. They're close to QE type levels. The safety of those returns is there, but the abundance of yield is not quite there. V.S. Srinivasan: And going forward, there could be pockets of opportunity if we get more clarity on what policy changes come about, post the GSE announcement to purchase MBS, higher coupons really have not tightened that much because that has increased policy uncertainty. So as we get some clarity there, there could be pockets of opportunity. Operator: And our next question today comes from Doug Harter at UBS. Douglas Harter: David, you were just talking about the lower risk environment that we're in today. I guess as you look out, like how do you handicap the risks that, that could change, what might be the factors that could cause kind of an end to this low-risk environment with more volatility. David Finkelstein: Sure. From a macro standpoint, then I'll drill down a little bit on the mortgage market. But the 2 biggest risks that we see are the global fiscal picture and the amount of debt out there, including that in the United States and a little bit of complacency around it, and you could end up with the vol environment because of the amount of debt in the world. And I think it's probably under-recognized the risk of that. And another macro risk is just the euphoria in asset markets and asset pricing. It's been a pretty remarkable run across markets, and there's real signs out there that people should be -- investors should be a little bit concerned. Just look at the price of gold as a safety store of value. It's doubled since the beginning of last year and up 27%, 28% this year. So I think there's some nervousness out there, and it's a little bit hard to invest and we could get a correction broadly in assets. Now as it relates to the Agency market, specifically in our markets, valuation as well is a risk. We are at the very tight end of the range on Agency MBS. It's justified given the facts I mentioned earlier, but nonetheless, they're relatively tight. Another risk as Eric discussed is housing policy uncertainty and what role the GSEs will play and what the administration will do to potentially increase affordability and how that could impact the convexity profile of the Agency market. So those are 2 things we're watching quite closely in terms of risks in the Agency market specifically. Operator: And our next question today comes from Rick Shane at JPMorgan. Richard Shane: Look, you guys are seeing attractive opportunities buying MSRs, low coupon MSRs. I assume you're basically seeing that as an attractive IO. Given discounts in MBS for lower coupons, does it make sense? Is it attractive to be buying lower coupon MBS at this point as well. I'm just curious, particularly as sort of on the margin, you're starting to get more questions about prepayment. David Finkelstein: Yes, you're just saying as a hedge to our MSR and the runoff. Richard Shane: Exactly. Give yourself an opportunity to pick up some discount accretion if speeds pick up and also potentially is an attractive yield. David Finkelstein: Yes. And look, the first point I'd note is that the valuation on low coupon MBS is quite tight. So there's better ways, I think, to manage that type of risk, whether it be through duration or other factors. There's a little bit of policy risk in low note rate MSR, but we feel it's very safe. And I think when it comes to housing policy changes, you could see legislation that reduces capital gains tax so you could get some turnover in low coupon MSR but those are at the margin. Otherwise, I think the borrower in a 3-odd percent note rate loan really ascribes the value to that loan, and there's some real reluctance to give it up. So we do feel like it's a safe durable asset and we do hedge some of that uncertainty through duration but to couple it with low coupon MBS. And we do have some, and that is obviously a consideration, Rick, but the valuations just don't warrant it. Richard Shane: Got it. And is there enough liquidity in the lower coupons that if you felt like there -- the bid-ask was attractive that you could deploy capital there? Or is it -- and that's a nuance just as equity guys, I don't think -- at least I fully appreciate. David Finkelstein: Yes. Yes. And there is liquidity in low coupons. It's not as good as production and slightly higher. But if you wanted to compile a bigger position in local bonds, it wouldn't be hard. I mentioned we added DUS to the portfolio, Agency CMBS. In our view, relative to lower coupon MBS that was meaningfully cheaper. And so to get a good convexity profile and longer duration assets that was sufficient for us last quarter. Richard Shane: Got it. Okay. That makes sense because that's got a super low prepayment characteristics because those are... David Finkelstein: Exactly. Locked out. Operator: And our next question today comes from Harsh Hemnani with Green Street. Harsh Hemnani: Thank you. So I think on the prepared remarks, you characterized the current environment as spreads have tightened across all housing finance assets, but unevenly. And it seems like credit is starting to look a little bit more attractive on a relative value basis and we saw that section of the portfolio grow a little faster than the rest of the businesses this quarter. I guess, as you look out over the next year or so, your long-term target for the equity allocation is like 60% Agency MBS and 20% across the other 2 each. Can you help us put some bands around that? How much could we see credit exposure or MSR even increase from your -- over that 20% number? David Finkelstein: Sure. And I did allude to this, Harsh, so thank you for the question. So in 2025, we grew the Agency portfolio of 30% each resi and MSR by 15% through the capital raises that we undertook. And that was the right weighting to go with, given how well Agency has done. So we're perfectly happy with it. But now we're at a little bit of a different balance when it comes to valuations, and we do from a capital allocation perspective, favor resi credit, even though it has tightened and MSR for that matter. And we like those percentages if we did add capital to switch. We'd like to grow resi and MSR 30% and Agency, less than that. So the objective today from a capital allocation standpoint is to increase MSR and resi. It's episodic in terms of the opportunities, notwithstanding the consistency of the pipeline for our whole loan correspondent channel, but we would like to grow those businesses. And we've said in the past that the longer term weighting we would like to achieve is 50% Agency, not below that and 30% resi, 20% MSR. We don't have to get there right away, but that is an objective. We have to be very considerate with respect to the credit environment. But nonetheless, when you look at the health of the loans we're acquiring, and our portfolio, we're very comfortable with the credit we're doing. And so we're hopeful we can grow it. And I don't expect us to get to those objectives over the near term in terms of down to 50% Agency, but we'd like to at the margin increase MSR and resi here. Operator: And our next question comes from Trevor Cranston of Citizens JMP. Trevor Cranston: You talked some about the impact of the GSE portfolio buying on the market. I was curious if you could share your views on the likelihood or feasibility of the portfolio caps potentially being increased at some point as they get closer to current cap size? And then also, I was just curious if you guys have seen or if you expect to see any impact from their portfolio buying on the swap or funding markets? David Finkelstein: Yes. So as it relates to the caps, it's hard to say. Obviously, everybody probably saw that post from the FHFA Director last Friday, I believe it was talking about they don't intend to increase the caps, but we just don't know. But when you look today, they came into the year with, I think it's $178 billion in capacity between the 2 of them. So we're a long ways away from hitting those caps, and we'll see how it evolves. But we don't have a good answer as to whether or not those caps will actually be increased. Obviously, they can do it in conjunction with treasury and it doesn't require Congress. So we'll have to wait and see how the year evolves on that front. And sorry, the second part of your question, Trevor. Hedging, yes. Trevor Cranston: Yes. Whether you're seeing any impact from the GSE buying on swap markets. David Finkelstein: Not as much. You could argue that swap spreads should be wider given the adjustments the Fed has made with respect to their asset purchases, and we didn't get, as I mentioned earlier, a meaningful amount of widening based on the greater availability of balance sheet. And it could indicate some involvement from the GSEs. We don't have information on that. I do know from our experience pre-financial crisis, and I was on the sell side interacting quite extensively with the GSEs. If past is prologue in terms of how they behave, they would hedge those purchases and use swaps because that will enhance the yield relative to shorting treasuries, for example, and they can get a decent ROE out of it. So we would expect that to be the case whether they're actively engaged in the swaps market today. I don't have a good answer for their involvement. And as it relates to funding markets, the GSEs are active participants in the funding markets with their liquidity and their capital during parts of the month and their absence might be a factor. However, what I would say is that they're buying MBS, which is a balance sheet-intensive product, and is funded in many circumstances. So they're taking assets out of the market that might otherwise be funded. And so even though they're not providing as much liquidity in the repo market that should offset -- the asset purchases should offset the lack of funding. And really what matters, I think, in terms of funding markets is reserves in the system. And that's the key factor we look at, and they're now back to slightly over $1 trillion -- or $3 trillion, and we feel like funding markets are still going to be fine without their participation. And Srini, you got another point. V.S. Srinivasan: The 1 thing I would add is just the size of the GSE book. I mean if they bought the entire $200 billion, it's about $100 million DV01 so if you assume they have done 5% or 10%, you're talking about $5 million, $10 million DV01, it's just not large enough for you to see any impact on swaps spreads right away. It will take time. Operator: And that concludes our question-and-answer session. I'd like to turn the conference back over to David Finkelstein for any closing remarks. David Finkelstein: Thank you, Rocco, and thank you, everybody, for joining us today. Have a good rest of the winter, and we'll talk to you real soon. Operator: Thank you, sir. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties, Inc. fourth quarter 2025 results. Our future speakers today are Marguerite Nader, our CEO, Patrick Waite, our President and COO, and Paul Seavey, our Executive Vice President and CFO. In advance of today's call, management released earnings. The call will consist of opening remarks and a question and answer session with management relating to the company's earnings release. For those who would like to participate in the question and answer session, management asks you that you limit yourself to two questions so everyone who would like to participate has ample opportunity. As a reminder, this call is being recorded. Certain matters discussed during this conference call may contain forward-looking statements in the meaning of the Federal securities laws. Forward-looking statements are subject to certain economic risks and uncertainty. The company assumes no obligation to update or supplement any statement that becomes untrue because of subsequent events. In addition, during today's call, we will discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplemental information, and our historical SEC filings. At this time, I would like to turn the call over to Marguerite Nader, our CEO. Marguerite Nader: Good morning, and thank you for joining us today. I am pleased to report the final results for 2025. We continued our record of strong core operations and FFO growth, with full year growth in NOI of 4.8% and a 5% increase in normalized FFO per share. Our year-end report is a good time to reflect on our business and our industry. Our business model is consistent and durable during all economic cycles. I'd like to focus on our annual rental streams, which comprise over 90% of our revenue. We offer prospective customers the opportunity to join a community where they can build their social connections in an active environment. The strength of our activity offerings continues to be a leading factor in resident retention at our communities. The average age of a new resident is 60 years old, and many are motivated by a desire to escape colder climates and avoid the isolation and inactivity found during northern winters. Resident engagement is a strength of our PLIP. Across our portfolio, hundreds of resident clubs promote social interaction, contributing to high occupancy levels and extended average lengths of stay. Affordability in our sector remains a competitive advantage. Our communities provide a well-maintained living environment at a lower cost than surrounding housing alternatives. The value proposition is further enhanced by the structural advantages of manufactured housing. The homes have changed meaningfully over the last twenty years, with today's homes generally featuring three-bedroom, two-bath layouts, modern open floor plans, energy-efficient systems, and contemporary kitchens and bathrooms. These home enhancements have wide demographic appeal and have strengthened the quality of our communities. Our MH portfolio has produced impressive growth rates over the last thirty years. These growth rates reflect an operating model in which residents choose to make our communities their long-term home, and ELS has reinforced that decision by consistent investment in the community to support growth. Our RV portfolio finished the year strong with an increase in annual of over 500 sites over the last six months. Our annual RV customers generally stay with us for approximately ten years and appreciate the ability to use our properties as a second home or weekend getaway. Last night, we issued initial guidance for 2026. Our guidance is built based on the operating environment at one of our 450 communities, including a robust market survey process. Our teams communicate with our residents to understand their views around capital projects and property operations. The results show strength in both top-line revenue and NOI. For the full year 2026, we anticipate normalized FFO growth of 3.7%. Next, I would like to update you on our 2026 dividend policy. The Board has approved setting the annual dividend rate at $2.17 per share, a 5.3% increase. Our decision to increase the dividend is driven by stable cash flow, a solid balance sheet, and strong underlying business trends. In 2026, we expect to have approximately $100 million of discretionary capital after meeting our obligations for dividend payments, recurring capital expenditures, and principal payments. Over the past ten years, we have increased our dividend by an average of 10% per year, and this year's dividend marks the twenty-second consecutive year of annual dividend growth. I want to thank our team members for all their efforts in 2025, and I'm looking forward to continued operating success in 2026. I will now turn it over to Patrick to provide more details about property operations. Patrick Waite: Thanks, Marguerite. I'll start with some color on our MH business and then address our long-term RV business. In 2025, these revenue streams totaled more than $1 billion. Over the last five years, their combined revenue CAGR was 5.9%, continuing to support our history of consistent property NOI growth since our IPO in 1993. Approximately half of our MH revenue is in Florida. Another 20% is in California and Arizona, and the rest is mostly in the North Central and Northeast US. Over the last five years, we've sold 3,800 new homes, which improved our quality of occupancy. Florida has been a driver of growth with migration patterns supporting economic growth and demand. The rest of the Sunbelt, coastal, and northern markets have contributed to consistent growth as well, given the desirable locations of our properties and the great value that our MH communities offer in their submarkets. Focusing on Florida first, our largest submarkets, Tampa, Saint Pete, and Fort Lauderdale, West Palm Beach, are supported by tourism, finance, and technology, favorable tax structures, business relocations, and in-migration. Demand for MH communities has been consistently strong. And over the last five years, we sold nearly 2,000 homes and reduced our Florida rental load to 2.5% of our occupied sites. Looking next to Arizona, our largest market is Phoenix Mesa, which experienced strong population growth and GDP growth and has supported demand for our MH properties. We sold more than 400 homes over the last five years. The last of the big three is California. Our MH communities offer great value in high-cost markets. Given the high demand, our California properties have an average occupancy of 96%. Before I move on to our RV business, I would note that our portfolio and locations are well-positioned to benefit from the demographic trends in the US. Our recent investor presentation highlights these demand drivers. There are 70 million baby boomers in the US, and every day, 10,000 baby boomers turn 65. Right behind the baby boomers are 65 million Gen X, all aging towards our core demographic. After Gen X is the millennial cohort of 75 million, they will start retiring in about twenty years. As these generations age, they behave similarly, although the timing may differ. As an example, Gen X and millennials entered household formation stages in buying homes later than baby boomers. But the direction is consistent through midlife years and into retirement. They seek what we offer: great value, active lifestyles, and social engagement. On the RV annual business, long-term stays and low turnover provide a stable revenue stream similar to our MH business. Most of our annuals own a park model or RV with fixed site improvements. And when they choose to leave, they resell their unit in place to the next long-term guest, resulting in an uninterrupted revenue stream, very similar to our MH business. Over the last five years, the average RV annual rate growth of more than 6% contributes to our durable long-term revenue. Over the last two quarters, we added more than 500 annuals, and we continue to see consistent demand throughout the Sunbelt and Northern markets. Attrition that we experienced early in 2025 appears to have subsided, and both current and new RV annual customers are enthusiastic about staying with us. Our RV properties are in desirable locations, and a customer can buy one of our resort homes for a fraction of what a lake house or similar accommodation will cost in those markets. The value we offer across our long-term revenue business lines supports consistent demand. As we head into 2026, we see demand for our MH and RV annual offerings, which supports consistent growth in these long-term revenue streams. I'll now turn the call over to Paul. Paul Seavey: Thanks, Patrick, and good morning, everyone. I will discuss our fourth quarter and full year results, review our guidance assumptions for 2026, including some key considerations for the first quarter, and close with a discussion of our balance sheet. Fourth quarter normalized FFO was $0.79 per share, and full year normalized FFO was $3.06 per share, representing 4.25% growth in fourth quarter and year-to-date periods, respectively, compared to the prior year. Strong core portfolio performance generated 4.1% growth in the quarter and 4.8% year-to-date. Our results are in line with our guidance provided at the 2025 and reflect our consistent track record of earnings growth in line with guidance. Core community-based rental income increased 5.5% for the full year 2025 compared to 2024, primarily because of noticed increases to renewing residents and market rent paid by new residents after resident turnover. Full year core RV and marina annual base rental income, which represents approximately 73% of total RV and marina base rental income, increased 4.1% compared to the prior year. Full year core seasonal and transient rent combined decreased 9.1%. The net contribution from our total membership business consists of annual dues and upgrade subscription revenues, offset by sales and marketing expenses. For the full year, the membership business contributed $65.6 million net. During the year, we enrolled approximately 5,900 upgraded membership subscriptions. Core utility and other income increased 3.4% for the full year compared to the prior year. In 2025, our utility recovery rate was 48.7%, a 220 basis point increase from 2024. Full year 2025 core property operating expenses increased 1% compared to the same period in 2024. Our ability to deliver expense growth below CPI resulted from our management of payroll expense at our RV properties, our 2025 insurance renewal, and a reduction in membership sales and marketing expenses. Income from property operations generated by our noncore portfolio was $1.9 million in the quarter and $10.2 million for the full year 2025. Property management and corporate expenses increased 1% for the full year 2025 compared to the prior year. The press release and supplemental package provide an overview of 2026 first quarter and full year earnings guidance. The following remarks are intended to provide context for our current estimate of future results. All growth rate ranges and revenue and expense projections are qualified by the risk factors included in our press release and supplemental package. Our guidance for 2026 full year normalized FFO is $3.17 per share, the midpoint of our guidance range, of $3.12 to $3.22. We project core property operating income growth of 5.6% at the midpoint of our range, and we project the noncore properties will generate between $4.6 million and $8.6 million of NOI during 2026. Our property management and G&A expense guidance range is $120.3 million to $127.3 million. In the core portfolio, we project the following full year growth rate ranges: 4.1% to 5.1% for core revenues, 2.7% to 3.7% for core expenses, and 5.1% to 6.1% for core NOI. Full year guidance assumes core MH rent growth in the range of 5.1% to 6.1%. Full year guidance for combined RV and marina rent growth is 2.4% to 3.4%. We expect 5.2% growth in rental income from RV and marine annuals at the midpoint of our guidance range. For the full year, our guidance assumes interest expense in the range of $133.3 million to $139.3 million. Our first quarter guidance assumes normalized FFO per share in the range of $0.81 to $0.87. That represents approximately 26% of full year normalized FFO per share. Core property operating income growth is projected to be in the range of 4.5% to 5.1% for the first quarter. First quarter growth in MH rent is 5.8% at the midpoint of our guidance range. We project first quarter annual RV and Marina rent growth to be approximately 4.5% at the midpoint of our guidance range. Our guidance assumes first quarter seasonal and transient RV revenues perform in line with our current reservation pacing. I'll now provide some comments on our balance sheet and the financing market. Our balance sheet is well-positioned to execute on capital allocation opportunities. We have no secured debt maturing before 2028, and the weighted average maturity for all debt is seven and a half years. Our debt to EBITDAre is four and a half times, and interest coverage is 5.7 times. We have access to $1.2 billion of capital from our combined line of credit and ATM programs. We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us. Current secured debt terms vary depending on many factors, including lender, borrower, sponsor, and asset type and quality. Current ten-year loans are quoted between five percent and five and a half percent, 50 to 75% loan to value, and 1.4 to 1.6 times debt service coverage. We continue to see solid interest from the GSEs and life companies to lend for ten-year terms. High-quality MH assets continue to command the best financing terms. Now we would like to open it up for questions. Thank you. Operator: And to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Michael Goldsmith from UBS. Your line is open. Michael Goldsmith: Good morning. Thanks a lot for taking my question. First question on the seasonal and transient business. It sounds like the first quarter expectations are consistent with the reservation pacing that you're seeing. But then what's implied for the balance of the year is that it improves pretty materially to, like, a positive, you know, two percentage, 1.8% if you're giving specifics. So just trying to get a sense of what are you seeing or what gives you confidence that seasonal and transient can accelerate through the balance of the year as you sit here today? Marguerite Nader: Sure. Good morning, Michael. Maybe Paul could take us through the pieces of the guidance and Patrick can give a little bit of color about the operating performances. Paul Seavey: Sure. I'll start with I'll frame first. The composition of the revenue and some of the timing considerations. So the first quarter, we earned approximately 50% of our anticipated full year seasonal rent and almost 20% of our full year transient rent. And by the end of the second quarter, we've earned almost two-thirds of that full year seasonal, and nearly 45% of our full year transient rent. The last thing I'll mention is during the third quarter, 40% of the transient rent is earned. So when we think about that activity, particularly transient, the short booking window means our revenue is heavily influenced by weather forecasts. We did put together the 2026 budget for these two revenue streams based on current reservation pacing for rent we anticipate earning in the first quarter. That implied rate is down about 13%. Then for the remainder of the year, as you said, Michael, we anticipate approximately 2% growth in those revenue streams combined. Patrick Waite: Yeah. So, you know, I guess a little color on the seasonal and transient, but first, I'd start with our annual RV that represents 70% of our total RV revenue. And as we mentioned in our opening remarks, we added 500 annuals in the back half of the year. So we see consistent demand, and that demand, through the year, substantially offset the attrition that we saw earlier in the year. On a seasonal and transient, you know, what Paul just walked through, you know, we've basically given you the first our first quarter expectations. And as you looked at Q2 to Q4 for seasonal and transient, that growth represents about $1.3 million. On the transient front, really the points that we focused on were the four major holidays, June 10 is on a Friday, and the July 4 is on a Saturday. So the two variable, key holidays are on weekends. Also, we're coming into America's 200th birthday, so the July 4 is expected to be, you know, particularly good for the hospitality business. And then last, although it's early, our booking pace for the Q2 to Q4 period on transient is favorable to what we experienced last year. On seasonal for Q2 to Q4, the majority of the pickup is in Q4 as we'd be entering the 2026-2027 Sunbelt season. And, again, early booking pace is ahead of last year. So really, at this point in the year, we're surveying and having events with our seasonal customers that are on-site. The ones who are on-site, the two things that they rank most highly are the warm weather and the time they spend with their friends. And anybody in the Northern United States over the last few weeks has experienced subzero temperatures. So it's particularly relevant today. We also survey the guests who did not book with us this season but have stayed with us in the past. They highlight really the same two things. They miss their friends, and they want to spend time in the warmer weather. So both of those groups are contributing to our positive early booking pace. Those are really the factors we considered as we're working our way through our long budget process, particularly with the seasonal and transient. But also for the RV, the total RV revenue. Demand and occupancy trend that we're seeing for the 70% of our RV annual has been positive in the last few quarters. Michael Goldsmith: Very helpful. And maybe just as a follow-up, and maybe this also relates to the expense line, is you just did you just had expense growth of 2.2%. You're guiding to 3.2% expense growth at the midpoint. So how much of that reflects, like, just a step up in the transient revenue and so that there's a corresponding, like, payroll increases related to on the expense side? And then also, you know, what are you expecting for your is, like, what are you expecting on the insurance renewal, and is that playing a role in the step up in expense expectations for 2026? Thanks. Paul Seavey: Sure, Michael. I guess the way that I would kind of address those rolling it all together, in some respects, we have guided to expense growth that generally tracks to it's about a 50 basis point premium to current CPI. We do have assumptions for payroll at higher staffing levels than we had in 2025 to match the revenue. The same is true for the utility expense, as a result of the expectations. With regard to insurance, we're quite pleased that we didn't have any adverse claims experience in 2025. In addition, there are indications that the market is softening. Our guidance does have an assumption with respect to our insurance renewal. However, consistent with our past practice, we're not disclosing that. We've started the renewal process, so we won't make our guidance expectation public. We do look forward to updating you in April after we've completed our renewal. Michael Goldsmith: Thank you very much. Good luck in 2026. Marguerite Nader: Thanks, Michael. Operator: Thank you. One moment for our next question. Our next question will come from the line of Jeffrey Spector from Bank of America Securities. Your line is open. Yana Galan: Hi. This is Yana on for Jeff. Thank you for taking the question. Just, you know, curious on a smaller portion of the RV and Marina. On the Marina side, there were some marinas that were taken offline. Was wondering if you can kind of help us on the progress of those repairs and when those may come back into the portfolio. Patrick Waite: Yeah. Yana, it's Patrick. You're right. It's a small part of the business, and it was a headwind for the quarter. You know, as we're working through that, three marinas. As we're working through repairs of prior storm damage, I think I mentioned this when we met in previous calls that we had some delays with respect to permitting and construction. We're working our way through that. I think we have a pretty good eye on timing at this point, and it looks like it's the latter half of 2026 when we're going to start coming online. That should be completed into 2027. Yana Galan: Great. Thank you. And then maybe a little bigger picture. Kind of curious, some of the new, you know, whether it's the Roads Act or some of these other MH affordable housing programs that the administration is looking at. I was curious if there were potentially any HUD pilot programs that, you know, ELS was looking to be a part of. Marguerite Nader: Yeah. We haven't seen anything new from HUD. I think, you know, when you consider how HUD? Manufactured housing fits into the discussions in DC, it's important to consider manufactured housing in a kind of a broader degree. There's about 7 million manufactured homes in the country that house about 18 million people. And on a square foot basis, MH costs about half as much as single-family construction. So it's definitely a product that could help to address the housing issues across the US, but we really don't see widespread acceptance, especially in areas where we would see being interested in developing new communities, and so we haven't seen a lot of change in DC. Yana Galan: Thanks, Marguerite. Thanks, Jenna. Operator: One moment for our next question. Next question will come from the line of Jamie Feldman from Wells Fargo. Your line is open. James Colin Feldman: Great. Thanks for taking the question, and good morning. Marguerite Nader: Good morning. James Colin Feldman: Can you talk more about Canadian customers, and it sounds like you're seeing a you feel more optimistic about things getting better. But can you talk specifically about Canadian customers and what you're seeing and what's in the guidance? What's your assumption for the decline in '26? In that group specifically? Paul Seavey: Yeah. I can. With respect to the first quarter for seasonal transient, as I mentioned before, it implies a 13% decline compared to the same quarter last year. The reservation pace for the seasonal customers is consistent with the pace we discussed during our call in October. So there hasn't been any meaningful change in that across the customer base. And then just thinking about the Canadians, we've previously talked about the fact that 10% of the total RV revenue is what the Canadians represent. 50% of that is from our annual customers. We have not seen any meaningful increase in home sales from those Canadian annual customers. So that demand profile remains strong. And then the remaining 50% is what we've talked about being split between the seasonal and transient. Marguerite Nader: And, Jamie, Patrick walked through some of the just the Canadian sentiment based on some of the survey work that we had done, and that points to a positive view on our properties and traveling back to Florida. James Colin Feldman: Okay. Thank you for that. And then I guess just shifting gears to the investment market. Anything that we should pay attention to that might feel different in '26? I know it's been very challenging to find opportunities. And maybe that's the honest question. Anything on the legislative side or policy side that might be helpful for you with affordability or just in general, maybe a state of affairs if you could provide it on the investment market? Marguerite Nader: Sure. So transaction activity continues to be constrained, I would say. As you know, ownership is highly fragmented, and we engage with homeowners as they move forward towards, you know, potential sale decisions. The strong performance of these properties over time has really reduced the desire to sell for the owners. And so knowing that, I think that attractive acquisition activities may be limited. We focused on internal growth and operations and expansions. And continuing to keep our balance sheet in a position such that if there is an opportunity, we're able to take advantage of it. With respect to anything happening at the federal level, that would impact us. I think what we've seen more is it's really what happens at a city or local level. You know, convincing city council members to have an MH or RV community in their backyard, it really it's oftentimes difficult even for highly amenitized communities, but we continue to work through that at the local level. James Colin Feldman: Okay. If I could just sneak in, what's your appetite for, like, one-off MH property rather than parks? Or do you think going forward, I mean, assuming legislation gets passed, would you be interested in that at all or no? You kind of sticking with the parts business? Marguerite Nader: I'm sorry. Interested in buying one-off manufactured housing communities? James Colin Feldman: Well, no. But, like, managing them off of, like, you know, random properties around different municipalities. If that becomes something that can get done. Buying single site homes, is that what you're asking? Marguerite Nader: Oh, I think that, you know, what we found is that that community aspect of certainly we operate 450 communities across the country. I think where our acquisition strategy is really focused on buying communities versus buying individual single-off assets. James Colin Feldman: Okay. Alright. Thank you. Marguerite Nader: Thanks, Jamie. Operator: One moment for our next question. Our next question comes from the line of Brad Heffern from RBC. Your line is open. Bradley Barrett Heffern: Hello, Brad? Paul Seavey: Brad, you may be on mute. Marguerite Nader: Victor, maybe if you could move to the next caller, and then we could get back to Brad. Thank you. Operator: Yes. Our next question will come from the line of Eric Wolfe from Citi. Your line is open. Eric Jon Wolfe: Hey. Thanks. Maybe to follow-up on Michael's question at the beginning. Just trying to understand why the annual RV rental income goes from 4.5% in the first quarter, I think, around 5.4% for the rest of the year. Just trying to understand sort of why it steps up in the first quarter and stays at that higher level. Paul Seavey: Sure, Eric. The main driver of the moderate growth in the first quarter, RV and Marina annual rent growth, is the comparison to our first quarter 2025, which had a higher level of occupancy. You may remember we experienced attrition in the Northern Resorts as they came back in season in the '25. And that has some carryover impact to the '26. Eric Jon Wolfe: Gotcha. And so this year, tell me if I'm wrong, you're expecting, you know, normal attrition, normal turnover. Can you maybe just sort of tell us how much visibility you have into that? You know, if at this point in the year, have very good visibility because, I don't know, 80% of your annual customers have already signed a lease or something like that. I'm just trying to understand, you know, how much visibility you have into that normal attrition at this point and what we should be watching, say, over the next, you know, couple months to determine what that's actually gonna happen or not. Patrick Waite: Yeah. It's Patrick. It's reasonable to view the attrition as, you know, normal. That's the we had that we had that period of elevated attrition, you know, early last year. Just as a reminder, we send out rent increase notices in the latter part of the year that is there's a timing component, but that covers the Sunbelt and our northern properties. And we go we're going through a renewal process as we make our way through the back half of the year. So we have pretty good visibility at this point. I will note that in the in the North, there are some, the effective dates of those rate increases are typically April as we're entering the summer season. So there's, you know, there's renewals that occur at that point, but the visibility we have right now feel pretty confident that the elevated attrition that we experienced in the prior year is behind us. Operator: Thank you. One moment for our next question. Our next question will come from the line of Manu Szbek from Evercore ISI. Your line is open. Manu Szbek: Good morning. Operator: And we'll go on to the next question. One moment. Marguerite Nader: Thank you, Victor. Operator: You're welcome. Our next question will come from the line of Wesley Golladay from Baird. Your line is open. Wesley Keith Golladay: Hey. Good morning, everyone. I have a question on the hey. Good morning. Question on the domestic RV transient and seasonal customer. You think we're finally back to normalized numbers on that? Are we back to the trend line post-COVID? Patrick Waite: You know, we've had that question over the last several quarters as we work our way through, you know, the normalization of that business. You know, I think given what we're seeing with respect to early pace, I feel that we if we're not at it, we have some we certainly see some green shoots with respect to positive trends on booking base going into 2026. Wesley Keith Golladay: Okay. And then, on your expansions, are you targeting the higher growth Sunbelt markets for those expansions? Patrick Waite: Well, yeah, for the most part of it. That's where the largest concentration of our portfolio is. So the significant majority of our expansions have occurred throughout the Sunbelt properties. Marguerite Nader: And we do have we do have a small expansion in the North, in Minnesota, but other than that, they're basically in the Sunbelt. Wesley Keith Golladay: Okay. And then just one quick follow-up on that. On the lease-up, I know you delivered some on the MH side in the fourth quarter. What's the typical time to lease that up and get the occupancy up? Patrick Waite: I mean, it depends on the number of sites. So just at any particular community, you're filling in the range of, call it, you know, 20 to 30 a year, you're having a you know, that's a that's a good pace for, you know, selling manufactured homes to new homeowners in an expansion. Wesley Keith Golladay: Okay. Thank you very much. Patrick Waite: Sure. Thank you. Operator: Moment for our next question. Next question will come from the line of John Kim from BMO Capital Markets. Your line is open. John P. Kim: Thank you. This quarter, you provided new disclosure on MH occupied sites. At the beginning at the end of the quarter. So new disclosure is always good. The actual number went down, though, during the quarter. So I was wondering what contributed to the occupies going down just given occupancy growth has been a focus for your company. And just generally, I think occupancy in MH has been at its lowest levels in about ten years. And I'm wondering what has been driving that just given the demographic tailwinds that you talked about earlier. Patrick Waite: Yeah. John, it's Patrick. First, I'll take the quarter. The outcome for the quarter was really driven by our number of sites where we have depleted our home inventory. We're in the process of replenishing, which would be just ordinary course of business for us. And just the mix of, you know, move-ins and move-outs for the quarter. It was down about seventies, 10 basis points. I think to your point on the demand profile, we consistently see good demand, and we feel very positive going into 2026. So, I think that has more to do with just the timing of the quarter as opposed to any takeaway on the fundamentals. And just, you know, long term with respect to the view of occupancy, I mean, we continue to increase the number of occupied sites over the years. The percentage I appreciate, as we've talked about in the past, can fluctuate as we're bringing on expansion sites into the denominator. Marguerite Nader: And, John, that was the kind of the reason for that new disclosure just to be clear about those expansion sites. John P. Kim: Yep. That makes sense. Okay. So I'm asking on RV, today, minus seven degrees Celsius in Toronto. It's 22 degrees Fahrenheit in New York. And I know in the past, you talked about the colder weather potentially being a driver for transient and seasonal RV demand. It doesn't sound like you feel that bullish on that today. But just wanted to get your updated thoughts on the cold weather impact on RVs. Marguerite Nader: Sure. So we're obviously looking at it on a daily basis. Sometimes throughout the day. But what we've seen in the month of January, I think we've had only three or four days where we were not exceeding last year's pace. So really positive pacing and it really is corresponding to what we're seeing as the temperature is dropping. Our marketing team does a really good job of monitoring the weather in the North and leveraging predictions of difficult weather, which is not difficult to do now because all the weather has been difficult across the country. And encouraging the customers to escape the cold and, you know, visit our Sunbelt locations. So we look at those marketing tools or, you know, weather-related digital ads and organic posts, and that's generating some positive return for us as people try to escape this difficult weather. John P. Kim: Great. Thank you. Marguerite Nader: Thanks, Jen. Operator: One moment for our next question. Our next question will come from the line of Jason Wayne from Barclays. Your line is open. Jason Adam Wayne: Hi, good morning. Marguerite Nader: Good morning. Jason Adam Wayne: Yeah. Just looking at the rental home business. Had a nice year in '25, some growth there. So I'm just wondering what's the strategy there and that business one that you'd like to continue growing moving forward? Patrick Waite: Yeah. I mean, that's really gonna be based on what we see from a demand perspective. As we're replenishing new home inventory across the portfolio and filling expansions, you know, our first priority is to sell the home. And as demand is coming at us, we may very well accept rentals. Rentals is a positive business in that it exposes more and more prospects to be future homebuyers. And spend some time since we spoke about this step, but roughly 15 to 20% of our sales on property are to current residents. Those are either renters looking to own a home and become a home buyer, or current home buyers that are looking to either downsize or get into an upgrade on their home. Jason Adam Wayne: And then you also began disclosing the rental home operating expenses. So just so the 4Q increase was tied to those expansions then, it sounds like. But I'm just wondering how that's expected to trend this year why it was kind of down the rest of the year based on the disclosure. Paul Seavey: Yeah. The rental home expenses, it's essentially embedded in our operating expense growth assumption. And what we see in that business, yes, to the extent that we have incremental rental homes, we will see a higher level of expense relative to prior periods. There is also impact just on the mix of homes that are in the program, whether they're new homes that happen to be rented or homes that have previously been occupied, and the expense associated with the latter can be higher. So as that mix changes, we see a slightly lighter load on expenses. Jason Adam Wayne: Got it. Thank you. Marguerite Nader: Thank you. Operator: One moment for our next question. Our next question will come from the line of David Siegel from Green Street Advisors. Your line is open. David Segall: Thank you. Guidance for the MH portfolio seems to imply that the vast majority of growth is coming from rent growth and that only a small bump from probably occupancy or other income. And considering the higher level of expansion sites likely to be added this year versus last year, would it be fair to say that this implies occupancy will actually dip further this year? Paul Seavey: I guess I wouldn't think about it that way. We have a practice that we've used for quite some time not to make a specific assumption about occupancy gains in our guidance, and we've used that in building our model for 2026. David Segall: Thank you. And then just on RV performance in 4Q, it ultimately landed below the low end of the range for the quarter, although as of November, it looks like it was tracking at the higher end of the range. Considering that you mentioned that the Canadian booking pace was, you know, in line with what was discussed in October. I just want to try and understand what happened in December to cause performance to lag so much. Marguerite Nader: Yeah. I mean, what we saw in December was really weather effect going the other way. It was moderate temperatures kind of throughout the North, and we didn't see those bookings pick up like we had in previous years. So it's kind of the opposite of what we're seeing in January. Is what we saw in December. David Segall: Great. Thank you. Marguerite Nader: Thank you. Operator: One moment for our next question. Next question will come from the line of Omotayo Okusanya from Deutsche Bank. Good morning. Omotayo Okusanya: Morning. I wonder if you could talk a little bit about the campground membership results. Again, we kind of had another quarter where the membership count declined. I know in the past, it kind of talked about making it up with kind of better pricing and upgrades and things of that sort. I think even upgrade activity this quarter was a little bit light. So just curious, you know, what's kind of happening there? What does that tell us about overall demand, whether it's on the transient side or seasonal side? Just kind of trying to get some read-through from those results and how you're thinking about it going forward. Marguerite Nader: Sure. Thanks, Theo. So I think, you know, the Thousand Trails system has got about 80 properties with about 24,000 sites. And I think 108,000 members right now. And it's I think it's helpful. You've mentioned the upgrade, but I think it's helpful to just highlight all the pieces of the Thousand Trails business. We have our annual membership subscriptions where we sell those online and in the field. And that activity, I think, about half of that activity comes from online activity. You know, initial subscriptions are sold online. That's that $700 product that we've talked about, the entry-level product that has a set of benefits to stay at the location. That line item now also includes our new upgrade dues product, and in the year, we saw a healthy growth of over 5% in that line item. And then when you think about the Thousand Trails portfolio, you need to consider the annual piece of it, and that's where we see our members wanting to stay and have a more permanent stay at our communities. And that annual income has increased significantly over time, I think 7% or 8% over the last five years. And then as it relates to the promotional membership originations, which we highlight in the supplemental, we're seeing tractions on that. And those are trial memberships that's included in the sale of an RV. These are really just really great prospects for the annual camping passes at our properties. And we've seen an increase in conversion of those. And the conversion is the important piece because that's the piece where the customer starts to pay dues in the year following their initial membership. Omotayo Okusanya: Gotcha. So what's the piece that kind of still if I may use the word weak amongst all those moving pieces, it's kind of dragging down the counts and things like that. Marguerite Nader: Sure. So what we've seen is there's some attrition of the legacy members that were paying a lower dues amount, and we're bringing in new members that are paying a higher dues amount. And so that's what you're seeing in the in the Omotayo Okusanya: Gotcha. Thank you. Thank you, Dale. Operator: One moment for our next question. Our next question comes from the line of Eric Wolfe from Citi. Line is open. Eric Jon Wolfe: For taking the follow-ups. For the noncore income looks like it's dropping $3.6 million year over year. I think it's the same pool properties in 2026 to 2025. I was just curious what's causing that. Paul Seavey: Sure. We have $6.6 million in our guidance for six. That does compare to the $10.2 million that we recognized in 2025. The difference is really attributed to timing of insurance proceeds and the recovery of the storm-affected properties. There's just a timing difference there. Eric Jon Wolfe: Okay. So you expect to get it. It's just I mean, normally, when I think about business interruption proceeds, it's the pay for the business interruption that you're seeing. So you're saying that you expect to get at some point, it's just the timing difference. You already received it more in 2025 than you thought you would. Paul Seavey: Exactly. The recognition occurs when it's received. And that doesn't necessarily line up with when we would otherwise earn it. Eric Jon Wolfe: Okay. And then I think your historical practice has been to not include any use of free cash flow in your core FFO estimate, just confirming that that's true this year. And then, I guess, sort of practically speaking, is that $100 million of cash after dividends and recurring CapEx earmarked for anything this year? I assume perhaps you're just going to more sort of inventory growth, but maybe help us understand where that could go. Paul Seavey: Yeah. I mean, I've I've I've I guess I'll focus on the interest expense. And our assumption for 2026. I mean, certainly, we look at our debt in place at the '25, scheduled principal amortization during '26, and then how our line of credit will increase or decrease throughout the year. We don't make any change any assumption for a change in the short-term borrowing rate. But the funding of working capital investments such as you described, that comes from borrowings on the line of credit that exceed the free cash flow. So that includes purchasing homes for sale and rental in our communities, the discretionary CapEx that we have that includes expansion as well. Eric Jon Wolfe: Okay. Thank you. Marguerite Nader: Thank you. Operator: Thank you. And since we have no more questions on the line at this time, I would like to turn it back over to Marguerite Nader for closing comments. Marguerite Nader: Thank you all for joining today. Appreciate you taking the time and look forward to updating you on our next quarter call. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Q1 2026 Plexus Earnings Conference Call. [Operator Instructions] I will now hand the call over to Shawn Harrison, Vice President of Investor Relations. Please go ahead. Shawn Harrison: Good morning, and thank you for joining us today. Some of the statements made and information provided during our call today will be forward-looking statements, including, without limitation, those regarding revenue, gross margin, selling and administrative expense, operating margin, other income and expense, taxes, cash cycle, capital allocation and future business outlook. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of factors that could cause actual results to differ materially from those discussed, please refer to the company's periodic SEC filings, particularly the risk factors in our Form 10-K filing for the fiscal year ended September 27, 2025, and the safe harbor and fair disclosure statement in our press release. We encourage participants on the call this morning to access the live webcast and supporting materials at Plexus' website at www.plexus.com, clicking on Investors site at the top of that page. Joining me today are Todd Kelsey, President and Chief Executive Officer; Oliver Mihm, Executive Vice President and Chief Operating Officer; and Pat Jermain, Executive Vice President and Chief Financial Officer. With today's earnings call, Todd will provide summary comments before turning the call over to Oliver and Pat for further details. With that, let me now turn the call over to Todd Kelsey. Todd? Todd Kelsey: Thank you, Shawn. Good morning, everyone. Please advance to Slide 3. Plexus has achieved significant momentum. Our consistent strategy and focus on delivering customer success continues to enable share gains and is facilitating our leadership in growth markets. We've seen strong year-over-year revenue growth to begin our fiscal 2026 as we ramp programs across all of our market sectors. In addition, we are now seeing pockets of stronger end market demand. Our ongoing market share gains are amplifying this revenue growth tailwind. As a result, Plexus now has the potential to meet or exceed the high end of our 9% to 12% revenue growth goal for fiscal 2026. In addition, we see significant opportunities to sustain our revenue growth momentum. Our funnel of qualified manufacturing opportunities remains diverse and robust while our Engineering Solutions funnel of qualified opportunities is the third largest in Plexus' history. We continue to forecast strong operating performance for our fiscal 2026. We anticipate robust growth in operating profit and remain focused on achieving our goal of a 6% non-GAAP operating margin while continuing to invest in talent, technology, facilities and advanced capabilities to support sustained future revenue growth and greater operational efficiency. Finally, although we are investing in support of substantially stronger than previously anticipated revenue growth, we continue to forecast approximately $100 million of free cash flow for the fiscal year highlighting our ongoing efforts to drive working capital efficiency. We will continue to deploy all excess cash to create additional shareholder value. Please advance to Slide 4. Revenue of $1.07 billion met the midpoint of our guidance range as we delivered our fourth consecutive quarter of sequential growth, representing a robust 10% increase year-over-year. A significant expansion in our Healthcare/Life Sciences and Aerospace and Defense market sectors associated with multiple program ramps and stronger-than-anticipated demand from semicap and energy drove our performance. Non-GAAP EPS of $1.78 met the high end of our guidance range, reflecting very strong operating performance in light of significant near-term investments we are making in support of additional capacity, program ramps and technology. Please advance to Slide 5. For the fiscal first quarter, we secured 22 new manufacturing programs, worth $283 million in annualized revenue when fully ramped into production. Included in these wins was a record quarterly performance from our Aerospace and Defense market sector estimated at $220 million in annualized revenue. Our fantastic Aerospace and Defense wins performance underscores strong interest in Plexus' industry-leading solutions as evidenced by expanded relationships with numerous existing customers, significant expansion in our leadership in commercial space and the addition of new and exciting partners deploying disruptive technologies. Finally, I would note we continue to see significant opportunities to drive market share gain and sustained revenue growth from our Aerospace and Defense market sector. Our funnel of qualified Aerospace and Defense manufacturing opportunities is up significantly year-over-year, while our total funnel of Aerospace and Defense engineering solutions opportunities sits at an all-time high. Please advance to Slide 6. At Plexus, we continue to demonstrate our commitment to innovating responsibly as we boldly drive positive change and promote a sustainable future for and through our people, our solutions and our operations, all of which is built on a foundation of trust and transparency. Therefore, I'm pleased to share that our team in Penang, Malaysia was once again recognized as one of HR Asia's Best Companies to work for. This represents the fourth consecutive year receiving this recognition. Along with this honor, the team also accepted HR Asia's Sustainable Workplace Award for the second straight year and the Tech Empowerment Award for the first time. At Plexus, people are the heart of who we are and what we do, and I'm incredibly proud of what these awards represent for our team members and our vision of building a better world. Our commitment to delivering excellence includes reducing our environmental impact throughout our operations. At the end of our fiscal 2025, we partnered with TNB, a utility provider in Malaysia and joined its green electricity tariff program. This partnership provides 100% renewably sourced electricity to our largest global campus in Penang, Malaysia. Through our fiscal first quarter of 2026, we have dramatically reduced our emissions, leveraging this partnership and the continued focus on emission reductions across all of our global locations. Finally, last quarter, we communicated the results of our Volunteer Time Off charitable giving program. Through this program, during the fiscal first quarter, we made financial donations to 24 global charities voted on by our team members. We extend appreciation to our incredible team members, partners and local communities whose contributions have been vital to our ongoing success. Please advance to Slide 7. For our fiscal second quarter, we are guiding revenue of $1.11 billion to $1.15 billion, representing 6% sequential and 15% year-over-year revenue growth at the midpoint. We are also guiding non-GAAP operating margin of 5.6% to 6.0% and non-GAAP EPS of $1.80 to $1.95. We are experiencing robust demand globally for our industry-leading solutions in support of numerous program ramps, inclusive of ongoing market share gains. In addition, we have seen recent strengthening in Healthcare related to surgical and monitoring technologies within semicap, in Industrial equipment and across multiple subsectors of our Aerospace and Defense market sector. We also anticipate delivering strong operating performance for the fiscal second quarter. We expect to leverage this robust revenue forecast and the benefits from our ongoing operational efficiency initiatives to offset sizable headwinds from typical seasonal cost increases, increased variable compensation expense and growth and efficiency investments. Finally, for fiscal 2026, we now see the potential to meet or exceed the high end of our 9% to 12% revenue growth goal. This reflects the positive momentum anticipated for our fiscal second quarter and signs of stronger end market demand. We expect to leverage this improved revenue outlook and our ongoing investments in operational efficiency to drive significant operating profit expansion and robust free cash flow for fiscal 2026. In closing, Plexus is generating significant positive momentum. This is a result of our consistent strategy, which is enabling share gains and leadership in growth markets and from our ongoing investments to further our industry-leading solutions and drive greater long-term operational efficiency. I will now turn the call to Oliver for additional analysis of the performance of our market sectors. Oliver? Oliver Mihm: Thank you, Todd. Good morning. I will begin with a review of the fiscal first quarter performance of each of our market sectors, our expectations for each sector for the fiscal second quarter and directional sector commentary for fiscal 2026. I will also review the annualized revenue contribution of our wins performance for each market sector and then provide an overview of our funnel of qualified manufacturing opportunities. Starting with our Aerospace and Defense sector on Slide 8. Revenue increased 3% sequentially in the fiscal first quarter, slightly below our expectation of a mid-single-digit increase on customer end-of-year inventory management. For the fiscal second quarter, we expect revenue for the Aerospace and Defense sector to be up mid-single digits from demand improvement in our commercial Aerospace and Defense subsectors as well as new program ramps within our commercial aerospace, defense and space subsectors. Our fiscal first quarter wins for the Aerospace and Defense sector were $220 million. This extraordinary quarterly performance nearly matches prior record annual wins performance in F '19 and F '21 of $222 million and $258 million, respectively. Broadly, our customers reference our operational excellence and depth of technical expertise as contributing factors for increasing interest in partnering with Plexus and our continued program awards. For the quarter, our Neenah, Wisconsin site won a substantial program that further expands our leadership in the space subsector. In our security subsector, our Guadalajara and Chicago sites will respectively assemble and service an innovative security detection technology product. This new customer cited our consultative engagement and ability to minimize total product cost with a combined production and services solution as contributing factors for this win. And our Boise, Idaho team is welcoming a new customer with disruptive technology in the unmanned subsector. We anticipate fiscal 2026 revenue growth for the Aerospace and Defense sector to now exceed our 9% to 12% goal. Our continued robust growth outlook is supported by new program ramps with multiple customers and subsectors, strong defense subsector growth and modest growth in our commercial aerospace subsector. Please advance to Slide 9. This first -- fiscal first quarter revenue in our Healthcare/Life Sciences market sector increased 10% sequentially, aligned to our expectation of a high single to low double-digit increase. For the fiscal second quarter, we expect the Healthcare/Life Sciences market sector to be flat to up low single digits sequentially, reflecting modest growth in our therapeutics subsector. Fiscal first quarter Healthcare/Life Sciences sector wins of $40 million and included an award for a next-generation imaging product for our Haining, China location. Our historical operational excellence, agile new product introduction performance and partnership through the quoting process contributed to the win. Our team in Oradea, Romania was awarded mechanical cabinet subassemblies for an imaging product for an existing top medical OEM customer. This share gain award strategically expands our support for this customer to include another region. We continue to have a robust fiscal 2026 outlook for the Healthcare/Life Sciences sector, anticipating revenue growth to now exceed our 9% to 12% goal, supported by contributions from ongoing and new program ramps and improved end market demand across our therapeutics and monitoring subsectors. Advancing to the Industrial sector on Slide 10. Fiscal first quarter revenue declined 8% sequentially, in line with our forecast. Our Industrial sector fiscal second quarter outlook of a high single to low double-digit increase is driven by demand strength and program ramps within our semicap subsector and program ramps and near-term demand improvements within our industrial equipment subsector. Industrial market sector wins for the fiscal second quarter of $23 million included an award from an existing semicap customer for our Neenah, Wisconsin facility. This award covers product launch volumes for a next-generation product. Our team in Oradea, Romania was awarded the assembly of a robotic solution that supports material handling and indoor logistics. This transition from our customers' internal manufacturing operations was awarded in part due to the strength of our advanced engineering and manufacturing capabilities. Our improved fiscal 2026 industrial sector revenue growth outlook is supported by new program ramps and robust growth that's well into the double digits for our semicap subsector and program ramps in our industrial equipment subsector, offsetting demand softness within other subsectors. As a result, we now anticipate fiscal 2026 revenue growth for the Industrial sector to approach our 9% to 12% growth goal. Please advance to Slide 11 for a review of our funnel of qualified manufacturing opportunities. The funnel of qualified opportunities remains robust at $3.6 billion. Notably, our aerospace and defense sector momentum continues to build. Even with the extraordinary wins performance this quarter, our funnel of Aerospace and Defense qualified manufacturing opportunities only saw a modest sequential decrease, reflecting a strong backfill of opportunities. Further, the Aerospace and Defense sector's total funnel for our engineering solutions achieved a record high in the fiscal first quarter. In summary, Plexus has significant momentum as evidenced by our improved revenue growth outlook. Our passion for delivering excellence and creating customer success, supported by our focus on partnership and technical and operational expertise continues to be rewarded through customer recognition, market share gains and new customer partnerships. Ongoing new program ramps, inclusive of share gains and improved end market demand all support Plexus meeting or exceeding the high end of our 9% to 12% revenue growth goal for fiscal 2026. I'll now turn the call over to Pat. Pat? Patrick Jermain: Thank you, Oliver, and good morning, everyone. Our fiscal first quarter results are summarized on Slide 12. Gross margin of 9.9% was consistent with our guidance and consistent with the last quarter despite a slight margin impact from the opening of our new Malaysia facility. Selling and administrative expense of $51.7 million met guidance and was consistent with last quarter. As a percentage of revenue, SG&A sequentially declined given revenue leverage. Non-GAAP operating margin of 5.8% also met our guidance. Nonoperating expense of $3.4 million was favorable to expectations due to lower-than-anticipated interest expense and foreign exchange losses. Non-GAAP diluted EPS of $1.78 was toward the top end of our guidance. Turning to our cash flow and balance sheet on Slide 13. For the fiscal first quarter, cash from operations consumed approximately $16 million to support significant program ramps planned this year. We also spent $35 million on capital expenditures with a large portion of this related to carryover payments for our new Malaysia facility. The result was a cash outflow of approximately $51 million. For the fiscal first quarter, we acquired approximately 153,000 shares of our stock for $22.4 million. At the end of the quarter, we had approximately $63 million remaining on the current repurchase authorization. Similar to last quarter, we ended the fiscal first quarter in a net cash position. We had $60 million outstanding under our revolving credit facility with $440 million available to borrow. For the fiscal first quarter, we delivered a return on invested capital of 13.2%, which was 420 basis points above our weighted average cost of capital and a strong result to be in fiscal 2026. Cash cycle at the end of the fiscal first quarter was 69 days, which was within our guidance range and 6 days higher than last quarter. Please turn to Slide 14 for additional details. The sequential change in our cash cycle was primarily due to the 6-day increase in inventory days tied to investments to support sizable, anticipated revenue growth. As Todd mentioned, Plexus now has the potential to meet or exceed the high end of our 9% to 12% revenue target this year, which is requiring greater investments in working capital. While these investments have increased our cash cycle, I'm pleased to see our net cash cycle remain in the 60s. As Todd has already provided the revenue and EPS guidance for the fiscal second quarter, I'll review some additional details, which are summarized on Slide 15. Fiscal second quarter gross margin is expected to be in the range of 9.9% to 10.2%. At the midpoint, gross margin would be slightly above last quarter despite seasonal compensation cost increases and the reset of payroll taxes for U.S. employees. We expect to offset these cost impacts through productivity improvements and additional fixed cost leverage from the anticipated robust sequential revenue growth. We anticipate selling and administrative expense in the range of $54 million to $55 million. This includes more than $1 million of seasonal compensation headwinds and additional variable incentive compensation expense linked to our strong performance. Note that the SG&A estimate is inclusive of approximately $6.8 million of stock-based compensation expense. For the second quarter, fiscal second quarter non-GAAP operating margin is expected to be in the range of 5.6% to 6%, exclusive of stock-based compensation expense. As the year progresses, we believe there will be an opportunity to meet or exceed our 6% non-GAAP margin target. Non-operating expense is anticipated to be approximately $5.3 million, which is sequentially higher primarily due to greater interest expense. Prior quarters have benefited from the capitalization of interest expense associated with site additions. We are estimating an effective tax rate between 16% and 18% for both the fiscal second quarter and for fiscal 2026. Diluted shares outstanding are expected to be approximately 27.2 million. Our expectation for the balance sheet is that working capital investments will increase compared to the fiscal first quarter. However, based on our robust revenue forecast, we expect this level of working capital will result in a sequential improvement to cash cycle days. As such, we are estimating cash cycle days in the range of 65 to 69 days, which represents a 2-day sequential improvement at the midpoint. With higher investments in working capital, we expect breakeven to a slight usage of cash for the fiscal second quarter. Despite the first half usage of cash to support anticipated revenue growth, we reconfirm our fiscal 2026 expectation for free cash flow of approximately $100 million. One final comment on fiscal 2026. In support of our revenue growth, we now expect capital spending to be in the range of $100 million to $120 million, which is slightly higher than the previous estimate. With that, Shaley, let's now open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of David Williams with Benchmark. David Williams: Congratulations on the really strong performance and outlook here. Todd Kelsey: Thank you, David. David Williams: Yes. I guess my first question for you, Todd, is what's changed do you think over the last 3 to 6 months? And obviously, the quarter is really strong in your outlook as well. But now you're talking about exceeding or meeting that 9% to 12% target. It feels like things have materially changed. And I'm just wondering if that's more market-driven or more of the program wins that you're seeing. Just any color on what do you think is the major driver of your success here? Todd Kelsey: Yes. David, I would call it a combination of both. We're certainly getting some very strong program wins, and you may have noticed the dollar value this quarter, the wins is substantially higher than typical for us as well, too, which is suggesting some larger programs coming in. Those ramps are going well in the new program ramps that we have underway right now, which is helping, particularly, I think Healthcare is being driven in a big way from program ramps, but somewhat in Industrial with semicap. But then we're also seeing end markets improve. We're seeing major changes in the semicap market right now. I would say we're in the early stages of seeing demand improvement right now, though we started to see things come through about a month ago, and we're seeing some bullish news out there even as of today. So it remains to be seen if that continues to improve in the future. But we're also seeing upticks in Healthcare, although a little bit more modest, and in certain subsectors of Aerospace and Defense. But one thing I'd also note, though, with regards to Aerospace and Defense is we're not seeing the full pull-through from Boeing yet. So while we're seeing some modest improvement, we're not seeing the full pull-through from their increasing volumes. David Williams: Okay. Great. Really nice commentary there. And I guess maybe secondly, just kind of thinking about that semicap equipment, as you mentioned and just seeing the early demand, how long does that typically take to translate into revenue or when you'll see those design win ramps? If we talk about CapEx being added today and having those discussions, is that a year? Is it 2 years? How long should we think about for that semicap to kind of show up in your revenue? Todd Kelsey: Well, David, demand increases will show up significantly faster. So that's in the quarter to 2-quarter range. It's really just a matter of getting the proper materials pipelined. And in many cases, with many of our customers, we have buffer stock inventory so we can respond fairly rapidly. So that will be quick. I mean if it becomes capital or footprint or things like that, then we're talking the year-plus time range. But we have ample available capacity right now. Operator: Our next question comes from the line of Jim Ricchiuti with Needham & Company. James Ricchiuti: So I was hoping to drill into that Aerospace and Defense demand and the wins you're seeing. First, is the demand -- it sounds like it's coming from traditional defense. It looks like you're still anticipating some of the commercial aerospace strength in maybe going forward. But I'm also wondering if you're seeing any momentum in some of the more -- the emerging areas, demand area, obviously, there's been a lot of attention on drones or [indiscernible] I think you highlighted commercial space. So I wonder if you could just elaborate on what you're seeing in that market. Oliver Mihm: Yes. Sure, Jim. This is Oliver. So hitting it from a couple of different angles. I'd say that new program ramps across all of the subsectors within that sector continue to contribute to our outlook here and our foregoing momentum. So that's certainly a big piece of it. In terms of just underlying demand, certainly seeing some underlying demand strength in defense. We talked about some incremental growth in commercial aerospace. But as Todd just highlighted, specifically within commercial aerospace, seeing Boeing or Airbus increase their production rates is currently not contemplated in our outlook. From a defense perspective, I'd say also that -- candidly, the implied spending from news headlines has not trickled through in any substantial way for us here yet in terms of demand signal from our end customers. So there's also potential upside going forward in that particular subsector. The other thing I think we're just excited about is, as you highlighted or hinted at, our leadership in the space subsector continues to build and create momentum for us. We've had some substantial wins there recently and again this quarter. And then also, we talked about in our prepared remarks, the disruptive technology and the opportunity for those particular programs to create additional revenue growth here in the out quarters as we ramp those programs. James Ricchiuti: Got it. That's helpful. Follow-up question. Maybe, Pat, for you. I'm wondering, you may have given it, but can you quantify the headwind on gross margins in the quarter from Malaysia, the new Malaysia facility? And does that ease? Or will it continue in Q2? Patrick Jermain: Yes. It was fairly minimal in Q1. It was a little less than 10 basis points of a headwind overall to margins. We'll see in Q2 very close to breakeven. But then encouraging the back half of this year, we're actually going to be approaching our -- close to our corporate average for margins within that site. And probably even more encouraging is what the tailwinds we're seeing from our new Thailand facility, which was profitable in fiscal '25, but the improvement in F '26 is looking to benefit margins by about 25 to 30 basis points overall margin. So really positive back half of this year with Thailand. And part of the reason why I think we can get to our 6% or above back half of this year. Shawn Harrison: Jim, it's Shawn. Just as a little bit of follow-up. We had a ribbon cutting a few weeks ago with one of our key customers at that new site in Malaysia. Extremely excited about that. And I know we've had other key customers into that site recently and feedback has been fantastic. So to Pat's comments, really expect some strong contributions from our newer facilities in Asia as we move throughout fiscal 2026. Operator: Your next question is from Melissa Fairbanks with Raymond James. Melissa Dailey Fairbanks: Congratulations on the great quarter and guide. Excited to see you put that stronger full year guide into print. I appreciate all the commentary about working capital investment to support a lot faster growth. We've heard from a number of your suppliers this week suggesting they're seeing increasing lead times across a wider range of components now. I'm wondering if you're starting to see that already and if this is either impacting customer plans for program ramps and/or your own internal working capital investments, specifically related to shortening or tightening lead times. Oliver Mihm: Yes. Melissa, this is Oliver. We are certainly seeing some of our supply-based commodities ticking up in terms of lead time. So more specifically, our semiconductor commodity space, printed circuit board specifically out of the APAC region also increasing a bit in lead time. But as we hinted at or talked to earlier here in some of the Q&A, really working to get ahead of that. So with customers, we're prepositioning inventory, we're being thoughtful about what specific aspects of their bill of material would warrant prepositioning to mitigate risk and ensure supply. For instance, within memory, that's something that we've extended out our PO coverage to our suppliers, working with customers to ensure we've got extended forecast visibility and basically just coming up with a creative partnership with our customers to ensure that we're covering the risk there and can ensure continuity of supply. Todd Kelsey: Yes. One of the things I'd add too, Melissa, is if you compare this back to a few years ago when lead times were stretched, I think we're in a significantly better position to not only manage inventory better, but also support our customers better through our redesign sales inventory operations planning process through some of the other systems and tools that we put in place. So we feel like we're in really good shape here as lead times begin to tighten a little bit. Melissa Dailey Fairbanks: Okay. Great. Yes. Let's hope we don't get back to the conditions of a few years ago. As a follow-up question -- yes, right. So my next question, I'm excited to see new program ramps ramping next time I visit the Neenah location. But I'm just wondering if with all of these new manufacturing wins and program ramps across a multiple number of locations and end markets, how close are we to needing new capacity additions? Or are you able to support all of this growth that we're expected to see this year and maybe into next year with the existing location or the existing footprint rather? Todd Kelsey: Yes. We're in pretty good shape from a footprint standpoint, Melissa. I mean we think we could comfortably support about $6 billion in revenue with the existing footprint. Of course, it depends a bit on geography and where the growth is if it ends up concentrated in an area. But we're in -- right now, we're in good shape with a significant available capacity in all our regions. Oliver Mihm: I'll jump in and add there and note that part of our technology and efficiency focus within operations is not just focused on P&L improvements, but also focused on essentially what I just call broadly asset utilization, whether that be machine assets in terms of machines or assets in terms of bricks-and-mortar footprint. So we've historically talked -- previously talked about our AutoStore, so where we're taking our warehouse and putting that into a 3-dimensional cube with robots that are running around picking up bins. And that yielded specifically a 60% reduction in space, and then we can convert that floor space to revenue. And then also, I'll reflect on a specific software tool that we're utilizing to drive efficiency and how we use our surface mount technology machines. And just in the past few quarters here, we have redeployed multiple SMT lines, 7 lines, which then creates additional footprint space for, say, higher level assembly as well as CapEx avoidance. Patrick Jermain: Yes. And from that standpoint, Melissa, capital spending, I see a shifting over the next few years from more footprint additions to these automation investments. And from a percentage standpoint, we've been running around 2.5% or below percentage of revenue for capital spending. I think we'll be in that range in the next few years. But again, it's more of a shift away from footprint to investments within our sites. Melissa Dailey Fairbanks: Okay. Great. Super, super helpful. I thought you guys were going to mention AI, but you missed your chance. Todd Kelsey: Well, we could talk about it, if you like. Operator: [Operator Instructions] Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Unknown Analyst: This is [indiscernible] on for Steve. The first one from us is on Industrial. It's a little bit of a 2-parter. First, I just wanted to follow up on the semicap commentary. We heard from 2 large semicap OEMs yesterday that called for pretty strong growth this calendar year. They said that pull-ins are happening quickly and demand is almost overwhelmingly strong. I wanted to ask, do you agree with one of their outlooks for greater than 20% growth that's second half weighted? Is that what you're seeing in your order book with your mix of semicap customers? And then the second part was if you could just walk through the puts and takes of the non-semicap industrial markets, that would be helpful for how we think about the consolidated segment. Oliver Mihm: Yes. Steve, this is Oliver. From a semicap perspective, certainly, our prepared remarks should reflect how bullish we're feeling here in fiscal '26. And certainly, we're seeing a variety of different growth rates coming through from customers, from industry metrics. I guess a couple of thoughts there. One is, and Todd hit this earlier, it's still early days, right? So this is something we've seen here just through the last quarter, the uptick in demand from our customers. So in terms of our outlook, we feel confident that we can outgrow the market. Exactly how that's going to play out. I think early days is the right phrase to use to quantify that. I'd also note that as we're contemplating and giving you metrics about how we're looking at growth, we're working on our fiscal year basis, which ends in September versus a lot of the industry and customer commentaries coming across from a calendar year basis. So that's a little bit off, and we're just talking about essentially for us, 3 quarters inside the calendar year. Across the rest of the sector, candidly, I think there's a lot of other things to be enthusiastic about. Certainly, within comms, and we noted this earlier, generally a little bit still muted in demand. So we're seeing inflection, but still opportunity for further upside there. Within comms, we see the tech transition unfolding from a comparable basis year-over-year. Recall that throughout F '25, we mentioned in a number of these calls how we had captured some legacy orders as the transition was bumping along, right? And so that's part of our comparable there. Another subsector we're really excited about is energy, whether that be infrastructure, distribution, control systems, storage. We're excited about our growth with our customers there. We're also excited about our funnel. We've seen a strong rate of increase with technology specifically in support of the data center like power management and storage, thermal cooling, thermal density -- in support of thermal density, and we've got some several good-sized opportunities in the funnel there. Unknown Analyst: Understood. That's very helpful. Then the second one from us. I kind of wanted to drill into your automation and efficiency-focused initiatives, maybe give you an opportunity to expand on the AI initiatives you have going on. I know you highlighted some activities you're doing. But could you just give us any color on the breadth of the initiative across your manufacturing base, the time line and the potential financial benefits? I mean do you think that can benefit sales return? Or are you more focused on the margin benefits from those activities? Oliver Mihm: Yes. I'll highlight a couple of different things we're doing here and take the opportunity to build in some of our AI-driven activities and then maybe others can jump in as well. One thing that we're really excited about is how we're using automated robots to drive material deployment from our warehouses, which are converting to these AutoStore 3D cube, which I talked about earlier. These robots piloted that in fiscal '25 and just to show that the pace and alignment across the organization as we adopt these technologies by spring of this calendar year here, 2026, we're going to have full site deployment of that technology across all of our sites, essentially eliminating human work, transferring materials from the warehouse to the floor for what I'll just say is generally lighter items, right? And then just thinking about that, didn't stop there. So one of our sites just in the past few weeks conducted a Kaizen activity, optimized their floor layout to now better support that technology and as a consequence, reduced as far as 75% reduction in the mileage that we're driving across -- for the material deployment. Each of those deployed bots replaces roughly 1.5 to 2 FTEs. ROI on that, less than 12 months. So we're pretty excited about that kind of deployment, I should say. Yes. And then from an AI perspective, we're building that in a number of different ways. So we're building AI and machine learning into how we can -- how we handle work orders that are in play, and we're specifically expecting a significant reduction in WIP on the production floor as a result of that. Also now using AI and some camera technology to help us define optimal standard work times, which will then enable us to reduce overall labor -- or sorry, improve labor efficiency in our high mix, high-level assembly aspects of our production floor. Patrick Jermain: Yes. So Jacob, a lot of what Oliver has talked about is definitely going to benefit margins. It will also help with reduced capital spending. One other AI application is around the quoting process and how can we speed up the quoting process. So that will have an impact on revenue as well, bringing in new wins. Todd Kelsey: So one of the things that's worth mentioning, too, is we have a two-pronged attack or approach for how we're attacking or AI and leveraging it throughout the facility. One, we have a dedicated team of data scientists and programmers, which are tackling large enterprise-level issues similar to the ones that Oliver and Pat talked about. But we've also fully deployed AI tools to the desks of all our employees, and that's getting well over 30% daily usage from our staff. So our teams are heavily leveraging AI in the way they go about doing their work. Operator: Our next question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: Congratulations on the nice performance here and outlook. Most of my questions have been addressed, but did you quantify to what magnitude your seasonal bonus pay are going to pressure the margins for the second quarter? Patrick Jermain: Yes. We didn't say it in number terms, but it's about 50, 60 basis points of a headwind that we're overcoming. So again, to maintain operating margin consistent with Q1, we're overcoming a lot of headwinds there. And again, that's a combination of improving profitability with our new Malaysia facility, Thailand, just the sheer revenue growth, better leverage of our fixed costs. And then what we've been talking about, a lot of productivity improvements, driving efficiencies and margin improvement there. Anja Soderstrom: Okay. And then do you expect further improvements in the Malaysia and Thailand facilities in the second half, right? And continue... Patrick Jermain: We do. Yes. And typically, what we see is this hit in the March quarter from the compensation headwinds, and then we start to earn through that with productivity improvements in the back half of the year. And with sequential revenue growth as well, we'll be leveraging our fixed cost even further. Anja Soderstrom: Okay. And then in terms of taxes, it seems like that's going to come down. What are the puts and takes for the tax rate? And why is that expected to come down? Patrick Jermain: I don't think we were guiding that, Anja. We're keeping our range at 16% to 18%. So I think the Street had us at 17%, and that's where we continue to think it will fall. If you go back to last year, it was a very low rate because we had a lot of reversals of some reserves that took place in fiscal '25. So that rate was 8% and now we're guiding up to 17%. And the real increase is around global minimum tax that's taking effect in certain jurisdictions. But yes, I think we're going to maintain that 17%. Anja Soderstrom: Okay. And then you mentioned in Industrial that you won a new robotics program that was transitioning out from internal manufacturing. Is that a new customer? Or -- and do you have more opportunities to win more programs from them? Oliver Mihm: That customer is not new. We're currently doing work for that customer in the Americas region. What's new is we're now going to be -- that particular win I talked about is in our EMEA region. And yes, we absolutely have further opportunity with that customer, including opportunities that are currently in our funnel of qualified manufacturing opportunities. Operator: Our next question comes from Jim Ricchiuti with Needham & Company. James Ricchiuti: I just had a quick one. I believe in the Q4 call, you alluded to some programs or it may have been one program that I believe was in A&D that slipped a bit. And I was just wondering if there was any catch-up in Q1? Or is the -- has that timing shift moved to later in the year? Todd Kelsey: Yes, that's on track now, Jim. James Ricchiuti: Okay. So it's -- you're anticipating that over the next few quarters. I don't know how significant that was. Todd Kelsey: Yes. It was enough to impact the A&D results, but I wouldn't call it a big needle mover on Plexus overall revenue. I mean yes, it has a positive impact, but it's not going to flow through in a huge way. Operator: There are no further questions at this time. I will now turn the call back to Todd Kelsey, CEO, for closing remarks. Todd Kelsey: All right. Thank you, Shaley. I'd like to thank shareholders, investors, analysts and our Plexus team members who joined the call this morning. In closing, we're generating significant momentum, and I anticipate fiscal 2026 to be a great year for Plexus as we celebrate our 40th year as a publicly traded company. Our strong start and outlook is a testament to our consistent strategy and our more than 20,000 team members globally who focus on delivering for our customers each and every day. Thank you again to our team members, our customers and shareholders. Have a nice day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, everyone, and welcome to Eagle Materials' Third Quarter of Fiscal 2026 Earnings Conference Call. The call is being recorded. At this time, I would like to turn the call over to Eagle's President and Chief Executive Officer, Mr. Michael Haack. Mr. Haack, please go ahead, sir. Michael Haack: Thank you, Drew. Good morning. Welcome to Eagle Materials conference call for our third quarter of fiscal year 2026. This is Michael Haack. Joining me today are Craig Kesler, our Chief Financial Officer; and Alex Haddock, Senior Vice President of Investor Relations, Strategy and Corporate Development. A slide presentation accompanies this call. To access it, please go to eaglematerials.com and click on the link to the webcast. While you're accessing the slides, note that the first slide covers our cautionary disclosure regarding forward-looking statements made during this call. These statements are subject to risks and uncertainties that could cause results to differ from those discussed during the call. For further information, please refer to this disclosure, which is also included at the end of our press release. In our third quarter fiscal 2026, despite the mixed construction environment, our businesses continue to perform well. We generated $556 million in revenue. Our earnings per share were $3.22, and we delivered a gross profit margin of 28.9%. In these choppy times, Eagle will continue to operate as it always has. We will control what is in our control and adjust to current market conditions to maximize profitability in both the short and long term. Our strategy is consistent. We will invest in the health and safety of our largest differentiating asset, our people, our plans to control costs and support our customers through increased reliability, efficiency and capacity, our short- and long-term strategy with return-focused projects or acquisitions. All of this while ensuring our balance sheet remains in pristine condition. Foundational to everything we do is maintaining the highest standards of health and safety. Our annual safety conference was held in December. It is always a great opportunity to interact with the leaders of the organization to review our safety and environmental performance, pass along some important messages and set our path for continued improvement. Our journey to 0 incidents is ongoing, but every employee at Eagle understands that the safety of our people always comes first. If we cannot perform a job safely, we will not perform the job. These meetings with the best practice sharing and commitment from the team have allowed Eagle to maintain an industry-leading safety record. To say the least, I'm proud of all Eagle's employees and the safety culture we have built. Regarding our plants, we work to maintain the reliability of our assets, increase efficiency and capacity, which gives us operational flexibility to execute efficiently through economic cycles. This past quarter, we advanced several initiatives that convert our waste streams into revenue streams to help further improve our low-cost producer position. Let me give a few examples. In Cement, we have been able to reclaim decades old waste streams that can be used as a source of raw materials in our production process. In our Aggregates operations, we have begun using fines and overburden to support our raw materials or extend our reserves at our Cement plants and Aggregates facilities. In the light side of our business, we are expanding the capabilities of our Republic paper mill to repurpose non-wallboard grade paper and trim rolls into higher value-add products. At American Gypsum, we are recycling 100% of our waste wallboard back into the production process, except at our Duke facility, which will also be at 100% following the completion of our modernization there. Importantly, many of these projects require minimal or no capital investment while having an outsized positive benefit on our operations. These initiatives complement some larger strategic projects we have underway that benefit our overall system reliability, capacity and profitability, namely the modernization of our Mountain Cement plant and the Duke Wallboard facility. We made good progress on both projects during the quarter, which means that our Laramie, Wyoming Cement plant should be going through its commissioning late this calendar year, followed by our Duke, Oklahoma commissioning in the second half of calendar 2027. Each investment will lower the cost structure of the respective plant, strengthen our already low-cost competitive position and deliver a strong return on investment. I'm incredibly excited for what's ahead as we are experiencing some downtime at the Mountain Cement kilns recently, increasing the justification for the modernization project. In the meantime, we can use our network of Cement plants to meet our customer needs, albeit at an increased cost. We'll continue to report on progress as we approach the end of each plant's construction time line. With both plants coming online over the next 18 months, let me pivot now to where we think we are in the economic cycle. At Eagle, we don't operate in a way that is overly focused on short-term demand cycles. Our primary products are essential commodities, meaning demand will fluctuate. That being said, heavy materials and Wallboard appear to be at different inflection points today. Our Cement and Aggregates sales volumes grew last quarter, and we believe the support from federal, state and local infrastructure spending plus solid growth on key nonresidential end markets will continue support for our heavy materials business. As discussed last quarter, we have announced price increases for the first quarter of calendar 2026 in most of our markets, further reflecting our volume expectations for our heavy materials business. At the same time, residential construction, which drives wallboard volumes was challenged last quarter. Current housing data reflects the affordability issues that have been plaguing the homebuilding industry for quite some time. Recent housing policy announcements, combined with more accommodative monetary and fiscal policy, recognize the fundamental need for new home construction in the U.S. so we are monitoring these developments closely. Nonetheless, as I said, our focus is on our operations, not on predicting demand. Over decades, we've demonstrated that we can operate equally well in strong economic environments and in mixed construction environments. Our low-cost producer position gives us opportunities and advantages for managing cost. In Wallboard, our sustaining maintenance costs are already low, and we benefit from the ability to flex production to match sales. Finally, as I mentioned earlier, our focus on financial discipline and balance sheet strength remains. During the quarter, we strengthened our already solid financial position, issuing $750 million in 10-year senior notes, aligning our capital structure with our ongoing investments at the Laramie, Wyoming Cement plant and Duke, Oklahoma Wallboard plant. While making significant progress on our major capital projects, we increased our return of capital to shareholders. During our fiscal third quarter, we returned nearly $150 million to shareholders through our dividend and share repurchases. Our leverage ratio of 1.8x allows us to navigate cycles and stay in growth mode even as our end markets have endured choppiness. Craig, with those comments, I will now turn it over to you. D. Kesler: Thank you, Michael. Third quarter revenue was $556 million, down slightly from the prior year. The decrease reflects lower wallboard and paperboard sales volume, partially offset by higher cement sales volume and the contribution from the recently acquired Aggregates business. Third quarter earnings per share was $3.22, down 10% from the third quarter of fiscal 2025. The decrease reflects lower net earnings, mostly the result of lower wallboard sales volume, offset by a 5% reduction in fully diluted shares due to our share buyback program. Turning now to segment performance. In our Heavy Materials sector, which includes our Cement and Concrete and Aggregates segments, revenue was up 11%, driven primarily by a 9% increase in cement sales volume and a 22% increase in concrete and aggregates revenue. Aggregate sales volume was up 81% to a record 1.6 million tons, reflecting a 34% increase in organic aggregates sales volume and the contribution from the recently acquired Aggregates business. Operating earnings were up 9%, driven primarily by the 9% increase in cement sales volume. As Michael mentioned, cement price increases have been announced in most of our markets to take effect in the first part of calendar 2026. Moving to the Light Materials sector on the next slide. Revenue in the sector decreased 16% to $203 million, reflecting lower wallboard and recycled paperboard sales volume and a 5% decline in wallboard sales prices. Operating earnings in the sector were down 25% to $73 million, primarily because of lower wallboard sales volume and prices. Looking now at our cash flow. We continue to generate strong cash flow and allocate capital in a disciplined way, in line with our strategic priorities. During the first 9 months of the fiscal year, operating cash flow increased 5% to $512 million. Capital spending increased to $295 million. Most of this increase was associated with the modernization and expansion of our Mountain Cement plant in Laramie, Wyoming and the modernization of our Duke, Oklahoma Wallboard plant. Considering these 2 projects as well as our sustaining capital spending, we expect total capital spending in fiscal 2026 to be in the range of $430 million to $450 million. During our fiscal third quarter, while investing in these growth projects, we also significantly increased our shareholder distribution. We returned nearly $150 million to shareholders through our quarterly dividend payment and the repurchase of approximately 648,000 shares of our common stock. Through the first 9 months of fiscal '26, we have repurchased approximately 1.4 million shares or 4% of our outstanding. We have approximately 3.3 million shares remaining under our current repurchase authorization. Finally, a look at our capital structure, which continues to give us significant financial flexibility. As Michael mentioned, during the quarter, we further strengthened our financial position by issuing $750 million of 10-year senior notes with an interest rate of 5%. This issuance enhances our debt maturity schedule, increases committed liquidity and aligns our capital structure with the long-term investments we're making at our Mountain Cement plant and Duke Wallboard facility. We also used a portion of the proceeds to repay our bank credit facility. At December 31, 2025, our net debt-to-cap ratio was 48% and our net debt-to-EBITDA leverage ratio was 1.8x. We ended the quarter with $419 million of cash on hand. Total committed liquidity at the end of the quarter was approximately $1.2 billion, and we have no meaningful near-term debt maturities, giving us substantial financial flexibility. Thank you for attending today's call. We'll now move to the question-and-answer session. Drew, I'll throw it back to you. Operator: [Operator Instructions] The first question comes from Trey Grooms with Stephens Inc. Trey Grooms: So Cement, if we could start there, the Cement volume up nicely again in the quarter, also organic Aggregates volume as well. Can you -- you touched on a few things there in the press release or in the slide deck rather, that were -- where we were seeing some strength, maybe infrastructure, data centers, those types of things. Can you talk about -- is that demand pretty well widespread across your markets? Or is it more isolated to some specific geographies? And then has that strength kind of continued as we've started off here into calendar '26? D. Kesler: Yes, Trey, look, I would tell you, it's pretty broad-based across our markets. I think we came into calendar '25. If you think about a year ago, we were optimistic around infrastructure, some of the nonresidential key markets and that played out as we had expected in many parts of our markets. And we're a broad national footprint. And so as we head into calendar '26, we have some -- continue to have that optimism around infrastructure and some of the nonresidential markets. So always hard to generate a trend in January and February given winter weather. And certainly, we've all lived through that in the last week or so, but optimism coming into '26. Trey Grooms: Good deal. Okay. And kind of sticking with Cement, the margins impacted a bit here or down a little bit here. I understand there was maybe a slight decline in pricing, but volume again here was strong like we discussed. Can you talk about what's driving the margins there? I didn't see anything kind of unusual called out in the press release as far as maintenance or anything, but just if you can maybe touch on the margins in Cement. D. Kesler: Yes. I mean, look, costs were largely in line. We did have some raw material costs, purchased raw materials costs that were up this quarter. But maintenance was largely in check. Fuel costs, as we've talked about, have been largely in line. So nothing stands out significant. Trey Grooms: Okay. Okay. Fair enough. And then last one for me is on Wallboard pricing. You saw a little bit of a decline there sequentially. I think it was about 3% or so and not overly surprising. But have you -- has this kind of pricing trend maybe continued into January? Or how should we be thinking maybe about the kind of directionally at least with Wallboard -- around Wallboard pricing here in the near term as we kind of bump along at these lower demand levels with nothing looking to change drastically on that front, at least in the near term. Any color you could give us on how we should be thinking about that? D. Kesler: Yes, you hit on it, Trey. The annual shipments for calendar '25 for Wallboard came in at about 25.4 billion square feet. That's back to a 2018 pace. So in this type of residential market, not at all surprised to see pricing have some downward trend. But again, very range bound relative to what we've seen and certainly relative to the demand environment that we're in. So not surprised by that at all. Trey Grooms: Yes. Yes. But I assume it's still your take that there's been a lot of changes in the industry and with the cost structure that we've talked about for years that have, I think, maybe changed -- made some changes with pricing over the long term being somewhat structurally higher just given the backdrop of some of those things. So is it still your take that modest declines could be expected, but these changes are still in place such that we shouldn't be expecting any kind of replay of some of the more drastic price swings that we saw maybe go back 10-plus years ago. D. Kesler: Yes. No, exactly. Given all the changes that have happened with raw material costs, this is what you would have expected to see happen, a pretty range-bound pricing environment even in light of a very difficult residential environment. So I don't see anything changing from that perspective. I do think there's upside on pricing as we get housing to recover and back to a reasonable level of construction activity. I think you'd see that fairly quickly. But in the current environment, yes, I still think prices are relatively range bound. Operator: The next question comes from Brent Thielman with D.A. Davidson. Brent Thielman: Just had a follow-up on the Wallboard side, just down 14% in terms of shipments. Just thoughts in terms of whether that's consistent across the footprint or you've got some -- potentially some regions outperforming that. D. Kesler: No, that was pretty consistent across our regions. And if you look at the total GA numbers, they were down 8%. Our regions underperformed that. So our business was pretty much in line with the regional performance. Brent Thielman: Okay. And then on the Lehigh JV, Craig, I guess, has been anticipating some improvement in terms of the profit contribution. Just wanted to get a sense of what we're seeing here in the December quarter sort of indicative of the market trends? Or there's still some operational noise under the hood there? Michael Haack: Yes. So with the JV itself, we're -- the plant itself is performing better. Texas was probably our most challenged market, both from a pricing standpoint and some on demand and its competitive nature with it. So I know Trey asked the previous question about across the U.S., where we see kind of our demand and our pricing and everything with it. And we've been very stable in every location except Texas had the most pressure. So you could really look at this as more of we had to adjust our pricing more in that area, which offset some of the benefits you'd see from our plant operating better on the profit side. Brent Thielman: Okay. All right. I appreciate that. Maybe just last quick one. Just in terms of the proposed price increases in Cement here to start the year, I think typically, you do some in January and some in spring. I mean, just from past experience, obviously, terrible weather across the country. Does that potentially push some of this more into the spring? Any thoughts around that? D. Kesler: Yes, Brent, I would say we have terrible spring every January and February. So yes, look, the volume improvement we saw here in calendar '25 is really good to see in terms of the incremental pricing opportunity as we head into calendar '26. We do have increases out there, as we talked about, they're spread throughout here the first couple of months of calendar '26. Exact realization, we'll certainly update everybody on. But we have the volume momentum, and that's a good sign and expect that to continue here into calendar '26. Operator: The next question comes from Anthony Pettinari with Citigroup. Asher Sohnen: This is Asher Sohnen on for Anthony. I was just wondering how we should think about maybe natural gas costs for Wallboard and Cement in the fiscal fourth quarter. I think natural gas prices have risen pretty meaningfully in recent weeks. So I'm just wondering how you guys are looking at that. D. Kesler: Yes. It's really more of a Wallboard thing. In Cement, you're going to burn typically more solid fuels than natural gas. In Wallboard, we do have a hedging program in place. So we're a little more than 50% hedged here through the winter, which is where we like to be because you will see these spikes when you get these winter storms that pop up. And I think that's what's driven natural gas here in the last week or so with the colder temps. Fully expect that to come back down more in line. There's not something that's structurally changed in the natural gas markets. So just a short period here during the winter, and we've got a good hedge position from that. Asher Sohnen: Okay. Great. And then one more for me. I mean with the pressure in Wallboard, it seems like it's coming a lot from new build. But I was wondering if you could talk about roughly what portion of the business is repair and remodel. I know it's a little bit smaller, maybe harder to estimate. And then what trends you might be seeing in that end market if you're able to get that visibility? D. Kesler: Yes. No, it's a good question. We talk about a lot of the new residential construction activity, but repair and remodel is, call it, 1/3 of the demand profile for Wallboard. And it's certainly meaningful and has been growing over the last many, many years. And it's a much steadier market, harder to get forecast data exactly, but at least the forward look there continues to see low single-digit type of growth and a very meaningful market for us. So it's a good question. Operator: The next question comes from Timna Tanners with Wells Fargo. Timna Tanners: I was hoping to follow up on the comments or questions about the upcoming quarter, if you had any specific observations on any impact to your operations from these storms? Anything you can comment on there? D. Kesler: As it relates specifically to the winter storms, our folks have done a really, really good job of preparing the facilities for very extreme cold temps, weather-proofing lines, raw material lines and things like that. So from the winter storm perspective, our folks and our plants are ready for it. Timna Tanners: Okay. I appreciate that. And then I was wondering if you can get into some more specific about what you're seeing about Cement imports. I think that's what you're alluding to in terms of Texas and California, but any updated observations there? Michael Haack: Yes. Really, how you look at it is any of the markets that could be served by imports, of course, it all depends on the freight rates and everything coming in. Texas is not just impacted by imports, though, with my comments there. There's been a structural change in the market in Texas a little bit with the ownership. And every time there is changes in it, people operate their plants a little bit differently and look at markets a little bit differently. So I think there has been some structural changes on how those plants that changed ownership, which is a significant portion of the production in the Texas market between the 2 facilities have different owners that they look at different. So we've just had different competitive pressures in Texas. As you get closer to the coast, imports definitely do have an impact, but it's kind of a -- it's not just one thing that's affecting Texas. It's more, and that led us to respond to some competitive pressures. Timna Tanners: Got it. Helpful. And then just finally from us on the CapEx comments, it seems like it was lowered from prior numbers. I'm just wondering if there's any basis or explanation for that. D. Kesler: No. Thanks, Timna, for bringing that up. We have been forecasting closer to $500 million. It's just timing. When you get these very, very large projects like Mountain Cement and the Duke plant, it's hard to exactly forecast when spending will occur. Nothing to change there. And then sustaining capital, we look very hard at what spending needs to occur there. And in light of the elevated capital spending, we've done a good job of prioritizing more of the sustaining capital, which ends up with a slightly lower number. Operator: The next question comes from Adam Thalhimer with Thompson, Davis. Adam Thalhimer: I wanted to start on capital allocation. How are you guys thinking about share repurchases and acquisitions after the November bond deal? D. Kesler: Yes. Look, that's where we spend a lot of our time. We've positioned the assets well. We've got a good group of operators. And so how we continue to allocate capital to generate value is where we spend the majority of our time. As we've said, and this really hasn't changed over decades, and that is the priority is to continue to grow the organization. But with a high bar for that growth, both strategically and financially and whether that's M&A or organic. So we have the 2 large organic projects underway, very excited about those and the returns they will generate. But we've also got a balance sheet that we can continue to pursue M&A activity, but remaining very disciplined on valuation there. And then you have our capital return strategy, and we certainly repurchased more shares this quarter than we had in quite some time. And some of that's also relative to the stock price. And so we still see value in the shares. But we're fortunate we can continue to kind of have a balanced offense across all 3 of those. Adam Thalhimer: Great. And then I wanted to ask about Wallboard margins. Can you talk a little bit about the puts and takes there? And I guess what I'm really getting after is if margins could stabilize at that Q3 level? D. Kesler: Yes. Look, I think we talked about we saw some sequential price declines there. I still think they're moderated given the structure and the changes that have occurred. Cost-wise, OCC continues to be at a pretty low level. Natural gas, again, it fluctuates a little bit during the winter, but don't see that as a long-term change. We own our primary raw materials. So nothing significant on the cost side that we're looking at today. But in a volume environment, we'll see where that goes. But we've positioned the business to continue to perform at this high level even in this difficult environment for residential construction. So I think we'll continue to see good performance. Adam Thalhimer: Okay. And last one for me. The Wallboard comps get a lot easier starting in late calendar '26. I'm just curious if there's any reason for optimism on volume stabilization or maybe even a little bit of growth as we get to the back half of the year. D. Kesler: Yes. Look, there's a lot of moving parts when it comes to homebuilding right now. So I would say our optimism is around how well our assets are positioned, the cash flow that we're generating even in this environment and our ability to continue to make good return investments. So we'll deal with the choppiness. When it does recover, I think it recovers meaningfully, and you'll see a significant upward inflection there, but maybe a little early to call that. Operator: The next question comes from Philip Ng with Jefferies. Philip Ng: Michael, great color on the Texas market for Cement. Are you seeing any other regions where you're seeing price competition be a little more elevated perhaps in the West? I know the last earnings call, you guys announced an $8 per ton cement price increase in all the markets ex Texas and the West. Have you announced price increases in those markets? And any early read on how the Jan increase is progressing? Are you seeing any traction? Or are you seeing some pushback here? Michael Haack: It's a great question. When we look across the U.S., we're very happy with the remainder of our markets. I mean some markets -- each market is independent of each other when you look at the supply-demand dynamics with it. But for the most part, we've announced price increases across the majority of our network with it. I highlighted Texas is the one that's the most challenged. Every other market structurally is in very good position, we feel. So there's nothing I would point out there. What's really -- what we're really going to determine over the next months is which ones -- as we talk with our customers, what that number is and if it's a January increase or an April increase, and that will be determined by individual markets. Philip Ng: Okay. That's helpful. And then I guess a question for you, Craig. Wallboard prices bled a little bit, right? No surprise there just given the dynamic on the homebuilding side. Are you expecting prices to kind of stabilize here and some of the weakness? Is that destocking related? Or it's just kind of normal trends in terms of underlying demand? How should we think about the wallboard side of things? D. Kesler: Yes, not really destocking in my view. Just it's a perishable product. So you don't -- you can't store it outside. So you're subject to the indoor storage at your own -- at our manufacturing facilities and the distributors. Look, as we said in the beginning, I'm not surprised by some of the pricing weakness, but it's all relative. It's down, but not down anything like what we would have seen in prior cycles, especially at this demand level. Utilization rates are higher just given some of the raw material issues. So again, I think pricing stays range bound. I wouldn't be surprised to see some further decline here, but I think it's all relative and certainly versus where we are with the demand side. Philip Ng: Got you. And just kind of one final question on the Wallboard side. Two of, I believe, your larger customers on the Pro distribution side now are owned by [ big box ]. I'm just curious, as you kind of look into 2026, have that relationship dynamic changed any way in terms of how you're talking about procurement conversations? Is it the same people or it's kind of merge where you have the retail side versus the Pro side having one conversation and any movement from a placement standpoint we should be mindful of this year? D. Kesler: Yes, Phil, I think it's probably a little early to have that definitive. See how -- again, you mentioned it, and it's an important point, very different business models, the traditional retail versus the mass distribution, how they run those is, I think, to be determined if they run them together or keep them independent because they are so different. So it's something that we'll continue to monitor, but maybe a little early to talk about that. Operator: The next question comes from Keith Hughes with Truist. Keith Hughes: A couple of questions on Wallboard. Given the volume, did you have to take extra downtime in the December quarter you kind of were expecting and same thing on the March quarter, we have some of that just given where housing is and where the trends are. D. Kesler: Keith, like we've always done, you match the production with the sales opportunity. It's more of a variable cost business, very different than Cement. You can run a Wallboard plant 7 days a week, you can run it 4 days a week. So you'll certainly modulate shifts depending upon the opportunity. Keith Hughes: Okay. And the -- switching back over to Cement. On the Cement side, I know you got price increases out. When will you kind of be able to definitively tell what pricing is going to be like for the year? Is that something that becomes evident in March? Or does it take well into the second quarter before the price settles in? Michael Haack: Keith, really, it's going to be dependent on our conversations we have with our customers and what those individual markets are. You'll see -- we'll update you on each quarter and you'll see it in the financial results with where we did the price increases and when. Our -- really, our conversations right now are on timing. We've announced them in those markets, and it's just on what timing we implement that makes sense for us and our customers. Operator: The next question comes from Garrett Greenblatt with JPMorgan. Garrett Samuel Greenblatt: I was wondering if you just touch on Cement pricing once again in terms of what have you announced in your current letters that you've already sent? And then maybe something like a low single-digit volume growth year for Cement, what has been the historical realization rate? D. Kesler: Yes. In terms of the price increases that have been announced, they've been around $8 a ton for most of our markets across the U.S., excluding Texas and the Far West markets. And timing ranges somewhere between January and April, kind of the first part of your calendar '26. And Michael said it earlier, but these markets are very regional. So they'll have a very different -- the pricing will be determined regionally rather than a national average. So that's what we're going through right now. Look, we're coming off of calendar '25 for us is really the first year where we -- in the first 3 years -- the last 3 years where we've seen volume improve. And so that has certainly improved utilization rates. And so that's been good to see. And as we head into calendar '26, again, optimism around volume continuing to grow and should push utilization rates higher. Garrett Samuel Greenblatt: And then just a follow-up on Wallboard. How did those demand trends, I guess, progress through the fourth quarter? Was there any momentum coming into calendar 1Q? D. Kesler: Look, it's been pretty consistent here in the second half of the year, which I think is pretty consistent with what the homebuilders has been reporting and others within kind of this light building materials sector, where the second half of the year was -- had a meaningful drop in demand profile. So I think as we head into calendar '26, again, you've got some winter issues here, but expect to continue to see a similar trend. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Michael Haack for any closing remarks. Michael Haack: Thank you, Drew. As we enter the final quarter of our fiscal year, we continue to prioritize health and safety, operational excellence and financial discipline while seeking growth opportunities that meet our strategic and financial criteria. I look forward to elaborating more on our strategic priorities next quarter as we wrap up our fiscal year 2026. Thanks to everyone for joining our call today. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to Washington Trust Bancorp, Inc.'s conference call. My name is Lydia, and I'll be your operator today. [Operator Instructions] As a reminder, today's call is being recorded. And now I'll turn the call over to Sharon Walsh, Senior Vice President, Director of Marketing and Corporate Communications. Please go ahead. Sharon Walsh: Thank you, Lydia. Good morning, and welcome to Washington Trust Bancorp, Inc.'s Conference Call for the Fourth Quarter of 2025. Joining us this morning are members of Washington Trust's executive team, Ned Handy, Chairman and Chief Executive Officer; Mary Noons, President and Chief Operating Officer; Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer; and Bill Wray, Senior Executive Vice President and Chief Risk Officer. Please note that today's presentation may contain forward-looking statements, and our actual results could differ materially from what is discussed on today's call. Our complete safe harbor statement is contained in our earnings release, which was issued yesterday as well as other documents that are filed with the SEC. All of these materials and other public filings are available on our Investor Relations website, ir.washtrust.com. Washington Trust trades on NASDAQ under the symbol WASH. I'm now pleased to introduce today's host, Washington Trust's Chairman and Chief Executive Officer, Ned Handy. Ned? Edward Handy: Thanks, Sharon. Good morning, and thank you for joining our fourth quarter conference call. We respect and appreciate your time and interest in Washington Trust. I'll begin with a brief overview of our results, and then Ron will provide more detail on our financial results for the quarter and the year. After our remarks, Mary and Bill will join us for the Q&A session. This quarter's results reflected continued earnings momentum and improving profitability. The quarter's performance was driven by margin expansion, continued in-market deposit growth and increased revenues from wealth management. We closed out the year with a well-positioned balance sheet, a normalized provision for credit losses and improved asset quality metrics. During 2025, we laid important groundwork for future growth with targeted investments in our Wealth Management and Commercial Banking business lines. This included the wealth asset purchase from Lighthouse Financial Management and the hiring of our new Chief Commercial Banking Officer, Jim Brown, who has an extensive network and proven record in leading high-performing commercial banking teams. In this new year, we are continuing to build upon the positive momentum from these strategic investments. Last week, we brought on a dedicated institutional banking team to serve education, health care and nonprofit providers throughout the Northeast region. This investment in our commercial banking business will help improve our balance sheet with high-quality C&I loans and strong deposit opportunities. We also expect to see wealth management opportunities come about. The ability to scale this high-quality new client base with an efficient staffing model will enhance earnings going forward. We're very excited about this key addition to Jim's commercial team and the growth potential that lies ahead. We're also looking forward to our de novo branch opening later this year in one of Rhode Island's fastest-growing communities, the city of Pawtucket, which will increase our presence in the northern part of the state. All these efforts will enhance our value as a full-service community bank and long-term partner to our customers and provide a solid foundation for the year ahead. With that, I'll turn the call over to Ron for some additional details on the quarter and the year. We'll then be glad to address any of your questions. Ron? Ronald Ohsberg: Thank you, Ned, and good morning, everyone. In the fourth quarter, we reported net income of $16 million or $0.83 per share compared to $10.8 million or $0.56 per share for the preceding quarter. On an adjusted basis, EPS was up 41% compared to last year's fourth quarter. Net interest income was $40.7 million, up by 5% from Q3 and 24% year-over-year. The margin was 2.56%, up by 16 basis points and up by 61 basis points year-over-year. A better funding mix with higher in-market deposits and lower wholesale funding as well as deposit rate management contributed to this improvement. Q4 included $516,000 of loan prepayment fee income, which benefited the NIM by 3 basis points. Noninterest income was up 5% compared to Q3 and up by 15% year-over-year on an adjusted basis. Wealth management revenues were up 5% and average AUA for the fourth quarter increased by 4% and 9% year-over-year. Mortgage banking revenues totaled $3.3 million, down seasonally by 7% and up 14% year-over-year. Origination and sales volumes increased by 21% and 25%, respectively. Our mortgage pipeline at December 31 was $81 million, down seasonally by 37% from the end of September. Full year mortgage originations totaled $667 million, up by 31% from 2024. Q4 loan-related derivative income was up by $810,000 in the quarter. Noninterest expense totaled $38 million in Q4, up by 6%. On a full year adjusted basis, noninterest expense was up by 7%. In the fourth quarter, salaries and benefits expense was up by $973,000 or 4%, reflecting higher levels of performance and volume-based compensation as well as increased staffing. Other noninterest expenses were up by $1.3 million in Q4, largely due to a $1 million contribution made to our charitable foundation. Our full year effective tax rate was 22.5%. We expect our full year 2026 rate to be approximately 22%. Turning to the balance sheet. Total loans were stable, increasing modestly by $12 million from September 30. End market deposits were up by 1% from the end of Q3 and 9% year-over-year, and wholesale funding was down $165 million or 21% from the end of September. Total equity amounted to $544 million, up by $11 million from the end of Q3. The dividend remained at $0.56 per share. Turning to credit. In the fourth quarter, the provision for credit losses normalized and our asset quality metrics improved. At December 31, nonaccruing loans were 25 basis points on total loans. Nonaccruing commercial loans were 0. Past due loans were 22 basis points on total loans. There was one CRE loan past due at December 31, and that was brought current in January. And we had net recoveries for the quarter of $160,000. And at this point, I'll turn the call back to Ned. Edward Handy: Thank you, Ron, and we'll now take any questions you might have. Operator: [Operator Instructions] Our first question today comes from Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: I guess first question, Ron, I'm curious how you're thinking about the margin? Do you feel like that sort of mid-2.50% level is kind of sustainable, as we move into the early part of 2026? Ronald Ohsberg: I do, Mark. And I can give you kind of the full year outlook on the NIM. I think you're all aware of the swap termination that will happen at the end of April. So I'll talk about that first. So in the second quarter, we expect the margin to increase 9 basis points related to that item and another 4 basis points in the third quarter. So that's a run rate benefit of 13 basis points that will be fully baked in, in the third quarter. Outside of that, if we talk about organic expansion, we're projecting 3 to 4 basis points per quarter. That is assuming no changes in the Fed funds rate. So that would bring our Q4 estimate to 2.78% to 2.82%. Mark Fitzgibbon: Okay. Great. Secondly, I guess, I know credit is really good here, but optically, the reserve looks a little light relative to your peers. How do you guys think about that? And is there a conscious plan to sort of nudge that up over time with maybe qualitative factors? Ronald Ohsberg: Yes. Bill, do you want to jump in on that? William Wray: Sure. Mark, we, as you know, follow the CECL guidelines, which essentially say this is our lifetime loss estimate. And we are on the lower side of the spectrum with our peers, although not unduly so. We run the numbers. We look at our history, and we're very comfortable that it's adequate for our portfolio. And so I think you can expect it may tick up a few bps, tick down a few bps here or there, but we're comfortable in that mid-70 coverage range just based on our portfolio and the loss estimates for it. But it obviously is something we spend a lot of time on, and we'll be more conservative on the call side when it's merited. Mark Fitzgibbon: Okay. And then... Ronald Ohsberg: I'm sorry, Mark. I would just make one other point. I mean we still have a relatively large residential portfolio. And so the reserve allocation on that is less than commercial, right? And we'd like to see our residentials come down, to be honest, but that does have an impact on the weighted average reserve coverage. Mark Fitzgibbon: Okay. Great. And then Ned, in your opening comments, you made a point that you think there's going to be some wealth management opportunities. Should we take that to mean you're looking at potential M&A in that -- in the wealth side? Or is that more sort of organic hiring and that sort of thing? Edward Handy: Actually, Mark, I was referring specifically to the institutional banking team, which is -- serves in large part the not-for-profit sector -- higher end not-for-profit sector. So that was really focused on endowments and retirement funds that might come with that with growth in that portfolio. Operator: Our next question comes from Damon DelMonte with KBW. Damon Del Monte: I just want to kind of start off with the outlook on expenses, kind of good control going in here to year-end. Kind of Ron, just wondering what your thoughts are on kind of the full year outlook and maybe any variability from a quarter-to-quarter perspective? Ronald Ohsberg: Yes. So Damon, I guess I'll break it salaries and benefits versus all other. In Q1, we're looking at a 6% increase in expenses, which factors in annual merit raises, which come into play at the beginning of the year, FICA resets and those types of things. But we've also made this investment in the institutional team that's coming on board. We also have, I think, as everyone probably has increased medical insurance, those types of things. So that's what we're kind of seeing for Q1 on the salaries and benefits line. All other expenses, we're looking at year-over-year, like 5% increase. And we also have the branch coming online. So that's going to add to our -- both our salary run rate as well as our expense run rate, call it, a total of $600,000 over the course of the year, starting in late summer, early fall. Damon Del Monte: Got it. Okay. Okay. Great. And then kind of can you just give a little update on kind of your outlook with loan growth? Are you optimistic that we can start to get back to that low mid-single-digit range kind of given what you're seeing as well as the recent hires to the commercial lending team? I guess, yes, just some color on the outlook for loan growth would be great. Ronald Ohsberg: Yes. Yes. Listen, net loan growth wasn't where we wanted it to be kind of closing out the year. But we're expecting 4% to 5% growth in CRE, which would be kind of standard. The C&I team, we think, will grow at a rate faster than that. So I'm not going to put a target on that. They're just getting situated, and then we expect residential to be a net runoff like it was this year. So I would say, all in, we're looking at, I would say, a very solid 5% year-over-year, which is an improvement over where we've been in 2025. And we'll leave it at that. But we do have a lot of confidence in this team that we've just brought in, and -- but we'll set the target there for now. Edward Handy: Yes. And Damon, I would just add a little more color. I mean we had $180 million of credit formation in the quarter. We just had a lot of payoffs, and the payoffs were some expected, some earlier than expected. And you saw that we got a pretty sizable prepayment penalty on one of them. But we don't expect that level of prepayment to -- of early prepayment to continue. But the new team has been with us for 9 days. So we don't -- we haven't seen pipeline growth yet. I think we'll be much better positioned next quarter to share our expectations. We have great expectations. They're a very seasoned team that's been in the market for a long time. They look at a lot of potential deal flow as they have for years and years. And so we have high hopes and great expectations, all in the C&I space, which we've been talking about for a while, figuring out strategically how to kind of change the balance sheet around and grow the C&I side a little faster. The growth that Ron talked about on the CRE side is a little bit due to the continued concentration level. And so we're being careful on that front and really want to focus on helping this team be successful on the C&I front. Operator: Our next question today comes from Laurie Hunsicker with Seaport Research Partners. Laura Havener Hunsicker: Just to circle back to the C&I group, can you share with us how many people are there and how much they did last year collectively? Maybe where they... Edward Handy: I don't have details on what they did last year collectively, but there are 4 people in the team that came over. There is -- we will add a treasury management specialist to that team because of their tendency to deliver deposits. They are -- they've had a -- the leader of the group has 30-plus years in this space in the Northeast region, very well known, and they've been highly successful at prior institutions. So yes, we're very confident, Laurie. And again, I think they've been here 9 days. Let's take a little time to build the pipeline up, but we'll report in detail, I think, probably as soon as next quarter. Laura Havener Hunsicker: Okay. And where did they come from? Edward Handy: They were most recently at Brookline. Laura Havener Hunsicker: Got you. Okay. Got you. So then is that focus basically in the Greater Boston MSA? Edward Handy: I'm sorry, Laurie, ask that one more time. Laura Havener Hunsicker: Yes. So the loan focus, is that going to be in the Greater Boston MSA? Edward Handy: Northeast region. So broader than just the Boston MSA. Laura Havener Hunsicker: Got you. Okay. And then going to expenses, Ron, the 1 quarter increase -- sorry, the 6% increase for 1 quarter of fourth quarter, that's obviously netting out the charitable foundation charge. Is that correct? Or are you thinking about from the $38 million... Ronald Ohsberg: Yes. Laura Havener Hunsicker: Okay. Okay. And then how should we think about the charitable foundation charge in '26? I think you previously guided to $500,000, but should we be thinking that at... Ronald Ohsberg: Yes. We penciled in $750,000 for the end of the year. Laura Havener Hunsicker: Okay. Great. And then I guess, branching, obviously, we've got that Pawtucket coming. Is there anything else you're thinking about? Or should we be thinking about kind of maybe one branch in '27 as well? How do you think about that? Edward Handy: Yes. So for '26, Pawtucket, but Michelle Kyle, our Head of Retail Banking, has developed a plan that we're reviewing as part of our strategic outlook that it may not be full-service branches. It might be alternative delivery, ATMs and the like that she's developing a sort of full sketch on. So nothing else on the docket in 2026, but I think it's safe to say that we will continue to invest in our retail footprint in the outer years. Laurie, we've done 1 or 2 branches a year for the last 5 years. I don't -- I think that order of magnitude is probably reasonable going forward. The form of it might be a little different. Laura Havener Hunsicker: Okay. Okay. That's great. And obviously, credit, you're probably one of the few banks in the entire country with 0 CRE nonperformers, 0 C&I nonperformers and booking recoveries. But just a very quick question. The $6 million of office classified, any color on that? And when does that mature? Ronald Ohsberg: Yes. Bill, do you want to take that one? William Wray: Sure. Sure. That matures in 2031. So plenty of running room there, extremely strong with dedicated sponsors. Occupancy right now is in the mid-40%, but growing. So the building is getting close to breakeven. I think it's just going to be a long, slow nursing process, but the sponsors are fully committed, and they are building it up slowly. So we feel comfortable about it. That's why it's accruing. And by the way, it's completely current. So we think we're going to nurse our way through on this one. Laura Havener Hunsicker: Great. Great. Well, congratulations on credit. Really, really great. Okay. So putting it all together, your earnings power, obviously very, very strong. In 3Q, you had dialed back comments around buybacks, and we're seeing buybacks ramp up across the board. As we're looking here, your CET1 almost 12%, your risk-based 13%. I mean why wouldn't you revisit buybacks here? How do you think about that? Ronald Ohsberg: Yes. Laurie, I think it's our -- kind of our standard answer that we take it under consideration all the time and taking into account other ways that we think that we need to deploy capital. So not saying that we're going to do more and not saying that we won't, but we'll just have to take that as it comes. Laura Havener Hunsicker: Okay. And then just remind me, what's existing in your current authorization? Ronald Ohsberg: I don't have that information off the top, Laurie. I have to look that up. Operator: And our next question comes from Ross Haberman with Rlh Investments. Ross Haberman: Most of my questions have been answered. Could you just talk about your wealth management and what you're doing to basically expand that a little faster in '26? Edward Handy: Thank you, Ross. So yes, we've added some business development officers. We are hopeful, although I think we need some -- a little more than 9 days' time to pass, but we're hopeful that this team that is focused mostly on the nonprofit sector will help us with the various things that will come out of that client base, which is generally higher ed, health care and private schools, that sort of thing that tend to have endowments and retirement plans. So we're hopeful there. M&A, we're happy with the Lighthouse deal that we did in 2025. That's a part of the ongoing strategy. It's probably not the primary focus and prices are high. And so we have to be careful about price and culture and fit. And we're -- again, we're happy with what we bought in 2025. And so we're not aggressively looking for opportunities, but we're opportunistic, and we'll keep our eyes open on the M&A front. And in that case, it would be relatively smaller tuck-in transactions that, again, that fit with our style of how we go to market and how we run the group... Ross Haberman: And just one follow-up -- sorry. Edward Handy: I was just going to say... Ross Haberman: Return on assets? Ronald Ohsberg: On wealth? Ross Haberman: On wealth, yes, yes, sorry. Your fee structure -- sorry, your average fees, is it somewhere between 0.5 and 100 basis points? Ronald Ohsberg: Yes. I would say all in on average, it's about, I think, 60 basis points... Edward Handy: Yes. Ross Haberman: Got it. Okay. I'm sorry, I cut you guys off. You were going to say something, I apologize. Edward Handy: No, no. You got the 60 basis points, right? Ross Haberman: Yes, I did. Edward Handy: Okay. I was just going to say that we've also added some -- a person in the financial planning side of things. So we think that's a great retention tool. We think it's a great way to appeal to sort of next gen and full families. And so we're -- we continue to invest in that side of the business. Ronald Ohsberg: And Laurie, just to follow up on your question, we had 850,000 authorized, and we've got 582,000 shares remaining. Operator: [Operator Instructions] We have nothing else on the line. So I'll pass you back over to Ned for any closing comments. Edward Handy: Thank you, Lydia, and thank you all. As we move into the new year, we remain committed to delivering value as a full-service community bank and long-term financial partner to our customers with a disciplined focus on long-term performance. So really appreciate your time today and your interest and support, and we look forward to speaking to you all again soon. Have a great day, everybody. Operator: This concludes our call today. Thank you very much for joining. You may now disconnect your lines.
Charles Nunn: Good morning, everyone, and thank you for joining our 2025 full year results presentation. It's great that the move to prelims has allowed us to update you earlier than prior years. This means that our organization can make a fast start and increase our focus on the year ahead as we enter the final stage of the strategy that we laid out in early 2022. I'm very pleased with our ongoing strategic transformation, and 2025 was another strong year for the group. We're building significant momentum that sets us up well to deliver upgraded 2026 commitments and stronger sustainable returns for the period. I'm very excited about the plans we're developing for our next strategic phase, and you'll hear more about this in July alongside our half year results. As usual, following my opening remarks, I'll hand over to William, who will run through the financials in detail. We'll then have plenty of time to take questions. Let me begin on Slide 3. I'd like to start by highlighting the following key messages. Firstly, our strategic delivery is accelerating and building momentum across the business. We're on track to meet or exceed our 2026 strategic targeted outcomes, delivering clear benefits for all stakeholders. Secondly, our continued strategic execution underpins sustained strength in financial performance and growth in shareholder distributions. We've announced a 15% increase in the ordinary dividend alongside a shareback (sic) share buyback of up to GBP 1.75 billion. And finally, we're confident in our outlook. We are upgrading our guidance for 2026 and are committed to further improvements in financial performance beyond this. Turning now to a performance overview on Slide 4. We delivered strong outcomes for all stakeholders in 2025. Our clear purpose of Helping Britain Prosper continues to drive attractive growth opportunities. This includes supporting our customers during a record ISA season and funding the growth ambitions of businesses that create opportunities across the U.K. These actions drive healthy franchise momentum, delivering growth across both sides of the balance sheet and market share gains in key focus areas such as personal current accounts. Taken together, the group is delivering sustained strength in financial performance. We returned to top line revenue growth during 2025 with increases in both NII and OOI, the latter up 9%. This supports a return on tangible equity of 14.8% and 178 basis points of capital generation, excluding the motor finance provision taken earlier in the year. On Slide 5, I'll provide a brief update on our outlook for the U.K. economy. As you've heard from me previously, we're constructive on our outlook for the U.K. We continue to forecast a resilient but slower growth economy with interest rates falling gradually in 2026. In addition, the financial position of both households and businesses continues to strengthen with emerging signs of growing capacity to spend and invest. Combined with the government's focus on regulatory reform and driving growth in key sectors, we believe the economy has the potential to move to a higher medium-term growth trajectory than is forecast today. We are well positioned against this backdrop with our strategy focused on faster-growing high-potential sectors such as housing, pensions, investments and infrastructure. We're already driving growth in these areas, leveraging our competitive advantages as the U.K.'s only integrated financial services provider. As a result, we expect the group to continue to grow faster than the wider economy over the coming years. I'll now turn to highlight our strategic progress, starting on Slide 6. We continue to successfully deliver a significant transformation. Over the last 4 years, we have meaningfully grown the balance sheet, driven diversified revenue growth, improved our cost and capital efficiency while significantly derisking the business and established a digital and AI leadership position. These actions have both enhanced the franchise and delivered attractive returns to our shareholders, including total capital distributions of around GBP 15 billion. We're now entering the final phase of our 5-year strategic plan with delivery accelerating and momentum growing. This is translating into significant financial benefits. We've generated GBP 1.4 billion of additional revenues from strategic initiatives to date and are today upgrading our 2026 target to circa GBP 2 billion. As part of this, we expect the other income contribution to be circa GBP 0.9 billion, ahead of our original '26 guidance. At the same time, we've now realized circa GBP 1.9 billion of gross cost savings, having met our upgraded 2024 target of GBP 1.2 billion last year. As you'd expect, we remain committed to driving further improvements in operating leverage. To bring this to life, I'll now spend a few minutes discussing our progress in more detail. Let me begin with our growth areas, starting with Retail and IP&I on Slide 7. In Retail, we are the leading provider across key products in our own and third-party channels. We further strengthened our position through growth in high-value areas and continue to develop our product range and capabilities to meet more customer needs. Mobile app users are now up circa 45% since 2021. In '26, we'll roll out in-app AI agents for these customers with these currently in [ colleague beta ] testing. In IP&I, we're deepening relationships as an integrated bancassurance provider, expanding our product offering through exciting partnerships. We're also transforming engagement through our Scottish Widows app with further growth expected in 2026 as we launch to the open market. Complementing our strategic delivery, we announced the acquisition of Schroders Personal Wealth in the second half of last year. It's early days, but we're really pleased with our progress, and we'll rebrand the business to Lloyds Wealth in the coming months. The acquisition is an important enabler to delivering our ambition for a market-leading end-to-end wealth offering, providing us with an opportunity to deepen relationships with our mass affluent customers and workplace clients. Let me continue on Slide 8. Our Commercial Banking division captures both BCB and CIB businesses. In BCB, we're building the best digitally led relationship bank, building upon our strong deposit franchise and rolling out new mobile-first journeys to support growth in targeted sectors. Our BCB gross net lending increased by 15% in 2025, and we are committed to further growth this year. And in CIB, we're driving revenue diversification through growth opportunities aligned to our simple cash, debt and risk management model. For example, FX volumes increased by over 20% in the year, supported by the launch of a market-leading algorithmic trading solution. We were also awarded a landmark U.K. Government banking services contract, a testament to the investment we've made in our award-winning cash management and payments platform. Finally, equity investments is a growing contributor to the group, now representing nearly 10% of group OOI. Lloyds Living has now grown to nearly 8,000 homes since launching in 2021, whilst LDC generated more than GBP 600 million of exit proceeds during the year. On Slide 9, I'll now talk about the ongoing drivers of OOI more broadly. Since 2021, we've delivered strong OOI growth across each of our business units, reflecting a resilient and diversified portfolio. For example, our Retail business has benefited from growth in our Motor franchise, whilst Commercial Banking has been supported by renewed focus in our Markets business. We've also realized the benefits from improved cross-group collaboration such as increasing protection take-up rates across mortgage journeys and leveraging the full breadth of the group to meet the ancillary needs of commercial clients. We delivered 9% growth in 2025, consistent with prior years and are confident in our outlook. Going forward, other income will also benefit from the full impact of the Lloyds Wealth acquisition, and we expect to unlock more value from this business over time. Turning now to cost and capital efficiency on Slide 10. We remain focused on delivering an organization that drives continued improvements in cost efficiency and capital intensity. As I mentioned earlier, we've now delivered circa GBP 1.9 billion of gross cost savings since 2021. This has been supported by the ongoing shift to mobile first and consequent refinement of our physical footprint as well as actions taken to reduce both the size and complexity of our legacy technology estate. These savings reinforce our confidence in delivering a cost/income ratio of below 50% in 2026. On capital efficiency, we've now delivered GBP 24 billion of gross RWA optimization since 2021. We continue to target more than 200 basis points of capital generation in 2026 and we'll now consider excess capital distributions every half year, reflective of our increasing confidence. I'll now move to Slide 11 and focus on our enablers of people, technology and data. As you heard in our digital and AI seminar in November, we're making strong progress against our clear strategic priorities. We have significantly enhanced our infrastructure, actively managing our legacy estate and increasingly building on modern technology. The ongoing investment in our people is critical to our success with circa 9,000 technology and data hires since 2021. These actions have created the platform for increased innovation. Digital-first propositions such as your credit score are driving clear benefits for both customers and the group. Our strong execution to this point means we're well positioned to take advantage of future opportunities. We're innovating and leading across new and emerging technologies, launching industry-first use cases at scale in the U.K. These areas will be critical to driving further enhancements to operating leverage in the future. I was incredibly proud to see that our efforts were recognized across the industry during the year. But importantly, we're not done. I see further significant potential in the coming years. Now turning to Slide 12, where I'll provide more detail on how we're thinking about AI specifically. In 2025, we scaled 50 Gen AI use cases into full production, demonstrating significant potential and generating GBP 50 million of in-year P&L benefit. It should be stressed that this is based on a narrow definition of the latest technology with the full spectrum of digital and AI initiatives contributing around 70% of our upgraded strategic initiatives revenue and over 60% of the total gross cost savings realized since 2021. This represents a strong foundation for us to accelerate our progress in '26, where we intend to increase the number of use cases with a particular focus on high-value agentic opportunities. This will deliver more than GBP 100 million of P&L benefit in 2026, capturing both revenues and costs with significant upside beyond this as use cases are scaled and mature. This is just the start of the journey, and we will, of course, talk more about our plans in this space as part of our strategic update in July. I'll now turn to Slide 13 and bring this together with a view on how we're building operating leverage in 2026. We've increased our net income by GBP 3 billion over the last 4 years. During this period, we have mitigated several headwinds, including those from the mortgage book and deposit churn with these partially offset by the structural hedge earnings growth of more than GBP 3 billion. As a result, the majority of this growth has been linked to management of the BAU business and the GBP 1.4 billion of strategic initiatives revenue, including a significant OOI contribution. We expect to deliver continued improvements in net income in 2026. Whilst headwinds will persist, these will be more than offset by an additional GBP 1.5 billion of structural hedge earnings and continued growth within the core franchise. This accelerating income growth, combined with flattening costs will further improve operating leverage and underpin the delivery of a cost/income ratio below 50% in '26. Let me now close on Slide 14. So as you've heard, we are successfully executing our strategy. This is reinforcing our competitive advantages and underpinning the delivery of strong shareholder outcomes. Indeed, reflective of our momentum, we are today upgrading our return on tangible equity target to be greater than 16% for 2026. Our confidence extends beyond this, and we're excited about sharing our updated strategic plan with you in July. We'll provide more details on the actions we'll be taking to further strengthen and grow the core franchise, address new diversified growth opportunities and deliver continued improvements in productivity, enabled by our leadership position across new and emerging technologies. We will, of course, share more detail on our medium-term financials at that stage, too. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns. Thanks for listening. I'll now return briefly at the end. But for now, I'll hand over to William to cover the financials. William Leon Chalmers: Thank you, Charlie. Good morning, everybody, and thank you again for joining. As usual, I'll provide an overview of the group's financial performance, starting on Slide 16. Lloyds Bank Group delivered sustained strength in its financial performance in 2025, in line with guidance. Statutory profit after tax was GBP 4.8 billion, equating to a return on tangible equity of 12.9% or 14.8%, excluding the Q3 motor provision. Within this, we delivered robust net income for the full year of GBP 18.3 billion, up 7% versus 2024. This was driven by sustained growth across NII and other income, up 6% and 9%, respectively. In the fourth quarter, net income was 2% higher versus Q3. This was driven by a 4 basis point increase in the net interest margin, continued balance sheet growth and further momentum in other income. Operating costs for 2025 were GBP 9.76 billion, up 3% year-on-year as continued investment, business growth and inflationary pressures were partly mitigated by further efficiency savings. Remediation charge for the full year was GBP 968 million, GBP 800 million of this relates to the additional motor finance charge in Q3. Credit performance meanwhile remained strong with an impairment charge of GBP 795 million for the full year, equating to an asset quality ratio of 17 basis points. Tangible net asset value per share ended the year at 57p, up 4.6p in 2025. Our performance for the year included capital generation of 147 basis points or 178 basis points, excluding the motor provision. This enabled a 15% increase in the ordinary dividend and a GBP 1.75 billion buyback while maintaining a 13.2% CET1 ratio. Let me now turn to Slide 17 to look at Q4 growth in lending and deposits. We saw a healthy balance sheet momentum in 2025. Lending balances closed the year at GBP 481 billion, up GBP 22 million or 5%. In Q4, lending balances grew by GBP 4 billion. Within this, retail saw growth across all of our business lines. Mortgages were up GBP 2.1 billion, strong but slightly slower than Q3 given higher maturities. Highlights elsewhere in Retail include credit cards, which grew GBP 0.5 billion with continued market share gains and European retail also up GBP 0.5 billion in the fourth quarter. Commercial lending was GBP 0.2 million higher. This represents further growth in targeted areas within CIB and business-as-usual performance within BCB, partly offset by continued government-backed lending repayments. Turning to liability franchise. Total deposits increased by GBP 13.8 billion or 3% in the year. Q4 was down slightly by GBP 0.2 billion. The fourth quarter saw growth in retail deposits across both savings and notably PCAs, with deposit churn continuing to ease as we had expected. Commercial deposits meanwhile, were down GBP 1.5 billion in Q4, driven by actions on low-margin funding as well as by seasonal outflows in BCB. And alongside these developments, insurance, pensions and investments saw open book net new money flows of GBP 7.9 billion for the year, including GBP 4.2 billion in Q4. This, of course, now includes inflows from Lloyds Wealth. Let me turn to net interest income on Slide 18. Net interest income for the year was GBP 13.6 billion, in line with our guidance. This represents an increase of 6% year-on-year, with Q4 up 2% versus the prior quarter. Across both the year and Q4, strong hedge income and business volume growth were partly offset by mortgage repricing and deposit churn headwinds. Average interest-earning assets of GBP 463 billion for the full year were up 3% compared to 2024. Q4 AIEAs were just over GBP 470 billion, up GBP 4.8 billion. Our net interest margin increased 11 basis points to 3.06%. This included a Q4 margin of 3.10%, up 4 basis points on Q3, driven by a significant pickup in hedge income, again, as we had expected. The nonbanking NII charge in 2025 was GBP 515 million, up GBP 46 million or 10% year-on-year, supporting growth in OOI. For 2026, we are guiding to NII of around GBP 14.9 billion. Within this, we expect margin expansion alongside continued healthy balance sheet growth across both retail and commercial. Our guidance incorporates further hedge income uplift of circa GBP 1.5 billion, partly offset by mortgage refinancing and easing deposit churn. Alongside, we also expect some growth in nonbanking NII charge consistent with associated business growth in OOI. Let me turn to mortgages on Slide 19. Mortgages grew by GBP 10.8 billion or 3% in 2025 to GBP 323 billion, supported by a growing market and a flow share of around 19%. We've continued to benefit from our strategic investment in the Homes ecosystem, enabling us to build customer relationships, including in higher-value direct lending and to retain more balances. It remains a competitive market. Q4 completion margins were again around 70 basis points with a further 1 or 2 basis points of tightening during the quarter. We continue to enhance the customer journey by integrating protection and home insurance. In 2025, we saw protection take-up rates in mortgages increase by 5 percentage points to 20%. There is further to go. I'll now turn to Slide 20 to look at developments in consumer and commercial lending. We saw a strong performance across our consumer portfolios in 2025 and a strengthening performance in commercial. Combined, cards, loans and motor grew GBP 4.1 billion or 10% year-on-year. We are taking market share in all 3 segments, driven by leveraging better data to add personalization and by launching innovative new products such as Lloyds Ultra within credit cards. Turning to Commercial Banking. Lending was up GBP 2.7 billion in the year or GBP 4.1 billion, excluding government-backed lending repayments. We saw encouraging progress in CIB, particularly in strategic areas such as infrastructure and project finance. This was partially offset by BCB lending, which held steady when excluding government-backed lending repayments or down GBP 1.4 billion if they are included. Let me turn to developments in the deposit franchise on Slide 21. Our deposit franchise continues to perform well. Total deposits ended the year at GBP 496.5 billion, up GBP 13.8 billion or 3%. Retail deposits were up GBP 5.5 billion or 2% in the year. Within this, current account balances grew by GBP 1.5 billion, representing growth in our market share of balances during the period. Retail savings meanwhile, grew by GBP 4.3 billion or 2%. This was driven by targeted participation throughout the year with a strong ISA season in the first half, followed by slower growth in H2 as we managed our portfolio. In Commercial, deposits grew strongly by GBP 8.5 billion or 5% on the back of growth in our targeted sectors. Notably, noninterest-bearing deposits stabilized and indeed grew a little in the second half. The performance and stability of our deposits are what underpin the structural hedge, which I will now talk to on Slide 22. The structural hedge is a strengthening tailwind to NII. The hedge notional stood at GBP 244 billion at the year-end, up GBP 2 billion over the year, supported by our high-quality deposit franchise. Hedge income in 2025 was around GBP 5.5 billion, a material step-up from last year and a little above our guidance. During Q4, the weighted average life increased to about 3.75 years built off continued strength in our deposit balances. And as previously guided, we expect a roughly GBP 1.5 billion step-up in hedge income to circa GBP 7 billion in 2026. We then expect hedge income to reach around GBP 8 billion in 2027 and to continue growing to the end of the decade as yields converge with market rates and as the notional slowly builds. Let's now turn to other income on Slide 23. Other operating income performance in 2025 was once again strong. OOI was GBP 6.1 billion in the year, up 9% versus 2024 and up 2% in Q4 versus Q3. The latter was supported, of course, by the full acquisition of Lloyds Wealth. Growth over 2025 has been broad-based. Retail is up 12% with strength in motor leasing as well as growth in cards and banking fees. Commercial was up 1% with solid growth in our Markets and Transaction Banking businesses, offset by lower loan markets activity. Insurance, Pensions and Investments meanwhile, grew by 11%, driven by strong performance in general insurance and workplace as we continue to focus on our strategic choices in this area. And our equity investments business was up 15%. This was particularly driven by Lloyds Living more than doubling its OOI during the year. Operating lease depreciation was GBP 1.45 billion in the year, up 10% versus 2024. This was driven by fleet growth, higher-value vehicles and to an extent, electric vehicle price movements, altogether, essentially in line with the OOI growth generated by the vehicle leasing business. Moving to costs on Slide 24. Cost discipline remains critical to the group. Operating costs were GBP 9.76 billion in 2025, in line with guidance, excluding the impact of the Lloyds Wealth acquisition in Q4. Year-on-year cost growth of 3% is on the back of continued strategic investment, volume growth and inflationary pressures, partly offset by further efficiencies. As Charlie highlighted earlier, since 2021, we have now delivered cumulative gross cost savings of circa GBP 1.9 billion, thereby creating capacity for strategic investment across the business. The 2025 cost/income ratio was 58.6% or 53.3%, excluding remediation. And looking ahead, as you know, we remain committed to delivering a 2026 cost/income ratio of less than 50%. Based on our current plan, that implies operating expenses of less than GBP 9.9 billion. This is in line with the flattening cost trajectory that we have previously indicated as our investment in this strategic cycle culminates. On top of that, inflation moderates and cost benefits are fully realized. Remediation for 2025 was GBP 968 million, including the GBP 800 million motor provision taken in Q3. There is no update on motor in Q4. We wait to see the detail of the FCA's final proposals post the consultation in the next couple of months. Let me turn to credit performance on Slide 25. Credit performance remains strong, reflecting our prime customer base, prudent approach to risk and healthy customer behaviors. Across Retail, new to arrears remain low and stable. Early warning indicators likewise are also benign. In Commercial, after some idiosyncratic cases in H1, the H2 picture has been very constructive. The 2025 impairment charge was GBP 795 million, equating to an asset quality ratio of 17 basis points. This incorporates a small MES charge, but also benefits from model calibrations and refinements. Indeed, we consider the underlying charge to be just below 25 basis points. The Q4 impairment charge is GBP 177 million or 14 basis points, including a GBP 47 million MES charge to reflect a slightly higher unemployment peak. Our stock of ECLs on the balance sheet now stands at GBP 3.4 billion. That's around GBP 0.4 billion in excess of our base case and leaving us well covered. Looking forward, we expect the asset quality ratio to be circa 25 basis points for 2026, similar to the underlying run rate that we've seen during 2025. I'll now turn briefly to our macroeconomic outlook on Slide 26. The macroeconomic outlook remains resilient. In the fourth quarter, we've made only minor changes to our base case versus Q3. We now forecast GDP growth of around 1.2% in 2026. Against this backdrop, our unemployment forecast increases marginally, now peaking at 5.3% in the first half of the year. Easing inflation meanwhile, allows for two 25 basis point reductions in the bank base rate during the year to 3.5%. This reflects a slightly lower rate than we previously expected, albeit we still expect a modest pickup later on in the forecast period. And in Housing, we assume growth in house prices of around 2% in 2026 and '27. That is supported by the slightly lower interest rate environment. Let me now turn to our returns and TNAV on Slide 27. In 2025, our return on tangible equity was 12.9% or a robust 14.8%, excluding the motor provision. Within this, restructuring costs were low at GBP 46 million, including GBP 30 million in Q4 with integration costs relating to Lloyds Wealth and Curve. The volatility and other items charge was GBP 70 million. This includes an GBP 87 million benefit in the final 3 months, incorporating a fair value uplift from the Lloyds Wealth acquisition. Tangible net asset value per share meanwhile, increased to 57p, up 4.6p or 9% in 2025. The increase was driven by profits, cash flow hedge reserve unwind and the reduced share count from our buyback programs, offset by shareholder distributions. And looking forward, we continue to expect TNAV per share to grow materially driven by these same factors. Given the momentum across the business, as Charlie said, we are upgrading our expectation for 2026 return on tangible equity to greater than 16%. Turning now to capital generation on Slide 28. The group remains highly capital generative and will become more so. In 2025, we generated capital of 147 basis points or 178 basis points, excluding the motor provision, in line with our guidance. Within this, risk-weighted assets closed the year at GBP 235.5 billion, up GBP 10.9 billion. This was driven by strong lending growth as well as GBP 2 million related to the implementation of CRD IV taken in Q4. This reflects our model outcomes, which are subject to PRA approval and therefore, of course, risk of modification. As planned, we paid down to a CET1 ratio of 13.2% at the end of 2025. And looking forward, we continue to expect 2026 capital generation to be more than 200 basis points. Beyond that, as you know, Basel 3.1 implementation is now scheduled for the 1st of January 2027. We expect this to result in a day 1 RWA reduction of around GBP 6 billion to GBP 8 billion on implementation. Our strong capital generation supports healthy and indeed growing shareholder distributions. So let me talk to that on Slide 29. We continue to grow our shareholder distributions at an attractive pace. For 2025, the Board intends to recommend a final ordinary dividend of 2.43p per share, taking the total dividend to 3.65p, up approximately 15% year-on-year. In addition, we've announced a share buyback of up to GBP 1.75 billion. And together, this represents a total capital return of up to GBP 3.9 billion, up 8% on 2024 and equivalent to around 6% of our current market capitalization. Dividends have grown consistently over our strategic plan with the 2025 dividend now up more than 80% versus '21. They remain at a payout ratio that allows for continued strong growth. Over the same period, our consecutive buybacks have also reduced share count by more than 17%. We remain committed to paying down to our target CET1 ratio of around 13% by the end of 2026. In addition, given our confidence in growing capital generation, we will now review excess capital distributions in addition to ordinary dividends every half year going forward. Let me wrap up on Slide 30. To summarize, in 2025, the group's financial performance showed sustained strength. Strategic execution and business momentum delivered continued balance sheet and income growth alongside cost discipline and asset quality, allowing for growth in shareholder distributions. As we look ahead to 2026 and the culmination of our current strategic plan, we are confident in delivering on the financial guidance you can see set out in this slide. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns. That concludes my comments for this morning. Thank you for listening. I'll now hand back to Charlie for closing remarks. Charles Nunn: Thank you, William. So as you can see, our strategic delivery is accelerating, and we're building significant momentum. We're creating a stronger, more diversified, more efficient and more capital-generative group. This, in turn, supports increasing shareholder distributions. We have today upgraded our return on tangible equity guidance for 2026 to be greater than 16% and are confident in the outlook beyond this. I look forward to providing much more detail on the next stage of our strategy and the associated medium-term financial plan in July. Thank you for listening this morning. We're now very happy to take your questions, and I'll hand over to Douglas, who will manage the Q&A. Douglas? Douglas Radcliffe: Thank you, Charlie. We will, as normal, be taking questions -- written questions online as well as questions in the room. [Operator Instructions] Okay. Why don't we start with Guy? Guy Stebbings: It's Guy Stebbings from BNP Paribas. The first question was on deposits. I think it's probably fair to say over the past year, if not longer, deposit flow has been better than expected, but Q4 was a touch softer mainly on the commercial side. I don't know if you could talk to any more in terms of whether that's just seasonality and then your expectations into 2026 in terms of pace of deposit growth, whether you're assuming kind of static mix effects and anything you might be able to elaborate in terms of deposit pass-through assumptions? And then the second question was on costs. Very reassuring performance in '25. The guidance for '26 in terms of limited absolute cost growth is encouraging. Just wondering how much we can sort of read into that, your ability to continue to run the business with limited absolute cost growth? Or is it more a function of the fact that it was a plan that was always expected that in 2026, you would see less growth in that particular year. Obviously, I'm thinking into beyond '26. So appreciating you're not going to be too specific. Douglas Radcliffe: Excellent. Thanks, Guy. I think both deposits and costs are probably questions for yourself, William. William Leon Chalmers: Sure. Yes. Thanks for the questions, Guy. In relation to deposits, the deposit performance, as you say, over recent years has been really very strong, and that's obviously what supported the structural hedge amongst other things within the balance sheet. So a good franchise with some good financial effects. When we look at 2025, we saw deposit growth of almost GBP 14 billion, GBP 13.8 billion over the course of the year, about 3%. So a really pretty good deposit performance during the year. Within that, we saw Retail up GBP 5.5 billion. We saw Commercial Banking up GBP 8.5 billion. So good to see deposit growth in the various different parts of the business, including within the subcomponents of each of those divisions, Retail and Commercial, some pretty healthy deposit performance in respect to the different components. So that's the way in which we see the year. Now within any given quarter, of course, we are going to be managing the deposit base as appropriate based upon making sure that we make the most of the franchise, offering, of course, good customer value and respecting the funding needs of the business. And so within -- on a quarterly basis, you're going to see variations in deposit performance, which reflect each of those imperatives. But over the year, at least, you should expect to see healthy deposit performance as you did in '25. I think in respect of your particular point on Commercial, the 2 points that I would make are seasonal outflows. We see those kind of every quarter or every fourth quarter, I should say, in respect of certain subsectors, education was one over the course of this quarter, indeed, a bit of a mix effect there, too. Alongside also a bit of management in terms of very low-margin deposits, which, as you can imagine, occasionally collect themselves within the Commercial Banking part of the business. So we'll manage that in the interest, as I say, of customer value of the funding position of the bank and of making sure that we make the most of the franchise. The other point I would make in respect of quarter 4, Guy, which is good to see is stability in NIBCA across both the retail and the commercial businesses. And within that, within retail businesses, PCA balance is up GBP 1 billion, which, as you know, is a crucial customer relationship product for us, and therefore, we pay very close attention to it. So it's good to see that being so strong in the course of the fourth quarter. You asked about 2026. I think overall, when we look at '26, we're expecting to see deposit performance, not too dissimilar really to what we saw during the course of '25 in terms of overall volume. There may be some gives and takes in that in terms of the different divisions. We'll obviously manage the business as appropriate. What I would expect to see within that overall deposit book is a slowing down in churn, just as we have seen in the course of '25, including in the latter part of '25. And that is simply off the back of bank base rates, if you like, coming down to lower levels and therefore, deposit churn easing off the back of it. At the same time, we'll also see the effect of 2 bank base rates. That's more of a financial point than a volume point, if you like, but worth bearing in mind. So good performance in '25. We do expect to see continued good performance in '26 of roughly speaking, the same type of proportions. In respect of costs, cost discipline, as I mentioned in my comments, absolutely critical to the group. Cost discipline remains an absolute imperative. When we see our cost performance during the course of 2025, first of all, GBP 9.76 billion in total, that's about a 3% cost growth over '24. Within that, if you exclude severance, which, as you know, bumped up a little in '25, then it's 2.4%. And actually, if you exclude severance plus Lloyds Wealth in the fourth quarter, it's 2.3%. So stripping out those 2 elements, if you like, it's a 2.3% underlying cost rise in '25 versus '24. When we look forward, you'll see from our numbers that we're looking at a cost base, which is expected to be less than GBP 9.9 billion. That is in total about a 1% rise, '26 over '25. And that represents a number of things. It is worth saying actually before going into them, that obviously includes the added costs of Lloyds Wealth, which I think we mentioned at Q3 around GBP 120 million. And then also the added cost of the Curve acquisition as well, which we haven't put a number on, but that obviously is an incremental cost base that we have to absorb. And so the cost increase, if I can call it that, to sub GBP 9.9 billion in '26 takes into account those additional headwinds and effectively absorbs them in our ongoing cost management. Now to your point, what is leading to that cost outcome in '26? A number of things really. We're obviously being helped by inflation coming in a little. That affects things like pay settlements. It obviously affects third-party contracts and the like. So that's all helpful, declining inflation. Alongside of that, that bump in severance that we saw in '25 irons itself out a little bit. So we're seeing a little bit of a benefit from that. But then more importantly, we are seeing the landing of our strategic initiatives or at least those strategic initiatives that are focused on cost benefits. Added to that, the full year benefit of the cost initiatives on a BAU basis that we took in '25. So those 2 factors, the landing and benefit of strategic initiatives, number one, and the full year benefit of '25 initiatives in '26, they're pretty helpful, too. And then I mentioned earlier on that as we come into the final year of our strategic plan, the investment plans, if you like, the investment expenditures are slowing off a little bit. That gives us a little bit of benefit as the cash investment slows. It's about GBP 100 million, put that in the -- if you like, in your considerations. But that is the natural culmination of the strategic initiatives and the investments that we've made, both from the revenue customer proposition side as well as the infrastructure of the business over the course of the '22 through '26 period. You asked about looking forward. You'll have seen in both Charlie's and my presentation that we talked about our commitments beyond '26. And we talked about them in the context of income growth, number one. We talked about them in the context of increased -- improving operating leverage, number two. And we talked about them in the context of improving returns, number three. The second of those 3 points, improved operating leverage effectively means a commitment to reducing the cost-income ratio. When we look forward, we are going to continue to invest in the business, you would expect us to because it's absolutely imperative to maintain the primacy of the franchise and the strength of the franchise today. And that will require investment in the type of sectoral evolution that we're seeing. But you have that all done being committed to within the context of an improving operating leverage, declining cost/income ratio environment. We'll obviously talk more about specifically what that means when we get to the summer of this year, but we felt those commitments were important to make. So you have some sense of direction from us in advance of that. Thank you. Benjamin Toms: It's Ben Toms from RBC. The first question is on NII. I mean you guided for 2026 of GBP 14.9 billion. Just to clarify, should we expect NII and NIM progression every quarter as we go through the year? And is there any lumpiness in the structural hedge maturities that are worth calling out? And then secondly, on capital, you talked about reviewing your capital distribution now on a half yearly basis going forward. How should we think about that for the half 1 of 2026? Will you come down to that 13% by the half year? Or should we think about that as a straight line, so halfway there by the time we get to the half year results? Douglas Radcliffe: Thanks, Ben. Again, I suspect that those are very much questions for William. William Leon Chalmers: Yes. Thanks, Ben, for both of those questions, and I'll answer them in turn. In respect of NII, you asked specifically about the shape of NII over the course of '26. So I'll come back to that, but I just want to make a couple of comments in respect of the overall guidance of 14.9% to put that in context, if you like. When we look at NII performance over the course of '25, we're obviously pleased with the outcome off the back of margin expansion and indeed AIEA growth, including that GBP 22 billion of incremental lending that we did during the year, up 5%. That led to NII growth of 6% during '25. Now we put forward guidance, which shows a further 9% increase in 2026. So a pretty solid growth expectation, if you like, for 2026 going forward. And again, that's built off of similar things. That is to say net interest margin expansion, probably a step more in '26 versus what we saw in '25 actually, plus, of course, AIEA growth expectations. We do expect net interest income to continue to grow in the years beyond that. And that is indeed partly what's behind the first of the 3 comments that both Charlie and I made about expectations after '26. When we look at that, we obviously calibrate the guidance in the context of what we are highly confident in delivering, and that's where GBP 14.9 billion expectation comes from. Within that, there are headwinds and tailwinds in the margin and perhaps we'll come back to that in the course of this discussion alongside AIEA growth expectations, as said. And we've, of course, absorbed a further bank base rate reduction in the course of '26 in calibrating the guidance that we've come up with. In respect of the pattern during '26, I would say, should you expect NII growth or should you expect NII and net interest margin expansion in every quarter over the course of the year? I won't guide too precisely to it. But broadly speaking, yes, you should do. That is going to accelerate and slow down from one quarter to the other for sure. But over the year, you should expect a steady growth in NII off the back of margin expansion quarter-on-quarter. Some quarters, however, will be faster than others. And behind that, of course, is, to your point, the -- a little bit the kind of the ebbs and flows, more the flows clearly of the structural hedge, but flows at different paces, I guess, of the structural hedge. So that's partly what will be behind that net interest margin expansion. The other point I would make is if you're looking at the quarters, just bear in mind that quarter 1 has a lesser day count versus quarter 4. So you need to take that into account in the context of NII expectations for that quarter in particular, simply because we're coming up to it. In relation to the buyback, as you say, we've moved to a buyback of 2x. Why have we done that? Over the last couple of years, at least, we felt that 1x per year buyback was appropriate in the context of giving you clear guidance as to what we expected and in the context or rather appropriate as we reduce the capital ratio of the business down to ultimately 13% at the end of this year. As Charlie said in his comments, as we increase our confidence in the capital generation of the business going forward and as the regulatory picture gets clearer, we feel it is now appropriate to move to 2x per year. And indeed, that gets us to, on average, being closer to our capital target of 13% over the course of the year. So there's good reasons behind it, and it gets us to an outcome that is more consistent with our overall 13% capital target. You asked about timing and how we'll look at it at the half year. We'll obviously let the Board deal with the buyback as appropriate at the half year. We will take into account clearly the position of the existing buyback and where we are at that point. The one point that I would make in that context is that in the past, as you know, we have seen buybacks end in August. We've also seen buybacks end in December. This year, we have a buyback that is a little higher than it was last year. We obviously had a much bigger -- or a much larger market capitalization of the overall company. And therefore, one would expect the buyback to -- if it's constrained by things like average daily traded volume, which these things typically are, to proceed at perhaps a slightly faster pace than it might have done previously. Overall, we will look at the buyback consideration at the half year. We will decide on what the quantum of the buyback should be at that point in time, taking into account the available capital stock of the company, taking into account the business needs on a go-forward basis and of course, ensuring that we preserve the position of the company. You asked specifically about how close we get to 13% at that point. Our objective right now is that we will get to 13% at the end of 2026. That's been our objective for a while now, and we maintain that position as we stand today. We'll take a look at it again at the half year. Douglas Radcliffe: Excellent, why don't we take the next question from Jason in the middle row here. Jason Napier: Jason Napier from UBS. Perhaps one question for William and one for Charlie. William, just coming back to the earlier question on deposits. I think you did a great job of handling the volume side of things. Commensurate with the bigger market cap that almost everyone now has, there's a lot of investor sensitivity around commercial intensity and what's happening to competition. So -- and particularly on the deposit side, I wonder if you could perhaps add a little color on that. And then, Charlie, the firm has done an admirable job of dealing with a really volatile macro environment over the 5-year period of the plan. One of them is the emergence of Gen AI as a thing that we all talk ad nauseam about now. What do you think has happened to the efficient frontier of cost/income ratios for banks over the period of the plan. Where do you think a modern Lloyds -- a fully modernized Lloyds, I should say, ought to operate from that perspective? Douglas Radcliffe: Thank you, Jason. William, I think obviously, deposits is for yourself and then Charlie, the AI side. William Leon Chalmers: Sure. Yes. Thanks for the question, Jason. I think you have to judge us by our results in some respects, at least. So the way in which we respond to the competitive environment is hopefully by delivering sustained franchise growth. And once again, you've seen that in 2026 with GBP 13.8 billion growth in deposits. I mentioned earlier on that we expect continued deposit growth during the course of 2026 and indeed beyond. So I think that's probably the base answer. What would I say in terms of competitive environment? Yes, to a degree, at least, it is increasing in its competitive intensity. I do think there are various different reasons for that. Some of them will be present for a while, i.e. they're more systemic. Some of them may be a little more transitory. We've seen, for example, quite a lot of competition from some of the fintech challenges, and there's much talk about that and the market share that they may be gaining or accessing. How do we respond to that? We respond in the context clearly of enhancing capabilities of our offering. That obviously includes things like app capabilities. Alongside of that propositional improvements, which you've seen a consistent flow of over the course of the last few years. Alongside of that, very competitive pricing in the markets that we want to be when we want to be in them. So we won't necessarily, if you like, be there all the time in every single case, we'll be there where we need to be. And in the context, obviously, of the systemic security that Lloyds offers, the branch offer that it offers, the brand and marketing and so forth. So overall, we see our competitive position versus some of those other factors within the deposit market is gradually strengthening, as said, endorsed by the deposit performance that we've seen across the franchise. One good indicator of that, going back a little to the earlier question is the PCA performance, which for us, as said, is the absolute critical relationship product. Balance is up GBP 1 billion in the course of quarter 4, balance is up GBP 1.5 billion during the course of '25 as a whole. And that is in the context of continuing market share gains from a balance perspective, which is good to see. So Jason, the competition is relevant. It's clearly something that we take very seriously. I do think the results that we show up against that competition withstand scrutiny. Charles Nunn: I might just add one thing to that. I don't want to jump on all of these questions because it's a really important question, obviously. We made the point around market share gains in personal current accounts. We've also done that in business current accounts over the life of this cycle, and those are 2 very important areas for any organization, but especially given our strategy. When you get to savings and investments, we performed very well on Instant Access money, which is money for liquidity purposes. And last year, we had a very strong ISA tax season, but as you get into time deposits, obviously, the margin for shareholders will depend on the pricing and the competitive context. They don't support directly the structural hedge. So we typically compete there from a customer proposition and a broader relationship perspective, but we won't chase market share for the sake of chasing market share where it's not relevant to our customers and where it's not relevant to our shareholders. So we really look at quite a differentiated view of the deposit base. And you're right, it's a competitive market. That's good for customers. Last year, we traded very well and offered great offers. Let's see where the market is this year. The really core part of this is really competing where we have the stable funding and stable deposit base that shows trust. Just on your second question, wow, we could spend the whole of the morning. Thank you for asking me a question, Jason. And look, I'm not going to give you the complete answer because it's -- I think it's partly one of the discussions we'll have in July. I think a couple of thoughts that are very helpful. The first thing is -- we've said a few times now, and we did it in the seminar back in November that about 60% of the GBP 1.9 billion gross cost saves we've delivered over the last few years has been linked to digital and AI, put generative AI aside for a second. And so this ongoing trend around driving very significant lift in efficiency and operating efficiency for financial services, we've been doing that for our whole careers, but it's a significant opportunity at the moment, and it has been what's driving a significant amount of our benefits in the last 3 or 4 years. And when we look at Agentic AI, we think that will enable us to continue that trend of efficiency. So that's the first thought. Second is when you look forward, and we're really quite excited this year, we announced -- we just announced today that we see for just the generative AI use cases we're deploying this year on top of the ones we deployed last year, the 50 use cases that generated GBP 50 million of P&L, we see greater than GBP 100 million of benefit in year. And those benefits will be both revenues and costs. And of course, when you look at our industry, what's more differentiating is our ability to differentiate our services and build broader relationships on the revenue line than driving efficiency. We will do both, but efficiency, if we can do it, other people can do it. What's really exciting for us is some of the differentiation that we're building in through the services we're doing this year. We're launching a couple of examples later this year, which we are currently in testing with our colleagues, one around providing investment advice to the whole market. So you don't have to have a certain size of investments to get that investment advice. [indiscernible] team is leading that. I can see them at the back, which is going to be really interesting. It won't drive massive revenue short term, but it will be very sustainable long term. And then the second one is around really changing how customers have access to their everyday banking and providing a conversational interface to get more out of their everyday spending. And we think that's going to be very, very important for the whole everyday banking personal current account business. Jas is leading that, and he's sat here as well. So we really think there's as much on the revenue as there is efficiency. And then going forward, I won't give you answer on kind of how we see the industry playing out. But those -- that does underpin the confidence that William said we've given you that we see the cost-income ratio continuing to progress positively over the next phase. We'll come back into this. It is also really important to think about, as you know, the mix of businesses. So we happen to have a mix of businesses with a very large retail business, a significant insurance and wealth business, which, as you know, is very good from a returns perspective, but typically historically has been a higher cost/income ratio and then a smaller commercial bank. And I think when you look at Lloyds and other institutions, obviously, the mix of businesses will affect how cost/income ratios progress. We're very ambitious on this, and we are very confident we have the right talent, and we're starting at a fast pace, which is great. So let's see how it develops. We'll come and give more guidance back in July. Douglas Radcliffe: Let's stay on the front row and let's go to Ben first, and we'll go on. Benjamin Caven-Roberts: Ben Caven-Roberts from Goldman Sachs. Just wanted to follow up on the lending. So you mentioned within the NII guide, very strong franchise volume growth in 2026. Could you elaborate a bit on the split between Retail and Commercial and how you see the trends evolving there? William Leon Chalmers: Yes. Thanks, Ben, for the question. Loans and advances GBP 481 billion, as you know. That is a pretty good outcome in respect to '25. So I mentioned earlier on GBP 22 billion growth in lending for the year, which is up 5%. And if you think about where GDP is, it's quite a markup on GDP. So we're pleased with that. I think it is more balanced towards the Retail part of the business over the course of the year. I talked about GBP 10.8 billion in mortgages, for example. We also saw sustained growth across cards, loans, motor and so forth. So a bit of a tilt in that direction. Within the Commercial Bank within '25, decent growth within, as I mentioned in my comments, targeted sectors within CIB. But within BCB, you effectively had a swap out of government repayments off the back of bounce-back loans for a swap in of private sector lending. And those 2 roughly equaled each other out. So that's the pattern for '25. Again, some strong franchise growth in both areas, particularly in Retail. When we look forward, first and foremost, we'll also -- we'll obviously be conditioned by the markets in which we operate. We have taken some relatively prudent assumptions in terms of the expected expansion of those markets. The mortgage market, for example, we are suggesting that lending will be healthy in '26, but maybe a touch down versus what it was in '25. That's a market comment as opposed to a Lloyds Banking Group comment. So we've deliberately taken some relatively prudent assumptions in that space, which means that our Retail lending, we still expect to show healthy AIEA growth to be clear. Will it expand at 5% -- well, will it expand by the same order of magnitude as it did in '25 in Retail? Let's see. I think our market assumptions are a little bit more cautious than that. And therefore, I would expect to see a bit of that reflected in our overall growth within Retail banking balances growth, but maybe not quite at the same pace as we saw during '25. However, within Commercial Banking, I think we see it as a bit of a different picture. That is to say we see sustained growth across the commercial bank. And maybe just to comment on that briefly. First of all, within CIB, the strategic initiatives, the focus on certain areas and so forth, I would expect CIB growth to continue to be healthy just really as it has been during the course of '25 actually. But within BCB, we're now at the point where there's only GBP 1.4 billion or so of bounce back loan balances in place. We are also at the point where we are investing heavily in the proposition there, whether that is sectoral expertise, whether it's relationship managers, whether it's customer journeys and the like. And therefore, the expectation is that the pace of organic growth within BCB should pick up a little bit. Meanwhile, because the bounce back loan stock is now only at GBP 1.4 billion, the headwind that is presented by those repayments should ebb a little bit. The net of that is probably more constructive growth within BCB, which in turn, I think, Ben, when you look at the overall balance, therefore, for '26, you should expect to see healthy loans and advances group -- sorry, healthy loans and advances growth within Lloyds Banking Group for sure. It may be a percentage point or 2 -- well, percentage point, let's say, inside of what we saw in '25. And the balance might be slightly shifting. That is to say, slightly stronger within Commercial, slightly weaker within Retail. But overall, as I said, healthy loans and advances growth with those comments attached. Douglas Radcliffe: And very impressive, Ben. Just one question. Perlie? Pui Mong: Sorry to disappoint I have two. So it's Perlie Mong from Bank of America. Can I ask about mortgage margin competition? So as completion margin is still about 70 basis points, and you mentioned that there's maybe 1 or 2 basis points of tightening in the quarter. I think we've all been hearing about the COVID era loans maturing in half 1 this year. So how are you seeing competition at the front end of the book in January so far? And especially in the context of the budget perhaps having less change to cash ISA than may have expected. So does that change the funding profile of some of your competitors, especially building societies? And then also the mix in the book as well because this year looks like it will have a lot of remortgages coming through. So does that change in mortgages -- remortgages versus first-time buyers change the margin picture as well? So that's number one on mortgage margins. And number two, on NII and non-NII split. So the GBP 14.9 billion is perhaps a touch below consensus. But obviously, the cost/income ratio guidance does imply an even bigger step-up in noninterest income growth versus expectations. So is that a conscious decision to put more resources behind noninterest income growth? And which area within the noninterest income growth are you feeling especially positive about? Douglas Radcliffe: Thank you, Perlie. I think both of those questions will originally come to yourself, William. William Leon Chalmers: Yes. And maybe, Charlie, you want to add. Charles Nunn: Mortgage competition dynamics, and then I can talk about that. William Leon Chalmers: Shall I kick off on mortgage margins briefly and then come over to you before getting to the second of the 2 questions. The mortgage market really as said Perlie, it has been competitive in '25. It continues to be competitive in '26. I mean that's the simplest way to look at it. We've talked about 70 basis points completion margins within mortgages. That's actually been the pattern pretty much quarter-on-quarter. I mean you'll remember quarter 2, I think I said the same thing, quarter 3, I said the same thing, and here we are in quarter 4 saying the same thing again. So 70 basis points throughout the year. But having said that, underneath that headline, you're probably seeing a chip of 1 basis point or so away in each and every quarter. So that's a reflection, if you like, of the competitive mortgage market that we are seeing. What is going on behind that? I think what is going on behind that is that everybody is enjoying the benefits of widening benefits from structural hedge, widening liability margins. And off the back of that, we and everybody else is looking at the margin as a whole. And in that context, we're pleased to see, obviously, the margin expanding by 11 basis points in '25. I mentioned earlier on that we expect to see a more material increase in net interest margins in '26. So I think everybody is looking at it in a fairly holistic way. And therefore, there's a bit of a trade-off going on between being more competitive in the mortgage market, which is being allowed for by the overall widening of our margin and the rest of the sector as a whole. I think that's what's going on. When we look at '26 in response to your question about kind of blocks of activity, yes, we have a mortgage headwind during the course of '26. We've been talking about it, I hope, very consistently over the course of recent years. So that's nothing new for us. We've been, I hope, telling you that for some years now. It is, first and foremost, because of the effect, as you say, a pretty thick 5-year margins that were written back in the, I guess, now the COVID era. That mortgage headwind is slightly compounded by the fact that completion margins, as just said, have come in a little bit versus our expectations. To be clear, we do not expect a heroic recovery in completion margins. We've taken a pretty prudent view on what those completion margins will look like over the course of this year. And of course, in doing so, we, therefore, build up the mortgage headwind a little bit in respect to '26. Now let's see what actually plays out. We might be proven wrong. Completion margins may be a little bit more steady than they are, but we've taken a relatively conservative view of how we expect competitive conditions to play out during the course of the year. And that combined with the '26 maturities means that the mortgage headwind is certainly there for '26. Again, consistent, I think, with what we've highlighted before, but maybe stretched a little bit beyond because of that completion margin pressure that I just highlighted. Now strategically, and Charlie may want to talk more about this, therefore, it is particularly important to us that we develop the franchise proposition, the customer relationship around the mortgage product. The mortgage product stands on its own 2 feet, and it meets its cost of equity. So we're perfectly happy with that on a fully loaded basis. It actually is a very attractive return on equity on a marginal basis. So the product itself stands on its own 2 feet from a financial perspective, but it is so much the better if we can develop the relationship with the customer off the back of it. And I mentioned in my comments earlier on that the protection take-up rate is now at 20%. That's gone up dramatically over the course of the time since I've been here. And indeed, as I mentioned earlier on, we think there is much further to go in that. That is only one example, but it's quite an important example of how we seek to build the customer relationship in the context of the mortgage product. You'll have noticed other examples are in the context of our PCA mortgage combination offering that we give to people. Likewise, GI is another string to the bow in terms of building that relationship. So that's what we do, if you like, to offset some of the pressure that we see within the overall financial point from the mortgage product. And then as I said, we look at the margin in its totality, which is undergoing a very benign and positive transformation right now, as you know. I'll just comment very briefly on the cash ISA and hand; over to Charlie for the question as a whole. I think overall, the pressure that may be induced by cash ISA changes may be felt by others a little bit more than us. That may be because of their deposit funding structure. It may be because of the overall way in which they maintain customer relationships. At the moment, at least, the loan deposit ratio within the business is 97%. It is a very successfully deposit-funded business with a lot of room to grow lending in. From a cash ISA strategic point of view, being obviously the combined Lloyds Banking Group Scottish Widows business that we are, we see actually the cash ISA movement as at least as much of an opportunity to build relationships in the savings space as we do see it as a source of concern in the deposit space. So from our perspective, we're fine with it. Charles Nunn: It's a pretty full answer. Look, maybe just take a step back. Obviously, when we started this strategic cycle, the mortgage business was hugely important, but we've been losing market share for a long period of time. And we kind of set out that we wanted to prove that we could trade at 18% to 20% market share and do it profitably for our shareholders. And that's what we've done. And last year was a very good year in that context. And I think just overall, we'll continue to have that mindset. This is about being relevant to our customers, bringing leading products to market, but we're not going to chase margins in any 1 month or quarter. The market has started competitively in January, but January doesn't make a quarter and a quarter doesn't make a year. So let us trade through that. So that's the first thought. The second one, which is William talked about what we can bring alongside our mortgage products to enhance returns from an overall relationship. The other thing that we've been very focused on, and we've done successfully that has helped us to change what you'll see as the mortgage margin dynamic is think about how we provide our existing mortgage customers or current account customers access to a remortgage or a product transfer and how we use our indirect channel. And those are great when we can do that because we don't pay a product fee or procurement fee to a broker, and we can share some of the value with our customers, and we can target our customers in a way that really brings the best of our products to market. So we've increased our share of direct mortgages to 26% of the market last year. And we think that's a really important point of differentiation. It enables us to compete differently from our competitors. And we've invested heavily. I'm being watched by the leader that's done a lot of this. I'm nervous now what I'm saying. We've invested heavily in our digital capabilities around our home hub, around remortgage journeys, and that really helps customers get a simpler, quicker and good value product, and that helps us. And we've invested heavily in our relationship with our mortgage brokers. And we typically see our completion rates being above the application rates because we provide a very, very good process and journey. And again, that helps us compete in the market. So look, it's a very different market from first-time buyers through buy-to-let through prime mortgages. One other fact, which I've talked about before, we did increase our share of mass affluent mortgages from 9% to over 20%. And again, we know the value of those relationships and the broader relationship in that context. Just on NII/OOI, maybe put it the other way around, I'll say the strategic and then you can add in some of the value because it's a really important question. But when we started this strategic cycle, we laid out very clearly that we wanted to grow more diversified income distribution across the group and get more bias towards other operating income, recognizing we were still looking to grow NII ambitiously as well. But it's been always part of our strategy to do that. And we've now got 4 years consistently of growing at 9% CAGR on other operating income or more actually in '22 because we bounced off a low start in '21, we grew more than that. But I think the real quality of the franchise, the other operating income businesses is starting to show differentiation as we come through this. So we always thought strategically the right thing for our shareholders was to drive that bias towards OOI. The NII, William has gone through, we'll always have a certain conservatism around how we think about NII, but that's our right ambition. So we like the idea of OOI growing faster and giving more differentiation and diversification around the revenues. You asked around which businesses, and maybe I'll pause. I'll do that relatively quickly. And I think we'll do more of this as we look forward in the July strategy. But as William laid out, and hopefully, you've seen this additional disclosure today around our equity investments business and Lloyds Living. We always had a strategy to build quite a diversified set of businesses so that in any one quarter or year, one business may not have the best year. Actually, William explained why because of a very strong year last year and then actually U.K. sterling DCM activity was suppressed this year, our corporate OOI grew slower last year. But the whole point is we know that with the diversification and breadth of businesses, we'll be able to drive strong growth across those businesses over the next few years. And what you saw this year, and you should expect again next year is strong growth in Retail, strong growth in our Insurance and Wealth business and Lloyds Wealth specifically will help that again next year and strong growth in Commercial and in our equity businesses. The growth rates might vary quarter-on-quarter, but the pillars of that growth are well established now and they're moving at pace. So we think that's a really important part of the strategy. William, do you want to flesh out any of the detail? William Leon Chalmers: Sure. Thank you, Charlie. I think I'd probably make 2 points. One is, of course, to flesh out the detail, but I'll come back to that in just a second. The second is I really do not think it is an either/or between NII and OOI. To be clear, we would expect to see meaningful growth in both. So when we look at NII, for example, as you know, we're looking at 9% growth in 2026. We are also looking at sustained NII growth in the period thereafter in the period beyond, fueled by structural hedge as the current headwinds of particularly deposit churn in '26, but also deposit churn and the mortgage headwind in '27 ebb away. So you should see 9% growth in '26 and then sustained growth in the period beyond that. Now just focusing briefly on '26, as I mentioned earlier on, and Charlie just highlighted it, we calibrate guidance to be highly confident of hitting it. That, of course, means a degree of conservatism in the way in which we look at things, including things like market rates and so forth. The headwinds and tailwinds in respect to the margin, they're familiar ones, the ones that I've just highlighted, for example, AIEA growth, as I mentioned in conjunction with the lending question just a second ago, is built off of relatively conservative market assumptions. Let's see how they fare over the course of the year. And then, of course, as I said, we've absorbed a macro -- a further macro change of now 2 bank base rate reductions versus previously 1. That all means that we're highly confident again in '26. It also means that we're highly confident of continued growth in the period thereafter. So, I don't think this is either NII or OOI subject to the resourcing decisions or capital allocation of the business. I think it's very much both. In terms of the detail, the 1 or 2 points I might just add just kind of fill in, in that respect. Retail up 12% during the year, 2025, that is driven by 2 or 3 factors in particular: transport, banking fees of PCA, cards, likewise. So that's a kind of, I suppose, a multipronged engine. Likewise, commercial a bit slower for the reasons that Charlie just mentioned. I would expect that growth rate to pick up in that business during the course of '26, not least because those '24 one-off effects that Charlie just highlighted drop out as well as what we've seen so far, at least a decent start to 2026. Let's see if that continues. And then Insurance, Pensions and Investments, the same drivers as '25, which is to say GI drivers, long-standing the unwind of the CSM being part of that, Workplace pensions continuing to build the business. But again, as Charlie mentioned, the embedding of Lloyds Wealth as it will be called. I think we talked at Q4 about that Lloyds Wealth income stream being an incremental circa GBP 175 million of income in the course of 2026 versus what it delivered during the course of 2025. So a meaningful, if you like, addition from that space. And then Lloyds Living -- or rather LBGI more generally, we've got a combined effect of LDC of housing growth partnership of BGF, but also Lloyds Living within that context. I mentioned Lloyds Living had doubled its OOI during the course of '25. You add together all of those LBGI businesses, and they're up 15% versus where they were the year before. You should expect meaningful growth in the OOI contribution of those businesses going forward. That hopefully just kind of fills in a bit of the blanks. But again, we would expect to see -- expect to deliver sustained growth in NII along the lines just mentioned, OOI growth for '26 ahead of what we saw in '25. Douglas Radcliffe: Excellent. I'm going to take a couple of questions online, then I'll come back to the audience here. Firstly, this question from Aman at Barclays. You are set to generate increasingly significant amounts of surplus capital from here. What should the market's base case expectation be for what you are likely to do with this surplus, buybacks, specials or potentially M&A? William Leon Chalmers: Shall I kick off on that, and then Charlie may want to add. Thank you, Aman, first of all, for the question. I think the start point and perhaps the endpoint for this question is that we are in the business of maximizing the long-term value of the group. That is really what the management team is focused on and indeed the Board. Looking forward, as it has done in the past, that is going to encompass business growth, balance sheet growth as an example of that, GBP 22 billion lending and advances growth last year, for example. Alongside clearly organic investment. We've invested, as you know, GBP 3 billion over the course of 3 years in the strategic cycle, GBP 4 billion over the course of 5 years, in fact, a touch above that as I think we talked about in Q3. That's in pursuit of improving customer propositions, making sure the franchise really progresses. At the same time, building the operational resilience of the bank as examples of other expenditures, if you like, of that cash investment. It also, from time to time, will include looking at least at M&A. But ultimately, it is all underpinned by capital distributions. And that is, as I said before, about maximizing the long-term capital distributions that we're able to give to shareholders. Now just a word on M&A. The M&A bar is pretty high. There's a couple of points to make there. One is it clearly has to be strategically coherent. I guess that goes without saying. But you've seen in the context of the last couple of years or so, a couple of M&A pieces, if you like, that we've undertaken, one being Tusker, one being Embark. Both of those 2 have enhanced capabilities of the business at a rate that was faster, at a risk that was lower and at a price that was cheaper than the organic alternative. When I first came in, we also did a scale add-on, which was the Tesco mortgage book. But it's that type of strategic, if you like, complementarity that we're looking for, either capability enhancement or alternatively scale add-ons. And then as I said, it has to be put through the filter of, is it going to get us to the target zone -- strategic target zone that is -- in a way that is faster than the organic alternative, in a way that is at least lower risk than the organic alternative and in a way that is ideally cheaper than the organic alternative. So we're looking for speed, low risk and value in the context of the M&A that we would choose to undertake or choose to look at, if you like. Only when we meet that high bar, would we choose to divert any money from what would otherwise be distributions to the shareholders to M&A. You've seen the type of things that we've done before. I think the concern is, does it tick all of those boxes. That's the way that we'll look at it. But as I said, any capital allocation, whether it's about balance sheet expansion, whether it's about organic investment in the business, whether it's about M&A, whether it's about capital distributions, is about maximizing the long-term value generation and indeed, ultimately, capital distribution in the business over time. Douglas Radcliffe: The second question online is from Rob Noble at Deutsche. When considering full year '26 distributions, will it be pro forma for the Basel 3.1 reduction in RWAs as of 1st of January 2027? Are there any other regulatory moving parts of RWAs in 2026? Or will they grow in line with loans? I expect both of those for you, William. William Leon Chalmers: Sure. I will kick off and Charlie may want to add about some of the strategic ambitions, if you like. The -- it's obviously far too early to talk about full year '26 capital distributions. We've just gotten to the point of offering GBP 3.9 billion in respect of '25, which in turn, as you know, from both Charlie and my comments, is a 15% increase in the dividend and a GBP 1.75 billion buyback. So we think that's a respectable outcome in terms of '25. To be clear, we do expect to grow capital distributions in respect to '26. That comes off the back of the increased capital generation of in excess of 200 basis points. So there's no debate about the direction that we're going in. But as you can imagine, Rob, I'm going to stop short of making any commitments about it. That will be a question for the Board at the right time. I might just pause for a moment on Basel 3.1. A couple of points to make really here. One is, as you know from our disclosures this morning, we do expect Basel 3.1 to be a positive from the company's point of view. That is to say, to reduce RWAs by the range of GBP 6 billion to GBP 8 billion. We'll see depending on the evolution of the balance sheet and indeed evolution of economics that drive some of the factors behind Basel 3.1, exactly where within that landing zone it ends up, but that's the range that we expect. Why is it that we expect that benefit? It's largely off the back of the commercial business and the fact that we are currently operating on foundation IRB, whereas other commercial businesses that we see in the market are typically on advanced ARB. And therefore, as Basel 3.1 gets implemented, there's less -- or rather maybe put it another way, there is some benefit for us because of our start point. That's where the majority of benefits come from. There is a little bit from retail as well, but that's the overall pattern of the Basel 3.1, as I say, RWA reduction. It's also worth briefly straying off Basel 3.1 for a moment on this, which is to say we have now landed our models for CRD IV. That is consistent with our GBP 2 billion RWA add-on in quarter 4, to be clear. We are now in the process of gaining PRA approval. Until we gain that PRA approval, there is obviously a little bit of risk around the PRA taking a look at it and if you like, entering into discussion with us. So let's see where that lands. We are where we are for good reason, but I just want to highlight that in the context of the Basel 3.1 benefits that we see. Finally, in terms of distributions, Rob, as said, I'm not going to comment on the quantum. I have commented already on the direction. I do think it's important to say in that context that Basel 3.1 is going to give us RWA relief. You can figure out how many basis points of capital that RWA relief equates to we certainly have done. We will look at investments in the business, to be clear. We will clearly look at maximizing long-term value of the company, and that is in the spirit of maximizing long-term capital distributions to shareholders for sure. But we will look at in the context of the overall capital position of the company, where we might deploy investments in the shareholders' best interests rather than necessarily automatically pay everything out in the minute that we get a pound in. That is not to say that we will not pay any element of that Basel 3.1 benefit out. It's not to say that. But it is to say that we will look at the round in the overall capital position of the company, and we will make the appropriate investments to ensure that the franchise stays as strong tomorrow as it is today and is capable of delivering shareholders what they want and need. Charles Nunn: The thing I might add is, William and I were really conscious as we came in today that we weren't able to give you financial guidance beyond 2026 until July. And so what we've tried to do today is do a couple of things. One, give you some confidence in the momentum in the underlying business direction and efficiency that we are delivering over this period, and that momentum will continue. The second thing was to give you some specific numbers where we felt guidance was appropriate. So the structural hedge in '27 and then some of the language William has used around that remaining supportive through the back end of this decade, even with our assumptions around how rates the yield curve will evolve. And then the RWA release we just talked about, again, you can see that we have the capacity to continue to really drive this business forward. And then obviously, the third thing is those 3 statements that we've both repeated a couple of times that we see beyond 2026, the opportunity to increase revenues, increase operating leverage and increase shareholder returns. So we'll come back in July and give you that broader view around what that really means. But you can see we were just trying to sow the seeds for you to really understand why the confidence that we have around this business in '26 and going forward is grounded. Douglas Radcliffe: Thank you. Let's return to the room. Let's take a question from Jonathan at the front. Jonathan Richard Pierce: It's Jonathan Pierce from Jefferies. I've got 2. The first one is just a modeling question really. The fair value unwind and the amortization of purchase intangibles. Consensus has those broadly holding moving forward. My suspicion though is those are going to come down quite notably, certainly by '27, '28. Can you just confirm where that number will be, those 2 items in aggregate, please, a couple of years forward? The second question, I'm sorry to come back to this point on capital generation, but it is clearly a major part of the story. And the guidance for this year for free capital generation of over 200 basis points obviously incorporates RWA growth and all these sorts of things. So we can see there's about GBP 5 billion of free capital from that. You've got another 20 basis points reduction in the equity Tier 1 to come, which is another GBP 500 million. And then you've got the day 1 Basel 3.1 of circa another GBP 1 billion 1st of Jan '27. That's GBP 6.5 billion taking into account organic investments and RWA growth at least. How should we think about the mix of buybacks and dividends moving forward? And in particular, I'm interested in the dividend payout ratio because, William, you've been keen to flag several times in the last few months that the dividend payout ratio is too low, yet again, consensus doesn't really have it moving over the next few years. So is there scope here for that dividend to start growing by somewhat more than 15% a year over the next 2 to 3 years? William Leon Chalmers: Thanks for those questions, Jonathan. I'll take both of them in the first instance. It may be that Charlie wants to expand also on the second in particular. On the fair value and amortization component, that has seen, as you know, a Q4 charge, I think, about GBP 34 million -- GBP 35 million actually. That is more or less consistent with the run rate, primarily related to businesses, many of them going back to the HBOS days and so forth, which in turn are amortizing over the last couple of years and indeed into the foreseeable future. We did see a bit of a step down during the course of the year, and we do see expectations of a bit of step down consistent with your question, actually, Jonathan, over the course of the coming years. And that is as certain instruments that are getting effectively amortized in the context of that line coming off. The HBOS debt instruments are one example of that. And so you should expect, if you like, downward pressures to come from that. The only point I'd make in addition to that is that we are -- as Charlie mentioned, we've done a couple of acquisitions this year, SPW being one, Curve being another. And so that will add to the pile of stuff, if you like, that then needs to be amortized in the future periods. So all being static, I would expect that line to gradually come down for the reasons mentioned, much of it relating to HBOS amortization. Having said that, we've added on a little bit in the context of '25 off the back of those 2 acquisitions. And therefore, we look at the net of those 2 rather than just one point in isolation. The second point I would make on that fair value unwind intangibles point is that, as you know, the bulk of it has nothing to do with capital. So while it may actually help, if you like, the overall build in RoTE over time, not by much, but it will make a positive difference. Nonetheless, don't expect that necessarily to feed into the capital generation of the company. And so just worth bearing that in mind. The second point, the capital generation, without commenting too specifically or directly on your numbers, I can see how you get to them. Maybe that's the best way of putting it. That relates to the capital generation of the company. It relates to the 13.2% down to 13%, which I said we've got a commitment to getting down to at the end of 2026. The Basel 3.1 basis points, you can tell from the GBP 6 billion to GBP 8 billion range that we've got what type of capital contribution that might make. Just as I said earlier on, though, just bear in mind that we're not completely settled on CRD IV until the PRA is signed off, just bear that in mind really. And then what does all that mean for the capital generation of the company and dividend payout ratio and so forth. One point that I'd make at the outset there is that the payout -- the dividend, if you like, needs to take into account recurring earnings streams within the company whereas the buyback is more capable of taking into account lumpy benefits. And therefore, the buyback is more attuned to dealing with things like Basel 3.1, whereas the dividend is more attuned to dealing with the ongoing earnings for the company. And that's an important start point for the way in which we look at it. When we look at the buyback versus dividend equation, we are committed not to a payout ratio within the dividend, as you know, but more to a progressive and sustainable dividend policy. And that, of course, means growth, but it means growth in a sustainable way, which for those of you who are long in the tooth like I am, will remember that is particularly important to Lloyds having the history that it has. So both growth but growth in a sustainable manner for the dividend. You've seen that over the last 2 or 3 years, that's meant 15% dividend growth, which now is 80% above where it was in 2021. And the point of emphasizing the payout ratio is not to say that we're changing our policy or that we have a payout ratio policy, but rather to say that there is a lot of room for progressive and sustainable dividend growth in the periods going forward. And what we'll end up debating with the Board, I'm sure, is do we take a step jump in one period of time for that dividend, i.e., see a sharp growth in 1 year and then, if you like, attenuate the growth in the period thereafter? Or do we keep the 15% or thereabouts growth rate going for some years into the future. And I think the good thing about where the business is right now is that based upon the guidance and expectations as to continued business growth, we have the scope to do one or other of those 2. And that's the point of, if you like, emphasizing the fact that we are on a low payout ratio. It is hard to put a finger on exactly where that changes, but we obviously pay attention to payout ratios that other banks, not just in the U.K. but beyond get to. But again, progressive and sustainable dividend policy is what it is all about. In that context, it's worth just briefly commenting on the buyback and how do we look at the buyback and what's the impact of the price and so forth on the buyback because that's an inevitable part of the equation. First of all, I'd say the buyback in respect of '25, the GBP 1.7 billion that we bought back was bought back at an average share price of 77p per share. So when we look back on it, that obviously looks like good value now. And we very much hope we'll be saying the same thing this time next year, of course. We are committed to the buyback that we have today. We also see significant value in the current share price. And so that commitment to the buyback makes sense in the context of the share price that we're at today. That's in the context of expected earnings growth, expected TNAV growth. It is also in the context of investors who basically see it the same way as we do. That is to say they have a preference for the buyback, and we obviously have to respect that as our owners. Alongside investors and owners who prefer income have it, and they have it from that 15% dividend growth, number one. They also have it because the buyback reduces the number of shares and therefore, helps us accelerate dividend growth on a per share basis, number two. We look at the buyback also with the EPS, the DPS, the TNAV per share benefits that it gives. And then in the round, therefore, we are still very much behind the buyback. We think it's a very sensible thing to do for all the reasons emphasized. That means, I think, Jonathan, looking forward that dividend progressive and sustainable growth is an expectation, certainly a core expectation of us, as I said in my comments, an attractive pace. But I think excess capital distribution, both for the reasons that I just mentioned, also to accommodate, if you like, lumpy capital benefits, Basel 3.1 being the best example, with buyback is a good way to do that. Charles Nunn: It's a pretty full answer. I think we said in the last few years, this is the problem we wanted to have that we get to a place where we have very strong capital distribution and our valuation more fully represents where we are today. And as William said, we think there's more value to come, but this is the right debate for us to be having, and we'll really value input from all of you and our shareholders as well as part of that as we go forward. Douglas Radcliffe: Excellent. Good. We run out of time, but I'll take a couple more questions. I think, Sheel, you had your hand out and Chris. So we start with you, Sheel, and then we'll finish with Chris. Sheel Shah: Sheel Shah, JPMorgan. Two questions from me, please. First, on the IP&I business. The other income has grown strong at 11%, but one area where maybe the strategic initiatives have been a little slower to show there is maybe the net flows. Net flow rate of growth has been maybe at the low single-digit percentage. How much of that is a function of the market? And what do you think is the natural growth rate of this business? And secondly, coming back to AI, the GBP 100 million that you've spoken about, there's a lot of focus on the ROI of these investments. Is that on a gross basis? Or is that including the cost of these investments that you've made? William Leon Chalmers: On the strategic investments, in particular, Sheel? Sheel Shah: Sorry, the AI. William Leon Chalmers: The AI. Charlie, shall I kick off, please? Charles Nunn: You can and I'll add on the... William Leon Chalmers: In terms of IP&I, the business, as you say, has been really successful in terms of growing some of its core activities. You'll notice that the IP&I business recently last year, maybe actually '24, it might be the tail end of, effectively focused the business on 2 or 3 core strategic areas. These include things like GI, it includes things like workplace pensions, for example. At the same time, it sold the bulk business. That was a reflection, if you like, of the strategic focus of the business and a very deliberate capital allocation decision upon those areas where we frankly felt we had a right to win and indeed a path to ensuring that we did so. So that's what's behind the positioning of the business. That's also what's behind the 11% OOI growth in respect of Insurance, Pensions and Investments in 2025, and that added to the acquisition of Schroders Personal Wealth now to be Lloyds Wealth, should add to greater growth, i.e., faster growth in OOI from IP&I going forward into 2026. That's the earnings story. You talked about book growth there. I would just distinguish in doing so between what we describe as the open book growth versus the closed book growth. And what we mean by that is that we're very interested in growing assets fast in the context of those businesses that we are strategically focused on, just as I mentioned a second ago. And if you look at open book AUA new money in 2025, it's almost GBP 8 billion. It's about GBP 4.2 billion in Q4. Of course, we would expect to see that build over the course of time. And off the back of the strategic focus and investments in the businesses that I've just mentioned, Sheel, you should expect to see that. I won't give you a precise run rate that we expect to target the business at. Safe to say that it's strategically focused and concentrated. And in addition to that, with that type of investment, with that type of background and context, we would expect those open book AUAs to grow at a faster base than necessarily or faster pace than necessarily the totality of assets under administration in the entire IP&I business might do. The second of your question, ROI, ROI always takes account of the investment. Charles Nunn: So just any other thing I'd add on the Workplace business is the benefit here of being a joined-up group is really helpful. We have all of our 1 million BCB customers and all our corporate institutional customers. And so the joined-up connectivity between the Workplace team and our Commercial teams is very strong, and you should continue to see us winning mandates, although the percentage of mandates in any 1 year is quite low. As you know, it's only about 2%. The pensions market is switching, workplace pensions, but it's a source of competitive advantage for us. And then the Lloyds Wealth acquisition, we said it both pretty quickly, I think. We see that as an opportunity, obviously, for our retail customers and especially mass affluent, but also our workplace customers and for all big workplace pensions businesses, and we're #2 today. As you know, attrition and consolidation as we get near a deaccumulation phase for people is one of the choices where people decide where they're going to consolidate their pensions. And we now have an advisory proposition we can bring to bear for our customers in the workplace business. So it helps us have another tool for supporting customers when they're making those really important choices and can help us manage attrition on that business. So we do think it's a really attractive business. Now it's at scale, good returns and does have the potential to continue to grow healthily. Douglas Radcliffe: Excellent. Chris? Christopher Cant: It's Chris Cant from Autonomous. Just trying to round things out, I guess, with regards to the commentary on AI and kind of digital leadership, the comment you made about reaching the end of this investment cycle and that being part of what's, I guess, helping control costs in '26 specifically as you look out to the next planning cycle, is it really a case of just redeploying the sort of investment spending that you've been doing over the last 3, 5 years? So changing the focus to focus more on this digital AI leadership angle or should we expect some kind of lumpiness? Like do you feel like you need to have a front load of investment in relation to this Gen AI opportunity that you see? So should we expect that progress towards operating jaws to be gradual? Or should we expect it to be, I guess, back-end loaded? Is there anything you want to say there? That would be helpful. And then just kind of reading between the lines a little bit. I get a distinct impression that you see one of the key opportunity sets within this AI revenue opportunity that you were pointing to as being the fact you have the captive insurer, you have this Workplace business. Could you comment on your inorganic appetite in that space? So you've been linked to Evelyn Partners. I'm not expecting you to comment on a specific transaction, but I'm sure you've seen the same headlines we all have -- I asked you about Schroders last summer, and you bought that. There's the Aegon U.K. workplace business potentially up for sale. I'm just curious, is -- am I right in inferring that that's the key area that you see the next leg of the strategy for OOI growth. The last few years has been a lot about the leasing business, and that's been a huge driver of the overall other income growth. As we look forward, is it more about the fact that you're this joined up group and you can cross-sell and you can deploy AI to do that? And is that where we should be directing our attention because I think we probably all under analyze your insurance business, frankly. Charles Nunn: Do you want to try the first one? We can both do both again. You want to try the first one, I have the second one and then... William Leon Chalmers: Yes, absolutely. Absolutely. Thanks for the question, Chris. In respect of the AI opportunity, it is obviously gathering pace, as Charlie has mentioned in his comments. We've seen some foundation building during the course of '25. We're seeing scaling during the course of '26, and Charlie mentioned the 4 or 5 blocks of activity that, that relates to. When we look at the impact on that in the next strategic plan, if you like, in the period beyond 2026, that opportunity is going to grow meaningfully. It will grow both across the revenue opportunity and just as you said, not just within businesses, but in terms of linking businesses up together for sure. It is also -- you asked about the nature of the operational leverage and whether that is back-end loaded or whether that is, if you like, a continuous commitment. I think it is fair to say, well, maybe make 2 comments. One is the improvement to operational leverage is intended to be about momentum. That is to say that we are delivering sub-50% cost/income ratio in '26. We expect that momentum to be sustained in the years thereafter. Now inevitably, when you make investments early on in the strategic cycle, just as we are in this one, you will see that momentum accelerating towards the end of the strategic cycle. But don't make -- if you like, don't misinterpret that as being a lack of momentum in the years '27, '28 and so forth. So that's the way I would look at it. It is sustained momentum. It will inevitably because of the nature of investments and the way in which they mature, accelerate towards the back end, but that's just the way of things, and you've seen it in the course of this cycle. The final point that I'd make on that perhaps before handing back to Charlie is that I hope that when people reflect upon this strategic cycle, people will believe that we've invested the money wisely. That is to say, we've invested GBP 3 billion over the course of 3 years, just over GBP 4 billion over the course of 5 years. That is starting to yield returns of the type that we're describing today. That is also what is behind our confidence in improved income growth, continuous operating leverage improvements in the period beyond '26 and indeed enhanced RoTEs and therefore, capital generation expectations in the period beyond '26. So when we look at the overall investments in AI, just to mention one class of investments, amongst others, you would expect us to invest wisely. And I very much hope this strategic cycle at least gives confidence in that respect. Charles Nunn: Great. You're close to getting us to talk about beyond 2026, which we are vehemently against because that will be July. Just in terms of your second question, a couple of things. And obviously, you wouldn't expect me to talk about individual companies despite the fact that you pointed out Schroders Personal Wealth last summer. Look, the first thing, again, on OOI growth, it's enhanced, not an old strategy. So we expect to see growth in all of those OOI pillars that we talked about. We're excited about the future of transport. We're excited about the future of our payments business, and we just bought Curve. We've captured market share in credit card payments, something as old-fashioned as that during the cycle, gone from less than 15% to 17.5%, one of the targets we said we would deliver. We delivered that last year, 2 years early. We're excited about the opportunity to continue to grow our commercial businesses that underpin OOI. William talked about the momentum in Lloyds Living as an example. So it's an and strategy. Yes, we are excited about the opportunity to continue to grow our Insurance, Pensions and Investments business. And so we see that as a really significant opportunity, not least because they're great stand-alone businesses themselves, but they are unique in our ability to bring them to our broader group, the connectivity into our commercial franchise, our retail franchise specifically. No one else in this market can do that. And we see there's lots of opportunity to innovate. In terms of acquisitions as a path for that, look, I think William laid out very clearly how we think about those, both our track record, yes, we will do them where they have -- they accelerate our ability to deliver distinctive capabilities strategically and scale that makes a difference for our customers and our shareholders. But we do have a high bar for those, and we'll continue to look at it in that context. I know, Chris, you'll remember back in '22 when we laid out this phase of the strategy, we laid out which businesses we aren't operating at the kind of 20-ish percent market share range. And as you know, there's still a number of these businesses. Actually, our Workplace Pensions business is pretty healthy in terms of its market share, but investments and then some of the associated areas around that, we're not operating at that level. That's also true in some parts of the payment space, in some parts of SME banking. And so we see opportunities to really grow in a number of businesses. And yes, IP&I is definitely one of them. William Leon Chalmers: Chris, just to perhaps finish off on your SPW example, it is worth saying that we acquired their full control of what is a great business that will extend our wealth proposition to the customer base, alongside GBP 18 billion of assets under management, assets under administration as well as an addition of circa GBP 180 million of earnings, and it was all for GBP 0 capital cost. Charles Nunn: And actually, just one more thought on that because we'll look and without doubling down is getting to the end, 300 great advisers, which is quite a material team that we can then apply into our broader group who are advisers we know, we love, some of them worked at Lloyds and we are confident in their conduct outcomes. So for a group like us, that's a hugely important part of making an acquisition like that. So well spotted last summer. Douglas Radcliffe: Excellent. So thank you. That concludes the questions. I don't know Charlie, whether you want to just briefly summarize and conclude the event. Charles Nunn: Well, no, just as always, first of all, thank you, Douglas. Thanks for hosting the questions, and thanks to everyone who's joined in the room. And offline, we really appreciated the questions. Thank you for bearing with us as we've got this gap between this year-end and our July new strategy and financial guidance. We're really already looking forward to July, but let's stay in the moment for a second. I know it's a busy moment. We've brought our results forward, but I think there's 9, 10 other European banks live. So thank you for prioritizing Lloyds over the rest. I don't know if you're going to be able to get the half term if you've got families, but that's hopefully a benefit from all of this. Obviously, our IR team is around for any further questions. As always, we'll be here for a few minutes ourselves. I'll look forward to seeing you in July. As I said, I'm really looking forward to that. William will do the Q1 results. As a team, we're going to be very focused on delivering 2026, and that's what we're going to be doing for the next few months until I see you again. So thank you very much for joining today, and see you very soon.
Charles Nunn: Good morning, everyone, and thank you for joining our 2025 full year results presentation. It's great that the move to prelims has allowed us to update you earlier than prior years. This means that our organization can make a fast start and increase our focus on the year ahead as we enter the final stage of the strategy that we laid out in early 2022. I'm very pleased with our ongoing strategic transformation, and 2025 was another strong year for the group. We're building significant momentum that sets us up well to deliver upgraded 2026 commitments and stronger sustainable returns for the period. I'm very excited about the plans we're developing for our next strategic phase, and you'll hear more about this in July alongside our half year results. As usual, following my opening remarks, I'll hand over to William, who will run through the financials in detail. We'll then have plenty of time to take questions. Let me begin on Slide 3. I'd like to start by highlighting the following key messages. Firstly, our strategic delivery is accelerating and building momentum across the business. We're on track to meet or exceed our 2026 strategic targeted outcomes, delivering clear benefits for all stakeholders. Secondly, our continued strategic execution underpins sustained strength in financial performance and growth in shareholder distributions. We've announced a 15% increase in the ordinary dividend alongside a shareback (sic) share buyback of up to GBP 1.75 billion. And finally, we're confident in our outlook. We are upgrading our guidance for 2026 and are committed to further improvements in financial performance beyond this. Turning now to a performance overview on Slide 4. We delivered strong outcomes for all stakeholders in 2025. Our clear purpose of Helping Britain Prosper continues to drive attractive growth opportunities. This includes supporting our customers during a record ISA season and funding the growth ambitions of businesses that create opportunities across the U.K. These actions drive healthy franchise momentum, delivering growth across both sides of the balance sheet and market share gains in key focus areas such as personal current accounts. Taken together, the group is delivering sustained strength in financial performance. We returned to top line revenue growth during 2025 with increases in both NII and OOI, the latter up 9%. This supports a return on tangible equity of 14.8% and 178 basis points of capital generation, excluding the motor finance provision taken earlier in the year. On Slide 5, I'll provide a brief update on our outlook for the U.K. economy. As you've heard from me previously, we're constructive on our outlook for the U.K. We continue to forecast a resilient but slower growth economy with interest rates falling gradually in 2026. In addition, the financial position of both households and businesses continues to strengthen with emerging signs of growing capacity to spend and invest. Combined with the government's focus on regulatory reform and driving growth in key sectors, we believe the economy has the potential to move to a higher medium-term growth trajectory than is forecast today. We are well positioned against this backdrop with our strategy focused on faster-growing high-potential sectors such as housing, pensions, investments and infrastructure. We're already driving growth in these areas, leveraging our competitive advantages as the U.K.'s only integrated financial services provider. As a result, we expect the group to continue to grow faster than the wider economy over the coming years. I'll now turn to highlight our strategic progress, starting on Slide 6. We continue to successfully deliver a significant transformation. Over the last 4 years, we have meaningfully grown the balance sheet, driven diversified revenue growth, improved our cost and capital efficiency while significantly derisking the business and established a digital and AI leadership position. These actions have both enhanced the franchise and delivered attractive returns to our shareholders, including total capital distributions of around GBP 15 billion. We're now entering the final phase of our 5-year strategic plan with delivery accelerating and momentum growing. This is translating into significant financial benefits. We've generated GBP 1.4 billion of additional revenues from strategic initiatives to date and are today upgrading our 2026 target to circa GBP 2 billion. As part of this, we expect the other income contribution to be circa GBP 0.9 billion, ahead of our original '26 guidance. At the same time, we've now realized circa GBP 1.9 billion of gross cost savings, having met our upgraded 2024 target of GBP 1.2 billion last year. As you'd expect, we remain committed to driving further improvements in operating leverage. To bring this to life, I'll now spend a few minutes discussing our progress in more detail. Let me begin with our growth areas, starting with Retail and IP&I on Slide 7. In Retail, we are the leading provider across key products in our own and third-party channels. We further strengthened our position through growth in high-value areas and continue to develop our product range and capabilities to meet more customer needs. Mobile app users are now up circa 45% since 2021. In '26, we'll roll out in-app AI agents for these customers with these currently in [ colleague beta ] testing. In IP&I, we're deepening relationships as an integrated bancassurance provider, expanding our product offering through exciting partnerships. We're also transforming engagement through our Scottish Widows app with further growth expected in 2026 as we launch to the open market. Complementing our strategic delivery, we announced the acquisition of Schroders Personal Wealth in the second half of last year. It's early days, but we're really pleased with our progress, and we'll rebrand the business to Lloyds Wealth in the coming months. The acquisition is an important enabler to delivering our ambition for a market-leading end-to-end wealth offering, providing us with an opportunity to deepen relationships with our mass affluent customers and workplace clients. Let me continue on Slide 8. Our Commercial Banking division captures both BCB and CIB businesses. In BCB, we're building the best digitally led relationship bank, building upon our strong deposit franchise and rolling out new mobile-first journeys to support growth in targeted sectors. Our BCB gross net lending increased by 15% in 2025, and we are committed to further growth this year. And in CIB, we're driving revenue diversification through growth opportunities aligned to our simple cash, debt and risk management model. For example, FX volumes increased by over 20% in the year, supported by the launch of a market-leading algorithmic trading solution. We were also awarded a landmark U.K. Government banking services contract, a testament to the investment we've made in our award-winning cash management and payments platform. Finally, equity investments is a growing contributor to the group, now representing nearly 10% of group OOI. Lloyds Living has now grown to nearly 8,000 homes since launching in 2021, whilst LDC generated more than GBP 600 million of exit proceeds during the year. On Slide 9, I'll now talk about the ongoing drivers of OOI more broadly. Since 2021, we've delivered strong OOI growth across each of our business units, reflecting a resilient and diversified portfolio. For example, our Retail business has benefited from growth in our Motor franchise, whilst Commercial Banking has been supported by renewed focus in our Markets business. We've also realized the benefits from improved cross-group collaboration such as increasing protection take-up rates across mortgage journeys and leveraging the full breadth of the group to meet the ancillary needs of commercial clients. We delivered 9% growth in 2025, consistent with prior years and are confident in our outlook. Going forward, other income will also benefit from the full impact of the Lloyds Wealth acquisition, and we expect to unlock more value from this business over time. Turning now to cost and capital efficiency on Slide 10. We remain focused on delivering an organization that drives continued improvements in cost efficiency and capital intensity. As I mentioned earlier, we've now delivered circa GBP 1.9 billion of gross cost savings since 2021. This has been supported by the ongoing shift to mobile first and consequent refinement of our physical footprint as well as actions taken to reduce both the size and complexity of our legacy technology estate. These savings reinforce our confidence in delivering a cost/income ratio of below 50% in 2026. On capital efficiency, we've now delivered GBP 24 billion of gross RWA optimization since 2021. We continue to target more than 200 basis points of capital generation in 2026 and we'll now consider excess capital distributions every half year, reflective of our increasing confidence. I'll now move to Slide 11 and focus on our enablers of people, technology and data. As you heard in our digital and AI seminar in November, we're making strong progress against our clear strategic priorities. We have significantly enhanced our infrastructure, actively managing our legacy estate and increasingly building on modern technology. The ongoing investment in our people is critical to our success with circa 9,000 technology and data hires since 2021. These actions have created the platform for increased innovation. Digital-first propositions such as your credit score are driving clear benefits for both customers and the group. Our strong execution to this point means we're well positioned to take advantage of future opportunities. We're innovating and leading across new and emerging technologies, launching industry-first use cases at scale in the U.K. These areas will be critical to driving further enhancements to operating leverage in the future. I was incredibly proud to see that our efforts were recognized across the industry during the year. But importantly, we're not done. I see further significant potential in the coming years. Now turning to Slide 12, where I'll provide more detail on how we're thinking about AI specifically. In 2025, we scaled 50 Gen AI use cases into full production, demonstrating significant potential and generating GBP 50 million of in-year P&L benefit. It should be stressed that this is based on a narrow definition of the latest technology with the full spectrum of digital and AI initiatives contributing around 70% of our upgraded strategic initiatives revenue and over 60% of the total gross cost savings realized since 2021. This represents a strong foundation for us to accelerate our progress in '26, where we intend to increase the number of use cases with a particular focus on high-value agentic opportunities. This will deliver more than GBP 100 million of P&L benefit in 2026, capturing both revenues and costs with significant upside beyond this as use cases are scaled and mature. This is just the start of the journey, and we will, of course, talk more about our plans in this space as part of our strategic update in July. I'll now turn to Slide 13 and bring this together with a view on how we're building operating leverage in 2026. We've increased our net income by GBP 3 billion over the last 4 years. During this period, we have mitigated several headwinds, including those from the mortgage book and deposit churn with these partially offset by the structural hedge earnings growth of more than GBP 3 billion. As a result, the majority of this growth has been linked to management of the BAU business and the GBP 1.4 billion of strategic initiatives revenue, including a significant OOI contribution. We expect to deliver continued improvements in net income in 2026. Whilst headwinds will persist, these will be more than offset by an additional GBP 1.5 billion of structural hedge earnings and continued growth within the core franchise. This accelerating income growth, combined with flattening costs will further improve operating leverage and underpin the delivery of a cost/income ratio below 50% in '26. Let me now close on Slide 14. So as you've heard, we are successfully executing our strategy. This is reinforcing our competitive advantages and underpinning the delivery of strong shareholder outcomes. Indeed, reflective of our momentum, we are today upgrading our return on tangible equity target to be greater than 16% for 2026. Our confidence extends beyond this, and we're excited about sharing our updated strategic plan with you in July. We'll provide more details on the actions we'll be taking to further strengthen and grow the core franchise, address new diversified growth opportunities and deliver continued improvements in productivity, enabled by our leadership position across new and emerging technologies. We will, of course, share more detail on our medium-term financials at that stage, too. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns. Thanks for listening. I'll now return briefly at the end. But for now, I'll hand over to William to cover the financials. William Leon Chalmers: Thank you, Charlie. Good morning, everybody, and thank you again for joining. As usual, I'll provide an overview of the group's financial performance, starting on Slide 16. Lloyds Bank Group delivered sustained strength in its financial performance in 2025, in line with guidance. Statutory profit after tax was GBP 4.8 billion, equating to a return on tangible equity of 12.9% or 14.8%, excluding the Q3 motor provision. Within this, we delivered robust net income for the full year of GBP 18.3 billion, up 7% versus 2024. This was driven by sustained growth across NII and other income, up 6% and 9%, respectively. In the fourth quarter, net income was 2% higher versus Q3. This was driven by a 4 basis point increase in the net interest margin, continued balance sheet growth and further momentum in other income. Operating costs for 2025 were GBP 9.76 billion, up 3% year-on-year as continued investment, business growth and inflationary pressures were partly mitigated by further efficiency savings. Remediation charge for the full year was GBP 968 million, GBP 800 million of this relates to the additional motor finance charge in Q3. Credit performance meanwhile remained strong with an impairment charge of GBP 795 million for the full year, equating to an asset quality ratio of 17 basis points. Tangible net asset value per share ended the year at 57p, up 4.6p in 2025. Our performance for the year included capital generation of 147 basis points or 178 basis points, excluding the motor provision. This enabled a 15% increase in the ordinary dividend and a GBP 1.75 billion buyback while maintaining a 13.2% CET1 ratio. Let me now turn to Slide 17 to look at Q4 growth in lending and deposits. We saw a healthy balance sheet momentum in 2025. Lending balances closed the year at GBP 481 billion, up GBP 22 million or 5%. In Q4, lending balances grew by GBP 4 billion. Within this, retail saw growth across all of our business lines. Mortgages were up GBP 2.1 billion, strong but slightly slower than Q3 given higher maturities. Highlights elsewhere in Retail include credit cards, which grew GBP 0.5 billion with continued market share gains and European retail also up GBP 0.5 billion in the fourth quarter. Commercial lending was GBP 0.2 million higher. This represents further growth in targeted areas within CIB and business-as-usual performance within BCB, partly offset by continued government-backed lending repayments. Turning to liability franchise. Total deposits increased by GBP 13.8 billion or 3% in the year. Q4 was down slightly by GBP 0.2 billion. The fourth quarter saw growth in retail deposits across both savings and notably PCAs, with deposit churn continuing to ease as we had expected. Commercial deposits meanwhile, were down GBP 1.5 billion in Q4, driven by actions on low-margin funding as well as by seasonal outflows in BCB. And alongside these developments, insurance, pensions and investments saw open book net new money flows of GBP 7.9 billion for the year, including GBP 4.2 billion in Q4. This, of course, now includes inflows from Lloyds Wealth. Let me turn to net interest income on Slide 18. Net interest income for the year was GBP 13.6 billion, in line with our guidance. This represents an increase of 6% year-on-year, with Q4 up 2% versus the prior quarter. Across both the year and Q4, strong hedge income and business volume growth were partly offset by mortgage repricing and deposit churn headwinds. Average interest-earning assets of GBP 463 billion for the full year were up 3% compared to 2024. Q4 AIEAs were just over GBP 470 billion, up GBP 4.8 billion. Our net interest margin increased 11 basis points to 3.06%. This included a Q4 margin of 3.10%, up 4 basis points on Q3, driven by a significant pickup in hedge income, again, as we had expected. The nonbanking NII charge in 2025 was GBP 515 million, up GBP 46 million or 10% year-on-year, supporting growth in OOI. For 2026, we are guiding to NII of around GBP 14.9 billion. Within this, we expect margin expansion alongside continued healthy balance sheet growth across both retail and commercial. Our guidance incorporates further hedge income uplift of circa GBP 1.5 billion, partly offset by mortgage refinancing and easing deposit churn. Alongside, we also expect some growth in nonbanking NII charge consistent with associated business growth in OOI. Let me turn to mortgages on Slide 19. Mortgages grew by GBP 10.8 billion or 3% in 2025 to GBP 323 billion, supported by a growing market and a flow share of around 19%. We've continued to benefit from our strategic investment in the Homes ecosystem, enabling us to build customer relationships, including in higher-value direct lending and to retain more balances. It remains a competitive market. Q4 completion margins were again around 70 basis points with a further 1 or 2 basis points of tightening during the quarter. We continue to enhance the customer journey by integrating protection and home insurance. In 2025, we saw protection take-up rates in mortgages increase by 5 percentage points to 20%. There is further to go. I'll now turn to Slide 20 to look at developments in consumer and commercial lending. We saw a strong performance across our consumer portfolios in 2025 and a strengthening performance in commercial. Combined, cards, loans and motor grew GBP 4.1 billion or 10% year-on-year. We are taking market share in all 3 segments, driven by leveraging better data to add personalization and by launching innovative new products such as Lloyds Ultra within credit cards. Turning to Commercial Banking. Lending was up GBP 2.7 billion in the year or GBP 4.1 billion, excluding government-backed lending repayments. We saw encouraging progress in CIB, particularly in strategic areas such as infrastructure and project finance. This was partially offset by BCB lending, which held steady when excluding government-backed lending repayments or down GBP 1.4 billion if they are included. Let me turn to developments in the deposit franchise on Slide 21. Our deposit franchise continues to perform well. Total deposits ended the year at GBP 496.5 billion, up GBP 13.8 billion or 3%. Retail deposits were up GBP 5.5 billion or 2% in the year. Within this, current account balances grew by GBP 1.5 billion, representing growth in our market share of balances during the period. Retail savings meanwhile, grew by GBP 4.3 billion or 2%. This was driven by targeted participation throughout the year with a strong ISA season in the first half, followed by slower growth in H2 as we managed our portfolio. In Commercial, deposits grew strongly by GBP 8.5 billion or 5% on the back of growth in our targeted sectors. Notably, noninterest-bearing deposits stabilized and indeed grew a little in the second half. The performance and stability of our deposits are what underpin the structural hedge, which I will now talk to on Slide 22. The structural hedge is a strengthening tailwind to NII. The hedge notional stood at GBP 244 billion at the year-end, up GBP 2 billion over the year, supported by our high-quality deposit franchise. Hedge income in 2025 was around GBP 5.5 billion, a material step-up from last year and a little above our guidance. During Q4, the weighted average life increased to about 3.75 years built off continued strength in our deposit balances. And as previously guided, we expect a roughly GBP 1.5 billion step-up in hedge income to circa GBP 7 billion in 2026. We then expect hedge income to reach around GBP 8 billion in 2027 and to continue growing to the end of the decade as yields converge with market rates and as the notional slowly builds. Let's now turn to other income on Slide 23. Other operating income performance in 2025 was once again strong. OOI was GBP 6.1 billion in the year, up 9% versus 2024 and up 2% in Q4 versus Q3. The latter was supported, of course, by the full acquisition of Lloyds Wealth. Growth over 2025 has been broad-based. Retail is up 12% with strength in motor leasing as well as growth in cards and banking fees. Commercial was up 1% with solid growth in our Markets and Transaction Banking businesses, offset by lower loan markets activity. Insurance, Pensions and Investments meanwhile, grew by 11%, driven by strong performance in general insurance and workplace as we continue to focus on our strategic choices in this area. And our equity investments business was up 15%. This was particularly driven by Lloyds Living more than doubling its OOI during the year. Operating lease depreciation was GBP 1.45 billion in the year, up 10% versus 2024. This was driven by fleet growth, higher-value vehicles and to an extent, electric vehicle price movements, altogether, essentially in line with the OOI growth generated by the vehicle leasing business. Moving to costs on Slide 24. Cost discipline remains critical to the group. Operating costs were GBP 9.76 billion in 2025, in line with guidance, excluding the impact of the Lloyds Wealth acquisition in Q4. Year-on-year cost growth of 3% is on the back of continued strategic investment, volume growth and inflationary pressures, partly offset by further efficiencies. As Charlie highlighted earlier, since 2021, we have now delivered cumulative gross cost savings of circa GBP 1.9 billion, thereby creating capacity for strategic investment across the business. The 2025 cost/income ratio was 58.6% or 53.3%, excluding remediation. And looking ahead, as you know, we remain committed to delivering a 2026 cost/income ratio of less than 50%. Based on our current plan, that implies operating expenses of less than GBP 9.9 billion. This is in line with the flattening cost trajectory that we have previously indicated as our investment in this strategic cycle culminates. On top of that, inflation moderates and cost benefits are fully realized. Remediation for 2025 was GBP 968 million, including the GBP 800 million motor provision taken in Q3. There is no update on motor in Q4. We wait to see the detail of the FCA's final proposals post the consultation in the next couple of months. Let me turn to credit performance on Slide 25. Credit performance remains strong, reflecting our prime customer base, prudent approach to risk and healthy customer behaviors. Across Retail, new to arrears remain low and stable. Early warning indicators likewise are also benign. In Commercial, after some idiosyncratic cases in H1, the H2 picture has been very constructive. The 2025 impairment charge was GBP 795 million, equating to an asset quality ratio of 17 basis points. This incorporates a small MES charge, but also benefits from model calibrations and refinements. Indeed, we consider the underlying charge to be just below 25 basis points. The Q4 impairment charge is GBP 177 million or 14 basis points, including a GBP 47 million MES charge to reflect a slightly higher unemployment peak. Our stock of ECLs on the balance sheet now stands at GBP 3.4 billion. That's around GBP 0.4 billion in excess of our base case and leaving us well covered. Looking forward, we expect the asset quality ratio to be circa 25 basis points for 2026, similar to the underlying run rate that we've seen during 2025. I'll now turn briefly to our macroeconomic outlook on Slide 26. The macroeconomic outlook remains resilient. In the fourth quarter, we've made only minor changes to our base case versus Q3. We now forecast GDP growth of around 1.2% in 2026. Against this backdrop, our unemployment forecast increases marginally, now peaking at 5.3% in the first half of the year. Easing inflation meanwhile, allows for two 25 basis point reductions in the bank base rate during the year to 3.5%. This reflects a slightly lower rate than we previously expected, albeit we still expect a modest pickup later on in the forecast period. And in Housing, we assume growth in house prices of around 2% in 2026 and '27. That is supported by the slightly lower interest rate environment. Let me now turn to our returns and TNAV on Slide 27. In 2025, our return on tangible equity was 12.9% or a robust 14.8%, excluding the motor provision. Within this, restructuring costs were low at GBP 46 million, including GBP 30 million in Q4 with integration costs relating to Lloyds Wealth and Curve. The volatility and other items charge was GBP 70 million. This includes an GBP 87 million benefit in the final 3 months, incorporating a fair value uplift from the Lloyds Wealth acquisition. Tangible net asset value per share meanwhile, increased to 57p, up 4.6p or 9% in 2025. The increase was driven by profits, cash flow hedge reserve unwind and the reduced share count from our buyback programs, offset by shareholder distributions. And looking forward, we continue to expect TNAV per share to grow materially driven by these same factors. Given the momentum across the business, as Charlie said, we are upgrading our expectation for 2026 return on tangible equity to greater than 16%. Turning now to capital generation on Slide 28. The group remains highly capital generative and will become more so. In 2025, we generated capital of 147 basis points or 178 basis points, excluding the motor provision, in line with our guidance. Within this, risk-weighted assets closed the year at GBP 235.5 billion, up GBP 10.9 billion. This was driven by strong lending growth as well as GBP 2 million related to the implementation of CRD IV taken in Q4. This reflects our model outcomes, which are subject to PRA approval and therefore, of course, risk of modification. As planned, we paid down to a CET1 ratio of 13.2% at the end of 2025. And looking forward, we continue to expect 2026 capital generation to be more than 200 basis points. Beyond that, as you know, Basel 3.1 implementation is now scheduled for the 1st of January 2027. We expect this to result in a day 1 RWA reduction of around GBP 6 billion to GBP 8 billion on implementation. Our strong capital generation supports healthy and indeed growing shareholder distributions. So let me talk to that on Slide 29. We continue to grow our shareholder distributions at an attractive pace. For 2025, the Board intends to recommend a final ordinary dividend of 2.43p per share, taking the total dividend to 3.65p, up approximately 15% year-on-year. In addition, we've announced a share buyback of up to GBP 1.75 billion. And together, this represents a total capital return of up to GBP 3.9 billion, up 8% on 2024 and equivalent to around 6% of our current market capitalization. Dividends have grown consistently over our strategic plan with the 2025 dividend now up more than 80% versus '21. They remain at a payout ratio that allows for continued strong growth. Over the same period, our consecutive buybacks have also reduced share count by more than 17%. We remain committed to paying down to our target CET1 ratio of around 13% by the end of 2026. In addition, given our confidence in growing capital generation, we will now review excess capital distributions in addition to ordinary dividends every half year going forward. Let me wrap up on Slide 30. To summarize, in 2025, the group's financial performance showed sustained strength. Strategic execution and business momentum delivered continued balance sheet and income growth alongside cost discipline and asset quality, allowing for growth in shareholder distributions. As we look ahead to 2026 and the culmination of our current strategic plan, we are confident in delivering on the financial guidance you can see set out in this slide. Beyond 2026, we are committed to continuing income growth, improving operating leverage and stronger sustainable returns. That concludes my comments for this morning. Thank you for listening. I'll now hand back to Charlie for closing remarks. Charles Nunn: Thank you, William. So as you can see, our strategic delivery is accelerating, and we're building significant momentum. We're creating a stronger, more diversified, more efficient and more capital-generative group. This, in turn, supports increasing shareholder distributions. We have today upgraded our return on tangible equity guidance for 2026 to be greater than 16% and are confident in the outlook beyond this. I look forward to providing much more detail on the next stage of our strategy and the associated medium-term financial plan in July. Thank you for listening this morning. We're now very happy to take your questions, and I'll hand over to Douglas, who will manage the Q&A. Douglas? Douglas Radcliffe: Thank you, Charlie. We will, as normal, be taking questions -- written questions online as well as questions in the room. [Operator Instructions] Okay. Why don't we start with Guy? Guy Stebbings: It's Guy Stebbings from BNP Paribas. The first question was on deposits. I think it's probably fair to say over the past year, if not longer, deposit flow has been better than expected, but Q4 was a touch softer mainly on the commercial side. I don't know if you could talk to any more in terms of whether that's just seasonality and then your expectations into 2026 in terms of pace of deposit growth, whether you're assuming kind of static mix effects and anything you might be able to elaborate in terms of deposit pass-through assumptions? And then the second question was on costs. Very reassuring performance in '25. The guidance for '26 in terms of limited absolute cost growth is encouraging. Just wondering how much we can sort of read into that, your ability to continue to run the business with limited absolute cost growth? Or is it more a function of the fact that it was a plan that was always expected that in 2026, you would see less growth in that particular year. Obviously, I'm thinking into beyond '26. So appreciating you're not going to be too specific. Douglas Radcliffe: Excellent. Thanks, Guy. I think both deposits and costs are probably questions for yourself, William. William Leon Chalmers: Sure. Yes. Thanks for the questions, Guy. In relation to deposits, the deposit performance, as you say, over recent years has been really very strong, and that's obviously what supported the structural hedge amongst other things within the balance sheet. So a good franchise with some good financial effects. When we look at 2025, we saw deposit growth of almost GBP 14 billion, GBP 13.8 billion over the course of the year, about 3%. So a really pretty good deposit performance during the year. Within that, we saw Retail up GBP 5.5 billion. We saw Commercial Banking up GBP 8.5 billion. So good to see deposit growth in the various different parts of the business, including within the subcomponents of each of those divisions, Retail and Commercial, some pretty healthy deposit performance in respect to the different components. So that's the way in which we see the year. Now within any given quarter, of course, we are going to be managing the deposit base as appropriate based upon making sure that we make the most of the franchise, offering, of course, good customer value and respecting the funding needs of the business. And so within -- on a quarterly basis, you're going to see variations in deposit performance, which reflect each of those imperatives. But over the year, at least, you should expect to see healthy deposit performance as you did in '25. I think in respect of your particular point on Commercial, the 2 points that I would make are seasonal outflows. We see those kind of every quarter or every fourth quarter, I should say, in respect of certain subsectors, education was one over the course of this quarter, indeed, a bit of a mix effect there, too. Alongside also a bit of management in terms of very low-margin deposits, which, as you can imagine, occasionally collect themselves within the Commercial Banking part of the business. So we'll manage that in the interest, as I say, of customer value of the funding position of the bank and of making sure that we make the most of the franchise. The other point I would make in respect of quarter 4, Guy, which is good to see is stability in NIBCA across both the retail and the commercial businesses. And within that, within retail businesses, PCA balance is up GBP 1 billion, which, as you know, is a crucial customer relationship product for us, and therefore, we pay very close attention to it. So it's good to see that being so strong in the course of the fourth quarter. You asked about 2026. I think overall, when we look at '26, we're expecting to see deposit performance, not too dissimilar really to what we saw during the course of '25 in terms of overall volume. There may be some gives and takes in that in terms of the different divisions. We'll obviously manage the business as appropriate. What I would expect to see within that overall deposit book is a slowing down in churn, just as we have seen in the course of '25, including in the latter part of '25. And that is simply off the back of bank base rates, if you like, coming down to lower levels and therefore, deposit churn easing off the back of it. At the same time, we'll also see the effect of 2 bank base rates. That's more of a financial point than a volume point, if you like, but worth bearing in mind. So good performance in '25. We do expect to see continued good performance in '26 of roughly speaking, the same type of proportions. In respect of costs, cost discipline, as I mentioned in my comments, absolutely critical to the group. Cost discipline remains an absolute imperative. When we see our cost performance during the course of 2025, first of all, GBP 9.76 billion in total, that's about a 3% cost growth over '24. Within that, if you exclude severance, which, as you know, bumped up a little in '25, then it's 2.4%. And actually, if you exclude severance plus Lloyds Wealth in the fourth quarter, it's 2.3%. So stripping out those 2 elements, if you like, it's a 2.3% underlying cost rise in '25 versus '24. When we look forward, you'll see from our numbers that we're looking at a cost base, which is expected to be less than GBP 9.9 billion. That is in total about a 1% rise, '26 over '25. And that represents a number of things. It is worth saying actually before going into them, that obviously includes the added costs of Lloyds Wealth, which I think we mentioned at Q3 around GBP 120 million. And then also the added cost of the Curve acquisition as well, which we haven't put a number on, but that obviously is an incremental cost base that we have to absorb. And so the cost increase, if I can call it that, to sub GBP 9.9 billion in '26 takes into account those additional headwinds and effectively absorbs them in our ongoing cost management. Now to your point, what is leading to that cost outcome in '26? A number of things really. We're obviously being helped by inflation coming in a little. That affects things like pay settlements. It obviously affects third-party contracts and the like. So that's all helpful, declining inflation. Alongside of that, that bump in severance that we saw in '25 irons itself out a little bit. So we're seeing a little bit of a benefit from that. But then more importantly, we are seeing the landing of our strategic initiatives or at least those strategic initiatives that are focused on cost benefits. Added to that, the full year benefit of the cost initiatives on a BAU basis that we took in '25. So those 2 factors, the landing and benefit of strategic initiatives, number one, and the full year benefit of '25 initiatives in '26, they're pretty helpful, too. And then I mentioned earlier on that as we come into the final year of our strategic plan, the investment plans, if you like, the investment expenditures are slowing off a little bit. That gives us a little bit of benefit as the cash investment slows. It's about GBP 100 million, put that in the -- if you like, in your considerations. But that is the natural culmination of the strategic initiatives and the investments that we've made, both from the revenue customer proposition side as well as the infrastructure of the business over the course of the '22 through '26 period. You asked about looking forward. You'll have seen in both Charlie's and my presentation that we talked about our commitments beyond '26. And we talked about them in the context of income growth, number one. We talked about them in the context of increased -- improving operating leverage, number two. And we talked about them in the context of improving returns, number three. The second of those 3 points, improved operating leverage effectively means a commitment to reducing the cost-income ratio. When we look forward, we are going to continue to invest in the business, you would expect us to because it's absolutely imperative to maintain the primacy of the franchise and the strength of the franchise today. And that will require investment in the type of sectoral evolution that we're seeing. But you have that all done being committed to within the context of an improving operating leverage, declining cost/income ratio environment. We'll obviously talk more about specifically what that means when we get to the summer of this year, but we felt those commitments were important to make. So you have some sense of direction from us in advance of that. Thank you. Benjamin Toms: It's Ben Toms from RBC. The first question is on NII. I mean you guided for 2026 of GBP 14.9 billion. Just to clarify, should we expect NII and NIM progression every quarter as we go through the year? And is there any lumpiness in the structural hedge maturities that are worth calling out? And then secondly, on capital, you talked about reviewing your capital distribution now on a half yearly basis going forward. How should we think about that for the half 1 of 2026? Will you come down to that 13% by the half year? Or should we think about that as a straight line, so halfway there by the time we get to the half year results? Douglas Radcliffe: Thanks, Ben. Again, I suspect that those are very much questions for William. William Leon Chalmers: Yes. Thanks, Ben, for both of those questions, and I'll answer them in turn. In respect of NII, you asked specifically about the shape of NII over the course of '26. So I'll come back to that, but I just want to make a couple of comments in respect of the overall guidance of 14.9% to put that in context, if you like. When we look at NII performance over the course of '25, we're obviously pleased with the outcome off the back of margin expansion and indeed AIEA growth, including that GBP 22 billion of incremental lending that we did during the year, up 5%. That led to NII growth of 6% during '25. Now we put forward guidance, which shows a further 9% increase in 2026. So a pretty solid growth expectation, if you like, for 2026 going forward. And again, that's built off of similar things. That is to say net interest margin expansion, probably a step more in '26 versus what we saw in '25 actually, plus, of course, AIEA growth expectations. We do expect net interest income to continue to grow in the years beyond that. And that is indeed partly what's behind the first of the 3 comments that both Charlie and I made about expectations after '26. When we look at that, we obviously calibrate the guidance in the context of what we are highly confident in delivering, and that's where GBP 14.9 billion expectation comes from. Within that, there are headwinds and tailwinds in the margin and perhaps we'll come back to that in the course of this discussion alongside AIEA growth expectations, as said. And we've, of course, absorbed a further bank base rate reduction in the course of '26 in calibrating the guidance that we've come up with. In respect of the pattern during '26, I would say, should you expect NII growth or should you expect NII and net interest margin expansion in every quarter over the course of the year? I won't guide too precisely to it. But broadly speaking, yes, you should do. That is going to accelerate and slow down from one quarter to the other for sure. But over the year, you should expect a steady growth in NII off the back of margin expansion quarter-on-quarter. Some quarters, however, will be faster than others. And behind that, of course, is, to your point, the -- a little bit the kind of the ebbs and flows, more the flows clearly of the structural hedge, but flows at different paces, I guess, of the structural hedge. So that's partly what will be behind that net interest margin expansion. The other point I would make is if you're looking at the quarters, just bear in mind that quarter 1 has a lesser day count versus quarter 4. So you need to take that into account in the context of NII expectations for that quarter in particular, simply because we're coming up to it. In relation to the buyback, as you say, we've moved to a buyback of 2x. Why have we done that? Over the last couple of years, at least, we felt that 1x per year buyback was appropriate in the context of giving you clear guidance as to what we expected and in the context or rather appropriate as we reduce the capital ratio of the business down to ultimately 13% at the end of this year. As Charlie said in his comments, as we increase our confidence in the capital generation of the business going forward and as the regulatory picture gets clearer, we feel it is now appropriate to move to 2x per year. And indeed, that gets us to, on average, being closer to our capital target of 13% over the course of the year. So there's good reasons behind it, and it gets us to an outcome that is more consistent with our overall 13% capital target. You asked about timing and how we'll look at it at the half year. We'll obviously let the Board deal with the buyback as appropriate at the half year. We will take into account clearly the position of the existing buyback and where we are at that point. The one point that I would make in that context is that in the past, as you know, we have seen buybacks end in August. We've also seen buybacks end in December. This year, we have a buyback that is a little higher than it was last year. We obviously had a much bigger -- or a much larger market capitalization of the overall company. And therefore, one would expect the buyback to -- if it's constrained by things like average daily traded volume, which these things typically are, to proceed at perhaps a slightly faster pace than it might have done previously. Overall, we will look at the buyback consideration at the half year. We will decide on what the quantum of the buyback should be at that point in time, taking into account the available capital stock of the company, taking into account the business needs on a go-forward basis and of course, ensuring that we preserve the position of the company. You asked specifically about how close we get to 13% at that point. Our objective right now is that we will get to 13% at the end of 2026. That's been our objective for a while now, and we maintain that position as we stand today. We'll take a look at it again at the half year. Douglas Radcliffe: Excellent, why don't we take the next question from Jason in the middle row here. Jason Napier: Jason Napier from UBS. Perhaps one question for William and one for Charlie. William, just coming back to the earlier question on deposits. I think you did a great job of handling the volume side of things. Commensurate with the bigger market cap that almost everyone now has, there's a lot of investor sensitivity around commercial intensity and what's happening to competition. So -- and particularly on the deposit side, I wonder if you could perhaps add a little color on that. And then, Charlie, the firm has done an admirable job of dealing with a really volatile macro environment over the 5-year period of the plan. One of them is the emergence of Gen AI as a thing that we all talk ad nauseam about now. What do you think has happened to the efficient frontier of cost/income ratios for banks over the period of the plan. Where do you think a modern Lloyds -- a fully modernized Lloyds, I should say, ought to operate from that perspective? Douglas Radcliffe: Thank you, Jason. William, I think obviously, deposits is for yourself and then Charlie, the AI side. William Leon Chalmers: Sure. Yes. Thanks for the question, Jason. I think you have to judge us by our results in some respects, at least. So the way in which we respond to the competitive environment is hopefully by delivering sustained franchise growth. And once again, you've seen that in 2026 with GBP 13.8 billion growth in deposits. I mentioned earlier on that we expect continued deposit growth during the course of 2026 and indeed beyond. So I think that's probably the base answer. What would I say in terms of competitive environment? Yes, to a degree, at least, it is increasing in its competitive intensity. I do think there are various different reasons for that. Some of them will be present for a while, i.e. they're more systemic. Some of them may be a little more transitory. We've seen, for example, quite a lot of competition from some of the fintech challenges, and there's much talk about that and the market share that they may be gaining or accessing. How do we respond to that? We respond in the context clearly of enhancing capabilities of our offering. That obviously includes things like app capabilities. Alongside of that propositional improvements, which you've seen a consistent flow of over the course of the last few years. Alongside of that, very competitive pricing in the markets that we want to be when we want to be in them. So we won't necessarily, if you like, be there all the time in every single case, we'll be there where we need to be. And in the context, obviously, of the systemic security that Lloyds offers, the branch offer that it offers, the brand and marketing and so forth. So overall, we see our competitive position versus some of those other factors within the deposit market is gradually strengthening, as said, endorsed by the deposit performance that we've seen across the franchise. One good indicator of that, going back a little to the earlier question is the PCA performance, which for us, as said, is the absolute critical relationship product. Balance is up GBP 1 billion in the course of quarter 4, balance is up GBP 1.5 billion during the course of '25 as a whole. And that is in the context of continuing market share gains from a balance perspective, which is good to see. So Jason, the competition is relevant. It's clearly something that we take very seriously. I do think the results that we show up against that competition withstand scrutiny. Charles Nunn: I might just add one thing to that. I don't want to jump on all of these questions because it's a really important question, obviously. We made the point around market share gains in personal current accounts. We've also done that in business current accounts over the life of this cycle, and those are 2 very important areas for any organization, but especially given our strategy. When you get to savings and investments, we performed very well on Instant Access money, which is money for liquidity purposes. And last year, we had a very strong ISA tax season, but as you get into time deposits, obviously, the margin for shareholders will depend on the pricing and the competitive context. They don't support directly the structural hedge. So we typically compete there from a customer proposition and a broader relationship perspective, but we won't chase market share for the sake of chasing market share where it's not relevant to our customers and where it's not relevant to our shareholders. So we really look at quite a differentiated view of the deposit base. And you're right, it's a competitive market. That's good for customers. Last year, we traded very well and offered great offers. Let's see where the market is this year. The really core part of this is really competing where we have the stable funding and stable deposit base that shows trust. Just on your second question, wow, we could spend the whole of the morning. Thank you for asking me a question, Jason. And look, I'm not going to give you the complete answer because it's -- I think it's partly one of the discussions we'll have in July. I think a couple of thoughts that are very helpful. The first thing is -- we've said a few times now, and we did it in the seminar back in November that about 60% of the GBP 1.9 billion gross cost saves we've delivered over the last few years has been linked to digital and AI, put generative AI aside for a second. And so this ongoing trend around driving very significant lift in efficiency and operating efficiency for financial services, we've been doing that for our whole careers, but it's a significant opportunity at the moment, and it has been what's driving a significant amount of our benefits in the last 3 or 4 years. And when we look at Agentic AI, we think that will enable us to continue that trend of efficiency. So that's the first thought. Second is when you look forward, and we're really quite excited this year, we announced -- we just announced today that we see for just the generative AI use cases we're deploying this year on top of the ones we deployed last year, the 50 use cases that generated GBP 50 million of P&L, we see greater than GBP 100 million of benefit in year. And those benefits will be both revenues and costs. And of course, when you look at our industry, what's more differentiating is our ability to differentiate our services and build broader relationships on the revenue line than driving efficiency. We will do both, but efficiency, if we can do it, other people can do it. What's really exciting for us is some of the differentiation that we're building in through the services we're doing this year. We're launching a couple of examples later this year, which we are currently in testing with our colleagues, one around providing investment advice to the whole market. So you don't have to have a certain size of investments to get that investment advice. [indiscernible] team is leading that. I can see them at the back, which is going to be really interesting. It won't drive massive revenue short term, but it will be very sustainable long term. And then the second one is around really changing how customers have access to their everyday banking and providing a conversational interface to get more out of their everyday spending. And we think that's going to be very, very important for the whole everyday banking personal current account business. Jas is leading that, and he's sat here as well. So we really think there's as much on the revenue as there is efficiency. And then going forward, I won't give you answer on kind of how we see the industry playing out. But those -- that does underpin the confidence that William said we've given you that we see the cost-income ratio continuing to progress positively over the next phase. We'll come back into this. It is also really important to think about, as you know, the mix of businesses. So we happen to have a mix of businesses with a very large retail business, a significant insurance and wealth business, which, as you know, is very good from a returns perspective, but typically historically has been a higher cost/income ratio and then a smaller commercial bank. And I think when you look at Lloyds and other institutions, obviously, the mix of businesses will affect how cost/income ratios progress. We're very ambitious on this, and we are very confident we have the right talent, and we're starting at a fast pace, which is great. So let's see how it develops. We'll come and give more guidance back in July. Douglas Radcliffe: Let's stay on the front row and let's go to Ben first, and we'll go on. Benjamin Caven-Roberts: Ben Caven-Roberts from Goldman Sachs. Just wanted to follow up on the lending. So you mentioned within the NII guide, very strong franchise volume growth in 2026. Could you elaborate a bit on the split between Retail and Commercial and how you see the trends evolving there? William Leon Chalmers: Yes. Thanks, Ben, for the question. Loans and advances GBP 481 billion, as you know. That is a pretty good outcome in respect to '25. So I mentioned earlier on GBP 22 billion growth in lending for the year, which is up 5%. And if you think about where GDP is, it's quite a markup on GDP. So we're pleased with that. I think it is more balanced towards the Retail part of the business over the course of the year. I talked about GBP 10.8 billion in mortgages, for example. We also saw sustained growth across cards, loans, motor and so forth. So a bit of a tilt in that direction. Within the Commercial Bank within '25, decent growth within, as I mentioned in my comments, targeted sectors within CIB. But within BCB, you effectively had a swap out of government repayments off the back of bounce-back loans for a swap in of private sector lending. And those 2 roughly equaled each other out. So that's the pattern for '25. Again, some strong franchise growth in both areas, particularly in Retail. When we look forward, first and foremost, we'll also -- we'll obviously be conditioned by the markets in which we operate. We have taken some relatively prudent assumptions in terms of the expected expansion of those markets. The mortgage market, for example, we are suggesting that lending will be healthy in '26, but maybe a touch down versus what it was in '25. That's a market comment as opposed to a Lloyds Banking Group comment. So we've deliberately taken some relatively prudent assumptions in that space, which means that our Retail lending, we still expect to show healthy AIEA growth to be clear. Will it expand at 5% -- well, will it expand by the same order of magnitude as it did in '25 in Retail? Let's see. I think our market assumptions are a little bit more cautious than that. And therefore, I would expect to see a bit of that reflected in our overall growth within Retail banking balances growth, but maybe not quite at the same pace as we saw during '25. However, within Commercial Banking, I think we see it as a bit of a different picture. That is to say we see sustained growth across the commercial bank. And maybe just to comment on that briefly. First of all, within CIB, the strategic initiatives, the focus on certain areas and so forth, I would expect CIB growth to continue to be healthy just really as it has been during the course of '25 actually. But within BCB, we're now at the point where there's only GBP 1.4 billion or so of bounce back loan balances in place. We are also at the point where we are investing heavily in the proposition there, whether that is sectoral expertise, whether it's relationship managers, whether it's customer journeys and the like. And therefore, the expectation is that the pace of organic growth within BCB should pick up a little bit. Meanwhile, because the bounce back loan stock is now only at GBP 1.4 billion, the headwind that is presented by those repayments should ebb a little bit. The net of that is probably more constructive growth within BCB, which in turn, I think, Ben, when you look at the overall balance, therefore, for '26, you should expect to see healthy loans and advances group -- sorry, healthy loans and advances growth within Lloyds Banking Group for sure. It may be a percentage point or 2 -- well, percentage point, let's say, inside of what we saw in '25. And the balance might be slightly shifting. That is to say, slightly stronger within Commercial, slightly weaker within Retail. But overall, as I said, healthy loans and advances growth with those comments attached. Douglas Radcliffe: And very impressive, Ben. Just one question. Perlie? Pui Mong: Sorry to disappoint I have two. So it's Perlie Mong from Bank of America. Can I ask about mortgage margin competition? So as completion margin is still about 70 basis points, and you mentioned that there's maybe 1 or 2 basis points of tightening in the quarter. I think we've all been hearing about the COVID era loans maturing in half 1 this year. So how are you seeing competition at the front end of the book in January so far? And especially in the context of the budget perhaps having less change to cash ISA than may have expected. So does that change the funding profile of some of your competitors, especially building societies? And then also the mix in the book as well because this year looks like it will have a lot of remortgages coming through. So does that change in mortgages -- remortgages versus first-time buyers change the margin picture as well? So that's number one on mortgage margins. And number two, on NII and non-NII split. So the GBP 14.9 billion is perhaps a touch below consensus. But obviously, the cost/income ratio guidance does imply an even bigger step-up in noninterest income growth versus expectations. So is that a conscious decision to put more resources behind noninterest income growth? And which area within the noninterest income growth are you feeling especially positive about? Douglas Radcliffe: Thank you, Perlie. I think both of those questions will originally come to yourself, William. William Leon Chalmers: Yes. And maybe, Charlie, you want to add. Charles Nunn: Mortgage competition dynamics, and then I can talk about that. William Leon Chalmers: Shall I kick off on mortgage margins briefly and then come over to you before getting to the second of the 2 questions. The mortgage market really as said Perlie, it has been competitive in '25. It continues to be competitive in '26. I mean that's the simplest way to look at it. We've talked about 70 basis points completion margins within mortgages. That's actually been the pattern pretty much quarter-on-quarter. I mean you'll remember quarter 2, I think I said the same thing, quarter 3, I said the same thing, and here we are in quarter 4 saying the same thing again. So 70 basis points throughout the year. But having said that, underneath that headline, you're probably seeing a chip of 1 basis point or so away in each and every quarter. So that's a reflection, if you like, of the competitive mortgage market that we are seeing. What is going on behind that? I think what is going on behind that is that everybody is enjoying the benefits of widening benefits from structural hedge, widening liability margins. And off the back of that, we and everybody else is looking at the margin as a whole. And in that context, we're pleased to see, obviously, the margin expanding by 11 basis points in '25. I mentioned earlier on that we expect to see a more material increase in net interest margins in '26. So I think everybody is looking at it in a fairly holistic way. And therefore, there's a bit of a trade-off going on between being more competitive in the mortgage market, which is being allowed for by the overall widening of our margin and the rest of the sector as a whole. I think that's what's going on. When we look at '26 in response to your question about kind of blocks of activity, yes, we have a mortgage headwind during the course of '26. We've been talking about it, I hope, very consistently over the course of recent years. So that's nothing new for us. We've been, I hope, telling you that for some years now. It is, first and foremost, because of the effect, as you say, a pretty thick 5-year margins that were written back in the, I guess, now the COVID era. That mortgage headwind is slightly compounded by the fact that completion margins, as just said, have come in a little bit versus our expectations. To be clear, we do not expect a heroic recovery in completion margins. We've taken a pretty prudent view on what those completion margins will look like over the course of this year. And of course, in doing so, we, therefore, build up the mortgage headwind a little bit in respect to '26. Now let's see what actually plays out. We might be proven wrong. Completion margins may be a little bit more steady than they are, but we've taken a relatively conservative view of how we expect competitive conditions to play out during the course of the year. And that combined with the '26 maturities means that the mortgage headwind is certainly there for '26. Again, consistent, I think, with what we've highlighted before, but maybe stretched a little bit beyond because of that completion margin pressure that I just highlighted. Now strategically, and Charlie may want to talk more about this, therefore, it is particularly important to us that we develop the franchise proposition, the customer relationship around the mortgage product. The mortgage product stands on its own 2 feet, and it meets its cost of equity. So we're perfectly happy with that on a fully loaded basis. It actually is a very attractive return on equity on a marginal basis. So the product itself stands on its own 2 feet from a financial perspective, but it is so much the better if we can develop the relationship with the customer off the back of it. And I mentioned in my comments earlier on that the protection take-up rate is now at 20%. That's gone up dramatically over the course of the time since I've been here. And indeed, as I mentioned earlier on, we think there is much further to go in that. That is only one example, but it's quite an important example of how we seek to build the customer relationship in the context of the mortgage product. You'll have noticed other examples are in the context of our PCA mortgage combination offering that we give to people. Likewise, GI is another string to the bow in terms of building that relationship. So that's what we do, if you like, to offset some of the pressure that we see within the overall financial point from the mortgage product. And then as I said, we look at the margin in its totality, which is undergoing a very benign and positive transformation right now, as you know. I'll just comment very briefly on the cash ISA and hand; over to Charlie for the question as a whole. I think overall, the pressure that may be induced by cash ISA changes may be felt by others a little bit more than us. That may be because of their deposit funding structure. It may be because of the overall way in which they maintain customer relationships. At the moment, at least, the loan deposit ratio within the business is 97%. It is a very successfully deposit-funded business with a lot of room to grow lending in. From a cash ISA strategic point of view, being obviously the combined Lloyds Banking Group Scottish Widows business that we are, we see actually the cash ISA movement as at least as much of an opportunity to build relationships in the savings space as we do see it as a source of concern in the deposit space. So from our perspective, we're fine with it. Charles Nunn: It's a pretty full answer. Look, maybe just take a step back. Obviously, when we started this strategic cycle, the mortgage business was hugely important, but we've been losing market share for a long period of time. And we kind of set out that we wanted to prove that we could trade at 18% to 20% market share and do it profitably for our shareholders. And that's what we've done. And last year was a very good year in that context. And I think just overall, we'll continue to have that mindset. This is about being relevant to our customers, bringing leading products to market, but we're not going to chase margins in any 1 month or quarter. The market has started competitively in January, but January doesn't make a quarter and a quarter doesn't make a year. So let us trade through that. So that's the first thought. The second one, which is William talked about what we can bring alongside our mortgage products to enhance returns from an overall relationship. The other thing that we've been very focused on, and we've done successfully that has helped us to change what you'll see as the mortgage margin dynamic is think about how we provide our existing mortgage customers or current account customers access to a remortgage or a product transfer and how we use our indirect channel. And those are great when we can do that because we don't pay a product fee or procurement fee to a broker, and we can share some of the value with our customers, and we can target our customers in a way that really brings the best of our products to market. So we've increased our share of direct mortgages to 26% of the market last year. And we think that's a really important point of differentiation. It enables us to compete differently from our competitors. And we've invested heavily. I'm being watched by the leader that's done a lot of this. I'm nervous now what I'm saying. We've invested heavily in our digital capabilities around our home hub, around remortgage journeys, and that really helps customers get a simpler, quicker and good value product, and that helps us. And we've invested heavily in our relationship with our mortgage brokers. And we typically see our completion rates being above the application rates because we provide a very, very good process and journey. And again, that helps us compete in the market. So look, it's a very different market from first-time buyers through buy-to-let through prime mortgages. One other fact, which I've talked about before, we did increase our share of mass affluent mortgages from 9% to over 20%. And again, we know the value of those relationships and the broader relationship in that context. Just on NII/OOI, maybe put it the other way around, I'll say the strategic and then you can add in some of the value because it's a really important question. But when we started this strategic cycle, we laid out very clearly that we wanted to grow more diversified income distribution across the group and get more bias towards other operating income, recognizing we were still looking to grow NII ambitiously as well. But it's been always part of our strategy to do that. And we've now got 4 years consistently of growing at 9% CAGR on other operating income or more actually in '22 because we bounced off a low start in '21, we grew more than that. But I think the real quality of the franchise, the other operating income businesses is starting to show differentiation as we come through this. So we always thought strategically the right thing for our shareholders was to drive that bias towards OOI. The NII, William has gone through, we'll always have a certain conservatism around how we think about NII, but that's our right ambition. So we like the idea of OOI growing faster and giving more differentiation and diversification around the revenues. You asked around which businesses, and maybe I'll pause. I'll do that relatively quickly. And I think we'll do more of this as we look forward in the July strategy. But as William laid out, and hopefully, you've seen this additional disclosure today around our equity investments business and Lloyds Living. We always had a strategy to build quite a diversified set of businesses so that in any one quarter or year, one business may not have the best year. Actually, William explained why because of a very strong year last year and then actually U.K. sterling DCM activity was suppressed this year, our corporate OOI grew slower last year. But the whole point is we know that with the diversification and breadth of businesses, we'll be able to drive strong growth across those businesses over the next few years. And what you saw this year, and you should expect again next year is strong growth in Retail, strong growth in our Insurance and Wealth business and Lloyds Wealth specifically will help that again next year and strong growth in Commercial and in our equity businesses. The growth rates might vary quarter-on-quarter, but the pillars of that growth are well established now and they're moving at pace. So we think that's a really important part of the strategy. William, do you want to flesh out any of the detail? William Leon Chalmers: Sure. Thank you, Charlie. I think I'd probably make 2 points. One is, of course, to flesh out the detail, but I'll come back to that in just a second. The second is I really do not think it is an either/or between NII and OOI. To be clear, we would expect to see meaningful growth in both. So when we look at NII, for example, as you know, we're looking at 9% growth in 2026. We are also looking at sustained NII growth in the period thereafter in the period beyond, fueled by structural hedge as the current headwinds of particularly deposit churn in '26, but also deposit churn and the mortgage headwind in '27 ebb away. So you should see 9% growth in '26 and then sustained growth in the period beyond that. Now just focusing briefly on '26, as I mentioned earlier on, and Charlie just highlighted it, we calibrate guidance to be highly confident of hitting it. That, of course, means a degree of conservatism in the way in which we look at things, including things like market rates and so forth. The headwinds and tailwinds in respect to the margin, they're familiar ones, the ones that I've just highlighted, for example, AIEA growth, as I mentioned in conjunction with the lending question just a second ago, is built off of relatively conservative market assumptions. Let's see how they fare over the course of the year. And then, of course, as I said, we've absorbed a macro -- a further macro change of now 2 bank base rate reductions versus previously 1. That all means that we're highly confident again in '26. It also means that we're highly confident of continued growth in the period thereafter. So, I don't think this is either NII or OOI subject to the resourcing decisions or capital allocation of the business. I think it's very much both. In terms of the detail, the 1 or 2 points I might just add just kind of fill in, in that respect. Retail up 12% during the year, 2025, that is driven by 2 or 3 factors in particular: transport, banking fees of PCA, cards, likewise. So that's a kind of, I suppose, a multipronged engine. Likewise, commercial a bit slower for the reasons that Charlie just mentioned. I would expect that growth rate to pick up in that business during the course of '26, not least because those '24 one-off effects that Charlie just highlighted drop out as well as what we've seen so far, at least a decent start to 2026. Let's see if that continues. And then Insurance, Pensions and Investments, the same drivers as '25, which is to say GI drivers, long-standing the unwind of the CSM being part of that, Workplace pensions continuing to build the business. But again, as Charlie mentioned, the embedding of Lloyds Wealth as it will be called. I think we talked at Q4 about that Lloyds Wealth income stream being an incremental circa GBP 175 million of income in the course of 2026 versus what it delivered during the course of 2025. So a meaningful, if you like, addition from that space. And then Lloyds Living -- or rather LBGI more generally, we've got a combined effect of LDC of housing growth partnership of BGF, but also Lloyds Living within that context. I mentioned Lloyds Living had doubled its OOI during the course of '25. You add together all of those LBGI businesses, and they're up 15% versus where they were the year before. You should expect meaningful growth in the OOI contribution of those businesses going forward. That hopefully just kind of fills in a bit of the blanks. But again, we would expect to see -- expect to deliver sustained growth in NII along the lines just mentioned, OOI growth for '26 ahead of what we saw in '25. Douglas Radcliffe: Excellent. I'm going to take a couple of questions online, then I'll come back to the audience here. Firstly, this question from Aman at Barclays. You are set to generate increasingly significant amounts of surplus capital from here. What should the market's base case expectation be for what you are likely to do with this surplus, buybacks, specials or potentially M&A? William Leon Chalmers: Shall I kick off on that, and then Charlie may want to add. Thank you, Aman, first of all, for the question. I think the start point and perhaps the endpoint for this question is that we are in the business of maximizing the long-term value of the group. That is really what the management team is focused on and indeed the Board. Looking forward, as it has done in the past, that is going to encompass business growth, balance sheet growth as an example of that, GBP 22 billion lending and advances growth last year, for example. Alongside clearly organic investment. We've invested, as you know, GBP 3 billion over the course of 3 years in the strategic cycle, GBP 4 billion over the course of 5 years, in fact, a touch above that as I think we talked about in Q3. That's in pursuit of improving customer propositions, making sure the franchise really progresses. At the same time, building the operational resilience of the bank as examples of other expenditures, if you like, of that cash investment. It also, from time to time, will include looking at least at M&A. But ultimately, it is all underpinned by capital distributions. And that is, as I said before, about maximizing the long-term capital distributions that we're able to give to shareholders. Now just a word on M&A. The M&A bar is pretty high. There's a couple of points to make there. One is it clearly has to be strategically coherent. I guess that goes without saying. But you've seen in the context of the last couple of years or so, a couple of M&A pieces, if you like, that we've undertaken, one being Tusker, one being Embark. Both of those 2 have enhanced capabilities of the business at a rate that was faster, at a risk that was lower and at a price that was cheaper than the organic alternative. When I first came in, we also did a scale add-on, which was the Tesco mortgage book. But it's that type of strategic, if you like, complementarity that we're looking for, either capability enhancement or alternatively scale add-ons. And then as I said, it has to be put through the filter of, is it going to get us to the target zone -- strategic target zone that is -- in a way that is faster than the organic alternative, in a way that is at least lower risk than the organic alternative and in a way that is ideally cheaper than the organic alternative. So we're looking for speed, low risk and value in the context of the M&A that we would choose to undertake or choose to look at, if you like. Only when we meet that high bar, would we choose to divert any money from what would otherwise be distributions to the shareholders to M&A. You've seen the type of things that we've done before. I think the concern is, does it tick all of those boxes. That's the way that we'll look at it. But as I said, any capital allocation, whether it's about balance sheet expansion, whether it's about organic investment in the business, whether it's about M&A, whether it's about capital distributions, is about maximizing the long-term value generation and indeed, ultimately, capital distribution in the business over time. Douglas Radcliffe: The second question online is from Rob Noble at Deutsche. When considering full year '26 distributions, will it be pro forma for the Basel 3.1 reduction in RWAs as of 1st of January 2027? Are there any other regulatory moving parts of RWAs in 2026? Or will they grow in line with loans? I expect both of those for you, William. William Leon Chalmers: Sure. I will kick off and Charlie may want to add about some of the strategic ambitions, if you like. The -- it's obviously far too early to talk about full year '26 capital distributions. We've just gotten to the point of offering GBP 3.9 billion in respect of '25, which in turn, as you know, from both Charlie and my comments, is a 15% increase in the dividend and a GBP 1.75 billion buyback. So we think that's a respectable outcome in terms of '25. To be clear, we do expect to grow capital distributions in respect to '26. That comes off the back of the increased capital generation of in excess of 200 basis points. So there's no debate about the direction that we're going in. But as you can imagine, Rob, I'm going to stop short of making any commitments about it. That will be a question for the Board at the right time. I might just pause for a moment on Basel 3.1. A couple of points to make really here. One is, as you know from our disclosures this morning, we do expect Basel 3.1 to be a positive from the company's point of view. That is to say, to reduce RWAs by the range of GBP 6 billion to GBP 8 billion. We'll see depending on the evolution of the balance sheet and indeed evolution of economics that drive some of the factors behind Basel 3.1, exactly where within that landing zone it ends up, but that's the range that we expect. Why is it that we expect that benefit? It's largely off the back of the commercial business and the fact that we are currently operating on foundation IRB, whereas other commercial businesses that we see in the market are typically on advanced ARB. And therefore, as Basel 3.1 gets implemented, there's less -- or rather maybe put it another way, there is some benefit for us because of our start point. That's where the majority of benefits come from. There is a little bit from retail as well, but that's the overall pattern of the Basel 3.1, as I say, RWA reduction. It's also worth briefly straying off Basel 3.1 for a moment on this, which is to say we have now landed our models for CRD IV. That is consistent with our GBP 2 billion RWA add-on in quarter 4, to be clear. We are now in the process of gaining PRA approval. Until we gain that PRA approval, there is obviously a little bit of risk around the PRA taking a look at it and if you like, entering into discussion with us. So let's see where that lands. We are where we are for good reason, but I just want to highlight that in the context of the Basel 3.1 benefits that we see. Finally, in terms of distributions, Rob, as said, I'm not going to comment on the quantum. I have commented already on the direction. I do think it's important to say in that context that Basel 3.1 is going to give us RWA relief. You can figure out how many basis points of capital that RWA relief equates to we certainly have done. We will look at investments in the business, to be clear. We will clearly look at maximizing long-term value of the company, and that is in the spirit of maximizing long-term capital distributions to shareholders for sure. But we will look at in the context of the overall capital position of the company, where we might deploy investments in the shareholders' best interests rather than necessarily automatically pay everything out in the minute that we get a pound in. That is not to say that we will not pay any element of that Basel 3.1 benefit out. It's not to say that. But it is to say that we will look at the round in the overall capital position of the company, and we will make the appropriate investments to ensure that the franchise stays as strong tomorrow as it is today and is capable of delivering shareholders what they want and need. Charles Nunn: The thing I might add is, William and I were really conscious as we came in today that we weren't able to give you financial guidance beyond 2026 until July. And so what we've tried to do today is do a couple of things. One, give you some confidence in the momentum in the underlying business direction and efficiency that we are delivering over this period, and that momentum will continue. The second thing was to give you some specific numbers where we felt guidance was appropriate. So the structural hedge in '27 and then some of the language William has used around that remaining supportive through the back end of this decade, even with our assumptions around how rates the yield curve will evolve. And then the RWA release we just talked about, again, you can see that we have the capacity to continue to really drive this business forward. And then obviously, the third thing is those 3 statements that we've both repeated a couple of times that we see beyond 2026, the opportunity to increase revenues, increase operating leverage and increase shareholder returns. So we'll come back in July and give you that broader view around what that really means. But you can see we were just trying to sow the seeds for you to really understand why the confidence that we have around this business in '26 and going forward is grounded. Douglas Radcliffe: Thank you. Let's return to the room. Let's take a question from Jonathan at the front. Jonathan Richard Pierce: It's Jonathan Pierce from Jefferies. I've got 2. The first one is just a modeling question really. The fair value unwind and the amortization of purchase intangibles. Consensus has those broadly holding moving forward. My suspicion though is those are going to come down quite notably, certainly by '27, '28. Can you just confirm where that number will be, those 2 items in aggregate, please, a couple of years forward? The second question, I'm sorry to come back to this point on capital generation, but it is clearly a major part of the story. And the guidance for this year for free capital generation of over 200 basis points obviously incorporates RWA growth and all these sorts of things. So we can see there's about GBP 5 billion of free capital from that. You've got another 20 basis points reduction in the equity Tier 1 to come, which is another GBP 500 million. And then you've got the day 1 Basel 3.1 of circa another GBP 1 billion 1st of Jan '27. That's GBP 6.5 billion taking into account organic investments and RWA growth at least. How should we think about the mix of buybacks and dividends moving forward? And in particular, I'm interested in the dividend payout ratio because, William, you've been keen to flag several times in the last few months that the dividend payout ratio is too low, yet again, consensus doesn't really have it moving over the next few years. So is there scope here for that dividend to start growing by somewhat more than 15% a year over the next 2 to 3 years? William Leon Chalmers: Thanks for those questions, Jonathan. I'll take both of them in the first instance. It may be that Charlie wants to expand also on the second in particular. On the fair value and amortization component, that has seen, as you know, a Q4 charge, I think, about GBP 34 million -- GBP 35 million actually. That is more or less consistent with the run rate, primarily related to businesses, many of them going back to the HBOS days and so forth, which in turn are amortizing over the last couple of years and indeed into the foreseeable future. We did see a bit of a step down during the course of the year, and we do see expectations of a bit of step down consistent with your question, actually, Jonathan, over the course of the coming years. And that is as certain instruments that are getting effectively amortized in the context of that line coming off. The HBOS debt instruments are one example of that. And so you should expect, if you like, downward pressures to come from that. The only point I'd make in addition to that is that we are -- as Charlie mentioned, we've done a couple of acquisitions this year, SPW being one, Curve being another. And so that will add to the pile of stuff, if you like, that then needs to be amortized in the future periods. So all being static, I would expect that line to gradually come down for the reasons mentioned, much of it relating to HBOS amortization. Having said that, we've added on a little bit in the context of '25 off the back of those 2 acquisitions. And therefore, we look at the net of those 2 rather than just one point in isolation. The second point I would make on that fair value unwind intangibles point is that, as you know, the bulk of it has nothing to do with capital. So while it may actually help, if you like, the overall build in RoTE over time, not by much, but it will make a positive difference. Nonetheless, don't expect that necessarily to feed into the capital generation of the company. And so just worth bearing that in mind. The second point, the capital generation, without commenting too specifically or directly on your numbers, I can see how you get to them. Maybe that's the best way of putting it. That relates to the capital generation of the company. It relates to the 13.2% down to 13%, which I said we've got a commitment to getting down to at the end of 2026. The Basel 3.1 basis points, you can tell from the GBP 6 billion to GBP 8 billion range that we've got what type of capital contribution that might make. Just as I said earlier on, though, just bear in mind that we're not completely settled on CRD IV until the PRA is signed off, just bear that in mind really. And then what does all that mean for the capital generation of the company and dividend payout ratio and so forth. One point that I'd make at the outset there is that the payout -- the dividend, if you like, needs to take into account recurring earnings streams within the company whereas the buyback is more capable of taking into account lumpy benefits. And therefore, the buyback is more attuned to dealing with things like Basel 3.1, whereas the dividend is more attuned to dealing with the ongoing earnings for the company. And that's an important start point for the way in which we look at it. When we look at the buyback versus dividend equation, we are committed not to a payout ratio within the dividend, as you know, but more to a progressive and sustainable dividend policy. And that, of course, means growth, but it means growth in a sustainable way, which for those of you who are long in the tooth like I am, will remember that is particularly important to Lloyds having the history that it has. So both growth but growth in a sustainable manner for the dividend. You've seen that over the last 2 or 3 years, that's meant 15% dividend growth, which now is 80% above where it was in 2021. And the point of emphasizing the payout ratio is not to say that we're changing our policy or that we have a payout ratio policy, but rather to say that there is a lot of room for progressive and sustainable dividend growth in the periods going forward. And what we'll end up debating with the Board, I'm sure, is do we take a step jump in one period of time for that dividend, i.e., see a sharp growth in 1 year and then, if you like, attenuate the growth in the period thereafter? Or do we keep the 15% or thereabouts growth rate going for some years into the future. And I think the good thing about where the business is right now is that based upon the guidance and expectations as to continued business growth, we have the scope to do one or other of those 2. And that's the point of, if you like, emphasizing the fact that we are on a low payout ratio. It is hard to put a finger on exactly where that changes, but we obviously pay attention to payout ratios that other banks, not just in the U.K. but beyond get to. But again, progressive and sustainable dividend policy is what it is all about. In that context, it's worth just briefly commenting on the buyback and how do we look at the buyback and what's the impact of the price and so forth on the buyback because that's an inevitable part of the equation. First of all, I'd say the buyback in respect of '25, the GBP 1.7 billion that we bought back was bought back at an average share price of 77p per share. So when we look back on it, that obviously looks like good value now. And we very much hope we'll be saying the same thing this time next year, of course. We are committed to the buyback that we have today. We also see significant value in the current share price. And so that commitment to the buyback makes sense in the context of the share price that we're at today. That's in the context of expected earnings growth, expected TNAV growth. It is also in the context of investors who basically see it the same way as we do. That is to say they have a preference for the buyback, and we obviously have to respect that as our owners. Alongside investors and owners who prefer income have it, and they have it from that 15% dividend growth, number one. They also have it because the buyback reduces the number of shares and therefore, helps us accelerate dividend growth on a per share basis, number two. We look at the buyback also with the EPS, the DPS, the TNAV per share benefits that it gives. And then in the round, therefore, we are still very much behind the buyback. We think it's a very sensible thing to do for all the reasons emphasized. That means, I think, Jonathan, looking forward that dividend progressive and sustainable growth is an expectation, certainly a core expectation of us, as I said in my comments, an attractive pace. But I think excess capital distribution, both for the reasons that I just mentioned, also to accommodate, if you like, lumpy capital benefits, Basel 3.1 being the best example, with buyback is a good way to do that. Charles Nunn: It's a pretty full answer. I think we said in the last few years, this is the problem we wanted to have that we get to a place where we have very strong capital distribution and our valuation more fully represents where we are today. And as William said, we think there's more value to come, but this is the right debate for us to be having, and we'll really value input from all of you and our shareholders as well as part of that as we go forward. Douglas Radcliffe: Excellent. Good. We run out of time, but I'll take a couple more questions. I think, Sheel, you had your hand out and Chris. So we start with you, Sheel, and then we'll finish with Chris. Sheel Shah: Sheel Shah, JPMorgan. Two questions from me, please. First, on the IP&I business. The other income has grown strong at 11%, but one area where maybe the strategic initiatives have been a little slower to show there is maybe the net flows. Net flow rate of growth has been maybe at the low single-digit percentage. How much of that is a function of the market? And what do you think is the natural growth rate of this business? And secondly, coming back to AI, the GBP 100 million that you've spoken about, there's a lot of focus on the ROI of these investments. Is that on a gross basis? Or is that including the cost of these investments that you've made? William Leon Chalmers: On the strategic investments, in particular, Sheel? Sheel Shah: Sorry, the AI. William Leon Chalmers: The AI. Charlie, shall I kick off, please? Charles Nunn: You can and I'll add on the... William Leon Chalmers: In terms of IP&I, the business, as you say, has been really successful in terms of growing some of its core activities. You'll notice that the IP&I business recently last year, maybe actually '24, it might be the tail end of, effectively focused the business on 2 or 3 core strategic areas. These include things like GI, it includes things like workplace pensions, for example. At the same time, it sold the bulk business. That was a reflection, if you like, of the strategic focus of the business and a very deliberate capital allocation decision upon those areas where we frankly felt we had a right to win and indeed a path to ensuring that we did so. So that's what's behind the positioning of the business. That's also what's behind the 11% OOI growth in respect of Insurance, Pensions and Investments in 2025, and that added to the acquisition of Schroders Personal Wealth now to be Lloyds Wealth, should add to greater growth, i.e., faster growth in OOI from IP&I going forward into 2026. That's the earnings story. You talked about book growth there. I would just distinguish in doing so between what we describe as the open book growth versus the closed book growth. And what we mean by that is that we're very interested in growing assets fast in the context of those businesses that we are strategically focused on, just as I mentioned a second ago. And if you look at open book AUA new money in 2025, it's almost GBP 8 billion. It's about GBP 4.2 billion in Q4. Of course, we would expect to see that build over the course of time. And off the back of the strategic focus and investments in the businesses that I've just mentioned, Sheel, you should expect to see that. I won't give you a precise run rate that we expect to target the business at. Safe to say that it's strategically focused and concentrated. And in addition to that, with that type of investment, with that type of background and context, we would expect those open book AUAs to grow at a faster base than necessarily or faster pace than necessarily the totality of assets under administration in the entire IP&I business might do. The second of your question, ROI, ROI always takes account of the investment. Charles Nunn: So just any other thing I'd add on the Workplace business is the benefit here of being a joined-up group is really helpful. We have all of our 1 million BCB customers and all our corporate institutional customers. And so the joined-up connectivity between the Workplace team and our Commercial teams is very strong, and you should continue to see us winning mandates, although the percentage of mandates in any 1 year is quite low. As you know, it's only about 2%. The pensions market is switching, workplace pensions, but it's a source of competitive advantage for us. And then the Lloyds Wealth acquisition, we said it both pretty quickly, I think. We see that as an opportunity, obviously, for our retail customers and especially mass affluent, but also our workplace customers and for all big workplace pensions businesses, and we're #2 today. As you know, attrition and consolidation as we get near a deaccumulation phase for people is one of the choices where people decide where they're going to consolidate their pensions. And we now have an advisory proposition we can bring to bear for our customers in the workplace business. So it helps us have another tool for supporting customers when they're making those really important choices and can help us manage attrition on that business. So we do think it's a really attractive business. Now it's at scale, good returns and does have the potential to continue to grow healthily. Douglas Radcliffe: Excellent. Chris? Christopher Cant: It's Chris Cant from Autonomous. Just trying to round things out, I guess, with regards to the commentary on AI and kind of digital leadership, the comment you made about reaching the end of this investment cycle and that being part of what's, I guess, helping control costs in '26 specifically as you look out to the next planning cycle, is it really a case of just redeploying the sort of investment spending that you've been doing over the last 3, 5 years? So changing the focus to focus more on this digital AI leadership angle or should we expect some kind of lumpiness? Like do you feel like you need to have a front load of investment in relation to this Gen AI opportunity that you see? So should we expect that progress towards operating jaws to be gradual? Or should we expect it to be, I guess, back-end loaded? Is there anything you want to say there? That would be helpful. And then just kind of reading between the lines a little bit. I get a distinct impression that you see one of the key opportunity sets within this AI revenue opportunity that you were pointing to as being the fact you have the captive insurer, you have this Workplace business. Could you comment on your inorganic appetite in that space? So you've been linked to Evelyn Partners. I'm not expecting you to comment on a specific transaction, but I'm sure you've seen the same headlines we all have -- I asked you about Schroders last summer, and you bought that. There's the Aegon U.K. workplace business potentially up for sale. I'm just curious, is -- am I right in inferring that that's the key area that you see the next leg of the strategy for OOI growth. The last few years has been a lot about the leasing business, and that's been a huge driver of the overall other income growth. As we look forward, is it more about the fact that you're this joined up group and you can cross-sell and you can deploy AI to do that? And is that where we should be directing our attention because I think we probably all under analyze your insurance business, frankly. Charles Nunn: Do you want to try the first one? We can both do both again. You want to try the first one, I have the second one and then... William Leon Chalmers: Yes, absolutely. Absolutely. Thanks for the question, Chris. In respect of the AI opportunity, it is obviously gathering pace, as Charlie has mentioned in his comments. We've seen some foundation building during the course of '25. We're seeing scaling during the course of '26, and Charlie mentioned the 4 or 5 blocks of activity that, that relates to. When we look at the impact on that in the next strategic plan, if you like, in the period beyond 2026, that opportunity is going to grow meaningfully. It will grow both across the revenue opportunity and just as you said, not just within businesses, but in terms of linking businesses up together for sure. It is also -- you asked about the nature of the operational leverage and whether that is back-end loaded or whether that is, if you like, a continuous commitment. I think it is fair to say, well, maybe make 2 comments. One is the improvement to operational leverage is intended to be about momentum. That is to say that we are delivering sub-50% cost/income ratio in '26. We expect that momentum to be sustained in the years thereafter. Now inevitably, when you make investments early on in the strategic cycle, just as we are in this one, you will see that momentum accelerating towards the end of the strategic cycle. But don't make -- if you like, don't misinterpret that as being a lack of momentum in the years '27, '28 and so forth. So that's the way I would look at it. It is sustained momentum. It will inevitably because of the nature of investments and the way in which they mature, accelerate towards the back end, but that's just the way of things, and you've seen it in the course of this cycle. The final point that I'd make on that perhaps before handing back to Charlie is that I hope that when people reflect upon this strategic cycle, people will believe that we've invested the money wisely. That is to say, we've invested GBP 3 billion over the course of 3 years, just over GBP 4 billion over the course of 5 years. That is starting to yield returns of the type that we're describing today. That is also what is behind our confidence in improved income growth, continuous operating leverage improvements in the period beyond '26 and indeed enhanced RoTEs and therefore, capital generation expectations in the period beyond '26. So when we look at the overall investments in AI, just to mention one class of investments, amongst others, you would expect us to invest wisely. And I very much hope this strategic cycle at least gives confidence in that respect. Charles Nunn: Great. You're close to getting us to talk about beyond 2026, which we are vehemently against because that will be July. Just in terms of your second question, a couple of things. And obviously, you wouldn't expect me to talk about individual companies despite the fact that you pointed out Schroders Personal Wealth last summer. Look, the first thing, again, on OOI growth, it's enhanced, not an old strategy. So we expect to see growth in all of those OOI pillars that we talked about. We're excited about the future of transport. We're excited about the future of our payments business, and we just bought Curve. We've captured market share in credit card payments, something as old-fashioned as that during the cycle, gone from less than 15% to 17.5%, one of the targets we said we would deliver. We delivered that last year, 2 years early. We're excited about the opportunity to continue to grow our commercial businesses that underpin OOI. William talked about the momentum in Lloyds Living as an example. So it's an and strategy. Yes, we are excited about the opportunity to continue to grow our Insurance, Pensions and Investments business. And so we see that as a really significant opportunity, not least because they're great stand-alone businesses themselves, but they are unique in our ability to bring them to our broader group, the connectivity into our commercial franchise, our retail franchise specifically. No one else in this market can do that. And we see there's lots of opportunity to innovate. In terms of acquisitions as a path for that, look, I think William laid out very clearly how we think about those, both our track record, yes, we will do them where they have -- they accelerate our ability to deliver distinctive capabilities strategically and scale that makes a difference for our customers and our shareholders. But we do have a high bar for those, and we'll continue to look at it in that context. I know, Chris, you'll remember back in '22 when we laid out this phase of the strategy, we laid out which businesses we aren't operating at the kind of 20-ish percent market share range. And as you know, there's still a number of these businesses. Actually, our Workplace Pensions business is pretty healthy in terms of its market share, but investments and then some of the associated areas around that, we're not operating at that level. That's also true in some parts of the payment space, in some parts of SME banking. And so we see opportunities to really grow in a number of businesses. And yes, IP&I is definitely one of them. William Leon Chalmers: Chris, just to perhaps finish off on your SPW example, it is worth saying that we acquired their full control of what is a great business that will extend our wealth proposition to the customer base, alongside GBP 18 billion of assets under management, assets under administration as well as an addition of circa GBP 180 million of earnings, and it was all for GBP 0 capital cost. Charles Nunn: And actually, just one more thought on that because we'll look and without doubling down is getting to the end, 300 great advisers, which is quite a material team that we can then apply into our broader group who are advisers we know, we love, some of them worked at Lloyds and we are confident in their conduct outcomes. So for a group like us, that's a hugely important part of making an acquisition like that. So well spotted last summer. Douglas Radcliffe: Excellent. So thank you. That concludes the questions. I don't know Charlie, whether you want to just briefly summarize and conclude the event. Charles Nunn: Well, no, just as always, first of all, thank you, Douglas. Thanks for hosting the questions, and thanks to everyone who's joined in the room. And offline, we really appreciated the questions. Thank you for bearing with us as we've got this gap between this year-end and our July new strategy and financial guidance. We're really already looking forward to July, but let's stay in the moment for a second. I know it's a busy moment. We've brought our results forward, but I think there's 9, 10 other European banks live. So thank you for prioritizing Lloyds over the rest. I don't know if you're going to be able to get the half term if you've got families, but that's hopefully a benefit from all of this. Obviously, our IR team is around for any further questions. As always, we'll be here for a few minutes ourselves. I'll look forward to seeing you in July. As I said, I'm really looking forward to that. William will do the Q1 results. As a team, we're going to be very focused on delivering 2026, and that's what we're going to be doing for the next few months until I see you again. So thank you very much for joining today, and see you very soon.
Operator: Ladies and gentlemen, good day and thank you for standing by. Welcome to the TAL Education Group's fiscal twenty twenty six Third Quarter Earnings Conference Call. All participants will be in a listen only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then 2. Please be informed, today's conference is being recorded. I would now like to hand the conference over to Ms. Fang Liu, Investor Relations Director. Thank you. Please go ahead. Fang Liu: Thank you all for joining us today for TAL Education Group's third quarter fiscal year twenty twenty six Earnings Conference Call. The earnings release was distributed earlier today and you may find it on the company's IR website, also the newswire. During this call, you will hear from Mr. Alex Peng, President and Chief Financial Officer and Mr. Jackson Ding, Deputy Chief Financial Officer. Following the prepared remarks, Mr. Peng and Mr. Ding will be available to answer your questions. Before we continue, please note that today's discussions will contain forward looking statements made under the Safe Harbor provisions of The U.S. Private Securities Litigation Reform Act of 1995. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public filings with the SEC. For more information about these risks and uncertainties please refer to our filings with the SEC. Also, our earnings release and this call include discussion of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. I would like to turn the call over to Mr. Alex Peng, Alex, please go ahead. Alex Peng: Thank you, Fang, and thanks to all of you for participating in today's conference call. Over the past fiscal quarter, we continue to make steady progress on our strategic priorities. With a consistent focus on supporting the holistic development of our students. Our commitment to innovation, user engagement, and service quality continues to guide our efforts as we refine our offerings and adapt to the evolving learning landscape. Guided by these objectives, our core businesses have continued to operate with stability and consistency. At the same time, we recognize that changes in the market demand and advances in technology continue to introduce new dynamics. Across several of our newer initiatives, including the learning devices business, we face a highly competitive environment. In areas like content, hardware and AI. In response to this evolving environment, we'll continue to advance our strategic initiatives and flexibly allocate resources to build long term capabilities. Consequently, we may face occasional variability and limited visibility in our financial performance due to seasonal demand shifts, competitive pressures and deliberate resource reallocation. While these factors may cause short term fluctuations, we remain focused on building the long term capabilities needed to seize the opportunities in the market.I will now provide detailed updates starting with our Q3 FY twenty twenty six performance. During the quarter, our learning services recorded year over year revenue growth across both offline Peiyou programs and online enrichment offerings. This was driven by sustained user demand and reflects our commitment to providing students with high quality learning experiences through a diverse portfolio of the enrichment programs delivered in both offline and online formats. Meanwhile, we maintain a disciplined approach to expanding the Peiyou learning center network. Balancing demand with operational capacity, efficiencies and long term sustainability. Positive feedback from parents and students alongside solid operating metrics such as retention rates, affirms the trust placed in our products and the consistency of our service standards. Our online enrichment learning programs also maintain year over year growth during the quarter. By leveraging technology driven innovation, we continue to enhance users' learning experience. Building on this approach, we introduced immersive classroom solutions to improve engagement and learning outcomes. We also extended our offerings to include more technology themes such as three d printing, with the goal of fostering interest in emerging technologies and supporting future skill development.Alongside our learning services, our content solutions encompass a wide range of offerings. With learning devices remaining a key focus for our long term development. The learning device market continues to evolve, shaped by ongoing advancements in hardware, software and AI technologies. Given this context, we are focused on further enhancing our devices across three key areas: User learning experience, AI enabled capabilities, and overall effectiveness. Compared with general purpose AI models, we believe an educational AI agent should go beyond simply providing students with correct answers. We believe they should focus on guiding students through the learning process. Adapting explanations to their level of understanding, diagnosing learning gaps, and supporting personalized learning path. Building on this vision, we have incorporated over two decades of educational insight into the interaction logic of our learning devices. Instead of simply providing answers, our devices are designed to apply structured instructional processes and guided teaching approaches with the aim of approximating one on one tutoring experiences. This design enables them to function not only as tools for problem solving, but also learning companions that provide individualized support. Looking ahead, we'll continue to enhance our AI functions including capabilities in problem solving, explanation and other forms of learning assistance. Our goal is to steadily evolve our learning devices into personalized AI companions that inspire thinking and support deeper learning.In addition to learning devices, we're also exploring new product formats to address a range of use cases. At CES twenty twenty six, we showcased several early stage concepts including our AI buddy, which received industry CES picks award. Designed for children aged six to 12, the smart companion uses interactive features such as voice, touch, and motion based interactions to support age appropriate engagement. These initiatives reflect our broader exploration of how technology can support children's development in learning related and everyday use scenarios, and with a continued focus on responsible design and practical application. So with that overview, I'd like to turn to our financial performance for the quarter. Our net revenues were $770,200,000 or 5,480,400,000.0 for the quarter representing year over year increases of 27% and 26.8% in U.S. dollar and RMB terms respectively. Our non-GAAP income from operations and non-GAAP net income attributable to TAL for the quarter were US$104.0 million dollars and US$141.4 million dollars respectively. I will now hand the call over to Jackson who will provide an update on the operational developments across our core business lines and a review of our financial results for the fiscal third quarter. So Jackson, over to you. Jackson Ding: Thank you, Alex. I am pleased to walk you through our operational highlights and financial results across our core businesses for the third fiscal quarter. Please note that all financial data for the quarter are unaudited. During the quarter, Peiyou small class enrichment programs demonstrated stable operations delivering year over year growth driven by increased enrollment. We continued to expand access to high quality enrichment learning programs for a broader user base. Supporting students' holistic development. In our online enrichment learning programs, we have embraced a technology driven approach to enhance the learning experience. For instance, some of our humanities courses now feature immersive online classrooms powered by virtual settings and interactive activities. Designed to boost student engagement and support learning outcomes. Students role play as protagonists from classic literature and collaborate with peers to complete themed challenges, deepening their grasp of character traits and story backgrounds. These immersive programs also incorporate gamified learning mechanisms during class to promote learning and comprehension, followed by out of class challenges that encourage reinforcement of key concepts. This cyclical engagement helps students internalize the material while building the language skills and knowledge needed for effective expression. Looking ahead, we will continue to build on this foundation by further integrating technology into our engagement tools and instructional design. This effort will be supported by sustained investments in content, product development, and services. Our focus remains on the continuous improvement of learning experience with the goal of supporting student engagement while meeting the evolving demands of online learning.Next, let's turn to our learning device business. Our diverse portfolio equipped with intelligent features and learning resources is designed to empower users on their self learning journeys. Operationally, our learning devices delivered year over year growth in both revenue and sales volume this quarter. The average weekly active rate among learning device users remained at approximately 80% with average daily usage per active device at approximately one hour. These metrics reflect sustained engagement even as we expanded both our product lineup and our user base. On the product innovation front, as Alex highlighted, we are transforming learning devices into more intelligent learning tutoring AI companions rather than simple problem solving tools. Our AI Thinky one-on-one, the interactive step by step tutoring AI companion embedded in our learning devices, has facilitated over hundreds of thousands of hours of guided learning. Meanwhile, our AI assistant, Xiao Si, remains a trusted companion for users. As of December 2025, students have activated it 1,000,000,000 times. These developments reaffirm our belief in AI's role in supporting students' learning and development.Earlier this month, we launched the X5 Classic Learning Device, positioned as a comprehensive solution for the mid price segment. This new product further expands our product lineup. Designed as an all rounder, the X5 integrates a systematic learning platform with specialized modules with the aim of structuring and supporting self directed learning. Beyond our business progress, we contributed to the ongoing development of the industry. In October, the standardization administration of China released the national standard for mobile learning terminal function requirements. By sharing practical insights from our device ecosystem, we participated in the formation of the standard. We believe that well defined standards help elevate product quality, protect user interests, and support the industry's sustainable development. That concludes the operational update.And I'd like to now walk you through our key financial results for the third fiscal quarter. Our net revenues were $770,200,000 or RMB5,480.4 million. An increase of 27% and 26.8% year over year, in US dollar and RMB terms, respectively. Cost of revenues increased by 18% to 338,400,000.0 US dollars from 286,700,000.0 US dollars in the 3Q FY 2025. Non-GAAP cost of revenues which excludes share based compensation expenses, increased by 18.4% to 338,000,000 US dollars from 285,400,000.0 US dollars in the 3Q FY 2025. Gross profit increased in the 3Q FY 2026, rising by 35% year over year to 431,800,000.0 US dollars from 319,800,000.0 US dollars for the same period last year. Gross margin increased to 56.1% from 52.7% for the same period last year. Selling and marketing expenses for the quarter were US$220.1 million dollars representing a decrease of 2.8% from 226,400,000.0 US dollars for the same period last year. Non-GAAP selling and marketing expenses which exclude share based compensation expenses, decreased by 2.1% to 217,600,000.0 US dollars from 222,400,000.0 US dollars for the same period last year. Non-GAAP selling and marketing expenses as a percentage of total net revenues decreased from 36.7% to 28.3% year over year. General and administrative expenses increased by 7.1% to 118,600,000.0 US dollars from 110,700,000.0 US dollars in the same period of last year. Non-GAAP general and administrative expenses which excludes share based compensation costs, increased by 10% year over year to 110,700,000.0 US dollars from 100,600,000.0 US dollars for the same period of last year. Non-GAAP general and administrative expenses as a percentage of total net revenues decreased from 16.6% to 14.4% year over year. Total share based compensation expenses allocated to related operating costs and expenses decreased by 30.2% to 10,800,000.0 US dollars in the 3Q FY 2026 from 15,500,000.0 US dollars in the same period of last year.Income from operations was 93,100,000.0 in the 3Q FY 2026, compared with a loss from operations of 17,400,000.0 in the same period of last year. Non-GAAP income from operations which excludes share based compensation expenses, was US$104.0 million dollars compared with a non-GAAP loss from operations of 1,900,000.0 US dollars in the same period last year. Net income attributable to TAL was $130,600,000 in the 3Q FY 2026, compared to net income attributable to TAL of US$23.1 million dollars in the same period of last year. Non-GAAP net income attributable to TAL which excludes share based compensation expenses, was 141,400,000.0 US dollars, compared to a non-GAAP net income attributable to TAL of 38,600,000.0 US dollars in the same period of last year. Moving on to our balance sheet. As of 11/30/2025, we had 2,146,300,000.0 US dollars in cash and cash equivalents, 1,471,100,000.0 US dollars in short term investments and 339,300,000.0 US dollars in current and noncurrent restricted cash. Our deferred revenue balance was 1,162,800,000.0 US dollars, as of the end of the third fiscal quarter. Now turning to our cash flow statement. Net cash provided by operating activities for the 3Q FY 2026 was 526,700,000.0 US dollars.Finally, I would like to briefly address our share repurchase program. In July 2025, the company's Board of Directors authorized a new share repurchase program. Under the program, the company may spend up to approximately $500 million dollars to purchase its common shares over the next twelve months. Between 10/30/2025, and 01/28/2026, the company has repurchased 844,856 common shares and an aggregate consideration of approximately 27,700,000.0 US dollars. That concludes the financial section. Alex, I will now hand the call back to you for business outlook. Alex, please go ahead. Alex Peng: Thanks, Jackson. I'd like to share some thoughts on our outlook for the company's future development. We view the intersection of learning and technology as one of our long term strategic priorities. By integrating technology with our industry expertise, we aim to continue enhancing our product design and service delivery across our businesses. In addition, we are strengthening our go to market capabilities. For newer businesses such as learning devices, we are implementing more agile channel management strategies, dynamically optimizing resource deployment based on market conditions, and performance indicators. At the same time, we are reinforcing our multi channel ecosystem by combining digital and physical touch points to broaden market reach and user engagement. From a financial perspective, as I mentioned previously, improving overall profitability remains a key priority for us. At the same time, we remain mindful of near term variability which may be influenced by factors such as market conditions, investment cycles, and seasonal fluctuations. These factors may also require timely adjustments to our operational execution, potentially resulting in limited short term visibility. Nevertheless, we'll continue to advance our strategic initiatives and strengthen capabilities across our core business lines. Maintaining a focus on long term sustainable development rather than short term financial outcomes. So, that concludes my prepared remarks. Operator, we are now ready to open the call for questions. Thank you. Operator: We will now begin the question and answer session. You may press star then 1. If you are using a speakerphone, please pick up your handset before pressing the keys. The first question today comes from Felix Liu with UBS. Please go ahead. Felix Liu: Thank you, Alex and Jackson for taking my question and congratulations on the very strong quarter. If my memory is correct, this is probably the highest level of the November margin since 2018. So congratulations on that. My question is related to offline Peiyou small class. Could management provide some update on the learning center network expansion in Q3? And your latest perspective on the pace of expansion going forward? With respect to Peiyou revenue, what has been the key drivers of your year over year growth? And could you provide more color on the upcoming winter season as well as growth outlook from here? Thank you. Alex Peng: Thanks, Felix. This is Alex. Let me first of all thank you for your kind remark and your continued long term attention to the company. Let me take this question. So I'll provide an update on Peiyou's Q3 performance and outlook. During the third fiscal quarter, Peiyou offline enrichment programs delivered year over year revenue growth which is largely aligned with the expansion of our learning center network. We really maintain our disciplined operational approach to network expansion. We evaluate factors such as our organizational readiness and capability, our operational efficiency, the regional market demand—really, this does come down to a very micro level of districts and neighborhood—and user acceptance of our offerings. So based on this measured and multidimensional approach, the business remains on a stable growth trajectory. Our operating metrics, really, they show that we built a solid and sustainable business framework, and we aim to maintain this level of operational efficiency for the upcoming winter season. So when I look ahead, I think we'll continue to manage the pace of learning center expansion prudently, balancing growth with operational efficiency, and long term sustainability. So when I look at the drivers of Peiyou's year over year growth, revenue growth during the quarter was primarily driven by increased enrollments while our ASP remained relatively stable. So, this performance really reflects both market demand for high quality enrichment programs and the internal capabilities we've been developing. If you look at these capabilities: product design, service quality, and content development just to name a few. Right? So on the product and service front, we really emphasize a standardized teaching framework while fostering an interactive student centric classroom experience. On the talent front, we train our lecturers in house to ensure consistent teaching quality. So, provided that these growth drivers remain in place, we expect this business line to continue growing. At the same time, given that we are coming off a higher comparison base and we talked about this in the past as well—it's coming off a higher comparison base than in prior years—we anticipate a gradual moderation in the pace of revenue growth in FY 2026. So, Felix, I hope that answered your question. Felix Liu: That's clear and congratulations on the results. Thank you. Operator: The next question comes from Charlotte Wei with HSBC. Please go ahead. Charlotte Wei: Good evening. Thank you for taking my question and congratulations on a strong set of results. My question is related to the top line growth momentum. We noticed that the growth kind of slowed down compared to last quarter. Could you please elaborate the key reasons behind this trend? In addition, how should we think about the revenue growth outlook for different business lines, especially for learning devices for the upcoming quarter? Thank you. Jackson Ding: Charlotte, thanks for the question. This is Jackson and I'll take this one. For your question regarding revenue trend, I think we talked about this a few times in the previous quarters. As we continue to grow, our growth rate will taper off naturally, normalizing to a more moderate growth result. More specifically, if we look at this quarter, the moderation in our top line growth was primarily driven by a deceleration in the growth rate of our learning device business, which stems from multiple factors. First, it reflects the evolving patterns in our learning device business, which is transitioning from its initial rapid expansion phase to a more sustained growth trajectory. Another consideration is the timing of a product launch across fiscal years, creating a different kind of comparable base. If you look at last year's fiscal quarter three, for example, it benefited from late August introduction of some of our new product lines back then. While this year, our major product launches happened earlier in the year in May, boosting fiscal quarter two sales instead. So the shift in product launch cycles resulted in different sales paths between the two fiscal years, leading to a higher comparison base in quarter three of last year.Additionally, as we have consistently emphasized in the previous quarters, we continue to prioritize long term competitiveness. By applying this philosophy across all business lines, we aim to balance sustainable high quality growth with prudent execution. Given factors such as market condition, investment cycles, and seasonal fluctuations, dynamic and timely adjustments to operational actions may be required, potentially resulting in quarterly variability in financial performance. Looking ahead, we expect continued fluctuation in learning device revenue. Now coming back to the group level, we believe year over year growth rate will moderate in the second half of this fiscal year, primarily due to a higher comparison base. Consequently, the year over year growth rate in the second half of this fiscal year is expected to be lower than in the first half. Our growth strategy remains grounded in the value we deliver to our users and the society. This guiding principle informs our business decisions and operations as we continue to develop our business. Over the long term, we believe that sustainable growth is driven by three core factors: continuous innovation, strengthened organizational capabilities, and disciplined operational execution. By maintaining our focus on these fundamentals, we aim to support sustainable development over time as we continue developing solutions that address learning needs and contribute to education development. Charlotte, I hope that answers your question. Charlotte Wei: This is very clear. Thank you, Jackson. Operator: The next question comes from Li Ping Zhao with CICC. Please go ahead. Li Ping Zhao: Good evening, Alex and Jackson. Thanks for taking my questions and congrats on a strong quarter. I have a follow-up question on the learning devices. Could you please share the Q3 sales performance of your learning device and how they performed during the Double 11 promotion period relative to management's expectations before? And how do you view the competitive landscape in the learning device market at present? Thank you. Alex Peng: Hi, Liqing. This is Alex. Thanks for the question. So let me begin with our Q3 sales performance. We saw year over year volume growth driven by enhancements to our product portfolio and channel strategies. I also note the blended ASP remained below RMB4,000, which really reflects a shift in our product mix compared to the same period last year. Financially speaking, the learning device business reported an adjusted operating loss as it remains in an investment phase. We'll continue to allocate resources to strengthen our capabilities and support long term competitiveness in this area. So speaking of competitiveness, if I turn to the competitive landscape question: We are really operating in a dynamic environment where artificial intelligence advancements are fundamentally transforming the educational technology landscape. Our approach really combines vertical domain large models with general AI capabilities to create more intelligent personalized learning experiences.One of the... when I think about it, one of the common challenges in at home learning involves students encountering difficult questions or unclear unfamiliar concepts, but they don't have immediate access to teacher support. Rather than simply providing answers in that moment our AI solutions really aim to emulate the human teaching methodologies. Right? So you break down complex problems, you offer tailored explanations, you take in the student's feedback, and then you guide students through learning progression pathways. So to this end, we are developing our AI agents full stack capabilities across these diverse learning scenarios. Investment in product innovation and channel expansion continue to yield positive feedback, which really underscores the user value we're creating with our products. Our key user engagement metrics remain very solid, with an average weekly active rate exceeding 80% and then average daily user time per active device at approximately one hour. During the recent Double 11 promotion period, if you look at our market share performance, that's really aligned with our expectations. So these outcomes, I think they demonstrate that our learning devices are gaining market traction through growing product market fit and diversified user acquisition channels. So these collectively enhance our long term competitiveness. So I'll also note that we look at AI's integration into education as a long term process shaped by technological breakthroughs and evolving market demands. So short term fluctuations are inevitable. But our commitment to the strategic business remains unwavering. Our vision really extends beyond just the current offerings. As artificial intelligence continues to advance, we aspire to bring the principle of teaching in accordance with individual aptitude to a wider scale. So this really helps ensure that more students, regardless of where they're coming from, or what kind of learning environment they have at home, they really have the access to high quality learning resources. So, Liqing, I hope that answered your question. Li Ping Zhao: Yes, that's very helpful. Thanks, Alex. Operator: The next question comes from Timothy Zhao with Goldman Sachs. Please go ahead. Timothy Zhao: Great. Thank you for taking my question and congrats on the very strong results again. My question is regarding your profitability and the bottom line performance. As I think our colleague just mentioned just now, the operating margin in the third quarter reached the highest level probably over the past five years or so. Just wondering what is the main drivers ahead and also if you can share how is the operating margin performance across different major business lines in the Q3? And what is your outlook in terms of profit margin for the group and for different segments? That'll be very helpful. Thank you. Jackson Ding: Timothy, thank you for the question. This is Jackson. Let me take this one. Let me maybe first address the key drivers of our operating margin performance this quarter. On a year over year basis, the improvement primarily reflects the volatility in our selling and marketing expenses, coupled with disciplined cost management across all business lines that continue to drive operating leverage. In this quarter, online marketing and branding expenses for our learning device business were lower compared to the same period last year. Our marketing expenditures naturally fluctuate as we dynamically adjust spending levels and marketing strategies based on market conditions, campaign performance, and strategic priorities. As we continue building our long term core competitiveness, we actively diversify our marketing approaches across different platforms. Brand related expenses also declined during this period. On a sequential basis, online marketing and branding expenses for learning device business also declined. In addition, for online enrichment learning programs, this quarter is not peak season for online customer acquisition, resulting in lower online marketing expenditure compared to Q2. We consider these adjustments a normal part of resource allocation as we balance short term needs with the long term objectives, and the resulting margin volatility aligns with our expectation.For these reasons, we would caution against using this quarter's margin performance as a benchmark for future periods. For learning device business, we reported adjusted operating loss this quarter. As we've emphasized, we prioritize establishing long term competitiveness over short term profitability for this emerging business. The breakeven time line remains uncertain. We are continuing to refine our offerings through new product development, content expansion, AI driven user experience enhancement, and ongoing optimization in operations and sales channels. Looking at our overall margin profile, it is important to note that we are managing a portfolio comprising both mature profitable businesses and newer initiatives still in the investment phase. This dynamic will result in quarterly margin fluctuations, making it inappropriate to extrapolate current results as indicative of future trends. Timothy, I hope that answers your question. Timothy Zhao: Sure. Thank you for the color. Operator: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Alex Peng: Thanks to everyone again for joining us today. As it is that time of the year, I also bid you an early happy Chinese New Year. And we'll talk to you next quarter. Thank you. Bye bye. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Tina: My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bankwell Financial Group, Inc. Fourth Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. To ask a question, simply press star 1 on your telephone keypad. To withdraw your question, it is now my pleasure to turn the call over to Courtney E. Sacchetti, Executive Vice President and Chief Financial Officer. You may begin. Thank you. Good morning, everyone. Welcome to Bankwell Financial Group, Inc.'s fourth quarter 2025 earnings conference call. Courtney E. Sacchetti: To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.mybankwell.com and go to the events and presentations tab for supporting materials. Our fourth quarter earnings release is also available on our website. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on Forms 8-K, 10-Q, and 10-Ks, for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. And now I'll turn the call over to Christopher R. Gruseke, Bankwell Financial Group, Inc.'s Chief Executive Officer. Thanks, Courtney. Christopher R. Gruseke: Welcome, and thank you to everyone for joining Bankwell Financial Group, Inc.'s quarterly earnings call. This morning, I'm joined by Courtney E. Sacchetti, our Chief Financial Officer, and Matthew J. McNeill, our President and Chief Banking Officer. Appreciate your interest in our performance and this opportunity to discuss our results with you. Our fourth quarter GAAP net income was $9.1 million or $1.15 per share, which includes a $1.5 million one-time adjustment to the income tax provision associated with various state tax filings and changes in estimated tax positions. This adjustment relates to both current and prior year tax estimates. Excluding this one-time adjustment, operating income for the quarter was $10.7 million or $1.36 per share on an operating basis. A reconciliation of GAAP operating results is included in our materials, and we encourage you to review both metrics together. Courtney will walk you through these results in more detail in a moment. Pre-provision net revenue return on average assets was 180 basis points for the quarter, an increase of 10 basis points from the prior quarter and a 75 basis point increase over 2024. This improvement reflects continued expansion of our net interest margin as well as strong growth in non-interest income, driven primarily by our SBA division. We also made further progress in reducing our asset balances during the quarter and maintain a constructive outlook on credit quality heading into 2026. While our net interest margin has continued to expand this quarter, as we've previously signaled, the pace of that expansion has moderated. This is a result of our intentional increased exposure to floating rate loans. We ended 2025 with floating rate loans comprising 38% of our total loan portfolio, compared to 23% at the end of 2024. On the funding side, we've taken advantage of the lower rate environment to issue $1.2 billion of time deposits this year and have also reduced rates on key non-maturity interest-bearing deposits. In addition, the mix of our deposits continues to improve. Average low-cost deposit balances increased by $22 million or 5% over the prior quarter and by $86 million or 21% versus 2024. As we note in our investor presentation, low-cost deposits include non-interest-bearing accounts plus NOW accounts with a deposit rate of 50 basis points or less. Loan production remained strong in the fourth quarter. We funded $240 million of new loans, bringing total funded originations for the year to $758 million. Net loan growth for the quarter was $122 million, and for the full year, we generated $134 million of net loan growth or 5% annual loan growth. With the end of the government shutdown and the reopening of the SBA in November, our SBA division was able to fully resume both originations and sales. As a result, gains on sale increased to $2.2 million for the quarter, bringing full-year realized gains to $5.1 million. SBA originations totaled $24 million in the fourth quarter, resulting in $68 million of total originations for the year. As SBA activity has normalized post-government shutdown, we anticipate this business will remain a meaningful and growing contributor to our diversified revenue base and overall profitability. Credit trends in the portfolio continue to improve. Nonperforming assets as a percentage of total assets fell to 49 basis points compared to 56 basis points last quarter. This improvement was driven by the sale of a $1.3 million OREO property and the collection of $400,000 on an SBA guarantee. Finally, our efficiency ratio improved to 50.8% this quarter compared with 51.4% in the prior quarter, underscoring the operating leverage created by faster revenue growth relative to expenses. I'll now turn it over to Courtney for a more detailed review of our financial results. Courtney E. Sacchetti: Thanks, Chris. We closed the year on a strong note, delivering fourth quarter GAAP net income of $9.1 million and a reported EPS of $1.15. Pre-provision net revenue for the quarter totaled $14.9 million or 180 basis points of average assets. Net interest income reached $26.9 million, while non-interest income increased to $3.4 million, driven by $2.2 million of SBA gain on sale income. Fourth quarter net loan growth of $122 million brought full-year loan growth to $134 million, representing 5% growth over year-end 2024. For the full year, we originated more than $900 million of loans, including approximately $68 million of SBA originations. Net interest margin expanded to 340 basis points, up six basis points from the prior quarter. The improvement was driven by a 15 basis point reduction in deposit costs, which declined to 3.15%. These funding benefits more than offset pressure on asset yields, which contracted 11 basis points in the quarter to 6.23% as certain rate-sensitive assets reset lower. Since late September, we responded to the Fed's 75 basis points of rate cuts by adjusting our deposit pricing. We lowered offered time deposit rates by 50 basis points, priced approximately $250 million of index deposits at a 100% beta, and reduced rates on roughly $700 million of non-maturity deposits by an average of 22 basis points. As a result, we exited 2025 with a total deposit cost of 3.08%. We expect $1.2 billion in time deposits to reprice favorably over the next twelve months, with an average rate reduction of 32 basis points. This repricing is anticipated to provide an annualized incremental benefit of roughly $4 million, about 12 basis points of net interest margin. These estimates do not incorporate the impact of any other future rate changes. Additional detail on our balance sheet repricing and rate-sensitive assets and liabilities can be found on Page 10 of our investor presentation. Non-interest income of $3.4 million, an increase of 35% versus the linked quarter, was largely driven by $2.2 million of SBA gain on sale income, representing an approximate $800,000 increase quarter over quarter. As shown on page 13 of our investor presentation, non-interest income now represents 11.4% of total revenue compared to 4.6% in 2024. Asset quality continued to improve during the quarter. We've reduced nonperforming assets by $1.9 million, bringing the NPA to assets ratio down to 49 basis points. We recorded modest net recoveries and a provision for credit losses of approximately $600,000. Our allowance for credit losses stands at 108 basis points of total loans, while coverage of nonperforming loans increased to 188%. Our financial position remains strong. Our balance sheet remains well-capitalized and liquid, with total assets of $3.4 billion, up 3.6% versus the linked quarter. The holding company and bank remain well-capitalized, with our estimated consolidated common equity Tier 1 ratio now at 10.2% and bank total capital ratio of 12.9%. Our tangible book value per share also increased, reaching $37.84, representing 11% growth over 2024. As previously noted, we recorded approximately $1.5 million of non-recurring income tax expense this quarter. This reflects an $855,000 expense related to a true-up of prior year's state tax estimates based on final return filing. It also includes a $692,000 P&L impact related to an addition to our FIN 48 reserve for uncertain tax positions driven by a change in estimate and the company's expanded state-level footprint. These adjustments represent a one-time true-up to certain current and prior period estimates. Our 27.4% effective tax rate for full-year 2025 reflects this one-time expense. On a go-forward basis, we would expect our effective tax rate to be approximately 25%. Finally, in addition to fourth quarter operating net income of $10.7 million or $1.36 per share, we delivered an operating return on average assets of 1.29%, versus our reported 1.11%, and an operating return on average tangible common equity of 14.32% versus our reported 12.31%. Now I'll turn the call back to Chris. Christopher R. Gruseke: Thank you, Courtney. 2025 was a year where our team demonstrated the ability to execute and make meaningful progress across every dimension of our strategy. We entered the year with a clear set of priorities: strengthen credit, improve the funding mix, build non-interest income, generate high-quality growth, and embrace an innovative mindset as we continue to invest in our people and in technology. I'm pleased to say that we delivered on each of these priorities. Nonperforming assets ended the year at 49 basis points of total assets. We've continued to improve the profile of our funding base, reducing our dependence on higher-cost sources and growing our relationship-driven lower-cost deposits. Our focus on building diversified recurring sources of revenue is bearing fruit with the successful growth of our SBA division. And despite a year of heightened prepayment, we ended 2025 with year-over-year loan growth of approximately 5%. Finally, we continue to invest in the people, technology, and capabilities that will carry us forward. We've strengthened our teams both in key client-facing and operational roles, and we're seeing the benefits of those investments. While making these investments, we've also increased scalability. We believe the work done throughout 2025 sets us up for even better results in the coming year and are providing the following guidance. For 2026, we expect loan growth of 4% to 5%. We anticipate net interest income in the range of $111 to $112 million. We also expect non-interest income to increase to approximately $11 million to $12 million. We estimate total non-interest expense of $64 million to $65 million, which incorporates a prudent level of ongoing investment in our people, infrastructure, and operational capabilities. Before we open the line for questions, I'd like to thank our entire team for their commitment and professionalism throughout the year. Their work has allowed Bankwell Financial Group, Inc. to finish 2025 in a position of strength to enter 2026 with confidence for an even better year ahead. Operator, we're ready for questions. Tina: At this time, I would like to remind everyone to ask a question. Simply press 1 on your telephone keypad. And our first question comes from the line of Feddie Justin Strickland with Hub Group. Please go ahead. Feddie Justin Strickland: Hey. Good morning. Just wanted to start on loan growth. Great to see you're expecting a pickup there in '26. Think it's a little bit above what I have previously modeled. Can you talk about the extent to which payoffs versus new originations drive the net new growth number? Christopher R. Gruseke: Yes, Feddie. This is Chris. It was pretty lumpy during the year, we were paying catch up as you know. And now we're primed for that sort of payoff. I'll let some more detail on that. Matthew J. McNeill: Exactly that, Feddie. You know, the volume of payoffs in '25, especially in the first part of '25, was somewhat unexpected. Change the way that we were thinking about our were able to catch up quarter. Now that we're you know, the new normal is anticipating that runoff back to be able balance sheet a little earlier in the year. Just, you know, build pipeline. To, you know, anticipate, you know, more volume. Christopher R. Gruseke: Yeah. Feddie, I'd just add to that. And not take away from the question time. I think what we've shown is that if there's a number we want to get to, we can get to it. It was a matter of priming the pump. And we can generate we have enough demand for loans that we can get to a number when we're ready for it. So within the constraints of capital, etcetera, obvious. Feddie Justin Strickland: Okay. Great. And I apologize if this is in your answer. It was a little choppy on my end, but just wanted to ask what the makeup in the loan pipeline was today as well. Are you looking for a segregation between, like, C&I and investor? Matthew J. McNeill: It's C&I heavy. Let's say it's sixty forty C&I. You know, we've steadily brought down investor created capital over the past, you know, several years. You know, we anticipate, you know, continuing to be strong C&I real estate originators in 2026. Feddie Justin Strickland: Got it. That's it for me. I'll step back in the queue. Thanks for taking my questions. Christopher R. Gruseke: Thanks, Feddie. Tina: Your next question comes from the line of David Joseph Konrad with KBW. Please go ahead. David Joseph Konrad: Yes, thanks. Good morning. A couple of quick questions. One, what do you expect the low-cost deposit growth to be this coming year? I don't think we've got a number on guidance. Christopher R. Gruseke: It's for that. We obviously expect steady improvement. We've hired people. We've got our own teams. We're making headway. So I don't think we're gonna guide you a number, but don't what we have for the what was our number for the year? Courtney E. Sacchetti: Well, if you look at, just looking to the right page, but page eight of our investor presentation, our average low-cost deposits grew 5% from last quarter, but 21% from the '24 on an average basis. So we were able to to put up a good growth on an average basis for the year over year. Mean, we certainly like to repeat that again. Christopher R. Gruseke: Right. But I but it it seems also very likely without pay the loan growth. Matthew J. McNeill: I'd say the loan growth I think the way we're looking at is loan growth is a function of deposit growth plus, you know, how capital ratios. So the you know? And then, of course, you know, with more deposit growth, we could pay down brokered. Courtney E. Sacchetti: Correct. I'll point out, David, that the 5% of low-cost deposit growth is on an average basis for the year. So it's very likely that this is a conservative growth number. David Joseph Konrad: Got it. Okay. And then on the fee income side, kind of with the SBA kind of dominating the number. Just wondered should we think about in the guide for the total year any seasonality of that quarter to quarter? How should we base that out? Christopher R. Gruseke: I think that we'll we'll see smooth production throughout the year, and we would unless there's a government shutdown. Courtney E. Sacchetti: Or a government shutdown. Yeah. David Joseph Konrad: Right. Right. Okay. Appreciate it. Tina: Our final question comes from the line of Stephen M. Moss with Raymond James. Please go ahead. Stephen M. Moss: Good morning. Maybe just following up on the SBA stuff. On the SBA stuff here, in terms of just what are your thoughts and I apologize if I missed this, for originations in SBA in 2026? Courtney E. Sacchetti: I think I think the way the math works out is to achieve our non-interest income number to it's about a 100 SBA. Stephen M. Moss: Okay. And we we No. Okay. We finished twenty '5 with 60 and that this was the real the the first full year of the SBA division. Functional. So we think hundreds vary. Courtney E. Sacchetti: I think 25,000,000 in final quarter. Right? Christopher R. Gruseke: Yeah. 20 yeah. Just under 25. So $5.20. Stephen M. Moss: 25,000,000, it was down a quarter of 2,025. Correct. Stephen M. Moss: Okay. Just wanted to to temperature check that, but appreciate that. And then in terms of the outlook here, just kind of curious what you expect to be the drivers on expense growth here in 'twenty six? Christopher R. Gruseke: The people and processes. I mean, we've definitely added, you know, across the bank, you know, in in client and non-client facing. As we said on the call, our headcount went up by more than 10% last year. From about a 145 to a 170. FTE in the expenses that you see that we've guided to. We have some further growth in that. And I just point out that, you know, we're aware that we that we put out a a larger expense number, but we want we want know, shareholders and you all to have you know, complete transparency as to what we're doing. But the number the guide on on revenue and, you know, income and and profitability has these numbers baked in. So, you know, our approach is not well, if you can if you build it, they will come. We're making these investments while we're putting up you know, operating ROA for the quarter is a 129 basis points in the guidance. We have out there probably gets you depending on what you use for allowance. You know? Somewhere north of one twenty. Yep. Next year. So, we're we're making the investments, but our our profitability is growing. Stephen M. Moss: Right. Okay. Appreciate that color there. And just in it's just what you we have a strong opinion that if you don't invest, stay current. You're out of business. So we wanna make sure that we're always ready for the future. Stephen M. Moss: Right. No. Definitely, definitely appreciate that dynamic. And and I guess the other thing in terms of just kinda loan pricing here, you know, curious you know, how are, you know, new origination coupons holding up these days? If there's been any spread compression just any color you can give on that front. Courtney E. Sacchetti: No no recent spread compression. You know, we generate a a reasonable amount of floating rate loans. As indices fall, the, you know, the origination coupon on a floating rate loan goes down and you know, we price our fixed rate primarily off of treasury. So as as those fall, you know, the coupons down, but the credit spread itself we we have seen people requesting and showing us offers at other other FIs with lower credit spreads, but we typically are able to to keep our due to loan demand, we're spreads in time. Stephen M. Moss: Okay. Great. I appreciate all the color here. Nice quarter. Thank you. Christopher R. Gruseke: Thanks, Steve. Tina: With no further questions in queue, this does conclude today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings. Welcome to the L3Harris Technologies Fourth Quarter 2025 Earnings Conference Call. At this time, participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this call is being recorded. It is now my pleasure to introduce your host, Tony Calderon, Vice President of Investor Relations and Corporate Development. Thank you. Tony, you may now begin. Tony Calderon: Thank you, Tiffany, and good morning, everyone. Joining me are Chris and Ken. Earlier this morning, we issued our fourth quarter earnings release outlining our results and our 2026 guidance, along with a presentation available on our website. Before we begin, please note that today's discussion will include forward-looking statements subject to risks, assumptions, and uncertainties that could cause actual results to differ materially. For more information, please refer to our earnings release and SEC filings. We will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the earnings release. With that, let me turn it over to Chris. Christopher E. Kubasik: Thanks, Tony, and good morning, everyone. We wrapped up 2025 by continuing to execute with speed and discipline, meeting our customer commitments, improving on-time delivery, and investing to increase production capacity while delivering strong fourth quarter and full-year results. We ended the year with a record order book and strong demand signals from our customers. All of this is positioning us for sustained growth going forward. We are equally focused on how we evolve our business. Over the past six years, we have aligned our portfolio to the fastest-growing defense priorities, with a vision of the future of warfare. As a result, we have acquired and divested billions of dollars of businesses, including our recently announced sale of a majority stake in our civil space propulsion and power business. 60% of this business is being sold to AE Industrial Partners. AE's multiple investments in space assets make them an effective steward to scale the business and unlock its value for our shareholders. This transaction enables us to sharpen our focus on our priorities for the Department of War and our allies. We have continued to improve our operational agility and market position. We reorganized our businesses from four segments to three in order to align technology and business models. And we announced our intention to pursue an initial public offering of our missile solutions business in 2026. The Department of War is the anchor investor, creating a $4 billion-plus revenue majority-owned public company with sustainable double-digit growth. This new company will deliver critical propulsion systems at unprecedented speed and scale, as well as other missile solutions such as air-launched effects, IR seekers, and weapon release systems. This is an example of the strategic partnerships we have pursued to drive business growth and address critical needs for our customers. We spent time in the Pentagon and listened to the DOW's needs to significantly expand missile production. And we responded by negotiating a novel partnership structure that benefits the warfighter, taxpayer, and our shareholders. We, along with our supply chain, will build production capacity faster than anyone in the industry to meet the demand signal. The US government is planning to make a financial investment in a new company critical to our national security. Their stake is solely economic. They want greater capacity quickly and a return on their investment. The strategy is straightforward. Construction began last year to expand capacity on large solid rocket motors and certain tactical rocket motor programs. The government invests now, allowing us to further increase capacity for critical interceptor programs such as THAAD, PAC-3, and standard missile. There is no waiting for contracts or acquisition funding. The investment gives us the confidence to build today while the long-term contracts are being negotiated and finalized. Capacity is now the most important capability. Our actions are deliberate. We are leading the industry to meet the needs of our customers. We are strengthening the industrial base, reinvigorating competition following decades of consolidation, and unlocking value for our shareholders. In our industry, the year unfolded against one of the most demanding defense and security environments in decades. It was complex, competitive, and rapidly evolving. Speed and execution mattered. Against that backdrop, our workforce delivered. So thanks to them for our best year ever. We met our commitments to warfighters, to customers who measure value in deliveries and not intentions, and to the DOW by strengthening the supply chain that underpins national security. Delivering on our commitments resulted in record orders, solid organic growth, expanding margins, and strong cash flow generation. Doing what we say we are going to do is fundamental to how we run the company. Our portfolio is directly aligned with the fastest-growing customer missions: space sensing, missile defense, resilient communications, aircraft ISR missionization, and kinetic effects. That alignment is deliberate and informs where we invest, how we come to market, and how we engage with customers. Our mission relevance is seen in our record order book and strong organic growth. We executed on our programs, stabilizing challenging space programs, clearing delinquent rocket motor deliveries dating back to the time of our acquisition, and realizing efficiencies through LHX NEXT. These outcomes reflect disciplined execution, technical credibility, and our ability to deliver at speed and scale in direct alignment with evolving customer requirements. Undoubtedly, what stood out the most in 2025 was the pace and urgency of customer demand. Threat environments evolved faster than recent history, and expectations shifted just as quickly. Customers require advanced capability at speed and scale. We have the competitive advantage in this environment as the agile trusted disruptor. We also deepened our role as a trusted international partner. We won key awards in Europe and Asia, leveraging a global supply base, and investing in local industry to scale capacity. We have localized production across the globe, enabling us to meet customer needs during production and during the long sustainment tail. These efforts reinforce our commitment to strengthening global security through interoperable solutions and partnerships. We secured awards that reflected the full breadth of our capabilities and our ability to consistently bring the right technologies to the table and translate them into customer-aligned solutions. These wins underscore customer confidence in our technical depth, disciplined execution, and our ability to deliver integrated mission-ready capabilities. All of this resulted in a record backlog and order book this year, with an overall book-to-bill of 1.3 and backlog in excess of $38 billion. Let me highlight a couple of our key wins this quarter. At the start of the fourth quarter, we secured a landmark $2.2 billion award from South Korea for next-generation airborne early warning mission business jets. Also during the quarter, we were awarded an international weather set satellite program for approximately $200 million and multiple international tactical communications and software-defined radio orders in the quarter totaling over $200 million. At the end of 2025, we strengthened our leadership in space-based missile defense with the award of an SDA contract valued at approximately $850 million to deliver 18 satellites for the tranche three tracking layer. Building on a proven track record as the only company awarded contracts across all four tranches, this milestone reinforces our alignment with national defense priorities and underscores our ability to deliver trusted, resilient, integrated spacecraft architectures. The continued technology maturation for this contract, as well as production synergies, positions us very well for the HBTSS award. And following the quarter, we were selected to deliver multi-aircraft special mission business jets for an international customer with a potential value of over $2 billion. An initial order of over $700 million will be booked in 2026. Our 2026 guidance exceeds our ambitious targets for revenue, margin, and free cash flow that we laid out at our last Investor Day in December 2023. Our record backlog and robust order outlook underpin our 2026 industry-leading 7% organic growth. We also exceeded our LHX NEXT $1 billion savings commitment one year ahead of the plan. Many doubted our ability to meet these targets. But today's guidance exceeds the 2026 financial framework and is a result of our relentless focus on leadership, talent, accountability, culture, operational excellence, and disciplined execution. Our 2026 guidance that Ken will take you through momentarily is the foundation for a new 2028 financial framework that we will announce at our upcoming Investor Day in February. With that, I'll turn it over to Ken. Kenneth L. Bedingfield: Thanks, and good morning, everyone. Turning to the financial results for 2025. Revenue was $21.9 billion, up 5% organically with growth in all four segments. Adjusted segment operating margin was 15.8%, up 40 basis points, reflecting continued cost efficiencies and strong program and product delivery. Non-GAAP EPS was $10.73, an increase of 11% over 2024. Adjusted free cash flow grew to $2.8 billion, representing an increase of greater than 20% driven by earnings growth, effective working capital management, and the benefit associated with favorable tax planning strategies and tax reform. For the fourth quarter, revenue was $5.6 billion, up 6% organically with a segment operating margin of 15.7%, up 40 bps. Non-GAAP EPS was $2.86, up 10% year over year. Turning to our segments results. For 2025, CS delivered revenue of $5.7 billion and margins of 25.2%, 4% growth and 50 bps of margin expansion. In the fourth quarter, CS delivered revenue of $1.5 billion, up 3% driven by increased international deliveries for software-defined resilient communications, as well as next-generation Jammer program ramp. Q4 operating margin increased to 24.9%, up 50 basis points. CS margin benefited from LHX NEXT. In 2025, IMS delivered revenue of $6.6 billion, 8% organic growth, and margin of 12.2%. In the fourth quarter, IMS revenue was $1.7 billion, up 11% organically due to ramping activity on classified ISR programs and our airborne early warning and control aircraft for The Republic Of Korea. Q4 operating margin was 11.1%, down 270 basis points with the reduction largely reflecting the CAS divestiture and unfavorable program performance in Maritime. For 2025, SAS delivered revenue of $6.9 billion and margin of 12.3%. For the fourth quarter, SAS revenue was $1.7 billion, up slightly primarily driven by increased FAA volume admission networks, partially offset by lower classified program volume in space, and Intel and cyber. The government shutdown delayed awards and limited additional revenue growth in the quarter and the year. Q4 operating margin increased to 13.7%, up 290 basis points reflecting stabilized performance on classified space programs and LHX NEXT benefits. For 2025, Aerojet Rocketdyne delivered 12% organic revenue growth, with revenue in excess of $2.8 billion and margin of 12.5%. For the fourth quarter, AR delivered another strong quarter with organic growth of 12%, marking its third consecutive quarter of double-digit growth. Performance was driven by higher production volumes across key missile and munitions programs and the continued ramp of new awards. Q4 operating margin expanded by 130 points to 11.8%, benefiting from higher volumes and LHX NEXT. Great results by each of the segments. Now I'd like to highlight key terms of the Department of War's planned investment. This is a $1 billion preferred security invested directly in the missile solutions business. The security converts at a 20% discount to the IPO price plus 3% detachable warrants priced at a premium. We are planning for an IPO in 2026 and the DOW is expected to hold a single-digit equity ownership stake. As a reminder, Missile Solutions will remain a consolidated segment in our financials following the planned public offering. This business will continue to be a part of LHX and will take advantage of our enterprise services and support structure. Turning to guidance for 2026. We expect revenue of $23 to $23.5 billion, representing organic growth of 7% at the midpoint. Segment operating margin is anticipated to be low 16%, supported by strong program execution and investments to drive continued transformation and cost structure efficiency. Free cash flow is expected to be $3 billion, driven by growth, higher profitability, and disciplined working capital management even as we increase our CapEx to approximately $600 million. We are transitioning our diluted EPS guidance from a non-GAAP to a GAAP basis now that we have completed the implementation portion of the LHX NEXT program. Our GAAP diluted EPS is expected to be in the range of $11.30 to $11.50. Solid growth even from our non-GAAP diluted EPS in 2025. Our guidance reflects appropriate risk early in the year and the dynamics associated with administration priorities. It includes a full year of space propulsion and power systems business, as we continue to work towards closing the transaction expected in the second half of the year. Consistent with prior practice, we will update as necessary upon the transaction closing. At the segment level, space and mission systems or SMS formed primarily from IMS and SAS, delivers critical multi-domain defense solutions in a traditional prime business model. SMS revenue is expected to be $11.5 billion driven by strength in ISR aircraft missionization and space solutions. Operating margin is expected to be in the mid-10% range. Communications and spectrum dominance or CSD brings our former CS segment together with our Westcam sensor business and other EW programs from across the company, to deliver primarily commercial products at commercial margins. CSD revenue is projected at approximately $8 billion driven by growth in EW programs and communication and airborne EOIR sensor products, with operating margin of about 25%. Missile solutions or MSL combines Aerojet with critical missile systems, including air launch effects, IR seekers, and other advanced technologies, creating a focused high-growth business underpinned by scaled capital investment. MSL revenue is anticipated to be approximately $4.4 billion with margins in the mid-12% range, supported by continued growth in solid rocket motor production. And for modeling purposes, this would convert to EBITDA of approximately $620 million. Our capital deployment strategy reflects our commitment to investing in the business while delivering value to our shareholders. Our approach to dividends is unchanged, and the number of shares outstanding is expected to be relatively consistent with year-end 2025. With that, I'll turn it back to Chris. Christopher E. Kubasik: Thanks, Ken. Our results and actions position us for the next phase of growth. We are more agile, and we're able to allocate capital dynamically, partner strategically, and adapt our portfolio as markets evolve. And we are strengthening our foundation for long-term performance. By transforming our company, evolving our operating system, and adopting AI. Most important, our actions ensure that we remain a trusted partner for our customers and continue to disrupt with a focus on long-term value creation for all stakeholders. Tiffany, let's go to Q&A. Operator: And please limit to one question per person. If you'd like to ask a question, please press 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press 1 if you'd like to remove your question from the queue. If you have an additional question, please press 1 again to get back in the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question today comes from the line of Kristine Liwag with Morgan Stanley. Please proceed with your question. Kristine Liwag: Hey. Good morning, everyone. Chris and Ken, thank you for the additional color you provided on the missile solutions business this morning. Considering the strong demand for this product, should we continue to see long-term agreements similar to what was announced on PAC-3 and THAAD, or is this satisfied by the IPO plans with the US government? And also a follow-up to that is you've called out double-digit growth for this business, but demand is very strong. In the next three to five years, and maybe too premature to think about it like that, but is this something that could grow three to five times larger? Christopher E. Kubasik: Thanks. Alright. Kristine, thank you for the question. Yeah. Look. Everything is tracking as we've been talking about. We were excited to hear this morning that Lockheed Martin reached an agreement on THAAD. As you know, we're the only provider of the propulsion and DAC systems for THAAD, and, obviously, we're going to be glad to support Lockheed Martin's and the end customer. So, absolutely, this is what all of the industry has been discussing with the DOW over the last half year or so, and we're starting to see these transactions take form. Once we get the several billion dollars and start with the facilitation building, in excess of 60 factories over a million square feet ordering the equipment, and our supply chain doing the same. I think there's a lot of upside and potential. As you would expect, we'll file form S-1 as part of the IPO process later this year. And it will provide a lot more information and details and highlight the potential upside. Yeah. I'll just add, Kristine. As Chris mentioned, we're absolutely excited about the framework agreements that have been signed between the Department of War and Lockheed on both PAC-3 and THAAD. We are working closely with our customer as well as the end user to make sure that we're very closely aligned. In particular, those customers that are working closely with the Department of War on the acceleration and the scaling and get the agreement signed. We've been investing and, again, closely to modernize production lines for THAAD and PAC-3. We'll continue to do that, and we'll take some of the lessons learned from that to scale across all of the munitions acceleration programs. And, as we look at this, I don't want to put a number out there on tripling, but we do think that this business as we combine missile solutions is one that can grow at a double-digit CAGR for some period to come. We've studied the market. We've studied the demand. We've had some outside parties come in and do an independent look just to make sure we're looking at it correctly, and we do see this business as able to grow double digits for the foreseeable future. Operator: Our next question comes from the line of Myles Walton with Wolfe Research. Please proceed with your question. Myles Walton: Great. Thanks. First one was on CapEx. It's obviously higher, 2.5% of the '26 sales or thereabouts. Is there a much bigger step up happening in the future to give a smaller step up than what I expected for the multibillion-dollar investment required in missile solutions? Kenneth L. Bedingfield: Yeah. Myles, I can take that one. Yeah. We're stepping up CapEx in 2026 to about two and a half percent of sales or $600 million. I think that's something like a 35 or 40% increase from 2025. As we do that, we're still holding to our 2026 free cash flow guidance of $3 billion. And, looking forward, I'm not going to put a number on 2027 CapEx at this point. But we're certainly thinking about it in terms of, as we capacitize to deliver, how will we be able to pull cash on some of these new production programs to be able to offset some of that CapEx that we're needing to invest upfront. We'll certainly be working with the entire supply base to make sure that we're going at this together. And, suffice it to say, I think that this is kind of a one-time capital investment to really and truly modernize how solid rocket motors are produced at speed, and at scale and at a rate that quite frankly, the customers haven't gotten to date out of the SRM supply base. And, there is a lot of demand and we're to help to fill that as quickly as possible to get that product into the hands of the warfighter. So we think there's a durable long-term benefit to this capital investment. But, again, we'll certainly be working to maximize cash inflows as we look at those CapEx requirements in 2027 and 2028. And I'll just add, Myles, as you know, we purchased Aerojet Rocketdyne two and a half years ago, and on day one, we started investing. So it's been well over a half billion dollars of CapEx spent at Aerojet over the past two and a half years. So when we made this acquisition, we knew it was a race. We started on day one. And we sure plan to win the race. Operator: Our next question comes from the line of Noah Poponak with Goldman Sachs. Please proceed with your question. Noah Poponak: Hey. Good morning, everybody. Kenneth L. Bedingfield: Good morning. Hey, Noah. Noah Poponak: Thanks. Ken, just a quick point of clarification. The comment you made about the expectation of the government or Pentagon stake in missile solutions is that it would be a single-digit percentage of the enterprise value of missile solutions. Just want to make sure that's what you meant. And then just as a second question, to your point on still doing the $3 billion with the higher CapEx, that implies your cash from ops is growing year over year quite a bit faster than your segment EBIT. If you could just break down the pieces of why that's happening. Kenneth L. Bedingfield: Sure. Yep. On the first question, yes. I did, in fact, mean a single-digit stake, single-digit ownership stake in the business. And on the second question, look, in terms of our cash from ops and our free cash flow, we're certainly laser-focused on ensuring that we deliver the cash out of the earnings that we generate. And, as we look at 2026, we're very comfortable that we can accommodate the additional CapEx requirements as we look, again, at investing in the business to support our customers and to drive the needed capacity increases in our products. And I should say that's really across the L3Harris portfolio. We focus often on solid rocket motors, but there are demands for a number of our products, as Chris mentioned in his comments. And, look, disciplined working capital management, certainly working in all aspects of the contractual deals with our customers as well as our suppliers to make sure that we can deliver the cash at $3 billion for 2026. Operator: Our next question comes from the line of John Godin with Citigroup. Please proceed with your question. John Godin: Hey, guys. Thanks for taking my question. There's obviously a lot of excitement around missile solutions. But we do get questions on RemainCo. And what the revenue outlook for RemainCo LHX RemainCo might look like over the next couple of years and points of leverage to what could be a very large defense budget on the horizon. I'm sure we're going to get more detail at the Investor Day, but I'd love to just kind of give you a chance to speak to what the revenue growth rate might look like, whether you envision it accelerating from here and what points of leverage remain in the business even when you IPO the sort of most exciting, fastest-growing part? Thanks. Christopher E. Kubasik: Hey, John. Thanks for the question, and I appreciate the focus on RemainCo because that's a big part of L3Harris, and as Ken said, and we've said over the last several weeks, we will continue to consolidate, own, and control MSL even after the IPO. So we're looking at solid mid-single-digit growth, a little faster, I think, than the rest of the industry and hopefully faster than the market in total. As I said in my prepared comments, I really like our portfolio. We spent a lot of time realigning this over the last five or six years. And I would look at our capabilities. I look at our capacity. We've talked about building new factories for space. You know, the SDA win is a big win for us. Four in a row. HPTS has come in. It's a lot of classified work. So when I look at what we have in space, what we have in the airborne domains, even maritime, maybe not as a prime, but supporting a lot of the new construction, I think we're well-positioned. You know, the accelerant will be, we need to see the 2027 defense budget, the PVR president's budget request has yet to be submitted to Congress. I think sometime in March is what people are saying. And if that's in fact $1.5 trillion, I'll be as excited as everybody else in the industry and it could even be further upside. 7% is the midpoint of a range. So I really like our portfolio. I love our backlog. And I think we're well-positioned. Kenneth L. Bedingfield: Yeah. I would just add, John, to that. If we do see a significantly increased defense budget in FY27, our expectation certainly is that, as we look at upside to growth, we would expect L3Harris to be able to deliver on that quicker given our agile nature and our ability to crank up production given some of the investments that we've made in the business. Whether that's in space satellites related to missile defense for America, whether that's in communications or even as we scale the solid rocket motors. Operator: Our next question comes from the line of Peter Arment with Baird. Please proceed with your question. Peter Arment: Yeah. Hey. Good morning, Chris and Ken. Nice results. Chris, regarding Golden Dome and the FDA, you've been very successful with all the FDA programs that you highlighted, and another great win in December. How do we think about the total opportunity? Or can you quantify what Golden Dome looks like for L3Harris when we think about that? Christopher E. Kubasik: Absolutely. Golden Dome was set up as part of an executive order probably about a year ago today. We've been tracking, as you have, all the progress under General Gute Line and setting them up as a DERPAM and the budget. A $155 billion of reconciliation money which contains $25 billion just for Golden Dome. When you look at the three pieces, there's a space-based interceptors, which I think will be the slowest to develop over time and probably began with development programs. We are taking a merchant supplier approach with space-based interceptor. We have some great technologies that everybody wants. I think part of our strategy in a portfolio allows us to prime sub or be a merchant supplier. So that's how we're going to play in that. You know, we talked about the actual satellite architecture. I think we're in a really good position as evidenced by what we've won to date, as you said, Peter. And we just need to wait for more awards and more RFPs. I think the government shutdown, as we said, probably set back Space Force forty-five days or so, but they did come out with an architecture. We have our capabilities and we'll be ready to respond quickly. Again, we've invested. We built the facilities, and we have state-of-the-art modern factories to crank out these satellites at the right time. And then everything else under Golden Dome, a lot of deals with the missile defense and the interceptors, which I think we've covered under the THAAD PAC-3 umbrella. We also have hypersonic capabilities and large solid rocket motors as well. So I believe we're in really good shape relative to each and every piece. And we have the capabilities. We can go fast, as Ken said, and we're just ready to get some awards and respond to some proposals. Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question. Sheila Kahyaoglu: Good morning, Chris and Ken. I wanted to ask another business question. You mentioned international tactical comms in your prepared remarks. How robust has that growth been in '25 and expectations over the next few years? How are you balancing the domestic side of tactical just thinking about the multiyear outlook there? Christopher E. Kubasik: Yeah. No. Thank you, Sheila. I'm glad you asked the question. We still think we have the best and only resilient comm capability as going to be critical to the future of warfare. On the international, you read a lot about it. We continued to win a lot of business in 2025. We think we're going to continue to win some business in '26. We're in discussions with a lot of countries around the world. And, you know, you have to balance all the political rhetoric with the needs. At the end of the day, these countries need resilient comms and they need interoperability. Our strategy has been and is actually increasing with more and more localization. We utilize partnerships. We're making investments in-country. We're transferring technology as appropriate. And we will have more international software-defined radios in 2026 than we will in 2025. So that's growing on that front. Domestically, you know, there's a lot being reviewed mainly by the army. I do like the fact that they're running experimentation. They're doing demos. And they're going to make the decision based on the capability. We continue to believe we have the best capabilities by far. Again, our radios are software-defined. So we've been investing and upgrading them with new capabilities. And, look, at the end of the day, the soldiers want to carry one radio, don't want to go backwards where people are carrying two or three or four radios. So the fact that we have the software-defined radios is a huge advantage for us. We've invested in the past. It's leveraged the commercial business model. We can scale, and we have a state-of-the-art factory in Upstate New York. So I'm optimistic about the future. Operator: Our next question comes from the line of Gautam Khanna with TD Cowen. Please proceed with your question. Gautam Khanna: Yep. Thank you, guys. Just following up on the last question. As we think about some of the things that did not get funded as well in the '26 request, things like armed Overwatch and some of the US military radios. I'm just curious, do you anticipate that we'll start to see some of that stuff get funded in the '27 request? Do you have any indication either way? And then just as a follow-up, obviously, the compare on margins, there were some asset gains in 2025. I'm just curious if you could talk about sort of what's driving the margin improvement in 2026. Thank you. Christopher E. Kubasik: Yes. Thanks. Thanks, Gautam. We don't actually have insight into the '27 budget as you would expect, but if it is in fact going to be a $1.5 trillion, you know, I got to believe that the needs for, like I've said, the space sensing, the resilient comms, kinetic effects, and such are in our sweet spot, and these will, in fact, be funded. Finding the budget as it relates to these HMS software radios. It's on a variety of different line items. Again, you know, we feel that our hardware is needed, that our capability in the network is needed. And we're willing and able to compete with any and all newcomers and incumbents to prove our capabilities. So I'm feeling pretty good about the potential there, but we need to see how this plays out over the next several months. Kenneth L. Bedingfield: And to the second part of the question, Gautam, I would say, as a part of our strategy and including LHX Next and how we do things differently and most efficiently, we've certainly been focused on investing in the business where we see future opportunities and growth. And as a part of that, where we see some product lines that are, I'll say, legacy or that we're not investing in that are less core to our strategy and our growth, we've focused on trying to monetize some of those for other folks who may see those as more attractive in terms of the longer-term sustainment tails or what aligns better with their business model. In terms of 2026 margin improvement, I largely see it falling onto our team to deliver on our programs and our product deliveries. Not projecting a lot of product line sales or gains relative to that in 2026. This is going to be about execution, product delivery, program delivery, and that's how we plan to get to that increased margin in '26. I think we've got confidence. You know, we're projecting to be, I think, positive EACs for 2025. And that puts us on a good trajectory for '26. I think we've gotten some program challenges understood and behind us, and we've stabilized a few programs that we had been, quite frankly, challenged with in parts of '24 and into '25. So feel good. I think we got the right team. And we can deliver on those commitments, largely by performing on the business, performing on our programs, getting the product delivered, and getting to our low 16% margin rate in 2026. Christopher E. Kubasik: Now I'll just clarify. In my comments, I talked about LHX NEXT finishing a year early. That was a top-down approach, as you know, for two years to take out significant over, you know, billions of dollars of cost to streamline the business. That is now part of our DNA. It's going to be embedded into our operations as part of our ongoing continuous improvement program. So the concepts and the philosophy of continuous improvement efficiency, cost savings will continue. It just won't be called out as a separate top-down initiative. It will be into the day-to-day operations of the business. So another potential tailwind to higher margins. Operator: Our next question comes from the line of Scott Mikus with Melius Research. Please proceed with your question. Scott Mikus: Morning, Chris and Ken. Bookings were very strong in the quarter and the year. But given the shutdown, a lot of the funding from last year was delayed, and the one big beautiful bill funding is yet to be put on contract. I'm just curious where do you expect book-to-bill to come in for the year, and could you maybe parse that out by the new segments? Christopher E. Kubasik: Yeah. I think you're right on the, you know, I think right now, we're waiting for, I think the Department of War has to provide a spend plan for the $155 billion reconciliation back to Congress, and then once that occurs, the money will be allocated and start to flow. You know, we did end the year at 1.3 book-to-bill. Generally, don't guide book-to-bill, but I would think it would be at least 1.1 or larger. But, again, we need to get the '26 appropriations passed. We got to see the '27 PBR, but we feel good about it, and we always plan to book more orders and revenue. We're going to grow 7% midpoint. We're going to grow orders double digits. Operator: Our next question comes from the line of Seth Seifman with JPMorgan. Please proceed with your question. Seth Seifman: Hey, thanks very much, and good morning, everyone. Maybe just a quick question and a clarification. I guess, from the question, the CSD business and kind of, you know, healthy margin there, 25%. How do you think about the sustainability of that margin going forward? Is that a segment where given the model, there's potential for margin expansion? Or is it at a place where, you know, that's about as healthy as things can get? Or are there various, you know, pressures out there from mix or anything else? And the clarification? Christopher E. Kubasik: The clarification. We talked earlier about the, you know, lower funding in the request for tactical radios. Do you, in fact, have a good sense of how everything shook out in appropriations for Tactical? Seth Seifman: Okay. Yeah. Let me take those. Yeah. On CSD, the nice thing now is we have a majority of our commercial businesses in the same segment, and I think that's what's unique about L3Harris. And I think Ken said it well. We have the traditional prime business models. We have the commercial business models, and then, of course, we have the high-growth top-line MSL. So yeah, we are constantly looking to improve our margins. I think with the commercial business model, with the volume and the efficiency, even the upcoming adoption and utilization of AI, there's always potential to increase on those particular opportunities. So I'm really optimistic about it. And there will be best practices shared within the commercial business model segment that has only been formed about four weeks ago. So there's absolutely upside in that regard. And, yeah, checking out on the 2026, like I said, there have been some reductions in some of the tactical radio line items. They are kind of peanut buttered throughout, so you have to piece them together. Some are competitive, which we plan to win, and we're still optimistic that we can grow our tactical radio business in 2026, and that is our plan. Kenneth L. Bedingfield: Yeah. I'll just add maybe just a couple of things, Seth. In terms of CSD and the 25% margin rate that we're forecasting for '26. I think we certainly feel good about that in terms of, look, it's a commercial model. We invest. We bring the product forward. And we will continue to invest in that business to continue to modernize our products and ensure that they meet the ever-changing demands of the warfighter. And, you know, as we make those commercial-type investments, you know, they certainly are or they do offset some of that margin as you think about that model. We certainly accommodate that within the 25%. Is there the opportunity to see some of that go up, as Chris mentioned, as we continue to modernize and continue to think about how we operate the business? Sure. But we'll also think about that as giving us the ability to continue to invest in the growth of that business. And I think that ties into, you know, a bit into your question on the radios. You know, we certainly continue to invest in modern waveforms, certainly into the software-defined radios themselves. And certainly into our relationships with partners around the globe that are able to procure US radios from L3Harris that are, again, resilient and operable. And able to enable us to have steady throughput in the factory even as we think about on the domestic side, reallocating some of our resources to support programs like NGC2, you know, from HMS Manpack and COTS and then filling in the production for our international partners who really want to get their hands on, again, those interoperable L3Harris radios. So it's been a good model for us. Operator: Our next question comes from the line of Douglas Harned with Bernstein. Please proceed with your question. Douglas Harned: Good morning. Thank you. You know, on space, I wanted to understand a little bit more about what your production plans are, the ramps in Palm Bay and Fort Wayne, and then how you think about it in the context of your broader space business. You mentioned, as we know, you've been on every one of the tranches for the tracking layer. But when you look at tranche three, there are three of your peers also on there. So I'm trying to understand how you see the tracking layer evolving over time from a competitive and industrial participation standpoint and how that ties in with your thinking about production ramps in your new facilities. Christopher E. Kubasik: Okay. Good morning, Doug. Thanks for the question. Yeah. There were 72 tracking satellites awarded. I think in our meetings with the customers over the last year or so, the number one focus is speed, followed closely by scale. So we've made the investments over 200,000 square feet, as you said, in Fort Wayne, Indiana, and in Palm Bay. We have the capacity to quickly turn these satellites and meet the schedules and commitments that we've made to. The supply chain is always critical in the satellite manufacturing business. I used to think with all this ramp, that seems to be the challenge. You know, that the entire industry is facing and getting the second and third-tier suppliers the scale and the ability to perform and meet their commitments. So we envision increased revenue in both of those factories as we start to fill them up. Looking forward to getting HPTSS for however many satellites that turns out to be. And there's a lot of work going on, Doug, in the classified arena. So Golden Dome is starting to fill in. And like I said, we've made the investments. We have the capacity. And I think the DOW is going to look for companies that have the capacity. They don't have time to wait for people to build buildings and go from one or two demos to 18 or 36 a year. So I think the strategy has worked. And, again, being a little further ahead several years back, we're perfectly positioned for this growth. Operator: Our next question comes from the line of Robert Stallard with Vertical Research. Please proceed with your question. Robert Stallard: Josh, good morning. Christopher E. Kubasik: Morning. Hey, Rob. Robert Stallard: Chris and Ken, you laid out some pretty interesting growth opportunities ahead. But I suppose all of this is dependent on your supply chain and your personnel. So how do you feel about the capacity of the suppliers and your internal staffing to deal with this trajectory that's ahead of us? Christopher E. Kubasik: Alright. I'll take it for a shot. Good to hear you. Personnel has not been an issue. You know, I think we're one of the hottest companies in the industry for people to work for. We have a very active recruiting both on campus and experienced hires. So no issue filling the workforce. We are spending a lot of time with almost half our employees being engineers. Engineers, you know, how do we enable the engineers AI-enabled to be more efficient, get more productivity, without necessarily having to add a significant amount of people. We're using more and more robotics in our factories, including in the missile segment as well. On the supply chain, I think they have now seen the demand signals where historically, there were sole providers to the entire industry. I think we're seeing two and three different suppliers out there. There's a ton of private equity money looking for things to do. And every time we meet with them, we tell them to start a second, third-tier supplier for the defense industry. The world needs a lot more there. So I think it's healthier than it used to be. It got through COVID. They're investing now that they see the demand signal. And I think, as a country, we're close to being able to hit on all cylinders. But as always, they have to be able to hire. They have to be able to invest and perform, and I think this administration is doing a good job setting us all up for success. Kenneth L. Bedingfield: Yeah. Thanks, Chris. And maybe I'll just comment a little bit further on supply chain at MSL. Just given the rapid growth that we are projecting there. And I'll just say, we've significantly matured our approach to supply chain, our supply chain organization, and the relationships with our suppliers where we really are thinking about our suppliers as partners on this path that we see of growth and getting the additional capacity to our customers. And less about a vendor or a transactional type relationship. So we're working very closely with all of the key suppliers. I would say, in that particular business, we're certainly one of their, if not their largest customers, certainly for these types of products. We certainly intend to keep it that way with the growth that we project. And, as Chris mentioned, in helping our customer get the missiles they need into the hands of the warfighter. And for us, solid rocket motors into the hands of our customers, we are essentially in a race both to get those in the hands of the warfighter as well as stay ahead of the competition. And we do intend to win that race, and working very closely with our supply chain is a key part of that strategy. Christopher E. Kubasik: Tiffany, we'll now take the last question. Operator: Our final question comes from the line of Michael Ciarmoli with Truist Securities. Please proceed with your question. Michael Ciarmoli: Hey, morning, guys. Nice results. Thanks for taking the question. Chris, just Chris or Ken, a little bit more detail on maybe unwinding Aerojet and MSL now. You'll have the majority stake. In the past, you've talked about having all the capabilities or the majority of capabilities under one roof to compete as a prime. Is this still going to be the case? Or is MSL going to be a 100% merchant supplier model? And if so, were there any stipulations or conditions mandated by the DOW to that end? Christopher E. Kubasik: Thanks, Mike. There were no stipulations from DOW with regards to that question. They want competition. They want scale. They want speed, and that's what we plan to focus on. Yeah. It's interesting. I think this when you look at this $4 billion-plus entity, a lot of the focus is on solid rocket motors. But we did talk about seekers. We've been investing hundreds of millions of dollars in developing seekers. Have weapon release. So it's kind of a one-stop shop relative to missiles. But really as a supplier, you know, there generally are a lot fewer new start missile programs as a prime. But if that's something we choose to do, we have the ability to do it. My honest assessment is we have so much work, so much growth, you know, we try to focus on what we do well and how we can grow the top line, the bottom line, and generate cash. And we're not going to spend a lot of time getting distracted or chasing shiny objects. So we have more than enough work. I'm excited about the sixty-plus buildings, the equipment, the robotics, the increase in the workforce. But we'll see what they need, and if we can support the customer, we always look to see in what role is best. Sometimes it's merchant suppliers. Sometimes a prime, sometimes it's a sub. But nothing out there in the near term to focus on in that regard. So I appreciate the last question. In closing, 2025 was our best year ever. We reinforced the durability and alignment of our portfolio, the strength of our and the discipline of our strategy. We took deliberate actions at the beginning of this year to evolve and position ourselves for the future as we build on the momentum from 2025. We enter the next phase as the industry's most focused, agile, and resilient company, confident in our ability to drive sustainable growth, deliver strong results, and to continue to create long-term value for our customers, shareholders, and employees. I want to thank you all for joining today's call. We look forward to seeing you on February 25 at our 2026 Investor Day in New York City. Till then, stay safe and warm. Operator: Thank you.
Operator: Good morning and thank you for standing by. Welcome to International Paper's Fourth Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, you will have an opportunity to ask one question. As a reminder, due to time constraints, we ask that you limit it to one and one question only. Press one. To withdraw your question, press 1 again. It is now my pleasure to turn the call over to Mandi Gilliland, Senior Director of Investor Relations. Ma'am? The floor is yours. Mandi Gilliland: Good morning and good afternoon, and thank you for joining International Paper's Fourth Quarter 2025 Earnings Call. Our speakers this morning are Andrew K. Silvernail, Chairman and Chief Executive Officer, Lance T. Loeffler, Senior Vice President and Chief Financial Officer, and Tim Nichols, Executive Vice President and President of DS Smith. There is important information at the beginning of our presentation, including certain legal disclaimers. For example, during the call, we will make forward-looking statements that are subject to risks and uncertainties. These and other factors that could cause or contribute to actual results differing materially from such forward-looking statements can be found in our press releases and reports filed with the US Securities and Exchange Commission. We will also present certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures is available on our website. Our website also contains copies of the fourth quarter earnings press release and today's presentation slides. Beginning on Slide three, before we jump into the presentation, I want to provide clarity on what will be discussed on the call today. We will begin by walking through the separation announcement for the EMEA packaging business. Then we will discuss our 2025 full-year and fourth quarter results followed by our outlook for Packaging Solutions North America and Packaging Solutions EMEA. We will close out the call with Q&A. So now let me turn the call over to Andrew K. Silvernail, who will start on slide four. Andrew K. Silvernail: Thanks, Mandi. Good morning, good afternoon, everybody. Thank you for joining us to discuss the next steps in our transformation journey. Today, I'm excited to announce our plan to create two publicly traded scaled regional packaging solution leaders in North America and EMEA. I recognize that this action is understandably a surprise to most of you. But during this call, I'll walk you through why this is the right step to accelerate value creation for both businesses. My objective today is to answer a few critical questions: What, why, and why now? We look forward to helping you understand how this swift decisive action is a continuation of our 8020 focused strategy and an accelerant toward our ambitions and supports our ultimate objective, which, as always, is to maximize long-term value for our shareholders. But first, turning to Slide five. I want to anchor you in our core strategy and how we operationalize it through our 8020 performance system. While our portfolio is changing, the core strategic principles and the operating model are not. 8020 is the driver for our transformation. The lens we use to determine where to play and how to win, and it guides us on how we operate each day. The four elements of 8020 are simplify, segment, resource, and grow, and they ensure that resources are focused on the highest value areas across geographies, customers, and products. The 8020 methodology is also how we drive sustainable value creation through our virtuous cycle as we build an advantaged cost position and a high relative supply position all delivered for a world-class customer experience. I'm now on slide six. The acquisition of DS Smith strengthened our regional footprint and positions both businesses in North America and EMEA to advance our virtuous cycle. Through the application of 8020, we have made significant progress on building an enhanced cost position. Executing $710 million of cost-out actions through 2025 on a full run rate basis. Which includes synergy benefits, that'll be realized in 2026 and 2027. This was achieved through actions such as optimizing our footprint in North America, streamlining and reducing structural organizational layers in EMEA, and exiting lower margin segments. The combination also advanced our competitive positioning. Our voice of the customer surveys show that we have achieved the highest customer satisfaction among direct competitors in North America and leading scores on customer experience relative to the other top players in EMEA. The improved positioning and bolstered operational capabilities will provide ongoing benefits for each independent region going forward. Moving to slide seven. So why separate and why now? The combination of IP and DS Smith enabled important steps forward in terms of cost and relative supply positions, and enabled superior customer experience as demonstrated by a high and increasing in-region Net Promoter Scores. Since the combination, our teams have made tremendous progress rapidly integrating the businesses within each region implementing our 8020 roadmap. I'm proud of how our teams have embraced the challenge. And because of these efforts, it has become clear that each business is at a positive inflection point. By acting now, we can more fully enable the full potential of each business. Taking this action will allow both businesses to accelerate progress toward maximizing long-term profitable growth through greater speed, agility, and differentiation as well as enhanced focus on their different regions and targeted investment approaches. Creating independent companies will further enable the businesses to win in distinctive competitive markets through focused leadership, tailored commercial strategies, independent balance sheets, and flexible capital allocation aligned to attractive, but different in-region opportunities. The separation will also give each business the ability to customize their messaging for regional customers without diluting the message for a global audience which is a very small portion of the customer opportunity. I'm now on slide eight. Overall, we are playing in the two most attractive global profit pools, significant and increasing demand. After the combination of IP and DS Smith, the regional integration of the legacy positions of both businesses each of the regional businesses is better equipped to compete and win in their respective geographies. However, there are key structural differences in the competitive and commercial landscapes that will require tailored commercial and capital allocation strategies going forward. North America is more integrated, and resilient in terms of supply positions and buyers, has a high degree of supply integration and steady demand growth. EMEA, has more localized dynamics at the country level and relatively higher demand growth. Customers in EMEA value different product and supplier traits as well with greater emphasis on sustainability. Consequently, it's important that each business unit tailor its strategy to best meet the distinct customer expectations in their markets. Creating two separate businesses will enable each region to accelerate its path to long-term profitable growth. I'm now on slide nine. I want to address what is changing and what is not. As we discussed, our 8020 methodology starts with simplify. Which we have been working toward over the past year deemphasizing or exiting select businesses, markets, and functions and then redirecting our resources to a sharper focus and higher value. The action we are discussing today is the next step in the 8020 performance system. Segmenting the business to further optimize resource allocation and enable long-term profitable growth. While these actions separate the businesses from one entity into two discrete highly focused companies. Both businesses will continue to emphasize the powerful operating discipline of 8020 and our three strategic pillars. Our 8020 approach with a clear focus on cost optimization and operating efficiency strategy execution, customer centricity will remain core to both businesses. The independent scale businesses will benefit from true alignment to the characteristics of their distinct customers and regions. Local leadership, and optimized capital allocation strategies without regional trade-offs. Most importantly, both companies will continue to be customer-driven organizations focused on delivering exceptional customer service with attention to detail around on-time delivery, quality, and engagement. Turning to slide 10. Let me provide an overview of what the post-separation International Paper will look like. IP will be the leading, scale sustainable packaging solutions provider in North America, relentlessly focused on customers with an advantaged cost position and leading innovation capabilities. The business will be comprised of the current Packaging Solutions North America, including both legacy IP and DS Smith assets. As you can see from the pro forma results on the slide, the business that will become stand-alone IP had full-year '25 net sales of more than $15 billion approximately $2.3 billion of adjusted EBITDA that is poised to accelerate rapidly over the next twenty-four months. The sharper regional focus will enable IP to further accelerate value creation for our shareholders. We have already made significant progress executing our transformation strategy, and expect the benefits to flow through adjusted EBITDA over the coming year. We'll provide more detail about that in the earnings portion of the presentation. Additionally, we expect that the acceleration of our transformation to result in expanded margins growing free cash flow, which will support disciplined investments in organic and inorganic growth opportunities. We have a robust plan in place to continue delivering our strategic ambitions, you can see on Slide 11. This is a continuation of our 8020 approach in our virtuous cycle. We will continue to assess our mill and plant footprint and transform day-to-day operations. Deliver differentiated customer service, and develop and deploy local commercial strategies. These actions will enable strategic reinvestment in the business to accelerate organic growth drive productivity, support disciplined bolt-on acquisitions. This will all be supported by a strong investment-grade balance sheet and capital structure that supports an attractive dividend. Our ultimate goal will continue to be to provide customers with the best possible solutions and create value for our shareholders as a preeminent packaging company in North America. I'll now turn the call over to Tim to talk about the post-separation EMEA packaging business. Tim Nichols: Thanks, Andy. I'm on slide 12. I'm excited to talk to you about the post-separation EMEA packaging business. Which will continue to be a leading provider of innovative, sustainable packaging solutions across Europe. The new independent company will be defined by its strong customer relationships, high-performance operations, and best-in-class innovative solutions that help our customers meet their sustainability goals. The business will be comprised of IP's current packaging solutions EMEA business including the combination of legacy DS Smith and IP assets. As you can see from the pro forma results on the slide, the business will become the standalone EMEA business at full-year 2025 net sales of approximately $8.5 billion and approximately $800 million of adjusted EBITDA. Over the past year, we have created and begun to implement an 8020 road map. Based on the proven 8020 performance system. We are still at an early stage of the transfer to optimize our footprint structurally reduce cost, and extend our innovation leadership but we expect to begin seeing the benefits of these actions in 2026. The separation will enable us to accelerate this progress enhancing the new company's ability to make both organic and inorganic investments into our business to further improve our cost position and enhance customer experience and relative supply position. You can see the priorities for the post-separation EMEA packaging business on slide 13. A key area of focus is to continue using our 8020 approach to complete the integration of legacy acquisitions made by DS Smith prior to the combination with IP. Transforming our footprint and aligning resources to drive value. We will remain laser-focused on our customer-centric mindset rigorously aligning our resources and investments with the needs of our key customers. As we execute our strategy and 8020 road map, we'll be focused on delivering organic growth and structural cost reductions. In order to expand margins and drive strong cash flow and returns. We expect the post-separation EMEA packaging business to have a strong investment-grade balance sheet and a dividend policy that is supported by strong operational profit and high return organic and inorganic investments. Our goal is to meet our customers' needs with the best possible packaging and to create value for our shareholders by delivering operating performance at the top of our peer group. Our transformation will continue in 2026 and we believe that by the time the separation is complete, we will be making significant progress against our financial targets and toward more definitive market leadership in sustainable packaging solutions. I'll now turn the call over to Lance. Who will go over the details of the transaction. Lance T. Loeffler: Thanks, Tim. Moving to slide 14, let me walk you through some of the specifics of the separation. First, we expect the transaction to be structured as a spin-off of the EMEA packaging business to shareholders. With International Paper retaining a meaningful ownership stake in the new company. Second, whether the transaction will be tax-free to US shareholders will depend on the ultimate terms of the transaction. The percentage of ownership retained, and other factors. Third, we expect the separation to be completed within the next twelve to fifteen months. Subject to satisfaction of certain customary conditions and regulatory approvals. With plans for the company to be listed on both the London and New York Stock Exchanges. As part of the management plan, Andy, Tom Hammack, and I will continue in our respective roles at International Paper. Following the separation, Tim will serve as the CEO of the publicly traded EMEA packaging business. As many of you know, Tim previously served as CFO of International Paper has been leading the EMEA packaging business during the past year. Overseeing EMEA's 8020 implementation and strategic transformation. The International Paperboard has confidence that he is the right person to continue leading EMEA's transformation. Also, David Robby is expected to be appointed as chairman of the board. David has a wealth of experience having served on the former DS Smith board as senior independent director until joining the International Paperboard in 2025. In order to position the EMEA packaging business for success, following the separation, we plan to invest approximately $400 million in EMEA, throughout the course of 2026 to fund the ongoing transformation of the business and 8020 implementation. As mentioned earlier, we intend to create strong investment-grade balance sheets for both businesses and we'll continue to provide updates and additional information on our progress as the details of the separation materialize. I'll now turn the call over to Andy to discuss our full-year results and fourth-quarter performance. Andrew K. Silvernail: Shifting now to our full-year and quarterly earnings update on Page 15. In North America, we made significant progress on implementing our 8020 plan, executing our strategy this year, achieving approximately 37% year-over-year adjusted EBITDA growth in 2025. And we expect our volume growth to outpace the underlying market by three to four percentage points in the fourth quarter. Which is well ahead of where we thought we'd be earlier last year. Throughout the year, continue to advance our cost improvement strategy. Delivering approximately $510 million of run rate cost benefits. The ongoing transformation resulted in approximately $110 million related to footprint optimization in 2025 and we expect to have similar amounts in 2026. We'll share more detail on these dynamics for North America in a moment. In EMEA, moving decisively on a transformation of the packaging business. We have actioned 20 site closures impacting approximately 1,400 roles with another seven sites and 700 roles in work council discussions. We have a clear road map for applying our commercial and structural cost levers and expect to see the benefits of our cost and commercial actions accelerate through 2026. Turning to our enterprise results for full-year 2025. Which reflect the steadfast commitment of the entire IP team to execute our transformation plan continue to deliver best-in-class customer experience, and create value for shareholders. We continue to drive strong growth from integration and 8020 in the year significant transformation. We expanded adjusted EBITDA margin by two thirty basis points. Our adjusted EBIT and EPS were impacted by $958 million accelerated depreciation our footprint optimization and higher levels of depreciation and amortization related to the DS Smith acquisition. As anticipated, our investment in the transformation resulted in negative free cash flow of $159 million As a reminder, I would note that the enterprise earnings numbers have been restated to exclude GCF and we are pleased that we closed the transaction at the end of last week. Now I'll turn it over to Lance to take you through the drivers of North America performance including what drove the year-over-year improvements and what to expect in 2026. Thanks, Andy. I'm on slide 17. I'd like to begin by reiterating the progress and momentum we've built in North America. in a challenging environment. Our teams delivered meaningful improvement across the business And the results reinforce our strategy is working. Notably, we have gained commercial momentum through focused service and reliability efforts increasing on-time delivery percentage to the upper nineties, which has allowed us to win the trust of both new and existing customers. Also, our investments in our commercial team adding new sales reps and upskilling the existing team, has supported customer excellence across our national and local accounts. Evidenced by our above-market volume growth the 2025 as well as strong price realization. We continue to optimize our box footprint while rolling out our lighthouse model to shift decision-making and strategy closer to our customers. We've now installed this in 85% of our box plant system. Our mill investments are paying off. And we're beginning to see reliability improvements as we've expanded our lighthouse learnings to all our mills this year. The combination of our 37% year-over-year EBITDA improvement and 340 basis point margin expansion gives us confidence in our road map and our ability to achieve results in North America. Moving to slide 18. As a reminder, we are using adjusted EBITDA for our bridges as a better comparative metric during the company's transformation. Now let me walk you through the sequential variance for the fourth quarter. Volume was $87 million unfavorable largely in line with our expectations. Due to an almost $60 million impact as a result of exiting the nonstrategic export business. As well as the impact of three fewer shipping days in the quarter. Which was partially offset by continued momentum in onboarding our strategic customer wins. Operations and costs were $3 million favorable. The cost-out benefit from the mill closures was offset by the timing of spending across the business. Including transitory costs as we optimize our network in line with our new footprint, as well as higher seasonal labor costs. Maintenance and outages were $41 million unfavorable as we continue to invest in the reliability and quality of our mill system. And input costs were $24 million favorable for the quarter primarily due to minimizing the impact from the natural gas curtailment at our Valiant mill early in the quarter. Which has now been resolved. All of this leads to an adjusted EBITDA for North of $560 million for the 2025. Turning to Slide 19. And looking ahead to 2026, our EBITDA growth will be primarily driven by approximately $100 million of commercial benefits as well as $500 million of cost benefits. Key drivers to this include strategic customer wins in the commercial front. As well as cost-out benefits across footprint optimization, productivity, supply chain, sourcing, and overhead. Those benefits will be offset by approximately $200 million of nonrecurring transformation costs related to our ongoing investments in reliability and capacity. Primarily driven by the Riverdale mill conversion in the 2026. These investments are critical to support our profitable growth ambitions and bolster our lightweight capabilities to meet customer demand. This year, we also expect inflation to rise by approximately $200 million we continue to optimize our sourcing and procurement to minimize the impacts. The takeaway here is that we remain confident in our trajectory to deliver on our 2026 targets of 2.5 to $2.6 billion with the assumption that the industry growth is flat to up 1% and we outperform the industry by approximately 2%. Our 2026 target does not include the impact of any future pricing realization. As we do not forecast price until it publishes. However, would expect to see an incremental adjusted EBITDA impact approximately $90 million for every $10 per ton price move on an annualized basis. Now moving to slide 20. We wanted to provide additional visibility into how we anticipate this year playing out with our planned transformation investments. There are a few factors driving the shape of 2026 that we wanted to be very clear about. In the first half of the year, we expect to see typical seasonality and one fewer shipping day. However, the main driver of our anticipated year-over-year decline comes from our planned investments in reliability, capacity, and capabilities. This manifests itself in higher maintenance outages and costs related to our Riverdale mill conversion. Altogether, these represent approximately 165,000,000 of nonrecurring timing impacts that will unwind in the second half. Normalized for these one-time impacts, we remain on a strong growth trajectory with approximately ten percent first-half year-over-year EBITDA growth. In the second half, we expect our performance to materially accelerate driven largely by non-repeating items from the first half and realizing the additional momentum from our 2025 transformation activities. To add some more color on the sequential jump, approximately $200 million will come from returning to a normalized outage schedule, approximately $80 million associated with Riverdale non-repeating items and margin benefits, and a $75 million benefit from second-half volume seasonality. The remaining $200 million in our plan will be achieved through commercial and operational productivity actions as a part of our 8020 transformation. The main drivers here are from continued footprint optimization, mill and box productivity improvements from rolling out the lighthouse model, as well as supply chain efficiencies procurement initiatives, and the winding down of ongoing mill costs. on executing against this plan Our team remains laser-focused and we have high confidence in our ability to deliver. Moving to the first quarter Packaging Solutions North America outlook on Slide 21. Price and mix are expected to improve by $51 million primarily due to seasonal mix improvement following a heavy e-commerce fourth quarter as well as favorable mix related to our smaller but more strategic export customers. We believe volume to be unfavorable by $68 million The sequential seasonal decrease as well as the exit of nonstrategic markets more than offset the increased volume from our strategic wins and one additional shipping day. All in, our first quarter 2026 outlook for North America is approximately $534 million of adjusted EBITDA. One more note before we move on. The first quarter outlook I just shared does not include any impact from the winter storm that moved across The United States Southeast this past week. We are currently assessing the impact And at this point, we're estimating that the total impact could be in the range of 20 to $25 million for the first quarter. That wraps up our review of North America performance and outlook. And with that, let's move on to EMEA. Turning to packaging solutions EMEA. Slide 22. We delivered a solid fourth quarter with sequential EBITDA growth of $19 million The improvement was primarily driven by favorable pricing on key inputs, including fiber, and natural gas, along with benefits for some of our early 8020 cost actions. From a demand standpoint, the market remains soft but broadly stable. With continued pressure on board pricing. Overall, while we are still in the early stage of our transformation in EMEA, we are starting to see the benefits of our strategy materialize and are very confident of the path ahead. Now on slide 23 looking at a full year 2026, our adjusted EBITDA growth in EMEA will be driven by $200 million of commercial benefits. Primarily driven by above-industry growth with continued momentum of flow through already captured from 2025 growth with our strategic customers. In addition, we expect approximately $200 million of cost-out benefits. Primarily driven by footprint and headcount optimization. As well as cost improvements across procurement, distribution, and our mill and box systems. We expect these benefits to be offset by approximately a $100 million of inflation impact. Overall, we continue to build momentum on our transformation, and we'll continue to act decisively to optimize our footprint and operations while strategically investing in reliability and quality to best serve our EMEA customer base. Moving to slide 24, I want to take a moment to share additional detail on recent actions we've taken to improve our cost position and focus resources on the most attractive markets. In 2025, week action closures across 20 sites, reducing headcount by more than 1,400 positions. While we are engaged in ongoing consultation on our additional seven sites more than 700 roles. We expect this to deliver run rate cost savings of more than $160 million At the same time, it's important to recognize these actions affect people and their families. We do not make these decisions lightly, and I want to thank the employees across these facilities and offices for their professionalism, dedication, and contributions to the company. Turning to slide 25. And our outlook for the first quarter. We expect EBITDA to be roughly in line with the fourth quarter. We anticipate price and volume tailwinds of approximately $33 million driven by favorable mix and continued benefits from our strategic wins in 2025. Ops and costs are higher by $42 million primarily driven by the timing of energy subsidies typically received in the second half of the year as well as costs related to accounting policy changes. We continue to build momentum with our strategic actions while managing through ongoing market volatility and focusing on those things that we can control as we execute our plan. Now let me turn it back over to Andy, who will close it out with some key takeaways from today. Andrew K. Silvernail: Thank you, Lance. Turning to slide 26 and our full-year 2026 targets. We are confident in our trajectory. Our plan for the coming year, and our ability to execute against our targets for 2026. We're projecting enterprise net sales of 24.1 to $24.9 billion with adjusted EBITDA of 3.5 to $3.7 billion and free cash flow of $300 million to $500 million As for the first quarter, including corporate, we're guiding to $740 million to $760 million of adjusted EBITDA. Importantly, as Lance mentioned earlier, our guidance does not include the impact of price actions. The enhanced positioning and greater efficiency that we've realized through our strategic actions and 8020 implementation have us well-positioned for 2026. And we expect that we will begin to see that flow through in the coming year. We discussed today, we are taking swift and decisive action to create long-term value for our shareholders. The combination of IP and DS Smith created two regional powerhouses that are leading providers of sustainable packaging solutions with significant scale and strong customer relationships. Our 8020 actions over the past year have reduced complexity in each region. And the next step to continue the transformation is to segment the businesses so they can realize their full potential. Separating the businesses will provide each with the ability to best align capital and resources to distinct regional opportunities. Market environments, and customer needs. Each business will have the necessary ingredients, including strong investment-grade balance sheets, to execute its 8020 plan the virtuous strategic cycle in the most effective way possible. We believe this is the most certain path to deliver our 2027 target of $5 billion of EBITDA and enables each business to achieve best-in-class performance and best-in-class valuation as we create long-term value for our shareholders. At this time, let's open up the line to questions. Operator: Thank you. If you would like to ask a question, simply press 1 on your telephone keypad. To withdraw your question, press 1 again. Our first question is going to come from the line of George Staphos with Bank of America. Please go ahead. George Staphos: Hi, everyone. Good morning. Thanks for the details. My question in your free cash flow guidance of $300 to $500 million, can you give us some of the other important assumptions that are in there I don't believe price is in there, but if you could confirm that, related is are you out with a price letter to customers And then more most importantly, terms of the question, if you wanna just take this $305,100,000,000 dollars doesn't cover your dividend, Andy, with the spin, might you consider reviewing a dividend policy over time? Thank you. Andrew K. Silvernail: Thanks, George, and good morning. First, yes, we are out with a price letter. We have done that earlier this week. And so that will play itself out in the normal course of business. As you noted, no. There is no inclusion of price in the numbers that we have provided today into the guidance that we have provided to the incremental price to come through. And as Lance said in there, each $10 price that sticks is worth about $90 million of price realization into the market. So that I think that covers that question there. Lance T. Loeffler: Yep. George, the second part of your question? George Staphos: Just the dividend. The dividend, a billion, and the free cash flow, $305,100. Lance T. Loeffler: Might the spin be an opportunity to review the policy? And how do you feel about it? Thank you. Andrew K. Silvernail: Yeah. Sure. So, you know, we've said all along that covering the dividend was about 3.6 to $3.7 billion of EBITDA is the breakeven. Obviously, in 2026, we have substantial restructuring costs that are going in and some one-time costs that don't fit into the restructuring line. So you've got a combination of those things. We are maintaining our dividend policy as it is through 2026. And, of course, you know, through any process like this, you're gonna review that work in conjunction with shareholders to, you know, make sure we get to the right place on a dividend post spin. And we'll evaluate that throughout the year in conversation with shareholders. George Staphos: Thank you so much. Operator: And our next question is going to come from the line of Mark Weintraub with Seaport Research Partners. Please go ahead. Mark Weintraub: Thank you. I have a couple of real straight good good morning. A few really straightforward quest one is so some of the slides it's says, like, at the segment level, it's doesn't exclude that it excluding corporate. And then on the final slide, it it doesn't sort of say anything about that. So just one clarification. How should we be thinking about corporate relative to the the various numbers you're putting out there, the 3.5, 3,700,000,000.0. Is that included in talk? Lance T. Loeffler: Yeah. So the guide that Andy gave on a total company basis, seven forty to seven sixty includes the impact of corporate. If you take what we gave you on the region slides, and the difference between that should cover the corporate line item. Mark Weintraub: Yep. Same thing for the for the year, Mark. Andrew K. Silvernail: Okay. And it with the spin, is there any meaningful change to what you expect corporate costs would go to? Lance T. Loeffler: Well, they would go to their independent regions but in terms of it being an overall increase, no. They would not be. Mark Weintraub: Okay. Very good. And then second, any specific reason why and and maybe this is normal course of both normal course, but why twelve to fifteen months to complete this process? Seems like a long time. To me, but maybe I'm just wrong. Andrew K. Silvernail: Yeah. I'd I'll touch on that. You know, there's the you got the mechanics, frankly, of accounting. Right? There's just it's a it's a heavy lift from an accounting perspective. What we don't have here is is kind of, you know, large legal entity issues or things like that. And, obviously, we're gonna move to do it as quickly as possible, Mark. But the best guidance that we've been given and and the precedence are usually somewhere in that twelve to fifteen month time frame. Lance, anything you'd to that? Lance T. Loeffler: Yeah. No. I would say I would echo Andy's comments. I think, you know, this is this is a little different than if you look back at the Silvamo exercise we went through several years ago that had a lot more operational tethering that we had to to unwind, to get that to where it needed to be. This is this is largely an accounting exercise that we're gonna start off you know, today in in in real haste to to try to get this thing done. By the end of the year. But right now, we're contemplating twelve to fifteen months. Mark Weintraub: And and one last one, hopefully not an unfair one, but so you've you've got this big step up in the second half of next year, particularly in in North America, and and you you lay it out very clearly. It does include that, you know, a a big cost takeout acceleration, that 200,000,000. And if we look back you had a great first quarter. Relative to expectations, etcetera. And then then the last three quarters, though, you you've fallen shy. Yep. On ops and costs. And so may maybe talk a little bit about why you have a lot of confidence that, you know, you get back on track and you can deliver a really big number 2026. Andrew K. Silvernail: Yeah. A few things in there, Mark. So first and foremost, that the vast majority of what we're talking about are things that have been actioned. And the tail here are the cost of finalizing that. So as an example, closures and the lingering cost of finalizing those closures, those those tails start to fall off as we get through this year. That's a big one. Second, we've got more actions. They're not the large scale actions that we've seen so far. But we're starting to get much more into the nitty gritty around things like supply chain and procurement Distribution. Rolling out the lighthouse models throughout the mill system. And the productivity investments that we're ramping up going into that. And so a lot of intensity that happened last year and certainly throughout this year. Gonna continue to drive those. So those benefits start to accumulate more and more as time goes on. You know, through there. So you know, the key to it is it's literally the costs have gotta be counted you know, down to the penny in terms of facilities, impacted people, which is always unfortunate. But a tough reality and a transformation And that's the level of granularity we're operating at. And that's both in North America And you saw for the first time today that we were able to now that we've gotten past a bunch of the consultation periods, to lay out the granularity in Europe. And you could see the magnitude of what we're doing in Europe. That we will accelerate throughout the year. So this is extremely granular. You know, look, I'm also realistic. There's a lot of moving parts. There's no doubt about it, but we are executing quite well. Mark Weintraub: Thanks so much. Andrew K. Silvernail: Thank you, Mark. Operator: Your next question comes from the line of Charlie Muir Sands with BNP Paribas. Please go ahead. Charlie Muir Sands: Yeah. Thanks very much, guys. Good morning. Andrew K. Silvernail: Hey, Charlie. Charlie Muir Sands: Hey. Just firstly, if I could just ask on volumes. You're late to your break, you don't share second half of the year in North America. Seems likely a bit around the industry data yet. You just talk about the relative possibility you're seeing on those new ways versus the old the business you lost. And also, I think you could suggest you do something similar in the EMEA. I wonder if you could share any kind of like for like course of pro forma volume performance you've achieved in that region? Thanks. Andrew K. Silvernail: Charlie, I apologize. You're you were pretty muffled on that call, so I'm gonna do my best where I think I heard the question which is really around the the the volume wins and the quality of profitability. Around those volume wins, if I understand it right. Charlie Muir Sands: Yes. Andrew K. Silvernail: Correct. They're they're very good. As you recall, back a couple of years ago, we really started to to reset our discipline around assuring that we were pricing to market and we've obviously kept that discipline. And if you look at the volume wins we've had in North America, they have been absolutely at those quality levels that we've been talking about. And so I feel really good about the business that we're winning and coming on. You know, again, we won substantial market share here in North America in the back half of the year. You know, we were we were three or four points above market. We'll find out where the market actually settled, you know, later on here, but we feel very confident given the the other results that we've seen that we have one quality market share. And you can see the expanding margins at the same time. In Europe, right, the market has been softer in Europe. And just like in The US, you have to play where the market is. We have been really disciplined about making sure that we are bringing value to the market, and we're not chasing bad business. That's very important in a softer market, and we have not been doing that. And, again, you can count it by meters or you can count it by tons. We can see where those winds have have come in and then how they'll be layered into into the year. So we feel good about the wins that we have. We feel good about the commercial momentum in both regions. Particularly in North America where we won substantial market share. And our work is to keep that momentum continuing. Operator: Your next question comes from the line of Philip Ng with Jefferies. Please go ahead. Philip Ng: Hey, guys. Thanks for all the great Bye bye. Thanks for all the great call. A lot to unpack. I guess, kinda kick things off, the 2026 guidance, Lance, last quarter, you guys gave us a nice slide deck calling out 600,000,000 upsell pulp and commercial efforts. Certainly, there's feels like there's some movement, but, you know, the guide itself, does it account for any incremental cost actions that has yet to be announced? So or is that kinda accounted for? Second, I think on the commercial front, certainly better in North America and Europe, and I correct me if I'm wrong, Lance. The North America piece accounts for the exports. Kinda commingled it. So where are you seeing some some of the wins on the commercial side, whether it's North America, and Europe? I mean, Europe, I'm particularly curious just given I thought the commercial side of things were quite good, but it was more on the cost out. So help us kinda tease through, some of those, dynamics. Lance T. Loeffler: Yeah. So I'll start with the I'll start with the cost out. Side. Yeah. So what we described, I think, infamously was, like, slide 15 on the on the deck on the third quarter call where we talk about a lot of the the momentum that we had in carrying over things that had already been announced in 2025 and what that impact would be. I think that the $500,000,000 you were characterizing. We are gonna continue to optimize in North America around our 8020 transformation. So it's a incremental $200,000,000 of of cost benefit that should be accruing to us as we continue to to execute that plan as we look to to '20 in the '26 and in the 2027. On the commercial side, we're really pleased with the amount of progress that we've made about know, we're we're ahead of schedule, I think, as Annie mentioned, in terms of North America and our exit this year in the fourth quarter, And we thought we'd be at market. We're clearly ahead of that. And we're excited about onboarding some very important customers that allow us to to achieve those to achieve those metrics. And, we're excited about the wins that we've got in Europe. You know, we expect to outperform You know, we believe the market next year will be up 1.7% I believe, next year. And or excuse me, in 2026. And we believe we'll outperform by about 50 basis points ahead of that. So we're excited about the momentum that we've got in that market as well. Philip Ng: Got it. So just so if I heard you correctly, Lance, the upside on cost out, the 200,000,000, that's incremental cost actions you haven't taken in the in the '26 that you still need to execute, Lance T. Loeffler: Yeah. We'll be we'll be executing Yeah. So, Phil, those will be those are that that amount and those actions are stuff that was not announced or actioned in 2025 that we will continue in terms of our momentum into 2026. Philip Ng: Okay. And and the other piece I wanna tease out, perhaps for you, Andy, Mark kinda teased it out already. Last year, a nice beat in the first first quarter in the Q2 to Q4 was a little uneven. Just wanna get give us some comfort that the framework you've laid out accounts for any hiccups along the way just because it's it's a choppy environment. So, like, how you kinda laid out the framework where is this conservative, or are you baking, like, a lot of stuff kinda has to kinda stick to landing just because you got a lot of moving pieces. Andrew K. Silvernail: Yeah. I I think the range that we've given provides a pretty decent margin in there in terms of the $740,000,000 to $760,000,000 in the quarter. And the $3.05 to $3.07 in the year. You know, in terms of kind of I'll just call them, you know, good guys, bad guys, you know, how do you think about that over the year? You know, on the on the the good guy side, the year has started strong. And I will certainly say that January was strong. Obviously, the ice storm, that's gonna be on the bad guys. Side to see kind of what that impact is gonna be. You know, it's a super thumb thumbnail sketch of 20 to 25,000,000. It's just hard to know. Right? You you could you could make that up. But, certainly, you know, mill shutdowns certainly some of the areas that were hit hard in terms of box the bauxite will come back, you know, fast. But you got some mill impact. That we'll we'll see how that plays out. Because that's a pretty modest bad guy. That's out there. Again, you know, the the January has has started strong. We've seen that in our daily numbers. We'd expect that to even off throughout the year. And, again, we said we thought the North America market would be flat to up one. We'll take a couple of points of market share in there. In terms of other good guys, right, we have we don't have anything in here for price. You know, and and we don't normally do that. We don't normally guide that. And and so we've kept to that practice. But depending upon what happens with pricing, that's a pretty substantial, good guide that's not in any of our numbers here. Know, the the real, you know, big bad guy is is potentially out there. We don't know with what we face last year was was the global economy. And, you know, again, right now, things have started well. But, you know, that's hard to predict throughout there. So I feel good about where we are. I think that they're given the pricing, there's more upside than downside. You know, in terms of opportunity. And so we feel like we played it down the middle. Philip Ng: Okay. Appreciate the color, Andy. Thank you so much. Andrew K. Silvernail: You bet. Thank you. Operator: Our next question comes from the line of Michael Roxland with Truist Securities. Please go ahead. Michael Roxland: Yeah. Thank you, Andy, Lance, Mandi, and team. For taking my questions. Some calls in North America appear to be more sticky like, like, no reliability, etcetera. I mean, your volume's up for 2% in 4Q, better than you expected, yet EBITDA missed. Wondering if you can speak to cost in North America, which ones are more problematic, stickier, how you intend to tackle them, and was the cost structure in North America part of calculus in terms of deciding to spin out Europe? And what I'm what I'm trying to get is if you have to deal with the cost structure a little bit more challenging than you expected, it's it's harder to tackle that plus having a European arm as well. So, any any call you could provide would be helpful. Thank you. Andrew K. Silvernail: Yeah. So on the cost side, look. I'm really happy with what we've done. We've taken out over $700 million in total cost when you look at the execution on that. So I'm very happy with the progress that we've made. On that. The things that are harder to get at that, there's really two. Right? One is the speed at which you take things down and all of those costs go away. Right? So as you close a mill, there tend to be lingering costs during the shutdown and ultimately into the final closure and then potentially the sale or disposal of of the property. Those tend to linger a little bit. And then on the reliability front, it's as we have described, which is you've gotta get in there, and you've gotta make the investments consistently over a period of time to drive the reliability and not have things pop up that can be very expensive in any given period. I mean, you know, a singular mill struggling can be a $100 million hit in a year easily. If a mill is really struggling. And so we are putting aggressively investing back into our mill system in North America. And that's if you look at the expanded CapEx, if you look at the onetime accelerated transformation costs, even the lighthouse roll Those are all things that we are doing, to drive that reliability. Absolutely showing up for the customers. They're feeling that positive reliability, and it's showing up in their customer satisfaction numbers. It's showing up in our cost numbers. But it is. That's a slug fest. And you gotta stick with it. And the team is doing an excellent job. On the European side, you know, look. You know, what Tim and team are doing in Europe is pretty exceptional. They are tackling structural costs in a way that's very unusual in the European marketplace. And you can see from the magnitude of what was on that one slide that we're getting after it. And so we're getting after it fast, and we'll continue to do that throughout 2026. Michael Roxland: Got it. Just one quick follow-up. I mean, so it sounds like you know, with respect to Europe, the costs are the harder to get at and taking a little bit longer. So was that part of what was factored into your what was that what you consider in terms of the spin? Was that a huge factor in terms of your consideration for spinning Europe? Because then when I get back to your investment Andrew K. Silvernail: No. Not at all. The real driver for this decision is the fact that the value is really in the regions. When you get right down to it, and you look at where value is created, the acquisition and the combination, what it did was it created two regional powerhouses. That really have very, very, very little overlap. I'm talking almost zero overlap in terms of how those businesses are structured in the market, how those businesses go to market, with customers, and how you execute all the way from inputs, fibers, all the way through the market They're really distinctive markets. And so, you know, using 8020 as the lens and as the mindset wanna simplify. Right? You wanna take the complexity out. You wanna focus on where the value is in the discrete markets. And then you wanna get capital and people aligned and focused to those best opportunities. And that's really the driver there. The exciting opportunity in Europe is even with the headwinds that the business had. All of last year, with a combination of the war in Ukraine and trade tensions and the softness in the market, is the business performed well relative to the marketplace and is getting after the changes in a way that's really distinctive to that marketplace. And this business coming out as a stand-alone business is gonna have a great balance sheet, It's gonna have great positioning in the market, you know, top of its class in terms of customer satisfaction, and the ability to direct and align people and capital to that unique mission. And that's really what this is all about. So I'm super excited for what team and the Tim and the team have lined up. And as an independent company, I believe it's gonna thrive Having that focus and that that aligned capital allocation. And the same thing in The US. And this really allows us for each to realize its unique mission and really drive incredible value. Michael Roxland: Got it. Thank you very much. Operator: Your next question comes from the line of Anojja with UBS. Please go ahead. Anojja: Good morning. How are doing? Andrew K. Silvernail: Morning. Anojja: I just wanted a quick clarification. So, clearly, the price increase is not built into commercial initiatives in North America. I get that. Read you loud and clear. But in EMEA, the commercial initiative bucket is now 200,000,000 in contribution I think in Q3, it was a 100,000,000. So what happened there? And can you confirm that if price goes down in Europe, that whether that's already in that bucket or not? Andrew K. Silvernail: Yeah. So specific to yes, you're correct on North America First. There is nothing in there in terms of price. In EMEA, same thing. It's only things that have been executed and we have line of sight too. So you have the underlying assumption of market growth. In there, which, as Lance said, was was 1.7%. And then you got a half a point, which are wins that we know that we have today. And so we do not have incremental price that has not been that has not settled into the market built into there. So there's no price. Now that being said, as I mentioned in my remarks, just as there's a $70 price increase in North America that's been put out the marketplace by us to our customers. In Europe, there have been a lot of activity, and there's about a €100 paper price increase that's gone out in most markets. And what we don't know is whether, you know, kind of what's gonna stick. It's a more dynamic market. In The US, on an annualized basis, if you got every penny of that, a little over $600,000,000, about $630,000,000. And in Europe, you got every penny of that, it would be about 300,000,000. Incrementally from what we're talking about today. But in neither case, do we have those built into the numbers? Anojja: Perfect. That's very helpful. I'll turn it over. Thank you. Operator: You bet. Your next question comes from the line of Detlef Winklemann with JPMorgan. Please go ahead. Detlef Winklemann: Morning, guys. Just if I can ask two. Maybe the first one, regarding your commercial improvements year on year that you've guided for now, it looks like about $100,000,000 in North America. If I go back to third quarter, it was sitting at about 300. Based on your bridge that you gave. Just wondering if anything has changed and why the delta Lance T. Loeffler: Yeah. I don't know. I have to go back and look. I nothing rings a bell. I mean, I think nothing has really changed other than the the relationship that we've described. I think that extra 100,000,000 is incremental. To where we were in the third quarter. But, you know, we do have some commercial trade offs that we've talked a lot about in North America about leaving the export business and the closure around Savannah. Andrew K. Silvernail: Yeah. That that might be part of what you're looking at there. Is is that that that 100,000,000 if we're talking about North America, right, that is netted against the trade offs with the export business that we have exited. Detlef Winklemann: Do we have to get you that list? I wanna make sure we have Yeah. Yeah. I think so. It was kind of a net zero right in the beginning now to net a 100,000,000 if I if I we'll correct you understand. And if I can ask one more follow-up. I mean, right in the beginning on your Investor Day, you were very helpful in giving an EMEA and a North America split all the way to 2027. Now I know, you know, partway through the year, you said demand is a bit worse, pricing came down a bit from your initial expectations. So I think you were talking about maybe Europe coming down a bit from that initial guide of, call it, dollars 1,800,000,000.0 to 2,000,000,000 I'm wondering given the context of your $5,000,000,000 guide now, what Europe plays a part of in that if you can share. Any color would be great. Yeah. We haven't broken out specifically, but generally, you're talking about kinda three five in North America. Andrew K. Silvernail: And one five in in Europe. Detlef Winklemann: Okay. Perfect. Very much. Operator: Our last question today is going to come from the line of Matthew McKellar with RBC Capital Markets. Please go ahead. Matthew McKellar: Good morning. Thanks for taking my question. Just following up on questions from Charlie and Phil, apologies if I missed it. But is the 2% outperformance versus the North American industry or expect in 2026 based solely on those customer wins you've seen so far, mostly in the back half of 2025? Or have you assumed further wins and share gains as the year progresses as part of that outperformance assumption And I guess with that, could there be upside to that number as the year progresses given improved service quality and customer experience metrics you've highlighted? Thanks. Andrew K. Silvernail: Yes. So those are that's a great question. Those are based on what we have line of sight to today, so business that we have won. So we don't need major incremental wins, in, in this year to move the needle. And to be fair, the what will move a needle in a short period are gonna be local wins. Right? The national business tends to be more on a contract cycle And and so know, we know what we won in 2025. It's now showing up at 2026. That's what we're communicating here. And then you'll have the local piece of business, which is much more day to day, much less contractual in there. So if we were to win incremental business, you know, throughout the year, obviously, that would be an upside. Matthew McKellar: Thanks very much. I'll turn it back. Andrew K. Silvernail: Great. Thanks. Operator: You. I'll now turn the call over to Andrew K. Silvernail for closing comments. Andrew K. Silvernail: Well, thank you very much. I appreciate everybody joining us today. This is an important and a very exciting day for International Paper. The decision to split into two public companies, to build two powerhouses that we have put together from the legacy pieces of international paper and the legacy pieces of DS Smith. Now have two regions that are that are number one in their regions have an exciting strategy in terms of cost position, how we're working with customers, how we're building our relative share position, and ultimately, the financial upside that we see here. All of the hard work that's been put in the focus on 8020, making really tough choices around assets and reinvesting back into the business aggressively, to drive the customer service experience that we're seeing today winning share, aggressively taking cost at cost out, and maximizing return on invested capital. When I look at that, I see two businesses that will stand on their own with great balance sheets, with the ability to invest in their future, with the ability to make dynamic capital allocation decisions to maximize maximize value for shareholders. I'm very excited about that future, and I applaud the team for all the incredible work that they've done. I thank our shareholders for for your interest in the business and what this can become. I'm incredibly excited about the future. Again, the year has started strong. We've seen a nice pickup in business here. And, and we're excited for the year to come and, in the years to come. So thank you very much. Take care. Operator: Once again, we'd like to thank you for participating. International Paper's fourth quarter 2026 earnings call. You may now disconnect.
Operator: Good morning. Thank you for joining The Sherwin-Williams Company's review of fourth quarter and full year 2025 results and our outlook for the first quarter and full year of 2026. With us on today's call are Heidi Petz, chair, president, and chief executive officer; Ben Meisenzoll, chief financial officer; Paul Lang, chief accounting officer; and Jim Jaye, senior vice president, investor relations and communications. This conference call is being webcast simultaneously in listen-only mode by Newswire via the Internet at www.sherwin.com. An archived replay of this website will be available at www.sherwin.com beginning approximately two hours after this conference call concludes. This conference call will include certain forward-looking statements as defined by U.S. Federal securities laws with respect to sales, earnings, and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement whether it is a result of new information, future events, or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open the session to questions. I will now turn the call over to Jim Jaye. Thank you, and good morning to everyone. Jim Jaye: Sherwin-Williams ended the year with strong fourth quarter results, driven by solid core performance and inclusive of the first full quarter of the Suvenil acquisition. Consolidated sales in the fourth quarter increased by a mid-single-digit percentage, inclusive of a low single-digit contribution from Suvenil. Reported gross margin was flattish year over year but expanded excluding the dilutive impact of the Suvenil acquisition. SG&A as a percent of sales decreased year over year, including severance and other restructuring expenses and Suvenil, reflecting our disciplined ongoing cost control measures. Adjusted diluted net income per share in the quarter increased by 6.7%. Adjusted EBITDA in the quarter grew 13.4% and expanded 120 basis points to 17.7% as a percent of sales. Free cash flow conversion in the quarter was 90.1%. In terms of our segments in the fourth quarter, Paint Stores Group sales increased in the range we expected, led by high single-digit growth in protective and marine, against a high single-digit comp. Residential repaint remains solid, and growth was just slightly below the mid-single-digit range, also against a high single-digit comp. Group sales included positive low single-digit price mix partially offset by a low single-digit decrease in volume. Segment margin expanded 90 basis points to 20.8%. Consumer Brands Group sales exceeded our expectations. Sales from the Suvenil acquisition and positive low single-digit FX were partially offset by price mix and volume, both of which were down less than a percentage point. Sales in the underlying business, excluding Suvenil, were essentially flat, which was better than we expected and drove the top-line beat. Adjusted segment margin decreased, including a negative impact from Suvenil and related transaction closing costs and purchase accounting items. Adjusted segment margin increased excluding these impacts. Within Performance Coatings Group, sales were at the high end of expectations, led by strength in packaging and auto refinish. Adjusted segment margin improved 150 basis points to 19%, driven by new business wins, as well as good control of SG&A, which was down mid-single digits. We also continued our strong cost control efforts within the administrative segment, where SG&A was down a low single-digit percentage in the quarter, including one-time restructuring costs of approximately $2 million. Excluding these restructuring costs and the non-annualized new building operating costs, administrative SG&A was down by a low teens percentage, improving on third-quarter results that were down low double digits, demonstrating our continued tight management of G&A costs. The slide deck accompanying our press release this morning provides more detail on fourth-quarter segment results. Let me now turn it over to Heidi, who will provide a few full-year highlights before moving on to our 2026 outlook and your questions. Heidi Petz: Thank you, Jim, and good morning. I want to start by thanking our 65,000 global employees for their dedication and determination to deliver a solid year during one of the more challenging operating environments our company has seen. Sherwin-Williams celebrates 160 years in 2026, and it's because of our employees and our culture that we're able to deliver sustainable results through all types of cycles. Our team continues to execute our playbook while finding new ways to help our customers become more productive and more profitable. I'm proud of what our team accomplished in 2025. At this time last year, we talked about the potential for a softer for longer demand environment, and that is exactly what we saw play out, as there was no meaningful improvement in demand across our end markets. Our team refused to wait for the market and instead focused on creating opportunities and controlling what we could control. We stayed true to our strategy, made targeted investments, focused on share gains, and executed on our enterprise priorities. We continued to deliver innovative solutions for our customers, and in a disruptive competitive environment, Sherwin-Williams stood out by being a consistent, reliable, and dependable partner. Our success by design approach resulted in our team delivering record full-year consolidated sales and record adjusted diluted earnings per share. Gross profit dollars and gross margin expanded. Adjusted EBITDA dollars and adjusted EBITDA margin also expanded. It was also another very strong year for cash generation, with net operating cash growing 9.4% to $3.5 billion or 14.6% of sales. This percent of sales is right in the middle of the most recent target range that we've previously announced. Free cash flow was $2.7 billion, and free cash flow conversion for the year was 59%. In terms of capital allocation, our policy remains consistent. We returned $2.5 billion to shareholders through share repurchases and our dividend, which we raised for the 47th consecutive year. We completed the acquisition of Suvenil, and we continue to make strategic CapEx investments, including our new global headquarters and global technology center, which opened at the end of the year. We've been talking about these buildings for years, and we are thrilled that we are here. The move-in is going extremely well, and I'm confident that this will continue to strengthen our culture of collaboration, innovation, and winning together. All in, we ended 2025 with a strong balance sheet and a net debt to adjusted EBITDA ratio of 2.3 times. Looking at our reportable segments on a full-year basis, Paint Stores grew sales by a low single-digit percentage. Protective and marine increased by high single digits. Residential repaint increased by mid-single digits and, for the third year in a row, meaningfully outperformed the market where existing home sales remained soft. Low single-digit growth in commercial reflects share gains and above-market performance, as multifamily completions were down significantly during the year. Share gains are also evident in property maintenance and new residential, both of which were flattish in a down market characterized by muted CapEx spending, high rates, and affordability challenges. Segment margin increased, reflecting operating leverage and solid returns on our investments. We also added 80 net new stores and 87 net new sales territories. Consumer Brands' full-year sales grew by a low single-digit percentage, driven by the Suvenil acquisition, as underlying sales decreased by low single digits, resulting from soft DIY demand in North America and unfavorable FX. Adjusted segment margin decreased, including a negative impact from Suvenil, as we previously described, as well as lower production in the segment's manufacturing operations to match softer demand, resulting in lower fixed cost absorption. Performance Coatings' full-year sales varied by division and geography and were flat overall, which outpaced a very challenging industrial demand backdrop. Acquisitions added a low single-digit percentage in the year, and FX was a slight tailwind, but these were offset by unfavorable price mix. Packaging grew at the high end of high single digits as we continued to win new business globally, including those complying with new non-BPA coding requirements. Auto refinish was flat for the year, with share gains becoming more evident in the second half, where sales were up mid-single digits. Coil sales decreased by low single digits, as meaningful new account wins were not enough to offset steel tariff impacts. Industrial wood and general industrial each decreased by low single digits, driven by soft housing and industrial markets, respectively. Adjusted segment margin remained in our high teens target range but was impacted by unfavorable geographic mix, as Europe grew by mid-single digits while other regions were down low single digits. As we close out 2025, I'm also pleased to share that we are reinstating our 401(k) matching program for eligible US employees effective February 1. We'll also be restoring the matching contributions that have been paused since October 1 by the end of our first quarter. As I described last quarter, the decision to pause the company match was made after we had implemented multiple cost savings initiatives and significant restructuring actions, driven by multiyear demand and macroeconomic uncertainty. Given what we anticipated back in July, and with the prospect of additional risks materializing, we faced a difficult decision: either pursue further workforce reduction or temporarily pause the 401(k) company match. While many companies chose widespread layoffs, we chose a different path. We chose to protect jobs, retain talent, and invest in the long-term health of the organization by keeping our teams intact. We also committed to restoring the match as soon as performance allowed, just as we have done in the past. Our teams responded exactly as strong teams do. We elevated our performance and focused on controlling what we could control, including winning new business, growing share of wallet, pricing discipline, and accelerating further cost reductions. We demonstrated what truly differentiates Sherwin-Williams. At the same time, some of the risks that we saw in July did not materialize or were less severe than expected, including the delayed realization of some tariff impacts. The combination of all these factors is enabling us to both resume and retroactively restore the match sooner than originally anticipated. Now moving on to our 2026 guidance. The demand environment feels much like it did a year ago. The softer for longer dynamic we described again back in October remains intact. While some conditions are gradually becoming more stable, many of the indicators we track, along with cautious consumer sentiment, provide little support for any broad-based or accelerated recovery at this time. This environment is likely to persist well into 2026. The slide deck issued with our press release lays out our key economic assumptions for 2026. I'd also like to provide you with some additional color that informs our outlook. On the architectural side of the business, residential repaint remains our single biggest growth opportunity, and we have and will continue to make investments to win here. Demand remains difficult to predict, with industry forecasts for existing home sales growth varying widely from slightly down to up double digits. The mortgage rate lock-in effect remains real. Harvard's LIRA Index is projecting very modest growth, and select retailers have forecasted flattish home improvement growth as a base case. Additionally, consumer sentiment remains muted. These same dynamics also signal another potentially challenging year for DIY. We expect the new residential market to be down at least in the mid-single-digit range this year, given negative single-family starts over 2025 and many forecasters' expectations for further softening in 2026. National Association of Home Builders sentiment levels were notably negative exiting 2025, and mortgage rates remain in the six-plus range. We welcome meaningful economic and policy proposals to address affordability and increase supply, though these will take time to finalize, implement, and take effect. We expect to outperform the market as we continue strengthening our homebuilder customer relationships. In the commercial segment, the Architectural Billings Index has continued its long run of negative readings. We do see a bright spot in multifamily starts, which were positive for most of 2025. However, these starts won't turn to completions in painting until late this year and into 2027. We are pleased with the share gains we are making here, as demonstrated by our above-market growth over 2025, and which we expect will continue throughout 2026. Property maintenance CapEx spending still appears to be idling and neutral, so we are well-positioned to capture pent-up demand when rates moderate. We expect flattish sales as we continue to grow our account base to help offset core softness. In protective and marine, the project pipeline remains solid, though the timing of starts and completions remain variable. We expect this business, along with residential repaint, to be the best sales performers in Paint Stores Group this year. On the industrial side, the US manufacturing PMI ended at its lowest point in the year in December after ten months of contraction. Brazil and the Eurozone PMIs are also contracting. Optimism is easing in China, and the PMI there remains below its historical average. We see a 2026 backdrop where our core business remains flat at best, but strong new account wins from last year and this year, along with positive price mix, will drive low single-digit sales growth in Performance Coatings Group. We expect modest growth in auto refinish, driven by share gains and price mix, with the industry remaining flattish to down given pressure on consumers and related softness of insurance claims. In coil, we expect flattish sales as the market remains under pressure related to steel tariffs. In packaging, share gains and our industry-leading non-DPA coating should drive flattish sales against a tough double-digit comparison. Our industrial wood and general industrial divisions have the strongest new account growth in the group last year. We expect these wins to drive low single-digit growth in both of these divisions, even as core demand remains very weak. In summary, for the third year in a row, the market is not going to give us much help. And for the third year in a row, we expect to outperform the market and grow sales and earnings per share. We'll continue to remain extremely aggressive with a focus on helping existing customers grow as well as winning new business and converting share gains. I want to be very transparent here. We're providing guidance that we believe is very realistic given this backdrop. We are also confident that if the market is better than we're currently seeing, we would expect to outperform the guidance that we are providing to start the year. The slide deck issued with this morning's press release includes our expectations for consolidated and segment sales for 2026. The deck also includes our initial expectations for the full year, where consolidated sales are expected to be up a low to mid-single-digit percentage. Diluted net income per share is expected to be in the range of $10.70 to $11.10 per share. Excluding acquisition-related amortization expense of $0.80 per share, adjusted diluted net income per share is expected in the range of $11.50 to $11.90, an increase of 2.4% at the midpoint compared to 2025 adjusted diluted net income per share of $11.43. I'll note that at the $11.70 midpoint, earnings growth will outpace the midpoint of our core sales growth, excluding the impact of Suvenil sales. Our slide deck contains several additional data points that provide important context that I'd also like to briefly address. Any comparisons described are year over year. From a sales perspective, I'll remind you that the Paint Stores Group implemented a 7% price increase effective January 1. Realization should be in the low single-digit range given market dynamics and segment mix. We are also implementing targeted price increases in specific areas with our other two reportable segments. We expect the market basket of raw materials to be up a low single-digit percentage in 2026, driven by tariffs along with select commodities also inflating. We expect to overcome these raw material headwinds and deliver full-year gross margin expansion given both incremental 2026 pricing and accelerated simplification efforts across our supply chain. We expect GAAP SG&A dollars to grow by a low single-digit percentage in 2026, inclusive of a low single-digit contribution from Suvenil. As we pointed out last quarter, interest expense will be up this year. This increase includes approximately $40 million related to the lease payments for our new global headquarters and approximately $35 million of interest related to the $1.1 billion one-year delayed draw term loan that we executed in September. It also includes approximately $15 million in increased interest expense related to refinancing at higher rates. We expect to end the year within our current long-term target debt to EBITDA leverage ratio of two to 2.5 times. We expect to open 80 to 100 net new stores in the US and Canada in 2026. We'll also continue adding sales reps in territories, accelerating innovation, and expanding our digital capabilities. Next month at our Board of Directors meeting, we will recommend an annual dividend increase of 1.3% to $3.20 per share, up from $3.16 last year. If approved, this will mark the 48th consecutive year we've increased our dividend. We expect to continue making opportunistic share repurchases. We'll also continue to evaluate acquisitions that fit and accelerate our strategy. In addition, our slide deck provides guidance on our expectations for currency exchange, effective tax rate, CapEx, depreciation, and amortization. Finally, I'll remind you that as our first quarter is a seasonally smaller one, we do not plan to make any updates to full-year guidance up or down until our second quarter is completed, at which point we will have a better view of how the paint and coatings season is unfolding. Sherwin-Williams is extremely well-positioned as we enter 2026. Again, while we expect little, if any, help in terms of end-market demand, our teams refuse to be discouraged by these near-term trends. We know stronger demand will return at some point, driven by powerful demographics and enduring market fundamentals. But we're not waiting for that moment. We're focused on winning today and securing our long-term future. We know the playbook. Stay true to our proven customer-first strategy. Control what we can control. And turn volatility into opportunity. That means relentlessly pursuing new accounts and share of wallet, innovating in and out of the can, investing where returns are clear, maintaining price-cost discipline, advancing our enterprise priorities, and driving accountability to ensure flawless execution. This is how we grow and create value regardless of market cycles. We're proud of what we've accomplished, but we're even more energized by the opportunities ahead. Across every business, we see room to grow, innovate, and lead. Our focus remains sharp: grow sales, drive returns on sales and assets, and generate cash. We'll continue to deliver unique solutions for customers and outperform the market. This is a great time to continue demonstrating what makes Sherwin-Williams so unique. We win when our customers win, and that is exactly what we plan to do. I'd like to end where I started by thanking our team for being truly the best in the industry. This concludes our prepared remarks. And with that, I'd like to thank you for joining us this morning, and we'll be happy to take your questions. Jim Jaye: Certainly. Operator: Everyone, at this time, we will be conducting a question and answer session. If you have any questions or comments, please press 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. We do ask that participants please ask one question. Once again, if you have any questions or comments, please press 1 on your phone. Our first question is coming from Ghansham Panjabi from Baird. Your line is live. Ghansham Panjabi: Yeah. Thanks, operator. Good morning, everybody. I guess, first off, on the performance coatings segment, the margin outperformance there relative to at least our expectations. The incremental seemed very, very high in 4Q, and I know you called out some of the more profitable businesses like packaging and auto refinish being up nicely, etcetera. But could you just give us a bit more color in terms of what drove that? Heidi Petz: Yes, Ghansham. I think what you're seeing there clearly is discipline on display. This is an organization led under Karl Jorgensrud, who has been in the industry for over thirty years, and I think this is an environment where we're in the fifth straight year of a challenging demand environment. The team stood tall and delivered. And you're gonna see this play out with a very clear aggressive focus on new business wins, taking market share, but also a lot of heavy lifting. And we talk about simplification in our enterprise priorities, taking complexity out of the business. I'm very pleased with some of the heavy lifting there. Having said that, we're early innings, and I'll hand it over to Ben here to jump in. Ben Meisenzoll: Hey, Ghansham. Ben Meisenzoll. Yeah. Adding to what Heidi said there, you know, I point to the two halves of PCG. Heidi called out simplification. SG&A has been a focus of this team here. They've consistently been able to keep their SG&A at a moderated pace considering where volumes are at. If I look at the two halves, I think that's a good way to look at it here. We were under pressure the first part of the year right after the election, and we started seeing some of the new policies take shape. There might have been some hesitation. The operating margin was backwards about 160 basis points in the first half. The second half, adjusted operating margin showed 20 basis points worth of improvement. The second half was at 17.9%, pretty close to where we ended 2024. Obviously, the 19%, you know, the good pop in the fourth quarter. And so I agree with what Heidi said there. It just comes down to discipline. Focus on SG&A. I think this is also a good example. We always talk about the operating margin and that looking just at gross margin or SG&A is a really good example of why we do that because we're able to demonstrate and grow operating margin as a really good SG&A controls. Jim Jaye: Thank you, Ghansham. Operator: Your line is live. John Roberts: Yeah. Good morning. Thanks for taking my question. And maybe kind of a decent segue from that last question. On the SG&A outlook for 2026, I guess, could you help us to think about what you're factoring in? What kind of level of growth we should be expecting? Because I know you continue to invest even when markets struggle. You've also got this 401(k) match coming back in. So I guess, could you help us to think about how that should play out as the year progresses? Ben Meisenzoll: Hey, John. Yeah. The way to think about that, and we called out, you know, Heidi talked about in her opening comments, with reinstating the 401(k) and doing our retroactive match, we're apples to apples 2025 versus 2024. And so the catch-up contribution as it relates to 2025 earnings, we're apples to apples there. And so because we did that, as you look at 2024, 2025, and then into 2026, there is no quarter-to-quarter or year-over-year 401(k) impact. If you look at broader SG&A, as we called out in the opening remarks, SG&A up a low single digit. That obviously includes the history of the restructuring costs that we took in 2025, then you layer on the incremental Suvenil, which is also a low single digit. So you can do the math there to figure out the core versus Suvenil. But really what we have, you know, embedded there is, you know, that low single-digit growth. Again, that points right back to the cost control, everything that we talked about throughout the year here. We had about $40 million in savings in 2025. You saw that our one-time restructuring costs were a little bit higher than what we guided to in October. Gonna give us the ability to upsize the other $40 million that we initially called out. That's probably closer to $46 million in savings in 2026. And so again, really proud of what the teams are doing to really control costs while volumes are challenged. Heidi Petz: John, give Ben a lot of credit. He uses this phrase to the team. And for those employees listening, I'm talking to you here too. We want to earn our SG&A. Right? And so we're gonna always pace that volume, and you're gonna see that discipline play out throughout the year. Operator: Thank you, John. Thank you. Our next question is coming from Chris Parkinson from Wolfe Research. Your line is live. Chris Parkinson: Great. Thank you so much. You know, should we talk about some of the things that are more or less in your control in terms of your guidance and just how you, Ben, and Al are thinking about in terms of the implied gross margin guide? Just perhaps just a quick comment on healthcare labor assumptions, the raw basket. Seems like there's some divergences between solvents, acrylics, and TiO2 asset utilization. Just kind of just what underpins that and what gives you the confidence that that is the correct framework at least to begin the year? Thank you so much. Jim Jaye: Yes. Good morning, Chris. This is Jim. I'll start with the raws piece of your question. So as you saw in our slide deck, we're guiding our raw material basket to be up a low single-digit percentage this year. That includes tariffs and some of the commodities inflating in particular. I'd say the areas where we're seeing the most pressure would be on the packaging side of our basket. Also, non-TiO2 pigments, extenders, things of that nature. Also, some pressure on resins, and I'd say that's a little bit heavier weighted on the industrial side of the basket. But those are the things that are driving the raw material guidance that we're laying out. Ben Meisenzoll: Yeah. Chris, I'll add on to the SG&A side and just the overall cost side. You think about, we've called out in the admin segment, interest expense, you know, being a headwind for next year. And so when you look at the growth that we have in our admin spending next year, about half of that is going to be interest expense, and then half of it is normalization of other non-operating costs and just your general SG&A. And you called out healthcare. We've all seen the headlines, healthcare up, you know, double digits. We're in that camp. We have things that we can do to mitigate that. So what we're passing on to our employees isn't as meaningful as that. So we're trying to be, you know, really diligent there. But, you know, we continue to try to keep that cost low. If I go back and point to some of the opening comments on the admin SG&A, the core SG&A, we've been able to keep that down low double digits, you know, down low teens, and that just demonstrates again the levers we're able to pull to make sure we can keep that cost in check knowing that, again, we're in that lower volume environment right now. Jim Jaye: Thank you, Chris. Operator: Thank you. Our next question is coming from Greg Melich from Evercore ISI. Your line is live. Greg Melich: Hi. Thanks. I wanted to follow up on price mix. In the fourth quarter and then also the 7% price hike on January 1. I guess it looks like it was 3% to 3.5% price mix in 4Q. And with the price increase coming in, in January, why wouldn't we expect that to be more going into the first quarter in 2026? Heidi Petz: Yeah. Greg, I'll start, and I'll hand this over to Ben to give a little bit of color. But I'll take you back to some of the comments I said in my prepared remarks relative to market dynamics. And, you know, we are looking at the competitive environment. I would frame it more as a jump ball environment, to be honest with you, and so we're going to continue to be, as you would expect, extremely aggressive as it relates to chasing volume right now. And so there's a balance. The team is very prepared. There's a lot of tenure in the organization. They know how to strike that right balance, but I'm very confident that when we get some of our customers in, I'm very confident in the team's ability to work with them to add value and continue to, you know, trade them into more premium products that ultimately is gonna make them more productive. Let me hand it to Ben to comment on the quarter. Ben Meisenzoll: Yeah. I agree with everything Heidi said there. And again, we've talked about that price mix, you know, looking at incremental pricing and, you know, mix of some of the business as well. And so you may have, you know, a little bit of noise in there. But Heidi hit the head on it with volume. I mean, we've talked about, in this environment, prioritizing volume. And so as our teams know that high effectiveness is critical, you know, for us to get to the high end of our guide. We're gonna continue to, you know, put the pressure on there to capture as much price as we can, but we're not gonna put volume at risk to do that. And so, yeah, that may be what's a little bit different than what you've seen in the past. But still very confident when they're in our gross margin targets that we put out, and we're going to hold to that. Operator: Thank you, Greg. Thank you. Our next question is coming from David Begleiter from Deutsche Bank. Your line is live. David Begleiter: Thank you. Good morning. Heidi, can you discuss the impact of the severe winter weather on your current demand trends? And does that mean that Q1 EPS could be down year over year just because of the weather impacts? Thank you. Ben Meisenzoll: Hey, David. It's Ben. Let me make a couple of comments here. I mean, I realize right now in the midst of, you know, watching the storm go through this week, we have weather every quarter. I mean, it impacts us every year. If you remember last year, you know, we had the Gulf winter storm. It had all the classic ice, you know, wind, snow, everything that you would expect with a winter storm like that. But our Southeast division, our Southwestern Division, they deal with weather this time of year every single year, and so no concerns there right now. Operator: Thank you, David. Thank you. The next question is coming from John Roberts from Mizuho. Your line is live. John Roberts: Thank you. In your packaging coatings performance is impressive here. Have we recovered to new highs since the correction you had? And how much more is left in terms of the conversion of the industry? Heidi Petz: Yeah. Good morning, John. I would tell you, you know, we've essentially recovered a lot of what we said was kind of temporary share loss, but that doesn't mean that we're happy with where we are. There's still a lot more to go get. I really like our position here with our leading technology. We continue to win and demonstrate value. We've got some, obviously, dynamics playing out. EFSA, the European Food Safety Association, ban on BPA. That's gonna be taking effect in Q2. We know that that will continue to drive more customer conversions for us. So really like our position here, so we're in good shape. Jim, maybe if you could comment on a few of those areas. Jim Jaye: Yeah. I would add to that, John, that in terms of how much is left to go, I would say that in Asia and LatAm, there's still quite a bit to go. You know, North America and, as Heidi just pointed out, Europe are farther ahead on that. But in terms of that conversion, those other regions still have quite a ways to go. Thanks for the question. Operator: Thank you. Your next question is coming from Aleksey Yefremov from KeyBanc Capital Markets. Your line is live. Aleksey Yefremov: Thanks. Good morning. Heidi, I wanted to come back to your comments on focusing more on volumes than price this year. I guess, typically, this could lead to a bit of a zero-sum game where your competitors would also focus on volumes. Is there something that's different right now about the competitive environment? Maybe your competitors cannot afford lower prices, so they have to raise their prices and cede some volume? Or is there another dynamic that kind of makes your strategy of being more volume-focused the right one this year? Heidi Petz: So, Aleksey, let me reframe what I heard you say. I think you said not putting volume above price. And I would say it's not putting volume above price. It's being very balanced in our view here. And so in this, it's a jump ball competitive environment. There's a lot of market share up for grabs right now, and we're not going to lose our mind, lose our way. We're very disciplined when it comes to pricing. But we want to make sure that the teams are empowered out in the front line to convert some of these larger, bigger customers that weren't in the Sherwin-Williams family before. We're gonna be dog on a bone and chasing that business. Ben Meisenzoll: Aleksey, I'll add to that. You know, we've always talked about volume as one driver of our operating margin. And so when you look over the long term, getting that wider base of business, getting that share of wallet and new accounts in, and even when we bring them in, we have ways in our stores, wherever the customer is in their journey, to help get them up into those premium products and other ways that that flows into that price mix as well. But we recognize over the long term, you know, that securing the volume, the right volume that we want, is how we get to our midterm and long-term goals. Heidi Petz: One piece Ben just said, and I think it's really important to emphasize, when we bring our contractors in, the confidence we have in treating them up to premium is they are making more money as a result of working with these higher-end, better products. And I'll remind you, the total cost labor comprises 85-87% of their total cost. So their willingness to pay a premium to get on and off of job sites faster, have less touch-up, less quality issues, especially in an inflationary environment, it plays to our strength. Operator: Thanks, Aleksey. Thank you. Our next question is coming from Jeff Zekauskas from JPMorgan. Your line is live. Jeff Zekauskas: Thanks very much. Your residential repaint sales were up low single digits, but your prices were probably up higher than that? So were residential repaint volumes flat or down? And have they decelerated through the course of the year? And if so, why? Ben Meisenzoll: Hey, Jeff. If you look at the fourth quarter, we were last year, we were up against a really strong comp in residential repaint. We were up a high single digit, and so that had a little bit of impact on what you're seeing here for the third quarter. Remain very confident in residential repaint. This is where, you know, we made a lot of investments. We're at the biggest opportunity for share gains. We're very confident with that segment with our pricing realization. And so I think we continue to be very happy with where residential repaint is. And obviously, as you look forward into 2026, that's a segment that we're gonna continue to count on and invest in. Heidi Petz: This is also a segment we have a lot of confidence in because we continue year over year to outperform the market. And so I wouldn't characterize it, Jeff, as slowing. I think, if you go back into some of our history, the last two years, there was a surge as we continue to focus on taking that Kelly-Moore share. That's now in our history and behind us. Probably seeing a little bit of that. But in terms of what is out there, the amount of market share to be gained is extraordinary, and we're gonna chase it. Operator: Thank you, Jeff. Thank you. Our next question is from Vincent Andrews from Morgan Stanley. Your line is live. Vincent Andrews: Thank you, and good morning, everyone. Wondering if you can help us bridge Consumer Brands from the fourth quarter performance on the top line up about 25% with Suvenil in the mid-20s to your expectations for 1Q. And for the full year with 1Q up low to mid-teens now and the full year up high single to low doubles, recognizing that you have to comp Suvenil late in the year. But what does that imply that, you know, the existing business is gonna do from a volume price mix perspective? And then what is your FX assumption within there as well? Thank you. Ben Meisenzoll: Hey, Vincent. Yeah. So going from the fourth quarter into next year, I mean, you nailed it. We got the annualization. That's obviously gonna have a sizable impact through the third quarter of next year when we annualize. The underlying business, I mean, as Heidi talked about in her opening comments, there's still a lot of challenges with the North American DIY market. We don't expect that to be an overperformer for us until we see some of the housing catalysts really catch. You asked about pricing. All of our businesses have some level of pricing embedded in their guide for next year. And so even though we don't go out all at the same time like we do for Stores Group, you should expect that there are some targeted price increases not only for Consumer Brands Group but also for Performance Coatings Group that could differ by the different business units or by region. And then FX, when you look at a full-year basis, I mean, we do have Consumer Brands Group down a low single digit because of FX. That's mainly gonna come in the second half of the year, and that's mainly coming from headwinds that we anticipate in Latin America. Heidi Petz: And I'll mention on the Suvenil piece because I can't help it. We're really excited about this acquisition and the progress that we're making. It's obviously early, but the teams are laser-focused. We've got our dedicated integration team so that our commercial teams can remain laser-focused on our customer and business continuity. I think that we're certainly pulling out the Valspar playbook, the rigor behind customers and employees, and making sure that we're keeping the happening in the market is going to be really important here. We got an opportunity to demonstrate why these brands are better together, why these teams are better together so that we can drive innovation with a market-leading brand. And I'm very confident in what we're gonna be able to do in Brazil. Operator: Thank you, Vincent. Thank you. Our next question is coming from Josh Spector from UBS. Your line is live. Josh Spector: Yeah. Hey. Good morning. I was trying to go through all the macro assumptions you have in that slide, which is very helpful. When I put that all together, it seems to say that maybe you're thinking the market and your Paint Stores Group is down something like 1%, maybe 2% next year. If I look at your Paint Stores Group guidance, you know, you're flat. Your store addition is typically at a point. So to me, that implies that you're basically saying you do closer to in line with the market versus outperform by a point or two. I'm just curious if you disagree with any of that framing. Is the market lower? Are you assuming more? And just square that with the comments you've been talking about earlier about focus on gaining volumes of share gains. Thanks. Heidi Petz: Josh, respectfully, I disagree. The market is down. I think it's probably hard to characterize it, but I would say it's down more than that. And where we look at our performance base case, we've guided to down single to up single. And the controllable in that space. And I'll point to residential repaint, where we continue to take share in a down market. We're gonna continue to make the investment, putting a new store in every four days, continue to invest in dedicated reps. We're investing in innovation. In fact, at the end of the quarter, we're gonna be launching zero VOC plant-based interior coating that will be the best paint we've ever made. And it's because we're that confident in our ability to convert share with residential repaint. I'll hand over to Ben to speak to any of the other segments here. Ben Meisenzoll: Yeah. I mean, if I take it to, you know, you're talking about, you know, volume here, I think one thing to point at in Paint Stores Group is the ability, even in, you know, a challenged volume market, to still, you know, grow incremental margins. And you look at what happened in the fourth quarter with volumes down low single digit, with Stores Group, good cost control, you know, we're able to generate, you know, almost a 50% incremental margin. And if you look at the full year, I mean, it's almost 40% again in a volume-challenged environment. And so we're gonna continue to find ways in, you know, despite what's happening in the market, to continue to drive margin. Jim Jaye: Thanks, Josh. Operator: Thank you. Our next question is coming from Mike Sison from Wells Fargo. Your line is live. Mike Sison: Hey. Good morning. Heidi, you mentioned that you'd welcome some, you know, policies or proposals to help affordability increase supply. You know, what do you think would be helpful in terms of maybe sparking a recovery in paint demand this year? And then quick follow-up in Protect the Marines. Had another good year. Is that mostly the protective side? And does it go into data centers, and if it does, you know, how big, and what's the potential there? Thank you. Heidi Petz: Great. Well, Mike, I thought you were gonna offer up a policy recommendation. So, yeah, we look at this kind of a three-legged stool, if you will. I don't know that it's gonna be one without the other. I think it's a combination of household income rates and affordability. And so as we come into, you know, a year of a midterm election, we'll see what moves there. But at the end of the day, our builders, our partners are still, you know, still hesitating and waiting to see for some of those things to be solved. I think we're in an environment here where, as we partner with these, our builders, and I remind you we've got a pretty healthy position with some of the largest builders from an exclusive standpoint. So our ability to lock in with them, help them see around the corner, and plan is gonna be important now more than ever. I'll move on to the PNM side. And, yeah, it is higher on the protective side than the marine side. And you said it right, Mike. This is where Sherwin-Williams is so exceptionally well-positioned because of the boom we see with AI infrastructure. As you look across that PNM division and the healthy pipeline that the team is working on and what we can bring to market, these data centers, for example, you look at every coating that every surface that needs to be coated, we've got a solution. Our high-performance flooring, that we just made some acquisitions in recently, puts us in a market leadership position. And you're gonna see us be extremely bullish as we move forward. Ben Meisenzoll: Yeah. Mike, I'll add just one more thing. I mean, going back to, you know, the first question in the policies and delayed that out well. You know, what that all means to us as it relates to our outlook, you know, if there are things that happen, if there are policies that are implemented that become tailwinds for us, the plan that we have built, you know, is gonna enable us to capture those and win from those. And so I know we outlined on slide nine of the presentation to see if there are policy, you know, some of our economic assumptions. And so we're gonna be watching adjustments that could turn some of those metrics better for us, and in turn, you should expect our performance to mirror that. Operator: Thanks, Mike. Thank you. Our next question is coming from Patrick Cunningham from Citi. Your line is live. Patrick Cunningham: Hi. Good morning. So, Heidi, throughout the past year and a half, you talked about capitalizing on opportunities, disruption in the industry, and given the recent mega merger announcement, there's potentially some fresh disruption. So how would you characterize the opportunity set maybe within more of your industrial-facing businesses? Heidi Petz: Yeah. It's a great question. I think the word disruption is the right word. When you think about what's in play there, obviously, it impacts several of our divisions. And the teams are gonna continue to be very aggressive out there. I think it's safe to say that. But when I step back and look at the big picture over the last few years, by and large, there's been a lot of shift across the competitive set on both architectural and industrial. And what I'm most excited about is the stability of our strategy. We've got a rock-solid strategy. We've got the playbook. We've got the management team, the team out in the field every day. Clarity about how to execute that playbook. And so we mentioned earlier that there's, you know, we think volatility is an opportunity to create opportunity, whether that's in the macro or in the competitive landscape, and we're gonna do just that. We're gonna continue to stay close and get closer to our customers. Find new ways to solve their challenges, and we're gonna come out winning. Operator: Thank you, Patrick. Thank you. Our next question is coming from Arun Viswanathan from RBC Capital Markets. Your line is live. Arun Viswanathan: Great. Thanks for taking my question. Hope you guys are well. I guess I just wanted to understand the element of potential conservatism in the guide here. And maybe what could get you to the upper end. It sounds like, you know, you will be implementing that price increase. Maybe you get two to three points out of that. And then, you know, would it be mainly volume in Paint Stores Group? I mean, we have seen some improvement in existing home sales over the last few months. And are you kind of assuming continued softness in commercial and new? Maybe you can just kind of go through some of the verticals within Paint Stores Group and see how, you know, maybe some of the different scenarios could play out and maybe get push you towards the upper end of that guide. Ben Meisenzoll: Hey, Arun. I'll start with saying that, you know, when you look at our outlook, I would call it realistic. And if I point back to the presentation deck and the economic assumptions that are the foundation of our guidance, you can see how, you know, we're framing that out. And I'll point to a couple of the indicators. You know, if you look at existing home turnover, there's a wide varying range of assumptions next year. You have some people that think it's gonna be back one to 2%. You've got some that are reporting it could be as high as 14%. And so I think what's important for us to share and the reason that we put that slide together so you could anchor on see where we were anchoring our basis for our midpoint guidance. And so we feel in that example with existing home sales, it's more realistic to be, you know, in that low single-digit range absent any major policy shifts or anything else that we talked about. And so the basis of that foundation, I think we feel very comfortable and confident with. And as I mentioned earlier, if those indicators get better, if we see, you know, rates trend lower, if existing home sales turnover is higher, consumer confidence affordability gets better, you should expect that our results are higher than the midpoint that we're providing. Operator: Thank you, Arun. Thank you. Our next question is coming from Duffy Fischer from Goldman Sachs. Your line is live. Duffy Fischer: Yeah. Good morning. Could we go back to Consumer Brands Group? I just want to understand the margin implication of Suvenil coming in and the cost-cutting programs. So do we need to kind of model a 2% decline year over year until we anniversary Suvenil? And then, you know, it kind of bounces back up towards normal or how to think about playing out throughout this year. And then once we've anniversaried it, what does it look like? Ben Meisenzoll: Hey, Duffy. Yeah. If you think about the fourth quarter, it's generally a lower margin quarter, you know, for us anyway. And as we talked about, you know, coming out of our second-quarter call, you know, we Consumer Brands Group, we have some supply chain built in there, and that was, you know, due to targeted production volume reductions as we're trying to manage our inventory to the end of the year. With Suvenil, I know there's a lot of noise there with Suvenil coming in. That doesn't help as well. But what I will tell you is that, you know, from an operating margin point of view, we should expect to see, you know, similar core business to our existing Sherwin business. We will have some integrating costs, as you can imagine. You know, a deal of that size, the integrating activities that are gonna be required, the system integrations, etcetera. We're gonna have some costs, you know, as we go through 2026. But, you know, from a margin point of view, yeah, until we anniversary that in the third quarter of next year, you know, you can expect it to be maybe a little muted, say the same degree that you saw in the fourth quarter. Operator: Thanks, Duffy. Thank you. Our next question is coming from Mike Harrison from Seaport Research Partners. Your line is live. Mike Harrison: Hi. Good morning. You've talked in the past about the periodic repaint of houses occurring every five to seven years. A lot of demand was pulled forward into the 2021 time frame. So we should be getting into a period where we should start to see more repaint activity. In your view, Heidi, what is preventing that piece from playing out? Is it the cost of labor and maybe availability of paint contractors? Is it the cost of the paint itself? You know, when you think about consumer sentiment and, you know, just propensity to repaint periodically, what could conflict with that prevailing view of repainting every five to seven years? Heidi Petz: Yeah. And you're right. It is, we say it's kind of a five to six to seven-year cycle, and we are coming off of that post-COVID. I do think there are some natural governors in play right now because we are in an inflationary environment. Consumer confidence is absolutely impacted. When you think about home improvement in general, though, what I love about our position is that we're one of the most affordable and most quick to update your home versus larger kitchen and bath projects. And so I do believe as we continue to monitor a lot of these indicators, we're gonna stay very close to it. But we'd like to see more tick up happen faster. I do think it's gonna still be a bit choppy throughout the year. And I'll remind you too, the DIY segment represents about 40% of the available gallons out there. And so when it starts to move, you're gonna wanna come along for the ride, but we just need it to start moving. Jim Jaye: I think Ben's point that he mentioned a minute ago is important too, Mike, around the existing home sale outlook. I mean, that range of some saying existing home sales could be down low single digits to up 14%. That gives you a really good view, I think, into the uncertainty that's out there in terms of demand. So whatever way it goes, though, we expect to outperform, and we're very well-positioned to do that based on the investments we've consistently made over the last two years. And thanks for the question. Operator: Thank you. Our next question is coming from Kevin McCarthy from Vertical Research Partners. Your line is live. Kevin McCarthy: Yes. Thank you, and good morning. Heidi, in the prepared remarks, I think you commented regarding the 7% price increase that you'd expect realization to be in the low single-digit percentage range. I'm not sure if that was a near-term comment or if that's where you would expect to be in the fullness of time. But maybe you can elaborate on what that trajectory does look like over the next few quarters. And what I'm really trying to get at is the nexus between this realization versus your historical realizations against the backdrop of, you know, your aggressive pursuit of volume? Will it be lower this time, or do you think ultimately it will be the same? Heidi Petz: We've said it's gonna be in the historic range. It may be the low end of the historic range, but I would look at this again because of this unique competitive environment that we find ourselves in. When I look at the low single-digit guidance, I would think of that, Kevin, as a full-year guide, and I'll invite Ben to jump in on any other details. Ben Meisenzoll: Yeah. Kevin, I think what's important to know here, you know, that the teams are engaged. We're getting after the effectiveness, you know, where we can get it. There might be some delayed realization as you have, you know, different accounts that go a little later than January. And so we're gonna continue to monitor this. We know how to do this well. There's a high degree of confidence in our stores group teams to get the price where they can, and we're gonna manage it that way. Operator: Thank you, Kevin. Thank you. Our next question is coming from Matthew Dio from Bank of America. Your line is live. Matthew Dio: Yeah. Good morning, everyone. To build a little bit on Pat's question, would you look at or participate in any asset sales on the backs of the kind of the pure merger going on? I mean, I know it's a bit of a broad question, considering there's a pretty diversified portfolio, but say, for example, powder coatings. Right? Would new market entry be interesting to you or expansion in some of these other more core industrial segments? Heidi Petz: Well, Matt, we love to grow, and we love expansion. Having said that, you know, the way we look at our growth strategy, obviously, we start with an organic focus. When we consider inorganic activity, it's a very disciplined review of our portfolio, which you just said. And so when I think about what's in play there and as stewards of your capital, you know, we're always going to look. But there are a few of those businesses that if they fell out of the air and into our laps, all day long, yes, we would love them. But right now, we're just focusing on growing organically and competing in the market. Jim Jaye: Thank you, Matt. Operator: Thank you. Our next question is coming from Garik Shmois from Loop Capital. Your line is live. Garik Shmois: Oh, hi. Thank you. As you made the decision to bring back the 401(k) match, you cited delays in tariffs as one of the drivers that helped you decide to reinstitute it. I was wondering if there's anything else specifically that you're looking at that gave you confidence. And just on the flip side, you're talking to a number of choppy macro indicators and, you know, trends that don't seem to be, you know, flipping anytime soon. I was wondering if there's any incremental cost that you're looking to implement this year? Heidi Petz: Right. So, Garik, I'll start, and then I'll hand this over to Ben. I think your point and your recognition and our recognition that the tariffs are going to have a delayed realization. So I'll have Ben comment on that here in a moment. But I do want to take a minute just to address this. I think we said this in the prepared remarks, but this decision was not made on a single quarter or any short-term optics. And we all know this period of elevated and prolonged uncertainty. We had one objective in mind, which was protecting the operating strength, the stability, and the long-term health of our company by protecting jobs. And I'm really proud that we've been in a position to restore that. But here's the reality, and I share this with you just to bring you into how I'm thinking about this. When you have a differentiated strategy that you believe in and it's clearly working, and you've got a world-class team that knows how to execute through all types of cycles, your number one focus is on execution. And so I think now more than ever, you've got customers that are dealing with so much uncertainty. They are looking for partners that can be stable, reliable, and predictable. And when you've got a winning strategy, you've got customers that need you, you're gonna invest in that execution capacity. So which means we're gonna continue to not only attract and hire but it's in our best interest to retain this talent. So we've seen a lot of widespread layoffs out there in and out of our industry, and I said earlier, we chose a different path. It was to maintain and preserve these jobs. And I think that making sure that we have that execution capacity is what has rewarded our shareholders very well over the last few decades. But let me hand it back to Ben to talk more about 2026 implications. Ben Meisenzoll: Yeah. I mean, just one comment there, and I'll remind you back in July, when we gave our guidance, we were operating in an environment of high uncertainty, and Heidi talked about, you know, us wanting to make sure we preserve that financial flexibility. And so it didn't materialize the way that, you know, we had planned out. Part of having that flexibility and pulling that 401(k) lever is, you know, if it since it didn't play out the way that we had thought throughout the year, it gave us that ability to reinstate that. And even though it was quicker than we had expected, it's great that we were able to do that. As we go into 2026, it doesn't mean that, you know, the pressures that we see have alleviated. There are still tariff pressures. It's part of our single-digit raw material guide that we're gonna have to contend with this year. And that delayed realization is something that we're going to have to contend with this year. You've seen us on the cost out and pulling, you know, levers for, you know, some of the big needle movers. We have confidence that our teams are gonna continue to do that. And we see our cross-business unit teams working really well together to unlock cost in areas that have been harder to get at in prior years. And so our confidence in them being able to do that also helps our decision, you know, to make this and get it reinstated, get this behind us. And we're gonna find ways to continue to overcome the volume challenges. Operator: Thank you, Garik. Thank you. Our next question is coming from Chuck Cerankosky from Northcoast. Your line is live. Chuck Cerankosky: Good morning, everyone. I want to take a look at the Paint Stores Group and see if there's any insights to be gleaned by how the non-coatings sales are going, especially with the professionals' basket when they're in your stores. Heidi Petz: Chuck, we're gonna need a little bit more on the question, if you don't mind. When you say non-coatings, what specifically are you referring to? Chuck Cerankosky: I'm thinking about the supplies, brushes, sprayers, things like that. That might indicate now where the pro's head is at and what you folks might be looking at to change in their baskets. Jim Jaye: That was helpful. Jim's gonna start off here, and then I'll jump in. Jim Jaye: Yeah. Chuck, I was just gonna say, you know, one of the things you may be thinking about is spray equipment sales, and I'd say those have been, you know, flattish reflecting the environment that we're in. Especially, those are, you know, areas we've talked about new res being under pressure. That'd be an area where you might see some more of that activity. Heidi, did you have anything else you wanted to add? Heidi Petz: Just flat. I mean, it's flattish. And, Chuck, the way we think about that, and we call it AP, applied products, is just obviously can be more of a leading indicator. Spray equipment's a really good example, but I would just characterize it as flat is what we're looking at. Operator: Thanks, Chuck. Thank you. Our next question is coming from Eric Bosshard from Cleveland Research. Your line is live. Eric Bosshard: Good morning. On the DIY market, could you just frame a bit of what you're seeing in terms of perhaps your performance in terms of volume and what's going on with price mix? In 4Q and the expectation in '26? Heidi Petz: Yeah, Eric. Volume continues to be very choppy. Obviously, this is similar to the comments I made earlier. I wish it was a different environment. Having said that, you know, we've got a unique distribution because we service this DIY customer in two areas. One, through our paint stores, and we love the margin accretion on that side of the business. That's more of a more discerning DIY customer that's looking for a higher level of service. But our partnerships through, you know, a lot of our strategic retail partners are extremely important here. And in this environment, we say don't let a downturn go to waste, making sure that we are aligned, thinking differently about, you know, what's on the shelf, how we can compete across the street. And so there's a lot of good momentum in terms of planning. We just need the catalyst to come to realization. On price mix, I'll hand it over to Ben. Ben Meisenzoll: Yeah. Eric, I mean, you've seen in our stores. I mean, our DIY performance has been a little bit better in the quarter here. If I look at DIY in total, though, a lot of what you see there is maybe the premium gallon push. We talked about that on our third-quarter call with some of our channel partners. We're seeing better premium gallons, so that's obviously a component of the price mix bucket that you see there. And that's a win for our customers because that's, you know, putting them in a position where they could be more efficient for, you know, for the projects that they're doing in their homes. And so that's about what, you know, we're seeing there. Obviously, in our stores, again, if we're changing pricing, that's a segment where maybe we can be a little more effective, but that'd be my only comment there. Operator: Thanks, Eric. Thank you. Our next question is coming from Laurence Alexander from Jefferies. Your line is live. Laurence Alexander: Good morning. Could you give an update on what your net price tailwind is expected to be going into 2026 and how that compares to how you think about trend pricing absent a sharp cyclical improvement? Ben Meisenzoll: Hey, Laurence. Yeah. I mean, we're gonna annualize our pricing. We went out January. And so by the time, you know, we did our pricing January 1 in stores this year, we've annualized that. There might have been a little bit of pricing that we captured later in the year. But our expectation is, hey, we've lapped last year's price increase. The timing, you know, coincides pretty well with the new price increase. And so as we've talked about a couple of times here this morning, you know, we'll be managing high effectiveness in that pricing as best we can as we work through 2026. Heidi Petz: Maybe just a final comment as it relates to pricing, I think, and the discipline just to put a bow on this. I think we are in a very unique position. There's a lot of inflection happening across the industry. And I'm very confident in our strategy, our leadership team, and confident in where we're taking this company. And I'm excited for what's ahead, and we just need the market to help us a little bit. And we're having a very different conversation. Jim Jaye: Now just add to tie that all up, Laurence. Again, if you look in the slide deck that we put out with some of the guidance, you know, we're talking for the full year in '26. We've got low single-digit positive price mix in all three segments, and that gives you a positive low single-digit price mix on a consolidated basis for the full year. Jim Jaye: And thanks for the question. Operator: Thank you. That concludes our Q&A session. I will now hand the conference back to Jim Jaye for closing remarks. Please go ahead. Jim Jaye: Thank you, Matthew, and thank you, everybody, for joining our call. And thanks to all the employees of Sherwin-Williams for all their continued hard work. Clearly, you heard today we're continuing to operate in a very challenging demand environment. And we expect that to continue well into the year. But as Heidi mentioned, Ben mentioned, we believe the guidance we're giving today, this initial guidance is realistic, given all the economic assumptions that we laid out in our slide deck. And, you know, quite frankly, should the market be better than we're seeing today, we'd expect to outperform that guidance. So regardless of the environment, you can count on us. Our strategy is clear, which is providing those differentiated solutions for our customers. I will close with a save-the-date request for everybody for our 2026 financial community presentation. It's gonna be in Cleveland this year on Thursday, September 24. And it will include the opportunity for you to see our new global headquarters and our new global technology center. So we're excited for all of you to experience this amazing investment that we've made for our customers and our people. That date again is September 24, and we'll have more details on that later in the year. As always, we'll be available for your follow-ups here, and thanks again for your interest in Sherwin-Williams. Have a great day. Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
Operator: Greetings, and welcome to Valero Energy Corporation Fourth Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Donovan, VP of Investor Relations. Thank you. Please go ahead. Brian Donovan: Good morning, everyone, and welcome to Valero Energy Corporation's Fourth Quarter 2025 Earnings Conference Call. I'm joined today by Lane Riggs, Chairman, CEO and President; Gary Simmons, Executive Vice President and COO; Rich Walsh, Executive Vice President and General Counsel; Homer Bhullar, Senior Vice President and CFO; as well as several other members of Valero's senior management team. If you have not yet received a copy of our earnings release, it is available on our website at investorvalero.com. Included with the release are supplemental tables providing detailed financial information for each of our business segments, along with reconciliations and disclosures for any adjusted financial metrics referenced during today's call. If you have any questions after reviewing these materials, please feel free to reach out to our investor relations team. Before we begin, I would like to draw your attention to the forward-looking statement disclaimer included in the press release. In summary, it says that statements made in the press release and during this conference call that express the company's or management's expectations or forecasts of future events are forward-looking statements and are intended to be covered by the safe harbor provisions under federal securities laws. Actual results may differ from those expressed or implied due to various factors, which are outlined in our earnings release and filings with the SEC. I'll now turn the call over to Lane for opening remarks. Lane Riggs: Thank you, Brian, and good morning, everyone. I'd like to begin by highlighting some of our team's accomplishments in 2025. Last year was our best year for personnel safety and environmental performance, building on personnel and process safety records we set in 2024. Our continued commitment to safe, reliable, environmentally responsible operations resulted in a record refining throughput and record ethanol production for both the fourth quarter and the full year. We also set a record for mechanical availability in 2025. These accomplishments reflect the hard work, expertise, and dedication of our entire team. We delivered strong financial results in the fourth quarter, reinforcing our consistent track record of operational and commercial excellence. We captured favorable refining margins during the quarter driven by strong product cracks and widening sour crude discounts, and our fourth quarter performance capped off excellent financial results for the year. Strategically, we continue to make progress on our SCC unit optimization project at our St. Charles refinery. This $230 million initiative will enhance our ability to produce high-valued product yields, including alkylate. We still expect the project to begin operations in 2026. Looking ahead, we believe refining fundamentals should remain supported by continued demand growth and a tight supply environment driven by limited capacity additions. Sour crude differentials are also expected to benefit from increased Canadian crude production, along with additional Venezuelan crude supply into the US. In closing, Valero's strong financial results and record operating performance highlight our operational and commercial excellence. We remain committed to our disciplined capital allocation framework that prioritizes balance sheet strength, disciplined capital investments, and shareholder returns. With that, I'll turn the call over to Homer. Homer Bhullar: Thank you, Lane. For 2025, net income attributable to Valero stockholders was $1.1 billion or $3.73 per share compared to $281 million or $0.88 per share for 2024. Excluding the adjustments shown in the earnings release tables, adjusted net income attributable to Valero stockholders was $1.2 billion or $3.82 per share for 2025 compared to $207 million or $0.64 per share for 2024. For 2025, net income attributable to Valero's stockholders was $2.3 billion or $7.57 per share compared to $2.8 billion or $8.58 per share in 2024. 2025 adjusted net income attributable to Valero stockholders was $3.3 billion or $10.61 per share compared to $2.7 billion or $8.48 per share in '24. The refining segment reported $1.7 billion of operating income for 2025 compared to $437 million for 2024. Adjusted operating income was $1.7 billion for 2025 compared to $441 million for 2024. Refining throughput volumes in 2025 averaged 3.1 million barrels per day or 98% throughput capacity utilization. And as Lane highlighted earlier, we achieved record throughput for both the quarter and the full year. Refining cash operating expenses were $5.3 per barrel in 2025. The renewable diesel segment reported operating income of $92 million for 2025 compared to $170 million for 2024. Renewable diesel segment sales volumes averaged 3.1 million gallons per day in 2025. The ethanol segment reported $117 million of operating income for 2025 compared to $20 million for 2024. Ethanol production volumes averaged 4.8 million gallons per day in the fourth quarter of 2025, also setting a quarterly and full-year record. G&A expenses were $315 million for 2025 and $1 billion for the full year. Depreciation and amortization expense was $817 million for 2025, which includes approximately $100 million of incremental depreciation expense related to our plan to cease refining operations at our Benicia refinery. Net interest expense was $139 million, and income tax expense was $355 million for 2025. The effective tax rate was 25% for 2025. Net cash provided by operating activities was $2.1 billion in 2025. Included in this amount was a $349 million unfavorable impact from working capital and $269 million of adjusted net cash provided by operating activities associated with the other joint venture member share of DGD. Excluding these items, adjusted net cash provided by operating activities was $2.1 billion in the fourth quarter of 2025. Net cash provided by operating activities in 2025 was $5.8 billion. Included in this amount was a $192 million unfavorable change in working capital and $30 million of adjusted net cash provided by operating activities associated with the other joint venture member share of DGD. Excluding these items, adjusted net cash provided by operating activities was $6 billion in 2025. Regarding investing activities, we made $412 million of capital investments in 2025, of which $368 million was for sustaining the business, including costs for turnarounds, catalysts, and regulatory compliance, and the balance was for growing the business. Excluding capital investments attributable to the other joint venture member share of DGD and other variable interest entities, capital investments attributable to Valero were $405 million in the fourth quarter of 2025 and $1.8 billion for the year. Moving to financing activities, we remain committed to our disciplined capital allocation framework. Shareholder cash returns totaled $1.4 billion in the fourth quarter of 2025, resulting in a payout ratio of 66% for the quarter. For the full year, shareholder cash returns totaled $4 billion, resulting in a payout ratio of 67% for the year. We ended the year with 299 million shares outstanding, reflecting a reduction of 5% for the year and 42% since 2014. Earlier this month, our Board approved a 6% increase to the quarterly cash dividend, slightly higher than last year, reflecting a strong financial position and our commitment to a growing dividend. With respect to our balance sheet, we ended the quarter with $8.3 billion total debt, $2.4 billion of total finance lease obligations, and $4.7 billion cash and cash equivalents. The debt to capitalization ratio net of cash and cash equivalents was 18% as of 12/31/2025. And we ended the quarter well-capitalized with $5.3 billion of available liquidity excluding cash. Turning to guidance, we expect capital investments attributable to Valero for 2026 to be approximately $1.7 billion, which includes expenditures for turnarounds, catalysts, regulatory compliance, and joint venture investments. About $1.4 billion of that is allocated to sustaining the business and the balance to growth projects. These growth projects are focused primarily on shorter optimization investments that enhance crude and product optionality across our refining system as well as efficiency and rate expansion projects within our ethanol plants. Collectively, these projects should strengthen the earnings capacity of our existing assets. For modeling our first quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.695 to 1.745 million barrels per day, Midcontinent at 430 to 450 thousand barrels per day, West Coast at 160 to 180 thousand barrels per day, and North Atlantic at 485 to 505 thousand barrels per day. We expect refining cash operating expenses in the first quarter to be approximately $5.17 per barrel. For the renewable diesel segment, we expect sales volumes of approximately 260 million gallons in the first quarter. Operating expenses should be 72¢ per gallon, including 35¢ per gallon for noncash costs such as depreciation and amortization. Our Ethanol segment is expected to produce 4.6 million gallons per day in the first quarter, operating expenses should average $0.49 per gallon, which includes 5¢ per gallon for noncash costs such as depreciation and amortization. For the first quarter, net interest expense should be about $140 million. Total depreciation and amortization expense in the first quarter should be approximately $835 million, which includes approximately $100 million of incremental depreciation expense related to our plan to cease refining operations at our Benicia refinery. We expect incremental depreciation related to the Benicia refinery to be included in D&A for the first quarter and in April. The first quarter earnings impact is approximately $0.25 per share based on current shares outstanding. For 2026, we expect G&A expenses to be approximately $960 million. Lastly, our capital allocation framework remains unchanged with a commitment to a through-cycle minimum annual payout ratio of 40% to 50% of adjusted net cash provided by operating activities, and our long-term target net debt to cap ratio remains 20% to 30% with a minimum cash balance between $4 billion to $5 billion, with all excess free cash flow going towards shareholder returns. Brian Donovan: Thanks, Homer. That concludes our opening remarks. Before we open the call to questions, please limit each turn in the Q&A to two questions. If you have more than two questions, please rejoin the queue as time permits to ensure other callers have time to ask their questions. Operator: Thank you. The floor is now open for questions. The first question is coming from Theresa Chen of Barclays. Please go ahead. Theresa Chen: Good morning. Looking at the macro outlook, certainly, we're seeing inventories building coupled with relatively high domestic utilization, as well as what seems like a precarious supply and demand setup given significant capacity slated to come online in Asia balanced against limited closures for the year. In light of these developments, how do you view the evolution of and demand dynamics for light products and crack spreads going forward? Gary Simmons: Yes, Theresa, this is Gary. Certainly, during November and December, we saw fairly significant builds in total light product inventory. It followed typical seasonal patterns, but the magnitude of the build was much larger than we typically see. So we kinda went from below the five-year average on total light product to above the five-year average. We didn't see anything abnormal in product demand in our system. Gasoline sales in the fourth quarter were flat year over year. Distillate sales in our system were actually up 13%. And I would tell you that's probably more related to a change in our customer mix than anything else. But good domestic demand. Our exports quarter over quarter were up. Exports year over year were up. So, again, good demand in the product market, but really what caused the inventory build is exactly what you alluded to. We just ran very high refiner utilization. So especially in December where you were at 95.4% utilization, very strong for that time of year. I think some of that was related to the very strong margin environment we had in November. Cooler weather allows you to push utilization rates as well. The thing that's really interesting to us is almost all that inventory build was in pad three. And, you know, we've always stated we like our position in pad three because it allows you to clear any link to the export markets. We didn't really build any inventory during the fourth quarter. Didn't see any economic incentive to carry inventory or produce summer grade gas, so we're not really sure what caused the inventory build in pad three. Going forward, when you look at 2026, most of the consultant data shows similar supply-demand balances to last year, but they are assuming lower refinery utilization. You know, refinery utilization coming back to normal levels. I think we agree with that. You know, you've already seen utilization drop as we start into turnaround activity. As we wrap up turnarounds, I think you'd get into warmer weather, which, again, it's hard to push refiner utilization due to some overhead temperature limits. You know, with the assumption of more normal refinery utilization, to us, it looks like demand is outpacing additional supply. Our numbers would indicate about 400,000 barrels a day in net capacity additions. We're showing about 500,000 barrels a day of total light product demand growth. So things look tight, you know, in the consultant data. There's also a lot of assumptions in the consultant data. They assume Russian refining capacity comes on, runs normally. They assume a lot of the new capacity that's starting up runs at nameplate. Assumptions around bio and renewable diesel coming back into the market in a strong way. And then really no refinery rationalization outside of what's already been announced. So, you know, I would say our outlook is a little more bullish than what the consultants are showing just because we believe execution risk remains high on a lot of those assumptions that I just mentioned. Really difficult to get much of a read on the market thus far this year mainly due to the weather. You know, I can tell you that first couple of weeks in January were fairly soft on domestic demand. That's typically the case. Things had started to recover nicely. Last week, we were back up to around the million barrels a day on US wholesale, but then we had the winter storm hit. So last weekend, we saw wholesale liftings that were about 40% of the prior weekend. It's remained soft this week, but gradually recovering. Sales yesterday were about 90% of normal. Continue to see good export demand. Diesel export to Europe is open. Diesel exports into Latin America are economic. Good gasoline demand into Latin America. And then, you know, we don't see an arb to really send winter grade gas to New York Harbor. So all of those things are constructive. Theresa Chen: Super helpful. Thank you, Gary. Looking at the feedstock side of things with the Venezuelan crude being rerouted to the Gulf Coast, how much of this can be absorbed within your footprint over time? And can you also elaborate on how you see this impacting differentials without a meaningful and immediate increase in Venezuelan production itself? How do you see this equilibrating over time? And what are the implications for both Gulf Coast light heavy diffs as well as light heavy diffs in the Mid Con given the related impact to WCS? Randy: Theresa, this is Randy. I'll kick that off. Obviously, having Venezuela supply kind of back in the fold for our system is great news. The exports that are coming out of Venezuela tend to be very heavy, high sulfur, high acid, and that fits our configuration pretty well. In fact, if you look over the last ten years, Valero has been the largest purchaser of Venezuelan heavy crude more than any other US refiner. You know, historically, you look back, and we ran as much as 240,000 barrels a day of Venezuelan heavy in our system. However, that was prior to the new coker project at Port Arthur that was installed in 2023. That project has substantially increased our processing capability for heavy crude. So expect our Venezuelan processing capability to be substantially north of that number now. Kinda looking at differentials, I mean, not only Venezuela, but we've had, you know, several beneficial factors that have occurred that kinda help move this market weaker. You know, after last year with discounts fairly tight, you know, most of these market moves tend to are making differentials increasingly favorable for refiners with the high complexity refineries such as ours. In OPEC increases of announced 2.9 million since April, seen growing sour crude production in the US Gulf. It's now over 2 million barrels a day. It's up about 200,000 barrels from a year ago. We've seen a resumption of the Kirkuk exports that started in October. And we continue to see high production or growing production out of Canada. That's been helpful. One other factor that's been helping discounts is freight rates have been sharply higher. You know, if we look at current rates compared to where we were in the fourth quarter, freight's up about 30%. So when freight goes up, since the US barrel must price to clear, it's having to have, you know, wider discounts in order to allow those exports to happen. So, you know, right now, we're seeing, you know, heavy Canadian in the Gulf Coast, trading at about $11 to $11.50 under Brent. That's about $4 cheaper than our Q4 average. And similarly, Mars in the Gulf has been around $5 discount to Brent. That's about a dollar kinda cheaper than we were in the fourth quarter. So all looks pretty favorable, I think, for discounts kind of heading into 2026. Theresa Chen: Thank you, Randy. Randy: Sure. Operator: Thank you. The next question is coming from Neil Mehta of Goldman Sachs. Please go ahead. Neil Mehta: Yes. Good morning, team. The first question, I guess, would be for you, Homer, be around return of capital. Last year, you guys were pretty strong versus, I think, what Mark had expected. Just we do get the question with the stock having done well. How aggressive you will continue to be around buying back stock and love your perspective on that. Especially as you step into the CFO seat. Homer Bhullar: Hey, Neil, good morning. I'll start. Obviously, returning excess free cash flow to our shareholders through share repurchases has been a pretty core tenant of our capital allocation framework, right, for over a decade. We've reduced our share count by over 40% since 2014. Maybe I'll just talk a little bit about the framework. So it all starts with the balance sheet. Right? It's in one of the best positions in the industry. If you look at our net debt to cap ratio at 18%, it's actually below our long-term target 20 to 30%. Our year-end cash balance was at $4.7 billion, again, towards the high end of our target range of $4 billion to $5 billion. So we don't really have any pressing need to pay down debt or build more cash. So then let's move to, like, the discretionary uses of cash. Right? I'm not gonna mention sustaining CapEx and dividend, which we obviously considered non-discretionary. So on the discretionary side, you've got growth projects, you've got acquisitions, and share repurchases. Right? So starting with growth projects, you know, we've we're going to be guided by our minimum return threshold. Right? We're gonna stay disciplined. On acquisitions, you know, same, we have to see good strategic value and a clear and quantifiable assessment of synergies. We're not gonna just do growth projects or acquisitions just because we have excess cash. So absent those uses of cash, we're gonna continue to lean into share repurchases. And if you think about share repurchases, there's always an underlying ratable part of share repurchases to meet our minimum commitment of 40 to 50%, and then beyond that, we do look for opportunities to be more aggressive around share repurchase and that's really any given period where we see weakness, particularly our share price is weak on a relative basis to the broader sector. And, you know, to your point on stock trading near all-time highs, I mean, you go back ten years when the stock was trading around $50 to $60 we've been getting that question ever since then. And for what it's worth, our return on buybacks is above mid-teens over that ten-year period with where the share price is today. And, frankly, I hope we keep getting the same question for the next ten years because that means the stock is doing well. Neil Mehta: Yeah. That's a great answer, Homer. Thank you for that perspective. Follow-up is just, we are seeing heavy start to discount, particularly Western Canadian crude. And so as you just there there was a story out there that some of the folks who are marketing the Venezuelan barrels were trying to bid them in pretty tight into Gulf Coast, maybe even move it into China. I just think from your guys' perspective, you have options for heavies, including Western Canadian. Down on the Gulf Coast. So know, if you if you could expand a little bit more on that specifically as you are you as you see the go forward for the barrels that are being marketed in, you think they're going to have to compete a little bit wider in order to in order to compete with your alternatives. Eddie: Hey, Neil. This is Eddie. I'll comment a bit on that. We're not going to comment on pricing for deals that we've done. But I'll just say that we're evaluating Venezuelan crude like we always do for all of our alternatives. We put it into the basket of alternatives, and will purchase Venezuelan grade if it beats our alternative. So, yeah, you've seen all the articles. I've read them as well. You know, looking forward, you know, we've already kind of engaged with the three authorized sellers of crude, and we purchased barrels from all three. So we anticipate the Venezuelan crude making up a pretty large part of our heavy diet as we move into February and March. Neil Mehta: Ready. Operator: Thank you. The next question is coming from Manav Gupta of UBS. Please go ahead. Manav Gupta: First, wanted to congratulate Brian on the new role of Investor Relations. And then also really wanted to congratulate the incoming CFO for pushing the stock price to an all-time high. Target achieved very quickly. Thanks. On a more serious note, Homer, look, even when we go back four or five years, for the same refining margin, what we are seeing is the cash flow profile of the company is different. You're producing more cash even if the margin was the same four or five years ago. Can you help us understand the dynamics over there? Like, what's been behind this transition? To generate the ability to generate more cash the same refining margin. Homer Bhullar: Yeah. Hey, Manav. So Lane talked about this in the past, but it's really a result of a number of things. And it all starts with being a good operator, you know, having discipline around capital and then a strong balance sheet, which ultimately all translate to, you know, higher cash flow and higher shareholder return. So, you know, starting with operations, we've obviously worked really hard to manage cost and our reliability over the years, and you can see that with the record throughput and mechanical availability this past year. And then, you know, we've also been very disciplined around growth investments. You know our minimum return threshold, which effectively, you know, ensures you have a good return when things are good, but also hopefully protects us with a return that's well above our cost of capital even in kind of a downside scenario. And you can see that if you look at our, you know, return on equity or return on invested capital over the last five or ten years, you know, that's in the mid-teens or higher number. And, again, keep that keep in mind, that denominator for that return on equity or return on invested capital includes all capital right, including sustaining CapEx. And then also, generally, on capital, we have been trending a little bit lower in recent years, which just frees up more free cash flow for shareholder returns. Lastly, I mean, you know, the balance sheet obviously plays a strong role in that both in terms of we've got lower debt and higher cash balance. So at the margin, you have lower interest expense, but then higher interest income as well. But really, more importantly, just having a strong balance sheet gives you much more flexibility with respect to shareholder returns. And then lastly, obviously, a per share basis, share repurchases have helped a lot as well. Manav Gupta: All very good points. My quick follow-up here is, very good improvement in renewable diesel. I know there were a few quarters where you know, the industry struggled. You did much better than the industry. But the industry was struggling. I we sign finally seeing, you know, at the light end of this tunnel where possible RVO, and then all those policies will become clear. And and do you expect generally a renewable diesel to deliver better earnings in 2026 versus '25, primarily a function of more maybe policy clarity, if you could talk about that. Eric Fisher: Yeah. Hey, Manav. This is Eric. You're exactly right. We're still waiting on final policy guidance on the RVO and PTC. And so you contrast the 2025 being the transition to PTC and everyone trying to understand it, we were the first and perhaps one of the maybe the only company, that has really figured out how to capture the PTC. So the second half of '25 was getting into full PTC capture, getting into full SAF commercialization. And between that differentiation, our ability to capture the PTC, and you know, the overall margins tightening in renewable diesel, allowed us to outcompete a lot of our competitors. And as we have started 2026, there's a lot of capacity offline. There's a lot of players that are now sitting out waiting for guidance to get finalized before they reenter the market, and that has caused fat prices to really level off and even drop throughout the fourth quarter and into this first quarter. So what I see in '26 is, you know, a policy should be a tailwind. The expectation is it should come out favorably for renewables. We do see that, there's a lot of talk of know, and tariffs continue to be a pretty strong headwind. But, you know, we'll see what the supreme court comes out with. And so I think, you know, you're gonna see 2026 starting off more like the '25. And so that would indicate a stronger year in '26 versus '25. Manav Gupta: Thank you so much. Operator: Thank you. The next question is coming from Doug Leggate of Wolfe Research. Please go ahead. Doug Leggate: I'm sure Brian has already told you about my family connection, but welcome, Brian. Guys, I wonder if I could just ask two quick ones. First of all, on all the dynamics of heavy oil in the Gulf Coast, there is obviously a lot of complexities. All across your system. Mexico looks like it's now running a little better so less imports or less exports rather from there. WCS has TMX. Of course, there's Venezuela. My question really is, about your coker utilization and the volume of your heavy runs, where that can get to, not the crude utilization, but where you can actually get your throughput to. And my specific question is, ten years ago, fifteen years ago, you were running about 1.3 million barrels a day of advantaged crude, including fuel oil. You've added the coker you're less than a million today. Where can that get to? Lane Riggs: Doug, it's Lane. I'll this one. If you really look at what happened, we did sort of when we added the coker because of the dynamics you're talking about in terms of heavy availability, what we really did is we incremented medium and light crude with some heavy, actually ramping up into higher rates. They ensure that our coker availability or coker sort of utilization was where we felt like it needed to be to meet FID. We're also purchasing outside resid. So we're doing all that. I think what you can expect is you get more available from Venezuela more avail from Canada. You'll see us actually fill the coker up sooner with that crude diet and we'll see on an incremental basis where we actually increase crude rates or actually lower them depending on how incremental crude because we believe there'll be a driver to fill the coker with heavy. Doug Leggate: Lane, is it possible to give a utilization rate on your coker so you your coker capacity today and where it could get to or is is that too granular? Lane Riggs: We don't know we've ever really been public with coker utilization. In fact, I don't think we even have it in front of us. So Yeah. But I know. We normally, from a just from a signaling perspective, most of the time, we optimize the crude diet into sort of, you know, the way you would do it, and then we purchase outside feed or internal resid feed to make sure that that coker is full most of the time. Yeah. Doug Leggate: Alright. That's that's helpful, guys. My follow-up is actually on one of Manav's questions about the RVO and RIN prices. They're obviously spiked here pretty dramatically since the start of the year. I'm trying to understand how how should we think I don't know if there is such a thing as mid-cycle earnings, but at today's RIN price, obviously, we're up around the one I think we're up one twenty or something today. Per gallon. What what do you think the mid-cycle earnings capacity of DGD is or maybe free cash flow, whichever one you prefer to lean on? And I'll leave it there. Thanks. Eric Fisher: Yeah. That's that's not really a question that can you can easily come up with an answer on about mid-cycle for RINs. What I would say is you've kind of been a new framework with the PTC. The previous ten years of DGD was on the blender's tax credit. So everyone gets a dollar cash from the government for every gallon that produce. Now we're into a regime where it is dependent on your CI. It's dependent on your income tax. Because it's now an income tax credit. So you're into a different just an overall different framework. Now RINs have been underlying this will be a part of this in the past as it will in the as it is going forward. Think as as we think about, you know, where this all goes, what the government has suggested as an RV as a obligation range of five two to five six billion gallons for 2627. Is well above domestic production capability. So if you see that and with the combination of tariffs, on foreign feedstocks and the elimination of credits for foreign imports the entire compliant you're you're essentially raising the obligation while also making it harder to generate. That all points to a higher d four RIN price especially as you draw the bank down, which a five two to five six obligation number would certainly do, And so what I would say is, you know, it's not really you know, trying to think about what a mid-cycle it is. More just saying you know, there's a good chance d four RINs are going to go up. And so then the next question is, does fat prices just follow that up and keep overall RD margins tight? Or do you see from a competitive standpoint, going back to the PTC, that low CI and the ability to run waste oils over veg oils is still going to have an advantage in this in this new framework of PTC. So all of that, you know, just really saying, 2026 is going to likely look better than 2025. For the segment, and then it particularly looks better for those that can export into advantage markets into Canada, and Europe and The UK, those that operate just like refining the most efficient capacity in the Gulf Coast, and then those that can run waste oils over veg oils. Doug Leggate: Great answer, Eric. Thanks so much. Operator: Thank you. The next question is coming from Paul Cheng of Scotiabank. Please go ahead. Paul Cheng: Hey guys, good morning. Lane Riggs: Good morning. Paul Cheng: I don't know whether you guys will be willing to share. That's a as usual, every several years that we have the labor contract being negotiate and marathon is having that with the USW. And can you tell us that which of your refinery is currently under that contract? So in other words, that if that's in case if there's any strike, I'm sure that you guys are well prepared. Management will be able to take care of it for a period of time. But which we find, you know, what percent of your capacity is actually will be impacted? Second question is that I think that has been asked previously. If we look back in your utilization rate, historically, I think on a full-year basis that your Mac maximum may be doing somewhere in the 94, 95%. Do you believe, given you've been look like there had been done a phenomenal job in operating your facility better and better? Do you think that now on a maximum full cycle basis, that you would be able to do better than that? Or that I mean that the entire curve have been shipped up? What I mean, they're comparing to maybe ten years ago. What, one or 2%. Is there anything that you can help to quantify it? Lane Riggs: Hey, Paul. It's Lane. I'll I'll take a stab at the first one. I just yeah. So your instincts were correct. We're very we're not really going to disclose exactly where which one of our sites and everything are are under USW, we some of the other maybe unions that are out there. What I will say one of the advantages that Valero has versus our competitors in that space What however you think about it, we are, you know, we're less unionized directionally than a lot of the other in the space. I don't buy everybody, but directionally that's true. And on the second one, I guess, it's Yes. So I think, Paul, what I'd tell you is we obviously had our record year in terms of mechanical availability last year. With better mechanical availability, you would expect to see better refinery utilization. You know, to try to quantify that would be very difficult. Paul Cheng: Hey, Gary. Do you think that the whole industry is getting better? Gary Simmons: It's a good question. I think a lot of what you saw in the fourth quarter was very strong margins. And moderate temperatures. And so that allows you to kind of push refinery hardware a little bit harder than you normally could. I think it'll come back off. I don't think what we saw in December is sustainable, but everyone is certainly trying to drive up mechanical availability as we have. Paul Cheng: And that you're talking about the weather. Do you guys have any noticeable downtime from the winter? That's my last question. Thank you. Gary Simmons: Yeah. Yeah, Paul. We really fared the winter storm pretty well. We had a few nuisance type heater trips, but nothing material. I think most of what we saw was really things external to the refinery. Some interruptions in hydrogen steam, hitting up against, product containment type limits. You know, if you look at our guidance, I would tell you there was nothing material that related to the winter storm that's gonna impact the quarter. Paul Cheng: Thank you. Operator: Thank you. The next question is coming from Ryan Todd of Piper Sandler. Please go ahead. Ryan Todd: Okay, thanks. Maybe one on the West Coast, if you could just talk a little bit about West Coast refining. A couple of things, maybe profitability was a little weaker in the quarter. Can you maybe talk about some of the drivers were there? And then can you maybe walk us through the timeline of the coming shutdown of Venetia, and how you're thinking about West dynamics for 2026? Gary Simmons: Yes. I'll start on the first. Yeah. Our capture rates were a little down on the West Coast. Some of that is to do with the fact that gasoline relative to diesel gasoline pretty weak relative to diesel. We've talked about, especially our Benicia refinery has a really strong gasoline yield, and so it tends to lower our capture rates. The other thing that hurt us is there was a retroactive tariff on one of the pipelines we utilize on the West Coast, and all those charges hit during the fourth quarter. So those are the two big things that impacted our capture rates in the fourth quarter on the West Coast. Rich Walsh: And this is Rich Walsh, I'll try to answer on the timeline there. You know, in terms of the Venetia idling, we're executing our plan to safely idle it, the refinery operating units that is. And know, so well planned out and phased process. And in February, you know, you saw you saw our most recent announcement. You know, we will be idling the process units because they have some mandatory inspection requirements. That are that are kicking in then, and so we'll we'll be pulling those offline. And but, you know, we will be continuing to produce fuel as we work down the inventory through this process. And, you know, as we've shared with the governor and CEC, we are gonna be importing some gasoline, and or gasoline blend components you know, over the over the nears near term. And, we remain committed to our, you know, contractual obligations, out there to meet to meet the supply obligations that we have. So we're working cooperatively with state officials, the CDC, and the governor on our plans, and we've kept them fully informed. And they're aware of our supplemental supply commitments to the to the Bay Area. So I think that's pretty much where we are. And then in terms of Wilmington, it's normal operations, and we'll continue to supply them California market out of Wilmington. Ryan Todd: Great. Thank you. And then maybe just maybe one follow-up for you, Eric. On the RVO stuff. Any thoughts in terms of what you're hearing on timing or any of the any of the items which are are kinda debated out there, whether it's you know, SREs or reallocations or penalties for foreign feeds or products, you know, directionally? What what you're hearing on those things? Eric Fisher: Yeah. That's really kind of a government question. I'm a let Rich answer that. Rich Walsh: Great. Yeah. You know, I mean, look look, UK has got a big challenge on dealing with the RVO right now. And, you know, the SREs. In this I think the administration is starting to recognize how now that know, all of this is getting caught up with these SREs. They've really gotten out of hand. You know, if you look at EPA, they they sort of defaulted to this outdated DOE process that that the government accounting office has already, you know, said was was a flawed process in both EPA and DOE. Had acknowledged that previously. And, you know, this this matrix is so out of date. It doesn't even account for the the Shell revolution in the domestic production, which is completely transformed with the US energy market. So it's a really flawed SRE basis. It's out there. And in terms of solutions, I mean, I think there is a legislative proposal out there that's a compromise that's supported by API, by ag interest, by retail trades and most refiners that you know, would allow a process to go forward that would kind of help correct all this and get us kind of realigned and and supporting the the RFS. But, you know, there are a small number of conglomerate so called small refiners that are that are out there that are having windfall on these SREs, and they're they're kinda holding it up. So that's where we we think this stuff is gonna have to be worked down. It's a it's a challenge for the agency that kinda gotten into a into a fix with the with over issuing these SREs. Ryan Todd: Great. Thank you. Operator: Thank you. The next question is coming from Paul Sankey of Sankey Research. Please go ahead. Paul Sankey: Good morning, everyone. Glad to hear, Brian, that you got the job because you're close family relationship to Doug Leggett. That's But I joke. Hey, guys. We'll have to clarify that. Yeah. Just some demand demand and supply at the moment obviously we're seeing oil through 70. Is that would you say that's related to the sanctions and shadow fleet being shut down effectively or more shut down than it has been? I'm just wondering, it's a big surprise, I think, to all of us. There's obviously the demand side of the equation. And I was just wondering what your perspective is on U. S. Oil demand right now in the storm because we're seeing some big numbers from some of the Northeastern generators, I mean 300,000 plus type daily use of oil to generate power. You didn't seem to really highlight that in your very complete comments so far. I just wondered if you're seeing a big a big impact from the storm in terms of the demand side of the equation, which might help to explain why we're at 70. So the overall question is, how come we've gone through 70 here at a time seasonally of weak oil prices? Thanks. Lane Riggs: Yes, Paul, I'll just touch on the flat price. I think what we're seeing right now, with the geopolitical wrangling going on in Iran, think has put quite a bit of geopolitical risk factor on top of flat price. Plus you've had, you know, the winter storm take off some some oil production, the shale patch. In addition to the continued issues with the CPC and Tengiz over in Kazakhstan. Stan. Had quite a bit of oil offline. So I think all those are leading to to some short-term tightness. Plus the geopolitical factor just kinda running up oil here in the short term. Gary Simmons: Yeah. In terms of heating oil demand, I think, you know, a lot of that is just where we have a strong wholesale presence. We're not really strong in the heating oil markets. You know, in markets like Boston where we do have a presence, we have seen a significant uplift in diesel demand as a result of heating oil. And then the rest of for us, you know, a strong incentive to ship to New York Harbor, which is again tied to to heating oil. Demand. Paul Sankey: Thanks. And if I could ask a follow-up. Lane, is there a way that you could see more investment as you shut down California? I'm wondering how your exposure to California is going to change if you're going kind of effectively exit that market or if you have access to it through other means. Secondly, whether or not you would consider perhaps with more heavy oil coming back on the market with the decline of potential certainly decline of U. S. Light sweet production, whether there might be more CapEx to be undertaken? Lane Riggs: Paul, this is Lane. I don't think you'll see our CapEx increase with respect to the West Coast as a matter of fact. I'd have to go back and look how long we've sort of we've obviously what we've done out there is to maintain our sustaining capital for all these years with respect to the West Coast, because we didn't see a that we were going to grow you know, grow the capacity to produce into it. So what you're actually going to see is when as we shut Venetia down, our sustaining CapEx should fall on a a number somewhere around a 150,000,000 ish, our sustaining capital actually fall. With respect to how we see California, it's still a very you know, it's a challenge to operate out there. We'll continue to operate Wilmington. It's a it's a a good asset and a and a a good market. It has its challenges with respect to regulatory capital at the end of the decade, and when we'll sort of make our decision. On how we'll how how our presence on the West Coast will what, you know, how it'll be. So Paul Sankey: And anything on incremental spending on a heavier slate going forward potentially? Lane Riggs: No, not on the West Coast. Mean, in the print? Yeah. We will definitely look at we'll definitely look at that, you know, in terms of our strategic are looking at that. We have, you know, things that we have in our gated process. We don't necessarily our tendency as a company is to talk about projects as we FID and not as we are studying them. But, you know, we have a pretty good position as it is, so we wanna make sure that we don't hurt that position. But clearly, as we there's more avails in the heavy oil market and we hit these constraints again, we'll probably still fit into the small we'll study, we'll we'll see what it would take to do, you know, those CapEx. We're not going to do a great coker expansion or anything like that. That's not the foreseeable future. Paul Sankey: Great. Appreciate that. Thanks, Dan. Operator: Thank you. The next question is coming from Sam Margolin of Wells Fargo. Please go ahead. Sam Margolin: Hey, morning. Thanks for the question. Yes. On revisiting CapEx, know, growth CapEx is is pretty moderated. I think you've you've explained why. Just drilling into it. How much is inflation a factor with with the gated process and returns? And, you know, if it is a big factor, do you think that means for sort of buy versus build? Decision making? You know, to the extent that you're interested in growth. Lane Riggs: Hey, Sam. So I will back up and explain the kind of our CapEx. If you really go back for a long time and we we feel like we have the capacity to strategically develop about $1,000,000,000 of strategic CapEx. When we went into COVID, we sort of lowered that number to about 500,000,000.0 really emphasizing at a time renewable, the renewable side of the business. So if you kind of if you were to look at the trend of where we've been for, the past five years or six years or something like that. Our half of the joint venture we're spending about $250,000,000 ish of CapEx with respect to R and D. But with all the policy uncertainty, starting last year and on an ongoing basis until we get some more clarity on how all that will work, that's falling, right? Our refining CapEx strategic CapEx is fairly stable, and it is in that, you know, sort of three hundred ish to, you know, three hundred ish kind of of number. And that that is I'm not gonna with respect to inflation, what I will say about inflation and regated process is it does make these projects more difficult to to do because the cost of building has gone up. I mean, our as an example, our alkyd cost, I don't know, 4 or 3 or $300.400000000 and now they're up we costed one out not too long ago. It's more like 600,000,000. So when you it is, you have to have you have to think about you have to think about a forward price set and do you believe the Ford price set is going to accommodate the inflationary cost of standing up units. And obviously, we are always interested in assets. We look at them through a lens of are there, you know, are there arbitrages with our current system either through you know, sort of, I would call it processing arbitrage or trading arbitrage. That's how we like to think of these and we're we're obviously we always look at those and through the and particularly through that lens. Sam Margolin: Got it. Okay. And then just revisiting heavy crude, for a second. I know there's competitive reasons you might not want to give an exact number of of what know, the headroom is, for incremental barrels. But maybe we could frame it this way. On crude valuation, just like, you know, while TMX has been ramping and availability has been low, do you have just kind of a ballpark number off the top of your head of how much you think heavy crude globally has sort of been overvalued a refinery economics perspective and, you know, where where it could normalize to whether that's freight costs or or some other method that you use. Randy: Hey, Sam. Just ready. Probably difficult to kinda give a value. I just will maybe harken back to 2025 when differentials on the sours were all pretty narrow and we got to a point where we were indifferent on running sweet crude versus sour for most of the year, especially in through Q2 and Q3. I think where we're at today, it it's it's firmly planted. We're gonna buy as much on the heavy and medium size as we can to fill up the filters and downstream units. Sam Margolin: Alright. Thank you so much. Operator: Thank you. The next question is coming from Joe Lache of Morgan Stanley. Please go ahead. Joe Lache: Great. Thanks. Good morning and thanks for taking my questions. Eric, can you talk a bit about the ethanol segment? The segment continues to to perform well from both the volume and capture standpoints. Can you unpack some of the drivers here? And then as part of that, I was hoping you could talk about how you think about the potential impact and probability of Nationwide E15? Thank you. Eric Fisher: Sure. Yes, ethanol has had another good year and continues to as Lane said, break throughput records as we've kind of grown capacity creep for the last couple of years. And and have plans to continue to creep capacity. In the ethanol segment. The corn crop has been good the last two years. So we see, essentially cheap feedstock is one of the big drivers. And then I think overall, you know, it's easy to see with the way export demand has grown. That the world is figuring out that ethanol is a very cheap source of octane. And so we've seen a lot of growth in ethanol exports. There's also continued growth in ethanol as a as a low carbon solution. So we see a lot of programs that are now allowing, first gen ethanol into low carbon programs. So between those two things, you've seen export demand grow. So the ethanol segment continues to be very competitive and flow a lot of cash. I think know, in terms of e 15, all of our ethanol plants have are registered to sell e 15. That's a we still see very slow customer acceptance of that. But it is slowly growing. I think, that's one of those that know, if and when that happens, we're positioned to take advantage of that. And, it's just a question of, you know, how RVO policy is gonna work out. You know, Rich alluded to, this is all wrapped up in the entire SRE conversation and this idea that you know, what part of renewables is gonna what part is renewables gonna play in the in the domestic slate is is what we're waiting for clarification on. I don't know, Rich, if you had other comments about e 15. Rich Walsh: No. I mean, I think I do think it's it you know, the national e 15 waivers caught up with this SRE. Issue and you can't have anything that's going to undermine the RFS. But like like you said are doing. And so I think I think you're gonna see you see ag and and and most of refinery aligned on how to go forward with the team and a solution for SRE. Over over the authorization. And so I those will have to be recognized. Joe Lache: Great. That's helpful. And then shifting to the refining side, was hoping to get your perspective on the fuel oil market here. Cracks have weakened recently, which I think is driven by the prospects of more Venezuela crude. But I was hoping to get your thoughts on the recent dynamics and outlook here for fuel oil as it relates to coker economics. Thank you. Randy: This is Randy again. I would say, things look really weak right now. Think we're hit 79% on high sulfur fuel oil. This morning if I look at the paper. You know, I think it's it's it's it's what you mentioned before, more heavy crude in the market. We're also seeing some of the Venezuelan fuels get pointed to the US, at least get offered this way. Which are barrels that normally didn't get shown in the US market. We're also seeing a little bit higher runs out of Mexico, which they tend to make fuel incrementally. So that's there's more barrels that are getting pointed this way as well. All that's kind of pushing the you know, and freight costs are high, so the the movement from the West to the East on fuel oil. So the higher freight goes, west just need to discount more. Joe Lache: Great. Thank you. Operator: The next question is coming from Philip Jungwirth of BMO Capital Markets. Please go ahead. Philip Jungwirth: Thanks. Good morning. As far as Russia, how are you seeing the EU refinery loophole sanctions impacting diesel markets? And could there be a greater call on U. S. Gulf Coast barrels? And and question to answer, but it's it's been a quieter month as far as drone strikes on Russian refineries. Just how are you thinking about the fundamental versus geopolitical tightness in diesel cracks currently? Gary Simmons: Yes. This is Gary. I think overall you are seeing EU shy away from Russian diesel barrels. Thus far, we've seen that being able to rebalance throughout other parts of the world. I think the big area we saw is some of those barrels were going to South America. We've seen those South American markets return to the US Gulf Coast, which has been supportive of the US Gulf Coast market. I don't know. We have seen a fairly quiet month in terms of drone attacks on Russia. What happens there going forward, I really don't have any insight. Philip Jungwirth: Okay. Great. And then might be a short answer, but you've always said you'll stay out of the the Cisco auction, but just given given the regime changes in in in Venezuela, is there any reason you might revisit this stance depending on what happens with the process in here? Lane Riggs: Yeah. This is Wayne. You know, it's still I mean, anything, it's added a degree of uncertainty to the process, think, again. So we're sort of we've we chose to stay out of it because of uncertainty of the process, the length of it all, just all the difficulty with respect to that would all work. And and I I don't know that it's I don't know that our change with respect to Venezuela has made that clearer. I would say like we always do, we're obviously interested in any assets that become open or the or there gets to be more certainty around the process that might change the way we think of it. Philip Jungwirth: That's helpful. Thanks, guys. Operator: Thank you. The next question is coming from Jean Ann Salisbury of Bank of America. Please go ahead. Jean Ann Salisbury: Hi, good morning. Capture in the North Atlantic has outperformed in recent quarters. Is this driven by closure related tightness in Europe? And do you view it as a structural shift? Gary Simmons: Yeah. I think a lot of it been. From our Pembroke refinery, highest netback barrels are the ones that we can sell domestically. And as people have chosen to exit that market, we've seen our wholesale volumes grow in the UK significantly, and it certainly improves the capture rate when that happens. Jean Ann Salisbury: Okay. And then as a follow-up, both refined products pipeline open seasons were extended, and I believe one now offers a path to multiple California markets now. Do you still prefer, as you kind of said on previous calls, to move product waterborne thinking that that's a a better solution. Here. Gary Simmons: Yes. So, you know, overall, there's a lot of volatility in the California market, so we hate to be committed to a pipeline that has a shipping into closed arms. We like the optimization opportunities from waterborne supply. You can supply the barrels from anywhere in the world. The one thing I would clarify is, you know, we have a significant commitment to supply the market in Phoenix. And to the extent one of these pipeline projects offers us a more efficient way to get to the Phoenix market, we would certainly entertain that. Jean Ann Salisbury: That's helpful. Thank you. Operator: Thank you. The next question is coming from Matthew Blair of Tudor, Pickering, Holt. Please go ahead. Matthew Blair: Thank you and good morning. You touched on the 45Z for your renewable diesel segment. Are you going to be recording 45Z credits in your ethanol segment in 2026 due to the removal of the indirect land use change? And if so, do you have a approximate EBITDA benefit it might be? We're we're estimating somewhere between, like, 50,000,000 and 100,000,000. Eric Fisher: Yeah. This is Eric. We are looking at that very closely. So what I'd say is given our experience with PTC through DGD, we have set the ethanol segment up to capture PTC from a prevailing wage and qualified sales standpoint. So really, we're just waiting on final guidance from the PTC to be able to answer your question directly. But what I would say is we are poised to capture whatever the PTC is going to give us. And you know, you could what I will add is it works in 10¢ increments. So, you know, you'll if you qualify, you'll get 10 or 20¢ a gallon for whatever they ultimately define as qualified sales. So you know, you can, you know, you can speculate on, you know, how that's all gonna work. But really, yes, we are poised to capture PTC in the ethanol segment. We're just waiting on finalization of guidance. Matthew Blair: Thank you. And one follow-up on the Venezuela discussion. You mentioned you're already running more Venezuelan crude in the first quarter. What barrels are you pushing out to do? Are you shifting to an overall heavier crude slate, so pushing out lights and mediums? Or are you pushing out other heavies? Randy: Yes. This is Randy. It's kind of a mix of everything. I depending on the location, it may be some incremental fuel, cargos, it may be some America heavy, and it could be Canadian heavy. So it's kind of a bit of a mix. But I would say, you know, as I mentioned before, we are pushing to to maximize heavy crude processing in the system going forward with the with the better differentials. Matthew Blair: Great. Thank you. Operator: Thank you. The next question is coming from Jason Gabelman of TD Cowen. Please go ahead. Jason Gabelman: Yes. Hey, thanks for taking my questions. I wanted to ask another one on the crude quality discs. Given they've widened out quite bit, and I know you kinda mentioned a bunch of reasons why that is. But if we kinda look back a few years prior to COVID, it seems like there was more kind of sour availability back then than there is now. But at the same time, differentials look wider today than they were prior to COVID. So I guess the question is, you think that the levels we're at today are sustainable? Are there reasons why the differential should be wider now than they were prior to COVID? Thanks. Randy: Yeah. This is Randy again. I mean, I don't know that I have a firm answer on where what we think market should be. I think the the things that I mentioned before, are kind of chief reasons, and I don't see those really going away as we as we head through the year. Probably the one thing on the freight side that is kind of pressuring differentials down in the prompt is freight rates have have went up significantly. That's kind of result is more enforcement on some of these shadow fleet vessels and that could be with us as we head through the rest of the year. Jason Gabelman: Got it. Great. Thanks. And my quick follow-up is is just on 2026 throughput, and it seems like sustaining CapEx is down a couple of $100,000,000 versus what you've you've done the past couple years. So is that an indication that mechanical availability should be higher and and given your your your track record of squeezing out more barrels out of the system, should we expect kind of throughput excluding the shutdown of Venetia to continue to improve? Lane Riggs: This is Wayne. I would say, can attribute most of it There's timing, obviously, year over year differences. But a big big part of it is we're, you know, is is Venetia. We have one less refinery to do sustaining capital on. Jason Gabelman: Alright. Thanks. Operator: Thank you. This brings us to the end of the question and answer session. I would like turn the floor back over to Mr. Donovan for closing comments. Brian Donovan: Yes. Well, we appreciate everyone joining us today. And of course, feel free to contact our IR team if you have any follow-up questions. Have a wonderful day. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time. Enjoy the rest of your day.
Operator: Good morning. My name is Morgan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Group Fourth Quarter and Full Year 2025 Earnings Call. All participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. I would like to introduce Mr. Blake Vanier, Vice President of Investor Relations. Mr. Vanier, the floor is yours. Blake Vanier: Good morning, everyone, and thank you for joining us today for our fourth quarter 2025 earnings call. Joining me here in Miami are Jason Liberty, our Chairman and Chief Executive Officer, Naftali Holtz, our Chief Financial Officer, and Michael Bayley, President and CEO of the Royal Caribbean brand. Before we get started, I would like to note that we will be making forward-looking statements during this call. These statements are based on management's current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release issued this morning as well as our filings with the SEC for a description of these factors. We do not undertake to update any forward-looking statements as circumstances change. Also, we will be discussing certain non-GAAP financial measures which are adjusted as defined, and a reconciliation of all non-GAAP items can be found on our investor website and in our earnings release. Unless we state otherwise, all metrics are on a constant currency adjusted basis. Jason will begin the call by providing a strategic overview and on the business. Naftali will follow with a recap of our fourth quarter, the current booking environment, and our outlook for 2026. We will then open the call for your questions. With that, I am pleased to turn the call over to Jason. Jason Liberty: Thank you, Blake, and good morning, everyone. I am very pleased to share our fourth quarter and full year 2025 results, our outlook for 2026, and our exciting strategic investments that will continue to shape and accelerate Royal Caribbean Group's future success. 2025 was an outstanding year, defined by strong demand for our brands and vacation experiences, disciplined execution of our strategies, strong balance sheet management, and robust financial performance. We delivered a record 9.4 million memorable vacations and a very high customer satisfaction score. Achieved nearly $18 billion of total revenue and 33% earnings growth, all while expanding our margins, increasing return on invested capital, and reducing leverage. We generated nearly $6.5 billion of operating cash flow and returned $2 billion to shareholders through dividends and share buybacks. Meanwhile, our scale and profitability enable continued investments in the differentiated experiences and innovations that delight guests and fuel the next chapter of long-term growth. I want to thank our team members worldwide for their passion and unwavering dedication to providing outstanding vacation experiences every day. Their efforts made our guest vacations memorable and contributed to a successful year for our shareholders. As a global vacation leader, we continue to broaden our vacation ecosystem across ocean, river, and land with unique experiences giving guests more ways to experience the world with our family of brands. Today, we are announcing a further expansion of Celebrity River Cruises with a commitment for 10 additional ships. This will expand Celebrity's River Cruise fleet to 20 vessels by 2031. The expansion will make Celebrity River Cruises one of the largest European river cruise operators, offering more itineraries and destinations than ever before. We are also announcing the launch of the Royal Caribbean brand's new Discovery class ships that will redefine how Royal's guests experience the world. The agreement with the shipyard includes two firm order ships and options for four additional ships. And we recently shared the next evolution of our loyalty program with Points Choice, which gives consumers the freedom to earn points on any of our three vacation brands and apply them where they matter most, regardless of the ship they're sailing. The expansion of our ocean and river fleets, loyalty enhancements, and our growing exclusive destination portfolio strengthens the integrated ecosystem we are building. These investments broaden our appeal to new guests while deepening the connection with those who already vacation with us. Supported by technology and AI that make the experience more seamless and more personal. This approach expands the way guests can vacation with our family of brands and reinforces our vacation of a lifetime strategy. Now turning to our results. I am very proud of what we have accomplished in 2025. Flawless execution by our incredible teams propelled our strong performance in 2025, elevating demand across our brands and driving durable margin expansion. This resulted in a 33% year-over-year increase in adjusted earnings per share and ROIC in the high teens. We also invested in key strategic priorities while strengthening the balance sheet and returning capital to shareholders. The year ended on a great note. Fourth quarter net yields grew 2.5%, and adjusted EPS was $2.80, higher than our guidance. We also generated strong profitability and margin expansion as we continue to execute on both commercial and cost priorities. With this strong performance, we are on track to achieve our perfected financial targets in 2027. As we said before, perfect is an important milestone on our growth journey, but our ambitions go well beyond it. 2025 was another year of remarkable milestones on our journey to expand the way our guests can experience our brands across ship and shore. We welcomed Royal Caribbean Star of the Seas, took delivery of Celebrity XL, launched Celebrity River Cruises, and finally, in late December, opened the Royal Beach Club Paradise Island. Our joint venture with Tuohy Cruises also added to this momentum with the delivery of MindShift Relax, the first vessel in its new class and the largest ship in its fleet. We also continue to invest in technology and innovation that makes our vacations easier to discover, easier to plan, and more personalized while making our business smarter and more efficient. Over the past year, we further embedded disruptive technologies like AI across all commercial and operational areas. Provide more detail on our tech investments later in the call. 2025 demonstrated the power of our model and the strength of our platform, and it sets us up well for 2026 and future years. Our momentum continues into 2026. The wave is off to a record start. We experienced the best seven booking weeks in the company's history since the last earnings call. As a result, we are already about two-thirds booked for the year with book load factors well within historical ranges at record rates. This sets us up to optimize pricing and yield growth as we continue to build the book of business for the balance of the year. All commercial channels are delivering quality demand with direct-to-consumer performing particularly well. Last year, we added hundreds of new digital capabilities as consumers' preference for digital engagement continues to grow. Our increasingly connected ecosystem aims to make vacation planning straightforward and seamless. Travel partners are also delivering meaningfully more bookings than last year and at higher rates. Our spectacular new ships continue to generate strong quality demand. Star of the Seas and Celebrity XL are exceeding expectations, and Legend of the Seas, our first icon class ship debuting in Europe later this year, is experiencing very strong booking trends. Our latest research shows that our consumers feel financially secure and continue to prioritize experiences, with 40% planning to increase leisure travel spending in the next year. The cruise value proposition continues to resonate due to quality amenities, value, and convenience. Looking ahead for 2026, our proven formula will continue to generate strong financial results. Moderate capacity growth, although 2026 will be a bit higher, at mid-single digits, moderate yield growth, and strong cost control. The combination of those three things creates meaningful margin expansion, increased cash flow, and drives a stronger balance sheet. That's the model we planned for, and it's the model we're executing today while also funding future growth and expanding capital return to shareholders. Revenue is expected to increase double-digit year-over-year, resulting in full-year net yield growth in the range of 1.5% to 3.5%. We expect positive yield growth for our key products, including the Caribbean, as our investments continue to differentiate us and strengthen our leadership position even in a period of elevated capacity growth in the region. Full-year adjusted earnings per share is expected to be in the range of $17.70 to $18.10, a 14% year-over-year increase. We also expect to deliver over $7 billion of operating cash flow this year, and we continue to prioritize strategic investments into our future while enhancing capital returns to shareholders through competitive dividends and opportunistic share repurchase programs. At Royal Caribbean Group, our strategy is centered on creating a lifetime of vacations for our guests by continually strengthening the ecosystem that makes those experiences possible. We are extending our competitive moat through differentiated experiences, world-class brands, exclusive destinations, and industry-leading loyalty program and technological investments that remove friction and make every interaction more personalized. Together, these elements reinforce our lifetime of vacation ecosystem, attracting new guests, driving more frequency, and long-term loyalty that translates into sustainable growth and shareholder value. A cornerstone of that strategy is our exclusive destination portfolio. We're especially excited about Royal Beach Club Paradise Island, which opened in December and is off to an incredible start. Guest response has been exceptionally positive, reinforcing our confidence in the role these experiences play as we continue to expand our destination platform. Innovation on the ship side remains a key differentiator. New ships do more than add capacity; they expand the experience, broaden the guest base, and raise guest satisfaction, all while driving and enabling better financial results. And today's announcement of a new discovery class of ships on our Royal Caribbean brand is the next step in our innovation roadmap designed to continue to raise the bar for our guest experience and to extend our leadership in the vacation space. We'll share more details as we go, but it will follow our disciplined approach, investing in product leadership and high-return growth that compounds over time. As I shared at the beginning of the call, we are expanding our 10 additional ships that will expand the Celebrity River cruise fleet to 20 vessels by 2031. We see river cruising as an exciting growth opportunity that adds an incremental vacation choice and expands the moments and occasions guests can experience with us, all while deepening loyalty across our family of brands. Finally, AI and disruptive technology are becoming a foundational advantage for us, representing a core capability that improves the guest experience, strengthens our commercial engine, and helps us run the business more intelligently. Our digital channels are increasingly the gateway to long-term guest value, highlighted by a 25% year-over-year increase in active users on the app in the fourth quarter. E-commerce traffic was up 10% year-over-year in 2025, with conversions improving throughout the year. As it relates to disruptive technology, including AI and GenAI, we're scaling in two complementary ways. First, we're investing in enterprise programs that deliver better guest satisfaction and experience while improving revenue and margin, helping us to fundamentally change how we run the business. And second, we're infusing these technologies across the organization through smaller practical use cases that create momentum, productivity, and confidence at the individual and team level. We are improving our ability to curate and personalize what guests see while increasing pre-cruise engagement. Because a vacation is better when it's easier to plan and easier to personalize. The goal is to reduce friction, improve the experience, and present relevant options that add value to the guest. We're also using AI to improve efficiency and execution from supply chain forecasting to energy management and marine operations. These are the types of capabilities that build durable, operating leverage over time and reinforce our focus on margin expansion and returns. Disruptive technology is not just a tool; it's a capability that we have been building for more than five years. It helps us deliver a better experience, run a smarter operation, and strengthen the ecosystem we're building for long-term growth. In closing, 2025 was an exceptional year, and we enter 2026 from a position of strength, a differentiated vacation platform, a strong balance sheet, and a disciplined approach to growth and returns. And with that, I will turn it over to Naftali. Naftali Holtz: Thank you, Jason, and good morning, everyone. I will start by reviewing fourth quarter results. Net yields grew 2.5% in constant currency, five basis points above the midpoint of our guidance. Yields grew across all key products, on 10% capacity growth, and were driven by both new and existing hardware. Total revenue growth in the fourth quarter was 13%. Net cruise costs, excluding fuel, decreased 6.3% in constant currency, in line with our guidance, as we remain focused on identifying sustainable efficiencies in our operations while further enhancing our vacation offerings. Adjusted earnings per share were $2.80. Earnings outperformance compared to guidance was driven by favorable revenue and better performance across our joint ventures. The fourth quarter capped an incredible year for us. As strong demand for our vacation experiences, coupled with strong execution by our teams, resulted in happy guests and robust financial results. Guest satisfaction continues to outpace industry standards and remains exceptionally strong. We consistently achieve significant improvements in financial performance. For the full year, total revenue grew 8.8%, adjusted EBITDA grew by 17.6% to just over $7 billion, and adjusted EPS grew 33% to $15.64. At the same time, we generated $6.4 billion of operating cash flow, achieved an investment-grade balance sheet, and returned $2 billion of capital to shareholders, all while investing more than $5 billion in our future. Since 2019, we have transformed the Royal Caribbean Group into a stronger, more profitable, and more resilient vacation platform, solidifying our strong financial foundation. Total guests increased 45% since 2019, with millennials and younger nearly doubling. At the same time, we saw strong growth from both new and repeat guests. Total revenue has increased by 64%, and adjusted EBITDA has surged 94% since 2019. Net income more than doubled, and operating cash flow grew 75%, supporting continued growth and long-term shareholder return. Moving to our 2026 outlook. I will start with capacity and deployment for the year. With the introduction of Legend, and the annualized impact of Star and Excel, capacity is expected to be up 6.7% year-over-year, on the higher end of our moderate capacity growth. While the amount of dry docks is modestly higher than 2025, the cadence and its impact on the quarterly capacity is different. We have less capacity in dry dock in the first quarter and more in the second quarter. It is also worth noting that on average, we have more premium hardware in dry docks this year when compared to last year, hurting yield comparisons. And this is most pronounced in the second quarter. We expect APCDs to grow 8.5% in the first and third quarters, and 5% in the second and fourth quarters. As Jason mentioned, the year is off to a very strong start. Book load factors remain within historical ranges at record rates, with approximately two-thirds of 2026 inventory having already been booked at higher rates. Our deployment mix is consistent with last year. The Caribbean represents 57% of our capacity, growing 8% compared to last year, with a full-year impact of Star of the Seas and Celebrity XL. Caribbean yields have grown 35% since 2019, and we expect continued yield growth in 2026, even as capacity in the region is increasing. The Caribbean continues to be the most desired cruise destination by consumers, and the best way to experience the Caribbean is with the Royal Caribbean Group. The combination of leading brands, the best hardware, and exclusive destinations results in the region outperforming in both NPS and profitability. We continue to differentiate in the Caribbean market. We have the best hardware in the market, with six Oasis class ships and three Icon class ships. Over 70% of guests on these itineraries sailing on the Royal Caribbean brand will visit a private destination this year, and that percentage will increase to 90% in 2028 with the opening of the beach club in Cozumel and Perfect Day Mexico. Europe will account for 15% of capacity and is growing 5% versus last year, including Legend of the Seas, debuting in Europe this summer. European sailings continue to perform very well on both rate and volume, with strong demand from both American and European consumers. It is worth noting that while European capacity, which is high-yielding, is up for the year, it is down in the first half of the year, driven by a decrease in the second quarter due to dry dock timing. Alaska is expected to account for 5% of total and is up 3% versus last year. We have some of the best hardware in the region, including Celebrity Edge, two Quantum class ships, and Silver Moon. Turning to our 2026 guidance. We expect yield growth of 1.5% to 3.5%, from both new and like-for-like hardware. With a projected capacity increase of 6.7%, revenue for 2026 is expected to achieve a double-digit growth rate. Our leading vacation platform, anchored by an attractive value proposition and supported by strategic investments, enables us to grow both capacity and rate, setting us apart within the vacation market. We do expect net yield growth to be higher in the second half of the year compared to the first half, given the impact of dry dock timing, the ramp-up of Royal Beach Club Paradise Island, timing of new ship deliveries, and deployment mix changes. Full-year net cruise costs, excluding fuel, are expected to be flat to up 1%, following a 10 basis points decrease in 2025. There are also about 200 basis points of cost headwinds mainly related to our private destinations portfolio ramp-up that come without APCD increase. The cadence of our cost growth varies throughout the year, with first-half cost growth expected to be higher than second half, driven mainly by timing of dry docks and year-over-year quarterly comps compared to 2025. We anticipate full-year fuel expense of approximately $1.17 billion, with 60% of our projected fuel consumption hedged. Approximately 10% of our fuel consumption is expected to be from LNG and biofuel blends, compared to 8% in 2025. Fuel efficiency continues to improve, with fuel consumption per APCD reducing by approximately 4% compared to 2025, driven by new hardware and deployment optimization. As a reminder, the scope of the European Union emissions trading system, or EU ETS, will expand in 2026 to cover 100% of emissions associated with our European itineraries, up from 70% in 2025. Based on current fuel prices, currency exchange rates, and interest expense, we expect adjusted earnings per share between $17.70 and $18.10, a 14% year-over-year growth at the midpoint. This also represents a 23% CAGR over the first two years of Perfecta, which sets us up well to achieve our targets by 2027. We expect adjusted EBITDA to be a little shy of $8 billion, a 13% year-over-year growth, and adjusted EBITDA margin that is just over 40%. Strong growth and improved profitability enable us to enhance cash flow, invest in key initiatives, maintain investment-grade metrics, and increase capital returns to shareholders. We expect to invest $5 billion of capital into our key strategic growth initiatives, as well as ensuring our assets are well maintained. We are set to deliver Legend of the Seas in the second quarter, with committed financing in place. Non-ship capital is expected to be $1.8 billion, with a significant portion related to our private destination portfolio, Santorini Beach Club, the Cozumel Beach Club, and Perfect Day Mexico, as well as our fleet modernization program that ensures we keep elevating the guest experience and enhancing financial performance. Now I will discuss our first quarter guidance. In the first quarter, capacity will be up 8.5% year-over-year. More than 70% of our capacity will be in the Caribbean, 16% in Asia Pacific, and the remaining capacity is spread across several other itineraries. Net yields are expected to be up 1% to 1.5% in constant currency. This includes an impact of 30 basis points from recent itinerary modifications in China, and approximately 50 basis points of yield headwinds due to deployment shift. Net cruise costs, excluding fuel, are expected to be up in the range of 0.9% to 1.4% in constant currency. Taking all this into account, we expect adjusted earnings per share for the quarter to be $3.18 to $3.28. Turning to our balance sheet. We ended the quarter with $7.2 billion in liquidity, and leverage well below 3x, consistent with our goal of solid investment-grade metrics. With strong expected cash flow generation, we will continue to manage maturities, find opportunities to reduce cost of capital, and opportunistically buy back shares. In closing, we remain committed and focused on our mission to deliver the best vacation experiences responsibly as we work to deliver another year of great results. With that, I will ask our operator to open the call for a question and answer session. Operator: At this time, we will conduct the question and answer session. To ask a question, please press star, then the number one, on your telephone keypad. We do ask that you limit your questions to one per analyst. Once again, to ask a question at this time, please press star then the number one, on your telephone keypad. Your first question comes from Matthew Boss with JPMorgan. Your line is open. Matthew Boss: Great. Thanks, and congrats on another really nice quarter. Thank you. So Jason, maybe to kick off, could you elaborate on the further acceleration and momentum into 2026 that you cited? And just larger picture, how do you see your portfolio differentiated today relative to that $2 trillion total vacation market with the opportunity to capture additional market share from here? Jason Liberty: Well, thanks, Matt. I hope you're doing well. One, I think that, obviously, our business is growing. Our capacity is growing 6.7% this year. One of the things that we just see coming into this year, and we saw this even during the Black Friday and cyber sale activities, is that we've seen an acceleration in demand, which, of course, more than matches the capacity that we have coming on. So we continue to see a very strong consumer who is really attracted to our incredible brands and the experiences that they're delivering. Also seeing additional tailwind, and you can see that in our, you know, just in terms of on the loyalty side, you know, we're seeing an increase in the percentage of our guests that are loyalists. So our loyalty programs and now with that coming with Point Choice, yeah, we're seeing more and more high-quality demand for our guests. And, of course, you know, with loyalty, you're able to personalize more and put a very effective package in front of them in terms of what they're looking to achieve with their friends and family that they're sailing with. As we look at the business, you know, and you've heard me say this in the past, we really do look at that $2 trillion plus. I mean, it's growing now. It's even over $2 trillion leisure space for us to grab more share of. And when you get into why are we so focused on obviously, there's many reasons to do that, to close that gap. And focus less on our cruise competitors is that we think that we're able to increase our margins by putting a product in place that is really attractive to our guests. And so what you're seeing us do commercially, first is, you know, we're making sure that we are personalizing, putting things in front of our guests, that they're attracted to and taking friction out of how they book their activities each and every day. On the product standpoint, listen very closely to what our guests are looking for, and so you're seeing us on the new ships that we deliver. You're seeing it on the modernization activities we're doing. And also the changes we're making on the ship to how do we close the gap to what our guests are looking to, not just for a cruise vacation, but for a broader vacation experience. And then on the destination side, you're seeing us invest in enhancing the guest experience. And when you look at, for example, think Santorini is a great example of this, we're not looking to take guests out of the key cities of Santorini. What we're looking to do is help them maximize their day. And spend time in our private destination, the Royal Beach Club that will be there, as well as in the key cities in Santorini. So all this is really focused on how do we enhance the experience. And when we find when we're doing that, we're building more trust and we're also enhancing the overall guest experience. And we see that just through the change in the Net Promoter Score. Then when you get into the ecosystem, we think about what are our guests doing when they're not with us. And so when will you grab share of that $2 trillion marketplace is you expand your offering. And so that's one of the things that, you know, historically, we would expand our offering by adding more destinations. Here, we see that when our guests are not with us, some of our guests when they're not with us, they're taking an additional vacation on a river. And that's why we feel so passionate about getting deeper and deeper into that business. And what we see is we're closing gaps to Orlando. We're closing gaps to Vegas. We're closing gaps to other vacation all-inclusive experiences. Which get higher APDs than us. By so at least 15% higher on APDs. And so we're trying to close that gap. We think we deliver a higher value proposition than what happens on land. And that collectively, by you tie that together with great loyalty, personalization, is resulting in I think what you see is outperformance. Naftali Holtz: Just to add, one more thing to what Jason said. All these things that we're doing, as you can see this year, we're growing both capacity and yield. And as we look at it, we feel that this is a differentiation within the vacation marketplace. And that leads really to winning more share from the consumer in that $2 trillion market. So feel very passionate that, you know, we'll continue to innovate. And that's just us so continue to innovate and add more experiences like River and that sets us very well to continue to win that share from that $2 trillion, which is, obviously a very big market. Operator: Your next question comes from Steve Wieczynski with Stifel. Your line is open. Steve Wieczynski: Congrats on a strong 2025. So they want me to ask one question. I'm gonna do that, but it's gonna two different parts. So I'm gonna, you know, try to do it. So, Jason, obviously, there's, you know, there's a lot of concern on the market, you know, about Caribbean capacity and what that means in terms of taking price action, especially on the, you know, the close-end side of things. So, you know, if you could, could you walk us through maybe what you're seeing today in the Caribbean, maybe more so, you know, whether it's by brand, whether it's by itinerary, whether it's by specific product. And I guess what I'm trying to understand is, you know, what is doing well in the Caribbean? What might be lagging? And then I would assume that you guys are probably taking a conservative approach to what close-in pricing is going to look like in the Caribbean given the industry capacity increases? And then second part of my question would be, Jason, if you think about your 2026 yield guidance, 2.5% at the midpoint, just wondering if that 2.5% fits with your company tagline, meaning you guys talk about moderate yield growth. And I'm just wondering if 2.5% fits that profile or is this a year where yield growth might be, you know, more hampered given what's happening in the Caribbean? That's it. Jason Liberty: Well, thanks, Steve. I'm sorry. Yeah. Yeah. I think there were more than two questions in that, but I'll I think I think first off, just talking about the Caribbean and so my colleagues here can chime in as well. You know, I, of course, we read what everybody else is putting out there in terms of points of view on the Caribbean. I think first, what I think we need to point out is I think when you have the best ships and you have the best destinations, and you have brands that have incredible loyalty and trust with their guests, that equates to, which is what we're seeing, is very similar demand trends for the Caribbean as we're seeing in other parts of the world. Now, you know, there is a significant level of demand for Europe, which is great. But it's also not a place where we have, you know, over half of our capacity. But you're seeing very good trends in the Caribbean across all three brands. So if you wanna get into, you know, we're concerned about K shapes or too much supply, we're seeing it whether it's on the Royal Caribbean brand or Celebrity or Silversea. We're seeing high demand, wanting to go to the Caribbean. And so as Nav commented, we're not only seeing good volume, but our pricing is higher in the Caribbean than it was last year. And I know that may not feed into what maybe some groups wanna hear, but that is a reality that we continue to see strong demand for the Caribbean, and we continue to see strong demand for our broader organization. And that leads us when we think about 2026, yeah, I mean, there are a few things that we did not expect. For example, with some of the redeployments we've had to make around China. And, you know, that also resulted, you know, a little bit more of our deployment in locations that are a little bit lower yielding doesn't mean they're less margin or less profit. They just may not have the same price point as something else. And that's why, you know, we're seeing strong, you know, earnings growth coming out of all this. But when you think about a company that, you know, our capacity is growing 6.7% this year. Our total revenue is up double digits. I think it's up almost 88% versus 19 total revenue. So we're growing our business. We're gonna continue to grow our business moderately. And the yield, I mean, typically, think about moderate yield growth somewhere between 2% to 4%. We're in that 2% to 4%. Probably be a little bit better if it wasn't for China. But besides that, you know, we're seeing people are willing to pay more money than they did last year. They're willing to spend more money on the ships than they did last year. We're getting the volumes that are more than what our capacity increases. And we're benefiting from a lot of the investments that we've made around, you know, AI and loyalty and so forth. The last comment I just wanna make about, you know, the comment I just made about that our total revenue is growing double digits in 2026. The Caribbean total revenue is growing by double digits in 2026. Operator: Your next question comes from James Hardiman with Citi. Your line is open. James Hardiman: Hey, good morning. I actually just wanted to continue down that same line of thinking. Maybe if you could help us think about your business sort of organic versus inorganic. Obviously, you've got another icon class ship coming on. You've got some calendar benefits from last year's icon and celebrity ships. And then you've got, you know, the Royal Beach Club coming on. I don't think you're gonna get any benefit from the second one in Cozumel. But at least that first one feels like you could get. So when I just think about the inorganic stuff, it sort of maybe north of 2% on that alone. So how should I think about the organic business? And then maybe specifically, the organic business in the Caribbean just given the idea that that seems to be if there's gonna be more capacity coming to the Caribbean, you know, those older ships, the older tonnage probably is taking on the brunt of that, you know, the competitive environment that you're seeing from one of your peers. Thanks. Jason Liberty: Thanks, James, for the question. And I think first, as we look at our yield profile for this year, about half of it's going to come from new hardware. By the way, as we add new hardware into our environment, just because the denominator is bigger, it has less of an effect on our yield improvement. So half of it's gonna come from new hardware or new, and the other half is coming from like-for-like. I'll have Michael talk for a second here in a minute on the Royal Beach Club. But historically, if you look at when we launched Perfect Day, you know, we started very slow in the buildup of that business. And we do that very intently to make sure that we have mastered the experience. And Michael and his team are masters at doing that before we kinda ramp up to more significant levels. But when you think about our business, like, that's typically the tailwinds that we see. We see like-for-like yield growth, by the way. That also includes the Caribbean. And you're also seeing, you know, the benefits of the new hardware as it comes on. Sometimes in quarters, it's a little bit, you know, when some of the new ships are coming in, some of the deployment changes, especially even when, like, new ships come in. Like, a ship might have been in on a Saturday. Now it goes out on a Friday. That can sometimes play a little bit of a mix in. Michael Bayley: Hi, James. Just to comment on Jason's commentary regarding the Royal Beach Club and the opening. You know, we typically start all of these new products slowly. We have capacity restraints when we open up just to make sure that we've got the product absolutely perfect, and that's exactly what we've done with the Royal Beach Club. The great news is that within four weeks, the Royal Beach Club has already become the number one top-rated experience in Nassau for our cruise guests. And it's already outperformed all other products that are available in the market. That's exactly where we want to be. So we're pushing it now to get to exactly the same level of satisfaction as Perfect Day. Latest results show at about 0.8 of 1% behind Perfect Day for a satisfaction delivery, which means that the NPS is really stunning. So we're moving towards that goal of making sure that we've got the perfect product and the demand now is really starting to ramp up. And we feel like we're gonna have a huge success with the product. Naftali Holtz: Just wanted to think about the yields and the like-for-like. You know, obviously, the yield is just one part of the equation. Also look at the profitability of the ships. So if you kinda look at the way we are expecting margins to grow this year and, of course, earnings, there is also the ability to not only benefit from new ships' efficiency and scale and just better margins, but we also make even if we make those deployment changes, we find ways to also run them more efficiently and deliver the guest experience in a better way. So the profitability is growing on both, not just the yield. Operator: Your next question comes from Lizzie Dove with Goldman Sachs. Your line is open. Lizzie Dove: Hey, thanks for taking the question and congrats on a great year. I guess thinking more, you gave a lot of great color in terms of some of the cadence for the year and the factors, like, on the dry dock side of things and deployment, islands, etcetera. Could you maybe share a little more in terms of how you're thinking about that net yield cadence for the year, I guess, in terms of the ramp of what's factored into your guidance? And I suppose specifically for 2Q given you kind of called that out on the dry dock side. Thanks. Naftali Holtz: Yes. We're not I'm not going to comment specifically about Q2, more about the first half and the second half. But as I said in the prepared remarks, there are really a couple of things that are driving that cadence. One is dry dock timing. So we do have more dry docks than last year. And, you know, I talked about them being more in the second quarter versus the first quarter. And, of course, towards the end of the year. One thing that is a little unique in this year is that we have also larger ships going into modernization or dry docks, and so those come obviously with higher yields. So the year-over-year comparison is different. And then we have also more Silversea ships significantly in the last year. And so those are, of course, also highly yielding. So this is more about, you know, how the comps work and year-over-year cadence. The second one is the ramp-up of the Royal Beach Club. Michael talked about. We wanna get the experience right. We're doing great, and we'll just make it better. So there's a little bit of impact there. And then some of the deployment and mixes, and the timing of new ships that we have every year. And so that's really the main impact of the cadence throughout the year. Operator: Your next question comes from Robin Farley with UBS Financial. Your line is open. Robin Farley: Great. Thank you. Wanted to ask about the new ship order, the discovery class. There's not a ton of detail, but an industry chatter is that it's gonna be much smaller than the, you know, ICON Oasis, a lot of other ships you've done. And so I wonder if you could talk a little bit about I assume that means you can put them in higher yielding guest destinations or just kind of what's the trade-off between maybe those ships not paying as much capacity growth versus pricing. And then I'm just gonna squeeze in a part two. I won't make it but just on our next cruise cost, just, you know, this is, like, year two here of just incredibly low net cruise cost. Is this due to just the timing of, you know, two years in a row of dry dock days something related, or is this actually, like, a sustainable rate of net cruise cost growth that we would think about longer term? Thanks. Michael Bayley: Hi, Robin. It's Michael. I'll talk a little bit about Discovery. Actually, I'm really not gonna talk about Discovery. We've been working on Discovery for the last couple of years. And from the business perspective, we are really excited with the innovation, creativity, and the kind of product that we've now created with Discovery. It really is going to be a game changer. Just as ICON was introduced, and kind of changed the game, Discovery is going to do exactly the same thing. We are really looking forward to sharing more details about Discovery with the marketplace, but we're not planning on saying much about it today or in the next couple of months. We have a promotional campaign that'll be ready to go soon, and we'll be very excited to visit multiple cities and start talking about Discovery. I can tell you that it really is gonna be a game changer. The many of the assumptions that are currently out there in social media, etcetera, in terms of size, capacity, etcetera, etcetera. Are probably, it's fair to say, inaccurate. So looking forward to introducing it. It's gonna be a big deal, and we'll make sure that you get an invitation. Naftali Holtz: Okay. And, Robin, I'll cover the cost. So I think for, you know, our formula, and we do subscribe to it. And that's the way we run the business. And so we wanna always have that spread between yield growth and cost growth. And we believe that that's the right way to do that. And so that's going to follow our formula. Right? And this year, it follows that formula. I think the first thing to really this is really important. We're very proud of how our teams, not only growing the commercial aspects of it and revenue, but how they are also delivering the experience and the cost management that we do that. And what's very, very important to us is we are not compromising on the product. Because for us, it's really important that we continue to deliver the best vacation experiences, and Jason talked a lot about how that will carry us and allow us to grow sustainably into the future and win share. The other thing that is, the two other things that are kind of helping us in terms of how we manage costs. First, our capacity growth this year is 6.7%. And so you should expect from us, and we expect from ourselves that we can leverage the scale of this business. We're now going to be an $8 billion company. That as we continue to grow, the capacity, right, there comes some economies of scale on the cost side as well. That's one. And the second one is that we're finding more and more ways and Jason talked about it in his prepared remarks, about how do we more sustainably and smartly run the business utilizing all the disruptive technologies that's out there, including AI and GenAI. And we talked a little bit about how we're doing that on large commercial activities, but it's really infused in what we do day to day, and the teams are really working through that and utilizing it to find better ways to run the business. Jason Liberty: Yeah. And I just wanna just to add on the AI side because I think a lot of times, it's attributed to people, like you're gonna have less people. I think we look at AI as really allowing us to do more higher purpose activities to enhance the experience for our guests. And our business, because of the scale of our business, you can think about supply chain. You can think about how our ships get from point A to point B. You can think about how we yield manage, or just being able to get people to start, you know, kind of further up the chain in the activities that they do. That yields not only a better experience for our guests, a better experience for our employees, but also then provides cost opportunities for us. And so we see it as a huge commercial enhancer. It's a significant guest experience enhancer. We see it as really tooling our employees to make their experience better and for them to provide higher value. And it's less about what I think sometimes we think that there's just, like, less people. We actually see it as more as a, you know, it creates a lot of new things that we could be doing that's gonna drive higher margins into our business. Operator: Your next question comes from Brandt Montour with Barclays. Your line is open. Brandt Montour: Great. Thanks for everybody. Thanks for taking the question. So we spent a lot of time on the supply situation in the Caribbean. My question is more about how maybe industry participants away from you have reacted to that. Does it feel I mean, Jason, you've been watching this industry for a long time. Does it feel like, you know, a little bit more or less rational than maybe what this type of environment would have engendered in the past? And sitting here, you know, halfway through WAVE, with industry volumes so far seemingly pretty strong across the board, are we at a point now where maybe things can improve or sort of still wait and see? Jason Liberty: Well, yeah, it I, you know, it's only been twenty years. So but I've a lot, and Michael, for sure, has seen a lot over the twenty years in terms of all the kind of promotional activities. For sure, this industry is so much more rational, so much more about price integrity. And there's always promotions in the market. And but those promotions in the market are we would say, very similar to what we saw last year or two years ago. And similar to what we saw in 2018/19, etcetera. Now there's a, you know, if you go back probably a decade ago, you saw some, you know, some irrational activity. But I think overall, we would say that it's rational. There's a lot of price integrity. You know, our travel partners are doing such an exceptional job in generating high-quality demand, as well as our other channels as we're for sure, a channel of choice. And so I think collectively, what I can see, there's a lot of rational activities. And that, by the way, also expands into really have a look at our true competitive set which includes our land-based vacations. And when we, you know, we, you know, and I think somewhat the cruise side of this a little bit insulated because of the price gap to land base. But we're certainly chasing to see how we can go about and close that. Operator: Your next question comes from Conor Cunningham with Melius Research. Your line is open. Conor Cunningham: Hi, everyone. Thank you. Just maybe a comment around the close-in booking strength. I was just hoping you could talk about your skewed itineraries that are moving more towards three to four days versus, you know, seven plus. You know, it's not in the context of, like, you having less visibility. It's more in the idea of, you know, closing demand, you know, has the opportunity to move yields a lot more. So just can you talk a little bit about that and how the I think it was 20% in 2025. So if you could just maybe correct that number, but also give your thought process around '26 and beyond. Thank you. Jason Liberty: Yeah. Well, first, Conor, I think that, you know, coming in, you know, I would say over the past, you know, call it three or four years, certainly have made it a priority to bring more short product to the market. And that is to really match how guests or certain segments wanna go out on vacation. They want more vacation experiences. They want them more often. They want them shorter duration. That's not everybody, but there's certain segments that want that great weekend getaway. And so we've, you know, we've certainly have added that into this, but we haven't, you know, we're now kind of in a more mature state with those short products. As you pointed out, it is closer in business. But the reason why I wanna combine those two thoughts about it's closer in business and we've kind of, you know, we've reached a good level of scale. Not that there's not more growth. It's just that it's not going from, you know, single digits into something that's more material into our business. The reason why those thoughts are important to bring together is that our yield management models, right? I mean, you know, they are AI-based. They do learn. And so when we think about close-in, you could see this in the fourth quarter, you we did see better demand, but it's not, you know, it doesn't necessarily mean that that better demand gonna result in what we saw in previous quarters with close-in booking. I think we have a pretty good handle now on close-in demand, how we market it, how we price it, how it comes in. And our yield management and our forecasting is informed by all of that. I think the other point I wanna say on the short product side that I think Michael and Laura have really, on the celebrity side, done an exceptional job is they have really elevated the experience. Our guests walk away with having the best vacation weekend, certainly, of the year. And, of course, we want it to be of the lifetime, but certainly of the year. And I think that when you're delivering that experience, you're building that trust. It's an incredible feeder for our broader part of our business, especially new to cruise because now they're hooked on the vacation experience. And that's also yielding more reps for getting out of our guests. And that's resulting in achieving that goal of delivering a lifetime of vacations. Michael Bayley: And, Conor, just to add to Jason's comments. I mean, for Royal, we've got, you know, now we've got two Oasis class ships, one out of Port Canaveral, one out of Miami. Moving twice a week carrying around 12,000 people per ship per week. So that's 24,000 a week. Going to Perfect Day in CocoCay. And now, of course, with the Royal Beach Club, and they're also going to the Royal Beach Club. So when you think about the proposition in the marketplace to the customer, the fact that you can get on these incredible ships just packed full of activities and entertainment features, multiple restaurants, then wake up in the morning and take the kids to Perfect Day CocoCay and then have a great show in the evening, and the next day get to the Royal Beach Club and be back in work on Monday morning. It's really a fantastic proposition. And we've seen the demand for those products really accelerating. And of course, the kind of the margins that we generate on those products are really quite significant. The other comment is the simplicity of booking, the ease of being able to get on board these ships. It's become increasingly easier. And then with all of the investment that we've made over time in the pre-cruise planning and the ability to start communicating with our guests about opportunities to book and buy products before they come on board. All of that is really combined to make this a very seamless, easy product to buy, and that's exactly what we're seeing. And so in many ways, it does encourage people to wait a little longer before they book because they know how simple it is, and they also know what a great time they're gonna have. Operator: Your next question comes from David Katz with Jefferies. Your line is open. David Katz: Good morning, everybody. Congrats, and thanks for taking my question. Can you just talk about what information or inputs you have with respect to River? That, you know, are driving the increased commitment there? And, you know, the degree to which you believe you can induce trial of your current customer base versus, you know, taking share from existing river cruise companies? An update there would be great. Thank you. Jason Liberty: Sure. Well, obviously, we are very excited about River. Of course, when we announced River and we announced the first 10 ships, also, at the same time, I said this was not gonna be a hobby. And so we are, you know, this is another, I think, point of evidence that this is not a hobby for us. And we feel, well, obviously, we've done a lot of research even, you know, announcing this or getting into this. About the trust that we've built with our customers, how loyalty affects them, and that really their desire for an elevated river experience. And so we, you know, we felt very strongly just based off of, you know, we have nine and a half million guests a year. This year, we'll have over 10 million guests sailing with us. We have a massive database of loyalists that our ability to generate high-quality demand is, I mean, very strong. That really availed itself when we began to tease it and build waiting lists and so forth that you immediately saw, but specifically from our loyalty guests, not just with the celebrity brand, but across our three brands, a strong desire to take a vacation on River with us. And, of course, that, you know, we see that every day in terms of the demand from the trade and from our customers for any open spot that they could possibly get. So we feel very good about it. And, you know, I think we always just need to remember that these are not 20 seventy-five hundred passenger ships. These are, you know, these are, you know, sub-200 passenger ships. And we're very excited. And we think that, you know, Europe is just one area of the world where our guests wanna go on a river. Naftali Holtz: Yeah. Just one two other things to add is as we were opening for sale, obviously, the demand actually exceeded our expectations, so that gave us a lot of confidence also as well. And that's both on the volume, but also on the price. And then one other maybe data point that really was encouraging to us because this is what we thought it's gonna happen is that, you know, roughly 80% of the people that booked are actually existing customers, but they've never RiverCruise before. And so they're very excited because they trust the celebrity brand to actually experience another different vacation with the celebrity brand. And that's so that tells you that we can have an opportunity not only to attract other river cruisers, but also expand the market. Operator: This concludes the Q&A period. I'd like to turn the call back to Naftali Holtz, CFO, for any concluding remarks. Naftali Holtz: We thank you all for your participation and interest in the company. Blake will be available for any follow-ups. We wish you all a great day. Operator: Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Hello, and thank you for standing by. Welcome to A. O. Smith Corporation Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the call over to Helen Gerholt. You may begin. Helen Gurholt: Good morning, everyone, and welcome to the A. O. Smith Full Year and Fourth Quarter Conference Call. I'm Helen Gurholt, Vice President, Investor and Financial Planning and Analysis. Joining me today are Stephen Shafer, Chief Executive Officer, and Charles Lauber, Chief Financial Officer. In order to provide improved transparency into operating results of our business, we provided non-GAAP measures. Free cash flow is defined as cash from operations less capital expenditures. Adjusted earnings, adjusted earnings per share, and adjusted segment earnings exclude the impact of restructuring and impairment expenses. Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website. A friendly reminder that some of our comments and answers during this conference call will be forward statements that are subject to risks that could cause actual results to be materially different. Those risks include matters that we described in this morning's press release, among others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue. We will be using slides as we move through today's call. You can access them on our website at investor.aosmith.com. I will now turn the call over to Stephen to begin our prepared remarks. Please turn to the next slide. Stephen Shafer: Thank you, Helen, and good morning, everyone. I want to take a moment to sincerely thank all of our employees for their outstanding dedication and hard work in 2025, allowing us to navigate a dynamic environment and deliver record EPS. Their commitment to serving our customers, adapting to new challenges, and consistently delivering high-quality solutions is instrumental in our success. Each and every member of the A. O. Smith team plays a vital role in building trust with our customers and upholding the values that define A. O. Smith. I am truly grateful for your ongoing passion and collaboration. It has me excited for our potential together in 2026 and beyond. Now moving on to our 2025 financial performance, please turn to slide four. Our 2025 sales increased slightly as pricing benefits and higher commercial water heater and boiler volumes were offset by lower China sales. Our EPS increased 6% to a record $3.85 driven by profitability improvements in both segments. North America segment margin improved 20 basis points over 2024 adjusted segment margin led by profitability improvements in our water treatment business as well as mix benefits from higher commercial sales. In our rest of world segment, benefits from our 2024 restructuring actions and other cost control measures in China resulted in margin expansion of 40 basis points, even with lower China sales. We returned $597 million of capital to shareholders with our dividend and share repurchases. In the fourth quarter, we announced the acquisition of Leonard Valve, which we completed earlier this month. This acquisition expands our water management market reach, digital capabilities, and integrated product portfolio. I welcome the Leonard Valve team to the A. O. Smith family. Now turning to our North America segment performance. North America water heater sales increased 1% in 2025 as cost and tariff-related pricing benefits and higher commercial volumes offset lower wholesale residential volume. We project that full-year 2025 residential industry unit volumes were roughly flat to 2024, and the commercial water heater industry volumes increased approximately 5%. We are pleased with our performance in the commercial market and retail residential channel. However, we faced some challenges in the wholesale residential channel in the fourth quarter. This part of this market is experiencing pressure from a new construction slowdown and continued initiatives by retailers to expand into serving the professional, which is leading to increased competitive intensity. The benefit for us as an industry leader is that we have a strong presence in both the retail and wholesale channels, and we have a good line of sight into how the market moves, backed by data, analytics, and extensive customer relationships. We are actively working with select customers to address the specific geographies and product offerings that are under the most pressure to deliver better outcomes in the wholesale market in 2026. Our North America boiler sales grew 8% compared to 2024 due to higher commercial and residential boiler volumes, as well as pricing benefits. We are pleased with our 2025 boiler performance and the continued strong demand for our market-leading high-efficiency products. North America water treatment sales decreased 2% in 2025 as our strategic shift away from the on-the-shelf retail channel offset growth in our more profitable priority channel. Sales in our priority dealer direct-to-consumer and e-commerce channels grew 10% in 2025. We also expanded operating margin by 400 basis points to almost 13% last year, which we expect to improve by an additional 200 basis points in 2026. In China, full-year third-party sales decreased 12% in local currency as a result of continued economic weakness and soft consumer demand, particularly in the second half of the year as government subsidy programs were discontinued. The restructuring actions we took in late 2024 and expense management drove profitability improvement of 130 basis points despite lower sales as the team executed well in a challenging environment. I'll now turn the call over to Chuck who will provide more details on our full year and fourth quarter performance. Charles Lauber: Thank you, Steve, and good morning, everyone. We delivered sales of $3.8 billion in 2025, a slight increase over last year. 2025 earnings were $3.85 per share, compared with adjusted earnings of $3.73 per share in 2024. Turning to slide five. Full-year sales in the North America segment of $3 billion increased slightly compared to 2024. Pricing actions and higher boiler and commercial water heater volumes were offset by lower volumes of residential wholesale water heaters. North America segment earnings of $728 million increased 2% compared with 2024 adjusted segment earnings. Segment margin was 24.4%, an increase of 20 basis points year over year. The higher segment earnings and segment margin were primarily driven by improved profit of our water treatment business and higher commercial volumes. Moving to Slide six. Rest of the world segment sales of $880 million decreased 4% year over year primarily driven by lower sales in China that were partially offset by 13% sales growth in our legacy India business, and purity sales of $54 million. Rest of the World segment earnings of $76 million were flat to 2024 adjusted segment earnings as the impact from lower sales in China was offset by the benefits from our 2024 restructuring actions and other cost-saving measures. Segment operating margin was 8.7%, an increase of 40 basis points over 2024 adjusted segment margin. Please turn to Slide seven. Turning to fourth-quarter performance. We delivered sales of $913 million in 2025, flat to the same period in 2024. Earnings in the fourth quarter were $0.90 per share, a 6% increase over adjusted earnings of $0.85 per share in 2024. Please turn to Slide eight. Fourth-quarter sales in the North America segment increased 3% to $714 million compared to the same period in 2024, primarily as a result of pricing benefit. North America segment earnings of $165 million increased 7% compared to 2024. Segment margin of 23.1% increased 70 basis points compared to last year's adjusted segment margin. The higher 2025 segment earnings and segment margin were primarily due to pricing benefits and actions taken to improve water treatment profitability, which were partially offset by higher input costs. Moving to slide nine. Fourth-quarter Rest of the World segment sales of $206 million decreased 13% year over year primarily driven by lower sales in China. Organic India sales grew 18% in local currency, 2025, and PUREC contributed $8 million to sales in the quarter. Rest of the World segment earnings and segment margin of million dollars and 7.8% respectively, in 2025 compared to adjusted segment earnings and adjusted segment margin of $19 million and 8.1% in 2024. The lower segment earnings and segment margin compared to the prior period were primarily due to lower sales in China, partially offset by the benefits of our 2024 restructuring actions and other cost savings measures. Please turn to Slide 10. We generated strong free cash flow of $546 million during 2025, a 15% increase over 2024, primarily driven by lower year-over-year capital investments as well as higher earnings and the benefit of a one-time tax adjustment. 2025 free cash flow conversion was 100%. Our cash balance totaled $193 million at the end of December. And our net cash position was $38 million. Our leverage ratio was 7.7% as measured by total debt total capital. While our 2026 leverage will increase due to the cash we borrowed under a new credit agreement, used to acquire Leonard Valve, we continue to have significant available capacity for future acquisitions. Let's turn to Slide 11. In addition to returning capital to shareholders, we continue to drive organic growth through the development of innovative product offerings and continuous improvement in productivity. Two of our key strategic priorities. Consistent with our portfolio management priority, we continue to actively assess opportunities that meet our strategic and financial criteria. Earlier this month, our Board approved our next quarterly dividend of $0.36 per share. We have increased our dividend for over thirty consecutive years. We repurchased approximately 5.9 million shares of common stock in 2025 for a total of $401 million. We continue our strong track record of delivering returns to shareholders. Over the last two years, we have returned almost $1.1 billion to shareholders through dividends and share repurchases. Please turn to Slide 12. And our 2026 earnings guidance and outlook. Our 2026 outlook includes an expected EPS range of $3.85 to $4.15 per share. The midpoint of our EPS range represents 4% growth over our 2025 EPS. Our outlook is based on a number of key assumptions, including within material costs, our guidance assumes that steel prices in the full year 2026 will increase approximately 10% compared to 2025. Other material and freight costs including the carryover impact of tariffs, will also be a headwind in 2026. Our guidance assumes no change to the current tariff level that are in effect today but we continue to monitor the situation closely. We will continue to invest in our gas tankless offering. As a market leader, we believe that it's important for us to offer best-in-class products in this category. We project our year-over-year impact to our North America margins would be minimal as we continue to build a foundation in this category and gain scale over time. We estimate that 2026 CapEx will be between $70 million and $80 million. We project a generate a strong free cash flow of between $525 and $575 million. Interest expense is projected to be between $30 million and $40 million, an increase over previous years due to the $470 million of additional debt incurred to acquire Leonard Valve. Corporate and other expenses are expected to be approximately $80 million to $85 million and include advisory fees associated with the Leonard Valve acquisition. Our effective tax rate is estimated to be between 24 to 24.5%. Our board has approved 5 million additional shares of stock for repurchase, and we expect to repurchase approximately $200 million of our stock in 2026. We project our outstanding diluted shares will be 138 million at the 2026. I'll now turn the call back over to Steve who will provide more color on our key markets and top-line growth outlook for 2026 as well as a portfolio update. Staying all on slide 12. Steve? Stephen Shafer: Thank you, Chuck. Our top-line outlook includes the following assumptions. While we believe that US new home construction remains in a deficit, we project that the softness in new construction will persist into 2026. We assume that proactive replacement remains steady and will be similar to 2025. Based on those factors, we project that 2026 US residential industry unit volumes will be flat to down compared to 2025. Our current projection assumes US commercial water heater industry volumes will increase mid-single digits in 2026 due to a buy ahead of lower efficiency non-condensing commercial gas products that are scheduled to be eliminated as part of the October 2026 commercial regulatory change. We assume that 2026 commercial electric industry volumes would be flat to 2025. In addition, our outlook includes carryover from our May 2025 price increases in North America. We project our North America boiler sales will grow between 6 to 8% in 2026 due to the carryover of pricing benefits and from the continuation of the transition of energy-efficient boilers particularly as commercial buildings look to improve their overall carbon footprint. We expect North America water treatment sales will grow between 10-12% due to tariff-related pricing benefits as we continue to grow faster than the market through the expansion of our dealer network. And turning to our outlook for China, we foresee continued headwinds in our markets due to continued low consumer confidence, a discontinued government subsidy program, and ongoing competitive intensity. Because of these factors, we project that our 2026 China sales will decrease mid-single digits compared to last year. We expect 2026 to be particularly difficult as consumer demand remains subdued and we will face comps from 2025 during which stimulus programs were in place. We anticipate a return to growth in the second half of the year. We continue to manage our discretionary costs prudently in this environment. These decisive actions are designed to protect our profitability and strategically position the business to be competitive during an eventual recovery once market dynamics begin to improve. Our outlook excludes any potential outcomes of the ongoing China assessment. We project our India business, inclusive of Purit, will have top-line growth of approximately 10% as we continue to leverage brand synergies and introduce innovative new products to grow faster than the market. Based on these 2026 assumptions, we expect top-line growth of approximately 2% to 5%. We expect our North America segment margin to be between 24-24.5% and Rest of World segment margin to be between 8-9%. Please turn to Slide 13. 2025 was an exciting year of transition for A. O. Smith. With several leadership changes including myself. As I began my tenure as CEO last year, we announced three key strategic value creation levers that will guide A. O. Smith's path forward: portfolio management, innovation, and operational excellence. These levers are fundamental to strengthening our industry leadership position, supporting our customers through a dynamic market environment, and delivering long-term profitable growth. We will be providing periodic updates on each of these areas going forward. Today, we'll discuss portfolio management. Over the past year, we have been actively working to transform our portfolio to be better positioned for long-term profitable growth. We have been focused on looking at strategic options in our China assessment to better position our business there to be more competitive going forward and take advantage of the eventual market recovery. The assessment is ongoing, and I am pleased with the quality of discussions we are having with a number of potential partners. We're also continuing to evaluate opportunities to strengthen our core North American water heater and boiler business. Examples of actions we have taken include our recent investments in gas tankless, heat pump, and commercial condensing gas, product development, and manufacturing capacity. We continue to evaluate broader options for strengthening our leadership position in this space. We have also announced over the past year a number of actions to help scale and improve the profitability of our North American water treatment. We have been learning much about the space through the acquisition of high-quality businesses we have used as the foundation of this platform. And have taken actions to prioritize the channels and further integrate the business to create more synergy and scale. These actions have allowed us to improve the profitability of this business by 400 basis points last year, and we believe additional opportunities are still in front of us to both continue expanding margins and returning the business to higher growth. Finally, we have done work to evaluate expanding into the broader market of water management. This includes the broader ecosystem of moving, controlling, and mixing water across the residential and commercial markets. These products, systems, and solutions often interact with our water technology products that serve as our core business today. Leonard Valve and its portfolio of mixing valves and control units represent our first action expanding into this attractive market opportunity. Please turn to slide 14 as I share more details about our strategic rationale for this acquisition. Leonard Valve is well aligned with our strategic and financial criteria and is an excellent complement to our core water heater and boiler business. It enters us into the attractive water management market with well-established premium Leonard and Heat Timer brands. Leonard's connected products, which represent approximately 30% of their sales, and growing, expand our digital platform and provide us capabilities to leverage going forward. By broadening and integrating our product offering, we will be able to create new and innovative solutions for our commercial and institutional customers. Along with its higher growth profile, the business also has predictable demand with approximately 80% of the volume associated with repair and replacement. Leonard is also a strong cultural fit as a value-based company with deep market experience, a strong brand and reputation across the industry, and many long-tenured and dedicated employees that have a passion for serving their customers and the market well. Simply put, they do business a lot like how A. O. Smith does business. And I'm looking forward to what we can do together. We expect Leonard Valve to contribute approximately $70 million in sales in 2026. In summary, we are further strengthening our portfolio to deliver greater value to our customers and other stakeholders. We also remain focused on leveraging operational excellence and innovation in addition to portfolio management to drive long-term sustainable growth for A. O. Smith. As we have discussed, while we had challenges to navigate in 2025, we also had meaningful achievements. Highlights include the demonstrated strength and resiliency of our commercial water heater and boiler business. Our leadership in these markets is well recognized and valued by our customers. The significant profit improvement driven by our prioritized approach to North American water treatment. We are now better positioned for long-term growth and profitability. The disciplined cost management actions in China as we look to reposition that business for a more competitive future. The continued double-digit growth of our India business now complemented by the addition of Purit to drive continued growth at an even greater scale. And finally, the continued focus on making the necessary investments to ensure our bright future despite the challenging and uncertain market conditions. I am confident that the strategic actions we are taking today along with our continued disciplined operational approach, will enable A. O. Smith to build on our leadership position, become more agile, and be better prepared to seize future opportunities. With that, we conclude our prepared remarks. We are now available for your questions. Operator: Thank you. Ladies and gentlemen, as a reminder to ask a question, please press 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press 11 again. We ask that you limit yourself to one question and one follow-up then return to the queue for additional questions. Our first question comes from the line of Saree Boroditsky with Jefferies. Saree Boroditsky: Good morning, Helen. This is James on for Saree. Thanks for taking questions. Stephen Shafer: Good morning. How are you? Good morning. Saree Boroditsky: Yeah. I wanted to ask on the residential guidance here. Your outlook is calling for a flattish to down kind of industrial volume here for 2026. And I think then this marks kind of the third year of flattish to declining volumes, which we haven't really seen for a while. So can you kind of provide me details on what is making this down or weakness kind of more persistent? And can you provide more details on what kind of seeing in the market generally? Stephen Shafer: Yeah. Thanks for the question. So just overall, as we look into 2026, it was really three components as we think about it. Right? We have the emergency replacement, which is very resilient, very reliable, very predictable, and we expect that to continue. We have proactive replacement, which, you know, we've talked about being fairly high the last five or six years. We feel like that's pretty resilient at this point. It's been out there for five years at above 30% of total replacement. And so we're expecting that to continue. We're seeing some headwind is kind of the new home completions, multifamily and single-family. We see pressure in that as we go into next year. So, yes, we've had a couple of years of flat volumes coming off, you know, some better growth years earlier that were a little lumpy due to COVID, but the pressure we're seeing next year is really in the new home construction, which you know, we feel like without some stimulus with a lower interest rate or perhaps some velocity on new home sales is gonna be a bit of pressure on our top-line residential volumes. Saree Boroditsky: Great, Dale. Thanks for the color. And I guess I wanted to ask a question on China. I think your guidance kind of implies like, double-digit decline in the first half and then return to growth here. What specific, like, indicators are kind of giving you confidence that it can kind of what is it? What is it? Return to growth in the second half? Stephen Shafer: Yeah. Some of it is we've gotta work through a period where there was a lot of government subsidies that were driving some demand generation. So that's the challenge we're gonna face in the first half of this year as we're now comping against that. The return to growth will be partly driven by as we move past that phase and we get back to the remodel wins and the refurbishments that need to happen in China. And part of it is some of our own actions internally to get behind and focus and drive growth in certain areas. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Mike Halloran with Baird. Your line is open. Mike Halloran: Good morning, Good morning. Hey. So can we first start on just the comments that you made about increased competitive intensity in the wholesale channel? Maybe just a little bit more context of two things. I suppose. One, what is it meaning in terms of price, share, etcetera, in that channel? But then secondarily, when you net the two together, with the strength you have on the retail side, how is that balancing out all else equal to give both the narrow view on the wholesale, but then draw it back to how that's impacting the cumulative market. Stephen Shafer: Sure. And I'll start by saying, as I mentioned, we have meaningful share in both the retail and wholesale side. So from that standpoint, we participate when there's movement between the two. I'd say specific update on wholesale, Mike. Right? I mean, the dynamic of low new home construction, which we just talked about, and the fact that retail has made some inroads in terms of share gains overall in the industry is just putting pressure on that part of the channel. And anytime you've got kind of pressure that way where there's limited growth or even there's some declines, it just makes it a more competitive environment. And, you know, from what we see right now, it's not really driven by a lot of, you know, kind of new entrants into the space. It is primarily the, you know, kind of the leaders that serve the wholesale channel today. And it's not new that there's dynamics playing out across the channel in terms of, you know, different partners and how that works. I would say it's a bit accelerated a bit the last, you know, six months in particular just because of the pressure that's been in that market. And I think, you know, as we look at it, and this is again another area where because we are, you know, such a large player in the space, we know all the industry participants. We know all the different distribution partners. You know, we know where those pressures are the greatest. And that's really our focus going forward. You know? So we obviously were happy with the gains we've made on the retail side and with our partners over there. We think we can do better on the wholesale side to serve that market, and that's what our focus is gonna be here right now. Mike Halloran: Thanks for that. And then, maybe just some help with the cadencing through 2026 cumulatively. You have a lot of moving pieces, front half to back half. So any thoughts on how the earnings and revenue should cadence relative to normal seasonality? Any one h, two h dynamics that are worth mentioning? Any help would be appreciated. Stephen Shafer: Yeah. So, yeah, if you look at 2026, Mike, it's going to look a little different than 'twenty-four and 'twenty-five. Both those years, 'twenty-four and 'twenty-five, on the residential side in particular, on commercial water heating, we had price increases that pulled volume forward in the front half of the year. So, you know, 'twenty-four and 'twenty-five cadence on the residential water heating side was, you know, 53% in the front half, 47% in the back half. We look at 2026 and expect a much more normalized year and maybe closer to 50-50 or 51-49. So there will be, you know, tough comps in the front half of the year, both compared to 'twenty-five and 'twenty-four. On the water heating side. As you also step into next year or 2026, input costs, we're looking at those very closely. Steel should be up, it's expected to be up about 10%. And as you know, have pretty good visibility into that. In forward view of what our pricing is. We'll have carryover tariffs into the first half of the year and other costs are also causing a bit of headwind. And then, you know, thinking about China, and we've talked a lot in the past about the cadence in China. As Steve said, a bit around with we'll see pressure in the first half of the year because the subsidy program was in place. In 2025. This year, beginning actually, beginning midyear last year, it was discontinued, and that's why we saw weakness in the back half of this year. We expect that to continue into next year until there's some traction. We think there is some pull ahead. Into the marketplace and expect some of that traction to come back perhaps in the second quarter or midyear. As you know, the first quarter is always a challenge in China because of the Chinese festival of New Year. We expect that to be a little bit more accentuated this year because of the discontinuation of the subsidy program. And then return to I would say, in the back half of the year for China, kind of their normal little bit better in the third quarter and your outlook expected to be improved in the fourth quarter, like it historically has been with some of the holiday shopping. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Jeff Hammond: Hey, everyone. Good morning. This is Mitch Moore on for Jeff. Thanks for taking my questions. Stephen Shafer: Hey, Mitch. Good morning, Mitch. Jeff Hammond: First, I was just wondering if you could give a bit more color on Leonard Valve, their go-to-market strategy. What end markets they plan and maybe how much growth the $70 million in sales you're expecting this year, like what growth rate that reflects? Thanks. Stephen Shafer: In terms of end markets, they're very strong in kind of the commercial markets, which was appealing to us. They serve in some ways, like, with their heat timer controls business, it's very much a specking driven business, very similar to, like, our lock and bar business. In fact, we show up on a lot of the same spec sheets together. So there's a similar go-to-market model that way. And there's just overlap in a lot of the channels. Both in the representatives who take our products to market, and in distribution as well. So it's close to our categories in that way. And then on the actual way the product is used, it interacts in the ecosystem. Similar to our product. So, you know, it's down in the mechanical rooms where our products are often found. And I think that it's similar trades and contractors operate with the product. So from that standpoint, it's a very close adjacency in terms of product expansion. And I think it's what's got us excited strategically that there's both ways we can work together and serve the market better and how we go to market, but also ways in which we can innovate and find ways that our products can interface and create better solutions for our customers. You know, as far as growth rate, you know, with it's the business has been growing double digits. So in that 10% range. It's kinda baked into how we think about the growth rate, largely driven by the digital portion of the market that they serve. Jeff Hammond: Great. That's helpful. And I know there's a lot of moving pieces around price cost just with tariffs and lapping price increases and whatnot, but can you maybe just give some thoughts about how you expect price cost to trend through the year? Stephen Shafer: Yeah. I mean, Steve had comments around the competitive nature of what's happening in the marketplace today. We certainly also commented that we have some carryover pricing that we expect to carry over in the next year. And, historically, I'll say we do a really good job of protecting our price cost relationship. So we do expect that to continue over time. But also, historically, we generally see some fade. You know, we'll be watching that closely. I'll just kinda say that we're very committed to making sure in the competitive environment that we keep our customers competitive and we'll be focused on that. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Bryan Blair with Oppenheimer. Your line is open. Bryan Blair: Thank you. Good morning, everyone. Stephen Shafer: Good morning, Bryan. Bryan Blair: It'd be great to I guess, following up on Leonard Valve, it'd be great to hear a bit more about the build-out and prospects of your water management platform. I guess, how should we think about TAM expansion given the new products and applications that are involved there or potential there? And in what ways is LVC, you know, foundational to build out? And, again, given the right opportunities, how aggressive would your team like to be on incremental M&A? Stephen Shafer: I mean, we're excited about the way we're defining kind of the water management market. You know, as I mentioned, it's kind of thinking about how does water move, mix, get controlled, through the ecosystem of, you know, residential and commercial units. We play an important part in that today with the categories of our water heaters and boilers. And I think there's a lot of other products that help make that happen. And so, you know, we're still early in our journey of kind of shaping up where the right places are for us to participate. So your question around TAM, I think we're excited about that it does open us up to bigger market opportunities. We've got what we think is an exciting and healthy pipeline of where we could go to do that. Obviously, when it comes to acquisition, there's a lot of things that have to come together to make that work, but we think our reputation in the industry helps us because we're a good spot for good high-quality companies to kind of gather around in how we serve the market. And I think, you know, there'll be those near-term opportunities as we think about how do we go together into the marketplace, provide these products that are well-established categories today. And then longer term, I think it creates more growth for us because it allows us new ways to create, you know, value for our customers. Today, we do that in a meaningful way by driving more efficiency and performance in the water heater and boiler products that we serve the market. But if you think about how, you know, commercial customers, you know, use our products or thinking about things like energy efficiency more broadly, having a way to serve the market with an ecosystem, I think, is a way to create more value. Bryan Blair: Okay. That makes a lot of sense. And you noted the strategic assessment of China is ongoing. So there isn't a definitive update, but you did mention a number of potential partners. I was just curious if you could offer any other color on direction or whether, you know, options or considerations have narrowed and whether there's any connection to any of the incremental turnaround actions that are underway. Stephen Shafer: Yeah. I would say, you know, we're moving with urgency. Because we know when we talk about an assessment of the business, right, we're still running the business and we have employees and customers that we want to provide some confidence and certainty to. But I would say while we do that with urgency, we're also being thoughtful to do it in the right way. And our goal, again, is to make sure that we set the business up to be as competitive as possible going forward. I can't get into the specifics of the folks that we're necessarily working with, but we are learning, I think, a lot about other options out there on what we can pursue. I think, as I mentioned, the quality of the conversations has been terrific. Our local team in China has been very active and involved in that to make sure we're thinking about things the right way. And I'm, you know, we'll continue to move that forward, and we'll continue to update you guys as we learn more. But at this point, we don't have anything in terms of how we've narrowed the scope in terms of what potential options and outcomes could come from it. But I'm pretty happy that the process itself has been very helpful for us. Operator: Thank you. Our next question comes from the line of David MacGregor with Longbow Research. David MacGregor: Yes. Good morning, everyone. I guess I want to start by talking about I wanted to begin by asking about the water treatment business. You called out the 400 basis points of margin improvement in 2025, which is quite an accomplishment. And maybe you could maybe talk a little further about just sort of the composition of that improvement and I guess as well, just where now in terms of where those margins go and at one point, I think the goal had been to grow those margins at about 100 basis points a year through a variety of different initiatives and how are you thinking now about kind of multiyear annual profitability growth in that business? Stephen Shafer: Yeah. We like the space, and for A. O. Smith, we entered in it, you know, eight years ago because we understood the megatrends and felt like there was a lot we could bring into the space in terms of how we run our businesses. To kind of build the platform, we made a number of acquisitions, and I think what we've done recently is we've now taken kind of a state of what have we learned through the businesses that we bought and through running the businesses, and that helped define for us a little bit of our journey and our path going forward. And as we've been talking about for the last year or so, part of it was prioritizing which part of the market we wanted to really focus on and invest in. And been obviously a little bit of a growth drag for the business as we've decided to deprioritize some things. In 2024, we took some restructuring charges to help reorient that business. And now I think, you know, what we're excited about is that we know the spaces in the market where we really want to focus and play. And that's helping us drive a more profitable part of the business. Also, the growth in the space where we want to play, we're very pleased with. And then also along with that is the natural path of just sort of learning how to kind of integrate the businesses, take advantage of levers you can pull to create value by doing that. And that, I think, is a journey we're still on. Going forward, I think, like I said, I think we're focused on where we want to play. We think we can continue to really add value into the water treatment market. We're excited about where this business can go. We're still very excited about the market opportunity overall. And we think we can continue, as I've mentioned in my prepared comments, to drive meaningful growth with this business as well as continue to expand margins as we scale and as we continue to pull levers on integrating the business. David MacGregor: Can you offer any sort of thought on where those margins might be today versus sort of the North American segment averages? And then I have a follow-up. Stephen Shafer: Yeah. I mean, so the margins today at 400 expansion of basis points kind of takes you into the ZIP code about 13% operating margins. And you know our North America margin is at 24.4% this year. So expanding it to another 200 basis points because it's a 15% margin, and we like the fact that we're kind of back to that mid-teens digits and looking for opportunities for M&A to match with the business to continue to grow the business and maybe have opportunities to enhance that margin profile throughout an M&A transaction. David MacGregor: Congratulations on that progress. As a follow-up, I guess, just wanted to stay close to the water treatment business and ask for any thoughts you've got on what you're seeing in the way of consumer demand patterns and how that may be evolving and how that's influencing your guide on 2026. Stephen Shafer: For water treatment? I think overall, that business is closely connected to consumers. So there's, I'd say, some caution that we see from consumers. In some segments of the market, it's considered a discretionary spend item. So, you know, from that standpoint, I think there's maybe cautiousness as we enter 2026. But overall, we still see it as growth because we see the category is still growing. We still see penetration opportunities, and we still see our opportunity to build out our own dealer network and grow even beyond the market. Operator: Thank you. Our next question comes from the line of Scott Graham with Seaport Research Partners. Your line is open. Scott Graham: Yeah. Hi. Good morning. Wanted to maybe get a little bit more color from you guys on maybe beyond what you provided with the initial question on this competition in, you know, in distribution, wholesale. And what I'm wondering is are you kind of saying that, like, residential water heaters in that channel are now kind of more jump ball, or is it that maybe some of the higher-end stuff because of the pros that that is what is maybe under a little bit of pressure. Is it so in other words, you know, if wholesale is half of residential, approximately, is that entire half an area of concern now? Or is it less? Stephen Shafer: No. I don't think the characterization of a jump ball is what's happening. I would characterize it more of a lot of industry dynamics that have always been out there. Right? And you have channel partners that are, you know, dedicated to certain brands and we partner very closely with them to help, you know, reach and serve our contractors and trades groups well. And then there's others that carry multiple brands, and it's sort of some share shift that happens through those dynamics. I would say that those are the dynamics. They've always been in that part of the market. There's still the dynamics playing out today. What we find is oftentimes when there are movements around share, there's typically reactions to those movements. And those take time to play out. And I think where we are right now in the wholesale market, like I said, it gets a little bit more intense when the market itself is not growing because the new construction builds aren't there. The wholesale channel primarily, you know, is the mechanism that serves that part of the market. There's a little bit of pressure, as you mentioned, coming from the retail players who are really looking to make inroads with the professionals. So that intensity is dialed up a little bit, but the dynamics itself are not new. And I'd say they're ones that we typically know how to navigate. And we do it working closely with our customers. And like I said, as there are actions and movements that happen, there's typically reactions. And over time, those things work their way out, and that's our focus of what we're gonna navigate here when we talk about the start of 2026. Scott Graham: Okay. Thank you for that. I want to maybe just ask a follow-up question on capital. And with the Leonard Valve acquisitions, it's clearly more of a pivot to, Steven, what you said about water management. And so what I'm wondering here is that with this pivot, and I know you found Leonard Valve and that's wonderful. But for many years, the focus was on water treatment. Pretty much as a silo. And I'm just wondering how the pipeline is in water management with Leonard Valve now done. Is that something that you have to build, or have you been building a pipeline there? Stephen Shafer: I think it's a pipeline that's been pretty visible to us for a while. I mean, I think when you're in kind of the plumbing space, you know who the players are. Like I said, there's a lot of overlap on how you go to market. There's a lot of overlap in terms of how you serve contractors. So it's not a starting from scratch kind of pipeline. I think that's been visible to us. I think the focus and attention we're putting on it is now kind of dialed up because there's a lot of different options of ways we could go. As you mentioned, we've been very focused on building out the water treatment platform. And, you know, this is a pivot that's not us walking away from water treatment. In fact, we think that's a very attractive growth platform that we're going to continue to invest in. But we do feel like there's more opportunity for us as a company. And we love our core water heater and boiler business today. It generates great cash flow. You know, it's very resilient. We're a market leader in that space. And we want to think about how do we leverage that to actually find more growth opportunities more than we participate. That's what we're trying to do with our water management effort. I think we know who the players are out there. But as I mentioned, with any acquisition strategy, there's a lot dependent upon, you know, what's available and when, and I think we can be competitive there. We're also gonna remain disciplined in our approach on how we go after it. Operator: Thank you. Our next question comes from the line of Tomohiko Sano with JPMorgan. Your line is open. Tomohiko Sano: Good morning. This is Ethan on for Tomo. I wanted to ask for a little bit more color on India. It seems like you guys have delivered strong growth with the Purit integration, adding incremental revenue. Can you share a little bit on the roadmap for scaling India over the next three to five years? And maybe any details on potentially further M&A within that area? Stephen Shafer: I think, you know, right now, our primary focus is on, you know, how do we take advantage of the Purit addition to our portfolio. India is a market that, you know, we've invested there significantly, you know, to get the business up and running and obviously, the Purit was an additional investment to that business. We've got a local team there that really understands the local market. We think we've got a lot of opportunities now kind of organically, if you will, with the combination of Purit and our A. O. Smith business. It's a market that requires a lot of high pace innovation. Bringing new products out to market. That's a big driver of how we've been able to grow double digits for many years in a row, and that's what we're now gonna do at a bigger scale, as you mentioned. So that's our primary focus. You know, ultimately, over time, does it mean more acquisitions or not? I think that still has to play out, but our focus right now is primarily running with the business we've got. Ethan: Thank you. And looking more on the margin side, for internationals, with India continuing to scale up, can we kind of forecast out strength within operational improvements similar to this year out into maybe 2027 or looking more on a longer-term scale with China potentially improving in the second half this year? Charles Lauber: Yeah. This is Chuck. I would say a little bit more longer-term scale. I mean, we're still investing in growth in India. We love the fact we're growing double digits together with Purit. Bringing those businesses together, you know, in India is still in the growth profile. China, I think it's a little early to call out much margin improvement. We're very pleased with how China performed this year in the fourth quarter, particularly the restructuring actions that we took in 2024 are paying off, and the team managing through a tough top line did a very good job of managing the margin. So margin improvement in both businesses, I think, will take a little bit of time. And we'll have to see how that plays out, particularly the economy in China and as we, you know, grow scale in India and invest in growth. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Nathan Jones with Stifel. Your line is open. Nathan Jones: Good morning, everyone. Stephen Shafer: Hey, good morning. Nathan Jones: Follow-up on steel prices. You guys said you're expecting steel prices to be up 10%. Can you just clarify what that means? Is that like average 2026 over average 2025, or are you expecting steel price to increase from where they are now? And then does that imply that you need to get more price in order to cover some of these inflationary pressures along with some of the other things that you had mentioned? There are still inflationary pressures? Charles Lauber: Yeah. Steel pricing has gone up. Right? So we've seen kind of a gradual increase in the index which does drive what we pay on a ninety to a hundred and twenty day lag. That 10% up is the year-over-year average. I would say if you kind of box it in, it's 10% 2026 over 2025 as well as 10% up quarter over quarter 2025. So we'll see steel. We project steel to still rise a bit as we go through the back half of the year, but on average, up 10% year over year. As far as price cost relationship, you know, we do have, you know, carryover tariffs. We've got other costs that are going up. I'll just kind of point to kind of our historical ability to be able to, over time, kind of maintain and protect our price cost relationship and our margin profile. Nathan Jones: Okay. I guess and then my follow-up question, the slide on Leonard Valve has 2022 to 2025 revenue CAGR of double digits. I think you said it was about 10%. There was a lot of inflation, and I assume that there's a lot of metal in a lot of their products as well. And a fair amount of that kind of growth was probably driven by price as well. Could you maybe just comment on what you think the long-term growth of that business is, kind of the volume that they can generate rather than what I just assume is some price-driven growth that you've seen there over the last few years? Thanks. Stephen Shafer: Yeah. Actually, the biggest source, and Chuck mentioned, of the growth in Leonard Valve has been the digital transition of mixing valves. So it's a technology upgrade that's happening. It's adding a lot of value in the marketplace. And so more so than just a pure kind of pass-through of cost pricing, that's been the big driver of the growth over the last few years, and it was one of the real appealing characteristics for us to both get more involved in that digital upgrade, but also bring that kind of capability and thinking to the broader ecosystem of solutions that we can serve our customers. So from that standpoint, we think it's a, you know, it's a growth that has still more momentum to it. And just to frame, I mean, about 30% of their volume or their revenue is digital and connected products. So it's a base that we look to grow over time. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Andrew Kaplowitz with Citi. Andrew Kaplowitz: Hey. Good morning, everyone. Stephen Shafer: Good morning. Andrew Kaplowitz: Steve, I know that the strategic review is ongoing in China. As you said, but restructuring does seem to be helping stabilize the margin of the business. So if, for instance, the market doesn't come back as you expect in the second half, do you have more restructuring that you can do? How do you think about the ability to sort of maintain margin if the market is still difficult? Stephen Shafer: Yeah. I mean, look. Over long periods of time, right, the answer in China is not continuing to restructure and cut costs and not be able to grow the business. So, you know, we're doing what we think is necessary to protect the business today and we're making, I think, smart decisions around where we do cut. There's a lot still to play out in terms of how the market will kind of respond, especially as we start to lap these subsidies. So we're watching that carefully. Obviously, the strategic assessment we're doing might change kind of how we approach our business in China. That's the high-quality discussions that we're having with partners. You know, whether there's more restructuring in the future, I think we'll evaluate that as we go. I think, ultimately, though, our goal is we need to find a way for the business to be even more competitive than it has been going forward. And eventually, the market will recover. But, you know, when that is, I think it's still obviously, a big uncertainty. But we'll do what we need to do to make sure we can maintain the competitiveness of the business there financially. But, ultimately, we need to find a strategic path forward that allows the business to grow again. Andrew Kaplowitz: It's helpful. And then your boiler business is continued to be pretty solid, and I think you have a good forecast for '26. So maybe just one more color on the health of that market. I know your high-efficiency boilers are doing well. But is that all mostly what this is, or is it the market strength overall? Stephen Shafer: It's a good market, but I would say our Lochinvar brand is the, I think, premier brand in that marketplace. We have great technology. As we've talked about, you know, on the high-efficiency end. You know, it's a great product. So it's a little bit of both. It's been a strong market, but also, I think we're performing well and even taking share in that market with the strength of our product portfolio. Operator: Thank you. Ladies and gentlemen, I am showing no further questions in the queue. I would now like to turn the call back over to Helen for closing remarks. Helen Gurholt: Thank you, everyone, for joining us today. Let me conclude by reminding you that despite many challenges, A. O. Smith achieved record EPS of $3.85 in 2025. We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join our presentations at three conferences this quarter: Citi on February 19, North Coast on March 12, and JPMorgan on March 17. Thank you, and enjoy the rest of your day. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to CSW Industrials Fiscal Third Quarter 2026 Earnings Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you'd like to enter the queue, please press star 1 at any time during this conference to enter the question queue. If anyone should require operator assistance during the conference, as a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alexa Huerta. Thank you. You may begin. Alexa Huerta: Thank you, Rob. Good morning, everyone. And welcome to the CSW Industrials fiscal 2026 third quarter earnings call. Joining me today on the call is Joseph Armes, Chairman, Chief Executive Officer, and President of CSW Industrials, and James Perry, Executive Vice President and Chief Financial Officer. Joseph Armes: We issued our earnings release, updated Investor Relations presentation, and quarterly report on Form 10-Q prior to the market's opening today, all of which are available on the Investors portion of our website at www.cswindustrials.com. This call is being webcast, and information on the replay is included in the earnings release. During this call, we will make forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results could materially differ because of discussed today in our earnings release and the comments made during this call as well as the risk factors identified in our annual report on Form 10-Ks and other filings with the SEC. Do not undertake any duty to update any forward-looking statements. I will now turn the call over to Joe. Joseph Armes: Thank you, Alexa, and good morning, everyone. It is my pleasure to begin by reporting that our team delivered record fiscal third quarter results in both revenue and adjusted EBITDA. Despite market headwinds and economic uncertainty that has been present for most of this fiscal year, and which has been most pronounced in the residential HVACR end market. Before commencing our regular quarterly commentary, I want to provide additional context for our strategic initiatives financial results in the quarter. CSW is a larger and more diversified company today than it was just three months ago when we last spoke to you. Capitalizing on our strong balance sheet and guided by our disciplined approach to capital allocation, we continued to invest in growth opportunities in a meaningful way. In this most recent quarter, we completed three acquisitions including the acquisition of Mars Parts, within our Contractor Solutions segment our largest acquisition to date, at $650 million. We also acquired Hydrotech's Holdings, and ProAction Fluids, within our Specialized Reliability Solutions segment. Which amounted to $26.5 million in aggregate investment. Considering the past twelve months to include the Aspen Manufacturing acquisition, we successfully executed four highly revenue, EBITDA, and cash flow accretive synergistic transactions with a total investment of approximately $1 billion. In addition, we've invested $70 million in open market share repurchases during the quarter, emphasizing our dedication to maximizing shareholder returns. Our financial was to maintain a long-term perspective and to invest opportunistically with great discipline even amid short-term volatility. Our capital structure now reflects these investments. In November, we strategically funded these acquisitions with cash on hand and low-cost debt capital, while always maintaining a net debt to EBITDA ratio well within our target range of one to three times. This ensures that we maintain a resilient balance sheet with ample liquidity for future investment. As we have committed to do in writing to you, our shareholders. These dynamics, with the magnified seasonality effects from the addition of the Aspen Manufacturing and Mars Parts businesses, make year-over-year comparisons of certain performance metrics less relevant. The interest expense generated by our new capital structure certainly impacts reported and adjusted EPS comparisons particularly when comparing to prior year periods when we were in a net cash position. Additionally, having deployed almost $1 billion in acquisition capital in the last year, our amortization of intangible assets will increase significantly, which also challenges comparisons. These items are excluded when providing EBITDA and adjusted EBITDA results which is why we continue to point you toward these metrics as the best multi-period comparison. Providing an update on the Mars Parts acquisition, we will remind you that at the time of acquisition, we reported that we expected to achieve $10 million of run-rate synergies and to reach a 30% EBITDA margin for this business within twelve months. We have already actioned a majority of the identified synergies and we now expect to exceed this initial objective. I am pleased to share that the team has done an outstanding job and accelerating the integration of Mars Parts into our contractor solutions segment. The conversion of this business into the contractor solutions ERP system was completed earlier this month, and other commercial integration initiatives including product harmonization, are well underway. In short, we confidently maintain our expectations to achieve our operational and financial goals for this acquisition. We have experienced encouraging order volume as we exited December and moved into January, as compared to the overall fiscal third quarter. Based on very recent detailed customer discussions, we have positive feedback that our customers' inventory levels are getting more imbalanced as their destocking plans have been or are being completed. Since going public in 2015, we have maintained that we generally expect mid to high single-digit organic growth through the cycle in our Contractor Solutions segment though quarterly volatility is common. While not recession-proof, this segment has shown impressive resilience due to the essential nature of our innovative products. While it is too early in the season to forecast what we expect, in calendar 2026 and for our fiscal 2027, we are cautiously optimistic and encouraged by order patterns starting to emerge. We expect to have a better view of this outlook on our fiscal fourth quarter earnings call in May. At this time, I will turn the call over to James for a closer look at our results. And following his comments, I will return and conclude our prepared remarks. James Perry: Thank you, Joe. Good morning, everyone. As Joe mentioned, this quarter had a lot of moving parts, and I will address many of them in my remarks today. During the 2026, we delivered record revenue of $233 million, up 20% as compared to the prior year, driven primarily by our acquisitions over the last year. This was partially offset by a 2.9% in consolidated organic revenue concentrated in our Contractor Solutions segment. I will discuss the revenue trends by segment later in my remarks. Adjusted consolidated EBITDA grew 7%. Adjusted EPS for the fiscal third quarter was $1.42, demonstrating resilience amid challenging market conditions. Recognizing that this reflects a 21% reduction compared to the same period last year, the reduction in adjusted EPS was primarily driven by $10 million of higher interest expense as we moved from a net cash position last year to a net debt position this year. After strategically funding acquisitions, and share repurchases with cash on hand and low-cost debt capital. Adjusted EPS was impacted to a lesser extent by increased operating expenses from the acquired businesses before realizing the full effect of planned and actioned synergies as well as gross margin compression we have signaled all fiscal year driven primarily by the margin dilution from the Aspen Manufacturing, and Mars Parts acquisitions in Contractor Solutions. More granularly on the EPS adjustments, our fiscal third quarter included $6.6 million or $0.40 per share in acquisition-related transaction and integration cost net of tax, as well as $11.3 million or 68¢ per share of amortization of acquired intangible assets. Consistent with the updated adjusted EPS methodology we introduced in our fiscal first quarter. Consolidated revenue for the 2026 increased by $39 million or 20% when compared to the prior year period driven mainly by the aforementioned acquisitions. Inorganic growth was partially offset by lower organic volumes in Contractor Solutions due to continued destocking by our customers in the residential HVACR market. Consolidated gross profit in the fiscal third quarter was $92 million up 15%, with a gross profit margin of 39.7%, down 170 basis points from 41.4% in the prior year period with all segments experiencing some margin contraction. Our consolidated adjusted EBITDA for the fiscal third quarter reached a record $45 million representing a $3 million increase and 7% growth compared to the prior year period. Our adjusted EBITDA margin declined by 250 basis points to 19.2%, from 21.7% in the prior year quarter. It was primarily driven by the Martian dilution from acquired businesses prior to realizing anticipated synergies and higher input costs resulting from direct and indirect tariff impacts. We successfully mitigated a portion of these cost pressures through strategic pricing actions and reduced domestic freight expenses. During the third quarter, Contractor Solutions generated a $168 million in revenue, representing 71% of consolidated revenue and 27% growth over the prior year quarter. Growth in the quarter was driven by $42.7 million or 32.3% from acquisitions, partially offset by a $6.8 million or 5.1% organic decline due to lower volumes in a challenging market. As a reminder, our fiscal third quarter has always been our weakest seasonally due to lower repair and replacement activity in the HVACR end market. And that seasonality effect on revenues, and the associated absorption has been magnified. With the additions of Aspen Manufacturing and Mars Parts. Third quarter organic revenue decline reflects ongoing weakness in housing activity, and the reduction of distributor inventory levels heading into calendar year-end. After a strong summer, Mars Parts experienced modest year-over-year revenue growth of approximately 1% during the quarter since the time of our acquisition. While Aspen experienced a reduction of 23.7% for the quarter. Aspen's decline was expected and driven by the prior year's unusually high third quarter sales distributors ramped up their inventories prior to the manufacturing deadline for products using the R-410A refrigerant. Aspen's third quarter sales this year were more in line with normal yearly seasonal patterns. Since the May 1 acquisition date, Aspen's year-over-year growth has been 14%, demonstrating overall sales growing well above the market. As a result of the Mars, Aspen and Water Works fiscal third quarter results, we had a total reduction of 7.3% in organic revenue if we had owned these businesses last year. A metric we recently started reporting due to our large investments in acquisitions. Adjusted EBITDA for the Contractor Solutions segment was $41 million or 24.4% of revenue, compared to $37 million or 28.4% of revenue in the prior year period. EBITDA margin declined to lower gross margins from acquired business-related dilution prior to realizing anticipated synergies, partially offset by pricing actions and the lower domestic freight costs. On November 4, we closed the Mars Parts acquisition and contractor solutions for $650 million in cash, utilizing a $600 million five-year term loan A and borrowing from our renewed and extended $700 million revolving line of credit. This acquisition, as previously mentioned, expands our existing portfolio in the HVACR end market with the addition of motors, capacitors, other HVACR electrical components, equipment installation parts, and other components used by the pro trade for repairs and replacements. This acquisition also enhanced CSW's into repair parts versus replacement parts. Our specialized reliability solutions segment revenue increased 10.8% to $38 million from $35 million in the prior period. Growth in the quarter included $2.3 million or 6.8% from recent acquisitions, and $1.4 million or 4% from organic growth driven by the general industrial and mining end markets, partially offset by declines in the energy and rail transportation end markets. Organic revenue includes the realization of the price increase in this segment announced during the second fiscal quarter partially offset by unfavorable revenue mix. The adjusted segment EBITDA of $6.5 million in the third quarter fell 1.6% from $6.6 million in the prior year period. The adjusted EBITDA margin contracted 210 basis points to 16.9% in the current period, driven by revenue mix. As Joe mentioned, in the third fiscal quarter, CSW acquired HydroTex and ProAction Fluids, for approximately $26.5 million in aggregate diversifying our specialized reliability solutions segment's products, and end markets. The HydroTex acquisition expands our specialty oils and lubricants portfolio and ProAction fluids as products for horizontal directional drilling that infrastructure build-out. In conjunction with these acquisitions, and in response to the challenges in the SRS segment's end markets, our recent margin performance, we have undertaken certain restructuring actions earlier this month. Some of these were related to winding down the headquarters facility for one of the acquisitions. In the remainder of the acquisitions, we're at our main legacy facility, as proactive initiatives to streamline the combined operations. We do not take these actions lightly. But we expect them to enhance our margins going forward as we strive for a sustained 20% EBITDA margin in this segment. The benefits from these changes will take effect April 1, and we will report further on the one-time charges with these restructuring activities with our fourth quarter results in May. Our Engineered Building Solutions segment revenue decreased 1% to $28.5 million from $28.8 million in the prior year period. Segment EBITDA decreased 5% to $3.9 million representing a 13.7% EBITDA margin, compared to $4.1 million and 14.2% in the prior year period, respectively. The slight contraction in EBITDA margin primarily reflects higher material cost linked indirectly to tariffs. The backlog remained flat during the quarter with a trailing eight-quarter book-to-bill ratio remaining steady at 0.9 to one. We're encouraged by the improved mix in the EBS backlog, which includes more higher-margin products. And we expect this to benefit future results. Pricing actions to offset increased costs are ongoing, with additional increases planned on a project-by-project basis. Transitioning to our cash flow, we reported third quarter cash flow from operations of $28.9 million growing 165% compared to $10.9 million in the same quarter year. The year-over-year growth was primarily attributable to a $16.8 million tax payment made in the prior year fiscal third quarter which was deferred from the first two quarters of the prior year due to a temporary federal tax relief. Our free cash flow defined as cash flow from operations minus capital expenditures, was $22.7 million in the fiscal third quarter, compared to $7.8 million in the same period a year ago. The third quarter free cash flow increase of $15 million or 193.1% was primarily driven by the aforementioned tax payment deferral partially offset by higher capital expenditures in the current quarter. And was otherwise relatively flat year over year. Our free cash flow per share was $1.37 in the fiscal third quarter compared to $0.46 in the same period a year ago. Excluding the tax payment deferral, our free cash flow per share in this year's third quarter decreased by $0.09 or 6.2% from 1.46. Our effective tax rate for the fiscal third quarter was a negative 34.2% on a GAAP basis due to a benefit from the $6.4 million release of uncertain tax position reserves upon statute act expiration from the acquisitions of TruAir and Falcon several years ago. Our adjusted tax rate was 28.3%, slightly higher than our normal range due to several items that vary quarter to quarter and due to the lower seasonal profitability in this quarter. We currently forecast our fiscal year 2026 GAAP tax rate to be approximately 23% or 26% adjusted, which varies quarter to quarter due to specific items. Year to date, these rates have been 21.425.8%, respectively. As Joe mentioned, our amortization of intangible assets will increase due to the recent acquisitions particularly Mars Parts. Based on preliminary purchase price allocation accounting, we expect that annualized amortization of intangible assets will be approximately $63 million moving forward. As I mentioned, we funded this year's acquisitions using cash on hand from the September 2024 follow-on equity offering, revolver borrowings, and a new term loan A. At quarter end, we had $200 million outstanding on our revolver borrowings, and the $600 million term loan A. As a result of this debt, our third quarter fiscal 2026 had interest expense of $8 million as compared to interest income of $2 million in the same quarter last year. Including cash on hand, our net debt for covenant calculation purposes was $764 million, resulting in a net debt to EBITDA leverage ratio of 2.3 times. This results in an interest rate of SOFR plus 200 basis points. As a reminder, we execute an interest rate swap of SOFR at a rate of 3.416% for three years to hedge a portion of our term loan A debt. We maintain a strong balance sheet with a net debt to EBITDA ratio well within our target range of one to three times, ensuring ample liquidity to continue to support growth initiatives and all other elements of our capital allocation strategy. Underscoring this point and with the support of our robust free cash flow and healthy balance sheet, during the quarter, we opportunistically repurchased approximately $70 million of our stock in the open market, representing 283,000 shares at an average price of $246 per share. Reiterating our confidence in our ability to create long-term shareholder value. We continue to monitor tariff developments and their impact on our businesses. While our specialized reliability solutions and engineered building solutions segments face minimal direct exposure, both have experienced indirect effects from broader economic consequences of tariff policies. Each of these segments sources a limited number of inputs internationally but even certain US sourced materials have seen significant cost increases. The SRS segment has negligible sales in high tariff markets though those could be at risk due to geopolitical volatility. Within EBS, we factor higher cost into bids for new projects. Within contractor solutions, we're continuing to reduce third-party manufacturing in China. A strategy that's been underway for several years. By the end of fiscal 2026, we expect China to represent 10% of the segment's cost of goods sold. Vietnam, primarily through our owned facility, will be in the low thirties as a percentage of Contractor Solutions cost of goods sold. Other Asian markets will contribute about 15% within the segment while the remaining cost of goods sold is primarily in The United States. After product harmonization is complete, the Mars Parts acquisition is not expected to significantly alter this geographic mix. With that, I'll now turn the call back to Joe for his closing remarks. Joseph Armes: Thank you, James. In the 2026, we delivered record third quarter revenue and adjusted EBITDA, propelled by 20% revenue growth from recent acquisitions that has significantly outperformed our acquisition models. We remain highly confident in our business and our ability to deliver above-market profitable growth thereby enhancing long-term shareholder value. We invested approximately $1 billion in acquisitions over the last year, demonstrating our confidence in the long-term strength of the residential HVACR plumbing and electrical end markets. Our strong balance sheet will allow our outstanding team to continue to execute on all elements of our capital allocation strategy across market cycles guided by our disciplined risk-adjusted returns analysis. We are proud of our demonstrated ten-year track record of creating sustainable shareholder value through prudent capital management and operational excellence. One of our guiding principles is to treat our team members well. And we remain committed to prioritizing the safety, and health of our employees. I'm very pleased to report that in calendar year 2025, we achieved a total reportable incident rate or TRIR of 1.1. An improvement from 1.2 in 2024 even as we acquired new businesses and integrated them into our environmental, health, and safety programs. This accomplishment reflects our ongoing dedication to maintaining a consistently safe work environment in our legacy businesses and enhancing the work environments of the companies we acquire. And I want to thank all of the CSW team members for their role in achieving this important milestone. We recently completed our biannual Korn Ferry employee engagement survey. This is a very broad-based survey that we believe provides instructive data and we are pleased to report that we had an impressive participation rate of 90% compared to eighty-five percent two years ago. We invest significant time analyzing these results and applying our learnings to enhance our employee value proposition. Having such a high level of employee participation is encouraging and it speaks to the strong employee-centric culture that we have at CSW. As always, to close my prepared remarks, I want to thank the CSW industrial team who collectively own approximately 4% of the company through our employee stock ownership plan as well as all of our shareholders. For your continued interest in and support of CSW Industrials. With that, Rob, we're ready to take questions. Operator: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad. You may press 2 if you'd like to remove your question from the queue. Before pressing the star keys. One moment please while we poll for questions. Our first question comes from John Kanowine with CJS Securities. Please proceed with your question. John Kanowine: Hey, good morning. Thank you for taking my questions. My first one is, I think you mentioned you saw encouraging orders in January. Especially relative to Q3. I was wondering if you could maybe quantify in terms of orders and organic growth so far. And I know it's early and not your biggest month, but maybe a little more color just on the improvement degree from the last quarter would be helpful. Thank you. James Perry: Yeah. John, thanks for being on as always. This is James. Appreciate that. Yeah. We exited December with a previewed good order rate. October and November stayed relatively soft as we expected and kind as we as we as we saw destocking continue with our customers. Were encouraged by December. The exit rate was good. Hard to quantify January yet, but Jeff certainly tells us that orders have been had been very good. We're pleased with that. We also referenced Joe did in his prepared remarks very detailed conversations with all of our top very thorough reports. Real-time even this week on their destocking plans. Encouraged by that, and, obviously, that shows up in order. Some are still working through it this quarter. I think a couple of the OEMs that have already reported said that they see this quarter people still working through it. So hard to quantify that from an organic growth rate. I don't think we'd get ahead of ourselves yet. But Jeff would certainly tell you that we're very encouraged by the order rates in January. We mentioned it very intentionally. I'll say we saw the same in the specialized reliability solution segment. Mark has seen similar order pace, as we as we entered the beginning of the calendar year. So we'll report fully on the quarter. Things will really, really get going in February and March, of course. But very pleased with what we're seeing so far, and it gives us encouragement. And as Joe said, cautious optimism leading into the busy season. John Kanowine: Got it. That's helpful. And then you could give us a little more color on your recent acquisitions and what their expected seasonality is, I think that would be helpful just because I think it's been a little bit increased just in terms of seasonality basis with all the new businesses you've put in there? Maybe more specific, what are you expecting from the contribution in fiscal Q4 from acquisitions? You mentioned forty-seven or 45 million in Q3. What does that turn into? Just based on historical parameters? James Perry: Yeah, John. Great question. Yeah. We've had Morris for just a couple of months now. So we're getting our arms around that fully. Aspen now will, you know, have it since May 1. So we're this will be our first January, February, March quarter. Know, we talked about Aspen was down a bit year over year just because last year such a buildup like the OEM saw with the equipment change. You know, we've said generally that our legacy contractor solutions business kind of a 50 to 55% in our, you know, stronger two fiscal quarters you know, forty forty-five, 50% in the others. Aspen and Mars are probably more like sixty forty. Breaking down quarter by quarter is still a little early for us to get to, and especially going through the first year with them, going through the disruption we've had in the market the last few quarters of course, with the destocking. So, you know, I think as we get through this quarter, we'll have a better sense. But they do they do exaggerate the seasonality, magnify that a little bit more because they're more repair focused. And, obviously, are not turning their air conditioners on, you know, certainly not with the cold snap we've had lately. Folks aren't turning their air conditioners on in, you know, December January, February, most places. So you don't know that you have a repair. Know, if someone buys a new house, they may go ahead and replace the system, so that's why that business tends to hold up a little better through the seasonality. But they're gonna exaggerate things somewhat, but I would ask that you kinda give us this quarter to get a better sense of what that looks like under our own ownership. And as we go along throughout the fiscal year, get a better and better look each quarter at how each of those perform. Anything else, John? John Kanowine: Almost everybody. Operator: Okay. Well, I'll take the next question. Our next question comes from Susan Maklari with Goldman Sachs. Please proceed with your question. James Perry: Rob, we cannot hear the questions. Operator: Okay. Can you hear me now? James Perry: We can hear you, Rob. We if Sue's talking, we don't hear Sue. Our queue is on. Operator: Hello? Susan, are you there, Susan? Charles Brown: Yes. Can you hear it's Charles Brown for Susan. Can you guys hear me? James Perry: Hi, Charles. Yeah. Can now. Thank you. Charles Brown: Hey. Wonderful. Sorry for the technical difficulties, but good morning. I guess, first, I would love to ask about, you know, understanding your optimism for more normalized order rates coming through in HVAC. You maybe help us understand what the organic growth for this business could look like in, you know, calendar '26 over the next few quarters. If the housing market remains weak, you know, what is the confidence in your ability to return to, you know, your target mid to high single-digit growth over time? James Perry: Yeah, Charles. This is James. You know, wish we had a real precise answer. As we said, it's a little early. I'll say a couple of things. You know, we've historically had a mid to high single-digit organic growth rate with contractor solutions. And that's through the cycles, obviously, this last year, we did not have that. We've certainly had years when that, you know, exceeds 10%. And you get back to that average. I think as we go through the next couple of years, we expect that type of average to return. What quarter we start seeing that? We're not sure yet. We're certainly, as we said, encouraged by the order volume we've seen in December and January. We're most encouraged by the anecdotal evidence we have in talking directly to our customers and where their inventory levels are terms of parts and accessories, which could be different from OEM. Inventory. So we're encouraged by that. I would also say, as we go through the year, we're gonna have easier comps. You know, last year's fiscal fourth quarter was up about 8%. You know, you kinda had to make up over the fiscal third quarter. So the quarter we just started, January, February, March, was pretty good last year because people waited to stock up because they were buying the OEM equipment in the November, December months, and then they stocked up on parts and accessories down in March. So this quarter's comp's a little harder. As we go through the year, obviously, the comps get a little bit easier. So I think when we talked to you in May, we'll have a much better sense than with a couple of months behind us of order. Order volume. You'll obviously hear a lot more from our customers. Those public and the ones that we talk to that we're happy to talk about. In terms of what their inventory levels look like. So when we return to that, we'll see. But you know, we've got a long history in this end market and in this business that tells us that know, a mid to high single-digit organic growth rate is what we expect in the long term. Charles Brown: Okay. Now that's very helpful color. Second, I just like to touch on pricing. Can you provide the latest on what you're seeing on the contractor solutions side? And considering the moving pieces in terms of tariffs and other input costs, how do you approach decisions to maybe get more pricing over time in this business this year? James Perry: We've been reactionary in terms of tariffs, obviously. The last couple of years, we've taken our annual price increase in January. And that's worked its way through the system and been well received. I think as we always say, that gets passed all the way through the system. Where we are in the value chain is very important. People pass that through as well. As you know, we took a bit of a midyear price increase to cover our tariffs, and that's really starting to get fully impacted now quarter we just started. It takes a little while to get through the system. So as long as tariffs remain steady for the most part, we think we've covered that now. You've seen some, obviously, some price increases on the metals side. Some of that starts to impact us. Aluminum affects us in EBS. Even something like silver can have a bit of an impact for us. We're watching that closely. Not a big impact yet, but we're watching things like that as commodity prices continue to go up. We think what we've done in terms of pricing is what we need, but we have never been shy about taking price increases and pushing those through. If we see the cost moving up. And we're very transparent with that with our customers. That gets passed through the system, like I said. We don't do that early or until we need to. You know, last year, as you recall, tariffs kinda spiked, came back down. We waited, and I think our patience was rewarded with customer response. On how we handle that in terms of the industry. And so we will not be hesitant to take pricing as we need to. Last fall, we took price increases within specialized reliability solutions and passed that through the system. Within EBS, that's a project-by-project basis. So we're not going to let the shareholders bear the brunt of cost increases. We will continue to pass that through as warranted. Charles Brown: No. That makes sense. Thank you for that. And if I can squeeze one last question in, maybe for James. Can you provide an update on your capital allocation priorities from your obviously, you're sitting near the midpoint of your targeted leverage range. And, you know, are you willing to do more acquisition in the near term? And what is the pipeline for M and A that you're seeing today? James Perry: Yeah. I'll pass some of this over to Joe Charles, if you don't mind. But, you know, we will certainly work to pay down our debt. But we're sitting at a 2.3 times on the covenant. We've been there before after the Truer acquisition. We were right on that same number, in fact, and we're that down over time. We've got strong cash flow. You know, as we get into the next couple quarters, these acquisitions, the power really gonna show the cash flow that they generate similar to our legacy business. So we're gonna have the opportunity to do that. You know, that leverage ratio obviously moved up from the acquisitions, but we also repurchased $70 million of stock in the quarter. You know, we've got certain levels at which we do that, and that got triggered, and we did that. And we think having an average share price of $246 in that repurchase program last quarter is gonna look very attractive long term. Create a lot of value for the shareholders. So we made a very intentional decision to take on a little more leverage to do that. But we're very comfortable with 2.3. We see that coming down over time from the results of our cash flow. And I'll let Joe talk about of our thoughts on M and A right now. Joseph Armes: Yeah. Thank you, James. I think as James said, I mean, free cash flow and our cash flow is gonna very impressive as we move through the year with these acquisitions. We do have a period of digestion here. I've been asked about, you know, future acquisitions and how long will it take to be able to you know, be in a position to do another acquisition. And I've said that will be quarters, not years. The integration is going exceedingly well. We are very, very pleased with the team's performance on that, and therefore, we're hitting all of our targets. We're exceeding. And so we're very pleased with that. So, again, that would be quarters of digestion, not years. And but that also gives us quarters to pay down debt, and we will do that with our capital in the meantime. And we are disciplined. We are very rigorous in our analysis, in our thinking about returns on those investments. And so but but we're we're in a bit of an execution mode right this moment. But again, that will last quarters, not years. And I think all levers are available to us. And we're just gonna be very mindful of how we move forward. And continue our track record of carefully allocating capital to the highest risk-adjusted return opportunity and that that's paid off for us so far. Charles Brown: Thank you for the time, guys, and good luck for the quarter. James Perry: Thanks, Charles. Operator: Our next question comes from Natalia Bak with Citi. Please proceed with your question. Natalia Bak: Hi. Good morning. James Perry: Morning, Natalia. Natalia Bak: I lost connection for a bit, so I'm not sure if this was asked. But I'll just ask it anyway. Just curious that given the colder weather and snow we've recently seen, have you observed any, like, near-term pickup and replacement activity or pull forward within the contractor solution solutions? Segment in this quarter? James Perry: Yeah. I don't think we see much impact there necessarily. You know, we've got less exposure on the heating side. So to speak. Obviously, there's some there, but, you know, it's more on the air conditioning side. You tend to have something like this every year or two, so it's not terribly unusual in terms of changing patterns. I think, Natalia, all I would say so far, obviously, a look back will be valuable, you know, a few weeks or a couple months from now. But, you know, we talked about the order volume has been, you know, at a very encouraging pace. As we exited December and January, seeing very nice orders. In the contractor solution business as well. The only direct impact we've seen so far is we lost a couple shipping days some of our facilities. We'll make that up in the quarter, so we're not concerned about that. So we don't see any negative impact. In terms of tailwind, I think Tom will tell, but you know, we see more of that in the summer when it gets exceptionally hot on the air conditioning side than in the winter when it gets exceptionally cold. Natalia Bak: Got it. That's helpful color. And then just on the acquisition front, I think earlier you mentioned that you expect to exceed the initial cost synergies that you outlined. So I'm just curious, what inning are you in or the margin maturity curve today? Versus where you one first, when you initially closed on acquisitions and how much additional cost synergies do you expect to now realize from them? James Perry: Yeah. This is James, Natalia. Thanks for that. Yeah. Joe did mention that, and we're really pleased that we see in excess of $10 million just a couple of in, I don't think we're ready to quantify that quite yet. We've got some internal goals that we always had internal goals that exceeded 10 million, but now we feel comfortable saying that we're gonna exceed them. Terms of innings, I'd say on the margin side during the first couple innings. You know, we said that's a twelve-month target where, you know, two and a half months into the acquisitions, maybe you're in the second or third inning. And it's the seasonally low quarter. So you can only do so much from a margin perspective. But we remain on track and are very comfortable with continuing to talk about a 30% margin. I'll say this. Mars has been fully integrated. So being able to directly pick out a margin is gonna get difficult for us, but we're tracking it awfully well. In terms of the synergies, I'd say we're more in the middle innings because we've actioned these synergies. You know, a lot of it was folks that didn't come with the acquisition day one. You know, we've wound down a facility. We have, you know, another you know, the rent coming off of that facility as we go along. So we have actioned the vast majority of the 10 million and now even beyond 10 million of synergies. But it takes the twelve months to really see that roll through. Obviously, that's an annualized type number. So you know, I think we're in the middle innings in terms of actioning. But you're still similarly in the first couple innings in terms of a pro rata and what we're seeing so far given that's a twelve-month goal. Natalia Bak: K. That's helpful. And then just one last quick question. Just switching over to SRS, adjusted EBITDA margin contracted in SRS. And I believe last quarter, mentioned that you implemented a price increase. So how much of the margin pressure is due to timing lag in pricing versus structurally higher material costs? And when do you expect pricing to fully offset the material inflation in the segment? James Perry: Yes. I think that we've seen the price increase come through now, Natalia. So that offset the that part. tariffs. I think we're there. That was done prior to last quarter end. So I feel comfortable with The biggest change this quarter was mix. You know, when the energy markets or some of our more attractive products and they were down, you obviously see less drilling activity and some of those things. So as the energy markets are softer and our product mix shifts away from that, then you you're gonna see potentially lower margins. I'll reiterate though that, you know, we mentioned in my remarks that the acquisitions are gonna be favorable to us as we kinda get through a year of having those. We've got synergy and margin goals with the acquisitions while small. Gonna be important to us. They also to continue to diversify our end markets, more in the food and beverage market, for example, which is attractive. More in the horizontal drilling market. Infrastructure continues to be attractive, so we feel good. About their contributions. And then we mentioned we took the opportunity, and we really give Mark a lot of credit for the proactivity here. We took some restructuring, activity earlier this month. Both with shutting down the headquarters facility of the acquisitions, which was part of the plan, But we also saw some some administrative and other roles that we could reduce and combine and give others more responsibility at our legacy facility here just outside of Dallas. We'll have some charges here in the fourth quarter that we'll quantify on the earnings call. Those will all then be tailwind for us as we enter the new fiscal year, April 1. So when we look at a margin in the mid-teens the last couple of quarters with a goal of 20%, sustainable, Mark, and working with the team looked at that and said, we've gotta get to the 20%. And taking these acquisitions into effect with these restructuring activities. Gives us better sight to that goal. Natalia Bak: That's helpful. Thank you. That's it on my end. James Perry: Thanks, Natalia. Operator: Our next question comes from Tom O'Shanall with JPMorgan. Please proceed with your question. Tom O'Shanall: Good morning, everyone. James Perry: Good morning, Tom. Hello. Tom O'Shanall: Hi. And congrats on TRR, by the way, and my first question is regarding margins. How purchase how how participant how sorry. How persistence do you expect the one-off cost such as integration, inventory write-downs, recognized in this quarter to be going forward? Like, when do you anticipate margin recovery once these costs subside, please? James Perry: Yeah, Tomo. This is James. Thanks. I really appreciate you mentioned the TRIR. We know how important it is to you, and it's of highest importance to us. So seeing that come down this year, was really an exciting achievement to be able to report. In terms of margins on Contractor Solutions, we'll continue to have some integration expenses. Transaction expenses will be behind us. Those were kind of you know, because of the acquisitions of Mars, Hydrotech, some ProAction during the quarter, So those were specific expenses related to that. Not only the acquisition expenses themselves, the pro formas that we put out a couple of weeks ago, We're at the corporate level. So, you know, we have those calls. I think those are for the most part behind us. We'll continue to have some integration expenses. The ERP integration just went live two and a half weeks ago at Mars, so we'll still have some integration expenses. We will quantify and adjust that out. But I think as we get through this quarter, most of that should be behind us. be coming as we go throughout the year. So We still have to do the ERP implementation for Aspen. However, that'll we'll have some integration expenses, but we'll be sure to identify that for you that's why we continue to point to an adjusted EBITDA margin as being the best comparative tool and we feel good about using that. There another part to the question? Sorry if I missed that. Oh, the the the other thing you mentioned, I apologize. The inventory write-off that we had, that was one time in nature. That was related to a specific distribution relationship that terminated. We've since replaced that product in our product line. The customers have received that very well over last few weeks and weeks since we were able to start marketing that. That specific callout was one time in nature. Tom O'Shanall: Thank you, James. And my, follow-up is EBS business. We didn't touch, that much in a q and a session. So could you update the color of, the market outlook as well as your growth strategies margin improvement initiatives for EVS business, please? Because you got the one billion m and a on basically CS business, SRS business, but not for EBS business. So could you talk about organic and inorganic strategies and margins for this business, please? Joseph Armes: Sure, Tomo. This is Joe. I would say EBS is always been our most cyclical business and the commercial construction market continues to be really pretty tough out there. We've been very pleased with performance of our team and bucking that trend and showing some growth. Various quarters, and, to serve our customers really, really well. I would say that the opportunity for organic growth is still out there. One of the great things about this business is it's small and you win a project or two and it really makes a difference. And we are very pleased with the reception in the marketplace of some of our new product development work, especially in EBS where we have brought some new products to market that are being specked into projects, and we would say that that is a really good opportunity for us to see organic growth. But the market's tough. We continue to point to the Toronto market that really blew up over the last couple of years, added a significant chunk to our backlog. That is now being revenue. It's not being replaced in the backlog. The new, starts for high-rise residential in Canada has changed dramatically. But we're not seeing cancellations out of the backlog. We're not losing any business there. And so those projects are revenueing. And so, you know, we're benefiting from that as well. So new product development's probably, our best opportunity for organic growth in this tough market. But I think one of the things that we see with EBS is we are really well positioned for when the market does come back. We are serving multiple property types. We have focused highly on institutional hospitals, things like that that are high end and kind of set the standard for other types of construction. Within that market. And so we think there is organic growth opportunity there for us. If the market would come back, I think you'd really see a nice uptick there. Tom O'Shanall: Thank you, Joe. That's all from me. James Perry: Thank you, Tomo. Operator: Our next question comes from Jon Tanwanteng with CJS Securities. Please proceed with your question. Jon Tanwanteng: Hi. Thanks for taking the follow-up. I was wondering if you could just give your high-level thoughts on what you think housing demand and home improvement demand looks like heading into, you know, calendar twenty-six. And beyond that, if there's any specific puts and takes that we should be applying on top of that, like lapping the refrigerant change or others like that. James Perry: Yeah. John, it's James. You know, we're all hopeful, of course, that housing activity picks up. New housing activity continues to stay pretty soft, it looks like. You look permit numbers, it stayed soft. Existing home sales, we've seen some green shoots there, it looks like. Know, mortgage rates have dipped now and then, and you've seen the pickup on that. And as we talked about on the last quarterly call, you know, a good number of existing home sales come with replacement of units. That would be a good thing. Know, I think we'll see in the first couple of months here if mortgage rates start to move, what consumer confidence does in terms of mortgage rates, and there's a lot of pent-up inventory, it sure seems, that people willing to give up the lower mortgage rates to move has been challenging. You know, we would say that, obviously, the order rates we've seen this quarter, you know, so far could give us a little bit of positive signs there. Probably a little bit early. You know, another thing I would mention is, you know, someone else mentioned on a call earlier this week in the industry that, there's been a lot of repair business last year, and we think that continues this year. We're not sure when that shifts back, obviously. And, obviously, now with the diversification of Mars and Aspen, we've got good exposure and much better balance between repair and replace. Eventually, those repair jobs turn into a replacement. You know, they may buy you a couple years, there's no doubt that housing activity is key, and or a few years, but eventually, units do need to be replaced. But I think you've hit right on it. And when Charles asked earlier about organic growth rates, if you can tell us what housing's gonna do, we'll have a much better sense of that. And as our teams right now are going through the budget process, you know, our fiscal year being April 1, we're going through the intense budget process right now. Obviously, housing activity is a big key to that. So we're watching the same data you are. We watch the weekly permits. We watch the weekly inventory numbers, the weekly mortgage rates, and that informs us on what we think we could expect, and we hope to see some continued optimism in the next couple months. Jon Tanwanteng: Got it. Thank you. And then two quick timing questions. You mentioned higher margin backlog flowing through an EPS. When do you expect that to hit, number one? And then number two, you mentioned trying to achieve the 20% margin consistently in SRS. What's the timeline or your expected schedule to arrive there? James Perry: Yeah. On EPS, you know, the better backlog is coming over the last couple quarters and those usually have anywhere from sixteen to eighteen months turnaround. So I think we'll start seeing that. Still have some of the lower margin, you know, projects in the backlog. So that offsets that. So know, John, I think we'd like to tell you that know, as we exit the fiscal year next year, you're really getting a lot closer to that goal that we've put out there. Again, we're going through the budget as we speak. So if you can let me kinda put a pin in that till May, we'll give you a little better sense of expectations as we go through the budgeting process I just mentioned. In terms of SRS, I kinda give you the same answer, but, you know, they're in that 17% range a little more consistently recently. And the acquisitions coming in and with the restructuring that we've taken once we adjust that out during the fourth quarter, I think you're closer to seeing that 20% sustainably in the next few quarters. Jon Tanwanteng: Great. And then final one for me. Just a little more detail on the two smaller tuck-ins you did. Any mention of on revenue and kinda what the margin was there as well as the growth potential? James Perry: Yes. John, I would say both should be accretive to the margin profile of that segment. One of the reasons we did it. It gave us the benefit of both diversifying end markets and being accretive to our margin profile, so that's good. Growth, we expect to be able, again, to take their momentum and also add, you know, our Salesforce to that. Our distribution channels, they've opened up a couple of new end markets for us, namely would be food beverage. Where we've seen really nice growth. Already. And then also agriculture, which is something we have not done any of. And so we've we're we've got high hopes for that. You know, that's a GDP plus business. And so growth of, you know, mid-single digits organically would be a good rate for that business. We think we can do that and more. With these acquisitions providing some tailwind. But, the margin accretion is also really important to us on that. To show over the next few quarters. John, in terms of revenue, you know, pacing, you know, we said we had $2.3 million of contribution in the quarter from those. That was just a couple of months' worth. Also, you know, for something like horizontal drilling, especially a bit of the slow season, So I think, you know, that kind of run rate, you know, a million a month or so is what you were seeing. That's a little on the lowering because of seasonality. So, you know, you know, that I think you could see, you know, percent or so revenue opportunity accretion from that. But we'll give you a little more details. We get to a full quarter of owning these businesses and what that looks like. But the team is really excited, and Mark's already reported some good opportunities in those businesses now that we own them in terms of, sales. Jon Tanwanteng: Perfect. Thank you. James Perry: Thanks, John. Operator: Thanks, John. Okay. We have reached the end of the question and answer session. I'd now like to turn the call back over to Joe Armes for closing comments. Joseph Armes: Thank you, Rob, and thank you, everyone, for joining us for this quarterly report. We appreciate your support and interest and look forward to talking to you again in May. Thank you. Operator: Today's conference. You may disconnect your lines at this time. And we thank you for your participation.
Operator: Good morning, and welcome to Coda Octopus Group's Fiscal Year 2025 Earnings Conference Call. My name is Shamali, and I will be your operator today. Before this call, Coda Octopus issued its financial results for the fiscal year ended October 31, 2025, including a press release, a copy of which will be furnished in a report filed with the SEC and will be available in the Investor Relations section of the company's website. Joining us on today's call from Coda Octopus are its Chair and CEO, Annmarie Gayle, its Interim CFO, Gayle Jardine, its President of Technology and Director, Blair Cunningham, and Dylan King from their investor relations team. Following their remarks, we will open the call for questions. Before we begin, Dylan King from the company's internal investor relations team will make a brief introductory statement. Dylan, please proceed. Dylan King: Thank you, operator. Good morning, everyone. Welcome to Coda Octopus' fiscal year 2025 earnings conference call. Before management begins their formal remarks, we would like to remind everyone that some statements we are making today may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as may be required by law. We refer you to our filings with the Securities and Exchange Commission for detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances, including, but not limited to, risks and uncertainties identified in our Form 10-K for the year ended October 31, 2025, and Forms 10-Q for the first, second, and third quarters of our fiscal year 2025. You may get Coda Octopus' Securities and Exchange Commission filings free by visiting the SEC website at www.sec.gov. I would also like to remind everyone that this call is being recorded and will be made available for replay via a link in the investor relations section of Coda Octopus' website. Finally, as a reminder, this is our fiscal year 2025 reporting, and all comparisons, unless explicitly stated otherwise, are with our fiscal year 2024. Now I will turn the call over to the company's Chair and CEO, Annmarie Gayle. Annmarie? Annmarie Gayle: Thanks, Dylan, and good morning, everyone. Thank you for joining us for our fiscal year 2025 earnings call. Despite the challenging global policy environment, our consolidated net revenue in fiscal year 2025 increased by 30.7%, and I believe that we have delivered a solid set of results. For those who are new to the Coda Octopus story, our business is made up of three discrete business operations: the marine technology business, the defense engineering services businesses, and our recently added acoustics, sensors, and materials business unit. Within our group, our core business is the marine technology. This business generates most of our revenue, and in the fiscal year 2025, it generated 49.8% of our consolidated net revenue. It is around this business that we are building our growth strategy. The marine technology business operates in the subsea market and is home to key disruptive underwater technologies. These technologies are bringing the smartphone revolution underwater by providing a comprehensive real-time information platform, which provides vision underwater and allows our customers to make real-time decisions. This technology is a key enabler for the rapidly emerging AI-enabled autonomous capability required by the subsea market as it provides real-time 3D perception underwater. The specific addressable markets which are of relevance are the imaging sonar market and diving market. It is these market segments that our growth strategy is built around. Turning to our flagship imaging sonar, the Echoscope, the Echoscope is a real-time three-dimensional volumetric imaging sonar that can generate a real-time three-dimensional image underwater in zero visibility water conditions. This is widely used in the commercial offshore marine market for a range of underwater applications. A significant part of our annual revenue is derived from the commercial offshore marine market. To achieve the growth that shareholders want to see from our company, we have to increase our market share for underwater imaging sensors in the defense space. There are many ongoing defense programs globally where new classes of underwater vehicles are being adopted. Significant budgets are appropriated for this. The Echoscope's uniqueness of being a single sensor for multiple on-the-sea activities presents a significant advantage over other technologies. It allows the consolidation of multiple sensors into a single power-efficient unit without compromising the various missions to be executed. We recently launched our next generation of ultra-small form factor three-dimensional sonars, the NanoGen series. The three-dimensional sonars within our NanoGen series are a shade bigger than a smartphone and have been specifically designed for the emerging small class underwater platform encompassing manned, unmanned surface, subsurface, and fully autonomous robotic vehicles. The addition of the NanoGen series allows us to address a larger swath of the imaging sonar market. Our second key technology is the DAVD, the Diver Augmented Vision Display system. The DAVD provides a real-time information platform for diving operations, increasing safety and efficiency. The addressable market for the DAVD technology includes both the defense and commercial diving sectors. The untethered DAVD variant addresses the special forces type of divers and we believe constitutes the largest addressable market for the technology. The DAVD Tether system is already operational and is now the subject of focused business development effort to get broader adoption. The untethered variant of DAVD, which we believe constitutes the largest addressable market for the DAVD technology, has been the subject of a multiyear hardening program which we successfully concluded in fiscal year 2025. Following the successful conclusion of this hardening program, we delivered a small batch of 16 new generation untethered DAVD systems. This variant is now going through approved Navy use assessment which we believe will be the catalyst for broader adoption of the technology. We are also pleased with the acquisition of Precision Acoustics Limited, which is a recognized leader of acoustics and measurement centers widely used in the medical sector. The addition of this company expands our expertise in underwater acoustics, which is critical for maintaining and extending our lead in real-time 3D imaging underwater. It also positions the group to compete for larger defense contracts. Now turning to fiscal year 2025 highlights relating to our core business, the marine technology business. This business sells its products and solutions worldwide. Key highlights in the period include this business increased revenue by 3.2%. In respect of its revenue structure in the 2025 period, 46% of revenue was generated from the defense sector with 54% from the commercial marine sector. 71.9% of revenue generated by this business relates to Echoscope and 28.1% relates to DAVD. Hardware sales increased by 30.5% and were $9.5 million compared to $7.2 million in the previous fiscal year. Hardware sales to Asia, a strategically important market for this business, increased by approximately 7.7% and were $5.9 million compared to $5.5 million in the previous fiscal year. Rental assets were significantly underutilized in fiscal year 2025, resulting in lower units of rentals and associated services. This also impacted on the gross profit margin of this business. This reflects the change in US policy on funding for offshore renewables, which caused many projects to be shelved as reported by Shell, Orsted, BP, and others. Now turning to highlights relating to the defense engineering services business. In the fiscal year 2025, our defense engineering services business revenue increased by 5.6%. This business has long-standing relationships with prime defense contractors and has served the defense market for close to fifty years. It is reliant on receiving funding on the defense programs. During the fourth quarter, it experienced delays in receiving contract awards due to the US government shutdown followed by the use of continuing resolution to fund these programs. The success of the defense engineering business is dependent on increasing the number of defense programs that they sell proprietary parts into. Now turning to highlights relating to the newly acquired Precision Acoustics Limited. In the fiscal year 2025, this business unit contributed 20.4% to our net consolidated revenue. We continue to be very pleased with this acquisition and reiterate that it positions the group to collectively respond to large defense requirements, particularly in the underwater acoustic space. We continue to make it our priority to focus on executing our growth strategy. Blair Cunningham, our President of Technology, will be updating you on our progress and various milestones around our core technologies which underpin our growth strategy. I will now turn the call over to Blair Cunningham. Blair Cunningham: Thank you, Annmarie, and good morning, everyone. Today, I will focus on progress that we have made around our core technologies, Echoscope and DAVD. In fiscal year 2025, we saw an increase in sales of both Echoscope and DAVD. We also saw strong interest from the defense community. The Echoscope, our flagship technology, continues to represent the largest opportunity for scalable growth, particularly within the defense and security market. This sector is being fundamentally reshaped by the widespread adoption of next-generation underwater platforms encompassing manned, unmanned, surface, subsurface, and fully autonomous robotic vehicles. The defense subsea market is moving away from large bespoke platforms towards smaller networked and increasingly autonomous vehicles that can be deployed at scale. This transition favors technologies that maximize performance per unit cost and enable rapid production, modular upgrades, and multi-mission flexibility. A significant portion of these new programs is focused on reducing reliance on human-in-the-loop supervision and control for mission-critical decisions. The launch of the Echoscope NanoGen series, our ultra-compact real-time 3D imaging sonar, marks a critical step in enabling next-generation sub-AI-enabled autonomy. As the subsea industry moves away from vessel-intensive human-in-the-loop workflows, NanoGen series provides the real-time 3D perception required to unlock scalable software-driven autonomy across a growing range of platforms. NanoGen series delivers true real-time 3D imaging in an ultra-compact form factor, enabling autonomous systems to perceive, navigate, and make decisions independently underwater. Unlike traditional sonars designed primarily for data collection, NanoGen series functions as a core perception sensor for AI-enabled platforms, supporting navigation, obstacle avoidance, target guidance, and adaptive mission execution without reliance on bandwidth-limited communications or post-processing. A single NanoGen series sensor supports multiple high-value use cases, including subsea navigation, inspection, 3D modeling, subsea imaging, change detection, and gas and oil leak detection, allowing operators and platform developers to consolidate hardware, reduce integration complexity, and lower total system cost. This multi-mission flexibility positions NanoGen series as a platform-agnostic technology, accelerating adoption across AUVs, ROVs, hybrid vehicles, resident subsea systems, and future autonomous fleets. NanoGen series is aligned with the strongest growth drivers in the subsea market: autonomy, edge AI, reduced operational cost, and scalable deployment. By enabling higher levels of autonomy and mission efficiency with a single compact sensor, NanoGen series strengthens Echoscope's role as a critical technology provider to the next generation of intelligent subsea platforms. We are seeing strong and accelerating interest supported by highly successful trials with a number of key defense customers, including the US Navy and several allied foreign navies across their respective subsea vehicle programs. These engagements span next-generation platforms designed for multi-mission operations, combining manned and autonomous capabilities within a single operational framework. By working closely with naval special operations forces, program sponsors, and platform and control system manufacturers, we ensure our technology is aligned with real operational requirements and emerging concepts of use. This collaborative approach enables us to demonstrate best-in-class performance and rapid integration across diverse subsea platforms. As the market continues to transition away from traditional single-purpose sonar systems towards intelligent, AI-enabled perception, our solutions are increasingly viewed as a core enabling technology for future subsea autonomy, situational awareness, and mission flexibility. We anticipate the procurement and program decisions for the active opportunities in which we have already completed end-customer demonstrations and operational trials will be made in early 2026. These programs are currently progressing through the final stages of technical evaluation, operational validation, and internal budget approval within the respective defense organizations. Subject to successful contract awards, we expect initial deliveries to commence within the 2026 fiscal year, aligned with customer deployment schedules and platform integration timelines. These programs are structured to support multi-mission subsea vehicles with both manned and autonomous operating modes, providing a strong foundation for follow-on orders, platform expansion, and long-term fleet adoption. Given the strategic importance of these programs and the shift toward AI-enabled next-generation subsea capabilities, we view these near-term decisions as a meaningful inflection point with the potential to convert demonstrated technical leadership into recurring production contracts and sustained growth. While these active programs are presently focused on 3D perception, navigation, and obstacle avoidance enabled by the NanoGen series, they represent longer-term growth opportunities for our DAVD augmented vision display solutions. Many of these subsea vehicle programs support diver operations or involve manned subsea platforms, both of which align directly with the target applications and markets for DAVD. Turning to the other significant pillar of our growth strategy, DAVD, our Diver Augmented Vision Display, this system is a cutting-edge safety, augmented reality technology purpose-built to enhance performance and situational awareness in low visibility and technically demanding underwater environments. In fiscal year 2025, we experienced real momentum around DAVD, with increased domestic interest from non-Navy defense organizations and government agencies, as well as from several foreign navies and commercial diving entities. We were contracted under several programs and successfully delivered multiple next-generation DAVD systems to this expanded user base, and we will continue to support, educate, and drive further adoption of these systems within this community. DAVD is being leveraged as a critical life support and visualization component, enhancing diver safety and mission effectiveness by delivering real-time life support data via the DAVD head-up display and 3D situational awareness through the compact Echoscope NanoGen series sonar. These initiatives exemplify the growing recognition of DAVD and Echoscope technologies as mission-critical tools in the evolving landscape of advanced military diving and underwater operations. During the fiscal year 2025, we completed the funded DAVD hardening program under which the DAVD technology was jointly funded for adoption for the special forces market by the US and a leading foreign Navy. Following the successful completion and delivery of the DAVD hardening program, we were awarded the initial order of 16 new generation untethered DAVD systems in fiscal year 2025 for fleet evaluation by US special forces. These systems are the culmination of extensive field testing and direct feedback from operational divers, funded under the DAVD hardening program. Following the delivery of the initial production run of 16 DAVD untethered systems for the US Navy Mark 16 rebreather system in fiscal year 2025, the untethered DAVD variant is undergoing final approval of the US Navy's Authorization for Navy Use or ANU approval process. Following completion of this process, it is expected to support ongoing broader operational use and adoption of the untethered system. The DAVD untethered system continues to be fielded across an expanding community of EOD and special forces diver units for fleet evaluation and mission-specific tasking. The DAVD untethered system remains the largest growth opportunity for this transformative technology. For context, in the United States alone, there are approximately 14,000 divers within the potential government and defense user community for the DAVD untethered system. Fiscal year 2026 is an important year for the company in terms of reaching new milestones such as broader adoption of DAVD by foreign navies and Echoscope technology being adopted on some of the new autonomous AI-enabled platforms as a core perception sensor for navigation, obstacle avoidance, and target guidance. I will now turn the call over to Annmarie, and I will be available to take your questions. Annmarie Gayle: Thank you, Blair. Let me now turn the call over to our interim CFO, Gayle Jardine, to take you through our financials for fiscal year 2025 before I provide my closing remarks. Gayle Jardine: Thank you, Annmarie, and good morning, everyone. Let me take you through our fiscal year 2025 financial results. Starting with revenue. In fiscal year 2025, we recorded total revenue of $26.6 million compared to $20.3 million in fiscal year 2024, an increase of 30.7%. Our core business, the marine technology business, generated revenue of $13.2 million compared to $12.8 million, representing a 3.2% increase over fiscal year 2024. Our acoustic sensors and materials business, which was added to our group in October 2024, recorded revenue of $5.4 million in fiscal year 2025 and added 20.4% to our consolidated net revenue. Our defense engineering business generated revenue of $7.9 million compared to $7.5 million, representing a 5.6% increase over fiscal year 2024. Moving on to gross profit and margin. In the fiscal year 2025, we generated gross profit of $17.7 million compared to $14.2 million in the fiscal year 2024. Consolidated gross margin was 66.5%, versus 69.8% in fiscal year 2024. This 3.3 percentage points decrease is mainly due to the impact of the lower margin acoustic sensors and material business being added, which accounts for two percentage points, as well as the mix of type and geography of sales in our core business. In our marine technology business, gross margin decreased to 74.5% in fiscal year 2025, compared to 77.9% in fiscal year 2024, reflecting the mix of type and geography of sales. With 30.5% more units of hardware sale compared to a reduction of 36.6% in the higher margin rental sales. The acoustic sensors and materials business realized a gross margin of 58.6%. Our Defense Engineering business gross margin increased to 58.6% in fiscal year 2025, versus 55.8% in the fiscal year 2024, again reflecting the mix of engineering projects during fiscal 2025. Now looking at our operating expenses. Total operating expenses for the fiscal year 2025 increased by 24% to $13.1 million compared to $10.6 million in fiscal year 2024. The main factors for the increase in total operating expenses are the addition of Precision Acoustics Limited into the group, which added 22.1% to these costs, as well as the weakening of the US dollar against the British pound and Danish kroner, which impacted these costs when translated into US dollars from the base currencies for reporting purposes. Our selling, general, and administrative costs in the fiscal year 2025 totaled $10.7 million, an increase of 27.9% from $8.3 million in fiscal year 2024, reflecting the addition of the new business unit into the group and the inclusion of the earn-out provision as per the Precision Acoustics Limited acquisition agreement. SG&A as a percentage of consolidated net revenue in year 2025 was 40.2%, compared to 41.1% in the fiscal year 2024. Operating income in fiscal year 2025 was $4.5 million compared to $3.6 million in fiscal year 2024, an increase of 26.6%. Operating margin was 17.1%, compared to 17.6% in fiscal year 2024, which we attribute to the impact of the overall increase in our total operating expenses by 24% in conjunction with an increase in consolidated net revenue of 30.7%. Pretax income in fiscal year 2025 was $5.5 million compared to $4.6 million in fiscal year 2024. Net income after taxes in fiscal year 2025 was $4.1 million or 37¢ per diluted share, compared to $3.6 million or 32¢ per diluted share in fiscal year 2024. In fiscal year 2025, we provided for a current tax expense of $1.1 million compared to $700,000 in the fiscal year 2024. Switching now to our balance sheet. As of October 31, 2025, we had $28.7 million in cash and cash equivalents on hand and no debt. This represents an increase of $6.2 million from October 31, 2024, with the comparable figure of $22.5 million. Total assets increased by $6.9 million to $64.5 million in fiscal year 2025. Finally, to summarize the financial impact in the fiscal year 2025 of the introduction of the acoustic sensors and materials business into the group, it contributed 20.4% of net consolidated revenue and 18% to gross profit. Gross profit margin for this business was $3.2 million or 58.6%. Thank you. That completes my summary. Let me turn the call back over to Annmarie for her closing remarks. Annmarie Gayle: Thank you, Gayle. I'm very pleased with the increase in revenue in the fiscal year 2025 and our overall financial results, including earnings per share. I'm also pleased with the progress we are making against our key milestones for growing our business. Some of these include, in respect of our revenue structure, we increased sales in the defense sector where 46% of our core business revenue emanated from the defense sector and 54% from the commercial marine offshore sector. Realizing sales of $3.7 million relating to DAVD in the fiscal year 2025, successfully completing the DAVD Hardening program, which paves the way for broader adoption of the DAVD technology by the military diving market subject to receiving approved Navy use status. The launch of our NanoGen series sonar, which we believe is well-positioned as a core real-time perception sensor in the rapidly emerging AI-enabled autonomous and semi-autonomous platforms in the subsea market. And finally, receiving our first order from a highly influential European foreign navy for the DAVD untethered system. We certainly believe that fiscal year 2025 was critical for completing key development activities under the DAVD program, which were a prerequisite for broader adoption, as well as for launching the NanoGen series, which positions us to support a growing range of AI-enabled subsea robotic and autonomous systems. In terms of cash deployment, we will continue to prosecute our M&A strategy in fiscal year 2026, and we are continuing to build our M&A pipeline. We are very keen to close another acquisition in fiscal year 2026. Through our strategy, we aim to pivot the revenue model of the marine technology business towards a multiyear program-based adoption model, which supports recurring multiple sales on the programs of record and long-tail revenue as we have started to see with the DAVD product line. We continue to work to create stable long-term shareholder value and execute against our strategy to grow the business, which is our single biggest priority at the group. To conclude, we would like to thank our shareholders for their continued support. We are now happy to answer any questions. Operator? Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, while we poll for questions. Our first question comes from the line of Brian Kinstlinger with Alliance Global Partners. Brian Kinstlinger: Please proceed with your question. Kevin (for Brian Kinstlinger): Great. Thanks for taking my questions. This is Kevin for Brian. First, we were hearing about certain deliveries to the Indian Navy through an international prime. What Coda products were shipped to the Indian Navy, and is this a brand new customer, or have you worked with the Indian Navy in the past? And then broadly speaking, do you see any significant opportunities within India in the near to medium term? Annmarie Gayle: Sorry. Thanks very much for that question. I'm not clear. The Indian Navy, I'm not sure where that has come from. Kevin (for Brian Kinstlinger): Okay. Maybe I must be mistaken. I can move on to a different one. Can you update us on the progress in Europe? I believe you delivered two untethered systems to a European Navy. How is the satisfaction? And do you expect larger orders ahead from the Navy? Annmarie Gayle: Right. Thank you very much for that question. So I'm really, really excited about that development. As we mentioned earlier, we've completed the DAVD untethered hardening program. That's really the prerequisite to broader adoption. So what we really feel at this stage on the DAVD technology, which is one of our key pillars for our growth, we feel that we've spent last year focused on completing the hardening program and delivering systems to the US Navy. Really, now we're really waiting for that to complete the approved Navy use status, which then means the product will be operational and will be the catalyst for broader adoption. Then pivoting from outside of the US, really, this year, what is really key for Coda Octopus is broader adoption of the technology outside of the US, and in our fourth quarter, we delivered two systems to a very, very influential European Navy, and we will be providing training to that navy in our Q2, and then we believe that will be the catalyst for further adoption of the DAVD untethered system. So we're really, really excited about that, and we're waiting to support that customer. And we would expect Q3, Q4 would be where we start understanding opportunities for that customer. Kevin (for Brian Kinstlinger): Thanks. And then can you quantify cumulative deliveries of the untethered DAVD system? And last quarter, I believe you said Sorry. Could you repeat that? Could you what? Sorry. Could you repeat that? Could you quantify the cumulative deliveries of the DAVD untethered system? And I think last quarter, you said your target was $3.5 to $4 million of DAVD in fiscal 2025. Did you achieve that? And then given the progress you're making, what kind of range do you expect for DAVD contribution for the revenue in fiscal 2026? Annmarie Gayle: So in fiscal 2025, we did $3.7 million for DAVD. And 2026, really, of course, our internal business plan presupposes that we beat this. However, it's really difficult to see as we're waiting for completion of the assessment of the approval, the approved Navy use status for the product, which is the prerequisite for the product being operational. So we expect really to have that close to Q2. And, really, Q3 and Q4 is where we can really start understanding what revenues will be for the untethered variant in 2026. So DAVD revenue will be lumpy and back-ended to the third quarter and fourth quarter for the simple reason that until it goes through, we've delivered the evaluation systems. And until it gets on the ANU list, which is the approved Navy use list, it's very difficult for us to quantify what the budget is going to be. In addition to that, though, we're really focused on, as I said this year, getting broader adoption for the DAVD technology outside of the US. So we feel we've done all of the development programs. We've got a good understanding of where the trajectory of the product in the US. We're pretty much waiting for budgets and waiting for the budget line appropriation. Programs are now being funded by continuing resolutions. So we really don't know what the 2026 US budget is going to be. There will be a budget, but we don't have the visibility of that right now. But that aside, we take that as a given, and we presuppose that we're going to beat our $3.7 million. But we're really laser-focused now on the broader adoption now that we've finished the development program, broader adoption outside of the US. And this delivery to this European Navy is really a pivotal moment for the technology because this is really a trendsetter navy in Europe. So we're very excited about that. So I can't say what our target is. Really don't know because we're waiting for budget allocation in the US. But I think what we're saying is that we did $3.7 million in fiscal 2025, and we anticipate beating that. Kevin (for Brian Kinstlinger): Great. Thank you. And then can you quantify how many foreign navies have tested or are testing DAVD? And once you get in the door, can you discuss the sales cycle? How long might that occur? And then time frame for deliveries and then what would be a reasonable assumption for large quantity sales? Annmarie Gayle: Blair, did you want to talk about just broadly the business development activities with the broader navy community? Blair Cunningham: Yes. Absolutely. Yeah. I think it's been critical in both 2025 and prior to that, having a very close relationship with the US Navy is critical for the product because, as Annmarie stated, having the ANU, you know, authorization for naval use is critical for the rest of the navies to understand that this is equipment that they can put through to budget lines and move forward. In terms of the number of physical navies where we presented this product to, physically, in diving, we've been involved in a number of what I would call worldwide Navy collective missions, including RIMPAC, for example, which is in Hawaii, at which point, even at that single event, I think we had 10 different country navies diving the system. And that's obviously not a statement that all 10 of those navies are going to move forward with that, but it gives an idea of the number of entities that we're working with. I think it's probably easier to focus on the European sector because that's much more, you know, being defined and often maybe we deliver the system. You know, I've personally been working with them for the last two years, just to give you an idea of the gestation cycle. And now that the product is coming close to being, you know, annual deliverable, they are making their early investments into the program, but they are very, very committed. I think they're influential also as such that, you know, that particular navy has a very strong investment in navy diving of all factors about special forces, hard cut diving, salvage, for example, which we cover all bases. But they are incredibly well connected to all of the neighboring navies such that when they place an order, it's fairly well read that the adjacent navies will also follow suit and they will adopt the same level of equipment. And that's exactly what we are seeing today. So I think as Annmarie said, you were delivering out the first of those systems to that navy. There will, I'm sure, be invites of the other neighboring navies to that training event that I'll be conducting. And then Q3, Q4 is when we really understand how that progression moves forward. Annmarie Gayle: Yeah. Yes. And just to add there, the key benchmark for us in 2026 is to secure meaningful adoption of DAVD outside of the US. That is our key benchmark. We feel in terms of the product, its acceptance on the US side, we take that as a given. As Blair says, we've got very good relationships. The customer is very excited about the technology. I think the team did a great job with really understanding the requirements of the navy, the feedback, delivering the 16 systems based on feedback, and I feel all of that is settled. In addition to that, over the last year, what we saw, we saw real momentum on broadening the scope of the DAVD technology actually. So we had funding from several programs where they want to integrate the DAVD in their as a critical tool for their application. So we feel the DAVD technology is really now mature and, really, all the development that we've been talking about, we feel, you know, we've invested in that. That's behind us. And now we are really focused this year on adoption outside of the US, and that's what we are focused on. And in terms of your question about quantities, I'm really, that's pure conjecture. I really can't say what quantities, but what I really want to emphasize is last year, we did $3.7 million in DAVD. Our internal business plan assumes that we will beat this number. That and one caveat I will say is that DAVD revenue will be lumpy for a number of reasons. We're waiting for the ANU process. We expect our European customers, it's the third and fourth quarter before really, any form of procurement will take place. And so I think that that's really where I'll leave it on DAVD and its trajectory. Kevin (for Brian Kinstlinger): Thanks. And then last question is for the next generation NanoGen. Could you give us an update on what customer feedback is like? Annmarie Gayle: Blair, did you want to take that? Blair Cunningham: Yes. Yes. I can take that one. Yeah. Thank you very much for that question. Yeah. I think we are, you know, exceptionally excited to launch our NanoGen series. It really is a game changer for us in terms of really how wide a program we can actually fit our technology. And I think that'd be incredibly swiftly noticed by both the defense and oil and gas and other markets, you know, around the nanotechnology. I feel very much feel that we have really strong interest from a lot of those programs, and especially on the navy side, where we are already seeing considerable interest for existing funded programs. So they would typically execute what we would call a PIP or a product or platform improvement program. And that really is a formal engineering and funding pathway for upgrading already fielded systems. So either adding new capabilities, addressing, say, system deficiencies, improving reliability, and inserting new technology into existing platforms. So the interest to date from the community has been largely focused on the capability growth enabled by Nano. So we're adding brand new capability to those existing platforms. But the introduction of Nano does actually address multiple of those justification categories. So as a result, I see that the opportunities are much closer to program execution. They're either having lower, you know, acquisition risks. And they're definitely much more shorter term with a predictable volume profile. In other words, we can integrate onto existing platforms that are in the field, and this isn't waiting on perhaps a new funding program for an entire new vehicle. That said, we are also being approached by multiple defense companies for integration of the nanotechnology at a ground-up level, which is also very exciting. But we understand that, you know, those programs have got a longer gestation period. So we're very much, again, laser-focused on the PIP approach where we can integrate our technology onto already well-established programs and products. And I do see also that we will have closer and closer relationships with, you know, some of those, you know, some of those sort of people involved in this program as we integrate the Nano into that program. But really, taking the existing well-proven for twenty odd years at our 3D real-time volumetric sonar, which we still really stand, you know, almost alone in that capability and bringing that to these new AI-enabled, you know, vehicles, be they autonomous, semi-autonomous, or manned. And, you know, we're really excited to see the growth on that. Annmarie Gayle: Thank you. Blair Cunningham: Thank you. Operator: Thank you. And as a reminder, if anyone had any questions, you may press 1. Our next question comes from the line of Nick Waldo, a private investor. Please proceed with your question. Nick Waldo: Hey, thanks for taking my question. I just had a quick one and a quick follow-up. So as you look into calendar 2026, how would you characterize the offshore commercial demand environment? Do you see it improving out of 2025? And what indicators do you look for? Annmarie Gayle: Well, look, you know, the commercial market is really our, the commercial marine market, we're well established. And it's less a fight about what the technology can and can't do. So I think year on year out, we see good for the Echoscope within the commercial market. I think what the rental side has been really sort of slow, but Q4, we saw quite an uptick in rentals. And rentals are important for the business insofar as they are the big offshore companies who don't really buy equipment but run these very long projects where you can have multiple Echoscopes and engineering services on those programs. So they're really, really important to us. For the first March, the rental side was But in the fourth quarter, we saw a significant uptick in rental opportunities and rental fees. So looking out for us, the important part for our revenue growth is the defense market. It's always, and the reason for that is because the defense market has opportunities for multiple sales and long-tail revenue. So that's pretty much really where our effort is as a business to grow. And Blair talked very much about we've got a number of programs where the Echoscope is a contender for being embedded in those programs that will yield this long-tail recurring revenue that we talk about, but also, luckily for us, we have broken into some nearer-term catalysts on these PIP programs. So I feel really for us, that for the business to really grow, it is the defense market that really, we are allocating most of our resources and business development effort. Because as I said, in the commercial markets there, we're well established. You know, we've been in this game for, you know, over thirty years. We're well known. It's a small community. But the site that we really have to grow is the defense space, and I'm also very pleased with our core business revenue structure this fiscal year because the previous fiscal year, we did around 40% in the defense space. This year, we did 46%. So I feel we're making progress, and that's what we have to do to see significant growth for our business. And these PIP programs that are near-term catalysts for us with the focus on Nano, it's really, really where we're spending a lot of our time this year. Thank you. Nick Waldo: And then looking forward, now that you have $28 million in cash on hand, a pretty hefty amount, how do you think about capital allocation priorities going from here? Annmarie Gayle: Well, as I said, actually, in my closing remarks, recognizing we do have quite a lot of cash, we feel the best way to give return to investors and also to grow the business is through accretive value-added acquisitions. So we're really actively looking to complete an acquisition this year. We're still looking at targets. But, of course, we really want to make sure we make the right decision for the group. So we're putting a lot of work into screening what makes sense for our business. Nick Waldo: Thank you. Annmarie Gayle: You're welcome. Operator: Thank you. And at this time, this concludes our question and answer session. I'd now like to turn the call back over to Annmarie Gayle. Annmarie Gayle: Thank you, operator. Thank you for attending today's earnings call. Have a great day. Thank you, everyone. Operator: Thank you for joining us today for Coda Octopus' conference call. You may now disconnect.
Operator: Good morning, and welcome to the Trane Technologies Fourth Quarter 2025 Earnings Conference Call. My name is Regina, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. We ask that you please limit your questions to one and one follow-up. I will now turn the call over to Zach Nagle, Vice President of Relations. Please go ahead. Zac Nagle: Thanks, operator. Good morning. Thank you for joining us for Trane Technologies' fourth quarter 2025 earnings conference call. This call is being webcast on our website at traintechnologies.com where you'll find the accompanying presentation. We're also recording and archiving this call on our website. Please go to slide two. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Dave Regnery, chair and CEO, and Chris Kuehn, executive vice president and CFO. With that, I'll turn the call over to Dave. Dave? David Regnery: Thanks, Zach, and everyone for joining today's call. Please turn to slide number three. I'd like to begin with a few thoughts on our purpose-driven strategy, which continues to drive consistent outperformance over time. Demand for energy has never been greater. Digitalization, industrial growth, and new technologies are putting pressure on energy systems. Customers are looking for smarter, more efficient ways to run their operations. That's where Trane Technologies is uniquely positioned to win. Our solutions help customers save energy, lower operating costs, and create more balance and flexibility in how they use energy. It's proof that sustainability and performance go hand in hand. As we look ahead, our innovation and expertise continue to set us apart. With our exceptional backlog, robust demand, proven business operating system, and leading innovation, we're well-positioned to continue delivering differentiated value well into the future. Please turn to slide number four. 2025 was a strong year for the company. Our global teams executed at a high level, enabling us to exceed adjusted EPS guidance despite softness in residential and transport refrigeration markets. Free cash flow remained robust, funding strategic M&A, a growing dividend, and significant share repurchases. Bookings were also exceptional. Our commercial HVAC businesses in Americas and EMEA added $1.3 billion in backlog versus year-end 2024, strengthening our visibility into strong growth in 2026 and beyond. Please turn to Slide number five. Relentless investment in innovation, growth, people, culture, and our business operating system has delivered clear sustained benefits, reflected in our strong and consistent track record. Since 2020, we've achieved 11% revenue compound annual growth rate, a 24% adjusted EPS compound annual growth rate, expanded adjusted EBITDA margins by 470 basis points, and delivered free cash flow conversion of 106%, while deploying over $15 billion through our balanced capital allocation strategy. Consistent reinvestment has been central to our long-term success. For more than a decade, we've steadily invested in high ROI initiatives, built a world-class direct sales and service organization, and developed cutting-edge solutions for our customers' most pressing challenges, driving sustained demand. We have a proven track record and all the essential ingredients to execute our strategy and continue delivering differentiated returns over the long term. Please turn to slide number six. We delivered strong fourth-quarter performance, highlighted by exceptional enterprise organic bookings up 22%, driving a record backlog of $7.8 billion. Organic revenue grew 4%, led by continued strength in our Americas commercial HVAC businesses and our global services business. We also delivered 10% adjusted EPS growth and robust free cash flow. Exceptional bookings were led by our commercial HVAC businesses. America's commercial HVAC was again a standout, delivering record Q4 organic bookings, up more than 35% year over year. Applied solutions bookings were up more than 120% with a record book-to-bill of 200%, marking the second consecutive quarter with applied bookings growth exceeding 100%. EMEA HVAC also delivered strong results, with its second straight quarter of mid to high teens organic bookings growth. Commercial HVAC backlog is substantially higher versus year-end 2024, with backlog up approximately 25% in The Americas and nearly 40% in EMEA. And importantly, the backlog is predominantly applied, which carries a long higher margin services tail. As we enter 2026, we are well-positioned for growth, especially in areas where disciplined execution to our business operating system is a key driver of success. In commercial HVAC, exceptional bookings growth and record backlog give us strong visibility to future revenues and market outgrowth. Projected pipelines remain robust and continue to build. Even after two consecutive quarters of more than 100% applied growth, America's commercial HVAC, we continue to see substantial opportunities ahead. Our services business, about one-third of enterprise revenue, remains a durable and consistent growth engine, with a low teens compound annual growth rate since becoming Trane Technologies in 2020. We continue to invest heavily in services and expand our digital capabilities to deliver advanced solutions with compelling value and attractive paybacks. We are confident services will remain a strong growth driver in 2026 and beyond. Two additional factors have the potential to accelerate growth in the back half of the year. Residential markets were a tale of two halves in 2025, with a significantly weaker second half. We expect 2026 to get progressively better, with tailwinds building later in the year as comps ease. Similarly, industrial forecasts, including from ACT, point to a transport market recovery beginning late in 2026 and extending into 2027 and beyond, a view we largely share. This should support growth in the fourth quarter and beyond. Our guidance reflects this backdrop, and Chris will elaborate shortly. Please turn to Slide number seven. America's commercial HVAC continued its standout performance, with bookings up more than 35% and revenue up low double digits. Growth was broad-based across nearly all verticals and in both equipment and services. In residential, bookings were up mid-single digits while revenues declined mid-teens, reflecting the normalization of channel inventory in the quarter. In Americas transport refrigeration, bookings were down mid-single digits and revenues were down low single digits, outperforming transport markets that declined more than 20%. In EMEA, commercial HVAC bookings were again robust, up mid-teens, and revenues were up mid-single digits. EMEA transport bookings were down low single digits, and revenues declined at a similar rate, outperforming end markets that were down mid-single digits. In Asia Pacific, China remained challenging, with double-digit declines in bookings and revenue. The rest of Asia performed as expected, with bookings up low double digits and revenues down low single digits. Chris Kuehn: Now I'd like to turn the call over to Chris. Chris? Christopher Kuehn: Thanks, Dave. Please turn to slide number eight. Dave covered many of the key points from this slide earlier, so I'll keep my comments brief. Q4 organic revenue grew 4%, and 7% excluding residential, consistent with the dynamics we've already discussed. Margins were impacted by proactive measures taken to normalize residential inventory, which reduced factory production days by one-third and resulted in roughly 60% deleverage in that business. Please turn to Slide number nine. In The Americas, we delivered 5% organic revenue growth, driven by strong commercial HVAC volume and positive price, partially offset by residential declines. Margins were lower mainly due to residential deleverage. We also stepped up innovation and growth investments. In EMEA, organic revenue grew 2% led by commercial HVAC. Adjusted EBITDA margin declined 160 basis points reflecting year one acquisition and integration costs. As noted throughout the year, channel investments and M&A in 2025 weighed on near-term margins but position us for stronger long-term growth. In Asia Pacific, organic revenue declined 6%, adjusted EBITDA margin declined 20 basis points. The team managed costs to limit deleverage, continuing to invest in the business. Now I'd like to turn the call back over to Dave. David Regnery: Dave? Christopher Kuehn: Thanks, Chris. Please turn to slide number 10. Operator: Overall, Q4 played out largely as expected. David Regnery: With residential revenues a bit better than anticipated and commercial HVAC bookings even stronger. Our Americas commercial HVAC business continues to execute at a very high level, significantly outperforming end markets. Bookings and revenues are compounding at strong rates, especially in applied solutions. As noted earlier, our exceptional bookings, record backlog, and rapidly expanding pipeline give us a high level of confidence that 2026 will be another strong year. Based on customer delivery timing and year-over-year comparisons, we expect solid growth in the first half and even stronger growth in the back half. In residential, we believe channel inventory is largely normalized as we enter Q1. Our outlook for the market for 2026 is prudent, flat to modestly lower, with Q1 expected to be the trough, down about 20% given the high teens growth we saw Q1 2025. We expect the market to return to growth in the second half. In The Americas transport markets, ACT forecasts trailers down about 7% in 2026, and our view is generally aligned. Market indicators are improving, and we expect the sector to turn positive late in 2026 and into 2027. We expect to again outperform the market. In EMEA, commercial HVAC enters 2026 following a significant investment year and strong 2025 bookings that lifted backlog nearly 40% year over year. We expect a softer start with mid-single-digit growth improving to high single-digit growth in the second half as backlog converts. EMEA transport markets are expected to be flat to modestly lower. The team grew low single digits in a down market in 2025, and we expect them to outperform again in 2026. In Asia Pacific, we expect mixed performance with the rest of Asia outperforming China. For the region as a whole, we expect relatively flat performance in 2026. Now I'd like to turn the call back over to Chris. Chris? Christopher Kuehn: Thanks, Dave. Turn to slide number 11. Our 2026 guidance reflects the market dynamics we've discussed and operational excellence driven by our business operating system. It also incorporates our value creation flywheel, continued investment in innovation, market outgrowth, healthy leverage, and strong free cash flow. We are initiating 2026 guidance with 6% to 7% organic revenue growth, and adjusted EPS of $14.65 to $14.85, up 12% to 14%. We expect about 50 basis points of growth from FX and roughly 200 basis points from M&A, either closed or committed for early 2026. All in, reported revenue growth is expected to be 8.5% to 9.5%. We are targeting organic leverage of 25% or higher, consistent with our long-term framework, and free cash flow conversion of 100% or greater. For the first quarter, we expect flattish organic revenue growth, reflecting continued strength in commercial HVAC, offset by tough comps in residential, given the high teens growth we saw in Q1 2025 and market-driven declines in transport. We expect Q1 adjusted EPS of approximately $2.50. Importantly, over the past four years, Q1 has averaged slightly below 17% of full-year EPS, which aligns with our 2026 guidance. Given the dynamics we've outlined, we believe this is a strong and achievable start to the year. For additional details, please refer to slide 18. Please turn to slide number 12. We remain committed to our balanced capital allocation strategy focused on deploying excess cash to maximize shareholder returns. First, we strengthen our core business through relentless reinvestment. Second, we maintain a strong balance sheet to ensure optionality as markets evolve. Third, we expect to deploy 100% of excess cash over time. Our approach includes strategic M&A to enhance long-term returns and share repurchases when the stock trades below our calculated intrinsic value. Please turn to slide 13. In 2025, we deployed or committed approximately $3.2 billion through our balanced capital allocation strategy, including about $840 million to dividends, $720 million to M&A, and roughly $1.5 billion to share repurchases. We advanced several strategic acquisitions during the year, and our pipeline remains active heading into 2026. The largest acquisition announced in December is Stellar Energy, a leading provider of turnkey data center cooling solutions. Stellar brings strong capability in modular design and build, positioning us to meet growing demand for prefabricated cooling systems that ease supply chain and labor constraints and enable rapid scalable deployment. Their expertise also enhances our ability to apply modular solutions across additional verticals. We expect the acquisition to close in the first quarter, and we look forward to welcoming the team to Trane Technologies. The deal economics are compelling, and we expect modest EPS accretion in 2026 even after year one acquisition and integration costs. For 2026, we expect to deploy between $2.8 billion and $3.3 billion with strong free cash flow, ample liquidity, a healthy balance sheet, and $4.7 billion remaining under our share repurchase authorization, we have excellent capital allocation optionality moving forward. Now I'd like to turn the call back over to Dave. Dave? David Regnery: Thanks, Chris. Please turn to slide number 15. The Americas transport refrigeration market remains dynamic, but the long-term outlook is strong. ACT forecasts the trailer market down about 7% in 2026, bottoming in the first half and improving in the back half. ACT also expects a sharp rebound beginning in 2027, including roughly 50% growth and continued expansion through the end of the decade. We expect growth as well but anticipate a more measured gradual slope to the recovery. We're managing the down cycle effectively, outperforming end markets, and continuing to invest in innovation, so we're well-positioned as the market strengthens. Please turn to slide number 16. In closing, I'm incredibly proud of our global team. Their talent has powered our consistent outperformance and leading financial results over the past five years. And we see tremendous opportunities ahead. With our exceptional backlog, strong demand, proven business operating system, and leading innovation, we're confident in our ability to deliver differentiated long-term value and advance a more sustainable world. And now we'd be happy to take your questions. Operator? Operator: At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. We ask that you please limit your questions to one and one follow-up. Our first question will come from the line of Julian Mitchell with Barclays. Please go ahead. Julian Mitchell: Hi, good morning. Maybe just wanted to start with America's commercial HVAC just to understand the guidance on revenue for the year ahead. I guess if I look at the orders or bookings there last year, they were up maybe 10% in the first half, up in the 30s in the back half. So with lead times and so forth, should we expect a decent acceleration in Americas Commercial HVAC revenue growth in the back half of the year ahead? Christopher Kuehn: Hey, Julian. It's Chris. I'll start, and then Dave will jump in. That's right. I mean, think about the very strong bookings growth in 2025 and commercial HVAC. And the first half was strong, up mid-teens. But we saw up about 30%, over 30% in 2025. And when you think about applied systems, it's not uncommon to think about a nine-month cycle from order date to ship date. So how we see 2026 playing out for commercial HVAC Americas is the first quarter strong growth, probably in that 7% to 8% range, second quarter grows to about 10% growth, and then it is up about low teens in the second half of the year. And we've dialed that in with the backlog and the timing of which when customers want us to deliver the products. David Regnery: Yeah. Hey, Julian. How are you doing? Dave here. I think as Chris described in the Americas, a very similar story that we see in Europe. Okay? So in Europe, think of the first half of the year, orders were up high single digits. The back half of the year, they were up high teens. So the same is exactly happening as to how our backlog, which is at record levels, is layered in. The good news also is that the pipelines in both businesses are extremely strong right now. I said that at the end of the third quarter that I've never seen them this high before, and I would tell you they remain very, very robust as we enter Q1 in 2026. Julian Mitchell: That's helpful. And then just my second question on U.S. Resi HVAC. Maybe help us understand the confidence in that leaning out of inventory having largely already happened? And any update you could give on pricing in that market? We keep being fed anecdotes from people every day about discounting. We didn't seem to hear that from your an OEM peer yesterday. Just wondered your perspectives on that, please. David Regnery: Yeah. I'll let Chris talk to the pricing side of it, but on the inventory side, look. We were very, very intentional in the fourth quarter to get the inventory right. And you heard in our prepared remarks, we took a third of the production days out. So we knew that was gonna cost us on the bottom line as we deleverage over 60% in that particular business. We also believe that we have inventory size right as we enter '26. So 2025 is behind us. We're looking forward. And how the year plays out. And remember, for the full year, we believe that you know, resi will be, you know, flat to down up to 5%. We'll see how the year plays out. But we believe that inventory is in the position we want it to be. And we were very, very intentional in getting there. Did you wanna talk about pricing? Christopher Kuehn: Julian, we've not seen pricing fade in the business. I think about the fourth quarter and pricing, it really is more due to volume being lower than anything else. So certainly, great products, good industry, and wouldn't add anything more than that. David Regnery: The only other thing I would add, Julian, is remember Q1's got some really tough comps. So even though inventory is in a right-sized position, we still are gonna have some very difficult comps with last year being up in the high teens. Thank you. Julian Mitchell: Alright. Thanks, Julian. Talk to you soon. Operator: Please go ahead. Our next question will come from the line of Scott Davis with Melius Research. Scott Davis: Hey, good morning guys. David Regnery: Hey, Scott. How are you? Scott Davis: I'm great. It's been a good quarter so far for or today, I guess, I should say. It's been pretty good. And you guys put up these orders and applied are a nice surprise. And my question just is really about whether orders are broadening out amongst your end markets you know, like office education, etcetera, or are they narrowing and more of that incremental order strength is in fact data center. David Regnery: Yeah. I mean, look, data centers are very strong. Okay? But I would also tell you that if you look across the 14 verticals that we track, at least in The Americas, we had broad-based growth. Which was very, very encouraging. I think we had 12 or 14 verticals up. So that's encouraging for us. And so yeah. But don't misinterpret my comments. Data centers were very strong, and they'll continue to be strong well into the future. But it is broad-based growth across the majority of our verticals that we track in commercial HVAC. Scott Davis: And comparably, broad, you would say, Dave, versus maybe a year ago? David Regnery: I have to go. I mean, I you know, it's hard to say. I think we saw growth in some verticals that maybe a year ago I was saying were weak like retail. We saw growth in retail. Office is coming back for us. So, look, I'm bullish, Sean. And for the order rate is one thing, but if I look at where the pipeline is, it's also very broad-based, which is very encouraging for the future. Scott Davis: Makes sense. Okay. I'll keep it at that. Thank you, guys. Best of luck this year. David Regnery: Scott, Talk to you soon. Appreciate it. Operator: Our next question comes from the line of Chris Snyder with Morgan Stanley. Please go ahead. Chris Snyder: Thank you. I also wanted to ask about the applied orders. Second straight quarter up over 100%. Know, as we've seen this ramp in orders into the back half of the year, has there been an impact at all from changes in customer lead times? Are we starting to see customers order maybe with longer lead times again? You know, there's some concerns out there in certain spots around supply chain pinch points. Just wondering if that's having any impact on these you know, just the massive orders we're seeing. David Regnery: Yeah. Hey, Chris. How are you doing? This is Dave. But I would say we haven't seen that. I mean, you know, you have some verticals that will give you more of a longer view versus others. But for the most part, I haven't seen any change occurring there probably since, really, probably at least the last I'll say, at least twelve months. There hasn't been a dramatic change there in lead times. We're very competitive on our lead times. I told you that in the third quarter. We actually introduced a couple of quick ship programs so that sometimes you could have an emergency or you could have a contractor that forgot to order a piece of equipment. We're able to provide that now with some of our quick ship programs. Chris Snyder: Appreciate that color. Thank you. Maybe if I could follow-up on data center, but specifically on the service side. You know, as that the architecture there continues to change, you know, obviously very rapidly, you know, are the attachment rates in that business better than they were, say, five or seven years ago as there may be more so relying on you guys to do a lot of that service just given how fast things are changing relative to a decade ago? Thank you so much. David Regnery: Yeah. I think for sure. Okay. Obviously, hyperscalers or colos, they want the OEM to be doing the service work. Okay? I think what's changing is the size of these data center fields or farms as they're referred to. Are quite large. So we're seeing more dedicated resources to a particular data center. But I would say for sure, if you go back up, like, say, a decade ago, I don't think our attachment rate was nearly what it is today. In fact, I'd be hard-pressed to think where we've done a major chiller farm where we haven't had the service agreements. Chris Snyder: Thank you. Appreciate that. David Regnery: Alright. Thanks, Chris. Operator: Our next question will come from the line of Andy Kaplowitz with Citigroup. Please go ahead. Andy Kaplowitz: Hey, Andy. How are you? David Regnery: Good. How are you? Andy Kaplowitz: Great. David, Chris, you had some margin pressure in Q4 in Americas and Europe. You explained it well. A lot of it was resi deleveraging in Americas. And European investment. But maybe you could talk about how to think about segment incrementals in the context of your normal expected 25% plus as European margins start to turn now more positive in 'twenty six, given its backlog and how should we think about your overall price cost dynamics? Dynamics given recently higher commodity costs? Christopher Kuehn: Andy, on the 25% or better incrementals for 2026, you know as well that's certainly where we like to start the year, and it gives us a lot of flexibility to make investments. We view each one of our segments. So The Americas, EMEA, and Asia all to be delivering 25% or better organic incrementals. In 2026. Reported incrementals, they'll have about a 700 basis point lower impact than organic, and that's really just the result of M&A coming into the year at a starting point of lower margins, which gives us a great opportunity to grow those margins over time. So 25% plus across each of the segments for the year. I think about price cost in the guide of the six to 7% organic, think of pricing as around a point and a half for the year. We've had a very proven and strong track record of staying ahead of inflation. It's our current view around inflation and tariffs today. And at the same time, we have to remain very nimble and dynamic given input costs. So confident that that one and a half points of price would be in a position to drive the 20 to 30 basis points of margin growth as we'd go into any year thinking about price versus inflation, but we'll remain dynamic. Andy Kaplowitz: Helpful, Chris. And then, Dave, maybe you could talk a little more about your positioning in the data center market. I think the Stellar acquisition is going to help you a lot. But how is Trane adapting in thermal management as it adapts? To maybe a little more liquid cooling. And then obviously, were some comments a few weeks ago from one of your data center partners. So you could opine on, you know, their comments you know, water chillers versus air chillers and so on. David Regnery: Yeah. Well, hey. Thanks for the question, Andy. Look. At the end of the day, we've been very strong in the data center vertical for decades, and we're gonna be very strong in the future. And the short answer to your question is we see chillers in the data center vertical well into the future. But let me take a step back. Look, we're working very closely with many influencers in the data center vertical. So think of hyperscalers, think of chip manufacturers, like Nvidia and others. We're helping them design data centers of the future. Or you may have heard them referred to as reference design data centers. And think of these data centers as the data centers that will be built you know, maybe two to four years out. And when we're sitting with these customers, we're bringing our expertise around the thermal management system to the discussions. And I have not seen a reference design or data center of the future that does not include chillers, just to be very clear. Now I think that when we talk about some of these future designs, you're gonna see a lot of innovation around the thermal management system, specifically around the chiller that is really exciting. I won't talk about in too much detail here for obvious reasons, but this is I mean, this is fun. I mean, when you sit down in these rooms and our engineers are very detailed on this, but it's just you get really creative ideas. We have a lot of these new innovations in the pipeline. Some of them are actually still being in the modeling stage because they're so futuristic in thought process. But I want everyone to realize that Trane Technologies is at the forefront of this innovation. And we're helping our customers think through what's possible. And I'll conclude with we've been very strong in the data center vertical for decades. And we're gonna continue to be very, very strong well into the future. Andy Kaplowitz: Helpful color, Dave. Thank you. David Regnery: Alright. Thank you. Thank you. Operator: Our next question comes from the line of Amit Mehrotra with UBS. Please go ahead. Amit Mehrotra: Thanks. Hey, Dave. I just wanted to follow-up on that point because I don't think people are debating whether a chiller will be in a data center in the future. I think the question really is about you know, how much you need to run it and do runtimes get affected, and do you need as many of them? And so I'd appreciate if you can just address that point, particularly also how Trane is positioned in an environment where chillers run less or are needed less. Because on one side, you're working with NVIDIA to create this reference design, and the other side, you know, one of the main value products you sell in that market could just need less of them or run less. I mean, I don't know if you disagree with that, but I'd love your perspective on it. David Regnery: Well, I do. I think, first of all, I mean, think about a data center farm in the future. Think about free cooling being built into the data center. Okay? So you'll have a so make up a number here. A 100 chillers will have free cooling capability. To run free cooling, you'll obviously be running the fans. We could debate how often you're gonna run the compressor side of the thermal management system there, but will definitely be running the fans through the free cooling cycle. How you manage that is gonna be very important in the future. And I'm trying to be sensitive here to some of the innovation that you're gonna see coming in the future. But chillers are mechanical systems. They're not a lot different than maybe your car. So you don't leave your car in the garage for six months and don't run it. Because if you did, you may not be very happy when you go out to try to start it up. So these systems do need to run at some point. And so we're working through that equation. The other side of it is do you need more or less? I think at the end of the day, you have a thermal load that you have to be able to size for the size of the data center. So the answer is you're still gonna have the same number. The frequency at which the compressor side runs will vary but which could impact the services side as to how often you service these pieces of equipment. And to be fair, we're still modeling that based on different innovations that are coming in the future. Amit Mehrotra: Got it. Okay. That's helpful. Thank you. And then just maybe more tactically, Chris, the organic growth target 6.5%, obviously, it's an acceleration to 25%. But not as much of an acceleration as that maybe I would have expected given resi is kinda flattish to down. You know, you've got probably applied equipment and services maintaining, if not accelerating growth just given the strength of the orders. Is that a fair assumption? I know you guys like to be conservative out of the gate. And give yourself cushion, especially given the uncertainty of last year and what happened. But I maybe you'd push back to me saying it's not actually that conservative based on some puts and takes that you think of? Christopher Kuehn: Yeah. I mean, Amit, we like to set guidance where we can meet it or exceed it, and so that's where we're starting here in January with a lot of flexibility to react to conditions that may present themselves we don't know today. You know, the guidance range on the six to seven on the full year organic, it's got America's commercial HVAC up about 10%. And, again, we think that's very strong growth for that business, and maybe a derisked outlook when you think about residential. You described it as flat to down 5%. Transport markets and residential markets trough in the first half and then much easier comps in the second half of the year. But transport, we're expecting to be flat to down low single digits. With markets down in the high single digits. We'll outperform. So I think it's a reasonable start to the year. We have a lot of confidence in delivering on the results like we would anytime here in January. And when you think about transport and residential, they're making up around 25, 30% of the portfolio that we're not baking in much growth for. On the full year basis. So we expect that they'll improve in the second half on easier comps. We've got great teams and innovations. We keep leaning both of those portfolios. And we'll see how the year kinda plays out. But we have a lot of confidence in the guide that we just put today. Amit Mehrotra: K. I thought I'd ask that question, but thank you, Chris, for entertaining it. Appreciate it. Take care, guys. Christopher Kuehn: Thanks, Amit. Operator: Our next question comes from the line of Andrew Obin with Bank of America. Please go ahead. Andrew Obin: Yes. Good morning. David Regnery: Hey, Andrew. How are you? Good morning. Andrew Obin: I'm great. Just a question on residential in the first quarter. I think the scope of sort of under absorption in the fourth quarter was a little bit surprising to us. At the same time, you commented that residential market was better in the fourth quarter. How should we think about under absorption relative to sort of normal operating leverage? In Americas in '26. David Regnery: Yeah. I'll let Chris talk about the unobserved. Let me just clarify a few things. I'm not sure the market was a lot stronger in the fourth quarter. I think we were stronger in the fourth quarter on resi. And I would also tell you, Andrew, that we were very, very intentional in these days out. So it wasn't necessarily a surprise to us to deleverage. We kinda had that baked into our models. But we wanted to get this behind us. And we believe it's behind us now. So I know, Chris, you wanna talk about Q1 leverage? Christopher Kuehn: Sure. And we've got residential in our guide in the first quarter down about 20%. A reminder, the business was up in the high teens in the first quarter of last year. And that drove strong volume growth. For Q1, look. We're still very much in a shoulder season for residential. We'd expect the deleverage in the first quarter to be better than the deleverage we saw in the fourth quarter. To Dave's point, we intentionally took production days out, and that had the strongest impact on a roughly 60% deleverage in the fourth quarter. So think about the first quarter residential deleveraging within gross margins. We've got level loaded production assumptions through the first quarter. We've got inventory we believe, at the right level in the channel. And then let's see how the year kinda plays out, but I think we really tried to, as one person noted, take the medicine in the fourth quarter as best we could and then set ourselves up well for 2026. Andrew Obin: Thanks so much. And just I know there is a lot of focus on data centers at a vertical, but at the same time, there are a lot of announcements about biopharma reshoring and, clearly, one of your key verticals. Can you tell us what it is you are seeing in terms of biopharma reshoring, how real it is, how excited should we get about it, into '26, and how much visibility do you have from your customers in '26 and '27? Thank you. David Regnery: Sure. A great question, Andrew. I mean, I said earlier that, you know, we had 12 of 14 that were positive. One of the verticals that was not positive was life science. Okay? So but if I look at the pipeline of activity, yeah, we see some of those large pharma projects that are, you know, set for reshoring, I said, in the pipeline. We're optimistic. But we'll see how they play out. But we are all over tracking some of those large projects that are in these you know, this classification of mega projects. But we're hopeful that some of those actually come to reality here in the near term. Christopher Kuehn: Andrew, I'll add, on the $7.8 billion of backlog that we finished 2025 with, there's a bit over a billion dollars of backlog that's for 2027 and beyond. That's up more than 30% versus a year ago, and it reflects multiple verticals. Let me be clear. But you know, again, entering 2026 with a stronger backlog than '25 and certainly building backlog already for '27 and beyond. Andrew Obin: Thanks so much. David Regnery: Alright. Thanks, Andrew. Operator: Our next question comes from the line of Tommy Moll with Stephens. Please go ahead. Tommy Moll: Good morning and thank you for taking my questions. David Regnery: Hey, Tommy. How are you? Good morning. Tommy Moll: Doing fine. Thanks. Dave, I wanna start by going back to the commentary from NVIDIA that you've elaborated on a bit today. If you think about the HVAC content in the data center, so whatever fraction of every dollar spent on a data center today that you would attribute to HVAC. And then you think about the two to four-year roadmap where you're in discussions already. When we're two to four years out, do you think that fraction is higher, lower, about the same as today? David Regnery: Yeah. I'm gonna err on the side of saying it's probably about the same. Okay? You gotta look at the whole thermal management system, and that's one of the advantages that we bring to these conversations as we do look at the whole thermal management system. I think the amount of power that is being consumed by the thermal management system may be less. Okay? So think of it as a trade-off between you will still need the thermal management system. How often it runs or the power that it consumes may be less. Therefore, you'll have the opportunity to do more computing within the data center. Right? If that makes sense. So those are the conversations that are happening where you know, how do we redirect some of the power over to the computing side versus running the thermal management system? Tommy Moll: Thank you. That's very helpful, Dave. Also wanted to ask a follow-up on resi pricing. Chris, I think earlier you said you have not seen it fade. I'm curious as you dialed in your outlook for sales this year flat to down five. Does that assume some incremental price realization? And 26? And if the answer there is yes, do you feel like you're pricing plus minus in line with other major players in the market there? Thank you. Christopher Kuehn: Yeah. Tommy, I don't wanna get in front of our residential team in terms of their plans for pricing, so I won't comment specifically there. But the flat to down five residential for the full year on a dollar basis assumes some level of price, whether it be new price increases or carryovers from last year, and then we'll see how the year plays out. It's rough estimates. At this point in time, it's probably a modestly lower year to flat on pricing. We'll see how that plays out. Tommy Moll: Thank you. I appreciate it, and I'll turn it back. David Regnery: Thanks, Tommy. Operator: Our next question will come from the line of Noah Kaye with Oppenheimer. Please go ahead. Noah Kaye: Hey, thanks for taking the questions. I'd like to pick up on the broad commercial HVAC strength. In the past, I think the split of orders backlog has maybe skewed a little bit more towards retrofit. We're seeing some new construction indicators picking up. So how should we think about new build versus retrofit split as relative drivers of the '26 outlook? And to what extent, if any, the back half acceleration ties into new construction? David Regnery: Yeah. I mean, I think you need to look at it by vertical, Noah. So certainly in the data center vertical, there's a lot of new construction almost all. But then when you get back into some of the other core verticals, it's very similar to what we've seen in the past. And it makes a lot of sense. Right? I mean, I always tell people look out your window and how many buildings do you see how many cranes do you see. And you'll realize that the majority of our business is focused on the you know, how do you retrofit versus new construction. But it really you gotta really your question's a great one. Just look at it by different verticals, and you may get a different answer. Okay? Noah Kaye: Yeah. Very fair. Thanks, Dave. I wanna ask you about Stellar Energy. I guess just how much overlap is there in the customer base today? And maybe can you talk a little bit about kind of key points of differentiation around what this adds to your capabilities? David Regnery: Yeah. I mean, look. I think that sure sure. There's some overlap, but at the end of the day, think of Stellar Energy as being able to build modular chiller plants. And, you know, I mean so just the and then these modular chiller plants get assembled on a job site like Legos. And so you're reducing the amount of skilled labor required on the job site. You're moving that back to the factory. You're testing these systems in a different way at a factory there versus what you would do at a job site. So, that's a benefit as well. Look. They're predominantly right now in the data center vertical. But we see a lot of opportunities for this modular concept in core verticals as well. I think we're all aware of the skilled labor shortages and the potential that that has to slow projects up where modular designs are gonna become they're very, you know, very attractive today, but I think they're gonna become even more attractive in other verticals than just the data center vertical. Noah Kaye: Yeah. And that cross-sell is an opportunity for you. Great. Thank you very much. David Regnery: Alright. Thanks, Noah. Christopher Kuehn: Hey, Regina, before you go to the next speaker, let me just clarify a point I made. I don't wanna confuse anybody. Resi down up to 5% in 2026. It's really driven by volume. We'll see where pricing ultimately falls out. I don't want anyone to think that pricing is coming down in that market. You know, the impact may be less than what we saw in 2025, which was significant pricing, but we'll see. But it's really, really volumes coming down that makes up that. I don't wanna intimate that we know pricing's coming down. Noah Kaye: Thank you. Operator: And our next question will come from the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead. Jeff Hammond: Hey. Good morning, guys. David Regnery: Hey, Jeff. How are you? Jeff Hammond: Doing great. Maybe just we talked a lot about applied just touch on commercial unitary, your orders, trends. I and how you see that shaping up in '26? David Regnery: Yeah. I mean, it's a great question. Look. If I go back and look at 2025, applied was extremely strong. But unitary was positive slightly. I guess if I look forward to 2026, you know, look, we have a kind of model right now as flattish. The 2025. We'll see how that plays out as the year progresses. But it and, again, it really depends on different growth rates that we're gonna see in different verticals because some are more apt to have unitary product for supplied systems. But right now, to answer your question, we're looking at it to be flattish in 2026. Jeff Hammond: Okay. Great. And then looking at your CapEx, I think you're guiding 1% to 2% of sales. You've kind of been in that 1.5% to 2% range. But it just you know, talk to me about what you've been doing behind the scenes to really ramp your capacity in the applied business just given the strength and what you need to do going forward you know, given all that pipeline, you know, in terms of capacity expansion for Applied? And maybe just touch on you know, your ability to kinda continue to ramp on the labor side, you know, for the service business as well. David Regnery: Good. Good. Let me start. I'll let Chris talk more about the actual dollars being spent. But, look, when we think of capacity, we really break it down into three different areas. One is our four-wall capacity. And that's in our factories itself. That's what we control. And I would tell you that we've been ramping there for a long time, and I think I told you in the third quarter call that, you know, our chiller capacity over the last two or three years is up over four x. Okay? So we've done a nice job there. And some of that's new builds, some of that is just leaning out, some of that is putting in lines and reducing inventory to create space. So there's a lot of goodness that's there, and I'm very comfortable with our capacity in that space. The other area we look at capacity is on our supply chain. And it's you know, their ability could hinder us if we're not careful. So we spend a lot of time working with our supply chain partners on their capacity. And making sure that they understand what our demands are gonna be in the future. Understand they know kinda like the robustness that we see in our pipelines so that they can anticipate as well. So that's another bucket that we look at. And, you know, we're in good shape there. I think there's always opportunities to improve, and our team is doing a great job of making sure that we have enough capacity there as our future needs will dictate. The third area that we look at is within our service business. And there, really, it's about being able to not only do the service on this equipment but commission the equipment. Applied Systems, we commission. Right? So we go out to the we're our own employees are out there before the mechanical contractor starts these systems up. We're out there making sure that everything is perfect before we start them up. And then we make sure that the system is operating the way it was designed before it gets turned over to the customer. And to be fair, we have over 7,500 technicians now on a global basis. So I feel very comfortable in our ability there to make sure that all these applied orders that we've been receiving were not only be able to manufacture, but we're also gonna be able to make sure that we commission on the job sites. Chris, I don't know you wanna talk about the actual capital dollars. Christopher Kuehn: I mean, we remain CapEx light in terms of intensity. You're right, Jeff, 1.5% to 2% has been the CapEx spend to revenues over the last few years. And it's been able to support all the capacity expansions we needed to do. I would add, though, M&A has been a great option for us as well as we brought in businesses on air handling or industrial process cooling capacity for data centers, the M&A brings capacity as well into our four walls. Then it gives us a lot of optionality as to how we want that production facility to operate, what products will it run, and what can we expand into that as well. So it's organic and also some inorganic opportunities where we've been able to expand capacity. Jeff Hammond: Appreciate the questions. Thanks, guys. David Regnery: Thanks, Jeff. Operator: Our next question will come from the line of Joe Ritchie with Goldman Sachs. Please go ahead. Joe Ritchie: Hey. Good morning, guys. David Regnery: Hey, Joe. How are you? Good morning. Joe Ritchie: Yeah. Doing great. Thanks, Dave. So, look, for all for good reason, there's always a focus on The US data center market. You take a look at your commercial HVAC bookings zone in EMEA up Mid Teens And Some Expectations, You Could Actually See Some Really Robust Growth In The State In The Data Center Market In EMEA And I'm just wondering whether you're starting to see any of that already, and then how are you positioned geographically if things were to really accelerate? David Regnery: Yeah. I mean, absolutely. We see data centers really on a global basis Joe. So it's not just in The Americas. I will tell you that the size of the data centers is dramatically different in Europe than it is here in The States. And you could almost I mean, the data centers that are built being built in Europe are probably about you know, one-tenth the size of what's the what's being built the majority of what's being built now or what's being certainly planned to be built here in The States. So I am hearing from some that they're gonna be make much larger data centers in Europe, but we'll see how that plays out. But if it does, we're very well positioned. I mean, we have an incredible portfolio of products really on a global basis. And there are nuances that you will see in the product portfolio for preferences and data centers as you start to move around the world. And my comments on Europe, you could replicate them into Asia. As well because it's, again, a very similar Asia is actually more similar to what we're seeing in Europe right now. Joe Ritchie: Got it. That's helpful. And then I guess maybe then just double-clicking on those orders. You mentioned your priority verticals in The Americas, most of them, I'm seeing the broad-based growth. Where are you seeing kind of like the real growth in the EMEA side of the business? David Regnery: Yeah. I mean, it's less we have less data there on the different verticals, but I would say it's, again, broad-based. We certainly see it in data centers. We certainly saw it in commercial as well, commercial office that is which is but it's a focus area. We also see nice growth in Europe as you would expect in our services business. It's as broad-based as you would have in the Americas. We just have less granularity on the verticals and kinda, like, have a reporting mechanism on those verticals. But if you ever come visit us in Europe, I think you'll see us being able to play across all the verticals. And again, the direct sales force really allows us to pivot to where the opportunities are. That's really on a global basis as well. Joe Ritchie: I'll leave it at that. Thanks, Dave. David Regnery: Alright. Thanks, Joe. Take care now. Operator: Our next question will come from the line of Jeff Sprague with Vertical Research Partners. Please go ahead. Jeff Sprague: Hey. Thanks. Good morning, everyone. David Regnery: Hey, Jeff. Jeff Sprague: Good looking numbers here, guys. Congrats. Hey. I wonder if we could talk a little bit more about price cost. Chris, you gave some color there. But I was just kind of curious, if you could kind of level set us on kind of what you absorbed on tariffs in 2025 what the wraparound might be, and then also just this you know, pretty dramatic, you know, metal spike we are seeing, you know, gold's getting all the attention, but copper and other things have moved a lot. Just how dynamic might your pricing have to be here as we progress through 2026? Christopher Kuehn: Well, I'm hoping it's less dynamic than what it had to be in 2025, Jeff, but that's the power of the business operating system and the models we have to take into account all of the costs that we can see. But your specific question, just given time on tariffs, we described it about a bit higher than $140 million of tariff cost in 2025 on our last call. We're in that range for what that cost was in 2025 for the full year. And think about that wrapping into 2026. We really have three quarters of that tariff cost in '25. Now you got four quarters of that. So we expect it to be inflationary from a tariff perspective, maybe in that 50-ish million dollar range in the ballpark. All in, maybe it's 200-ish million of cost that we'll make sure we price accordingly for. But the first step we do is we make sure we mitigate the tariff costs. So the numbers I'm quoting you are after mitigation. So we're continuing to work with suppliers on the short term to the long term. To ultimately mitigate the costs and or move source of supply to really not make this an area where we have to price. And if we do, we're not trying to make it a profit center. On commodities, we've had a program for well over a decade in terms of how we hedge. Think of copper and aluminum in 2026 now. About half of our needs are hedged at this point. And so we'll continue to layer on hedges as we move throughout the year as we normally would. But we'll remain dynamic in terms of pricing as we see those commodities move. On steel, we have about a six-month lock in terms of pricing. So any pricing moves there impact us beyond six months. But I think a proven track record to stay ahead of inflation and make sure that we've got a positive on the dollars and the margins for price cost. Jeff Sprague: Great. We're late in the hour. I'll leave it there. Thanks a lot, guys. David Regnery: Thanks, Jeff. Operator: Our next question will come from the line of Nigel Coe with Wolfe Research. Please go ahead. Nigel Coe: Thanks. Good morning, guys. David Regnery: Nigel, how are you? Morning. Nigel Coe: Good, Dave. Good. How are you? So you said some very interesting comments. Well, first of all, I wanna say well done on taking the imagery down. That's not easy, but Debbie sets you up well for 2026. So, well done there. Going back to the comments you made on the services intensity for chillers and data centers, I just want to make sure I understand that correctly because, obviously, these aren't running you know, twenty-four seven depending on the ambient temperature. But just could you just remind us, you know, how the service tail on applied systems typically looks versus the upfront cost? And is that materially different for data centers? That'd be an interesting comment. David Regnery: Yeah. Actually, it's a great question. And, you know, I think I could tell you right now, we think of it at the eight to 10. You've heard us say that number before in an applied system. At least on a thermal management applied system. In data centers, look, to be honest with you, it's probably gonna be a bit lower. And some of that we're still modeling. And there's a couple reasons for that. Right? One is we could all sit there and speculate what the life expectancy is of a thermal management system in a data center. I know what it will run from a mechanical standpoint, and that doesn't change. But because of the efficiencies that you're gonna see in the if you just follow the track of innovations and how we've been able to improve efficiency over the last five years, if you roll that forward to the next five years, you may start to see some of these chillers have different lives other than the data center. Because you'd switch them out to be able to get power to divert back into the computing side of the equation versus to the thermal management side. So those are some of the variables that are kind of unknown right now. But you know, the question that came in that I would try to answer was is, hey, if a chiller runs less, do you have the same, you know, service on it? And the reality of it is in a data center, think of it as a chiller. The fan side or the air side of the chiller is gonna run as it does today. The compressor compressing side of the chiller may run less but it still has to run. And if you don't run it, you're gonna end up with problems. So those are kind of the balances that we're working through. So it's pretty dynamic. And we don't have it 100% dialed in. But I would tell you, we have a lot of people that are modeling that so we can understand. Nigel Coe: Okay. No. That's clear. Thanks, mate. But don't but don't there's a couple of things that are gonna be the same. Right? Response time, being on the job site, making sure that you have uptime, all that. Is gonna be the same. Connected solutions is all gonna be the same. So we'll still have a big robust service business. Nigel Coe: Yep. No. Thanks, Dave. And then just one more crack at the resi pricing. Just given the inflation wave that's coming through in that business, and maybe, Chris, it doesn't sound like you want to put a pin on sort of the pricing. I just wondered, is that because the demand environment is too fluid? Raw material inflation impact is too fluid. I mean, any sense on why you're kind of I don't know the mystery of pricing here, but just wondering what's kind of, like, driving our thinking around pricing. Christopher Kuehn: Well, I'll start with our team hasn't announced a price increase yet for 2026. Okay. That's good. So I'm saying that, you know, we've got we've got for the year, but we'll continue to remain dynamic. Don't wanna signal anything in advance, but, you know, we have a lot of confidence in the team that they're gonna manage well throughout the year. Okay? Nigel Coe: Okay. Yeah. That's good. Thanks. David Regnery: Alright. Thanks, Nigel. Operator: Our final question will come from the line of Steve Tusa with JPMorgan. Please go ahead. Steve Tusa: Hey, thanks for putting me in. David Regnery: Hey, Steve. How are you? Glad you, glad you clarified that resi pricing comment because a few messages came in immediately when you said down. So, obviously, some sensitivity around that. But just the commercial HVAC side, can you help reconcile the like 100% plus applied orders and the 35% total orders, like, what was down to kind of get it to that rate or is applied just you know, a smaller piece of that pie? Christopher Kuehn: We saw growth in orders in both applied and unitary here in the fourth quarter. Unitary, you know, closer to that low single-digit kind of range, but it was positive. I guess I'd leave it there. I mean, it's pretty broad-brushed in terms of the verticals where we saw growth. They described the 12 to 14 12 of the 14 verticals. Steve Tusa: Well, I mean, I guess if they're just fifty-fifty simplistically, wouldn't that be a lot higher of a total order number? Or is there services maybe in there or something? David Regnery: Yeah. There's services that certainly would be part of the conversation as well in terms of order growth. We'd have to get back to you guys with Yeah. We can do the math on it, Steve. But, you know, also a little bit on comps. What's the prior year comps as well? We have to look at that too. Steve Tusa: Okay. And then just thinking about this kind of trajectory, obviously, very strong orders, strong backlog. In the first quarter, you're starting at like 7% to eight exiting the year at a higher rate. And obviously, these orders are very strong. Is there something outside of the core applied business? And I guess what I'm getting at is are there like a lot of like liquid cooling related orders that are now coming through and pushing that number higher and driving the acceleration in the second half. It's I know you guys have come out with some really big launches on that front. Is that moving the needle on some of this? David Regnery: Well, I think we're mixing orders versus revenue. So the revenue is more a function that we're gonna see in the back half of the orders that we've already booked. Steve. So think of it as if our last six months in commercial HVAC in The Americas, our orders are up over 30% just start adding nine months almost on average. To each of those to understand when it's going to ship out. And Europe is very similar. As I said, that was up the high teens level. So all that backlog is gonna come up. To your question on are we seeing robust demand for other elements of the thermal management system? Absolutely, certainly in our pipeline. And as you can imagine, we're all over it, and the teams are just doing a great job there on the innovation side as well as on the front end talking to customers as to what we have in our portfolio. Steve Tusa: Okay. And then one last one, Chris. Can you just remind us what the, what the standing kinda tier one Tier two kind of raws base is, so we can kinda, like, do our own math on that inflation dynamic this year? Christopher Kuehn: Yeah. Tier one is still around $750 million and then the Tier two is around $5.5 to $6 billion in terms of size. Steve Tusa: Great. Thanks for the details as always. David Regnery: Alright. Thanks, Steve. Operator: And that will conclude our question and answer session. I'll turn the conference back over to Zach Nagle for any closing remarks. Zac Nagle: Thanks, everyone, for joining today's call. As always, we'll be around to take any questions that you may have today or in the coming days. We'll be on the road at a couple of conferences here in February and then into the rest of the quarter. So we look forward to seeing many of you on the road. Thanks very much. Bye. Operator: This concludes our call for today. Thank you all for joining. You may now disconnect.
Operator: Welcome to the HEXPOL Q4 2025 presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Klas Dahlberg; and CFO, Peter Rosen. Please go ahead. Klas Dahlberg: Thank you, operator, and good afternoon, everyone. Thank you for joining this call, and a warm welcome to the HEXPOL Q4 presentation. This is Klas Dahlberg speaking, and I'm here together with our CFO, Peter Rosen. If you please turn to Page 2. I will start with a business update, and Peter will take you through the financials, and I will then summarize the quarter. And after that, we're happy to answer your questions. If you please turn to Page 4. I will start by going through the Q4 demand and sales. If we look at the quarter, we managed to increase the volumes, both in Europe and in North America. We maintained our strong market position, especially in compounding in a very competitive market situation. To do so, we are investing in our sales force to pave the way to be able to grow organically. Building and Construction, Wire & Cable and also medical showed increased demand and compensated for relatively soft automotive market. Automotive was affected by holiday closings at our customers, the same pattern we saw at the end of last year. In general, sales was negatively impacted by FX and a weaker mix. But we have actively chosen to gain and protect volumes staying close to our customers during Q4. Part of the volume we gained is so-called tolling. That means that our customers, mainly tire manufacturers, supply the material, and we mix their material. This gives us a positive margin contribution, but the total sales value of that is lower. The European -- and this is not a new business in anyway. It happens regularly. The European market is relatively stable despite uncertainty, whereas North America continues to be soft. But we are beginning to see signs that in-sourcing or as we say, captive conversion is stabilizing both in Europe and in North America. If we look at Q4 performance in the quarter, we delivered sales of some SEK 4.25 billion, which is a decrease of 9%. That was mainly driven by a negative FX effect of some 9% or SEK 436 million. The acquired companies, Piedmont and Kabkom added some 3% in sales, and that was offset by a lower organic sales of some 3%. We'll come back to that later in the presentation. Compounding Europe showed rather stable organic sales. We reached an EBIT of SEK 508 million and a margin of 12%, and that was impacted negatively by FX of some SEK 61 million and an unfavorable mix. The operating cash flow continued on a very good level. We reached more than SEK 1 billion in the quarter. And that is a result of -- we are constantly working on lowering our working capital. The HEXPOL Board proposes an ordinary dividend of SEK 4.20 per share, which is the same level as last year. As a background, I can say we have a very strong balance sheet, allowing us to do that. And we have also the full support from the Board when it comes to our strategic agenda going forward that I will come back to. When we look at sustainability, it's still a focus area for us. In 2021, we set a target to reduce the carbon footprint from our own energy consumption by 75% at the end of 2025 compared to the level of 2018, '19. We have been very focused on both reducing the overall energy consumption, but also using green electricity. Through these efforts, we managed to reach 80% reduction in total. And we are now working on setting new sustainability targets that we will launch during Q1 this year. If you please turn to Page 5. Looking at the different business areas, starting with compounding. During the quarter, we managed to increase the volumes, both in Europe and in North America. Sales of SEK 3.9 billion was impacted negatively by FX of 9%, but also by the mix. In general, we saw a softer demand in North American market, mainly driven by economic uncertainty, whereas the European market was more stable. We saw increased demand in building and construction, Wire & Cable and also in medical. And automotive was in line with last year. Raw material prices were relatively stable. The lower operating margin was affected by unfavorable mix and also OpEx in relation to sales. We come back to that or Peter will come back to that. With our new leadership in the U.S., Rubber Compounding Americas is taking the next steps, capturing and growing the business with a high degree of customer focus. And we are making progress now in gaining new customers, contracts for captive conversion, which is in line with our strategy. If I switch over to Engineered Products, sales reached some SEK 340 million. There, we also had a negative FX impact of 8%. And if we adjust for that, sales was in line with last year. EBIT increased compared to last year and reached more than 20%, which is very positive. If you please turn to Page 6. M&A is an important focus area in our strategic agenda for 2030. And we have the financial resources to accelerate acquisitions. The uncertainty in the market has, however, impacted the M&A activity level, but we start to see an increased activity even though it's from a relatively low level. We showed this slide that you see now during our Capital Markets Day in November. And I just want to reassure you, we have a very well-defined process for acquisitions, and we also have an extensive short list of interesting companies for the group. If you please turn to Page 7. Even though we have been experiencing uncertainty in the market for some time now, we believe that this will change. Our strategic plan for 2030 was presented in November, and the plan is set and the direction for the coming 5 years, and that is what we are actively working on right now. As mentioned, we can already see positive signs when it comes to captive conversion in North America, and we are investing in a new R&D center located in Italy and where we gather expertise in our compounding organization. I have also already mentioned signs of increased activity in M&A. We are investing in automizing our rubber compounding, starting with one plant at the end of the year, which will give us much higher productivity. Saying that, we are, of course, following the development in our different markets very closely. With our toolbox, we know we are able to adopt our footprint if that would be necessary. Right now, however, ladies and gentlemen, we have actively decided to capture new business and to keep our current volumes and even increase them. And as you know, Q4 is a bit special in the sense that we have the early closings of our customers during December. And if we look into Q1, without giving any future outlook since we don't do that. But normally, Q1 is a more normal quarter, if I may say so, where we don't have these shutdowns, and we expect a different outcome also when it comes to the margin. If you turn to Page 8, it's time for the financial update, and Peter will start with the sales development, I believe, in Q4. Peter Rosén: Thank you, Klas. If I can ask you to turn to Page 9, looking at the sales development in the quarter. As Klas mentioned and you've seen, we delivered sales of SEK 4.3 billion in the quarter, which is down 9% compared to the same period last year. At the same time, in this quarter, we had a negative impact from currency effects of the same 9%. And at the same time, we saw organic sales development with a negative 3%, offset by the acquisitions of Kabkom and Piedmont that added 3%. Included in the negative sales development in the organic sales development, we saw higher volumes with low single-digit increase compared to last year, but this was offset by negative price mix effects of mid-single digit, and I will come back to this later in the presentation. From a geographical perspective, Europe showed a small decrease in reported currency, but in local currency, Europe showed a small growth as did Asia. Americas showed a bigger drop compared to last year, the large part explained by the negative FX effects, but also in local currency, sales were somewhat below last year levels in the quarter. If I can ask you to turn to Page 10, just taking a look at the financial overview for the quarter. We delivered an EBIT of SEK 508 million versus an adjusted EBIT last year of SEK 631 million. Half of this decrease when it comes to EBIT is explained by negative FX effects. And I just want to make a comment here. We're going to use the term adjusted EBIT throughout the presentation, but this is related to last year only. We do not have any onetime adjustments here in 2025. So it's only in 2024. EBIT in the quarter came in at 12%, which is below what we did the same period last year. Main reason for this is somewhat less profitable mix and OpEx in relation to the lower sales that we had in the quarter. At the same time, we delivered a very strong cash flow of SEK 1 billion in the quarter, which is double the EBIT for the same time period. If we can ask you to turn to Page 11, just taking a quick look at the financial highlights for the quarter. Looking at the development compared to the same quarter last year, we see that sales came in at SEK 4.3 billion with an EBIT of SEK 508 million below last year. And at the same time, we saw an EBIT margin at 11%. And if I can then ask you to turn to Page 12, looking at the drivers of that EBIT development. Of the total decrease in EBIT of SEK 123 million, SEK 61 million of that is related to negative FX effects. Removing those and looking at the underlying drivers, the main driver of the lower EBIT is the lower sales volume. The gross margin percentage is on the same level as last year. The lower sales value is affected by 2 things. On the positive, we have somewhat higher volume, which is in the range of low single-digit impact. This is offset by negative price/mix effects in the range of mid-single-digit impact. The negative price/mix effect primarily comes from volumes produced and sold that have a lower sales value in absolute terms. The lower sales value and subsequently lower gross margin in absolute terms follow through to the lower absolute gross margin. There is also a third smaller item affected the gross margin percentage, but this one affects positively. Sometimes we are asked by customers to produce on their behalf and where they give us the raw materials to produce. We then produce but on the charge for our work and margin. This gives a low sales value but high gross margin percentage. And we did see some of this volume in this quarter. However, this is not volume that we can plan for as it is of ad hoc nature. And last year, we basically didn't have any of these volumes. So it's something that we've had this quarter, Q4, but not last year. Our OpEx increased some compared to last year, mainly driven by acquisitions and salary costs and also some more IT costs since we're implementing a new ERP system in the U.S. If I can ask you to turn to Page 13, taking a look at HEXPOL Compounding. For the quarter, we delivered sales of SEK 3.9 billion, which is below what we did the same period last year. The decrease in sales corresponds to the negative FX effect of 9% that we saw. We recently acquired Kabkom and also Piedmont, added some 3% in sales, while organic sales are down 3%. The lower organic sales from a geographical point of view are seen in North America, while Europe showed sales on a similar level as last year. And from an end customer perspective, the higher volumes are seen with building and construction, wire and cable, but also, for example, medical. Automotive volumes are on the same level as we saw last year. EBIT for the segment came in at SEK 439 million with a margin of 11.2%. And the decrease in EBIT is driven by the negative price/mix effect and its impact on the sales value. If I can ask you to turn to Page 14, taking a look at Engineered Products. Adjusting for the negative FX effects in the quarter, sales were in line with last year levels. But at the same time, operating profit came in at SEK 69 million with a very good EBIT margin of above 20%. Both EBIT and margin is well above last year levels. If I can then ask you to turn to Page 15, taking a look at the working capital. We continue to manage working capital efficiently. Despite adding Piedmont and Kabkom in this year, working capital came in below 8% of sales. And as before, there is no change in underlying payment terms regardless of whether it's customers or suppliers. If I can then ask you to turn to Page 16, looking at the operative cash flow in the quarter. As mentioned before, we delivered a very strong cash flow of SEK 1 billion, primarily driven by efficient management of working capital, which is down more than SEK 500 million, while keeping depreciation and investments balanced. And then if I can ask you to turn to Page 17. Looking at the net debt, it stands at SEK 3.1 billion, SEK 3.2 billion at the end of the year with a net debt-to-EBITDA ratio of 0.9. It's somewhat higher than last year and this is driven by the acquisition of the minority share of almaak as well as the acquisition of Kabkom during this year. So all in all, when we close 2025, we continue to stand with a very strong financial position. And with that being said, I hand over to Klas to summarize the quarter. Klas Dahlberg: Thank you very much, Peter. If we look at the volumes, we could see an increase in the quarter. And as I said, that was, let's say, a deliberate move from us to protect the volumes in our different markets. We believe we will benefit from that when the markets are coming back. Europe showed a stable sales compared to last year. In North America, the demand was somewhat lower and I guess we see it's affected by a high uncertainty related to not the least the U.S. trade policy. Engineered Products was stable with a very good profitability. We managed to reach and actually go above the set target when it comes to our carbon footprint. And we continue to focus on our strategic agenda for 2030. And I think those 3 pillars is very essential for us, about organic growth, M&A, but also operational excellence or efficiency. And despite the fact that we have been experienced uncertainty in the market for some time, we believe that this will change gradually, as I said before. And therefore, the plan we have set, the strategic plan for 2030 is essential for our -- for growing the company. And I also mentioned, we see -- starting to see progress, and that will contribute to our overall performance. And I want to emphasize again that we are, of course, following the development in our different markets. And we showed also in '24 that if necessary, we will adjust our footprint, but we believe we have a competitive edge. If we are able to be flexible when it comes to increased volumes and also if that would come short term, let's say. So by that, we conclude the presentation of the fourth quarter, and we open up for your questions, ladies and gentlemen. Operator: [Operator Instructions] The next question comes from Henric Hintze from ABG Sundal Collier. Henric Hintze: This is Henric Hintze, ABG. So this quarter, except for the FX headwinds, seems very similar to last Q4. So I'm just wondering, so far in January, have you seen automotive [results] reopen as expected, like we saw last year? And would it therefore be reasonable to assume that the margin weakness here is sort of isolated to Q4 like it was in the previous fourth quarter? Klas Dahlberg: Henric, thank you for the question, Klas here. So the pattern we see right now is actually very similar to last year. So it's typical that they lower their, let's say, stock in December and then we get the push effect in January, and that is the same pattern we saw last year. Henric Hintze: Yes. Okay. Very good. And then another question for me. You mentioned that volumes are up and that automotive is in line with last year, but organic growth was still negative due to mix. So what mix effects drove this except for the negative effect from automotive, which shouldn't have affected if it's -- if automotive was in line with last year? Peter Rosén: Henric, Peter here. The mix effect is driven basically by 2 things. One, there is a relative shift from automotive into some of the other end customer segments. And as we've said before automotive is a very good customer segment for us. And generally speaking, it's also a high-value products going into automotive. So that has a little bit negative impact on the mix moving over to other end customer segments, but also within end customer segments, there's somewhat negative mix effect in the sense that we are also taking volume with lower sales value. So it's a combination, a little bit between the end customer segments and within end customer segments to protect the customer... Henric Hintze: Yes. So when it comes to these volumes with end customer segments, is that for competitive reasons, then you mean that you've had to take lower prices or... Peter Rosén: It's more primarily actually taking other volumes than lowering prices, but taking volumes that -- we've taken just to protect the relationships and the market positions. Klas Dahlberg: I think it's important to emphasize, Henric, that I mean, we never in general, lower prices, let's say. It's a very strategic decision to keep, let's say, certain customers or keep certain volumes with a certain customer. So that's what we're aiming for. Operator: The next question comes from Johan Dahl from Danske Bank. Johan Dahl: On that same topic, talking about sort of defending share within those customer segments. How much would you say are you willing to commit to defending that? I mean if you look on the volumes that you've taken in Q4 and looking into next year, sort of how flexible are you likely to be on the pricing to sort of defend or possibly increase market share? Peter Rosén: Johan, Peter here. I think 2 aspects to the answer that question. One, Q4 is always a very special quarter in the sense it becomes very, very short. And this year, we saw even more extended customer shutdowns in December compared to last year. So it became very short and quite competitive quarter. And that was one of the reasons that we decided to take volumes to protect customer positions and market positions. How that translates in going forward, as Klas said, that's a strategic decision. It does not mean automatically that we will continue to do that when we have more normal quarters with more normal volumes and customer patterns. Johan Dahl: All right. Got you. Just to clarify, these tolling volumes, which we accepted this quarter 4, but not last year, if I understood you correctly. Is that included in the references you make to organic volume performance for the group year-over-year, which you say is slightly positive? Peter Rosén: Again, 2 aspects to your question. First of all, it's actually, it's more on the customer side, if they ask us to take these volumes, then we are very often happy to do that. So it's not that we accept or not. It's more if the customers have the need, and we are most often most willing to do that and support them. Second part of that question, is it included in the volume? Yes, it's included in the volume number. But it doesn't have a very large impact on the volume increase in itself. It just has a more impact on the gross margin percentage explanation because fairly, small volumes in relation to the totality, but it has an outside positive impact on the gross margin percentage. Johan Dahl: All right. On the OpEx cost increase, you talked about strengthening sales efforts, et cetera. Again, on that question, how do you aim to invest in that in sort of in the coming years? How much money are you committing to that to drive volumes better? I mean we're seeing signs of inflating at the moment, but looking into next year. Klas Dahlberg: So it's very different, of course, where we are in Europe or in North America. But for us, it's essential to be present in the market. And we have done, for instance, one investment in a key account in Europe to be able to follow some of the bigger players. But I don't have a number for you, Johan, but we see that as very crucial for the business, of course, to have a strong sales force. Peter Rosén: And if I can add, Johan, it's not going to change the OpEx picture of the company. It's targeted and staffing. Johan Dahl: Okay. Final question. You talk about wire and cable, construction and medical being sort of positive compared to the average in the group. Is that positive for your mix neutral or slightly negative. Peter Rosén: Peter here again. If we look at it from an outside point of view, it's probably balanced. So I wouldn't say automatically that, that means a shift in the mix effect. It's more related to, okay, within those segments, how do we move which volumes do we take? So that comes back to... Operator: The next question comes from Andres Castanos-Mollor from Berenberg. Andres Castanos-Mollor: Just about any actions that you may be taking to -- regarding the strength of the Swedish krona. Do you plan to maybe diversify your funding and maybe start borrowing in dollars, maybe this increases your appetite to acquire businesses in Europe rather than the U.S.A. Yes, any thoughts about actions on that regard. And if you think this is a phenomenon that could continue over the long term. Peter Rosén: Andres, it's Peter here. When it comes to the SEK, U.S. dollar, Euro development, I think that I'll leave that to politicians and somebody else. However, that being said, when we look at our currency exposure that we have, it's primarily translational FX effect. So very few transactional FX effects. Since we buy, produce, and sell in local currency. So the effect that we have is primarily translational FX effects. And when we look at the way our funding is structured, it's primarily in SEK. And then we have local -- certain local funding as well. So of course, we monitor it, but it hasn't triggered with us yet any change in it, but we are looking at it and monitor if we should have funding in other currencies as well. But at the moment, we are comfortable with the way we have our funding structure. Operator: [Operator Instructions] The next question comes from Gustav Berneblad from Nordea. Gustav Berneblad: It's Gustav from Nordea. I thought maybe just to build on these tolling volumes that you comment on are coming more at [ad hoc]. I mean is there a risk that this is a structural change we are witnessing here in the market and that the -- that we should have a look at the longer-term gross margin, maybe we should expect it to come down or anything there? Klas Dahlberg: Gustav, this is Klas. I would say not at all. The background for the tolling volumes is usually when some of the bigger, let's say, tire manufacturers, if they have a change in production, if they build a new plant, for instance, or if they do maintenance on their equipment. That's when they ask us usually to do the tolling. And given the situation we are in right now, it fits quite well as Peter also explained to take on that volume. But that is -- that would not, let's say, change our structure or anything. It's just something -- gives us coverage for our cost in our plans. So for us, it's -- I would say it's a win-win situation. Peter Rosén: And if I may add, historically, we've had these volumes come and go. Not driven by us, but driven by customer needs. It's just that in Q4, it became more visible because from a sales volume perspective, it's a short quarter. Gustav Berneblad: That's very clear. And then maybe just to build here on your comment on seeing this pattern that we saw last year of a catch-up in January from automotive. Is there anything -- I mean, when you look at it, is there anything that speaks against the better mix here in Q1? Peter Rosén: We're not going to give a forecast. But as Klas said before, the normal pattern is weak margins in gross margins in Q4, driven by a short period low volumes. And typically, we see volumes come back in January because the orders that didn't put through in December, they typically come in January. And so far, that's the pattern we see this year, same as we saw last year. Gustav Berneblad: Okay. That's very clear. And then just sorry, one more here. When you look at your the competitive landscape and so forth. I mean are you seeing among smaller players, I guess, any signs of bankruptcies or similar or... Peter Rosén: Simple answer is, no. We don't. They are still there. They seem to prioritize volumes ahead of profitability, but they are still there. Gustav Berneblad: Okay. So it sounds like you are really experiencing price pressure in the market or... Peter Rosén: Some of the competitors, they've been doing this for more extended -- much more extended than this quarter. But since you asked specifically about the smaller competitors, they are still there. Gustav Berneblad: Okay. But you don't interpret it as or see that price increase or price pressure in the market has increased here in the last quarter or.... Peter Rosén: I mean we've seen certain price pressure throughout the year, and we've spoken about that during the other quarters as well. What makes Q4 more special is that it's a very short quarter. So then if you need to -- want the volume, then it becomes even more competitive because of the calendar effect in the sense that customers are closing down. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Klas Dahlberg: So I just want to thank you all for participating, and wish you all the best and see you after Q1. Thank you so much.
Desiree: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Carpenter Technology Corporation's second quarter fiscal year earnings call. Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, press the star one. I would now like to turn the conference over to John Huyette. You may begin. John Huyette: Good morning, everyone, and welcome to the Carpenter Technology Corporation Earnings Conference Call for the Fiscal 2026 Second Quarter ended December 31, 2025. This call is also being broadcast over the Internet along with presentation slides. For those of you listening by phone, you may experience a time delay in slide movement. Speakers on the call today are Tony Thene, Chairman and Chief Executive Officer, and Timothy Lain, Senior Vice President and Chief Financial Officer. Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter Technology Corporation's most recent SEC filings, including the company's report on Form 10-Ks for the year ended June 30, 2025, Form 10-Q for the quarter ended September 30, 2025, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discusses the sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on adjusted operating income excluding special items and sales, excluding surcharge. I will now turn the call over to Tony. Tony Thene: Thank you, John, and good morning to everyone. I will begin on slide four with a review of our safety performance. We ended the 2026 with a total case incident rate of 1.4. We saw improvement over the last quarter. And as a result of the actions in this area, I expect to see continued progress going forward. As always, we remain committed to our ultimate goal, a zero injury workplace. Let's turn to slide five for an overview of our second quarter performance. Second quarter performance continued our earnings momentum and sets us up for a strong second half to fiscal year 2026. Let me highlight the four major takeaways for you. One, record earnings. In the second quarter, we generated $155 million in operating income, exceeding our previous record set in the prior quarter. And it is a 31% increase over our 2025. Another meaningful step up year over year. Our consistent earnings growth continues to be the result of our solid execution, strong market position, and unique capacity and capabilities. Two, expanding operating margins. The SAO segment continued to expand margins, reaching an adjusted operating margin of 33.1% in the quarter. This margin compares to 28.3% a year ago and 32% the prior quarter. Keep in mind that there are lots of factors that impact what our operating margins can be in any given quarter. Most notably the mix of our products. So going forward, we may see some quarters that are flat or slightly lower but their overall trajectory is anticipated to continue upwards. With that being said, our current outlook calls for increasing SAO margins over the next two quarters of fiscal year 2026. As in the past, the positive trend will continue to be driven by increased productivity, product mix optimization, and pricing actions. As a result of the expanding margins, the SAO segment recorded $174.6 million in operating income. An increase of 29% year over year and another all-time record for the segment. Three, strengthening market demand. Especially in the aerospace and defense end-use market. As we continue to see strengthening demand signals in terms of OEM production and order intake rates. Our customers are keenly aware of these demand signals. And are positioning themselves accordingly. In the quarter, bookings for the aerospace and defense end-use market increased 8% sequentially. However, it is important to note that defense submarket orders were down materially in the quarter. Due to the government shutdown and uncertainty in terms of the defense budget. Most importantly, commercial aerospace bookings were up 23% sequentially. This is the fourth consecutive quarter of sequential order intake increases for the aerospace and defense end-use market. Seeing such strong bookings in a quarter that's usually quieter due to the holidays, is a good indication of the accelerating demand for our materials. And four, pricing continues to be a tailwind. Given the strong demand outlook, our customers continue to be focused on securing their supply and our pricing continues to increase. As evidence of this, we completed three additional long-term agreements with aerospace customers with significant price increases during the quarter. These long-term agreements represent good value for us and our customers. As they look to secure their material needs going forward. Let's turn to Slide six to have a closer look at second quarter sales and market dynamics. In the 2026, our total sales, excluding raw material surcharge, were up 8% over the 2025 and down 2% sequentially. Net sales were as we expected and the result of multiple factors, including available operating days, and customer closure schedules. Items which we see at every calendar year end which I noted in last quarter's earnings call. As we enter our third quarter, these factors are not in play, and we expect a sequential increase in net sales. Let me briefly review some of the key markets. Starting with aerospace and defense. Sales in the aerospace and defense end-use market were down 1% sequentially and up 15% year over year. While down modestly on a sequential basis the aerospace and defense end-use market net sales represented our second best quarter on record. And activity with our aerospace and defense customers continues to increase. I will mention two important data points from the aerospace engine and structural submarkets. Order intake in the quarter for our aerospace engine materials was up 30% sequentially. Signaling continued growing strength in demand. And very importantly, our aerospace structural customers are moving off the sidelines, and ramping up order placement. Many of them recently placed their first large orders with us in several quarters. And are already preparing the next round of orders. Which they anticipate being larger and even more urgent. Moving on to the medical end-use market, Our sales were down 7% sequentially and 22% compared to the prior year second quarter. The decrease is isolated to certain titanium products for a specific set of medical distribution customers. And all within our PEP segment. Clearly, this has impacted the earnings of the much smaller PEP segment. But the impact is not material to total Carpenter Technology Corporation results and not material to our overall earnings outlook or our ability to deliver on such outlook. Outside of these distribution customers for Titanium, we do see bright spots in other areas of the medical end-use market. There's to our orthopedic and dental submarkets remain strong. Both near an all-time record. Our advanced solutions, are ultimately used to support improved patient outcomes and are critical to trends like minimally invasive surgery, metal sensitivities, and robotics. Remain highly valued by our customers. Shifting to the energy end-use market, Sales were down 10% sequentially and up 19% year over year. As I've said many times, sales in the power generation submarket will fluctuate quarter to quarter, due to the frequency of orders and our practice of strategically slotting them into our production process. Power generation demand continues to accelerate. Driven primarily by the immense energy needs of data centers. We remain in close coordination with the power generation customers, across multiple platform types and OEMs. To plan for their future material needs. Altogether, we are operating in a strengthening demand environment across the high-value end-use markets that we believe will drive meaningful growth in both the near term and long term. Now I will turn it over to Tim for the financial summary. Timothy Lain: Thanks, Tony. Morning, everyone. I'll start in the income statement summary. Starting at the top, sales excluding surcharge increased 8% year over year on 5% higher volume. Sequentially, sales were down 2% on 4% higher volume. The improving productivity, product mix and pricing are evident in our gross profit, which increased to $218.3 million in the current quarter up slightly sequentially and up 23% from the same quarter last year. Selling, general and administrative, or SG&A, expenses were $63.1 million in the second quarter, flat sequentially and up $4.5 million from the same quarter last year. The SG&A line includes corporate costs, were $26.2 million. This is flat sequentially and up $2.6 million from the 2025. For the upcoming 2026, we expect corporate costs to be about $25 million. Operating income was $155.2 million in the current quarter, which is 31% higher than our 2025. And up slightly from our recent first quarter. As Tony mentioned earlier, this represents another record quarterly operating income result. Breaking the previous record that last quarter. Moving on to our effective tax rate, which was 19% in the current quarter. This quarter's effective tax rate was lower than anticipated primarily due to discrete tax benefits associated with the exercise of certain equity awards in the current quarter. For the balance of the fiscal year, we expect the effective tax rate to be between 22% to 23%. For the full fiscal year 2026 the effective tax rate is expected to be on the low end of the full year guidance we previously provided, of 21% to 23%. Finally, the adjusted earnings per diluted share was $2.33 for the quarter. The adjusted earnings per share excludes the impact of the debt refinancing we completed in the quarter, I'll talk about that shortly. Now turning to more detail on each of the segments, starting with our SAO results. Net sales, excluding surcharge for the second quarter, were $527.3 million. Compared to the same quarter last year, sales were up 10% on 5% higher volume reflecting the impact of product mix optimization, and pricing actions. Sequentially, sales were down 1% on 5% higher volume. We recognize there is a significant focus externally on our reported sales and volume each quarter, and ultimately, the selling price per pound of our products. Particularly in our SAO segment as an indicator of pricing changes. As we've stated before, the selling price per pound in any given quarter is highly dependent on the mix of products that we ship in any one quarter. As we saw this quarter, our product mix was influenced by the planned maintenance activities and holidays. As a result and as expected given these dynamics, our reported net sales excluding surcharge per pound were down slightly sequentially and up year over year. Most importantly, SAO's adjusted operating margin continued to increase and, in fact, hit record levels. Reaching 33.1% in adjusted operating margin. This marks the sixteenth consecutive quarter of margin expansion. As a result, SAO reported operating income of $174.6 million in the second quarter, a new all-time high for the segment. In addition to mix and price benefits, the record performance reflects the SEO team's ability to actively manage our production schedules. Increase productivity at key work centers, manage costs, execute thoughtful planned maintenance activities, Looking ahead to our 2026, we anticipate SAO will generate operating income in the range of $105 million to $200 million. This implies a healthy 12% to 15% increase from SEO's second quarter record results. Now turning to Slide 10 and our PEP segment results. Net sales, excluding surcharge in the 2026, were $77.2 million, down 11% sequentially and down 10% from the same quarter a year ago. As Tony mentioned earlier, the decline was primarily driven by titanium sales, which were heavily impacted by lower demand from specific medical customers. As a result, PEP reported an operating income of $900,000 in the current quarter, compared with $9.4 million in the 2026 and $7 million in the same quarter a year ago. The year over year improvement in operating margin reflects increasing sales in our additive business driven by demand. As well as the cost benefits of actions we took last year to reduce structural costs in this business. We currently anticipate the PEP segment's operating income for the upcoming third quarter to be in line with the 2026. Before we move to cash flow, I just wanted to pull together the pieces that make up our outlook for operating income for the 2026. We anticipate total operating income of $177 million to $182 million. This includes SAO at $195 million to $200 million, PEP at roughly $7 million, and corporate costs of $25 million. Now turning to the next slide to talk about our cash generation and capital allocation priorities. In the current quarter, we generated $132.2 million of cash from operating activities, and spent $46.3 million on capital expenditures which resulted in adjusted free cash flow of $85.9 million. As I mentioned last quarter, we expect capital spending will accelerate in the 2026. As construction activities related to the brownfield capacity expansion project broaden equipment delivery and installation begins in earnest. As we look ahead, we expect to generate at least $280 million of adjusted free cash flow in fiscal year 2026. Our free cash flow generation is important as it enables us to deploy a balanced capital allocation. As we've discussed before, our primary focus areas for capital deployment are investing cash in attractive and accretive growth projects, and returning cash to shareholders. In that regard, we continue to execute against our share repurchase authorization and repurchased $32.1 million of shares in the current quarter. This brings the total to $183.1 million spent to date against the $400 million authorization that we announced in July 2024. In addition to the buyback program, we also continue to fund a recurring and long-standing quarterly dividend. That brings us to investing in growth. As noted, the brownfield expansion project construction activities are ongoing and rapidly progressing. The project is currently on budget and on schedule. Finally, our ability to deploy capital is also supported by our healthy liquidity and strong balance sheet. In the current quarter, we took actions to strengthen both our balance sheet and liquidity. Namely, we completed the refinancing of our long-term debt to extend the maturity of our notes to 2034 while reducing the interest rate. In addition, amended and restated our revolving credit facility primarily to increase our credit facility from $350 million to $500 million and extended the term to twenty third. As of the most recent quarter end, our total liquidity was $730.8 million including $231.9 million of cash, and $498.9 million of available borrowings under our credit facility. Our credit metrics remain very strong. With our net debt to EBITDA ratio remaining well below one times. Altogether, we believe our strong balance sheet and outlook for significant cash generation positions us well to fund continued growth and deliver significant shareholder returns. With that, I will turn the call back to Tony. Tony Thene: Thanks, Tim. Each quarter, important themes emerge that become the focus of attention in the investment community. As I did last quarter, I will address them in detail to make sure Carpenter Technology Corporation's position is clear. First, the ongoing discussion concerning the strength and acceleration of the aerospace demand environment. With a focus on current and anticipated build rates. On last quarter's earnings call, I spent a lot of time providing details of positive momentum the aerospace demand environment. Without repeating everything, I will just state again that the aerospace market is in the midst of one of the largest build ramps ever. To meet the unprecedented demand projections. Let me provide a couple new positive data points that have appeared over the last quarter. Notably, Boeing achieved the milestone of building forty-two 737s in the month of December. On their earnings call earlier this week, Boeing reaffirmed their intention to increase build rates in calendar year 2026. And most notably, they emphasized that builds would be increasing much higher than deliveries. Given that finished plane inventory has now been depleted and their intent to build some 737 ahead of delivery in 2027. While citing an expected 10% increase in deliveries, Boeing noted that build activity would have to increase much more to account for the factors I just mentioned. In light of this, our aerospace customers can to report increasing demand in the supply chain, to support the build rate ramp. This, in turn, is accelerating confidence in the aerospace outlook across each of our submarkets. Our aerospace engine customers are full steam ahead. The engine OEMs are asking us whether the supply chain has ordered enough material to support part builds. And our direct customers are focused on getting orders placed against, in many cases, recently signed long-term agreements. Importantly, and as I mentioned previously, we continue to see meaningful sequential increases in order intake for our aerospace engine materials. Up 30% sequentially. I will also repeat my statement from earlier that our aerospace structural customers are moving off the sidelines and ramping up order placement. This is an aerospace submarket that has been lagging to others and the recent placement of their first large orders with us in several quarters is an encouraging sign of strengthening confidence in the aerospace ramp. We are also working closely with our aerospace fastener customers to ensure they get the materials needed as they are projecting big increases for calendar year 2026. Altogether, we are clearly in the midst of an acceleration of aerospace demand. Our sophisticated customers understand the accelerating demand dynamic. And we continue to work with them to ensure they have their orders in place so they are not last in line. Our customers also understand that nickel-based superalloys will be in short supply with only a few qualified producers globally. That point leads to the second topic to discuss, nickel-based superalloy industry supply. This could be a difficult topic to understand and to quantify, as there are numerous complex nickel-based superalloys that are supplied into aerospace engines and other critical areas of the aircraft such as landing gear, avionics, and structural. Before I address supply, it is important to understand the demand projections for nickel-based superalloys into the aerospace supply chain. As we have detailed in our investor event about a year ago, the aerospace industry is targeting build rates of 2,100 plus airplanes per 30% higher than the pre-COVID high calendar year 2019 when the industry was effectively sold out of nickel-based superalloys. But aerospace OEM demand is not the only area that competes for scarce nickel-based superalloys. As the installed fleet of planes continues to grow and ages, MRO demand is projected to be at significantly higher levels going forward versus today. Defense demand is increasing rapidly. Driven by the increased number of platforms and by the need of even more advanced capabilities. Both of which mean higher demand for specialty material solutions. Demand for specialty materials used in space has also been increasing. With one driver being that the number of commercial satellite launches continues to increase. As the space economy grows. And lastly, power generation demand is increasing substantially. This has been widely discussed. With news articles on this topic nearly weekly. And it is driven by the need for power to support their growing data center build out as well as increasing needs from developing economies. It's important to include the power generation demand in this discussion because in many cases, it competes for time on the same assets used to produce aerospace nickel-based superalloys. Taking into consideration increasing demand from several areas, it becomes clear that macro trends support accelerating explosion of demand for nickel-based superalloys. Now let's address the supply of these alloys. Since the pre-COVID year of 2019, there has been no meaningful increases in overall qualified nickel-based superalloy supply. Other than from internal productivity improvements from the current suppliers. Since that time, Carpenter Technology Corporation has been the only company to formally announce any investment in capacity expansion in this specific area. As we did recently at our February 2025 investor update. For those who are unfamiliar, we are investing in a brownfield capacity expansion focused on primary mill. Specifically a new vacuum induction melting furnace which is a critical piece of equipment in the manufacturing process of high purity specialty alloys. In total, this project plans to add 9,000 additional tons roughly a 7% increase over our 2019 shipments. While this is meaningful to the financials of Carpenter Technology Corporation, it is not a meaningful increase for the industry. Remember, Carpenter Technology Corporation is one of three players participating in the high-end nickel-based alloy market. And we are only adding a modest 7% additional capacity versus our 2019 shipment levels only. Taking into consideration the significant projected increase aerospace OEM builds, combined with the projected demand increases for aerospace MRO, defense, space, and power generation applications our capacity increase may account for only a small single-digit percentage of the total projected supply-demand deficit. Of course, there could be other incremental capacity announcements on the horizon, given the demand environment. But they too will likely be minimal in terms of their impact on closing the projected gap in supply. Keep in mind, this type of capacity is highly specialized difficult to operate, costly, and takes significant time to build install, develop, and qualify. It is this persistent supply-demand gap that is driving the current pricing environment particularly in the nickel-based superalloy market and we don't see that changing materially. This leads to the third topic, nickel-based superalloy pricing. Similar to the aerospace demand environment topic, I also spent a lot of time providing details of our pricing and customer contractual arrangements on last quarter's earnings call. Again, all of that commentary still holds true. I will note again to support our view of the pricing dynamic for our materials, that in the quarter we completed negotiations on three long-term agreements with aerospace customers with significant price increases. It is also important to note that in turn, our customers also benefit greatly as they are getting surety of supply of our products. Which is highly valuable to them in an extraordinarily high demand environment. Final point on this topic. We have communicated publicly many times and state again today that we believe pricing actions will continue to be a positive tailwind into the future due to the supply-demand imbalance that exists today and is expected to intensify in the future for nickel-based superalloys. Lastly, we continue to receive questions about our confidence in our earnings guidance. As you have come to understand, our earnings guidance philosophy is very structured and well thought out. We believe in establishing challenging targets we have line of sight to achieving. With disciplined action plans in place. We have earned the reputation of achieving exceeding our targets. At the start of fiscal year 2026, we projected operating income for the current fiscal year of $660 million to $700 million. Given the supply-demand dynamics I just covered, and the visibility, have for the second half of the fiscal year 2026 we are raising our guidance to $680 million to $700 million. This range for fiscal year 2026 represents a 30% to 33% increase over our record fiscal year 2025 earnings. As you recall, we established fiscal year 2027 guidance of $765 million to $800 million almost a year ago. In February 2025. At that time, we stated our belief that the targets for fiscal year 2026 and 2027 were the highest earnings growth trajectory among our industry peers. And we still believe that to be true. However, let me be clear. As this aerospace market continues to accelerate, our focus is not on achieving fiscal year 2027 guidance. The focus is on exceeding that target. As we continue to fine-tune our outlook, I would expect in the next few quarters, we will be updating the fiscal year 2027 guidance as well as adding longer-term annual guidance. Now let's turn to the final slide, to summarize this great story. Let me close as I did last quarter with why I thank Carpenter Technology Corporation is a compelling story for existing and potential shareholders. Let's take a look at the three major areas most important to shareholders. One, we have an enviable market position in the industry. We are in the midst of a significant acceleration in demand. Especially in the aerospace and defense end-use market. With accelerating build rates driving higher demand for our materials, a fundamental supply-demand imbalance in nickel-based superalloys will tighten even further. Our world-class collection of unique manufacturing assets and related capabilities are difficult, if not impossible, to replicate. Our leading capacity and capabilities are further differentiated by stringent qualifications necessary to supply advanced materials for aerospace and defense and other key end-use market applications. Two, we are committed to a balanced capital allocation approach. We have a healthy liquidity position and a strong balance sheet. Combined with an impressive free cash flow generation outlook. We are focused on returning cash to shareholders via a long-standing dividend and a robust share repurchase plan. In addition, our strong performance enables us to invest in highly accretive growth projects. Like our recently announced brownfield expansion. That accelerates earnings growth but will not materially impact nickel-based supply-demand imbalance. And three, we have delivered impressive financial results with a strong earnings outlook. We have just completed another record quarter of profitability, driven by significant margin expansion our SAO segment. Our increased guidance for fiscal year 2026 implies a 30% to 33% increase over a record fiscal year 2025. And we are well on our way to achieving and even surpassing the earnings target for fiscal year 2027. I don't know if anyone in our industry who can say they have a stronger earnings outlook than Carpenter Technology Corporation. Of course, fiscal year 2027 is not expected to be our peak. We have plans and line of sight to further earnings growth beyond 2027. In summary, we believe Carpenter Technology Corporation checks every important shareholder criteria box. We have created significant shareholder value to date but we are only at the beginning of this growth journey. The best is still to come. As always, we remain focused on supporting our customer needs operational execution, and living our values as we drive to exceptional near-term and long-term performance. Thank you for your attention. I will now turn the call back to the operator. Desiree: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you are called upon to ask your question and are listening via speakerphone in your device, Please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press 1 to join the queue. Our first question comes from the line of Gautam Khanna with TD Cowen. Your line is open. Gautam Khanna: Yes, thanks. Good morning, guys. I was wondering Tony, if you could elaborate on how broad-based you're starting to see the airframe customers participate in ordering. And is this kind of Boeing specific stuff where you were previously experienced a bit of a destock post the strike? Over at Boeing. Tony Thene: Hey. Good morning, Gautam. Hope you're doing well. Yes. I think two really important points that I made in the prepared remarks. I will say at a high level across all of our aerospace submarkets, whether that be engine fastener, structural, we're seeing increased activity with, you know, increasing forward demand. Specifically, though, in this quarter, the two things that stood out the most or or that you had engine orders continue to increase sequentially. 30% this quarter. That's significant. Maybe you could argue even more significant is what our structural customers did in the quarter. And you rightly said, Gautam, the impact of Boeing really put them on the sidelines. Prior to those issues, they had been probably the top submarket in terms of ordering quantity. So they they had a lot of inventory. To see them now come off the sidelines and two things, not only one place some significant orders, but then immediately come back to us and say, there's more coming. And they're gonna be bigger and more urgent that's a big positive sign. And I would agree with you that least on the structural side, that that was primarily driven by the confidence in Boeing, not just in what they believe they can do, but what they've actually you know, achieved in this last month. Gautam Khanna: Okay. That's very helpful. And you mentioned the defense submarket saw a bit of a government shutdown impact. Do you have any visibility from customer customers in that submarket as to how they expect to kind of put in orders over the next couple quarters? Tony Thene: Yeah. We've already seen that come back. I mean, quite frankly, they would have liked to have been placing orders during that time but weren't able to do so, weren't allowed to do so because of the government shutdown. So you've got some pent up you know, order demand there. So we see that coming back very rapidly. Gautam Khanna: Okay. And last one for me just on you mentioned the mix in the quarter itself. So the basic message, I think, is that overall pricing saw no reduction. This is purely a mixed dynamic pricing still trending, as you've said, for the last couple of years. Higher. For longer. Is that right? Tony Thene: Well, it's a 100% right. Maybe if you allow me to to speak more about this. This is something that we've talked about a lot. In fact, we signaled this on the last call where we said based on some of the planned maintenance that that we're going to do testing equipment at the back end. That allow the the higher priced aerospace needs to go through. That that would impact that. Alright? So I've talked about that quite a bit. And I think that if there's some belief that a small sequential price decline, which we've said could happen, multiple times, is somehow a red flag. I don't think it can be any more wrong than that. I mean, we just talked about it, Gautam. Aerospace only bookings up 23%. Aerospace engine bookings up 30%. Just completed three aerospace engine LTAs at substantial price increases. I can tell you very clearly, we are not or we did not discount premium airspace products in the quarter. There's absolutely no reason to do so. And and I've repeated this many, many times. And we said it probably several times over the last year. That we see pricing actions continue to be a positive tailwind. For us going forward. And I and I would just say, quite frankly, this should be obvious. Due to the supply demand imbalance that exists today. And that's only expected to intensify. So there is no issue with what happened in this in this quarter in terms of a slight you know, price per pound decrease, and you'll see that continuing to go up. Over the next several quarters. Hopefully, that's helpful. Gautam Khanna: Very much, though. Thank you, Tony. Tony Thene: Thank you, sir. Desiree: Our next question comes from the line of Scott Deuschle with Deutsche Bank. Scott Deuschle: Hey, good morning. Tony, I'm gonna I'm gonna take a shot at a question. I'm not sure if you'll be able answer. But for the aerospace LTAs that have renewed over the last six months, can you say whether the average price increase is more or less than 30%? Tony Thene: Scott, I think you already know the answer to that. I mean, these are substantial price increases going forward. 30% is not substantial. Scott Deuschle: And these are post-COVID LTAs? Tony Thene: There are there have been one or two that that are longer, you know, that that that were signed prior to COVID, but per primarily, these are ones that are that have come due again since that time. Yes. Scott Deuschle: Okay. And 30% is not substantial for this? Tony Thene: I agree with you. Scott Deuschle: Okay. Tony, just to deliver this strong SAO guide for the third quarter, should we expect volume, price per pound and EBIT per pound to all move up sequentially? Tony Thene: Yeah. You know, Scott, I I would say yes to that. I don't manage at that level of detail. Like, I know I am sitting on a gold mine here. Right? Doing something that very few people in the world can do. So I'm gonna supply all of those customers to the best of our ability to maximize the profitability. If one quarter, my margin goes down a half a percentage point, Scott, That that's not an issue. Right? The overall trajectory is going forward. And I think we get very hung up with this fact of quarter over quarter, you have some of these small movements basically, because you've got a complex production system that that's making a thousand different types of alloys. In any one quarter. Right? So I I wouldn't get so hung up on slight movements to that. Quarter over quarter. I will say year over year, absolutely. You will see increases in price per pound and and earnings per pound. There is no doubt. It's impossible for us not to deliver that based on the overall market dynamics going forward. Does that make sense? Scott Deuschle: Okay. Thank you. Absolutely. And just last question. The medical channel, is there any real sizable revenue left in that channel that you're shipping this past quarter? Or I'm just trying to think, is there still downward pressure potential there? Or is it basically completely bottomed out and and near zero? Tony Thene: Well, I can tell you that the good news in January from a booking standpoint that we solve that specific area come back and have the highest order intake than it had of any month in 2025. So that would suggest that I agree that, yes, you're right that it's probably hit the bottom. And I think the big piece here is that's very impactful to the PEP segment. As you all know, Scott, you cover us very closely. It's not material to overall Carpenter, and and it doesn't impact what I say about my guidance whatsoever. I I wanna see that bounce up, and I think when it But it's not something I rely on to when it does here in the next couple quarters, it'll be a tailwind for us. to hit my guidance numbers. Thank you. Scott Deuschle: Thank you. Desiree: Next question. Comes from the line of Joshua Sullivan with Jones Trading. Your line is open. Joshua Sullivan: Hey. Good morning. Good morning, Josh. Tony, you made an interesting comment there. You said jet engine OEMs are asking you if their own supply chains have ordered enough materials to to meet projected build rates. was your answer? You kinda left us on a cliffhanger there. You know, we'll Guess, how is the how are those conversations translating to the expectations of their suppliers? Tony Thene: Well, I mean, the answer can be different depending on the customer I would say that in many cases, our answer to that is no. They're not ordering quick enough. There needs to be more orders in the system based on the demand that that or the build rate that you want to achieve. So I would say and that's a positive thing for me to say is that there needs to be more orders to hit this build rate projection that's out there. We just talked about specifically on the structural side There hesitation to place orders and wanting to see more and more evidence of prolonged performance from the airframers, specifically Boeing. You're starting to see that. So you see them now coming off the sidelines. I've said that phrase several times now. And placing more large orders. So I've talked about this, Scott, more than once about there is not going to be a gradual increase in orders. You're seeing it now, and then you're gonna see a significant hockey stick. That's the way it's happened in the past. Believe that's the way it'll happen again this time. And I think the structural customers with the activity they had in this last quarter is one of the leading indicators to that. Joshua Sullivan: Got it. And, actually, that that dovetails nicely into just the conversation on the long-term agreements you highlighted. You know, what's your calculus or your mindset on, you know, committing to those versus leaving spot capacity open as you've talked about in the past? I got the golden goose. Just curious on your thoughts there. Tony Thene: Well, I don't I mean, that's another you know this. I mean, the words matter to me. Don't have spot pricing. Right? I don't have I don't have a generic alloy sitting on the shelf waiting for the highest bidder to come get. Right? relationship with my customers. My LTAs are based on a mutual beneficial You have a lot of volume. I'm gonna give you surety of supply. So I'm not here trying to be the riverboat gambler trying to say, let's keep it all you know, speculative. That's not what I'm trying to do. But I do understand the value of my product. As do my customers. When there's that beneficial relationship to say, let's enter into a an LTA, with increasing prices. That's that's good for both of us. So I think, Josh, you know this. I'm not sitting on the sidelines waiting for somebody to bid on my my products. I'm I'm pretty sure that's not what you were trying to allude to anyway. Joshua Sullivan: No. Was just curious on the long term. And and and I guess just relatedly, just outside of aerospace, are you seeing more interest in those types of relationships as you talk about IGT and some of those other markets? Are you seeing similar levels of interest, so the capacity might not be there. Okay. Tony Thene: Absolutely. Primarily on the power generation side. Because as you well know, in many cases, they use the same assets. But we also see some of that on the medical side as well. Primarily on the FAO business. You know? Because there's times that there can be overlap on some of the production assets between some of those, alloys. So you see more interest in those specific alloys for medical customers. Because in many cases, we're the sole supplier. And have a proprietary alloy there. So in both nondistribution medical and especially in power generation, we see some of the same dynamics as far as the openness or the willingness or wanting to have a LTA with us in those areas. Joshua Sullivan: Great. Thank you for the time. Tony Thene: Thank you. Desiree: Next question comes from the line of Bennett Moore with JPMorgan. Your line is open. Bennett Moore: Good morning, Tony and Tim. Congrats on yet another impressive quarter. Yep. Thank you. Quick. I wanted to you know, thank you for all the color, and commentary on the bookings. But could you also comment on how engine and fastener sales trended during the quarter and year over year? And also what lead times look like for structural products relative to engine alloys? Tony Thene: Yeah. It's a good question. You know, our overall aerospace, you saw our sales were relatively flat quarter over quarter, basically, because of the number of operating days you've you've written about this. As well as the holidays. So aerospace engine sales are relatively flat, down a couple percent. Engine fasteners was flat, I think, up 1%. So all of the submarkets inside of aerospace were you know, plus or minus one or two. On a sequential basis, certainly on a year over year basis all of them up. Quite substantially as you would expect. The second part of your question was on lead times. You're also very well aware, you know, that lead times isn't a universal indicator of of demand increasing just because we limit we cap lead times. But I can say that in that in that area, you have seen them extend across all the areas inside of aerospace. And I think, you know, we'll be pushing right back up to that same level that we were before in a in very short order. But, yes, we did see some we did see expansion of of lead times. Bennett Moore: And I guess in the context of your you know, positive commentary around structural customers moving off the sidelines, is it just fair to assume that lead times generally for the structural alloys are you know, shorter than the engine alloys so we could see that benefit sooner? Tony Thene: Yes. I think in general, that is a true statement. Bennett Moore: Great. And then real quick, I I just wanted to ask the additive business and you showed strong growth during the quarter. Is this lumpy or are you seeing improved adoption in this space and you remind us how the margin profile compares for these products? And if this is a space Carpenter would look to grow into into the future? Tony Thene: Yeah. I think the second part of your question is the right way to look at We see it as something that that could be a tailwind from us for us in the future. We've been inside the additive business for quite some time. This is a higher adoption rate And it's been, you know, some increased activity with some very large customers that we bring proprietary alloy in that in that area. So it's still relatively small in the whole scheme of things. Bennett. But, yes, I think it's something we wanna stay in. And I think going forward, we'll see continued growth in that area. So I'm very happy, quite frankly. The performance of additive. Again, relatively small from an earnings standpoint, but very happy with the way they've been performing. Over the last couple of quarters. Bennett Moore: Great. Tony, team, thank you for all the comments. Best of luck. Tony Thene: Thank you, sir. Desiree: Next question comes from the line of Andre Madrid with BTIG. Your line is open. Andre Madrid: Hey. Good morning. Tony Thene: Good morning, sir. As, as we look at the LTA signed in the quarter, I mean, are any of these first-time customers? On an LTA basis? And, I mean, how should we expect the mix of LTAs to trend in the quarters and years to come? Tony Thene: Well, it's gonna be it there's not a there's not a trend. There are they're all at at different times. It seems like we're always working on on some type of LTA and and let's take it to the first part of your question. These were these are long over term. Customers, so not not new. Andre Madrid: Got it. Got it. And then we've been hearing a lot of chatter from recent conversations with customers about, you know, potentially exploring capacity expansion that they help fund. I mean, is that something that you guys would ever look into? Tony Thene: Maybe if something became more than just chatter that that I could that I could comment on that. So we we have already made our position known. We have gone out there and announced capacity expansion in a very professional manner. We told you exactly what the pounds will be. We've told you when it will come online. We've told you exactly what the equipment will be and we've told you exactly what the impact will be not only to Carpenter Technology Corporation financials, but the overall supply-demand dynamic. So we've been very very clear and professional on what that would be. So we've told you already how we would react, and we were able and willing to fund that a 100% ourselves. Andre Madrid: Got it. Got it. That's clear. And then if I could sneak one more in. I mean, can you just maybe break down a little more clearly where the orders are exactly coming from? I mean, jet engine versus airframe, OEM versus MRO. Like, is there a split that you can provide? Tony Thene: Well, I mean, we're having orders are up across the board. I mean, I I give you a couple of examples. Engines were up 30%. That's significant. Right? So, I mean, we have order intake increasing across all of the submarkets. The one I called out, you know, is from from a sales standpoint. You obviously saw a bit of a a dip in defense. A sales standpoint, but now you see orders you know, I think will start picking back up again. So know, we have order intake increase across all of that. Markets. And, again, you know, Andre, that shouldn't be a surprise. Look what you have out there. Look what look what Boeing and Airbus and MRO and what all that is doing. That's increasing significantly. Of course, orders are going to have to increase also. Andre Madrid: Yeah. No. I I agree completely, and I I see it, though. I appreciate the color, Tony. I'll hop back in. Thanks. Tony Thene: Alright. Thank you, sir. Desiree: And our next question comes from the line of Philip Gibbs with KeyBanc Capital Markets. Your line is open. Philip Gibbs: Hey, good morning. Hey, Phil. Good morning. Tim, can you give us a review of the CapEx this year again just in terms of how much you expect to spend overall and how much of that is going to fiscal twenty seven? the new project and how much carries over into Timothy Lain: Yeah, Phil. I'll break that into pieces, and then then you can follow-up if you want to. The full year guidance for total CapEx was $300 million to $315 million. That includes the $175 million to $185 million the brownfield capacity expansion. I also said that, you know, given where we are, we spent about a little over $80 million through the first half. We said that we expect brownfield capacity expansion spending to increase pretty rapidly in the second half. As activity ramps up. There's a lot there there's a fair amount of assumptions there. I'm like, look. It's a big capital project complex The timing of those capital expenditures may vary. I mean, we're making assumptions about progress payments, when the equipment gets delivered, payment terms, So we'll we'll we'll provide an update in the next quarter, but I mean, the the guidance out there still holds true for now. And that's incorporated in into our free cash flow guidance. Philip Gibbs: Thank you. And Tony, any of the LTAs that you signed have they have they been with with PowerGen? Manufacturers at all? Tony Thene: Well, the three that I mentioned on the call here were all aerospace. Philip Gibbs: But none of the prior five five, for example, that you mentioned last quarter? Tradition traditionally, that's not been an area that's been LTAs for us, but it's an area I think it was to Josh's question earlier, It's an area that we're now exploring that the customers in that in that submarket would like to enter into an LTA, and that could be something that we're interested in as well. But, traditionally, that has not been for us because of the size. It's been relatively small. To the rest of the the business. It's becoming obviously much much bigger now. And then lastly, know it's a small business for you all. Philip Gibbs: Relative to s a excuse me, relative to SAO and and PEP, but what what surprised you just just relative to the outcome? Because I know you expected to do better. I know you had mentioned I know you had mentioned outright medical, but usually, you have pretty good visibility within a given Yeah. Given quarter. So Tony Thene: You mean you're you're you're speaking yeah. You're speaking specifically of that that sub market in of medical. Philip Gibbs: Oh, I'm just saying in general for the seg segment, you know you expected to to do better a few months ago, and and you usually have Yeah. Very good quarter visibility. So I'm just saying kinda what surprised you. Tony Thene: Yeah. In the PEP segment. Correct? Yes. Yeah. Yeah. I mean yeah. I Listen. I I think that's a fair question. I think we do usually have pretty good visibility. This one on medical distribution, quite frankly, has been a little elusive. For us to get a handle around that, quite frankly. I think that's a fair comment. But a good point is that you know, the order intake for that specific submarket was the highest in January he had been in any month in 2025. So, Phil, I'm hoping that on that for for the PEP segment that that's hit the bottom. But as you can see with our guidance, we're we're still remaining fairly fairly cautious in that area. And as you said, again, doesn't impact our overall guidance. But it's important to us to to do the best we can as far as forecasting what we think PEP can do as well. So a little bit of a little bit of you know, conservatism maybe or a little bit of let's wait and see to make sure we can get Philip Gibbs: Thank you so much. Tony Thene: Yeah. Thanks, Phil. Desiree: That concludes the question and answer session. I would like to turn the call back over to John Huyette for closing remarks. John Huyette: Thank you, operator, and thank you, everyone, for joining us today. For our fiscal year 2026 second quarter conference call. Have a great rest of your day. Desiree: Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.