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Operator: Ladies and gentlemen, thank you for joining us, and welcome to the LendingClub Corporation Q4 2025 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand and 6 to unmute. I will now hand the conference over to Artem Nalivayko, Head of Investor Relations. Please go ahead. Artem Nalivayko: Thank you, and good afternoon. Welcome to LendingClub Corporation's fourth quarter and full year 2025 earnings conference call. Joining me today to talk about our results are Scott Sanborn, CEO, and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via email or through the SAi Technologies platform. Our remarks today will include forward-looking statements, including with respect to our competitive advantages, demand for our loans and marketplace products, and future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and earnings presentation. Any forward-looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures relating to our performance, including tangible book value per common share, pre-provision net revenue, and return on tangible common equity. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation. Finally, please note all financial comparisons in today's prepared remarks are up to the prior year period unless otherwise noted. And now I'd like to turn the call over to Scott. Scott Sanborn: Alright. Thank you, Artem. Welcome, everyone. We had a strong close to what was one of the best years in LendingClub Corporation's history. Our results are validating our strategy and demonstrating our commitment to deliver a combination of growth, profitability, and shareholder returns. In the quarter, we grew originations 40% year on year to $2.6 billion, with all product lines contributing to the growth. We also more than tripled return on tangible common equity to almost 12%. For the full year, we grew originations by 33% to nearly $10 billion and more than doubled earnings per share. And we are looking forward to building on our success. Our substantial originations growth was driven by continued product innovation and marketing expansion, while also supported by improved marketplace pricing and sustained credit outperformance. Our discipline, combined with our advanced underwriting capabilities, delivered 40 to 50% better credit performance versus our competitive set. And we're seeing stable performance and consistency in our borrowers' behavior. Strong credit performance continues to support loan investor demand, with marketplace revenue increasing 36% year on year, driven by higher marketplace volumes and loan sales pricing improving back towards our historical range. We introduced a rated structured certificate product in 2025 designed to meet the needs of insurance capital. Insurance investors have a cost of funds and a risk appetite similar to banks, and so growth in this segment should further support the marketplace. We initiated our first direct forward flow agreement in Q4, with a top US insurance company, which is a nice addition to the previously announced agreements with BlackRock and BlueOwl. Investors remain selective about who they choose as partners. Our depth of credit data, performance history, and stability as a bank positions LendingClub Corporation as a counterparty of choice. Turning to our bank, our balance sheet is continuing to grow, with our loan portfolio driving net interest income up 14% year over year. Our funding is supported by our award-winning deposit products that deliver real value to customers while also driving ongoing engagement with LendingClub Corporation, supporting efficient revenue growth over the long term. LevelUp Savings, which rewards good savings behavior, is growing by double digits and driving 20 to 30% more logins per month than our legacy savings product. Personal loan borrowers account for over 15% of new accounts, and borrowers who have paid off their loans are using the product to build a financial cushion, accumulating average balances of over $15,000. Our more recently launched LevelUp Checking is also growing by double digits, with 60% of new accounts coming from personal loan borrowers, 84% of whom say they are now more likely to consider a LendingClub Corporation loan in the future. This virtuous cycle is exactly how our engagement model is designed to work. Importantly, we entered 2026 in a great position with multiple competitive strengths. First is our unmatched underwriting advantage enabled by proprietary models and informed by over 150 billion cells of data. Second are our products that attract members for life by delivering instant meaningful value. Third are our experiences that keep members coming back. Fourth is our agile, scalable technology which is engineered for innovation. And fifth is our digital marketplace bank business model, that combines the speed of a fintech and the resiliency of a bank. The best of both worlds. These competitive strengths are driving success in our core personal loan debt consolidation use case and have application far beyond, opening additional vectors for growth. Our significant advantages in funding reliability, underwriting, and user experience are allowing us to win over the competition and expand our major purchase business. Building on this momentum, last quarter, we shared our planned entry into the half-trillion-dollar home improvement financing market, an industry that aligns well with our capabilities. With our acquisition of foundational technology, hiring of leadership and key talent, and our first distribution partnership signed, we are well-positioned for growth over the medium term. We are currently integrating the acquired code base and remain on track to launch the partnership midyear. Our announced entry has also generated substantial inbound interest from additional partners, presenting potential opportunities to strengthen our trajectory. We're excited about the year ahead and expect our marketing investments to continue scaling, credit performance to remain best in class, and operating discipline in AI-driven to help expand margins. We're also excited to launch our new brand later in the year, to better reflect the scale of our ambition. Before I turn it over to Drew, I want to take a moment to thank Hans Morris, who will be stepping down from our board in March after thirteen years of extraordinary contributions. Hans has been instrumental to me and to LendingClub Corporation, from early investor to long-serving board chair, and his impact on the company is difficult to overstate. I am deeply grateful for his leadership and support. We are very fortunate that Tim Mayopoulos, who's been a high-impact member of the LendingClub Corporation board for nearly a decade, and who brings extensive experience in banking and fintech, will be assuming the role of chairman. With that, Drew, I'll turn it over to you. Drew LaBenne: Thanks, Scott. And good afternoon, everyone. Scott already covered the high-level results that made 2025 a fantastic year. So let's get into the details of our fourth quarter. Turning to Page 10 of our earnings presentation, loan originations grew by 40% to $2.6 billion. Borrower demand remains strong as the value we are providing continues to be compelling. Loan investor demand also remains strong, as marketplace loan sales prices continued to increase in the quarter. Our credit performance sets us apart from our competitive set and is one of the reasons we have been able to sell these loans without any need to provide credit enhancements. Leveraging one of the benefits of being a bank, we grew our held-for-sale extended seasoning portfolio to $1.8 billion, consistent with our strategy to expand our balance sheet while maintaining an inventory of seasoned loans for our marketplace buyers. We also retained nearly $500 million of loans in our held-for-investment portfolio. Now let's turn to the two components of revenue on page 11. Noninterest income grew 38% to $103 million, benefiting from higher marketplace sales volumes, improved loan sales prices, and continued strong credit performance. Net interest income increased 14% to $163 million, another all-time high, supported by a larger portfolio of interest-earning assets and continued funding cost optimization. Turning now to page 12, our net interest margin came in at 6%, up 56 basis points over the prior year. I'll note we retained higher cash balances to enable accelerated growth in 2026, which resulted in a sequential decline in net interest margin. If cash balances had been flat, net interest margin would have been 17 basis points higher and nearly flat to the prior quarter. We expect the deployment of this liquidity to be supportive of net interest margin as we grow the loan portfolio, in line with what we shared at investor day. On balance sheet funding, we ended the quarter at $9.8 billion in deposits, which was an increase of 8% compared to the prior year, and we continue to see healthy deposit trends across our product offerings. Turning to expenses on page 13, noninterest expense was $169 million, up 19% year over year. The majority of the sequential and year-over-year rise was due to planned higher marketing spend as we continue to invest in paid channels to unlock future growth. Now let's move on to credit where performance remains excellent. We continue to outperform the industry with delinquency and charge-off metrics well below our competitive set. Provision for credit losses was $47 million, reflecting disciplined underwriting and stable consumer credit performance. I note this quarter, a higher percentage of our held-for-investment loans were from our major purchase finance business, which is a longer-duration asset and therefore carries a higher day-one provision. In terms of net charge-off ratio, we experienced strong performance across all our vintages and we were down 80 basis points over the prior year. As we discussed on the last call, we saw the expected sequential increase as more recent vintages mature. On page 14, our expectation lifetime losses on our held-for-investment portfolio under CECL are also stable to improving across all annual vintages, including 2025, which contains a higher level of qualitative reserves. Going forward, given the stability of these metrics, and our move to fair value option for all new loan originations, we are no longer going to be updating this slide on a quarterly basis. Turning to the balance sheet, total assets grew to $11.6 billion, up 9% year over year. Our balance sheet remains a competitive strength, allowing us to generate recurring revenue through retained loans, maintaining the flexibility to scale up marketplace volume as loan investor demand grows. We ended the quarter well-capitalized with strong liquidity, and positioned to fund future growth. I'd like to provide a brief update on the $100 million share repurchase and acquisition program we announced in November. In Q4, we deployed approximately $12 million at an average share price of $17.65 and expect to continue to deploy additional excess capital through the program to support our shareholders. Moving to page 15, net income before taxes of $50 million more than quadrupled compared to a year ago. Taxes for the quarter were $8.5 million, reflecting an effective tax rate of 16.9% and included a nonrecurring benefit for research and development tax credits. There were also some beneficial changes to California and Massachusetts tax law in the quarter. As a result, we expect a normalized effective tax rate of approximately 24% going forward, with some potential for variability due to the valuation of stock grants and other factors. All of this translated to diluted earnings per share of 35¢, and tangible book value per share of $12.30. Our ROTCE of 11.9% came in above the high end of our guidance range. For the full year, we earned $136 million with diluted earnings per share of $1.16 and ROTCE of 10.2%. Now let's turn to our outlook. Looking ahead, we remain encouraged by the underlying fundamentals of our business, and our guidance assumes a healthy economy with stable macro conditions throughout the year. Before I get into the guide, I'd like to spend a few minutes on our move to fair value option. As we discussed at investor day, this change is about simplifying our financials by better aligning the timing of revenue and losses, and creating a consistent accounting framework across our marketplace and bank businesses. As you can see on page 18, over time, we expect this to result in a higher rate of return on invested capital by removing the front-loaded CECL impact we currently experience as we grow held-for-investment loans. We recognize that many of you have questions around how this change flows through the financials, so we've added a new section to this earnings presentation to walk through the mechanics in detail. This includes how fair value is established at origination, how revenue and credit flow through the P&L after day one, and how fair value adjustments will show up in noninterest income. To make this tangible, page 21 provides an illustrative single vintage example showing both day one and day two economics. And page 22 shows the select financial measures of our current fair value over the last two quarters. As one-time support to help with first-quarter modeling, we are also providing estimates for both fair value adjustments and credit provisioning. Expect total fair value adjustments in the first quarter to be roughly double fourth-quarter 2025 levels due to three factors. First, there is more volume receiving a day-one fair value adjustment as we are transitioning 100% of all new held-for-investment originations to fair value option. Second, loans from the major purchase finance business have a longer duration and a higher discount rate, which will mean a higher day-one fair value adjustment. Third, day-two fair value adjustments will also be larger due to a higher average balance of loans carried under fair value during the quarter. Separately, moving to fair value means there will be no day-one provision for loan losses on new originations. We will still have CECL expense from the remaining legacy portfolio, which we currently estimate at approximately $10 million for the quarter, subject to quarterly variability. Further, we will no longer defer loan origination fee revenue nor marketing expense for held-for-investment loans, which means both line items should increase from Q4 2025 to Q1 2026, independent of any changes in origination volume. For Q1 2026, we expect to deliver loan originations of $2.55 billion to $2.65 billion, representing 28 to 33% year-over-year growth. Additional investments in marketing to fuel 2026 growth. For the full year 2026, we expect originations of $11.6 billion to $12.6 billion, up 21% to 31% year over year. On earnings for Q1 2026, we expect to deliver diluted earnings per share of $0.34 to $0.39, a 240 to 290% increase year over year. For the full year 2026, we expect to deliver $1.65 to $1.80 earnings per share, consistent with the 13 to 15% near-term ROTCE target we shared at investor day, and up 42 to 55% year over year. With that, we'll open it up for Q&A. Operator: Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please raise your hand now. If you have dialed in to today's call, please press 9 to raise your hand and 6 to unmute. Please stand by as we compile the Q&A roster. And your first question comes from the line of Tim Switzer with KBW. Your line is open. Please go ahead. Tim Switzer: Hey, good afternoon, guys. Thank you for taking my questions. So the first one I have is on the expense trajectory here. There is a little bit of an increase across several line items this quarter. You know, the comp line was flattish, but then, you know, marketing was up quite a bit. Equipment went higher. Other expenses seemed a little bit elevated. Now is this kind of just some weird one-offs, or is this indicative of a little bit higher investment cost you guys are putting in the company right now as you look to ramp up? Drew LaBenne: Yeah. So I'd say, first of all, I think marketing spend was the obvious one that increased quarter over quarter. That was, I think, the vast majority of the increase. And as we've signaled, you know, last quarter and at Investor Day, we're continuing to invest in ramping our marketing channels, improving our capabilities, improving our modeling, and really, you know, a lot of this investment is to help 2026 performance. And so you can probably expect us to continue more of that as we go forward in Q1 as well. The other expenses, I'd say, you know, were largely noise in the quarter for the most part. Even having an investor day costs a little bit of money. So you gotta factor that in. But in all seriousness, I think as we go into Q1, other investments we'll expect to make would be, you know, ramping up our investment in people for the growth in the home improvement business. And then as we're looking to do the rebrand in the first half of 2026, there'll be some expenses related to that as well. And all of that is included in the guide. Scott Sanborn: I say investment, just to be clear, investment in the '26 rollout. Drew LaBenne: '26. Yep. Tim Switzer: Okay. So you're saying the investment cost should start to moderate into the second half of the year? Scott Sanborn: I'd say when we're through the transition. That's right. So we're not being specific on the timing of that yet, but we're obviously starting the work now. Tim Switzer: Okay. And your comment on marketing, like, is the marketing required for targeted? Is that higher than what you were maybe previously expecting? Or, like, what's the efficiency looking like so far? Scott Sanborn: Oh, if you remember, if you just go back to what we talked about at Investor Day. So one, all of our product categories were growing last year, and we're expecting future growth this year. Not all of them are marketing-driven in terms of their origination, so the SBA program and our purchase finance, you know, those are driven by different dynamics, as same with home improvement. But specific to PL, there's really three areas that we're pushing on for growth. One is product innovation. You know, we talked about how TopUp has successfully driven increases in take rate and higher originations. We have more ideas in the pipeline around the product innovation. There's funnel efficiency, you know, as magic as our experience feels, there are still evolutions possible to make it faster and more frictionless, and that'll be a growth driver. And then the third is marketing. And there, you know, we shared we're still that there are certain things that are quite robust, and I'd say, you know, close to very mature, like our partnership program, and I think we're getting there on direct mail and we're well on our way with paid search. But there are other areas that we're still quite early innings at having the right data models, the right attribution, and that paid social display connected TV. And I would say those are future growth vectors for us. They're, you know, one of many drivers of origination growth. And, you know, I think we gave at Investor Day that over the medium term, we think there's a couple billion dollars worth of originations to come from those added channels. What you're seeing us do now is normally for, you know, Tim, you've been following the business for a while. We normally don't push on new initiatives like this in Q4 and Q1. We usually wait till Q2 and Q3 because they are seasonally just a lot more forgiving and favorable. But given the momentum in the business, we're pulling those in to Q4 and Q1, which means they are going to be, you know, test programs and I would call this R&D spend. They're always, you know, less efficient because it's a learning agenda as opposed to a volume agenda. We're not driving much volume through it, but we are spending dollars. It'll be even less efficient when we pull them into less seasonably favorable quarters because response rates and all that are lower. But we think the trade-off is worth it because it, you know, sets us up for sustained growth, you know, later in the year and in the years beyond. Tim Switzer: Okay. Got it. That was all really helpful. One last question, and then I'll jump back in the queue. At the investor day, your slide deck indicated you're looking for a lower efficiency rate over time to '25. I think closer to the 55 to 60% range. But given all the, you know, the like, 2026 kind of transition year, the accounting is changing a little bit. Is the efficiency ratio moving up in '26, and then it starts to move back down as we get past the impact of the accounting? And, you know, you guys start to get better scale. Drew LaBenne: That's yeah. You're precisely right. So if you think about this transition from CECL to fair value, early in '26 or now, basically, in this first quarter, there's a bit of a tailwind that's created, and we're using some of that tailwind to do these investments that we were just talking about. Right? Reinvesting because once that tailwind fades, we want to make sure we continue to have momentum in growth top line and bottom line going forward. So we're using the first part of the year to make those investments to accelerate the back half of the year. Once you get through 2026, that comparison point that impacts efficiency ratio, you know, in PPNR basically is gone, and then your year-over-year comps will normalize at that point. But what's really important to note is you have these dynamics going on, but what we're getting is more pull-through by making this move. Right? So even though you're having some of these impacts on revenue and expenses, what you're pulling through to the bottom line because of the offset provision is higher. Tim Switzer: Got it. Alright. That makes total sense. I'll jump back in line. Thank you. And your next question comes from the line of Vincent Caintic with BTIG. Operator: Your line is open. Please go ahead. Vincent Caintic: Hey. Good afternoon. Thanks for taking my questions, and thanks for all the detail on the accounting change. I do want to focus on that. I understood that very helpful slide with slide 21. So are these key drivers sort of the discount rate 7%? Is that sort of what we should be thinking about going forward? I think in the prepared remarks, you kind of talked a bit about the, you know, the large the major purchase finance and other things having higher discount rates and higher duration. So you launch new products, I'm wondering how these assumptions will evolve, and if you could give us like, how we should think about the duration of these other products and the rates of these other products and coupons as well, that would be very helpful. Thank you. Drew LaBenne: Yeah. Great. I mean, there's only a certain level of detail we're gonna give just for competitive reasons, but it's a great question. And the first thing I'd say is just it's right on there, but this is illustrative of one vintage coming in. So the 7.3% discount rate in this illustration, we're actually at 7.1% discount rate for the quarter, so we're a little lower than this illustration. But how that discount rate will move if everything else remains equal, it will depend on the mix of loans that we're putting into fair value. And so some of the businesses like major purchase finance that have longer duration and they're less developed. Secondary market or marketplace are going to have a higher discount rate. Not necessarily all of that is true for home improvement where there's a very developed secondary market and marketplace. But it also is longer duration. So net-net, you'll have some offsetting effects on an asset class like that. But over time, it's gonna depend on what the mix within our held-for-sale portfolio looks like. But you can expect that we're probably adding more diversification of those other product types coming into the portfolio. Vincent Caintic: That's helpful. Thank you. And then I guess, relatedly, you know, now that the accounting is sort of making the market the held-for-investment loans look similar to the marketplace loans, at least from your income statement and balance sheet now. Like, your thoughts on the mix between what you will sell, what you'll maybe season and then sell versus what you'd return retain on the balance sheet? Drew LaBenne: Yeah. Interesting that and I'm glad you asked because there's another point I want to make as well. So we will continue to have an inventory of held-for-sale loans. We've, as we've said before, we found that program to be very helpful to onboard new investors and to make opportunistic sales and maybe better prices than we would otherwise get. There's actually, you know, one new development in CECL accounting this quarter which could be beneficial not for us, but for potential bank buyers. So I think one of the reasons that the bank pipeline has been slow to evolve is banks having to take that upfront CECL charge, sometimes it's difficult to get over that hump before you start building a portfolio of purchased LendingClub Corporation loans. Under the new CECL guidance, if you buy loans seasoned more than ninety days, you no longer have that upfront impact as you would if you were originating loans or buying or buying newly originated loans. So I'm not saying this is an immediate unlock in the bank pipeline is about to explode open. But I think net-net, it will be a positive for bank investors that are considering purchasing from us. So for all the reasons I mentioned before and for that reason, we'll continue to hold a held-for-sale portfolio available. Scott Sanborn: Yeah. Do you want to talk a little bit about the other part of the question, which was, you know, now that they look the same in period aspirations for balance sheet growth. You know, we gave some targets at investor day. Drew LaBenne: Yeah. I mean, I think in terms of balance sheet growth and aspirations, nothing has changed from investor day regarding that. As far as our mix going forward in terms of structured certificate securities, and I'll just call it whole loans, which would be loans held for investment and loans held for sale. We'd say that that distribution that we're at today probably roughly holds as we go forward in terms of our forecast. Vincent Caintic: Okay. Great. Thanks very much. Operator: And your next question comes from John Hecht of Jefferies. Your line is open. Please go ahead. John Hecht: Can you guys hear me? Scott Sanborn: Yes. Hey, John. John Hecht: Hey, guys. How are you? The I just one question I have is just on the fair value adjustment. You give the discount rate, is there some way we can take that and decide for what kind of annualized loss rate might be, I guess, in your primary product? Drew LaBenne: I don't know that you can exactly get to that. What we are going to do next starting next year, is we'll update our disclosures to include the charge-off much like we do today just for the CECL portfolio. We'll start to do that for the CECL the run of CECL portfolio, and be held for sale portfolio combined. But currently, you know, under our platform mix, we're still in that four and a half to 5% loss rate estimate on an ANCL basis. And then, you know, as we add new products, we think they have similar profiles, but, obviously, you know, we can we might move around their mix that could have some minor adjustments to those numbers. John Hecht: Okay. But the general tenor of the credit is consistent with what you've been underwriting, you know, for the last several quarters. Scott Sanborn: Yes. Yeah. No major no major pivots. Yeah. If you just think about, John, what we're doing is we're taking the capabilities, but I think we've demonstrated that we're quite good at, you know, appropriately assessing the risk, pricing the risk, you know, delivering value through the cycle from, you know, all the way through servicing just applying it to different categories, but it is the same core skill set. So different channels have slightly different SKUs, but the overall return profile coupons and all that are pretty similar. Like, purchase finance as an example, has a higher average FICO score, but the actual ROEs on that, we expect to be similar and in line. And home improvement obviously has homeowners, skews heavily homeowners and slightly higher coupon. John Hecht: Okay. And then just so I'm clear, the revenue yield on the loans is gonna be more akin to the discount rate. So the net interest margin will be reflective of that lower yield. But the offset from the upfront fair value mark is bigger than that. Is that an accurate description? Drew LaBenne: The coupon in the NIM take in the net interest margin table will be higher than the discount rate. Where the offset will be is in those fair value adjustments downward. So what you need to do is take the component of interest income offset with the component the fair value adjustments from noninterest income, and that will get you the revenue yield equal to the discount rate. John Hecht: Okay. And then from that, there you also subtract charge-offs the fair value marks. Is that correct? Drew LaBenne: Those are included in those adjustments. John Hecht: Okay. And then final question is, you know, it seems like a fairly good environment from the perspective of relatively stable credit. I think the macro expectations are reasonably constructive too. And then there's a lot of capital in the markets. Maybe could you guys describe your thoughts on the operating market and the competitive environment within your subset of products? Drew LaBenne: Well, I'll start with the marketplace, and Scott can cover, you know, credit dynamics and competition. The marketplace is very healthy. There is a, as you said, there is a lot of capital out there to be deployed, very active environment, you know, where the insurance capital that we're now starting to sell loans to and having more conversations, you know, we think has been a great addition to our marketplace customers that we are working with now. And as I mentioned, this CECL change in CECL accounting, hopefully, can give a little more tailwind to opening up some more banks as well. Scott Sanborn: Yeah. And on the competitive front, John, I'd say, you know, I think we say this almost every call. This is a competitive market. It always been a competitive market. Who we are competing with at any point in the cycle changes. You know, this past quarter, we had, you know, a fairly aggressive, ambitious, reasonably new entrant kind of pull out of the market similar to, you know, Marcus's arrival with much fanfare and then retraction. So we have that, but that's offset by some of the direct fintech competition who are, you know, on balance being more aggressive given, you know, the availability of marketplace capital. So let's say no real change in our view of how that's affecting what we do. We remain, you know, we feel very good about our ability to compete. We've shared multiple times statistics not only on the credit side, but also on our pull-through rate in our marketing and how we're able to convert the customers we want. So but we're just gonna be very selective, and we agree. We're, you know, as you can see in our materials, our credit looks very stable. And that's because we're maintaining our discipline. It's not clear that we're seeing that across the full industry. So we'll be watching. John Hecht: Great. Thank you guys very much. Operator: And your next question comes from Kyle Joseph of Stephens. Line is open. Please go ahead. A reminder, you may need to unmute. Kyle Joseph: Sorry about that. You guys hear me alright? Scott Sanborn: Yes. Yep. Kyle Joseph: Sorry about that. Anyway, yeah, kinda piggybacking on John's on macro, just looking at your DQ curves on slide nine. You know, anything you'd say about kind of the k-shaped economy and how you're thinking about 2026. We, you know, we've been reading a lot about elevated tax refunds, but yeah, just kind of a little bit deeper dive in terms of macro and how you're thinking about things. Scott Sanborn: Yeah. So, you know, I think the most important thing is post the inflationary period a few years ago, we did move upmarket, upmarket in terms of income, upmarket in terms of FICO. And, you know, as you can see there, we're seeing stable results. The, you know, customer we serve, you know, who we call the motivated middle, we think represent a lot of TAM for us both immediately today, but also over time as we evolve the use cases and credit products we serve at. You know, on tax refunds, we are expecting, right, or it is expected, it's not us, that this will be a larger than usual year. That, you know, that can have a positive effect on payment and a temporarily downward effect on loan demand, but, you know, all of that's factored into our guide. Kyle Joseph: I got it. And then, you know, not asking you guys to speculate any more than, you know, we can, but, you know, I think we'd be a little bit remiss if we didn't address the, you know, potential rate cap, obviously, given, you know, kind of your core product is on credit card refi, but just kind of want to get your initial thoughts and how you guys are thinking about, you know, everything that's out there. Scott Sanborn: Yeah. I mean, obviously, there's not a lot of specifics on how this could actually take shape and what it could do, and I think there's at the moment, not a lot of confidence that at least as initially articulated, anything like that would come through. You know, our view is there is an affordable alternative to credit cards available today. No government action required. And that's LendingClub Corporation. And, you know, we're already saving people, you know, 700 basis points off of the cards. And, you know, no price controls needed. Kyle Joseph: Got it. Fair enough. Thank you for taking my questions. Operator: And your next question comes from David Scharf of Citizens Capital Markets. Your line is open. Please go ahead. David Scharf: Hey. Good afternoon. Thanks for taking my questions. Most have been addressed. So a couple things I just wanted to ask if you could clarify. One, actually, just very near term. On the Q1 origination outlook, did I hear you correctly that the guide kind of factors in a larger than normal refund season in pay down cycle? Scott Sanborn: Well, what I'd say is I think that's pretty difficult to factor in with any degree of specificity. But, you know, our experience has been that larger than normal refund seasons, as I said, kind of flow through our business as I indicated, which is customer payment rates are higher, so you see good DQ trends, but you can see, you know, maybe, different demand for credit temporarily. I wouldn't expect anything significant, but, obviously, that'll be difficult to really predict, and we're not gonna give intra-quarter guidance. Then and hard to measure the impact of that together with any other, you know, broader macro events going on. So, you know, we're very confident that we've got a lot of tools in the toolkit to deliver the outlook that we provided. David Scharf: Got it. Got it. Fair enough. And then, just digging back to the fair value assumptions, it sounds like on the next quarter Q1 call, you know, we'll get kind of the obviously, current period losses and charge-off rate embedded in that change in fair value line. Is it, I think John may have asked this, but is it fair to assume that embedded in your earnings guidance is sort of a flattish year-over-year loss rate in that fair value mark? Or is there anything about the asset mix? You know, there've been more so many references to, you know, larger purchase, longer duration loans. Does are there any nuances that might kind of raise the loss rate purely due to the asset mix? Drew LaBenne: No. I don't think so. I mean, I think we're assuming we're obviously assuming a stable environment as we go through the year. We will have an increase in duration because our as our purchase finance, the major purchase finance business is, you know, growing and doing well, and home improvement will come on. So duration will go up. But in terms of the ANCLs, I'm not expecting a major shift in that. Now I think if you look at the net charge-off rate, there's seasonality, there's vintages, seasoning in there. There's a lot of portfolios. But in terms of the annual loss rates, we're not assuming a major change in those numbers. David Scharf: Got it. And, you know, you know, in regarding the vintages, you know, obviously, this is we're laying to rest this slide where you give the sort of components of provisioning and reserving for amortized cost accounting, is there a way to translate, you know, that sort of most recent vintage macro layer, you know, that one, one and a half percent kind of conservative upfront provisioning. Does that translate into a certain number of basis points of discount on a day-one fair value mark going forward? Drew LaBenne: Well, under fair value, we're not explicitly layering in qualitative reserves as we do under CECL. So it's a difference in methodology. Now if we see more stress coming through the portfolio, we may have, you know, take that through the fair value marks in some manner, but we're not going to speculate on what's gonna happen two years from now to the economy. In terms of how we reserve, which I think has been personally one of the most frustrating parts of CECL accounting. David Scharf: Yeah. No. Fair enough. I think you're about the seventh company we cover that's adopted the fair value option. Drew LaBenne: Yeah. Yeah. David Scharf: That's all I have. Thank you. Scott Sanborn: Alright. Thanks. Operator: And your next question comes from Giuliano Bologna of Compass Point. Your line is open. Please go ahead. And a reminder that you may have to unmute. Giuliano Bologna: Thank you. Congrats on another good quarter. And I appreciate all the, you know, the new detail on the fair value disclosures. One thing that, you know, I don't know if it's come up yet, but under fair value, there shouldn't be any more deferrals when it comes to marketing expenses. Is there a rough way to think about, you know, where your marketing expenses would be as a percentage of volume, you know, in the fourth quarter and third quarter, you know, for example, just to get a rough sense of what, you know, your marketing costs would have translated to on a pro forma basis? Drew LaBenne: Yeah. I mean, I think it would have been higher, obviously. We haven't disclosed the number. I mean, I think the obviously, the offset to that is also higher origination fees or origination fees are no longer deferred in that net. We're net beneficiary of those two dynamics happening together. Right? So I think if you're thinking about the marketing spend deferral, you know, then you then probably gotta think about the origination fee deferral as well. Giuliano Bologna: Got it. Yeah. And, I mean, obviously, the net impact is positive. So that's, you know, it's all significantly positive. When I think about the outlook for volumes for the or at least any guide for the year, it implies, you know, especially after one Q that you'd kind of reaccelerate from a volume perspective. You know, that they'll probably be flat to up slightly in the first quarter, but then you'd see a, you know, a pretty good reacceleration of volumes, you know, to hit, you know, kind of the midpoint of the volume guidance? Is that a good way to think of it that you should have a good step up into Q2, Q3? Drew LaBenne: That's correct. Yep. That's exactly right. And, you know, there's part of that is our normal seasonality, but, obviously, we believe we're going to have more benefits beyond that from the newer business lines that we're launching and the investments in scaling marketing paying off. Giuliano Bologna: That is very helpful. Yeah. I appreciate all the, you know, the enhanced disclosure, and I will jump back in the queue. Thank you. Operator: And next in the queue is Tim Switzer of KBW. Your line is open. Please go ahead. Tim Switzer: Hey, guys. Thanks for taking my questions again. One of the follow-ups I have is just on AI. You know, how I know you guys are using that quite a bit in the back office, but, you know, what areas that are a little bit more forward-facing that's helping you with either growth, or maybe getting a little bit better pricing and or demand? I know you guys had, like, the Cushion acquisition a few years ago, and I think you've mentioned it's helped speed up the doc verification process as applications come through. But just wondering if you guys could update us on that. Scott Sanborn: Yeah. So, you know, I'd say, at this point, there's probably not a department in the company that is untouched in some way. I think we have over 60 initiatives underway across the company, and you're right. They range from, you know, operations efficiency, you know, guiding agents on next best action to taking in, you know, sort of diverting customer contacts whatsoever to, you know, compliance, marketing material generation, audit, testing, generation. Obviously, heavy, heavy, heavy use in the engineering group for flow development and streamlining our QA efforts. On the growth side, you've hit the couple areas that we're really focused on. Now there's obviously longer pull in the tent, marketing, and credit. You know, continued evolution of our efforts there, which we won't talk about too much because we view that as part of our secret sauce. But then within the customer experience, the Cushion acquisition, including the team, is really will be evolving the NetIQ experience to bring more intelligence to evaluating people's transactions and history and helping, you know, recommend the actions to customers that improve their financial position. So and, you know, one you mentioned, we put into testing in Q4 and are, you know, expanding across the board is for the rare cases where we do need to require some kind of documentation that we can't get electronically, using AI to both assess whether the documents are what we ask for, whether or not they are real and not fraudulent, and then to extract that information, populate models, and render a decision is all improving, you know, or reducing the friction in the funnel and improving our pull-through. So there's just a ton of things happening across the company. Tim Switzer: Okay. Got it. And the last question I have it's a difficult one, but you guys the guide for this year is the 13 to 15% near-term ROTC guide you gave. Can you kind of help us map out how we get to the 18 to 20% medium-term target over time? Like, with this fair value accounting, is it a gradual steady build quarter over quarter as you guys continue to scale up? Or is there a point and I know it can this is very dependent on the pace of originations and the seasoning of the portfolio. Was there a point where maybe, you know, the ROTCE increase starts to slow down as, you know, the portfolio gets larger and that day-two impact on the fair value gets larger. Am I thinking about that a little bit wrong? Drew LaBenne: I think no. I mean, I think it will be our goal would be a steady, you know, increase up towards those medium-term targets. The dynamics of moving from CECL to fair value, I will say, by the time we're entering 2027, they are largely they should be largely behind us. And from there, you know, we're continuing growth through all the steps we laid out at Investor Day. You know, mainly growing originations, growing margin, expecting a little help from the Fed, obviously, but that's not the biggest component of it. Scott Sanborn: Growing originations, yeah. Growing the balance sheet, both are gonna be accretive to the bottom line. Tim Switzer: I guess another way to think about it is the impact to profitability is relatively steady as long as you continue to grow the balance sheet at 25%. So, like, if you're growing it with, say, $4 billion of loans or if you're growing it at $7 billion of loans, that doesn't impact, you know, the profitability as long as you're still growing a similar level. Is that the right way to think about it? Drew LaBenne: Yeah. I mean, the only growth headwind that we used to have was CECL. Right? And so with that gone, you know, the growth we should have positive operating leverage from growth, or maybe I should say positive pull-through now from growth. As we grow over these next three years. So but the keys are really, you know, grow the business lines we have, the expansion in the home improvement, growing originations, growing the balance sheet, and then pulling it through to net income. Tim Switzer: Okay. Got it. Thanks for taking all my questions. Scott Sanborn: Thanks. Operator: There are no further questions online. I will now turn the call back to Artem Nalivayko for retail investor questions. Artem Nalivayko: Alright. Thank you, Kevin. So, Scott and Drew, we have a couple questions here that were submitted by our retail investors via say technologies and email. So the first question is on the rebrand. The question is, once a name change has been made, what are the marketing plans that you have in place? Scott Sanborn: Yeah. So just a reminder, what's the of the rebrand? The initial LendingClub Corporation brand really was tied to our pioneering model of peer-to-peer lending, which is obviously no longer part of the model. We're now a bank. We don't just do lending. We've, you know, launched multiple consumer-facing savings products and checking, of which the name LendingClub Corporation on your debit card is quite strange. So the rebrand is really meant to capture the broader ambition of the company, what we do for our customers beyond just lending. So the plan is to do that later this year. Our first focus, you know, there could be a question of, like, what are we doing between now and then? We are mapping out the literally thousands of touchpoints we have with our customers across email, mobile app, third-party sites, and call center and all the rest and making sure that we've got everything captured, make sure our equity translates from the old brand to the new brand. And then, yeah, we will be putting some weight behind the new brand. I wouldn't expect, you know, we're not gonna go from being a highly data-driven, you know, efficient curve-oriented direct response marketer to getting stadium rights in 2026. You're not gonna see a big step change in how we think about marketing. But this is absolutely the beginning of us moving, you know, further up the funnel, if you will, as our offering to consumers broadens and what we stand for broadens, the marketing tactics we can use can also get more broad. And so, you know, we do expect over time, you'll be seeing us, you know, beyond these direct response channels just won't be immediate. Artem Nalivayko: Thank you. So the second question saw a recent press release on a partnership with a company called Wonder. Can you please elaborate on that? Scott Sanborn: Yeah. So if you recall, an investment we talked about how we're taking our capabilities in unsecured consumer and which, you know, is applied. Our largest use case is debt consolidation, credit card refi, but, you know, those same capabilities apply to any way you can use a personal loan, which is to finance any large purchase. We've been seeing really great traction there. We think there's a real we feel a real need in the space, which is we've got the resilient stable funding of a bank, but we've got the customer experience and the speed and the interaction model of a fintech. So we've been gaining distribution and growing that business. Our, you know, our kind of core verticals that we're in today, like elective medical, dental, teeth implants, fertility, tutoring, few others, and we're expanding into others, ophthalmology, wellness. You know, these are all we're testing some purchase verticals. So that's what that is. These and other things, which some of which get announced and some of which we're just doing as part of our testing, are all meant to assess consumer demand in incremental verticals that'll diversify our use case, diversify our acquisition channels, and provide future vectors for growth. So excited about it, seeing very solid traction in the business overall, and excited to keep growing it. Artem Nalivayko: Perfect. And last question. Just in terms of increasing shareholder value, in the long term? How does leadership intend to drive shareholder value? Drew LaBenne: Alright. Well, always a great question, and thank you, retail investor, for that. I'd say the number rather than me explaining it all again on this call, I'd say the number one thing investors should do is go watch our Investor Day that we did in November because I think there's a lot of time dedicated to going through the strategy and how we expect it to evolve over the next several years. But citing, you know, what we accomplished in 2025, a lot of which we already covered on the call, for the full year. We grew originations 33%, we grew revenue 27%, and we grew diluted EPS by 158% year over year. So I think 2025 was a great year. And if you look at our guide for 2026, we're looking to obviously improve upon performance again as we go into this year. Then finally, we announced the share repurchase and acquisition program of $100 million, which, you know, we think is also beneficial to shareholders now and in the future. Artem Nalivayko: Alright. Thanks, Drew. Alright. So with that, we'll wrap up our fourth quarter and full year 2025 earnings conference call. Thank you all for joining us today, and if you have any questions, please email us at ir@lendingclub.com. Thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day everyone and welcome to the Littelfuse, Inc. Fourth Quarter 2025 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to Head of Investor Relations, David Kelley. Please proceed. David Kelley: Good morning, and welcome to the Littelfuse, Inc. Fourth Quarter 2025 Earnings Conference Call. With me today are Greg Henderson, President and CEO, and Abhishek Khandelwal, Executive Vice President and CFO. This morning, we reported results for our fourth quarter and a copy of our earnings release and slide presentation is available in the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to Slide 2 for our disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review today's press release and our Forms 10-Ks and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available on the Investor Relations section of our website. I will now turn the call over to Greg. Greg Henderson: Thank you, David, and thank you to everyone for joining us today. This morning, I will provide highlights on our fourth quarter, then an update on the progress we are making on our strategic priorities. But I wanted to start by highlighting two recent exciting developments. First, we closed the acquisition of Basler Electric in December. Basler strengthens our high power capabilities and expands our positioning in key growth markets, including grid and utility infrastructure, and data center. I got the opportunity to meet their leadership and technical teams last month, and this left me even more excited about Basler's market and technology positioning, scalability, and long-term growth opportunities with Littelfuse, Inc. Second, we are excited to announce that we will host an investor day on May 14 in New York, where we will provide a detailed review of our strategy and long-term financial goals. I look forward to sharing more about Littelfuse, Inc. and our opportunities at this event. Now turning to our fourth quarter. We delivered strong performance with year-over-year revenue growth of 12%. Across our businesses, we continue to drive momentum in our high growth markets. We delivered double-digit revenue growth in data center, grid and utility infrastructure, and renewables markets. Automotive grew mid-single digits despite declining global vehicle production in the quarter. Finally, we are seeing emerging signs of broad-based industrial recovery into 2026. In the fourth quarter, our teams also delivered on our operational excellence priority, which culminated in our earnings results exceeding the high end of our guidance range. Throughout 2025, we remained focused on executing our strategic priorities, and we exited the year with a robust backlog and considerable momentum. Entering 2026, we are well-positioned to drive strong performance. We expect to deliver double-digit first-quarter revenue growth and significant earnings expansion supported by our fourth-quarter bookings, up more than 20% versus the prior year. Abhi will discuss specific results and our outlook in more detail shortly. But I want to thank our global teams for their persistent hard work and efforts. Now I want to share the progress we are making as we enhance our focus on future growth opportunities. Our end markets require increasingly higher power and higher energy density solutions from Littelfuse, Inc. We are seeing broad-based momentum reflected in our 2025 design wins, which were up double-digit relative to the prior year. Today, I wanted to specifically highlight our grid and utility infrastructure opportunity. If you turn to Slide 6, our position in this high growth market was significantly bolstered by the closing of our Basler Electric acquisition this past December. With approximately $3 trillion expected to be invested in grid modernization through 2030, the market is demanding more advanced and higher power protection excitation systems. With the strategic timing of the acquisition, we are well-positioned to help our expanding grid and utility customer base navigate the challenges of higher voltages and increasingly complex system requirements. Basler enhances our core high power protection capabilities and equips us to sell more complete solutions. We believe our complementary portfolio coupled with our deeply embedded relationships positions us for double-digit growth and strong profitability within this market. An example of our expanding reach this quarter, Basler was selected as a design partner for a next-generation control system solution for a leading player in the high power industrial data center backup generator market. Now turning to our second strategic priority, which is to work more closely with our customers to help better understand and solve their technology challenges. Our new go-to-market evolution is live, and we are seeing the early signs of success following our Salesforce realignment, which is now market-facing, customer-centric, and focused on solving our customers' most complex challenges with our complete technology portfolio. As an example, we continue to drive significant progress in the data center market, where we were early to adapt our new sales model. Our 2025 data center design wins more than doubled relative to the prior year. As you can see on Slide 7, we have a comprehensive data center technology portfolio, and we are capturing meaningful wins with leading hyperscaler, cloud, and infrastructure customers. The data center market is undergoing a significant architectural shift to high power systems. As shown on Slide 8, we believe our content opportunity on these next-generation architectures will be significantly more than double current levels. Importantly, we also have meaningful growth opportunities across the data center infrastructure ecosystem. The acquisition of Basler further expands our high power data center infrastructure capabilities. To illustrate our momentum, we secured a significant design win for a static transfer switch with a leading data center infrastructure provider. This solution leverages our high power semiconductor and packaging technology, which enables increased power density of approximately 20%, improved efficiency, and simplified integration into the customer's equipment. This win is for a two-megawatt UPS bypass and power distribution unit application that enables uninterrupted power to data center racks. Shipments are slated to begin in 2026, representing continued momentum and growth in high power data center solutions. Turning to our third strategic priority, enhancing operational excellence. Today, I want to highlight our semiconductor business opportunities. This business is core to our technology differentiation. Our market-leading protection and complementary power semiconductor products are critical to our mission of enabling a safe and efficient transfer of electrical energy. Last quarter, we shared that we made a change in semiconductor leadership. I would like to provide an update on the strategic progress we are making in optimizing our power semiconductor products, which accounts for roughly half our semiconductor business. First, we have made a decision to sharpen our focus on high value and high growth applications. We have differentiated technology and strong customer relationships in high power markets, such as data center, battery energy storage, grid and utility infrastructure. We have started the process of rationalizing our portfolio to reduce exposure to lower value product families and are aligning our manufacturing strategy accordingly. As part of this initiative, we are reviewing our power semiconductor manufacturing footprint to ensure it is optimized and resilient. We believe these actions will significantly improve the strategic focus and profitability of the business and position us to deliver next-generation technologies that will drive growth in our targeted markets. We look forward to providing further updates on these initiatives and sharing our firm strategic and financial roadmap at our May investor day. Taking a step back, we closed 2025 with considerable momentum, reflected in our fourth-quarter performance. We closed the Basler acquisition and drove robust backlog through customer and market traction throughout year-end. Into 2026, we are focused on executing our three strategic priorities, and believe we are positioning Littelfuse, Inc. today for meaningful long-term scale and leading shareholder performance. With that, I'll hand the call over to Abhi. Abhishek Khandelwal: Thank you, Greg. And to everyone joining us. Today, I will start with an update on the Basler acquisition. Then, I will walk you through our fourth-quarter results, followed by our first-quarter outlook. We will then be happy to take your questions. As Greg mentioned previously, we are excited to close the acquisition and look forward to executing on the meaningful revenue synergies and opportunities that the combination of Basler and Littelfuse, Inc. will deliver. We anticipate the acquisition will contribute between $130 million and $135 million in revenue and $0.10 to $0.15 of adjusted earnings in 2026. We also expect Basler to deliver a high teens adjusted EBITDA margin for the year. With that, please turn to Slide 10 for details on our fourth quarter. Going forward, comparisons I will discuss will be relative to the prior year, unless stated otherwise. We delivered strong results as revenue in the quarter was $594 million, up 12% and up 7% organically. The Dortmund and Basler acquisition contributed 3% to sales growth, while FX was a 2% tailwind. Adjusted EBITDA margin finished at 20.5%, up 180 basis points reflecting meaningful operational leverage, while fourth-quarter adjusted diluted earnings were $2.69. We also delivered meaningful cash generation in the fourth quarter. Operating cash flow was $139 million, and we generated $120 million in free cash flow. We ended the quarter with $563 million of cash on hand and net debt to EBITDA leverage of 1.2 times. In the quarter, we returned $19 million to shareholders via our dividend. Now before we go into further details on our results and outlook, I wanted to discuss the non-cash goodwill impairment charge that we recorded in the fourth quarter. The impairment charge of $301 million is for the IXYS and Dortmund acquisitions and is the result of our annual impairment testing of our reporting units. It reflects weaker sales and profitability than original expectations amid persistent soft market conditions. As Greg mentioned, we have an opportunity to enhance our power semiconductors focus on applications and markets where we have strong market share, brand power, and technology expertise. With the sharpened strategy, power semis will better complement our market-leading protection capabilities and ultimately drive improved performance over the long term. Please turn to Slide 12 for brief highlights on our full year 2025 performance. We delivered strong revenue growth of 9%, while adjusted EBITDA margin expanded 260 basis points to 20.9%, reflecting the focused execution of our strategic priorities. We also delivered robust cash flow for the year with free cash flow expanding 26%, showcasing the strength of our operating model. We continue to target free cash flow conversion of more than 100% in 2026. Please turn to Slide 13 for our segment highlights. Starting with the electronics product segment. Sales for the quarter were up 21%, led by strong passive products organic sales as well as growth contributions from protection semiconductor products. Adjusted EBITDA margin of 23.7% was up 170 basis points reflecting favorable year-over-year passive and protection volume leverage. For the full year, sales increased 13% while adjusted EBITDA margin expanded 190 basis points driven by solid volume leverage. Moving to our transportation product segment on Slide 14. Fourth-quarter sales increased 1% year-over-year but declined 1% organically. Passenger vehicle organic sales growth was more than offset by softer commercial vehicle volumes. Adjusted EBITDA was 16%, reflecting our team's focus in driving margin expansion in a continued soft transportation market environment. For the full year, our focus on operational execution led to solid margin expansion and we remain confident in our ability to drive long-term transportation profitability enhancements despite continued soft market conditions into 2026. Turning to Slide 15. Industrial product segment sales increased 4% but declined 1% organically for the quarter as improved energy storage, utility and grid infrastructure, renewables, and data center demand was more than offset by lower HVAC demand. Fourth-quarter adjusted EBITDA margin was 16.2%. For the full year, our industrial segment delivered revenue growth of 10% reflecting our secular growth positioning. Solid full-year 2025 adjusted EBITDA margin expansion reflects favorable volume leverage, while we continue to invest in long-term growth. Please move to Slide 16 for our first-quarter outlook. We entered 2026 with a strong backlog and significant momentum. With that in mind, our first-quarter 2026 guidance incorporates current market conditions, trade policies, commodity prices, and FX rates as of today. We expect first-quarter sales in the range of $625 million to $645 million, which assumes 7% organic growth at the midpoint and five points of growth from our Basler acquisition. We are projecting first-quarter EPS to be in the range of $2.70 to $2.90, which assumes 25% flow-through at the midpoint as well as a $0.03 contribution from the Basler acquisition. Turning to Slide 18. We want to provide you with a view on our key market exposures and underlying growth assumptions for 2026. We look forward to sharing our full strategy with you at our May 14 Investor Day in New York. With that, operator, please open the call for Q&A. Operator: It's time to ask a question. Simply press star followed by the number one on your telephone keypad. And our first question comes from the line of Luke Junk with Baird. Please go ahead. Luke Junk: Greg, maybe if we could start with data center. Obviously, it's emerged as a big part of the story over the past year. Just hoping you can help us think through some of the key incremental drivers as we move through, not only in the first quarter, but through '26 in terms of share gain opportunity flowing through that 2x backlog growth that you cited for the full year and maybe even initial tailwinds from those higher voltage systems starting to launch. You mentioned the award in the script that, you know, for half 2026 shipments are starting there. Just how should we kind of scale in the opportunities as we go through this year? Thank you. Greg Henderson: Yeah. Thank you, Luke, for the question. Good morning. We continue to see good progress in the data center market. I think I emphasized that data center is one of the early markets where we focused on our sales realignment, putting a dedicated team focused on our customers selling our complete technology portfolio. We're already seeing traction. As I mentioned, our design wins were up significantly, more than doubled in 2025, and we continue to see momentum. And I think the good news is that as is shown on the chart, as the customers are moving to higher voltage systems, their architecture is on higher voltage and DC, high voltage systems. There's a lot more for us, and we're part of those conversations with our customers now on architecting that. So we can't give a quantitative number exactly because the architectures are evolving. But it's at least twice the opportunity for us as we go to the higher voltage systems and in some cases, significantly more than that. So we have momentum. I mentioned the design win on the static transfer switch. We have momentum across the business. Also, Basler has a good position in data center for backup power generation solutions. And so as we mentioned, it's not just in the rack, the white space, but actually more and more solutions that we offer in the gray space as well. So we have good momentum. We continue to see growth in design wins. We will continue to see growth in revenue. And I just say that the thing I'm most excited about is we're having deeper conversations with our customers, talking about more of our technology portfolio, talking about next-generation architectures around the high voltage solutions. Abhishek Khandelwal: And, Luke, just to build up on what Greg said. So, again, to reemphasize the design wins are 2x, you know, 2024 and '25. Data center grew really, you know, grew strong double digits in the quarter and was a material contributor to our growth story in Q4. We expect it to be a leading, you know, market contributor growth in '26. And then more importantly, as I think about our data center exposure, you know, it's double digits as a percent of revenue inclusive of Basler as I think about our data center exposure. Luke Junk: Very helpful. And then, Greg, switching gears to industrial. You mentioned in the script that you're seeing signs of a more broad-based recovery in industrial into '26. Just hoping you could double click on that in terms of some of the maybe more specific things that you're seeing or obviously this touches a few parts of the business maybe flow through to some specific business impacts as well. Thank you. Greg Henderson: Thank you, Luke. Yeah. I would say that, you know, if you look at the bookings we had in 4Q and the momentum we feel, we're seeing a broader-based momentum, I would call it, in our broader industrial market, especially, like, our diversified industrial segments and industrial automation segments. The one market where I would say we still continue to see softness is in the residential HVAC where we have a reasonable exposure on our industrial business. So that one continues soft. But broadly, the market is improving. And I would say the good news is that we see that broad momentum across the business. It's strong in our industrial products and passive electronics and also our semiconductor protection. The book to bill in the quarter was above one, and we're seeing growth in not just book to bill, but also in POS at our end through to our end customers. Abhishek Khandelwal: Yeah. And just, Luke, last one I'll make is if we think about the bookings in Q4, we're up 20%. We saw similar, you know, numbers in Q3. So points to, again, strong momentum exiting '25 and coming into 2026 to Greg's point. Luke Junk: Yeah. And then maybe for my last question, obviously, there's a lot of metals inflation out there right now. You just remind us how you buy things like copper and silver in terms of buying at spot rates versus indexing mechanisms to pass through those higher costs to different customer types assume distribution, a little more straightforward versus some other customers and maybe put a finer point on what you're assuming in the first quarter guidance specifically? Thank you. Abhishek Khandelwal: Yes. Absolutely. Look, Luke. So we're seeing pressure on the metal side, right? Our exposure is primarily to copper and ruthenium. But given the volatility in the silver and gold prices, we're seeing an impact from that. Right? So they kind of think about what our teams are focused on. Firstly, they're focused on supply chain opportunities and really looking at ultimate ways to go procure that same material for cheaper pricing. Two, it's around, you know, how do we go price that and take that inflation and price it along to our customers either through pricing or surcharges. What I will tell you is while we're getting impacted, you know, just like 2025. Right? If you think about the price cost type to tariff, we did our teams did a great job managing that. That's what we're focused on. That's what we plan to go do this year. Now there might be some timing between quarters just given the timing of inflation versus when you, you know, get your price. But that said, our goal is to be price cost neutral. We have factored the impact of current commodity prices in our Q1 guide and feel reasonably comfortable about where we are, and the Q1 guide. Luke Junk: Yeah. Just maybe in terms of the first quarter guide, is the assumption that your price cost neutral and the first quarter guide? Or should we think of that as a full year comment? Abhishek Khandelwal: I think it's a full year comment. But like I said, there'll be timing, Luke, throughout the year as we go through it depending on how the, you know, commodity pricing moves versus when we recognize the pricing on it. So I that that's a full year comment, not a Q1 comment. Luke Junk: Understood. I'll leave it there. Thank you. Operator: Your next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead. Christopher Glynn: Yeah, congrats on the deal in the data center momentum there. You know, you answered a lot of questions upfront about, you know, migration to the higher voltage architectures. You know, obviously get some constructive comments there net of some product categories that will diminish. So that's great. Still a question remaining. Curious about, you know, what you're seeing in terms of opportunities like partnerships or consortiums into that space for standard application design? And I'm just wondering if there's anything to talk about in that respect. Greg Henderson: Well, I think yeah. Thank you, Chris. I think the thing to understand is that we have increased focus on the data center market. And we're wanting to play across the ecosystem. So we're partnering and talking to the hyperscalers. We're partnering and talking to the chip providers that the architectures. We're very active in the ODM and the design ecosystem in Asia and Taiwan that supports the design ecosystem. So what's important about our strategy now is that we have a dedicated focus, a dedicated sales focus on the data center customers and increased focus. And I think what's important is that we participate in all parts of that. From the chip designers that are building architectures to the hyperscalers that are designing and power to the ODM in Asia, and we're covering all of that, and we're participating in all of that. Our view is that, you know, we get our products architected and designed in, throughout the cycle, and we're touching all those phases. So we're very active. You know, we're also very active in platforms like Open Compute, for example, to make sure we know where the architectures are going, where the standards are going. One other thing I will emphasize is that when you go to high voltage architectures, many of these high voltage architectures, once you go to 400 or 800 volts, products that didn't used to need to be UL certified, for example, now need to be UL certified. We need new standards. We're active in the standard body and the UL certification process for some of the standard setting processes for these high power applications that ultimately are going to go into data center. So we're participating across the ecosystem. That's actually how we think we're going to win. And we're increasingly investing in that. Christopher Glynn: Great. And then, on the power semis, you kind of blew through some of the target markets focused there. So I'd like to just revisit that. And also, what kind of attrition might we anticipate in kind of related earnings power? How should we contemplate that element ahead of the kind of breakout in May? Greg Henderson: Yeah. Thank you, Chris. I'm going to try to give a little bit more color. So again, just to anchor on our semiconductor business, which is in our electronics segment, about half the business is our protection semiconductor business. This is actually a model franchise for us. We have very good market position, strong share, good customer value. That's about half the revenue. And then the other half is our complementary power semi business, which is core to our strategy. And I think where we're focused here though is that there's elements of power semi business where we have high value, we see high growth markets, we have meaningful share, we're important to our customers, and actually, those tend to be the higher energy density, high power segments, like data center, battery energy storage, grid and utility customers. And so those are the areas where we're going to continue to focus, where we have high value, where we have market position that's giving us differentiated solutions. There are, however, parts of our Power Semi portfolio where it's lower value and a little bit more commoditized, I would say, where we don't have as much value. And so we're undergoing an effort to rationalize the portfolio and double down on the areas where we believe we can win. And as part of that, we will also be optimizing our manufacturing footprint. So what I think we're telling you is that this is a work in progress. Telling you where we are. We look forward to getting you continued updates as we progress this between now and Investor Day in May. So we will continue to give updates as we make progress. But I think the strategic focus is to continue to just like we're doing broadly for the company, sharpen our focus on where we play and why we win. Abhishek Khandelwal: Yeah. Chris, just to build around, you know, Greg's commentary, the way to think about it from a financial standpoint is as we go through the year, as we make progress, we'll incorporate any changes to our guide. That's point number one. Point number two, again, to Greg's point, you know, our semiconductor business unit is made up of two things really. Right? It's protection and it's power. Protection is a model franchise. So what this also does give us an ability to go do is we rationalize our portfolio, optimize our footprint, get our power to semi business, at that model level profitability. Right? That's what we're focused on. Again, more to come on this, but to Greg's point, our efforts are underway. And as we make progress through the year, we'll keep you up to date. And then more importantly, a vision and a roadmap by Investor Day so that the team understands what is it that we're going after. Christopher Glynn: Perfect. And then if I could sneak one in on Basler. Just curious about how you're seeing the cultural fit. Anything kind of edgy on the integration? You know, probably some differences in go-to-market and specification process with a little bit more of a systems and solution orientation to their portfolio. Greg Henderson: Yeah. Thank you, Chris. Yeah. Look. We are very excited to have Basler as part of Littelfuse, Inc. As I mentioned, I got the, you know, we did the due diligence, but that was kind of a limited process. So I got the opportunity to meet with the team shortly after close in December. What we really like, and actually, I left even more excited about is that couple things. One, Basler is a highly technical organization. They have a great engineering capability. They're market leaders in protection solutions, like excitation systems, and probably punch above their weight based on the size of the company for the capabilities that they have. Two of those, you mentioned go-to-market. We really like about Basler is that they have market position and established go-to-market in the utility industry. If you look at Littelfuse, Inc.'s legacy portfolio, we have technology that really plays in good utility. And some subsegments of that, like battery storage and solar, we've done really well. But other subsegments that may be more core utility grid space we have under-participated mainly because of focus, but one of the key areas is that we didn't have the channel. So we're actually really excited about Basler and the capabilities they bring. They have complementary products. They're a system-level provider. They provide complete solutions. So many of the places we're going Basler is, and our goal is to leverage their go-to-market and customer understanding to help us bring more of the Littelfuse, Inc. portfolio into that space. So just like we're doing other places, we're leveraging that. We're very pleased to have the Basler engineering and go-to-market team as part of Littelfuse, Inc., and we see that as a growth synergy out of this acquisition. Christopher Glynn: Great. Thank you. Operator: The reminder to ask a question, press 1 on your telephone keypad. And our next question comes from David Williams with Benchmark. Please go ahead. David Williams: Hey, congratulations on the progress here. It's really great to see, and the tone has changed and I'm much more enthusiastic. So congratulations there. Maybe the first question is, Greg, as you kind of think about over the last ninety days, what has changed or shifted? What do you think has become maybe more positive? And is it simply because of the self-help, the strategy you've implemented, or do you feel like the markets are also helping in that regard? Greg Henderson: Yeah. So two things. First, I think, you know, we're on a multiyear journey. And I think that from the Littelfuse, Inc. perspective, we are continually making progress. We've been making progress throughout '25. We anticipate we're going to continue to make progress through '26. And so for us, I would say it's a multiyear journey, and we are seeing results of our, you know, results of our progress. We expect to continue that. In addition to that, I would say we continue to see market momentum. So if you go back to 2025, I think the market momentum was maybe more narrow. In data center and grid utility, solar, battery storage, energy around data center, the market momentum was a little more narrow. We actually are seeing a little bit broader market momentum. We talked about the broader industrial market momentum. So I would say it's both. Right? We are making progress on our strategy. It's a journey. It's a, you know, step by step, we're making progress. But also, we're seeing some market momentum that is adding to that. Abhishek Khandelwal: Yeah. And, David, just to build on what Greg said, I think a couple things will add to it. First of all, as you see our results for '25. Right? We talked a lot about operational execution. While we have more to go do there, you see that play itself out in our margin expansion across all three segments, whether it's transportation, industrial, or electronics. Two, I think the whole conversation we just had around, you know, power semi and that focus really gives us an opportunity to optimize our profitability and continue to move that, you know, move that profitability to optimal level. So I think to Greg's point, I think there's a little bit of focus that we're driving that helps us optimize our portfolio further and then Greg, I talked to '1 guide, right, I mean, at the midpoint, it's a 7% organic, 15% growth year over year. Where Basler's going to contribute about 5%, you know, in the quarter. And an EPS guide that the midpoint is a, you know, 28% growth and a 7% top line growth. So, again, points to the strong momentum exiting '25, coming into '26. As I think about the markets, as Greg mentioned, we're seeing broad-based industrial strength, right, with the exception of the HVAC market. It's not just data center anymore. It's a little more broad-based. So in general, we feel really good about where we are in 2026 and the momentum that we're seeing as we go along the year. Of course, we'll, you know, keep the team up to date on our progress. But sitting here today, we feel really good about our momentum in '26. David Williams: Thanks so much for the time. Certainly appreciate it. Best of luck. Abhishek Khandelwal: Thank you. Thank you, David. Operator: With no further questions in queue, I will now hand the call back over to CEO, Greg Henderson, for closing remarks. Greg Henderson: All right. Well, thank you all for joining us today. I just want to close by first thanking our global teams. As we mentioned, we had a strong Q4 and good progress to our goals in '25. And we're confident in our momentum into '26 as Abhi just said. So thank you for joining us. We look forward to seeing many of you in person as you join us at our Investor Day on May 14 in New York. So thank you very much.
Operator: Ladies and gentlemen, thank you for standing by and welcome to the Elevance Health Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session where participants are encouraged to present a single question. If you wish to ask a question, please press star then 1 on your telephone keypad. You will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then 2. These instructions will be repeated prior to the question and answer portion of this call. As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead. Nathan Rich: Good morning, and welcome to Elevance Health Fourth Quarter 2025 Earnings Conference Call. My name is Nathan Rich, Vice President of Investor Relations. With us on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Peter Haytaian, President of Carillon; Morgan Kendrick, President of our Commercial Health Benefits Business; and Felicia Norwood, President of our Government Health Benefits Business. Gail will begin the call with a discussion of our fourth quarter performance, our 2026 guidance, and the progress we continue to make on our strategic priorities. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website elevancehealth.com. We will also be making forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties may cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail. Gail Boudreaux: Good morning, and thank you for joining us today. Affordability remains the central challenge in health care. At Elevance Health, our focus is on improving outcomes, making care easier to access and navigate, and managing costs responsibly. Our commitment to whole person health shapes how we deliver on our strategy. Strengthening care coordination, reducing unnecessary complexity, and creating a simpler experience for those we serve. Before I go through the business, there are three points I want to underscore. First, 2026 is a year of execution and repositioning. And the outlook we provided today reflects prudent achievable assumptions grounded in pricing discipline, operational rigor, and targeted investments. Second, even in a dynamic environment, we are acting decisively in the areas within our control to strengthen margins, reduce volatility, and improve the consistency of our performance. And third, as those actions take hold, we expect to return to at least 12% adjusted EPS growth in 2027 off our ending 2026 earnings baseline supported by the earnings power of our diversified platform. Consistent with that approach, we are establishing 2026 adjusted diluted earnings per share guidance of at least $25.50. As you consider the year-over-year comparison, it's important to remember that our 2025 results included approximately $3.75 per share of favorable nonrecurring items. Let me walk through how we are positioning the portfolio. In Medicaid, we continue to see our rates lag elevated acuity and utilization, and we are working urgently with state partners on both rate actions and program design changes that support the long-term sustainability of the Medicaid program. We continue to view 2026 as a trough year. We expect our Medicaid operating margin to be approximately negative 1.75%, with improvement over time as rates incorporate more current experience and our actions take hold. We are also preparing for new eligibility and community engagement requirements under recently enacted federal legislation, the One Big Beautiful Bill Act. As these changes are phased in by states, we expect Medicaid membership may decline, and the acuity of the population may shift over time. And we have reflected that in our planning assumptions. We believe this is manageable within the context of our diversified enterprise and long-term growth strategy, and we're approaching these changes constructively with state partners with a focus on continuity of care and program stability. Turning to Medicare, our execution during the annual election period was aligned with our emphasis on delivering greater value for members and strengthening our performance while maintaining stable share in markets that are core to our long-term growth. We expect Medicare Advantage membership to decline in the high teens percentage range in 2026, reflecting deliberate portfolio actions and stability in our dual eligible membership. The actions we've taken and the composition of our membership should support meaningful margin improvement in 2026. In the individual ACA market, we've repositioned our plans with discipline to reflect higher costs observed this year and the expiration of enhanced subsidies while maintaining value and access for consumers. Our commercial business continues to have healthy momentum, particularly in national accounts, supported by a productive selling season, favorable client retention, and new opportunities to expand our reach through the second blue bid process. We remain disciplined in our pricing and focus on delivering sustainable margins while helping employers address affordability through Whole Health Solutions that integrate a member's medical, pharmacy, and behavioral health needs. Our integrated approach continues to resonate in the market, and we are pleased that 40 employers over the past five years have selected our Anthem affiliated plans as their sole carrier. And finally, Carillon is increasingly recognized as a differentiated platform in the market, growing demand for its solutions in managing high-cost complex areas of health care. Near-term growth will be moderated by lower health plan membership, most pronounced in CarillonRx, while Carillon services is less impacted by membership dynamics, reflecting its broad mix of external relationships and value-based arrangements. As our business mix evolves and we make targeted investments to strengthen the foundation, we are also refining certain long-term margin expectations to reflect a more prudent view of the forward environment. Our long-term enterprise margin target is 5% to 6%. For health benefits, Carillon and CarillonRx, we are targeting mid-single-digit margins, with our Carillon services target unchanged. These updates are intended to provide a clearer, more durable framework for evaluating performance, and they do not change our focus on disciplined execution, durable earnings growth, and strong cash generation. Stepping back, we view 2026 as a year of execution and repositioning. Across Medicaid, Medicare Advantage, and ACA, the dynamics we've described reflect a combination of policy-driven changes and deliberate portfolio and pricing actions designed to strengthen performance consistency. And we are aligning our cost structure and operating priorities accordingly. That's why we believe we have a clear line of sight to improve performance as we move through this year and into 2027. Now let me turn to the actions we have underway. We are strengthening our ability to emerging utilization trends and improve care coordination by leveraging actionable data and advanced analytics. These capabilities help us identify trends earlier and address inefficiencies in the system while supporting timely access to appropriate high-quality care. In Medicaid, we're strengthening our analytics to identify outlier utilization and billing patterns in high-cost substance use disorder treatment settings while maintaining access to clinically appropriate care. These insights are enabling targeted actions, including provider education, claims review enhancements, and payment accuracy and compliance initiatives where appropriate. Consistent with program requirements and clinical guidelines, we're able to execute with confidence because we built and are scaling capabilities that improve outcomes and reduce costs in complex areas of health care. In 2026, we will further strengthen specialty pharmacy management, advanced behavioral health support, and expand care management programs for members with elevated care needs. Established programs in oncology and serious mental illness are delivering savings for our health plans in the face of heightened utilization trend. Our patient advocacy programs now serve over 7 million members, up nearly 20% from last year. Through proactive tailored support, we help members navigate the system with greater confidence, remove points of friction, and close gaps in care, especially for individuals with greater care needs where early engagement can materially improve outcomes and reduce downstream costs. And we remain deeply committed to improving the experience of care providers. We remain on track to exceed our commitment that 80% of prior authorization decisions will be made in real time in 2027, particularly for routine approved services supporting faster access to care and reducing administrative burden for care providers. Through our HealthOS platform, we're enabling real-time data exchange that aligns information across the system, streamlines interactions with care providers, and makes it easier to deliver care. In summary, while the environment we operate in continues to evolve, our strategic direction remains clear. We are entering 2026 with prudent planning assumptions, focused execution, and targeted investments to unlock the embedded earnings power of our diversified platform. And based on the actions underway this year, we remain confident in our long-term algorithm and our expectation to return to at least 12% adjusted EPS growth in 2027. Before closing, I want to thank our associates for their unwavering commitment to our purpose throughout 2025. In the face of a challenging year for our industry, our teams operated with integrity, compassion, and a deep sense of responsibility to the people and communities we serve. Their dedication is the foundation of our performance today and the progress we are building for the future. And I am deeply grateful for the impact they continue to make across Elevance Health. With that, I'll turn the call over to Mark for a more detailed review of our financial results and outlook. Mark Kaye: Thank you, Gail, and good morning. Elevance Health reported adjusted diluted earnings per share of $3.33 for the fourth quarter and $30.29 for the full year. Relative to our guidance, fourth quarter results benefited from greater tax favorability than anticipated, increasing the full-year contribution from nonrecurring items to $3.75 per share. Solid underlying performance in the quarter enabled us to advance a portion of the investments we had planned for 2026 and to support our workforce as we enter the year. Throughout 2025, we remained focused on aligning pricing to elevated cost trends, refining our product portfolio, and investing selectively in capabilities that differentiate our model and support sustainable growth. We ended the year with 45.2 million members, a decrease of approximately 500,000 year over year, principally reflecting a decline in Medicaid membership due to continued eligibility reverification. Operating revenue for the quarter totaled $49.3 billion, an increase of 10% from the prior year, driven by premium rate adjustments and recognition of higher cost trends and acquisitions completed in the past year. Our consolidated benefit expense ratio was 93.5% for the quarter and 90% for the full year, in line with our guidance. Cost trend development was consistent with our expectations across major lines of business. Our adjusted operating expense ratio was 10.8% for the fourth quarter and 10.5% for the full year. We are managing the enterprise with discipline while making targeted investments to support our long-term performance. During the quarter, we pulled forward one quarter of the approximately $1 per share of incremental investments that we had anticipated in 2026. Our Medicaid operating margin ended the year favorable to the outlook provided last quarter. We are encouraged by the initial results of our targeted efforts to better coordinate care and support high-quality, low-cost treatment pathways. While the benefit of these actions will build over the course of the year, we continue to expect cost trend to be in the mid-single-digit percent range in 2026, with rates lagging this level of trend. As such, we anticipate our Medicaid operating margin for 2026 to be approximately minus 1.75%, in line with what we shared last quarter. Medicare cost trend in the quarter was consistent with our expectations. For 2026, we made deliberate changes to our plan offerings and intentionally exited select geographies, prioritizing plans that deliver value to members while producing sustainable financial performance. As you heard from Gail, we now expect Medicare Advantage membership to decline in the high teens percentage range in 2026 while achieving meaningful margin improvement. We've also repositioned our individual ACA business for higher expected morbidity following the expiration of enhanced subsidies. Similarly, our commercial group risk membership reflects our focus on margin stability and disciplined pricing. Carillon continues to experience strong customer demand for its solutions. However, near-term growth will be moderated by lower health plan membership. The guidance provided today reflects the impact of our anticipated membership headwinds as well as investments we plan to make as we scale our dispensing and home health assets. Operating cash flow was $4.3 billion for the year, or approximately 0.8 times GAAP net income. Cash flow in December was negatively impacted by the timing of certain Medicaid-related payments, which were subsequently received in early January. Incorporating these items, we expect our 2026 operating cash flow to be at least $5.5 billion. Days in claims payable was 41.3 days, a decrease of 0.1 days sequentially. For 2026, we expect days in claims payable to remain in the low forties range, consistent with our long-term target. In the fourth quarter, we repurchased 1.4 million shares for $470 million, bringing full-year repurchases to $2.6 billion. Combined with dividends paid during the year, we returned $4.1 billion of capital to shareholders. Turning to our outlook, we are establishing guidance for adjusted diluted earnings per share to be at least $25.50 in 2026. We anticipate operating revenue to decline in the low single-digit percent range in 2026, driven by a low double-digit percentage decline in risk-based membership, partly offset by higher premium yields and growth in Carillon. Our consolidated medical loss ratio is expected to be 90.2%, plus or minus 50 basis points, reflecting a prudent view of cost trend and shifting acuity in Medicaid. Our adjusted operating expense ratio is expected to be 10.6%, plus or minus 50 basis points, as we maintain operational discipline while investing to scale Carillon, embed AI-enabled and digital capabilities, and simplify the member experience. Our capital deployment plans remain aligned to our long-term framework, and we plan to allocate approximately $2.3 billion towards share repurchases in 2026. Regarding earnings seasonality, we expect to earn approximately two-thirds of our adjusted EPS in the first half of 2026, with 65% of that coming in the first quarter. Based on the actions underway this year, we are reaffirming our long-term algorithm of at least 12% adjusted earnings per share growth annually on average over time, and we expect to return to at least that level of growth in 2027 off our ending 2026 earnings baseline. Finally, our long-term earnings growth algorithm is supported by multiple levers: robust revenue growth, operating margin expansion driven by operational execution and technology integration, and our commitment to disciplined capital allocation. As our business evolves, we are recalibrating our long-term margin targets for the enterprise as well as for each segment to reflect our current portfolio and how we expect it to evolve in the future, both across and within segments. Importantly, the revision to our health benefits target margin is reflective of the revenue mix we have today while maintaining our targets by line of business. These adjustments are intended to provide a clear and durable framework for evaluating performance but do not change our conviction in the embedded earnings power of our diversified platform. And with that, operator, please open the line for questions. Operator: You will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then 2. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, we ask that each participant limit themselves to a single question to allow ample time to respond to each analyst that may wish to participate in this portion of the call. For our first question, we'll go to the line of A.J. Rice from UBS. Please go ahead. A.J. Rice: Hi, everybody. Thanks for the question. I wonder when you think about the cost trend across the major lines of businesses, I think the industry would say, and I think you guys would say that it was elevated in 2025 across commercial, Medicaid, Medicare, and exchanges. I know, Mark's saying that you have a mid-single-digit cost trend assumption at Medicaid, I believe, for the '26 guidance. But I wondered if I could just get you to comment on are you assuming sort of a similar cost trend in '26 in your embedded guidance to what you experienced in '25? Or is there any place you're assuming it gets worse or better? Mark Kaye: Hey, A.J. Good morning, and thank you very much for that question. Briefly, I would say the fourth quarter medical cost performance across the health benefits segment came in generally in line to slightly better than our expectations. We did see some modest variations by line of business, and so we've carried that forward into our planning for 2026. To your question, in commercial, within large group, we do expect cost patterns and margins to be largely consistent with what we saw in 2025, meaning an elevated but stable trend environment with some pockets of high utilization. In ACA, we again expect accelerating cost trend, especially as the expiration of the enhanced premium subsidies affects the risk pool. We expect to see some healthier members exit, and we do expect the remaining population to become more acute. In Medicaid, we expect cost pressure to remain pressured again in 2026 at roughly twice the historical average. And that's going to reflect elevated utilization. It's going to reflect continued misalignment between rates and member acuity. That said, I would say after two years of fairly unprecedented trend, we do expect some moderation versus 2025. So you could think about cost trend here moving into that mid-single-digit range per your question. Then finally, in Medicare, we anticipate higher reported cost trend in 2026 that's going to be largely driven by our membership mix, including a greater emphasis on the D-SNP. So overall, I'd say we're continuing to monitor trends very closely. We're comfortable with how we ended 2025, and we're very confident that our outlook for 2026 is prudent and appropriate. Gail Boudreaux: Thank you, Mark. Next question, please. Operator: Next, we'll go to the line of Andrew Mok from Barclays. Please go ahead. Andrew Mok: Hi. Good morning. Your 2026 membership declines generally came in larger than expected, especially on the Medicare side. Can you walk us through what played out during AEP that prompted the negative revisions and help us understand the components of membership declines within commercial risk between ACA and employer group? Thanks. Felicia Norwood: Thank you for the question, Andrew. I'm going to have Felicia Norwood start, and then maybe Mark talk a little bit about the second part. Good morning, Andrew, and thank you for the question. You know, our enrollment during AEP and the member composition is really aligned with our focus on margin. As you know, we took very deliberate steps to reposition our business to deliver sustainable value for our members and move the business towards our margin objectives. So while our outlook for our membership is going to be in the high teens percentages, as Gail referenced, and this is below our expectations, we're really pleased at how members reacted to our emphasis on D-SNP as well as our HMO products as we go forward. From a profitability perspective, I will say the mix of the lives that we lost was very consistent with our strategy. A majority of the attrition occurred in PPO products and in HMO products in geographies where we didn't offer a comparable alternative, where we were intentionally disciplined in repositioning our product vis-a-vis the broader market. The outcome that we've seen in January AEP reflects deliberate choices. The products and the members that we exited were less aligned with our long-term objectives, particularly as we continue to focus on our D-SNP products. Importantly, and I think this is critical, we're positioned to deliver meaningful Medicare margin improvement to at least 2% in 2026. It's a meaningful step up year over year. So very pleased at how things turned out. Higher membership losses, but very consistent with the expectations. And then I'll turn it over to Mark for the rest of the responses. Mark Kaye: And, Andrew, on your question on the employee group risk membership, we are expecting to end 2026 down in the high single-digit percent range. And the short answer here is it's just a strong focus on margin discipline. Some of the expected decline is really driven by deliberate price decisions that we've made, maybe more specifically in a subset of accounts, including some of the lower or negative margin public sector business that we had. And we really did make a conscious decision to hold the line on pricing and not pursue business that returns below our margin threshold. Gail Boudreaux: Yep. So thank you for the question. And I think the headline there again is this played out in a very disciplined way against the pricing expectations we set. And I think we feel very good about where we're coming into '26. Next question, please. Operator: Next, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead. Justin Lake: Thanks. Good morning. I wanted to ask about margin in the health benefits business for '26. So you mentioned Medicaid margins of minus 1.75%. I appreciate the help there. And you did say that margins were a little better than expected, I think, Mark, in the fourth quarter. Can you expand on the drivers of that in terms of pricing and cost as you go into 2026? And then any color on where guidance assumptions sit for margins for the exchanges in Medicare Advantage would be helpful as well. Thank you. Mark Kaye: Justin, thanks very much for the question. I thought a good place for me maybe to start here is really to talk about how we ended the year from a margin perspective, then I'll give a little bit of color in 2026. So overall, health benefit margins very much in line with our outlook and our expectation. On Medicaid, margins were pressured in the fourth quarter, but they did track slightly better than our outlook that we gave in October. That really reflected two things. One, we had some favorable prior period development come through. We also had some modest retroactive rates. And if you exclude those two items, Medicaid margins completely in line with expectations. They still reflected that elevated utilization, they still reflected that ongoing reverification-driven risk called deterioration and the misalignment of our rates and acuity. On Medicare, fourth quarter margins, inclusive of the IRA-driven Part D seasonality, were largely in line with our expectations. They reflected the prudent assumptions that were embedded in our 2025 bids and overall guidance. And then in the commercial large group, cost patterns and margins, I would say, were, again, largely consistent with our expectations. On the ACA side, a smidgen better than our prudent outlook. Cost trends were significantly above historical levels, but, again, very much in line with what we were expecting. And so as we think about 2026, the guidance that we put out this morning really incorporates that framework. That really means that continued pressure in Medicaid offset by improvement in Medicare Advantage, as you heard Felicia talk about, and then better performance in the individual ACA space. And then lastly, I had a quick question on flu. So maybe let me go ahead and cover that here. We did see a meaningful uptick in influenza-like activity in December, that did have a modest adverse impact on the fourth quarter benefit expense ratio, and we have carried some of that experience into our 2026 planning. Specifically, we are expecting a first-quarter headwind of about 20 basis points for flu that's already embedded in our outlook. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead. Lance Wilkes: Great. In the Medicaid business, could you talk a little bit about rate outlook for 2026? And then could you help frame for us how we should be thinking about this on a go-forward basis? Respect to, obviously, you've given the trend estimate, how should we be looking at kind of rate expectations, what states are doing as far as program changes, and then what are the opportunities and the achievable objectives for medical management? Thanks. Felicia Norwood: Good morning, Lance, and thank you for the question. We are contemplating a composite rate increase in 2026 in the mid-single-digit percent range net of certain known risk corridor impacts. I will say the final rates that we've received from states for January, and as you know, January represents about a third of our Medicaid premium, those rates were in line with our expectations. But for these states, the rates, while modestly above the historical levels, will still lag trend in 2026. Given the ongoing membership attrition and the shifting risk pools, we continue to see as a result of some ongoing state reverification activities. You mentioned program changes. You know, I will say the rate discussions today are increasingly tied to broader program changes and benefit designs that states are more receptive to consideration. And I think that's very important as we think about trying to maintain long-term sustainability and the adjustments that need to be made in states around budget challenges that we're going to see in 2026. We are always engaged in constructive conversations with our state partners, and we're also taking actions ourselves to help control what states are seeing in terms of their Medicaid budgets by doing all of the things that states expect, that tightening our cost management, increasingly focused on those high trend drivers that you heard earlier around behavioral health, ADA, and other services. Certainly very much engaged in program integrity activities to make sure that the program reflects soundness as we look at ongoing issues in the program. Gail Boudreaux: So good constructive conversations with rates, a continued lag though in terms of the trend. But I would say we continue to be very engaged in having a program this long-term sustainable in our Medicaid program. Thank you. Next question, please. Operator: Next, we'll go to the line of Josh Raskin from Nephron Research. Please go ahead. Josh Raskin: Hi. Thanks. Maybe just big picture. If you could give us a little bit more details and speak to what gives you that confidence to confirm the long-term EPS growth target of 12% plus starting in 2027? In light of the trends that you've seen in the past two years. Is there something specific in Medicare or Medicare or the commercial markets that's just an opportunity to start growing earnings in '27? You seeing something in Carillon's side that maybe leads to a stronger acceleration of growth there? And lastly, I assume this includes your view of the 2027 MA rates post the prelim notice? Gail Boudreaux: Yeah. Thank you for the question, Josh. You know, I think it helps as we frame '27. Let's start with '26. We guided to an adjusted diluted EPS of at least $25.50. And, again, as I shared, you know, we see that outlook as prudent and achievable. And it's based on actions that are already underway to reposition our business and improve margins across the enterprise. As I step back, '25 was about strengthening the foundation. We tightened pricing discipline, we improved our execution, and we advanced our affordability through Carillon. And as you just heard, Mark, the fundamentals came in where we expected them to. And I think that work matters as we think about the next few years because it gives us a very clear line of sight and a lot of confidence in the outlook that we're laying. My headline for '26, it's all about execution. The fundamentals are there. Looking to '27, we have confidence in at least 12% adjusted EPS growth coming off of our '26 ending baseline. And again, that's because it's driven by the same fundamentals that we saw at the '25 and into '26. You know, again, over the past two years, we've made very specific portfolio targeted decisions, our pricing has hardened, and our operating decisions are designed to protect our earnings base and position the enterprise for durable growth. That leverages the unique capabilities, and I think our diversified platform, we're going to start to see come through. And there's three points I just want to underscore. First, the key earnings levers are already in motion. So that puts upsets in place for '25 and '26. Again, pricing, care management, and the portfolio we feel are positioned. Second, our '26 outlook is intentionally prudent, so the actions so if those actions mature, we can capture more operating leverage, and that sets up clear step up into 2027. And third, and I think this is really important to your question, the path isn't predicated on a single assumption. It's built on multiple independent levers and disciplined execution across commercial, Medicare, Carillon, and Medicaid. And that's why we have the confidence both in the twenty-seven and in long-term in our long-term earnings algorithm. Thank you for the question. And that confidence is behind our outlook in 2020 and the growth in '27. So, hopefully, that provides some clarity. Next question, please. Operator: Next, we'll go to the line of Lisa Gill from JPMorgan. Please go ahead. Lisa Gill: Hi. Thanks very much. Good morning. I want to go back to Mark's comments on the investments that were pulled forward. Mark, I want to make sure that I heard correctly. You said it was roughly $1 of investments, but a quarter was pulled forward. So should I think that 75¢ is still embedded in your guidance for 2026? And can you talk about specifically what bucket those investments are in, and how do we think about how it flows through the model? Mark Kaye: Lisa, good morning, and thanks very much for the question. Maybe let me do a little bit of a broader framing, and then I'll get specifically to your question. So our results this morning do include $3.75 of discrete noncore items embedded in our outlook, and that is $2.75 more favorable than what we contemplated in our October call. So what changed versus prior expectations? Well, that incremental favorability that was driven entirely by strategic tax items that came in better than expected as we finalized results, particularly in the fourth quarter. Importantly, and I want to emphasize this point here, you know, underlying operating performance came in as expected. Meaning medical cost trends. So given that outperformance, operating execution, they're consistent with our outlook. In those tax-related benefits, we made two intentional decisions. One, we pulled forward a quarter of the approximately $1 incremental investments that we had previously planned for 2026. And two, we deployed an additional 25¢ towards retention and targeted workforce investments here. So it gives us a lot of confidence as we set the baseline for 2026. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Ann Hynes from Mizuho Securities. Please go ahead. Ann Hynes: I know in your long-term guidance, you're lowering the margin profile of each segment. Within the Healthcare Benefits segment, can you let us know what changed your long-term targets for Medicaid, Medicare, and commercial? And then on Carillon, it looks like you're lowering the Rx part of it. Is that just driven by membership losses, or is there anything else that's lowering that target? Thanks. Mark Kaye: And good morning. So most important here, we have not changed the underlying margin expectation for any line of business within health benefits. And that continues to reflect the risk that we assume and the value that we deliver for employers and the government programs that we support. What has changed is how we calibrate the health benefit segment margin to the portfolio we are operating today, applying the same line of business margin frameworks that we've always used. So as we worked through an elevated cost trend environment, I would say commercial growth has been more measured than we originally anticipated. Also, as we prioritize disciplined pricing and margin integrity over volume. At the same time, the composition within commercial that's also evolved. So individual ACA now represents a larger share of the statement relative to group commercial, and that obviously carries a different margin profile. So when you reflect these dynamics through the existing line of business margin ranges, the result is that mid-single-digit health benefits segment margin expectation. The key point here, look, this is not about a changing strategy, change in underwriting discipline, or pricing. This is just a recalibration to better reflect the mix of our business today and a prudent view of the operating environment. Gail Boudreaux: And why don't we have Pete talk a little bit about Carillon? Peter Haytaian: Okay. No. Thanks a lot for the question, Ann. So you asked about the Rx margin longer term. And, yes, we are adjusting them. It's a positive story around really growth and diversification of our portfolios. We talked about we're seeing a lot of growth in Rx. And in fact, just to reflect on what happened this past year headed into '26, it was our best growth year ever. And part of that is the composition of the business that we're growing through. We're starting to see a lot more large, upmarket jumbo accounts flowing through our business. That's one factor, and that comes with a different margin profile. In addition, we continue to build out our specialty business, and that's going really well both internally and externally. And again, that comes with a bit of a lower profile. And you've heard Gail and Mark talk about the investments that we're making in that regard. Then finally, I would say longer term, we're very mindful and respectful of what's going on from a perspective, and I think we're being very prudent in this regard as we think about the longer-term profile of the Rx business. For that question. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Ryan Langston from TD Cowen. Please go ahead. Christian Borgmeier: This is Christian Borgmeier on for Ryan Langston. Can you share where you began the year in terms of ACA membership after the annual enrollment period? Data on sign-ups nationally came in higher than we expected given the firing sub, but I know there's some attrition typically in the first quarter. I know it's early in the year, but any notable changes in utilization patterns from this line of business in January? Thanks. Felicia Norwood: Christian, good morning, and thank you very much for the question. On the individual ACA, we are guiding towards at least 900,000 members at year-end 2026. And that outlook really reflects two drivers here. First, the expiration of the enhanced premium tax credits, which we expect is going to pressure retention and increase lax activity. And second, intentional exits that we've made as part of our repositioning of the book for a more sustainable profile. Importantly, coming out of open enrollment, membership is up approximately 10%. And that helped in part by some of the modest growth that we've seen in markets. We first entered in 2025, which offsets some of the intentional attrition that we expected in our core blue states. Overall, I'd say trends through open enrollment are largely in line with what we've seen in the broader market. The key swing factor, and I think this gets to the heart of your question, is really now a situation rates. And, you know, that's going to come down to member premium payments, and that's behavior, and that typically is going to become much clearer through early April as members work through that normal billing cycle over the next few months. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Scott Fidel from Goldman Sachs. Please go ahead. Scott Fidel: Hi, thanks. Good morning. Interested if you can provide us with an update on capital deployment priorities for 2026. And in particular, maybe just sort of touch on the M&A priorities in terms of, one, just appetite for doing transactions this year just given the dynamic backdrop. And then two, you know, looking over the last several years, certainly, you've had a lot of activity on the M&A side on Carillon services and in particular, acquiring risk-based platforms to integrate into that. Just interested if that remains a priority at this point or whether you're more focused on integration of those assets you've acquired over the last several years? Thanks. Mark Kaye: Scott, thank you very much for the question. I'd say in the near term, our capital allocation is going to reflect a more conservative posture. Our priority here, look, is to maintain balance sheet strength and strong credit profile, fund targeted investments that accelerate margin stabilization, and Carillon's continued growth, and then to remain opportunistic around share repurchases, especially where we see compelling value. Over the longer term, the capital allocation framework is unchanged. We remain completely committed to a balanced approach that supports a long-term growth algorithm, including reinvestment back into the business. Disciplined M&A focused on some of the integration or integrated capabilities have strengthened our competitive position and then, of course, consistent capital return back to shareholders through dividends and share repurchases. On M&A specifically, our near-term priority is really focused on that integration execution, really fully scaling and realizing the value from recent acquisitions. And so at least in 2026, you should expect a lower level of M&A activity and a much greater relative emphasis on opportunistic share repurchases. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please go ahead. Kevin Fischbeck: Great. Thanks. Wanted to follow-up kinda on this margin commentary and the changes you're doing there. I guess, maybe putting in the framework of just the changes that you've had in enrollment across the different businesses that you know, I definitely applaud when managed care companies exit markets that are not profitable, low margin. I think it's 100% the right thing to do. But given that the membership numbers have been lower than we would have thought, I guess, across most of the products, is there anything that we should be reading into as far as where you are strategically or competitively in these markets? You know, the magnitude is more than we would have expected, and it's a broad-based across-the-board dynamics. So just trying to understand if there's something we should be reading into this and why, like, this business mix that you're now forecasting isn't is different than the business mix you thought, you know, a few years ago when you provided your previous margin assumptions? Thanks. Gail Boudreaux: Yes. Thanks for the question. I guess I would simply say the headline is no. This is a very disciplined approach in each of the businesses. And let me just touch on them. In the commercial business, we made very specific decisions around the ACA and feel very good about the sustainability of where the platform and the membership is coming out. And as you heard from Mark a few minutes ago, I think we've been we positioned ourselves well for sustainable business there. On the broader commercial risk-based business, we actually had quite high retention amongst our commercial business. But made some very conscious pricing decisions around public sector accounts that have been below profitability. So, again, this is a repositioning of the portfolio ready for growth. On the ASO, we had a very strong national account selling season, with great retention. I think Medicaid represents really just the redetermination impacts, but we continue to grow and have won accounts in some of the more complex populations. So, feel good there. And I feel very good about the positioning in Medicare Advantage. We came into this. We were very clear what we needed to do. As you heard, we believe we have improved our margin and, again, our sustainability. So I actually would say where we are entering '26, we feel quite strongly positioned for future growth in a very sustainable strong margin position. So thanks for the question. Next question, please. Operator: Next, we'll go to Erin Wright from Morgan Stanley. Please go ahead. Erin Wright: Great. Thanks. So, clearly, the industry was somewhat caught off guard with the MA rate notice this week, and just can you remind us of just your response? I think we know that to some extent, but just ability to mitigate this on top of the cuts that you're making this year as well. I assume you'll continue to take a disciplined approach here, and just your thoughts on what this means for the industry, for the MA market as a whole, and from a policy perspective. What we could see going forward? And just do you think also more of the risk adjustment changes being made? Are you more or less exposed relative to the industry on that front? Thanks. Gail Boudreaux: Yeah. Well, thank you for the question, Erin. And I'll start with just your sort of between-the-lines question, which is we will continue to take a very disciplined approach in positioning of our Medicare book. But I think it's important to start off by first framing the implications of the advance notice. Medicare Advantage is a critically important program for seniors. And it brings together, as we've said, affordable coverage, coordinated care, and supplemental benefits that members rely on to stay healthy and independent. We are still going through the details. We just got some of the advance notice. But at a high level, the advance notice is effectively flat, which you've all reported on. And quite frankly, it just doesn't keep pace with the current medical cost and utilization trends, and that does create real pressure on benefit stability and affordability for seniors. For MA to remain strong, the program needs to be stable and sustainable. And stability gets undermined when payment rates don't keep pace with the utilization and cost trends, especially as the member needs grow more and more complex. So, you know, we're going to continue to advocate, obviously, because if funding consistently lags the reality on the ground, the levers that we have are benefits, networks, premiums, exiting geographies. And quite frankly, that's not good for seniors, and I don't think it's good for the program. And we do believe this you know, we see more than 55% of seniors selecting this program, so it's very popular. We're also supportive of the measures that protect the integrity of the risk adjustment program. Now if you think back, risk adjustment exists for a reason. It's to ensure that plans are paid appropriately for the health status of the members they serve. So as we look ahead, we're going to continue to work with CMS on two things that have to go together. One is the appropriate funding that reflects the actual utilization and cost trends to support program stability, and two, if changes to that risk adjustment framework are proposed, they need to be accurate, and predictable and trusted to avoid disruption, I think, in negatively impacting seniors. So our priority is, again, work with CMS and also protect seniors' access and affordability because we know a very popular program that delivers significant value for seniors. So thanks very much for the question. Next question, please. Operator: Next, we'll go to the line of Ben Hendrix from RBC Capital Markets. Please go ahead. Ben Hendrix: Great. Thank you very much. I just wanted to go back quickly to the Carillon margin discussion. You noted expansion of risk-based solutions in Carillon services through 2025. I was wondering if you could remind us of the new services and your product lines where you're taking risk. To what degree could that expansion provide any offset to the shifting margin dynamics you mentioned in CarillonRx? Thanks. Peter Haytaian: Thanks. I'm going to have Pete address your question. Thank you. No. Thanks for that question. I think it's important to step back and just talk about how we address risk in Carillon because I think it's very important strategically. We're very intentional and disciplined about how we do that and take on risk. We, as you noted, have a diverse set of services and products and offerings. And importantly, in the infrastructure of Carillon, we're very disciplined around cost of care and managing trend across all these relationships. Also say that we have a good mix of fee-based business as well as risk business. And then when you break down our risk portfolio, we approach it in a very, you know, different way, in a diverse way. We're taking risk on a category of service basis in some cases, as well as on a whole, you know, health risk basis. And, again, we built in appropriate protections, with risk corridors and in terms of how we approach that. So I do think, you know, from an enterprise perspective, the way we approach that is very important in protecting our growth and our margin, you know, profile. In terms of services in which we deploy risk, because you asked that as well, it varies, you know, in most of our product offerings, we are assuming risk, like I said, sometimes on a category of care basis or on a whole risk basis. In some instances, we're on a fee basis, but we're excited about the proliferation of that. Our advancement of Whole Health going forward. When you think about our new offerings like SMI, when you think about what we're doing around oncology, when you think about what's happening with CareBridge, these are all risk offerings that are deploying a lot of value from a cost of care and quality perspective for the enterprise. Gail Boudreaux: Yeah. Thanks, Pete. And the only thing I'd say is we have a very strong external growth pipeline, which I think validates what Pete is saying. And, again, we're looking at serving the more complex populations based on the experience we have in our own health plans. So a lot of those programs around oncology, severe mental illness, orthopedics really give us a growth opportunity. So thank you for the question. Next question, please. Operator: Next, we'll go to the line of David Windley from Jefferies. Please go ahead. David Windley: Hi. Thanks for taking my question. I wanted to ask on the Medicaid membership. Expected decline. Is that all same store, or does that contemplate an exit of a state or an end of a contract? I'm thinking about Georgia. And then the 9% in total is a little bit higher than we were expecting. Your 125 basis points, I think, of margin pressure in Medicaid is consistent with what you had said before, and so wanted to try to reconcile those that that additional membership decline doesn't further disrupt the margin? Thank you. Felicia Norwood: Good morning, David, and thank you for the question. You're right. We've guided to Medicaid membership decline around 750,000 members for 2026. And this really reflects really same store. So a continuation of the challenges that we've seen across states as some states have really implemented more stringent eligibility reverification requirements, and that has happened. It happened consistently in 2025. And we thought it was very important to be prudent as we took a look at 2026 to maintain that same posture. Continuing to work closely with our states, but certain eligibility requirements as well as program changes will lead to some of those reductions in 2026. Mark Kaye: And then, Dave, how that carries in forward into our margin guidance of approximately negative 1.75 for the year is really grounded in three core assumptions. Number one, cost trend is going to remain elevated. We have planned for medical cost trend in that mid-single-digit percent range, still materially above historical norms. And number two, rates as we discussed early on the call, are going to improve. But they will still lag trends. You could think about that as roughly a third of those Medicaid premiums reset in January. And then third, not relying on rates alone. We are using all the levers we control, medical and pharmacy cost management, expanded BH interventions, etcetera. And so taken together, we think our outlook for Medicaid margin is prudent for 2026. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Sarah James from Cantor Fitzgerald. Please go ahead. Sarah James: Thank you. Commercial risk guidance is down about 700,000 lives while ACA is growing. Can you quantify how much of that decline reflects pricing actions on those government accounts versus employers shifting preference to ASO? And in your long-term health benefits margin guidance, does the mix change assume further commercial risk attrition or mainly the impact of the actions taken this year? Mark Kaye: Very much for the question. Maybe just a moment here to clarify. So on the individual ACA, we are guiding to at least 900,000 members at year-end 2026. Important to put that in the context of, obviously, where we ended 2025. For the employer group risk-based membership, we do expect to decline year over year in that high single-digit percent range. We spoke a little bit about that earlier. And that's primarily because we're prioritizing margin. And then finally, in ASO, we are expecting a pretty good season. I'm actually going to ask Morgan to help here because he deserves a lot of credit for our success. How we're guiding 2026. Morgan Kendrick: Thanks, Mark, and thanks, Sarah. Regarding the ASO business, national accounts, and Gail mentioned it earlier, so just a spectacular year, which I think sort of speaks to the health of the assets across the entire enterprise when you look at it. And a couple things were sort of driving that. We, Gail mentioned beginning the conference today around second blue bid, where this is the first year that we've had the opportunity for employers in competing geographies against us could actually quote with our organization if they wanted. So when we think about how it came together, we've got about we had about 11 bids in the second blue category for 2026. Won nine of them. And the tee-up of the actual pipeline for 2027 looks strong and also '28 as we sit here. So whether we're talking the local markets or the national markets, the self-funded business has done quite well. We expect it to continue to. And with that, as you also heard from Pete earlier, the pull-through with the CarillonRx has been really, really strong. And notably in the upmarket where it had not been formally. So we're pleased with it, and look forward to continued success. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Jason Kasorla from Guggenheim. Please go ahead. Jason Kasorla: Great. Maybe just a question on aggregate Carillon. It looks like for '26, revenue is growing across both Rx and services. Margins are generally holding in for both despite the enrollment losses. For your health benefits business. Maybe can you just help unpack or bifurcate CarillonRx and services revenue and margin impacts specifically coming from the health benefits enrollment losses versus perhaps the growth in margin maturation you're seeing from external clients? Be helpful. Thanks. Peter Haytaian: Alright. I'll let Pete address that. Thanks. Yeah. No. Thanks for that question. Let's step back and just talk about first setting up Carillon for 2026 of what we came off of in 2025, which was very, very strong. I think you saw that, you know, come through. We had almost 60% growth on the services side and on the pharmacy side, over 20% growth. And we're very encouraged in terms of what we're selling, a diversity of services. A growing portfolio of solutions. We launched CareBridge last year on the Rx side. As I noted before, we're selling, you know, upmarket to a much greater degree. And importantly, that momentum is continuing into 2026 with respect to your question. External sales. In fact, I'll emphasize this. We have the best year both in services as well as Rx in terms of growth. And when I mentioned external growth on the pharmacy side, that's the integrated, you know, ASO, you know, growth going forward. As you noted, those tailwinds are being offset by affiliated membership attrition. When you think about services, we also had one large external client which we had planned for, that went from a risk basis to a fee basis. But that was the largest driver in terms of, you know, headwinds overall. If you step back, though, and you take out that internal membership headwind, our overall growth would have been on the services side, high teens, low twenties. And on the Rx side, in the low double-digit range. So consistent with what we've guided to, longer term. And I would think of that as a mid-single-digit sort of opt-in impact on the affiliated membership. Gail Boudreaux: Thank you, Pete. I think we have time for one last question. Operator: And for our final question, we'll go to the line of George Hill from Deutsche Bank. Please go ahead. George Hill: Hey, good morning guys. And really appreciate you sneaking me at the end. Mark, the topic where I'm getting most questions is can you just contextualize a little bit more what does the ending baseline mean? Talked about earnings for fiscal '26 being front-end loaded. Should we kind of be thinking about that last period run rate as the baseline for 12% growth? And then maybe talk about any visibility to one-time any one-time items in '26 and whether or not they'll be included or excluded from the baseline. Thank you. Mark Kaye: George, thanks very much for the question. This is really a good one to conclude on. So let me try to bring it together the key themes and messages that we've delivered on the call today. So we have established the 2026 EPS guidance of at least $25.50 anchored in what I consider very prudent achievable assumptions supported by actions that we have already taken or underway to reposition our business and improve margins across the enterprise. And at a high level, you could think about the EPS bridge to $25.50 as really being driven by a few key building blocks. Stable performance in commercial fully insured, and continued strength in commercial fee-based, continued progress towards sustainable performance in ACA, Medicaid margins compressing to approximately negative 1.75 consistent with our view that 2026 is the trough year, more than a 100 basis points of operating margin improvement in Medicare Advantage to at least 2%, low single-digit operating gain growth in Carillon where external momentum is partially masked by those affiliated health benefit membership declines. And then below the line, a meaningful step down reflecting the nonrecurrence of the 2025 investment income and a return to a more normalized tax rate. So putting all of that together, again, the guidance of $25.50, prudent, achievable assumption. Gail Boudreaux: Okay. Thank you, operator, and thank you to everyone on the line. As we close, Elevance Health is entering this year with a clear strategy and a strong sense of purpose. We're focused on improving affordability, simplifying health care, and applying our capabilities in ways that drive better access, outcomes, and experiences for members and care providers and stronger health for the communities we serve. While the operating environment remains dynamic, our diversified platform and differentiated Whole Health approach give us confidence in the path ahead, and the actions we've taken position the enterprise to drive sustainable earnings growth over the long term. Thank you again for your continued interest in Elevance Health, and have a great rest of the week. Thank you. Operator: Ladies and gentlemen, a recording of this conference will be available for replay after 11 AM today through February 20, 2026. You may access the replay system at any time by dialing (888) 566-0046, and international participants can dial (203) 369-3677. This concludes our conference for today. Thank you for your participation and for using Verizon conference.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Corning Incorporated Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you would 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. Please be advised that today's conference is being recorded. It is my pleasure to introduce to you Ann Nicholson, Vice President of Investor Relations. Please go ahead. Ann Nicholson: Thank you, and good morning, everybody. Welcome to Corning's Fourth Quarter 2025 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, and Edward Schlesinger, Executive Vice President and Chief Financial Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we'll be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the fourth quarter, differences between GAAP and core EPS included noncash mark-to-market adjustments associated with the company's translated earnings contracts and foreign-denominated debt, as well as constant currency adjustments. Wendell Weeks: As a reminder, the mark-to-market accounting has no impact on our cash flow. Reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the interactive analyst center. Supporting slides are being shown live on our webcast, and we encourage you to follow along. Also available on our website for downloading. And now I'll turn the call over to Wendell. Thank you, Ann, and good morning, everyone. Today, we announced fourth quarter and full year 2025 results. We delivered another excellent quarter. Year over year, sales grew 14% to $4.41 billion and EPS grew 26% to 72¢. We expanded operating margin 170 basis points to 20.2%, achieving our springboard target of full year early. And we expanded ROIC 150 basis points to 14.2%. For the full year 2025, versus the prior year, we delivered double-digit sales growth with EPS growing twice as fast as sales and free cash flow growing three times faster than sales. Today also marks the second anniversary of SpringBoard and the plan has certainly been a tremendous success to date. Since our quarter four, 2023 launch point, we have transformed the financial profile of our company. We expanded operating margin by 390 basis points to 20.2%. We grew EPS 85% to 72¢, and we expanded ROIC 540 basis points to 14%. We also nearly doubled free cash flow in 2025 to $1.72 billion from $818 million in 2023. In total, we now have a highly profitable launch point for future growth and excitingly, we have even stronger long-term growth ahead. Today, we are upgrading our original SpringBoard plan to now add $11 billion in incremental annualized sales by 2028, up from our original $8 billion. So we feel great about our position entering 2026. In quarter one, we expect year-over-year growth to accelerate with core sales up approximately 15% to a range of $4.2 to $4.3 billion. Looking at 2026, our internal SpringBoard plan now adds $6.5 billion in incremental annualized sales by the end of the year, up from our previous $6 billion plan. And our high confidence SpringBoard plan now adds $5.75 billion, up from our previous $4 billion plan. Quite simply, our strategies are working. We're seeing remarkable demand for our innovations in manufacturing capabilities and we see a larger long-term growth opportunity through 2026 and beyond. Recently secured customer contracts including the one we just announced with Meta, only increase our confidence. We've been getting a lot of questions about the Meta Agreement from our investors. So before I talk about SpringBoard in more detail, let me take a moment to outline the key elements. Just yesterday, we announced that Corning and Meta announced a multiyear up to $6 billion agreement to support Meta's apps, technologies, and AI ambitions using our newest innovations in optical fiber, cable, and connectivity solutions. This long-term partnership with Meta reflects our commitment to develop, innovate, and manufacture the critical technologies to power next-generation data centers here in the US. Together with Meta, we're strengthening domestic supply chains and helping ensure that advanced data centers are built using US innovation and US advanced manufacturing. Meta will serve as the anchor customer for the expansion and upgrading our manufacturing and technology capabilities across our operations in North Carolina. We are concluding similar long-term agreements with other major customers to dedicate capacity for them as well. Taken together, these agreements enable Corning to provide our customers with secure US origin production of our most advanced GenAI high-density innovations. Now we're also seeking to appropriately share the cost and risk of such expansions with our customers. And we structure our agreements accordingly. These structures include components like customer prepayments and stringent long-term customer commitments to provide revenue assurance. For longtime followers of Corning, you would recognize the model is quite similar to our extremely successful Gen 10.5 agreements with our display customers, and most recently, Apple's $2.5 billion commitment to produce 100% of iPhone and Apple Watch cover glass in our Kentucky facility. Basically, we're taking the proven approach in our glass businesses and applying it to optical communications. As a result, we will serve our customers, grow organically, and share risk appropriately so that we can deliver the strong returns for our investors that are outlined in our SpringBoard plan and underpin our upgraded plan. So now let's talk more about the SpringBoard upgrade. I'll start with the basics of the plan. When we introduced SpringBoard in quarter three 2023, we used this chart to explain our incremental sales opportunity using our quarter four projected sales of $3.25 billion as the starting point, which put us at a $13 billion annualized run rate. The y-axis represents incremental annualized sales above our quarter four 2023 run rate. And the x-axis represents time for the following five years. Now let's fill in some numbers. Here's our original internal non-risk adjusted plan, which reflected potential growth of $8 billion in annualized sales run rate by 2028, with $5 billion by 2026. We took this opportunity and translated it into a high confidence plan to help inform investors. To do that, first, we focused on a three-year time frame. Second, we probabilistically adjusted for different potential outcomes in each of our market access platforms including market dynamics, timing of secular trends, successful adoption of our innovations, as well as volume pricing and market share across all of our business. And, of course, the potential that some of our markets may go through down cycles. We purposely drew this as a wedge. We were trying to guide every quarter for the next twelve quarters. We said it obviously won't be a straight line. But we were also not dealing with a hockey stick when we built the plan we expected. To see strong growth early. And we did. In March, we upgraded our internal and high confidence plans by a billion dollars. That's $6 billion and $4 billion respectively. So as I previously noted, we've made excellent progress and achieved our upgraded high confidence sales target a full year ahead of plan. Adding $4.6 billion of incremental annualized sales since the launch of SpringBoard. As you can see, we are also performing well against our internal plan. We look ahead, we expect our strong momentum and progress to continue. Of course, at its core, our SpringBoard plan was about more than our ability to grow organically. It was about enhancing our profitability base. We provided you with one metric to track our progress, an operating margin target of 20% by 2026. And as we executed SpringBoard, you can see that we expanded our operating margin significantly. In the fourth quarter, we achieved the 20% target a full year ahead of plan. This is just one example of how significantly we have transformed the financial profile of the company over the past two years. To illustrate my point, let's compare a snapshot of key metrics at the launch of SpringBoard versus today. In just two years, we've grown sales 35% to $4.4 billion. We've improved operating margin by 390 basis points to 20.2%. Growing EPS 85% to 72¢, expanded ROIC 540 basis points, to 14.2%. And for free cash flow, let's look at full year numbers. In 2025, we delivered $1.72 billion, and that's almost double what we delivered in 2023. In total, the first two years of SpringBoard has simply been a tremendous success. We established a new base from which to launch another round of strong, more profitable growth. And that takes us to our upgrade. Let's look at the highlights of the sales growth we now anticipate. Having completed our recent planning cycle. First, as I showed you, our original SpringBoard plan added $8 billion incremental annualized sales through 2028. We are upgrading our internal plan to now add $11 billion in incremental annualized sales. This represents a double-digit growth rate from the quarter we just closed through 2028. This upgrade also impacts this year. Our internal plan now adds $6.5 billion in incremental annualized sales by 2026, up from the previous $6 billion plan. Our high confidence plan now adds $5.75 billion in sales by 2026 up from the previous $4 billion plan. You will note our increasing confidence in delivering our growth objectives. Two years into the three-year plan, we've hit key milestones in advanced strategic initiatives like our announcements with Meta and Apple that increase our probability of success. We feel really good about our performance going into year three of SpringBoard. To wrap things up this morning, as we mark the second anniversary of SpringBoard, the plan has clearly been a success. We've transformed the financial profile of our company, and we've established a powerful base for future growth. Excitingly, we are now pursuing an even larger growth opportunity on that enhanced profile with significantly higher returns. Feel great about our position as we enter 2026. And this morning, we wanted to make sure that we shared our new top-line growth numbers with you. Because it's such a significant upgrade. How we'll get back to you in the coming months to do a more detailed review of our upgraded SpringBoard plan. We would like your input and ideas on the most helpful way to portray the plan and the associated metrics. It's really so interesting, isn't it? Here we are celebrating our 170th birthday as a company this year. A feat so few companies ever attain. I think it's pretty cool that we're on this exciting journey from our original 2023 to essentially doubling the size of the company in the coming years. So thank you for joining us in this exciting hour of Corning's history. I'm really looking forward to continuing the dialogue and updating you on our progress. Now let me turn things over to Ed for more detail on our results and outlook. Ed? Edward Schlesinger: Thank you, Wendell. Good morning, everyone. In the fourth quarter, we delivered outstanding results that not only capped off a record year but also illustrated the tremendous success of our SpringBoard plan to date. So this morning, I will provide details on our performance, our upgraded SpringBoard plan, and our approach to capital allocation. Let's start with our results. Year over year in Q4, sales grew 14% to a record $4.4 billion. EPS grew 26% to $0.72. Operating margin expanded 100 basis points to 20.2%. ROIC grew 150 basis points to 14.2%, and we delivered strong free cash flow of $732 million. We delivered both our high confidence sales plan and our operating margin target of 20% a full year early. For the full year, we grew sales 13% to a record $16.4 billion. EPS grew more than twice as fast as sales at 29% to $2.52. Operating margin expanded 180 basis points to 19.3%, and we delivered strong free cash flow of $1.7 billion. Turning to our business segments. In Optical Communications, Q4 sales were $1.7 billion, up 24% year over year. Net income was $305 million, up 57% year over year, and net income margin was 18%. For the full year, sales were $6.3 billion, up 35% year over year. Net income was $1 billion, up 71% year over year. The majority of growth in optical was driven by the outstanding adoption of our new GenAI products. For the full year, our enterprise business, where we capture sales for inside the data center, grew 61% year over year. And the hyperscale data center portion of our business grew significantly faster. We also saw year-over-year sales growth in our Carrier Networks business, which was up 15% for the full year. This growth was primarily driven by sales to interconnect data centers. The growth we are seeing in optical communications is an important component of the SpringBoard upgrade we are providing today. We expect this segment to continue to drive significant growth. Our recent Meta announcement is a great proof point. Moving to display. Fourth quarter sales were $955 million, and net income was $257 million. For the full year, we provided a target for net income in the range of $900 million to $950 million and net income margin of 25%. We exceeded both goals this year, delivering $993 million of net income and a net income margin of 17%. Looking ahead, in the first quarter, we expect the glass market and our volume to be down mid-single digits sequentially in line with normal seasonality. As a reminder, we successfully implemented double-digit price increases in 2024 to ensure we can maintain stable US dollar net income in a weaker yen environment. We've hedged our exposure for 2026, and we have hedges in place beyond 2026 through 2030. We continue to expect to deliver annual net income of $900 million to $950 million with a net income margin of approximately 25%, consistent with the last five years. Turning to specialty materials. The business delivered a strong fourth quarter with sales up 6% year over year to $544 million and net income up 22% to $99 million. For the full year, we outperformed end markets with sales growing 10% to $2.2 billion and net income growing significantly faster at 41% to $367 million. Results were driven by increased demand for premium products and growth in our Gorilla Glass Solutions business, with industry-leading flagship devices featuring our latest cover materials. Looking ahead, we expect our more Corning content approach to increase demand for our innovations and manufacturing capabilities, and we anticipate significant growth in this segment as part of our upgraded SpringBoard plan. Our expanded partnership with Apple creates a larger, longer-term growth driver. And we continue to innovate and advance the durability of our products to offer consumers industry-leading glass solutions for mobile device applications. A great recent example is the new Samsung Galaxy Z Trifold, a multi-folding device designed with our ultra-thin bendable glass solution on the interior, Gorilla Glass Ceramic Tube on the exterior, and camera lens covers featuring Gorilla Glass with DX. Turning to automotive, segment sales of $440 million were down slightly year over year in Q4, and for the full year, were down 3%. The heavy-duty diesel market in North America and Europe remained weak. Net income of $63 million was up 3% for the full year. Net income was up 7% driven by strong manufacturing performance. For 2026, industry analysts forecast light-duty vehicle production to be flat to down slightly. And for the heavy-duty market, to remain flat. We remain focused on executing our more Corning growth strategy in automotive as additional content is required in upcoming vehicle emissions regulations, and as technical glass and optics gain further adoption in vehicles. Turning to life sciences, full-year sales of $972 million were consistent with the prior year, and full-year net income was $61 million. Finally, Hemlock and Emerging Growth businesses' Q4 sales were $526 million, up 62% versus the prior year, driven by growth in polysilicon and module sales for the solar industry. Q4 net income of $1 million was down year over year as we have shared with you we are ramping capacity to make additional polysilicon wafers and modules, to build a much larger solar business. The cost of that ramp is the primary drag on net income. As a reminder, we plan to build solar into a $2.5 billion revenue stream by 2028 with profitability levels at or above the Corning average. Now let's turn to our outlook. For the first quarter, we expect year-over-year growth to accelerate, with sales growing approximately 15% year over year to a range of $4.2 billion to $4.3 billion. We expect EPS to grow significantly faster at about 26% to a range of 66 to 70¢. As was the case in Q4, our Q1 guidance includes the continued temporary impact of our solar ramp of approximately $0.03 to $0.05 as we continue to bring up capacity to meet committed demand. We expect our sales to increase and our profitability to improve as we move through the year. For the full year, we expect capital expenditures to be about $1.7 billion, a few hundred million dollars above our depreciation level. Even with that, we expect to generate significantly more free cash flow year over year while continuing to invest strongly in our growth vectors, aided by customer financial support. Stepping back as we mark the second anniversary of SpringBoard, the plan has been a tremendous success. Over the last two years, we fundamentally transformed the financial profile of the company. From Q4 2023 to Q4 2025, we expanded operating margin by 390 basis points to 20.2%. Grew EPS 85% to 72¢, and expanded ROIC 540 basis points to 14.2%. We also doubled full-year free cash flow to $1.7 billion in 2025, versus the year of 2023. We are operating from a much stronger profitability base. You see the margin and cash improvements already reflected in our fourth quarter 2025 results. Additionally, you just heard from Wendell that we are upgrading our SpringBoard sales plan. Our internal plan now adds $11 billion in incremental annualized sales by 2028, up from our original $8 billion plan. To put this in perspective, when we started SpringBoard in Q4 2023, our annualized sales run rate was $13.1 billion. Delivering our internal SpringBoard plan puts our annualized sales run rate at $24 billion by 2028. We almost double our sales run rate over this time period. Importantly, the combination of stronger sales growth with a dramatically enhanced financial profile will result in much more cash generation. We are also upgrading our internal and high confidence plans for 2026. Our internal plan now adds $6.5 billion in incremental annualized sales by 2026, up from our previous $6 billion plan. And our high confidence plan now adds $5.75 billion in incremental annualized sales by 2026, up from our previous $4 billion plan. We've significantly closed the difference between the high confidence internal plans because of our increased visibility, the success of new products, and customer commitments to our innovations. One thing I'd like to note is that we are not changing our operating margin target at this time. We developed our original target to build an exciting, highly profitable platform to support higher growth returns on our innovations. At this level of profitability, we would be delighted with more growth. Our target is to continue to be at 20% or above on operating margin. And to help you with your modeling, we'll handle profitability expectations through our normal guidance process. We expect to share more with you about our upgraded SpringBoard plan in the coming months. And since our upgraded plan will generate higher cash flows, I want to take a moment to share our approach to capital allocation. We prioritize investing in organic growth opportunities that drive significant returns. Overall, we believe this approach creates the most value for our shareholders over the long term. And our investors have confirmed they see the value in this approach. So for the larger growth opportunity in our upgraded SpringBoard plan, we need to invest. As we invest, we will use a variety of tools to share the cost and risk with our customers. Including customer prepayments and stringent long-term customer commitments to ensure we generate strong returns on our investments and secure our planned cash flows. We also seek to maintain a strong and efficient balance sheet. We're in great shape. We have one of the longest debt tenors in the S&P 500. Our current average debt maturity is about twenty-one years, and we have no significant debt coming due in any given year. Finally, we expect to continue our strong track record of returning excess cash to shareholders. We already have a strong dividend. Therefore, as we go forward, our primary vehicle for returning excess cash to shareholders will be share buybacks. We have an excellent track record. Over the last decade, we repurchased 800 million shares. Close to a 50% reduction in our outstanding shares. Because of our growing confidence in SpringBoard, we started to buy back shares again in 2024, and we have continued to do so every quarter since then. And we expect to continue buying back shares going forward. Now before we move to Q&A, we just reported quite a lot of news. So let me reiterate the key takeaways. First, our current performance is outstanding. We delivered fantastic results for 2025. And we entered Q1 with exciting momentum and accelerating growth. Second, over the first two years of SpringBoard, we fundamentally transformed our financial profile. Establishing a higher profitability base from which to grow going forward. And third, we now see an even larger growth opportunity. Therefore, we just upgraded our SpringBoard plan in both the near term and longer term. Because of our improved financial profile, and higher growth expectations, we expect to generate significantly more cash as we go forward, creating a very compelling plan for shareholder value creation. I look forward to engaging with you to discuss our upgraded SpringBoard plan in more detail. To get your input on the most helpful way to portray our plan, and of course, to update you on our progress. Now, before we move to Q&A, I'm going to turn it back to Wendell for a moment. Wendell Weeks: Thanks, Ed. I just want to let everyone know that our beloved VP of Investor Relations, Ann Nicholson, will be retiring after forty years of exceptional service to Corning. Now I first met Ann when she was a young process engineer and I was a shift supervisor almost thirty-nine years ago. We have followed each other through many roles in subsequent decades. My personal favorite was when she was my supervisory effectiveness instructor a long time ago. Again, thank you for my success as a supervisor. More importantly, Ann, thank you for being such a good friend, an adviser, and trusted colleague, and most importantly, thank you for showing what it means to be Corning Blue. Ann Nicholson: Thank you, Wendell. Alright, operator. We'll now turn it over to questions. Operator: Please press 11 again. And the first question will come from Wamsi Mohan with Bank of America. Your line is open. Wamsi Mohan: Yes. Thank you so much. Wendell, we'll all have to get together and share Ann's stories on this news. I guess, on my question, you noted that there are similar long-term agreements with other major customers to dedicate capacity. Could you help us think about if any of that is already baked into your SpringBoard plan? And secondarily, the optical fiber market has been very tight globally. Would you say that you're experiencing supply constraints at the moment? And do you have a view on how pricing could evolve on the fiber side given these kinds of constraints? Wendell Weeks: Okay. Let's start with similar agreements to Meta that we are in the process of concluding. First, let's size them. They are of a similar size and scale, each of them, to the Meta agreement. So very significant, obviously. What is our approach to these in the SpringBoard plan? As you have noted, we tend to be very thoughtful and conservative as we give these upgrades. So we have not yet included everything that those could mean because we have yet to conclude all of those agreements. And also remember this, we are dedicating capacity for these customers we are in the process of building now. So we won't see the financial impact really until you get into '27, and then it will continue to build to 2028. So that is the way I would portray those. Before I get to the second question, Wamsi, did that address your question, and do you have any further follow-ups on that question? Wamsi Mohan: No. That's good, by now. Thank you. Wendell Weeks: Okay. As far as the optical fiber market, I would say on a generic basis, it is our opinion that there is enough fiber in the world to meet demand. Now what our capacity expansions are about is about our new high-density products in fiber, in cable, and in connectivity. And for those, we are experiencing very, very robust demand. And that is why we continue to expand our capacity and improve our productivity in these products. If we could make more of these new products, we could sell more. And it is for those types of products that we are dedicating these capacities through these agreements. Is that a good answer to your question, Wamsi? Wamsi Mohan: Yeah. Is there a pricing element, Wendell, though, that we're not yet maybe seeing that potentially as you're talking about these fairly massive amounts of demand coming in, would that change the economics around pricing for you? Wendell Weeks: Yes. So what you'll tend to experience here is over time, you'll see a mix of that impact of these more valuable innovations. These innovations enable our customers to have better and more reliable optical performance in about half the space with significantly reduced installation cost. Whenever we create this much value, usually, some of that value creation will end up accruing to our shareholders. We would assume that that will be so in this case as well. As we begin to master our manufacturing of these product sets. So over time, the more valuable our innovations are, we would expect our profitability to improve. Wamsi Mohan: Okay. Great. Thank you so much, Wendell. Operator: Next question. And our next question will come from Joshua Spector with UBS. Your line is open. Joshua Spector: Yeah. Hi. Good morning, and congrats, Ann. I wanted to ask first just on similar lines of the capacity that's being added. So if we think about Meta as a share of your enterprise sales today, versus what this agreement implies, are they going to disproportionately buy more from you after this agreement? And are you adding capacity to match that added sales or is it less than that? Meaning your capacity might tighten a bit as it relates to this agreement? Wendell Weeks: Okay. So to the first is sort of relatively scale. Last year, Ed, maybe help me with some of the numbers. Our enterprise business was about $3 billion for the year. Roughly two-thirds of that would be the hyperscalers of which Meta was one. Edward Schlesinger: Yeah. That's right. We were a little over $3 billion in enterprise, Wendell's right. And I think a good note was our enterprise business in total grew 60%, the hyperscale portion of that grew almost double that rate in 2025. Wendell Weeks: So with this sort of significant agreement, you're obviously seeing continued very high growth into the future. Now you ask the question of does this mean that relative to our other customers, Meta will be catching a lot more. I think, the thrust of your question. And what I just was sharing with you is we're concluding other similar size and scale agreements. Several of them. With other of our major customers. So what I think we tend to think about it as is not so much a shift in what portion of our product sets. Our various customers get. Is being the overall the pie is going to get much bigger. And then people will decide, so you know what slice of that they want. Does that address your question, Josh? Joshua Spector: It does. I mean, I guess what I'm trying to figure out here, does this so if we thought hyperscalers were going to grow at x percent in Meta within one of them, know, we're baking something like that into our estimates of what your growth would be. Does this it sounds like this kind of codifies that growth and maybe secures them some of that capacity as you grow into the future. Versus know, Corning capturing more share of that pie. Wendell Weeks: That's I want to make sure I understand if maybe you're capturing more share of that pie or not. Thank you so much, Josh. So you will have your point of view on sort of the rate of optical growth in Gen AI and our hyperscalers. It is true that our new products and the reaction to those new products is increasing the demand for our products relative to the demand of others' products mainly because of unique advantages these innovations are offering. Now how all that will shake out, I am not sure. But I like our hand a lot better than I would like anybody else's. Joshua Spector: Excellent. Thank you. Edward Schlesinger: Thanks, Josh. Next question. Operator: And the next question will come from Meta Marshall with Morgan Stanley. Your line is open. Meta Marshall: Thanks. Great. And congrats on the quarter. I just wanted to ask kind of one clarifying question about the Meta deal just since you mentioned kind of expansions of high-capacity cable. Would any of what is kind of included in that deal be included in the carrier line item, or is that all kind of being counted in enterprise today? And going forward? And then maybe on a second question, just if you could kind of give a sense of CapEx for the year as you start to kind of make out some of these capacity investments? Wendell Weeks: Well, first, I'd like to thank you for participating in that CNBC special that was done, Meta. I appreciate it. And then I'll turn it over to Ed for the answers to your question. Edward Schlesinger: Yes. So on the accounting of the Meta deal, you can think of our accounting protocol as when we're selling to a high scaler directly like Meta, account for that in our enterprise business. And when we're selling to a carrier, like Lumen or AT&T, for example, we account for that in our carrier business. The only thing that gets a little bit, you know, maybe confusing is that data center interconnect has typically, at least to date for us, long-haul data center interconnect has gone through carriers. So our customers, for example, Lumen, are, you know, building out networks for data centers. We think of that as sort of outside the data center. That sits in our carrier business. But the Meta deal would be all in enterprise. Does that make sense? Meta Marshall: That does. Yep. Edward Schlesinger: Okay. And I'm sorry. Can you repeat your second part of the question? Just the CapEx how we should think about CapEx in terms of 2026? Wendell Weeks: Yes. So we plan to spend about $1.7 billion in CapEx. For reference, we spent a little under $1 billion this year. Our depreciation level happens to be around that $1.3 billion level. So we're spending a little bit more in '26. We plan to spend a little bit more. That is good. You know, we have a lot of growth opportunities. We want to ensure that we invest for those opportunities. You know, optical is a place that you can think about where we'll direct a lot of that capital. And, of course, as we shared on the call, we look to ensure we get a really strong return on those investments. Sometimes that gets accounted for by customers providing an upfront payment. Sometimes that gets accounted for the nature of our agreement with the customer, so that may show up in the operating cash flow, the cash section, or against our capital. But you can think of us as spending around that $1.7 billion. Meta Marshall: Great. Thank you. Edward Schlesinger: Yeah. Next question, please. Operator: And our next question will come from George Notter with Wolfe Research. Your line is open. George Notter: Hi. Thanks a lot, guys. Just to continue on that line of questioning, the $1.7 billion, does that include specific CapEx associated with the Meta project? Or is that just you there's kind of a gross and a net number here, I think. And I guess I'm trying to figure out I think the basic idea here for you guys is you're trying to get your customers to pay for more of your capital expansions or capacity expansions, and I guess I'm just trying to figure out, you know, how much of this is ascribed to the customer and how much of this is on Corning. Thanks. Edward Schlesinger: Yes. So as we've shared, we use a number of tools to de-risk our investments. Sometimes, when we do an upfront payment from a customer, it goes against the capital. And sometimes it actually doesn't. It may be a refundable down payment that they get through a take-or-pay mechanism or some other mechanism in a contract. We don't disclose and we typically don't disclose the details of any specific agreements. I can say that for sure some of the capital we plan to spend in 2026 for the Meta deal. George Notter: Got it. Okay. And then just one other question. You know, certainly not every major customer certainly, you'll have customers in the optical business that won't sign contracts like this. I assume that with those other customers, those guys will be looking at price increases. Is that a part of the strategy here? Thanks. Wendell Weeks: So first of all, to add on it, our plan with that $1.7 billion, we're integrating and the cash flows that we're thinking about. We're integrating all of the various customer agreements we believe that we will complete and we're addressing that as thoughtfully as we can. So more to come in that space over time, but that is what we think we'll invest this year. As far as our other customers, well, for long-standing customers, like our carrier customers, they are not related to these particular product sets. And so we will continue to serve them and serve them in an excellent way. And what we're seeking here is just to make sure that we have assured revenue streams. Against any capacity that is dedicated specifically to those customers. They're scaling this rapidly. George Notter: Thank you. Edward Schlesinger: Next question? Operator: And the next question will come from Steven Fox with Fox Advisors. Your line is open. Steven Fox: Hi. Good morning. First of all, congrats to Ann. Pretty sure you could probably do another forty years if you wanted to. But congrats, and thanks for all your help. I guess just on everything that was announced around Optical, I was wondering if you could fill in the blanks on two things. One is you seem to be pushing more and more assets towards US, North America production, and I was curious how you feel about international markets for Corning in the coming years. And secondly, Ed, I understand not changing the operating margin target yet for the company as a whole, but it seems like everything you talked about around optical is pretty positive for optical's own operating margins. So, like, maybe you could sorta give us some clues as to how that could influence the overall corporate average. Thanks. Wendell Weeks: Let me start on the first one about the global mix of our sales. We today are about 60% outside the US. And about 40 in and we would expect something in that zone to continue. But what will really drive the location of our factories will tend to be where our customers are because we seek to locate close to them. So if a lot more gets built in the West on the AI side, then we would expect to have more of that be here. If on the other side, in the glass side, let's say, or in our automotive emissions business or any of our other new innovations more outward to build in Asia, that's where we would locate that manufacturing. And just remember throughout all of this, what happens to us every year is we're continuously improving our productivity. Which is where we tend to get the product to be able to support ever-increasing revenue, and then if we don't have a revenue opportunity for that, in the specific market, then what we seek to do is develop new markets for that capability like we did for Gorilla, from display and then automotive from Gorilla. So that tends to be our approach with deep dedication to the locations we build the factory. Edward Schlesinger: Yeah. Steve, on margins, you know, I'm gonna step back for a second and then I'll come to your question. I think when we first created SpringBoard and launched it, improving our operating margin, our profitability, and our cash generation was such a huge component of the plan. Because of where we were operating from, our financial profile. We needed to get our returns up. We needed to generate more cash and we've significantly done that. Feel great about it. Optical has actually been a huge component of that. We've been talking specifically about their net income margin over the last year or two, and that's now at 18% significantly above where it was when we started this plan. So I think that actually is a good background for how we think about going forward. So from here forward, I think you're right, it is highly likely that our operating margin goes above 20%. Could do that for, you know, periods of time. It could be, you know, nicely above 20%. But we really like the financial profile and we want to focus on improving our return on invested capital and we want to generate more cash. So we want to make sure we capture all the growth that we can in this next window of time. So that's primarily why we're not putting a new target out. We expect to be at 20% or above 20%, and we expect to grow significantly. And we think that return profile is very compelling. Steven Fox: Great. That's super helpful. Thank you. Edward Schlesinger: Next question. Operator: Next question will come from Asiya Merchant with Citi. Your line is open. Asiya Merchant: Great. Thanks for the question, and congrats again, Ann, on the retirement. You'll be missed. Wendell, if I may, a question for you on the optical side of things. You've talked a lot about, you know, CPO and the scale-up opportunity. So given the growth profile that you guys are talking about here with additional commitments from hyperscalers coming forth, can you just remind us is scale-up included in that outlook through, let's say, here through the '28? Or are we looking at that opportunity further beyond? Thank you. Wendell Weeks: So the straightforward answer before I give others more color is we do not have a significant revenue amount for scale-up included in this most recent SpringBoard upgrade. So that would be on top depending on your opinion on timing. For those of you who are less close to scale-up, what Asiya is asking about is because transmitting information with photons is greater than three times lower power usage than using electrons even in very short lengths inside switches, or servers and that that advantage increases dramatically the longer you want to go or the higher the bit rate, can be 20 times or more. There is a widespread deep technical effort going on to be able to bring more optics into the scale-up piece of the network. Closer and closer, to the GPUs and inside of the boxes closer and closer to the switch ASICs. Though I believe deeply, the innovator in me, believes deeply that it is inevitable that those links go to photons. And I also believe that our innovations will play a significant role in those new links. I believe that's inevitable. Calling timing is more difficult. There are scenarios where the timing would be within this time period between now and 2028. There are scenarios where it will be primarily starting immediately 2028, and beyond. What we seek to do with SpringBoard is to not over-speculate. And if we don't have really quite compelling evidence of the timing of something as significant and large as the scale-up opportunity it is, we will tend to view the timeline from a conservative point of view. Does that answer your question? Asiya Merchant: Yes. That's great. Thank you. If I may, one for Ed as well. Ed, you talked a little bit about operating margins for or net income margins for Optical. Can you just remind us like within the SpringBoard, how we should think about margins for the solar business that's ramping up here and expected to I think, drive margins which are at or accretive to corporate. If you can just remind us where we are on that ramp and what it looks like within the updated SpringBoard. Thank you. Edward Schlesinger: Yeah. Thanks. So as we've shared and Q1, we're expecting sort of a similar Q4, you know, situation is we're significantly ramping an extremely large factory and so there's a drag on our margins, our profit dollars as well. We sized that in the fourth quarter originally at about $0.03. It was a little more than that. In the first quarter, we expect to be in the 3 to 5¢ range. So if you were to take that drag, just the drag part, not even the higher sales, and eliminate that from our financials. Clearly, our margins would go up. Obviously, our profit dollars would go up. And, specifically, that would hit, you know, in that Hemlock and Emerging Innovations segment, which is where we have solar. So I think there's a nice opportunity for us there to improve margins as we continue to ramp. And we expect sales to go up, our profitability to improve through the year of 2026, and we expect to get this business to sort of size and scale we would expect it to be, including margins at or above the Corning average by 2028. Wendell Weeks: Next question. Operator: The next question will come from Tim Long with Barclays. Your line is open. Tim Long: Thank you. If I could as well. One on the optical side. If you could go back to the carrier piece, you know, just wanna, you know, understand how you're thinking about this business going forward. Think historically, we've seen pretty big cycles here, a few good years and then some catch up, you know, inventory, whatever. But now there's a lot more data center in that line. So when you think about the carrier business over the next few years, do you think that the cyclicality of the business has changed, and it's a little bit more secular? Love your thoughts on that. And then second, maybe if we could just touch on display. I think the yen has moved back the last few weeks, but it was getting up there. So Ed, if you could just talk I get you're managing to that 25% and $900 to $950 million of net income. Is there a scenario? And I know you have hedges where we might need to see more price increases, or where are we with the flow through of the last set of price increases? Thank you. Edward Schlesinger: Yes. So on carrier, I'll start there. In 2025, our business was up about 15%. Majority of that growth was data center interconnect. I certainly see that data center interconnect portion of or the carrier business being driven by data center interconnect spend? That said, I think you'll see fiber to the home growth as well. So I do think Carrier will grow over the next several years, and we factored in scenarios and how we think of that in our SpringBoard plan. But probably the largest driver data center interconnect. Does that answer your question? Tim Long: Yeah. Yeah. That's helpful. Thanks. And then on to display. Edward Schlesinger: Yep. And then on to display. So, you know, the way I think about display is our goal is to generate $900 to $950 million of net income, cash, out of that business. We did better than that this year. We're, you know, we're high a little higher on income, and our margin percent was a little above our target. And we expect to be able to maintain that, and we could certainly be above that at times. You know, we could certainly be above that at 2026. To the extent we need to adjust for weaker yen than what we have, and we have a 120 yen in there, we will do what we need to do on price or otherwise to ensure that we can deliver that level of profitability. Tim Long: Thanks, Ed. Edward Schlesinger: Alright. Thank you. We'll take one last question. Operator: Okay. And our last question comes from John Roberts with Mizuho. Your line is open. John Roberts: And congrats as well, Ann. Hope you're headed to someplace warm. What percent of bare fiber currently used internally for cabling? And are you importing any bare fiber into the US? Wendell Weeks: I don't actually know the answer to that question off the top of my head. And everybody's looking at me like I should. So, John, let us take a moment to gather that information. And we'll chat with you. John Roberts: Okay. Thank you. Ann Nicholson: Great. Okay. So, just quickly thank everybody for joining us today. I wanted to let you know before we go that we're going to attend the Susquehanna Tech Conference on February 27. And the Morgan Stanley Tech Conference on March 3. Additionally, we'll be scheduling management visits to investor offices in select cities. Finally, a web replay of today's call will be available on our site starting later this morning. Thanks again for joining us and for the well wishes for me. Operator, that concludes our call. Please disconnect all lines. Operator: Thank you for participating, and you may now disconnect.
Operator: Good morning. My name is Michelle, and I will be your conference operator. At this time, I would like to welcome everyone to Automatic Data Processing, Inc.'s Second Quarter Fiscal 2026 Earnings Call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct a question and answer session. Instructions will be given at that time. I will now turn the conference over to Matthew Keating, Vice President, Investor Relations. Please go ahead. Matthew Keating: Thank you, Michelle, and welcome, everyone, to Automatic Data Processing, Inc.'s second quarter Fiscal 2026 Earnings Call. Participating today are Maria Black, our President and CEO, and Peter Hadley, our CFO. Earlier this morning, we released our results for the quarter. Our earnings materials are available on the SEC's website and our Investor Relations website at investors.adp.com, where you will also find the investor presentation that accompanies today's call. During our call, we will reference non-GAAP financial measures which we believe to be useful to investors and that exclude the impact of certain items. A description of these items, along with a reconciliation of non-GAAP measures to their most comparable GAAP measures, can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. I will now turn it over to Maria. Maria Black: Thank you, Matthew, and thank you, everyone, for joining us. This morning, we reported strong second quarter results that included 6% revenue growth, 80 basis points of adjusted EBIT margin expansion, and 11% adjusted EPS growth. We achieved these financial results while also making meaningful progress across our strategic priorities. Before discussing this strategic progress, I will briefly review some additional details from our results. We delivered solid employer services new business bookings growth in the second quarter. We enjoyed broad-based strength with the fastest growth in our international, US enterprise, and compliance businesses. Our small business portfolio and mid-market business also contributed to the growth in the quarter. With good momentum and healthy pipelines, we are focused on driving continued new business bookings growth in the second half of our fiscal year. Our employer services retention rate matched our expectations with a modest decline in the second quarter. We continue to benefit from a stable overall business environment and very high levels of client satisfaction. In fact, our overall client satisfaction results represented the single best quarter in Automatic Data Processing, Inc. history. Employer services pays per control growth rounded up to 1% for the second quarter, representing modestly higher year-on-year growth compared to the first quarter. Lastly, our PEO revenue increased 6% in the quarter, helped by growth in zero-margin pass-throughs and solid new business bookings growth. Our 2% growth in average worksite employees included a moderation in PEO pays per control growth. Peter will share our updated outlook in a few minutes, but we believe the demand environment for our PEO and other outsourcing services also remains healthy. We are proud of our strong second quarter financial results and excited by the progress we continue to make across our three strategic business priorities. I will start with what we are doing to lead with best-in-class HCM technology. We are very pleased with the strong traction our Workforce Now and ADP Lyric HCM platforms continue to experience. Workforce Now NextGen is being embraced by our mid-market clients for its always-on payroll processing capabilities, generative AI functionality, and expedited implementation timelines. We reached a milestone in the second quarter with our first sale to a client with more than a thousand employees. The client, a logistics company in the Midwest, selected Workforce Now NextGen based on the strength of its underlying technology and the breadth of its integrated solutions, which included payroll, HR, benefits administration, time and attendance, and learning. Workforce Now NextGen is a great example of how we build products to solve real-world challenges HR teams face each day, and we do so by combining our next-gen platform investments in AI and automation with robust compliance expertise to support our clients' wide-ranging needs. In the enterprise space, Lyric new business bookings once again exceeded our expectations in the second quarter, and its new business pipeline continued to expand at a rapid pace. Underscoring Lyric's strong reception in the market, more than 70% of its new business bookings and overall pipeline related to new logos as it continues to fare favorably against our competitors. Organizations are turning to Lyric for its flexibility, intelligence, and human-centric design that enhances the employee, manager, and practitioner experience. Among our many Lyric new business wins in the second quarter were two companies with more than 20,000 employees, which represents two of our largest clients sold on the platform to date. Earlier this month, Lyric was named a winner in the 2026 Big Innovation Awards presented by Business Intelligence Group, earning recognition for driving transformative impact in the HCM industry. In addition to building our own best-in-class solutions, we strive to enhance our HCM offerings through acquisitions that complement our business. Our October 2024 acquisition of Workforce Software is a great example. During the second quarter, we launched the ADP Workforce Suite, our integrated workforce management solution across our leading payroll and HCM platforms. Clients now have the opportunity to offer their employees around the world a unified time, pay, and HR experience with best-in-class workforce management tools at their fingertips. We are already seeing benefits from our integrated approach, winning several deals in the second quarter that included the ADP Workforce Suite. We also partner with others to accelerate innovation. In December, we successfully embedded Fiserv's Cash Flow Central, an integrated accounts payables and receivables management solution, into RUN in order to help our small business clients better manage their cash flow. The RUN powered by ADP platform brings payroll, contractor payments, bill pay, and invoicing together in one clear, connected experience. With payroll and payments in sync, our clients can do more in less time and steer their business forward confidently. AI remains central to our technology strategy, and we are moving full speed ahead to leverage it in attracting, serving, and retaining our clients. We continue to scale the usage and capabilities of our client-facing AI, including the launch of new ADP Assist payroll, HR, analytics, and tax agents that apply advanced intelligence to real workforce challenges. Built on ADP's comprehensive global data platform, these new persona-based agents help organizations manage people, streamline processes, and make informed decisions that support people at work. For example, ADP Assist tax registration agents can proactively identify when clients have missing or incomplete tax IDs and guide them through every step of the registration process. Additionally, our ADP Assist HR agents can create key talent actions instantly, such as initiating a promotion, simply by the user typing what they want to do. The system delivers real-time answers and guided next steps, reducing time spent navigating HR workflows. Our AI solutions are designed with a human-centric approach that enhances the value and meaningful connection we all derive from our work. Unlike generic AI solutions, ADP's approach combines proprietary workforce insights with advanced automation to solve real workforce challenges while maintaining the security, governance, and compliance standards companies trust. Our second strategic priority is to provide clients with unmatched expertise and outsourcing solutions. Success here requires us to carefully consider the breadth of our solutions and to continually evolve to best meet client needs. To this end, we were excited to introduce our first pooled employer plan, or PEP, within our retirement services business during the second quarter. A PEP is a single 401(k) plan that lets unrelated employers participate together with a pooled plan provider acting as plan sponsor, named fiduciary, and plan administrator. This arrangement shifts most of the compliance, filing, and oversight burdens from employers to the pooled plan provider. Our Save for Retirement pooled employer plan brings together scale, integration, and fiduciary support, allowing employers to offer robust retirement plan benefits without adding administrative burden. Clients gain scale-driven cost savings, reduced administrative work, and lower fiduciary risk. Finally, we are focused on executing on our third strategic priority, benefiting our clients with our global scale. We serve more than 70,000 clients outside of the United States, and we pay more than 16 million wage earners across more than 140 countries. Our mix of global solutions includes both in-country and multinational offerings. During the second quarter, we won the business of a large European bank with more than 75,000 employees. This win demonstrates the power of our brand, built by having associates on the ground for decades in most of our international markets. We also recently enhanced our global payroll platform through more intuitive dashboards with clearer messaging and easier navigation, all of which reduce manual tasks and enhance the overall user experience. The investments we are making in our international business are being noticed, as we were recognized recently in the HRM Asia Reader's Choice Awards, winning two golds in 2025 for best HR tech outsourcing and payroll solution. Overall, our second quarter represented strong outcomes on the financial front and with respect to our key strategic priorities. I would like to take a minute to thank our associates who continue to deliver exceptional product and outstanding service to our clients, particularly now as many of them are in the middle of our most hectic time of year completing year-end work. Their consistent effort over decades has established our company's trusted corporate reputation, and I am proud to announce that Automatic Data Processing, Inc. was recognized earlier this month by Fortune Magazine as one of the world's most admired companies in 2026. This marks Automatic Data Processing, Inc.'s twentieth year on this annual ranking. I would like to congratulate all ADP'ers on this well-earned accomplishment and thank them again for all that they do for Automatic Data Processing, Inc. and for our clients. And now I will turn the call over to Peter. Peter Hadley: Thank you, Maria, and good morning, everyone. I will start by providing some more color on our second quarter results and then update our fiscal 2026 outlook. Overall, we reported a strong second quarter, with our consolidated revenue growth, adjusted EBIT margin, and adjusted EPS growth all coming in slightly ahead of our expectations. Let me focus on our employer services segment first. I will cover both our results and our updated outlook. ES segment revenue in Q2 increased 6% on a reported basis and 5% on an organic constant currency basis, with FX contributing about a point of revenue growth in the quarter. As Maria shared, ES new business bookings were solid and broad-based in the second quarter. With continued healthy pipelines, we are maintaining our 4% to 7% new business bookings growth guidance for fiscal 2026. ES retention was in line with our forecast, declining modestly versus the prior year. We are keeping our outlook of a 10 to 30 basis point decline in full-year retention unchanged. ES pays per control growth improved slightly, rounding up to 1% for the second quarter, and we continue to forecast about flat pays per control growth for the full year. Client funds interest revenue increased slightly more than we anticipated in Q2, helped mainly by higher average client funds balance growth. We have increased our forecast for average client funds balance growth to 4% to 5% in fiscal 2026, and we continue to expect an average yield of approximately 3.4%. Accordingly, we are increasing our full-year client funds interest revenue forecast by $10 million to a range of $1.31 to $1.33 billion. We are also raising our expected net impact from our extended investment strategy by $10 million to a range of $1.27 to $1.29 billion. Overall, we are also increasing our ES revenue growth outlook to about 6% for the full year. ES margins increased by 50 basis points in Q2, driven by both operating leverage and the contribution from client funds interest revenue growth. Turning now to the PEO. Overall, PEO revenue growth in the second quarter was 6%, while PEO revenue growth, excluding zero-margin pass-throughs, was 3% in the quarter. PEO new business bookings growth was solid in Q2 but did come in slightly below our expectations. This impact, along with some further moderation in PEO pays per control growth, weighed on our average worksite employee growth in the quarter. Accordingly, we are now expecting average worksite employee growth of about 2% in fiscal 2026. We continue to expect fiscal 2026 PEO revenue growth of 5% to 7%, and PEO revenue, excluding zero-margin pass-throughs, to grow by 3% to 5%. PEO margins decreased 70 basis points in Q2, driven mainly by zero-margin pass-through growth and higher selling expenses. As we highlighted on our Q1 conference call, we do expect positive contribution to overall ADP margins this year from our other segment as a result of our client funds extended investment strategy. This margin contribution is being driven by growth in our corporate extended interest income, while at the same time, our short-term financing costs are decreasing. We saw this in the second quarter, and we expect this dynamic to continue across the balance of the fiscal year. Putting it all together, we are increasing our fiscal 2026 consolidated revenue outlook to about 6% growth, and we are maintaining our forecast for adjusted EBIT margin expansion of 50 to 70 basis points. We continue to expect our effective tax rate to be around 23% for the year, and we are also raising our fiscal 2026 adjusted EPS growth forecast to 9% to 10%, supported by share repurchases. Earlier this month, our board authorized the purchase of $6 billion of our common stock, which replaced in its entirety our 2022 authorization of $5 billion. This new authorization, along with our recent 10% dividend increase, signals our continued commitment to driving shareholder value and to returning excess cash to our shareholders, which remains a key pillar of our capital allocation strategy. Finally, a quick note on our anticipated adjusted EBIT margin cadence in the second half of the year. As we mentioned last quarter, we continue to expect a bit of a ramp in the back half of the year for margin expansion, and we currently expect to deliver more of this margin expansion in Q4 than in Q3. Thank you, and I will now turn it back to the operator for Q&A. Operator: Thank you. If your question has been answered and you would like to remove yourself from the queue, please press 11 again. We ask that you please limit yourselves to one question with a brief follow-up. Our first question comes from Mark Marcon with Baird. Your line is open. Mark Marcon: Good morning, lots of significant positives in the quarter. Maria, I am wondering if you could talk a little bit about the international opportunity, and congratulations on that win. Where do you see Automatic Data Processing, Inc. currently in terms of addressing that strategic pillar, and what do you think the runway is like? How do you compare the profitability of the international operations relative to the US? And then I have a follow-up on PEO. Maria Black: Sure. Good morning, Mark, and thank you for the question. As you know, international is an entire strategic priority for us. So we have three strategic priorities, one of which is candidly dedicated to exactly what you just suggested, which is the opportunity we have in our global space. So how are we doing? How are we faring? Perhaps I can comment on that, and Peter can touch on the impact of that business from a margin perspective to address the second part of your question. How we are faring is very well. I think the strength that we see in our offering is just getting started. I was excited to see the rebound in bookings, specifically this quarter, after a tiny bit of a softer first quarter on the heels of a very incredible fourth quarter. So we do know that the international space and those opportunities, they are big, they are complex, they are broad. They often involve lots of different stakeholders, countries, and decision-makers. So how do we show up? We show up well. I think the thing that was the highlight for me with respect to this quarter was this 75,000 employee European bank that we cited. But it was not just the fact that we had that win, which was tremendous execution by the team. It was also how that win came about, which was a direct reflection of the offering that we have in conjunction with our existing platform married to now the Workforce Suite that we launched. And so that was a key contributor to that win, and I think we continue to make progress in our offerings and our investments, whether that is through the products or through acquisitions. So we show up well from a product perspective. I mentioned during prepared remarks how we show up in terms of kind of this balance of Automatic Data Processing, Inc. associates on the ground in-country. That is unique. That is differentiated. So I think in general, and I apologize, I do not know what is happening to my voice. We are very proud of the offers that we have and how we show up in the international space. We continue to execute well from a bookings perspective. And as it relates to the future, I think it is bright for us, and I will let Peter comment on the margin piece. Peter Hadley: Yeah, Mark. On the profitability side, the international business is a little bit lower margin than some of the domestic businesses, which I think is to be understood. I think the retention rates, though, are very, very high. So if you take a look at it from a lifetime value sort of contribution, if you like, to value, it is very much comparable with any of the businesses we have in the US. So we are very happy to continue investing in that business. It does drive margin. It is an important contributor to our margin evolution, but it is a little bit lower on the margin as is the enterprise business in the US relative to, call it, the down market, mid-market. But over a lifetime value of a client, given the very high retention rates, we believe we achieve very similar levels of ultimate value from growing in international as we do in some of the maybe higher margin domestic market businesses. Mark Marcon: That is great. It seems like a great long-term opportunity. I was wondering on a separate note, can you just talk a little bit more about the PEO and the WSE growth? You know, it has been slowing for a while across the entire space. And, Maria, I know you know the PEO space better than anybody. What do you think is contributing to that slower growth? And how do you think about the long-term outlook on the PEO just in terms of WSEs? Because it seemed to me like we still have a long way to go in terms of penetration in multiple states that are not as well developed as some of the core states. Peter Hadley: Yeah, Mark, I will take that, and Maria might want to chime in. But I think we still agree with you. I think we still have tremendous opportunity in the PEO. You know, we have spoken about what we believe is the addressable opportunity, and we are, whilst we are clearly the largest PEO, we still think there is plenty of room to grow in that space. And as you know, around half of our PEO bookings come from our own client base. So, again, plenty of opportunity there. What is going on at the moment? I mentioned in my prepared remarks we had solid bookings. Maria also mentioned we had solid bookings in the PEO this quarter. They were a little less than we were expecting, but not a huge difference. But it does contribute when you are dealing with relatively small movements, basis point movements in things like WSEs. We also saw a little bit, again, very small margins here in terms of basis point moves, but we did see a little bit of softening in the PEO pays per control metric in the quarter. We saw a little bit of strengthening. Again, I do not want to overemphasize it, that it is just tens of basis points, but a little bit of softening in the PEO pays per control metric. By the way, it came in at exactly the same level as the ES metric. I think I mentioned last quarter, the PEO was, as it typically does, sitting a little ahead of ES. It is not always the case, but it is typically the case. This quarter, they happen to come in together. So just doing the math, looking at sort of where we were in Q1 and where we are now, we felt the lower end of the range was more appropriate. Hence, we have sort of adjusted our guide. But, you know, we are still very bullish on the opportunity. We continue to invest in distribution. We are investing in our product capabilities within Workforce Now specific to the PEO and certainly feel there is a tremendous opportunity in front of us with respect to the PEO. Mark Marcon: Great. Thank you. Operator: Thank you. Our next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Hey. Thanks so much. Thanks for the follow-up on Mark's question on PEO. I am just curious if you are doing anything differently to spur growth versus plan at the beginning of the year. Yeah. I know there is a lot of talk about health care costs being higher and perhaps SMBs are looking to trade down. Curious if you are seeing any of that and if you are responding to it. Maria Black: Sure. Happy to comment on that and the general value proposition of the PEO. As Mark mentioned, and you know as well, I am incredibly close to this business. Certainly been watching that value proposition over decades, and I can confidently say it is as strong as it has ever been. The complexity to be an employer in that space dealing with whether it is, as you mentioned, health care and the complexity of offering those types of things to your employees. It is very difficult. The PEO fits into that value proposition for those employers. I think the other piece is just the basic of co-employment and what employers are looking to do in that shared liability. So what are we doing to respond to what is arguably an increasingly complex landscape for small to medium-sized businesses? We are investing. So we are investing in our sellers. We are investing in their ecosystem. We talked a lot at Investor Day about the tools that we are developing to serve up the right leads to the right sellers at the right time. As Peter mentioned, a big piece of our value proposition inside of Automatic Data Processing, Inc. is that ability to mine our own base, and we are getting smarter about that. And so investments into tools, technology, to figure out who the exact right fit is for that PEO investment into things such as sales, incentives, headcount. So I can tell you from a go-to-market perspective, not a shortage of focus. The team is laser-focused. And building on the healthy pipeline, the momentum, we see that certainly in the solid results in PEO bookings in the second quarter, but we also see it when we look into the healthy activities, RFPs, things of that nature. There is a lot of motion in that space, and we are definitely positioned to take advantage of it. Tien-Tsin Huang: No. Great. All your confidence there, Maria, is important. Just on the margin cadence, Peter, I think you know, you talked about this last quarter about it being more back-half weighted. Looked like Q2 was a little bit better than what we had modeled, including the higher float from the higher balances. So Q3 to Q4, any callouts in terms of step function change, and have you changed your investment approach given the higher float? Sounds like maybe you are investing a little bit more, or maybe I am misreading it. Thank you. Peter Hadley: Yeah, Tien-Tsin, the second quarter, I think, came in a little higher than we were anticipating as well. We were pleased with that from a margin perspective. The margin cadence point is sort of really two things. As I said, we are expecting continued margin delivery in the second half, a little higher than the first half. The main driver of the second half versus the first half is we still had in Q1, as you remember, the fourth quarter of the before the anniversary of the Workforce Software acquisition. So we had some acquisition-related drag in the first quarter. The second quarter came in strongly. We are expecting good results in both Q3 and Q4. The main difference, I think, in Q3 versus Q4 is a little bit of timing of expenses, but that sort of happens from time to time. I would not overemphasize that. The other piece, though, is the float portfolio, which I think is where you are going. So the float portfolio in Q3 being calendar Q1 is our highest balance period where we have bonus season, we have tax rate, tax limits resetting. So we have more float basically in Q1, which results in more overnight balances. And this year versus last year, you know, as you know, we had a 75 basis point reduction in Fed funds between the same period last year and this year. So that creates a little bit of margin pressure in Q3 over Q3 last year relative. We do not really have that in Q4, so we are expecting a little bit more of this. The underlying margin expansion continues, I think, at really good momentum, but that float element as well as a little bit of timing of expenses, we are expecting Q3 not to be quite as strong as the fourth quarter. Tien-Tsin Huang: Perfect. Thank you for the answers. Operator: Thank you. Our next question comes from Scott Wurtzel with Wolfe Research. Your line is open. Scott Wurtzel: Thank you for taking my question. Maria, just wondering if you can talk a little bit more about the overall bookings environment. Just wondering how, you know, if you can characterize how growth in bookings was sort of trending in February relative to Q1 and even in the context if we go back to sort of the end of last year and some of the slowdown that we saw maybe on sales cycles, wondering how all of that is sort of trending now relative to six to nine months ago. Thanks. Maria Black: Yeah. Sure, Scott. So I think with respect to the overall environment, as mentioned during the prepared remarks, the environment is stable. I will tell you that from a new business perspective, we were really pleased with the solid performance in Q2. I think the thing that stands out to me the most with respect to Q2 is that it was broad-based. And so every single business contributed to that growth narrative. Some of the highlights we mentioned during the prepared remarks, certainly we saw in the enterprise space just how Lyric is resonating. It is really an incredible story for us. We are really excited about the momentum in the enterprise space. Excited to see that across the compliance solutions as well. I think within the small business portfolio, we continue to see strength in retirement services, in insurance, and mid-market also contributed to the growth. And as mentioned earlier, we had good PEO bookings, although that is not in the employer services numbers. So I think just broadly speaking, the quarter felt solid, and we were excited about the broad-based results that really were reflected in that. I think with respect to kind of intra-quarter type of stuff, I do not know that there is a lot to glean from kind of what happened in the three months. I think what, you know, what I would rest on is that we feel solid about the performance. It was broad-based. And that the pipelines are healthy as we set into the back half. But as always, we have a lot to get done in the back half. Scott Wurtzel: Got it. Makes sense. And then just as a follow-up. Hate to ask a question on AI impacts on hiring, but just in the context of even over the last, you know, 24, 48 hours, seeing some incremental announcements from enterprises around layoffs and citing AI. I am just wondering if you have any updated views on that topic. You know, impacts that AI could be having on the broader labor market? Thanks. Peter Hadley: Yeah. Thanks, Scott. I will take that one. We have seen the headlines too. I think more of the headlines I have seen actually have been more about sort of corporate realignment following, you know, a big hiring period post-pandemic. But in terms of the data we look at, we look at it obviously very closely. We look at it by industry, about 10 or 12 industry groups. We are not really seeing anything discernible there. I mean, you look at the labor market situation, certainly, the hiring levels are muted. Job openings are relatively muted. We have been talking about that now for some quarters on this call. Now what we have also been talking about though and what we still continue to see is continuing in the level of overall layoffs going on in the job market. And, certainly, lower layoffs and, you know, across the industry groups, we see a lot of consistency, if you like, in terms of where they are going and sort of areas that potentially you may think of as being more subject to being at risk with AI. We are not actually seeing in those industry verticals. So, you know, things like financial services, things like professional services, tech, and so on. You know, we are actually seeing reasonably healthy growth. So, you know, it is hard to say, but the empirical data does not really point to that happening at this point in time. Future, obviously, is yet to be determined. Scott Wurtzel: Great. Thanks, guys. Operator: Our next question comes from Bryan Bergin with TD Cowen. Bryan Bergin: Hi, guys. Good morning. Thank you. Wanted to follow-up on the international ES and compare that to the US. So Maria, I sense the incremental international focus here in your commentary, the investments you have been making there. Can you just give us a sense of how that is translating to potentially relative revenue and bookings growth of that international ES base relative to US ES? Peter Hadley: Yeah. I will take the revenue point, Bryan, and then Maria may want to comment more generally. But in terms of the revenue mix, it is not really changing. I mean, again, with the international space, the bookings that we are talking about and, for example, the 75,000 employee European bank, you know, those things take quite some time to come through to revenue generation. You know, they are large sort of enterprise implementation projects. So, you know, in terms of bookings performance, whether it is this quarter or in recent quarters, versus the, you know, having an influence, if you like, on the overall mix, not really. The mix has sort of been consistent for some time. I think the international business, as Maria said earlier, is certainly making good contributions, and we see a great growth opportunity there. But that is more over the medium and longer term than necessarily short-term influencing the revenue mix. Maria Black: Yeah. I think, Bryan, if I may just add from a bookings perspective, the focus across the entire enterprise space, inclusive of the large multinationals. So if you think of that global enterprise space kind of as large companies that are incredibly complex, that are driving large transformations, undoubtedly, the performance we saw specifically in the second quarter with respect to the enterprise space and international or Lyric in our global payroll offers were a larger contributor to the bookings narrative than perhaps in previous. But again, both of those spaces can be a bit lumpy. So to Peter's point, I think it is relatively consistent, but we have high hopes and lots of investment and focus as we continue to uniquely put together global payroll, global time, global HR, and global service into a unique offer in the market. Bryan Bergin: Okay. That is helpful. And my follow-up on ES PPC. So you just commented on the pickup here. I am curious if that was broad-based or if there were select contributors of that performance across certain client sizes? And as you just thought about the full year still roughly a flat outlook, last quarter you said you are rounding down to zero, here you are rounding up to one. Just curious how you thought about the second half, just given that pickup of trend. Peter Hadley: Yeah. It is a good question, Bryan. I think in terms of, like I was saying earlier, I think from an industry group contribution, very consistent also across the segments, our segments in the small market, small business market, the mid-market, and the enterprise space. What we do not really see is what the wider economy is seeing, which is a slowdown in the down market. Again, our base has tended to prove to be more resilient, if you like, I think, over the years. With respect to hiring than the wider small business segment. So it is really a pretty broad-based contribution, whether it is industry groups, whether it is from the segment sizes. In terms of the outlook, we had quite a lot of discussion about it. It is not an easy one to predict because we are really talking about we are very confident, I think, that we will continue to see growth. It is a question of is that growth just above or just below the half percent mark. So, you know, we decided not to adjust our guidance. I think we need to see a little bit more as I have sort of mentioned, we are talking about either tens of basis points above or one or two sort of, you know, below the half a point mark. So it is very consistent. You know, you can extrapolate, I think, sort of the ADP NER and the BLS, apply your usual, like, sort of ADP factor to that, and that is exactly what we are seeing. So, you know, I think the back half, we will see where it comes in and where it rounds to, but at the moment, it certainly looks very much like it is in and around what we have seen in the first and second quarters. Operator: Thank you. Our next question comes from Ramsey El-Assal with Cantor Fitzgerald. Ramsey El-Assal: Hi. Thank you very much for taking my question. I wanted to follow-up on Tien-Tsin's question before on margin cadence. I mean, there seems to be a few more moving parts in terms of the flow through in the second half. And given Q4 is typically a lower margin quarter for you guys. I just was wondering if you could speak to your confidence level about getting to where you need to get to deeper in the year. And just also whether there are any sort of underappreciated levers you might have access to to help things along. Peter Hadley: Hey, Ramsey. Yeah. Thanks for the question. I think, you know, I think it is really what I did say to Tien-Tsin. You know, we delivered 80 basis points this quarter. We are not guiding sort of to by quarters, obviously, but we are expecting sort of similar, you know, strong underlying margin contribution across the remaining two quarters. There is that dynamic on the short portfolio, which you can pretty easily, I think, extrapolate from our filings and our press release. We give the sort of the rates by quarter and the balances by between the portfolios, you know, in our press release. So there is clearly about a 75 basis point reduction on the yield of that short portfolio in Q3 versus last year. The other two portfolios continue as they are. So and, you know, more importantly, I think in terms of the true underlying margin expansion from, you know, from revenue growth and diligent cost management, that continues and they also obviously continue particularly cost management continues to be a lever for us. So, you know, I think we are we reiterated our range. We do that confidently in terms of our margin expansion range, and, you know, we do not necessarily anticipate any headwinds in the back half of the year absent, you know, the sort of the dynamics I have already spoken about with respect to margin expansion. Ramsey El-Assal: Okay. Got it. And a quick follow-up for me. Could you comment on the pricing environment right now? How does it feel in terms of your ability to deploy pricing? And maybe what contribution are you expecting from that in your numbers? Peter Hadley: Sure. No. I think the environment again, is very consistent with what it has been. We feel similarly confident with respect to our ability to price. Our pricing, you know, across our 1,100,000 clients. We do not just have a date in the year where we apply a price increase across the base. You know, it is feathered in, so we are halfway through the year already. I think our pricing has been very thoughtful as always, and generally well received as these things go. And, again, we are not expecting anything to deviate from what we have said before, which is around 100 basis points of contribution from price in fiscal 2026, which is a little lower, not a huge amount of difference, but a little lower than what we had in fiscal 2025 and a little higher than sort of what we were doing pre-pandemic, which was more in the half a point range. Ramsey El-Assal: Got it. Thank you very much. Operator: Thank you. Our next question comes from Ashish Sabadra with RBC Capital Markets. Your line is open. Ashish Sabadra: Thanks for taking my question. Your peer talked about a lower revenue per client. I was just wondering if you have seen anything on that front. In terms of the number of products that are obtained by your clients. Thanks. Maria Black: Ashish, I apologize that we missed the first word. Who spoke about a lower revenue per client? Ashish Sabadra: It was Paychex that talked about a lower revenue per client. So I was wondering if you have seen anything on that front or in terms of, like, just the number of products that are adopted by your clients. Thanks. Maria Black: Yeah. No. Fair enough. I am happy to comment on that with respect to I believe, the reference that they made was at point of sale, lower attach rates perhaps is the way that we would think about it, or a lower number of employees. I have not seen any of those trends. We, you know, monitor that closely, especially this time of year as we are looking at, you know, tremendous volumes, and we have not seen anything that would lead us to believe that there is a lower revenue per client or per client employee, if you will. Peter Hadley: No. No. And just to follow on to that, some of our strongest bookings performance have actually been our retirement and insurance services in that down market space. So if anything, I think we are perhaps seeing the reverse of what you were referring to. Ashish Sabadra: That is very helpful color. And maybe just another follow-up question on PEO. When we think about the bookings came in modestly below expectation, are there any particular regions or where you have seen any particular softness or in terms of, again, attach rate or employee penetration? Have you seen any color on those fronts? Thanks. Maria Black: I would say with respect to the strongest fit across the PEO markets, whether that is some of the states that have more concentration of PEOs, they continue to perform well in terms of those markets. But again, the performance is broad-based, if you will, across various industries. Certainly, the usual suspects of industries continue to fare well in terms of the strongest fits across PEO, whether that is the likes of property management, professional services. We kind of fit into that white-collar end of the PEO, maybe perhaps slightly blue-collar. So I think all of that feels normal. As it relates to the overall offer, I think the other piece that I heard a question in there, and perhaps you were not referring to it, but I will take the moment to comment on it because it is such a big contributor to the value proposition of the PEO, which is the health benefits piece and what are we seeing with respect to participation at the client employee level. What I would tell you is participation across health insurance and health offers across our PEO are healthy and remain strong, which to me is a direct reflection of the strength of the value proposition of that offer in the market. Ashish Sabadra: That is great color, and congrats on strong momentum in services. Thanks. Maria Black: Thank you. Operator: Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open. Kartik Mehta: Good morning. Maria, maybe just on PEO, in the last twelve months, have you seen a change in the type of client that is asking for PEO, in terms of are the clients larger or smaller or the type of industry any noticeable difference? Maria Black: Good morning, Kartik. No. No noticeable difference. I think the momentum across what is our strongest fit, if you will. So the PEOs that we look or the PEO opportunities that we look to bring into our PEO remains really consistent. I think that is a big piece of the strength of Automatic Data Processing, Inc. and ADP TotalSource and our offer is that we are incredibly guardrailed as well as strategic in terms of the clients that we target inside of the Automatic Data Processing, Inc. base, who we want to be in that PEO. And I would say that it is largely consistent across the last couple of decades, both with respect to size as well as respect to industry. Over time, we have pulled up a little bit in average size over the last couple of decades. Part of that is the PEO does have our best-in-class offer in the mid-market. So if you imagine the PEO sitting on Workforce Now, that stretches it into a little bit perhaps beyond just the small businesses. But again, that is relatively consistent over the decades we have been in the business. Kartik Mehta: And, Peter, just a question on AI. I know you talked a little bit about AI and maybe the impact of employment for your clients. I am wondering for Automatic Data Processing, Inc., I think you have implemented AI, I think you have had success on the sales side. Just a two-part question. Has that changed the number of people that maybe salespeople you need or made them more productive, so changes maybe the number of hires? And is it success? Of allowing you to increase investment or one leading you to increase investment in that? Peter Hadley: Yeah. Thanks for the question, Kartik. In terms of the headcount, no, we have not sort of taken a different approach to our headcount. We remain committed to growing sales headcount. We have seen over decades the contribution that that can make. What it has done to your point is it has enabled our sellers to be both more efficient and, I think, also more effective. I would still say we are in the relatively early innings in terms of taking dividends, if you like, from these investments and really seeing sort of the lift we expect to get from this over the coming years. But it is less about, okay, you know, a shift change in how we approach investing in the Salesforce or sort of where we expect sales to come from, really, it is a way that we are looking to make our salespeople more effective, more efficient, and ultimately deliver more wins. But I think you should expect us to continue to invest in both headcount and tools, be they AI and also other tools. We have spoken about, you know, the zone, which obviously is AI-infused, but it is also a platform our sellers use. All of those things, we will continue to invest in to maximize our opportunity to be successful on the sales front. Kartik Mehta: Thank you both very much. I appreciate it. Peter Hadley: Welcome. Operator: Thank you. Our next question comes from Daniel Jester with BMO Capital Markets. Your line is open. Daniel Jester: Great. Good morning, and thank you for taking my question. So maybe on Lyric, you know, it sounded like you sold a couple of quite large deals this quarter that you mentioned in the prepared remarks. Maybe can you share a little bit of color about how maybe you won those deals or how they came together? And as you think about the larger part of the enterprise for Lyric, do you have critical mass now in terms of reference customers or and are deals like this? Should we be seeing them more frequently, or maybe just any more color about the upmarket momentum on Lyric? Maria Black: No. Thank you, Daniel. I am so glad you asked. This is one of my favorite stories coming out of Q2 is the strength that we see in Lyric new business bookings. Really excited about those two deals as they do represent two of the largest. Do we anticipate and want to see more of them? Of course, we do. That is everything that we have been building toward. So that is, you know, part of our goal and our expectation. I think the part that again, also was a standout is that when you look across the pipeline, you look across the wins with Lyric, 70% of those are new logos. That is a direct correlation to how this product is resonating with CHROs, with the market at large. It is being cited not just the awards we are winning, but by the buyers. So how do these deals come together? They come together because CHROs today are looking for flexibility in their products. They are looking for dynamic tools. They are looking for products that have AI built in the fabric and in the core, not after and attached. So it is an AI-centric, human-centric platform that we build with really that worker at the center. That is unique. It is different. That is how these deals are coming together. That is how the pipeline is coming together. So you probably hear it in my voice, but, yes, we are very excited to see this, and we are building critical mass now. Again, I think Peter mentioned earlier on the international same thing on these deals. These are large deals. They will take some time to onboard to get to huge revenue contribution. But definitely material bookings contribution from Lyric at this time. Daniel Jester: Okay. That is great. Thank you. And then maybe just to go back to your prepared remarks on the customer feedback, it sounds like extremely strong, some of the highest you have seen. I guess I would love you to compare and contrast that with sort of the retention commentary that it just kind of came in line with your expectations. So if your customers really love the product and retention is coming in line, you know, any thoughts about sort of what is impacting the market in terms of exogenous factors from the macro or the competitive environment? Anything you would share on retention? Thank you so much. Maria Black: Yeah. Sure. So I will start with the client satisfaction because it is another highlight. It was a record quarter. It is a record first six months. I hope we always have records because that means that the efforts that we have to improve the experience that our clients have engaging with us, the investments we are making in those tools. Peter mentioned the zone. That is true for sales. We are also investing tremendously into AI tools for our internal associates as well as into our products to make our clients more productive and our practitioners, whether it is ours or our clients, in the HCM field, be able to navigate this space even better. So the investments into product, the investments into the tools, I would like to believe the NPS improvements that we continue to make, and by the way, they are broad-based. I think that is the other piece that stands out to me. From a structural perspective. So really excited about that, and as mentioned, it is a direct connection to retention. We do have strength in retention. That said, it was in line with our expectation, and that expectation is really how we set out the plan for the year, and Peter can comment on this as well, but we do anticipate a bit of a moderation. So it is hard to believe that six years later and I am still sitting here talking about pre-pandemic out-of-business rates there, but we are. You know, are we back to fiscal 2019 or not? And I would tell you, we are almost planning for, even in the back half of the year, a bit of moderation as it relates to things like out of business. We did see a tiny bit of that contribute to the slight decline, if you will, in the second quarter. It is right in line with how we are planning, but it is not a byproduct necessarily of the tremendous efforts that we continue to make on client satisfaction and more a byproduct of how we really structure the plan for the year. So I do not know if you have anything to add to that, Peter. Peter Hadley: Yeah. No. I think that is well said. I mean, again, our reported retention rate last year was in the US was 92.1%. So the math, obviously, on a $14 billion plus dollar business, but 10 to 30 basis points is actually a pretty small movement, if you like, that we are anticipating. As we said, our second quarter came in, you know, more or less where we were expecting. The first quarter was slightly better than where we were expecting. We will see where the back half goes. It is more a back-half story. Particularly Q3 is the most definitive period. So I think we are just anticipating, to your point, a little bit maybe more on the macro side but, again, very small margins, very small up in, as Maria said, a normalization of out-of-business levels in the small business segment, but all of this is very much on the margins given we are only talking about 10 to 30 basis points against the very high retention rate to start within a very large business. Daniel Jester: Okay. Very helpful. Thank you very much. Operator: Our next question comes from Bryan Keane with Citi. Your line is open. Bryan Keane: Hi, guys. Good morning. Just had a follow-up on PEO, Peter. Maybe you could help me understand the first quarter revenue ex pass-throughs grew at 6%, this quarter at 3%. That is a pretty big move or bigger move than usual we see between first and second quarter or just in the cadence of quarters. Is the 300 basis point delta there, maybe you could help us some of the drivers there? It sounds like maybe some of that is the softer bookings, but I did not know if there are other things at play. Peter Hadley: Yeah, Bryan. So if you take the rounding, it is actually a little less. We had some rounding up and down and what have you. But still, it is a bit of a differential. You know, there are a few factors there. One is the slightly softer worksite employees we were talking about earlier, which came from, again, from a solid but slightly below our expectations booking performance and some moderation in pays per control. The second factor is you may recall, Q2 last year, we had a bunch of pull forward of SUI revenues that we would not last year, we were anticipating in the third quarter were pulled forward just due to the way the processing calendar worked in the second quarter. We did not have that this year, so there is a bit of a grow-over challenge or challenging compare, if you like, from a revenue growth perspective as a result of that. Then the third factor we saw was which, again, all going in the same direction hence, the differential that you are referring to was wage growth. We saw a little bit less wage growth in the PEO in the second quarter. Again, this happens from time to time. I would not necessarily draw a trend that employers in that space are looking to put through lower wage increases. If anything, the third quarter is more a quarter where our third quarter being this current first calendar quarter is more when you see sort of wage rate changes if you like, for worksite employees. But yeah, just due to movements in the base clients moving out, other clients moving in, the timing of that, saw a little bit less in terms of the payroll base or the wage growth levels in the PEO. So bit of a step off from Q1. I would acknowledge that. I think though we are still positive with respect to the outlook for the year, and that is why reiterated, if you like, by the fact we did not change our guidance either with or without zero-margin pass-throughs. Bryan Keane: Yeah. I was going to ask about the guidance. I think you did reiterate the three to five ex the pass-throughs. Would we be on the lower end of the range more just given the trends or not necessarily? For the back half of the year. Peter Hadley: Yeah. I would say not necessarily, but, you know, we do not guide on the quarters, obviously, but there is a lot to be done. Again, we are in sort of prime selling season now, retention is a little bit more of a fourth-quarter play, so it is much more of a back-half story than front-half, so it is hard to sort of give, you know, clear guidance, I guess, as to where in the range we think we will finish. We are confident about being able to land in the range, but I would say at the moment, the range is there because all possibilities still exist and will depend on largely bookings and pays per control and, to some degree, retention. Bryan Keane: Okay. Helpful. Congrats on the solid results. Peter Hadley: Thank you. Operator: Thank you. Our next question comes from Dan Dolev with Mizuho. Your line is open. Dan Dolev: Hey guys. Really nice results. I think Maria, you mentioned in the beginning you are very proud of the Cash Flow Central partnership with Fiserv. Can you maybe discuss a little bit of sort of the contribution? When should that become really material? And then I have a follow-up quick question. Thank you. Maria Black: Yeah. And thanks, Dan. I appreciate the question and the nice comments about the quarter. I am really excited about our continued journey of the strategy of embedded offerings. So we have spent a lot of time talking about embedding RUN into other offerings. I think now I am incredibly excited to talk about Fiserv's Cash Flow Central being embedded into RUN. What this allows for is a small business owner to really leverage RUN powered by Automatic Data Processing, Inc. as a one-stop-shop platform where they have the ability to run payroll, they have the ability to do bill pay, APAR. They have the ability to pay contractors. They have the ability to pretty much pay everyone in one single platform. Other technology, we believe in this ecosystem approach. Anytime you can come together with to make it easier for a small business owner to navigate the work that they need to do is something that we are incredibly interested in, and it is, you know, part and parcel to the embedded strategy, whether it is putting RUN into other ecosystems or leveraging others' best-in-class offerings into our platforms. So really excited about it. That said though, we did just complete that integration in December, and so there is not a lot of contribution yet with respect to revenue and or bookings. So that opportunity is largely in front of us, which also makes me incredibly excited as we can continue down the journey of embedded. Dan Dolev: Great. Thank you. And I have, like, a little bit of a longer-term question. I think one of the key concerns obviously not ours, is sort of the long-term terminal value in sort of an AI-driven, you know, white-collar, you know, job-killing world, like software engineers, etcetera. Like, I am sure you guys are very I mean, you have been around for decades. Automatic Data Processing, Inc. has been around for decades. Like, are you guys working, I am sure, internally about sort of the more, like, the three to five-year outlook? How can Automatic Data Processing, Inc. add value or how, you know, changing kind of the framework if the AI thing does reduce long-term jobs. Just maybe some long-term comments would be great. Maria Black: Yeah. Absolutely. I am happy to start. And then, Peter, you know, if you want to chime in, kind of from a terminal value and things of that nature and things we may or may not be modeling. But I think maybe I will start with the things that I think every day about, which is the, you know, some level, like, the beauty of this business when I think about what it is that we do, which, as we have talked about, at investor day, we continue to see each and every day. What we do is not discretionary. What we do is an imperative, paying people on time and accurately is not just a brand promise. It is candidly how the whole world goes around. So I think deeply about what does that look like in the future. You said it well, which is Automatic Data Processing, Inc. has navigated many of these innovation cycles. We have been around for seventy years. So if you think about how payroll was processed seventy-six years ago to where it is processed today, a lot has changed. Work has changed. Workflow has changed. I spent the last week over at the World Economic Forum. And as I walked up and down the promenade, you know, this concept of AI changing workflow and augmenting the work as it automates tasks, that is real, and that is happening. And we see that. We see that in our business. We see that in our clients' business. But we also see that it has to be still anchored to, call it, human centricity. The world of work is a human place. What we do is probably the most emotional part of humanity, which is connecting people to their purpose, connecting people to their work. By the way, the way to test that is if you ever want to really upset somebody, you know, get their payroll wrong or, you know, get something with respect to benefits wrong. And so what we do will continue to evolve, and I think we are right there with it. That is why we are really excited about the work that we are doing across each of the domain disciplines of HCM with respect to AI. I talked about it in the prepared remarks. Having ADP Assist agents in payroll, in tax, in benefits, in, you know, all of these different areas will continue to change how work happens, whether that is for us or our practitioners. But at the end of it, you know, the other thing I think a lot about, whether it is, you know, this last week during the snowstorm or, you perhaps on December 23 when one of the largest global clients in the world had a challenge with payroll on their end. You know, do I see a world where a bunch of humanoids are going to be sleeping in offices to get payroll done and navigating things to ensure that people get paid accurately and on time without people involved. You know, candidly, I cannot see it. So I think workflow is changing. Yes. Are we prepared to continue to innovate in that space? That is exactly what we are doing, but I also believe what we are doing and what many companies do outside of Automatic Data Processing, Inc. is anchored in humans. And so, you know, only time will tell. Truly what the future holds, but we are navigating this innovation cycle at a rapid clip no different than all the other ones that Automatic Data Processing, Inc. has navigated. Dan Dolev: Great. Thank you for this. We believe in you. Maria Black: Thank you. Appreciate that. Operator: Thank you. This concludes our question and answer portion for today. I am pleased to hand the program over to Maria Black for closing remarks. Maria Black: Well, funny enough, I think those probably serve as pretty good closing remarks. I will only add one piece, which is exactly where I started, is thanking our associates because it is our associates that are innovating. It is our associates that are showing up for our clients, whether that is at the holidays to get things done, or it is weathering snowstorms to get things done. I am really proud of the work that we are doing. It is a direct reflection of how we get recognized by companies like Fortune for twenty years in a row as the most admired companies. I am in awe of the Automatic Data Processing, Inc. spirit and how human the work that we do and how it shows up, and I am really proud of that. And I just want to once again acknowledge our associates and thank everyone for their interest. Operator: Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Morning. My name is Daryl, and I will be your conference operator today. I would like to welcome everyone to Starbucks First Quarter Fiscal Year 2026 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question and answer session. If you would like to withdraw your question, please press star, then the number two. I will now turn the call over to Catherine Park, Vice President of Investor Relations. Ms. Park, you may now begin your conference. Catherine Park: Good morning, and thank you for joining us today to discuss Starbucks first quarter fiscal year 2026 results. Today's discussion will be led by Brian R. Niccol, Chairman and Chief Executive Officer, and Catherine R. Smith, Executive Vice President and Chief Financial Officer. This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factors discussed in our filings with the SEC, including our latest annual report on Form 10-K and quarterly report on Form 10-Q. Starbucks Corporation assumes no obligation to update any of these forward-looking statements or information. GAAP results in the first quarter fiscal year 2026 include restructuring and impairments, and transaction costs that are excluded from our non-GAAP results. Revenue, operating income, operating margin, EPS, and EPS growth metrics on today's call represent non-GAAP measures and are measured in constant currency. G&A and effective tax rate metrics also represent non-GAAP measures. Please refer to the earnings release and our website at investor.starbucks.com to find reconciliations of these non-GAAP measures to the corresponding GAAP measures and supplemental financial information. This conference call is being webcast, and an archive of the webcast will be available through Friday, March 13, 2026. Also, for your calendar planning purposes, please note that our second quarter fiscal year 2026 earnings conference call has been tentatively scheduled for Tuesday, April 28, 2026. I'll now turn the call over to Brian. Brian R. Niccol: Good morning, and thank you for joining. I look forward to seeing many of you tomorrow for Investor Day, where we will lay out our future vision for the company, our path to sustained growth and profitability, and how we plan to deliver the best of Starbucks Corporation for our customers, partners, and shareholders. Today, though, I want to focus on the continued progress we've made on our Back to Starbucks plan and the momentum we've built across the business through Q1 fiscal 2026. I'm most excited that our turnaround plan is coming to life in the way we envision. First, turnaround the top line, and then earnings growth will follow. And I am delighted to say we are now achieving top line growth driven by transactions, and we have clear plans on how we expect to turn top line growth into margin and earnings growth. We started the fiscal year strong with a focus on disciplined execution at scale. As a result, in Q1, global revenue grew by 5% to $9.9 billion, and global comparable store sales accelerated to 4% growth. We delivered 128 net new coffee houses globally, and we delivered operating margins of 10.1% and EPS of $0.56. Our North America revenue grew 3% in the first quarter to $7.3 billion. Across North America as a whole, and our U.S. business, company-operated sales comps were both 4%, led by three percentage points of comp transaction growth. And across our international business, sales comps grew by a healthy 5%, led by strong performance across our company-operated markets in China, Japan, and the UK. In the U.S., where much of our turnaround work has been focused, company-operated transaction comps grew year over year for the first time in eight quarters, and we grew transactions across all dayparts in the quarter. Starbucks Rewards ninety-day active members reached a record 35.5 million customers during the quarter. Rewards transactions grew year over year for the first time in eight quarters, and non-rewards transactions grew even faster. In fact, this was the first quarter we grew both rewards and non-rewards transactions since 2022. That's nearly four years ago. It is clear from our top line results that our Back to Starbucks plan is working, and our turnaround is taking hold. As we return to growth, we can also see more clearly where we will improve further. Over the past several months, we have surfaced legacy models and processes in our business that we are now fixing. For example, transaction growth has shown us continued opportunities to strengthen our supply chain and reevaluate menu offerings to ensure product availability while reducing future waste. We will keep moving with speed to identify and implement practical changes like these that we know are good for our customers and for our business. Also, continuing to refine our labor model because we see some opportunities to fine-tune it based on store format and performance. There's also an opportunity to better enable efficiencies with technology solutions in our coffee houses and across our support centers around the world. We're pleased with our progress, and we believe we remain ahead of schedule. And we're confident on our path forward. But we also recognize that we're still in our turnaround. And as we expected, the strategic investments we're making to fix our operating foundations will take time to flow through to sustainable earnings growth. A key piece of our path forward is technology, and I'm excited to share that Anand Rerudharajan recently joined Starbucks Corporation as our new Chief Technology Officer. Anand joins us following a successful nineteen-year career at Amazon, where he most recently served as President of Worldwide Grocery Technology. I am confident his leadership and knowledge will result in step-change improvements across all our technology platforms. I want to use the remainder of my time today to share with you what we've done to drive line growth through Q1 and why I'm confident we're on the right track to deliver improved growth in fiscal 2026 and beyond. First, our Green Apron service standard continued to improve our coffeehouse experience, creating value for our customers and underscoring our growth potential in North America. Through the quarter, we leveraged bigger rosters, new customer service standards, continued low hourly partner turnover, and our SmartQ algorithm to deliver more consistent, timely, and personal service. As a result, across our U.S. company-operated coffee houses, positive customer comments grew in the quarter. All day and peak throughput steadily increased. We addressed throughput challenges during peak with average cafe and drive-through service times both below our four-minute targets, even with meaningful transaction growth. And we brought order to mobile orders, ensuring they remained accurate and on time. To instill more ownership of the coffeehouse experience and the results they deliver, we rolled out new expectations for coffeehouse leaders to stay enrolled for at least three years. That's because we know leadership continuity strongly correlates to a better culture and improved coffeehouse performance. We also launched the Grow program, a simplified reporting system to evaluate, rank, and improve coffeehouse performance, measuring five key metrics that closely tie to comp growth and are within coffeehouse leaders' control. While it's only been a few months, leaders across our North America operations are already using the new report to help them better run their coffee houses and take ownership of their action plans to improve performance. To better support our Green Apron partners, we fully scaled Green Dot Assist across our North American coffee houses this past November. This new AI-powered knowledge search tool provides a real-time resource to look up beverage builds, troubleshoot operational issues, and adjust deployment plans. It also provides a strong foundation to test and learn, then develop and scale thoughtful AI solutions that reduce friction for partners and help them focus on craft and connection with our customers. Second, our overhauled approach to marketing and menu innovation is putting Starbucks Corporation back in the cultural conversation and back into a leadership position. Including our barista mug, our holiday offering featured an exciting menu and new merchandise, which created real energy and buzz that drove more customers into our coffee houses. Our partners also showed up with enthusiasm and a desire to connect with our customers, delivering a record revenue holiday launch week for our U.S. company-operated business and driving sustained performance through the quarter. We also saw brand performance improve. Brand affinity in the U.S. remained strong during the quarter, with continued improvements in visit consideration and Starbucks Corporation ranking as a customer's first choice. Connection scores improved, with more customers saying our partners make an effort to get to know them. Convenience scores improved significantly as customers responded to our Green Apron service standard and improved in-stock levels. And more customers said Starbucks Corporation offers great-tasting food and healthy menu choices. Value perception scores also held strong in Q1, and when paired with average ticket growth, it clearly shows that we're delivering greater value through menu innovation and customer connection, not through discounts. These are all clear signs that we are creating a more valuable brand for more customers. Going forward, we will continue to build on Starbucks Corporation's proven seasonal strengths with engaging marketing, on-trend menu innovation, and seamless digital experiences that work together to create moments our partners can deliver with excellence and our customers want to be a part of and share. Third, we continue to scale our coffeehouse uplift program, bringing more warmth and great seats back into our coffeehouses. Today, we've completed approximately 200 uplifts, primarily in Southern California and New York City, and we're on track to complete more than a thousand by the end of 2026. We believe these investments in our cafes and the customer experience will continue to have a positive impact on our business as we reclaim the third place. Within our international segment, we grew revenue by 10% to $2.1 billion, and we grew comps in nine of our 10 largest international markets, underscoring the strength and resilience of the Starbucks Corporation brand globally. China was a standout. Comps accelerated to 7%, marking our third consecutive quarter of comp sales growth led by transactions. This performance reflects the progress we are making to strengthen our competitive position as the leading premium coffee brand in the market. Looking ahead, we are sharpening our focus for our long-term future in the region. During the quarter, we identified Boyou as our partner to maximize Starbucks Corporation's potential in China. This partnership will help us expand into more cities, deliver exceptional coffee experiences, create new career opportunities for partners, and strengthen Starbucks Corporation's position as a global brand for long-term growth. We continue to expand our footprint with discipline and pace. In the first quarter, we opened 79 net new international coffee houses, reflecting 130 net new licensed coffee houses and 51 net closures in our company-operated business. India crossed 500 coffee houses, and we announced expansion into six new cities in our Latin American and Caribbean markets, along with plans to surpass 1,000 coffee houses in Mexico this year. International remains a powerful growth engine for amplifying the Starbucks Corporation brand, and we are confident in our ability to deliver consistent, profitable growth in this business longer term. So to conclude, we've continued to build momentum across our business through Q1, and we are clear on our long-term vision. We will be the world's greatest customer service company, will offer the best job in retail, visible, relevant, and loved everywhere. We will be the community coffee house. Our brand will be We will accelerate growth around the world. And finally, we will deliver on our commitments to create shareholder value. As a result of our disciplined work over the past eighteen months, we are now delivering the top line results we set out to achieve. And we're creating the room we need to invest thoughtfully in our future. As I said last quarter, we have a plan, we have been working the plan, and the plan is working. Our work is not done, and we are clearly in the early stages of our turnaround. And we have clear plans to maintain our top line performance while improving the foundations of our business. I don't expect the path forward to be linear, but we will continue to test, learn, and refine our approach to deliver the best of Starbucks Corporation, drive durable, profitable, long-term growth. Before I turn it over to Kathy, I want to thank our partners across our coffee houses and support centers around the world for their continued focus and relentless effort to execute with excellence. Our Back to Starbucks plan is the strategic currency of our turnaround. And their work is the foundation of our progress and our performance. Together, we've grown comps and transactions. Brand affinity and customer connection is strong. Our innovation pipeline is stacked with breakthrough menu items and new digital experiences. And the shine is back on our brand, both in the U.S. and around the world. With that, I'll turn it over to Kathy to walk us through our Q1 financial results and to share our fiscal 2026 guidance. Catherine R. Smith: Thank you, Brian, and thank you all for joining us this morning. We made meaningful progress in the first quarter as we executed our growth priorities to build long-term strength in the business. I'm incredibly proud of how our partners showed up for our customers throughout the holiday season. And I want to thank them for their dedication and hard work. I'll now share our Q1 results and then provide additional insight into how we're setting up for the months ahead. Our Q1 consolidated revenue was $9.9 billion, up 5% from the prior year, reflecting one net new company-operated store growth and a 4% increase in global comparable store sales, driven by strong performance across both our North America and International segments. Our North America segment revenue grew 3% in the first quarter to $7.3 billion, with comparable store sales growing 4%. In the U.S., our comparable store sales growth also accelerated to 4%, with transactions up 3%, fueled by the first full quarter of Green Apron service embedded in the daily operations of our company-operated coffee houses. Average ticket grew 1%, driven by a growing mix of espresso and tea-based beverages alongside the continued rise in the popularity of our cold foam platform. Our U.S. comp performance is a compelling proof point for our Green Apron service standard, menu innovation, and marketing efforts. This combination drove broader reach and deeper engagement with customers, as evidenced by our ninety-day active Starbucks Rewards member base growing 3% year over year to an all-time high of 35.5 million members. And as Brian mentioned, our Starbucks Rewards member transactions grew year over year in Q1 for the first time in eight quarters, and non-Starbucks Rewards customer transactions grew even faster. Our U.S. licensed store portfolio revenue declined in Q1, primarily due to ongoing trends within the grocery and retail channels. Steady growth across other areas of our portfolio, including business and college and universities and healthcare, continued to serve as partial offsets. Overall, our North America portfolio increased by 49 net new coffee houses to reach 18,360 at the end of the quarter. Moving on to international. The segment reported $2.1 billion of net revenue in the first quarter, growing 10% year over year. International's comp growth of 5% was led by transactions, as customers celebrated the holiday season with Starbucks Corporation around the world. Most of our largest international markets, including our company-operated businesses in China, Japan, and the UK, contributed to our comp sales performance in the quarter. China continues to showcase strong momentum. Starbucks China's comparable store sales grew 7% in Q1, with a 5% improvement in comparable transactions powered by product innovation, effective marketing, and continued growth in delivery. In our Channel Development segment, our Q1 net revenues grew 19% year over year, due to higher revenue from the Global Coffee Alliance, as well as our ready-to-drink business. In the first quarter, we launched our new multi-serve refreshers concentrate in our North America market, which was met with incredible demand. We will continue to work with our partners to innovate, to maintain our leadership position in the North America at-home and ready-to-drink coffee categories. Shifting to margin, our Q1 consolidated operating margin was 10.1%, contracting 180 basis points from the prior year. This was led by North America's operating margins, which declined by approximately 420 basis points year over year, primarily as our investments in support of Back to Starbucks continue to annualize. Approximately a third of North America's margin contraction was also driven by our product and distribution cost inflation, led by tariffs and elevated coffee pricing. As our fiscal year progresses, we are expecting these pressures will begin to abate. Consolidated G&A in the quarter decreased 7% as our work to streamline the business last year begins to actualize this fiscal year. Our Q1 effective tax rate of 26.8% was higher year over year, primarily driven by lapping some discrete tax items from last year. All in, our Q1 EPS was $0.56, down 19% from the prior year. I look forward to providing our longer-term targets at our Investor Day tomorrow, but today I'll focus on fiscal 2026. But before I do, let's spend a few moments on China. In November, we announced an agreement to form a joint venture with Boyu Capital to more strategically capture the significant white space we continue to see in China. Under the agreement, Boyu will acquire up to a 60% interest in Starbucks Corporation's retail operations in China, and Starbucks Corporation will retain a 40% interest in the joint venture. We will also continue to own and license the Starbucks Corporation brand and intellectual property to the JV. We currently expect to close in the spring of this year, subject to regulatory approvals. For your modeling purposes, here are some considerations for how this impacts our financials in the near term. In Q1, we classified the assets and liabilities of Starbucks Corporation China's retail operations as held for sale. This required us to cease property, plant, and equipment depreciation and right-of-use asset amortization, resulting in reduced DNA and store operating expenses. This means starting in December, we are recording $39 million less in monthly expenses than we otherwise would have recognized prior to the announcement. We expect these dynamics will likely continue through the transaction close date. Upon closing, we expect Starbucks Corporation China's retail operations will fully deconsolidate from our consolidated financials, and we expect to convert our 8,011 company-operated coffee houses to licensed stores within our international segment. Under the equity method of accounting, Starbucks Corporation will record our 40% share of income from the joint venture recognized as income from equity investees. We will also collect revenues from the joint venture for sales of coffee and other products, as well as royalty revenues. Our proportionate share of gross profit resulting from these revenues will also be included in income from equity investees. Turning to our outlook for the year. As we assess our Q1 results, we're seeing exactly what we want to see in our top line at this point in our turnaround. And we are pleased with our continued comp strength in January as well. Our strategy is working and gaining traction. We have always said that we expect the top line to come first and then earnings will follow. As such, our guidance reflects strategic flexibility to leverage our growing top line as we uncover opportunities to further strengthen the business longer term. For fiscal 2026, we expect 3% or better global comp sales growth, led by 3% or better comp sales in the U.S. as well. In fiscal 2026, we expect approximately 600,000 to 650 net new coffee houses as we work to rebuild our development pipeline. This includes 150 to 175 net new U.S. company-operated coffee houses, a slight decrease in North America licensed coffee houses, and 450 to 500 net new international coffee houses, of which China comprises close to half. We plan on providing more details of our accelerating pace of growth beyond this year at our Investor Day. We expect our consolidated net revenues to grow at a similar rate to global comp growth for the full fiscal 2026, as our portfolio repositioning at the end of fiscal 2025 offsets our new store openings. We expect consolidated operating margins to grow slightly year over year, driven by improvements in the back half of the year. Remember that our quarterly margin rates follow natural seasonality in the business, and our second quarters are usually the lowest margin quarters of the year. Our expectations for margin improvement are driven by the following. First, we will anniversary our Green Apron service investments in Q4. Second, we expect sales leverage builds as we continue to refine and our Back to Starbucks initiatives and improve our supply chain. And third, while market dynamics can change, we continue to expect coffee prices and tariff pressures to peak in Q2 and find some relief in the back half of the fiscal year. Following our structural reorganization last fiscal year, partial offsets to our investments, we expect fiscal 2026 consolidated G&A dollars to run below fiscal 2023 levels, providing We also expect continued discipline on costs more broadly and to find more efficient ways of working across our broader organization around the world. Our EPS guidance of $2.15 to $2.40 reflects our measured approach investing strategically in the first half to establish momentum then building on our work for growth in the second half. Note that our guidance contemplates business as usual China operations in 2026. We have taken this approach as we believe it provides the cleanest view of our expectations for the underlying business. Furthermore, the timing of close and our use of proceeds from the transaction can influence certain P&L line items, increasing variability in our results. That said, if we assumed a joint venture structure for 2026, we expect slightly lower consolidated revenues and comps, partially offset by slightly better consolidated operating margins relative to our original guidance. And on an annualized basis, we believe that the new structure could be approximately 40 basis points accretive to our consolidated margins. While subject to change, we currently plan to use our transaction proceeds for debt reduction, strengthening our balance sheet, and allowing us to execute our long-term growth strategy with greater financial flexibility. Collectively, we expect the transaction to have a $0.02 to $0.03 dilutive effect relative to our current EPS guidance. In summary, our Q1 performance demonstrates the momentum that we're building in our business and gives us confidence we're on the right path. It's also clear that our work isn't done. We remain focused on driving top line performance and managing our costs to deliver sustainable, profitable long-term growth. And we look forward to speaking further about our future vision tomorrow at our Investor Day. And with that, we are ready to take your questions. Thank you. Operator? Operator: Thank you. And we will come back for follow-up questions as time allows. Our first question has come from the line of David E. Tarantino with Baird. Please proceed with your questions. David E. Tarantino: And congratulations on the progress you're seeing. I had a question about the North America traffic performance. And maybe first, if you could perhaps clarify how much benefit you might have seen from the transfer of the sales from the stores that you closed during, I guess, September. And then, to just kind of give us some sense of kind of what the underlying improvement was in the business? And then secondly, I guess, Brian, could you maybe frame up what you're seeing in some of the earliest stores that got the Green Apron service model and whether those are continuing to ramp in terms of the traffic benefit from that service model? Thanks. Brian R. Niccol: Yeah. Good morning. Thanks, David. And so to answer your first question, what we're really delighted about is the North American comp result is driven by transactions. And specifically, the fact that both non-rewards customers grew transactions and rewards customers grew transactions. So two things happen. People came back to the brand. And we also drove engagement or more frequency with our existing customers. So that's a really strong foundation. To answer your specific question, about a half a point was driven by, call it, the sales transfer. In the comp is what we are seeing. So you know, the strength really is broad-based. Other thing that I love is we said from the beginning we wanted to win the morning. And that is exactly what we're seeing. You know, our partners have done a terrific job of staffing and executing the Green Apron service experience in the morning and, frankly, the balance of the day because we're growing transactions throughout the entire day. But the place where we saw the biggest move was in the morning. And then in regard to your question about the pilot stores, this is actually something that we're really excited about. Our 650 pilot stores continue to outperform the fleet by about 200 basis points in comp. We're seeing most of that is well, it is all pretty much driven by transactions. So what we continue to see is a great customer service experience in a great place with our partners doing their craft continually resonates with customers. And then I think you heard me talk about this too. I think we're just getting the brand back on its front foot both in its marketing communication and also the innovation that we're bringing forward. So I'm really delighted by where we are in this phase of the turnaround. David E. Tarantino: Great. Thank you. Operator: Thank you. Our next question comes from the line of Brian James Harbour with Morgan Stanley. Please proceed with your question. Brian James Harbour: Yes, thanks. Good morning, guys. I think sort of inherent in what you talked about was some additional cost opportunities, and it sounded like that's this year, but also over the next couple. Could you elaborate on some of those will be and what you expect the timing to be? Brian R. Niccol: Yeah. So I'm sure you guys probably saw this in some of our materials that have been released of late. We've got a clear plan in place to basically track down about $2 billion of cost. You know, we really started that work in 2025. I think it's gonna unfold over the next two years in front of us. And so, you know, it really is across the entire P&L. You know? So, obviously, we've made some progress on G&A. We're gonna continue to make progress in procurement efforts. We think there's tremendous opportunity with using technology to drive efficiency in the work that we're doing. And the thing that I love is this is really to Kathy's credit and the team, is it's not just one project that we're counting on. Okay? We've got a list of projects with people's names next to it, clear deliverables, and the thing I love about the power of our organization is when one idea doesn't work, we get another idea that's up. And so that's what gives us confidence to be able to deliver on the cost side of things while we continue to drive the top line. So it's gonna be an ongoing program. We've identified the $2 billion over the next couple of years here. But I will tell you, it's something that we're gonna be unrelenting, and it's gonna be a consistent piece of our program going forward. Operator: Our next question comes from the line of David Sterling Palmer with Evercore ISI. Please proceed with your question. David Sterling Palmer: Thanks. Good morning. I wanted to ask a little bit about the earnings guidance for fiscal 2026. Perhaps if you think there's some elements that you would like us to appreciate that might not be so obvious, love to hear about that. And relatedly, the earnings guidance seems just a little wide, a little wider than I would have thought. What scenarios do you think would get you to the high end and the low end? Are those two scenarios look like? And thanks. Brian R. Niccol: Yeah, sure. Thanks, David. So the thing that gets us to the higher end is maintaining the performance on comp. First and foremost. And, you know, that's why we're really excited about the underlying strength that we're seeing that's driving the comp. And then, obviously, we're gonna continue to do the work on the cost side of things. But, really, here in the near term, it is going to be driven by comp, is gonna be supported by terrific execution on the Green Apron service model, the marketing menu innovation. And I think you'll hear it at our Investor Day, all the comp drivers that, frankly, we have, across digital, rewards, menu, I'm really optimistic about our future. But that's gonna be the key piece is we gotta continue to drive the top line. And we need to do it in a healthy way so that we maintain the integrity of the experience and we give our customers access to the food and beverage that they want to experience in a Starbucks Corporation. Operator: Our next question comes from the line of Lauren Danielle Silberman with Deutsche Bank. Please proceed with your question. Lauren Danielle Silberman: Congrats on the quarter. I wanted to unpack some of the same-store sales momentum. The non-rewards member growth outpacing rewards member growth, I think over the last several quarters. Great to see the rewards member back to positive. What's driving the differential between the two? And what do you see as the biggest opportunities to narrow the gap? That's how you think about it? Brian R. Niccol: Yeah. Yeah. So thanks for the question. This is something that when I first came into Starbucks Corporation, I wanted to address because I had seen non-rewards customers declining for a consistent trend, and that's never healthy in a business. You have to win both with your rewards customers and call it the light or infrequent customer. And so when Tresi and I set out to discuss how we get back on our front foot, we knew we had to make sure that we had the marketing that was broad, we had to have the message about Starbucks Corporation that was broadly appealing. And I think that's what we're seeing happen with customers. And then, look, the innovation, I think, has been on trend. We're getting back into culture, leading culture. You know, most recently, the barista mug was a I would call it, a lucky strike extra. You know, Tresi would say that was intentional. But, you know, it is one of those things where you have to be relevant leading culture so that you get the infrequent customer to hopefully grow with your brand. And the thing that is exciting to see is our rewards customer user base is getting bigger. So, you know, we surpassed 35 million, and what is great about what's happening in a rewards customer is it's through better engagement that we're getting people to be active, not through discounting and couponing, but rather giving people the Starbucks Corporation experience, the thing that really makes Starbucks Corporation unique, which is our personalization. So when we do that personalization through the rewards program, we get rewarded with more visits from those customers. Then I think you're gonna hear really exciting things about the rewards program at our Investor Day on how Tresi and the team are going to make that program feel like it is made for you. And I think you'll see us have a step up in performance with our rewards program as a result without letting up on driving our non-rewards customer as well. I almost hate calling it non-rewards customer because they're just as valuable. Every customer matters and every transaction matters. We're gonna give that type of experience to everybody so that they know they matter. Operator: Thank you. Our next question comes from the line of John William Ivankoe with JPMorgan Chase. Please proceed with your question. John William Ivankoe: The question and really this is observation-based. Certain coffee chains have kind of separated both in the U.S. and around the world, their morning execution from the afternoon execution. And I'm really wondering what kind of opportunity that might mean for Starbucks Corporation, morning that might be faster and more consistent, but afternoon, that might be more innovative, specifically around, you know, for example, you know, handcrafted blended energy is just, you know, one idea. So if you could kind of address that theme of AM versus PM daypart execution? And secondly, and I think this is related, there's a lot of competition in this space that's accelerating, in fact, some markets, almost all of it is drive-thru and takeout focused. I'm wondering if that's something that that's really on your competitive radar at this point and if there's anything specific that Starbucks Corporation should do or could do to perhaps blunt some of the sales momentum that some of these chains are seeing? Thank you so much. Brian R. Niccol: Thanks, John. So first to answer your question on the afternoon day versus the morning daypart, you know, I think the way we think about it and the customer thinks about it is the morning is very much a ritual. There are a lot of habits that people have versus the afternoon is really a reset. And depending on where you are in that reset, you sometimes want a blended drink. You sometimes want an energy drink. You sometimes want a sparkling drink. Okay? And you sometimes want protein. And what you're gonna see us do, and this is why I'm really excited, we're gonna finally be done rolling out digital menu boards. It'll be across our entire system. It will allow us to daypart the menu. And drive against these two key insights. Right? The afternoon is a reset. The morning is a ritual. And in the afternoon, you're gonna see us, and Tressie's gonna be talking about this, we will have customized energy. We will have sparkling energy. We will have those indulgent drinks that people want. Right? The frappuccinos that we've made famous. And we will also have food that complements it. That's very much on trend. So the good news is we've got a strong base already in the afternoon. I just think there is tremendous opportunity to unlock that afternoon daypart further. Having more relevant beverages, for how people wanna reset in their day and then also complement it with food then we're gonna use, I think, the traditional tactics you would do in order to market and merchandise that we are the right solution for that afternoon. And, frankly, some of these places we've been slow to develop. And so it presents a tremendous opportunity for innovation pipeline to address it. Your question on drive-thru, mobile order pickup, you know, one of the things that I've been really excited about is it really is an entire ecosystem, John. When we've got the cafe, the drive-thru, and mobile order pickup all working together, we are unmatched. Okay? And when I put that execution on any street corner, I am confident we will win. And there's an opportunity for us to put a lot more stores with that ecosystem all across the country and be very competitive. So you know, Mike and Meredith, they know our goal is to put our entire ecosystem through, I think, cost-effective buildings that ultimately our partners can run with excellence, and give our customer experience that they want. Because I know customers want those moments in the cafe, they want those moments in the drive-thru, and they want those moments for mobile order pickup. And we can do all of it. And we can do it with excellence. And so I really like where we're headed, and I'm excited about how our pipeline is being rebuilt. And as we get back to building at the clip that we're capable of, because we will have people capability as well to go with that building. So thank you for the question because it really is areas that I think drive a lot of opportunity in this business. Building, you know, the drive-thru cafe, mobile order pickup, experience with our cafes, and then really building out an afternoon daypart. On the strength of our morning daypart. I think, is just tremendous upside for us. John William Ivankoe: That's great. Thank you so much, Brian. See you tomorrow. Brian R. Niccol: Yeah. Operator: Thank you. Our next question comes from the line of Sara Harkavy Senatore with Bank of America. Please proceed with your question. Sara Harkavy Senatore: Thank you. A question on another question on same-store sales and then a clarification, I think, on Kathy. One of your comments. So just on same-store sales, you mentioned kind of service. I think that it sounds like service, you know, Green Apron maybe a couple of hundred basis points if you could disaggregate it. Maybe you could just talk a little bit about as you think about the comp, how much was maybe the service versus innovation, you know, versus marketing? I know that's a hard thing to do, but just as I think about sort of the sustainability of the comp going forward. And then Kathy, you mentioned guidance embeds flexibility to, I guess, to identify projects. I interpret that as perhaps investments as well as savings. So just wanted to make sure I understood. Is it, you know, plausible that you might find additional investments that you want to make this year in addition to the kind of annualizing the $500 million in the labor model? Thanks. Brian R. Niccol: So I'll take the first part of that, and then I can hand it over to Kathy. On the second part. So the first part is, you know, you kind of ended your question. It's hard to separate these out. But what I can tell you is a strong operating foundation makes all the other initiatives that much more effective. Right? So, you know, we would not have had the holiday experience that we had with the innovation that we had if we did not have our partners executing the Green Apron service model. And we heard it in the customer feedback. Right? The customer feedback was, hey. Something's different, and it's different in a good way. You know? I love how Mike says this. Like, you're gonna see our partners with eyes up. You're gonna see our partners moving towards customers. You're gonna see our partners wanting to make sure that their craft is, you know, being experienced the way it's intended to be experienced. And so, you know, we heard it over and over again. We had the lowest level of customer complaints we've seen over the last couple of years. We've also seen that customers felt the speed or the convenience. So I think these are all service things. And then we also heard things like, hey. Your menu is much more relevant. It seems more health relevant. It seems more flavor relevant. And so, you know, that's a sign that the marketing is working, connecting. And then also, you know, I don't want to walk past the fact we've put seats back into our cafes. We've not put uplifts everywhere, but we've tried everything we can to get at least seats back in our cafes. And you know what? Every cafe I walk into, guess what? People are sitting in those seats. Enjoying a cup of coffee, or a beverage, and dwelling. And that's what we want to have happen because when you walk into a cafe and grab a mobile order to go, and it's full of seats, you feel better about your purchase decision. Just do. And if you're driving through the drive-thru and you see through the window a thriving cafe, you know, I think we all have had these experiences where it's like, well, on Saturday when I'm walking the dog, I'll probably stop by the Starbucks Corporation and linger. So, you know, it really is working in harmony. It was why it was so important that we get the operating foundation strong, and that then we ultimately dial up the marketing and the menu innovation. So it's hard to distill it, What I can tell you, though, is the fact that they're both working together is why we're seeing the transaction performance that we're seeing. And then on your question about the cost side, I'll hand it over to Kathy. Catherine R. Smith: Yeah. Good morning, Sara, and look forward to seeing you tomorrow. When we talked about having flexibility, it's really about our first objective is to make sure we're supporting the business. And so we're gonna continue to do that in our Back to Starbucks strategy and our plan. And so we want to make sure we've got the right flexibility to do that. You'll hear this again tomorrow, but this is not about broad-based cost-cutting. We are making sure we invest in what matters most. And so we want to make sure that we've got that flexibility inside the P&L and our guidance. Obviously, we've talked about the Green Apron service investment we're doing. We'll continue to evolve our supply chain, which will have little bits of investment here and there, but we equally see the opportunities for reduction or savings there as well. And all of that's embedded inside of our guidance. Operator: Thank you. Our next question comes from the line of Jeffrey Andrew Bernstein with Barclays. Please proceed with your question. Jeffrey Andrew Bernstein: Great. Thank you very much. As I think about the U.S. portfolio, comp growth is often volatile, but the unit growth is more stable in terms of a revenue driver over time. Brian, I think you just mentioned putting more restaurants on corners across the U.S. and being able to still win versus the competition. Just wondering if you could talk conceptually about one, the rate of reacceleration in the U.S. and two, kind of how you think about the opportunity over time? I think last year, you mentioned talking about doubling the long-term store counts. I'm just wondering how you think about that whether there's some sort of penetration analysis that you've done to give you that level of confidence and kind of the cost versus return analysis? Any color at least conceptually in terms of the glide path to reacceleration and where you could ultimately get to would be great. Thank you. Brian R. Niccol: Yeah. Yeah. Yeah. Thanks for the question. And, you know, obviously, we'll get into a lot more of the details on the new unit growth opportunity both in the U.S. and around the world tomorrow. What I will say right now, though, is, like, there are thousands of sites that we've looked at, and I've identified right now. So there's no barrier on unit growth. Frankly, the issues we needed to address was making sure that we're building the right unit, and we had the people capability to open up those new units successfully. And so we put both things in place. Right? We're gonna have, what we're calling now coffee house coaches, which are assistant store managers. That's gonna be a pipeline to enable new store openings from a people standpoint. Right? Because it also creates, I think, a great career path for our partners on their path to becoming a coffee house leader. And then it also allows us to have more stability in the system while we add new units versus what I saw when I first got here is new units were very disruptive on our people. And we can't have that happen. The other thing that we're addressing is the build cost and the actual, I would say, flow that we're going to build. And so I love the new building. We've called it the Ristretto. Right? We've got the tall and grande executions on that Ristretto, and then we also have a PICO Version Of The Ristretto. And so I love the fact that we got flexibility in the size and we can execute all of our access modes. And then we've got the people capability system set up to also then support the people that you need to open these stores. But we'll get into a lot more of these details tomorrow. I just leave you with there's thousands of opportunities in the U.S., and there are thousands outside the U.S. And, you know, our growth opportunity on new units is exciting. Operator: Thank you. Our next question comes from the line of Gregory Francfort with Guggenheim Partners. Please proceed with your question. Gregory Francfort: Hey, thanks for the question. Brian, there were some comments, I guess, in the proxy about adding a couple of platforms as part of the turnaround efforts. And I guess I'm wondering where does the menu stand today versus when you got there in terms of either SKU or products? And how much have you cleaned up? And then as you look at holes in the menu, where are you looking to identify opportunities to kind of maybe add back some excitement and some marketing to the customer? Thanks. Brian R. Niccol: Yeah. Sure. Thanks for the question. Yeah. I believe we've reduced the menu by, like, 25%. And then if you even go back further, we've reduced it even further than that. But based on my time just here, it's probably been a reduction of, like, 25-30%. And then the platforms that we're after are, like, a health and wellness platform, which we started with protein. You'll continue to see us push against the health and wellness platform going forward. I think there's an afternoon platform both in beverage and in food. And not surprising in beverage, I think it is going to be this personalized energy that can be executed as still sparkling and blended. So there's a pipeline for that platform. And then also, just to give you an example, on food, I think there's a real opportunity, not surprising, to make sure we have food for how people want to eat. Snackable, protein, fiber. Right? These are the things for how people want to eat and reset in their afternoon. So, you know, most recently, you probably saw us talking about another platform area, which is making the bake case more artisanal. So you're gonna see us have pastries that I think you're gonna wanna eat with your eyes. Okay? And that's that is really the heritage of Starbucks Corporation. Like, it is about craft. It's about artisanal. And I think we can do this in bakery. We can do this in what I would call snackable food. Obviously, we're already doing it in breakfast. Right? Our egg bites, I think, are iconic, and I think we have the opportunity with these platforms to create more iconic food and beverage. And I think you guys are gonna be really excited when you see the customized personalized energy platform, that really leverages strength, which is our refreshers platform. So, that's what we mean by we wanna be building platforms into the business. It's things that we can then innovate against without having to introduce at the same time. Operator: Thank you. Our next question comes from the line of Peter Saleh with BTIG. Please proceed with your question. Peter Saleh: Great. Thanks for taking the question and congrats on the quarter. I did want to ask about the throughput initiatives. Brian, I think you mentioned you're now below the four-minute promise. Is that where you want to be for Starbucks Corporation at this point? Or do you feel like there's more opportunities to improve throughput? And if so, where do you think we can get to over the next year or so? Thanks. Brian R. Niccol: Yeah. Thanks for the question. Look. We've made great progress on throughput at peak. We still have opportunity on the tails, though. There are still too many occasions throughout the day where we aren't hitting our metric. So there still is opportunity, frankly, to get the entire business every transaction to be under four minutes. We've not achieved that. But what we have achieved is, I think, great performance during peaks, which is really, in my opinion, my experience in this industry. You have excellence at the peaks. You can then win with the shoulders and then ultimately balance a day. That really is kind of what I mean by fine-tuning the model. And, you know, I think one of the things that is crystal clear to us is there is demand when we can get the speed and convenience right, as evidenced by, you know, getting more standard opening hours. You know? All our stores now are pretty much opening at 5 AM. And you know what? I wouldn't be surprised if 5 AM becomes 4:30 AM because of the throughput and the experience that we provide. It's just a matter of time. And we'll earn our way into that. And then the other thing I will tell you too is our teams are just getting more reps. The more reps they get, the better they perform. And then, you see that in, I think, the 650 stores that are part of the lead pilot. And then you also see that, frankly, in our Grow program. And, you know, having our teams really focus in on just a couple of key metrics that are in their control really is a big unlock. It eliminates a lot of the complexity, eliminates a lot of the noise, and allows them to focus on great craft, great speed, and ultimately great experiences. So there's still lots of upside in our mobile order pickup business, our cafe business, our drive-thru business. And, you know, I didn't really talk about much, but we've also got a really nice emerging delivery business. So you know, we just gotta get our Green Apron service labor model dialed in. Get our teams the reps that they need with stability, and then keep with consistent metrics so they know when they perform. They're recognized for their performance accordingly. So I think Mike and the team and you'll hear more about this tomorrow at Investor Day. Have a great plan for how we unlock the demand that Starbucks Corporation has. Peter Saleh: Thank you. Operator: Thank you. Our next question comes from the line of Zach Fadem with Wells Fargo. Please proceed with your question. Zach Fadem: Hey, good morning. Brian and Kathy, is there any color you can offer on the magnitude of operating margin performance in the first half of the year versus the second half? And you mentioned about a third of the pressure today related to product and distribution inflation. Is there a glide path in your mind in terms of these pressures rolling off? Brian R. Niccol: Yeah. I'll start, and maybe I can let Kathy fill in. You know, I think you heard Kathy say some of the inflation, specifically coffee, and the tariff headwinds start to peak here in Q2, and we start rolling off of it into the back half. As well as we start to roll over the initial big investment in our Green Apron service model. And then compound that with a very conscious effort on cost, which is, you know, this $2 billion program over the next two or three years. So, you know, I obviously envision that earnings will continue to pick up as we maintain the top line momentum that we have. But Kathy, I don't know if you wanna add anything. Catherine R. Smith: Brian hit really the it's kind of the four big ones. We've got the anniversary of the investment in Green Apron service, which you talked about. That'll we get anniversarying it by the fourth quarter. The savings program that we got in place while we've been working hard and at speed, a lot of that starts to come to fruition beyond some of the restructuring we already did come to fruition toward the back half of the year. And then, the tariff in coffee, we do expect to abate in Q3 and Q4. And then the most important one is the sales leverage. Just make sure that we continue to drive the top line like we expect. So all of that will weight it a little bit more to the back half of the year. Zach Fadem: Appreciate the time. See you tomorrow. Brian R. Niccol: Yes. Thanks. Operator: Thank you. Our next question comes from the line of Danilo Gargiulo with Bernstein. Please proceed with your question. Danilo Gargiulo: Thank you. Excited to see that you're focusing even more on the health and wellness platform. And I was wondering if you can maybe, Brian, start to dimensionalize a little bit how much of the shift in menu and expansion of your menu could be contributing to your comps going forward? Specifically, if you can comment on how much the protein beverages lineup is mixing today and what's your expectations as it grows over time and potentially how other platforms will complement that? Thank you. Brian R. Niccol: Yeah. Thanks for the question. So we launched the protein platform, and what I'm happy to say is, you know, back in early Q1, here in Q2, as we've not surprising, revisited the platform in January, we saw a nice, you know, recommitment to the platform from customers. So, you know, it is one of those examples of being very much on trend with how people want to eat and drink. And, you know, this is a platform that I think is gonna continue to build for us. As a matter of fact, I might've started my day with a vanilla protein latte. But, you know, look. The thing that is most exciting is customers, when they experience it, they really like it. Awareness is still pretty surprisingly low. But the trial and the repeat rates are really, really great. So meaning when someone tries it, we see a high level of repeat, and it is proven to be highly incremental. So it is one we wouldn't keep doing. And as I said, the thing I always love is you don't wanna launch and leave things. You wanna launch and leverage things. And that's exactly what we saw with our protein platform in January. Catherine R. Smith: Maybe I'd add just two more things really quickly that we're excited about for protein. Is it's we have seen it's a traffic driver, meaning the intention of why the customer is coming in. So that's getting us to access new customers or at least new occasions. And then the other thing is that maybe has been a little surprising is the popularity of the cold foam and protein in the cold foam. It's a great way to get that extra 15 grams or so of protein for our customers, and you can put it pretty much on every single drink. And so I think those have been maybe two of the positives or highlights we found out of the protein launch. Danilo Gargiulo: Great. Thank you. Operator: Thank you. Our last question will come from the line of Christopher Thomas O'Cull with Stifel. Please proceed with your question. Christopher Thomas O'Cull: Good morning. Thanks, guys, for taking the question. Brian, I know you mentioned you aren't taking your foot off the gas in terms of broad-based marketing. Could you just elaborate on how instrumental that's been in turning the tide for non-reward customers? And then Kathy, as you look at the 420 basis points margin contraction in North America, how much of this marketing step-up should we kind of model as a permanent rebasing of G&A OpEx line versus maybe temporary marketing turnaround costs? Brian R. Niccol: Yes. So I'll start, and then I'll hand it over to Kathy. You know, the marketing, I think, has done a great job of getting the brand back in front of all of our customers. And, you know, the metrics that we track, right, are brand affinity, the trust, and we're seeing all those metrics move up. We're also seeing our brand value scores move up. And what I ultimately say is, like, it's one thing to see what are claiming. It's another thing to see it in their behavior. And what I'm seeing in their behavior is every age cohort has increased their visitation with Starbucks Corporation over the last couple of months. And so that just demonstrates to me that we're doing a great job of making the brand relevant. Making the brand a leader and making the brand one that innovates on the right things at the right time that people want to engage with Starbucks Corporation. And so I really have to give Tresi and the team a lot of credit both our digital efforts, our personalization efforts, our menu innovation efforts, I think just you know I don't know if you've seen the most recent ad, the Together ad that we have running. Personally, it's one of my favorites. You know? It makes you feel good about the brand. It makes you start to see the soul of the brand. And I think that's what we're bringing back, and that's what I mean by the shine of Starbucks Corporation's back. The soul, the feeling, the emotion that you get when you get to have a moment to connect with humanity. And, you know, I think people want it. And when we get it right, people love it. And we're seeing that happen that that's relevant with every age group. And every income group. Catherine R. Smith: How we think about our investment in marketing is we look at our total spend looking at discounts as well, and those were not quite as effective. So we've taken some money and repurposed it into marketing. What I can tell you is this, we believe that that's an ongoing We think it's important an important investment in the brand. So that is something you should continue, but it's all included in our guidance. But we really have just reallocated some of the less effective discounts into far more effective marketing dollars. Christopher Thomas O'Cull: Great. Thanks, guys. Operator: Thank you. That was our last question. So I'll now turn the call back over to Brian R. Niccol for closing remarks. Brian R. Niccol: Yeah, thank you. And thanks, everybody, for the questions. And I really do look forward to seeing hopefully everybody at our Investor Day tomorrow. You know, the long-term plan that we have in place is one that I am really excited about. And I think you'll see our executive team, our leadership team share the growth story that we have in front of us. I do want to just leave you with a few things. You know, obviously, we are very delighted with where we are on the top line. And we believe we're gonna continue to drive that momentum. Then the earnings will obviously come behind it. And I also want to emphasize, you know, in any turnaround, the path is never linear. But I do believe we've got the right plans, the right team, and the right focus going forward. And, you know, our Back to Starbucks plan really is the strategic currency of our turnaround. And I really do want to thank our partners both in the stores and in our support centers because they really are the foundation of the progress and the performance that we're achieving. So I couldn't be more excited for them and the Starbucks Corporation to be able to have the shine back, and I couldn't be more excited to share our story with everyone tomorrow at Investor Day on our long-term plans for continued growth and just how much opportunity there is for Starbucks Corporation not just in the U.S., but around the world. So thank you, and look forward to seeing everybody tomorrow. Operator: Thank you. This does conclude Starbucks Corporation's first quarter fiscal year 2026 conference call. You may now disconnect.
Operator: Good morning. My name is Warren, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth Quarter and Full Year 2025 PPG Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's 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, press star one again. To allow everyone an opportunity to ask a question, the company requests that each analyst ask only one question. Thank you. I would now like to turn the conference over to Alex Lopez, Director of Investor Relations. Please go ahead, sir. Alex Lopez: Thank you, Warren, and good morning, everyone. This is Alex Lopez. We appreciate your continued interest in PPG Industries, Inc. and welcome you to our fourth quarter 2025 earnings conference call. Joining me today from PPG Industries, Inc. are Timothy Knavish, Chairman and Chief Executive Officer, and Vincent Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. Equity markets closed on Tuesday, January 27, 2026. We have posted detailed commentary and the accompanying presentation slides on the investor center of our website, ppg.com. Following management's perspective on the company's results, we will move to a Q&A session. Both the prepared commentary and discussions during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on PPG Industries, Inc.'s operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. The presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG Industries, Inc.'s filings with the SEC. Now let me introduce PPG Industries, Inc. Chairman and CEO, Timothy Knavish. Timothy Knavish: Thanks, Alex. Good morning, everyone. Welcome to our fourth quarter and full year 2025 earnings call. I'll start off by providing some highlights on Q4 and full year 2025, and then I'll move on to our 2026 guidance. I'm pleased to report that 2025 was a year of solid commercial, operational, innovation, and financial performance for PPG Industries, Inc. The year also demonstrated the strength and resilience of our diversified portfolio as well as the dedication of our PPG Industries, Inc. global team. Despite a very mixed and dynamic macroeconomic environment throughout the year, we delivered consistent organic growth, both volume and price, capping the year off with our strongest organic growth of over 3% in the quarter. We also continued our legacy of driving structural cost improvements through our self-help actions and maintained our heritage of strong cash flow generation and disciplined cash deployment, including returning cash to our shareholders. For the full year, net sales totaled $15.9 billion with 2% organic growth, which was driven by a combination of higher selling prices and volume gains across our segments. Our adjusted earnings per share came in at $7.58, underscoring our ability to maintain solid profitability in a dynamic environment. Our cash from operations totaled $1.9 billion, up about half a billion dollars year over year, supporting a robust free cash flow yield of 5%. This strong cash performance enabled us to return $1.4 billion to shareholders through dividends and share repurchases. Our segment EBITDA margin for the year was a healthy 19%, reflecting ongoing operational efficiency and cost discipline. I'm pleased that we have delivered on our organic growth commitment, with sales volume and selling price growth resulting in a full year increase of 2% in organic sales, which outpaced the estimated market decline of negative 0.2%. This is the result of our productivity solutions for our customers, as well as the share gains in our core technologies. Now turning to the fourth quarter, we further accelerated our growth momentum. Net sales were $3.9 billion, up 5% year over year with 3% organic growth driven by positive sales volume growth across all regions. We achieved record aerospace coating sales and earnings led by strong demand for our technology-advanced products. Automotive OEM net sales increased 6%, well outpacing the industry driven by share gains and customer mix. Architectural coatings in Latin America delivered high single-digit organic sales growth aided by the sequential quarterly recovery project-related sales and continued strong retail performance. We delivered positive sales volume growth in all regions, with Asia Pacific leading the pack achieving mid-single-digit percentage followed by low single-digit percentage in the US, Latin America, and Europe. Our segment EBITDA margin for the quarter was 18%, reflecting solid execution despite some headwinds that impacted certain end markets. Adjusted EPS for the quarter was $1.51, as the improved organic growth and improved operational performance were more than offset by higher interest costs and increased corporate expenses. Now looking at each of our segments, in the global architectural coatings segment, fourth quarter net sales rose 8% to $951 million with 2% organic growth. This was driven by Mexico's strong retail performance and sequential improvement in project-related spending as well as favorable foreign currency translation. Project-related spending was weak in 2025 driven by uncertainties related to tariffs. However, in 2025, we experienced consistent recovery and expect this to extend into 2026 based on leading indicators and discussions with our customers. Architectural coatings demand in Europe was mixed, with a low single-digit percentage decline, which was partially offset by favorable pricing. We have now delivered positive pricing for thirty-nine consecutive quarters in this business. Segment income increased 6% driven by improved pricing and cost management, and EBITDA margins improved nearly 100 basis points. We expect positive organic sales and margin momentum to continue in 2026 in this business. The 5% net sales growth to $1.3 billion was led by double-digit organic growth in aerospace and consistent gains in our protective and marine coatings business, which now has delivered 11 consecutive quarters of volume growth. As expected, automotive refinish organic sales decreased by a high single-digit percentage as sales volumes were lower reflecting customer order patterns stemming from distributors more heavily weighting their purchases to 2025. However, one closely watched data point in the industry is US accident claims, and the December year-over-year claims were down only 2% compared to high single-digit or low double-digit declines throughout the year. We communicated in our third quarter earnings call that the industry claims normalization and our 2025 distributor order patterns will result in a difficult sales comparison for PPG Industries, Inc. in 2026, but incremental volume growth during 2026. Segment EBITDA margin decreased driven by the lower automotive refinish coating sales and higher growth-related investment spending in aerospace, and protective and marine coatings partly offset by higher selling prices. We expect margin contraction for the segment during 2026 with margin growth during the second half of the year. As you know, our aerospace business is an important growth engine for the company, and I want to take a moment to talk about the momentum in industry growth and the demand for our highly specialized qualified products. The business is equally weighted to OEM and aftermarket customers, with margins that are accretive to the overall reporting segment and has a strong presence in commercial, military, and general aviation. During our second quarter earnings call, we presented the significant expected aerospace OEM growth given the increased builds forecast for the next several years. In addition to the OEM growth, the forecast for higher aftermarket demand translates into sales growth CAGR of high single-digit percentage growth for the foreseeable future. For PPG Industries, Inc., this is a business that is more than just coatings, with the majority of the portfolio being represented by transparencies, sealants and adhesives, and service and materials. For each one of these verticals, we compete with peers that do not have a strong presence in overlapping technologies. This makes our business very unique with a much stronger segment presence than any traditional competitor in our space. Moving to the industrial coating segment, fourth quarter net sales grew 3% to $1.6 billion with organic growth fueled by share gains that led to 5% sales volume growth well outpacing industry demand. As we realized the full run rate benefit of share gains with strength in automotive OEM coatings and packaging coatings. From a business unit perspective, our automotive OEM business delivered a 6% increase in net sales with growth above market as a result of our share gains. We expect to outgrow the market in the first quarter and for the full year in 2026 in this business. Organic sales for our industrial coatings business were flat as sales volumes growth in Europe and Asia Pacific region offset lower index-based price. Packaging coatings organic sales increased by a double-digit percentage year over year, growing significantly above industry rates. These results reflect the positive momentum in share gains led by Europe and the US as a result of the technology shift favoring our sustainable product portfolio. Segment EBITDA was up 6% year over year and EBITDA margin improved by 30 basis points to 15.1%, reflecting the leverage from the organic sales growth along with our manufacturing productivity and strong cost control actions. Now looking ahead, we expect some softness in global industrial and automotive demand to impact organic sales and margin in the first quarter of 2026. Now let me talk about our balance sheet and cash. Strong cash flow generation remains a key pillar of our strategy. As I said, our operating cash flow increased by over half a billion dollars year over year to $1.9 billion in 2025. We returned $1.4 billion to shareholders through dividends of $630 million and share repurchases of $790 million, which represents about 3% of our outstanding shares. We ended the year with a strong cash balance of $2.2 billion and a net debt position of $5.1 billion with $700 million of debt maturing in 2026, which we intend to pay from our current cash position. Our balance sheet is strong, which continues to provide us with financial flexibility, and we remain committed to using this strength and flexibility to drive shareholder value. Capital expenditures for the year totaled approximately $780 million, reflecting our investment in growth initiatives including expansions in aerospace and Mexico, and our digital and AI capabilities. 2025 will represent the high watermark of these growth investments, and we expect to sequentially pace back to our historical levels of approximately 3% of sales by 2027. Looking ahead, I'm encouraged by our organic growth momentum and what we will achieve in 2026. We anticipate that demand in Europe and global industrial end-use markets will remain challenged. However, despite the macroeconomic environment, we expect sales volume growth will be driven by aerospace, architectural coatings in Mexico, and about $100 million of share gains in the industrial coatings segment that will be realized in 2026, including $50 million of carryover share gains announced last year. We expect overall price for the company to be positive with strength from our performance and architectural coating segments, which will be partially offset by modest contraction in the industrial coating segment. This will result in organic sales growth in the range of flat to positive low single-digit percentage. The raw material basket remains favorable to coatings producers, and we are consolidating our supplier base which will help us offset the impacts of already enacted tariffs resulting in expected overall flat raw material costs for the year. Finally, during 2026, we expect growing benefits from operational excellence programs, reducing our cost by another $50 million. This combined with the leverage from acceleration in volume growth is expected to drive earnings per share growth that at the midpoint of our guidance represents a mid-single-digit percentage increase. We expect earnings per share to be flat to growth of low single-digit percentage during the first half of the year and increasing to high single-digit percentage in the second half of the year. In closing, I'm excited about the increasing momentum we have demonstrated during the fourth quarter that allows us to start 2026 on strong footing. We are laser-focused on executing our enterprise growth strategy which emphasizes high-margin business growth, strong cash flow generation, disciplined capital allocation, and operational excellence. Our portfolio pruning completed in 2024 enables us to more effectively win with our customers and drive shareholder value. Additionally, we are investing in customer innovation, including digital and AI capabilities to maintain our technology leadership in coatings, sealants, specialty materials, and productivity solutions for our customers. As always, we remain disciplined with our cash deployment to drive shareholder value. We're confident in our strategy and the strength of our business model to deliver sustainable long-term growth. Thank you to our PPG Industries, Inc. team around the world who make it happen and deliver on our purpose every day. We appreciate your continued confidence in PPG Industries, Inc. I look forward to discussing our results and outlook in more detail during today's call. Warren, please open the line for questions. Operator: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Christopher Parkinson with Wolfe Research. Your line is open. Christopher Parkinson: Most of us would still call the macro, you know, muted or even meager. And yet your organic growth, you know, with maybe one exception, has been pretty solid across a lot of the substrates and the facets you've been focusing on last few years. Could you just add a little bit of insight on what you saw in the fourth quarter and how you're thinking about everything in 2026 in terms of breaking that growth down as was the macro actually slightly better than you anticipated? Is it all share gain? Is it new product introductions? If you could kinda just break that down and how, you know, that breakdown would actually lead you to think about your '26 guidance, that'd be particularly helpful. Thank you. Timothy Knavish: Yeah. Hey, Chris. I guess a high-level answer, and I'll get into some details for you here. The high-level answer is, you know, macro is not better than we expected. And to your questions about is our growth based on macro share gain or technology introductions? The answer is yes, yes, and yes. So the spaces where we're seeing macro help you know, aerospace, right, that continues to crush it for us. The sequential improvement in Mexico that helps us. And, you know, I'd say still a pretty strong robust PMC market. When you look across the rest of our businesses, well and those businesses, if you think about auto OEM, you know, S and P has Q1 down. The rest of the year, call it flattish. But we're committed to outperforming that, and we will grow. Packaging industry is a very mixed bag, and we're crushing it there with multiple quarters of double-digit. And that's largely share gain, and I will tell you largely Europe. Where we're doing quite well there. You know, if you look at the other businesses, Architectural Europe, still flattish. Industrial or general industrial, which, as you know, is the catch-all. It's you know, some segments are up. Some are down. Overall, I'd still call it pretty flat. So, really, there's a few markets where we're getting macro help. Most of our businesses were getting share gain help, and to the technology question, a lot of the share that we're gaining in packaging is technology-driven. A lot of the share that we're gaining in refinish even though the you know, the destocking is covering this right now. A lot of the share gain is driven by the productivity tools that we launched. So it's really a combination of all three. But high level, I don't think anything has changed significantly with our view of the macro. Operator: Your next question comes from the line of Aleksey Yefremov with KeyBanc Capital Markets. Your line is open. Aleksey Yefremov: Good morning. Thanks for providing all the color on end markets. I was hoping you could just give us some details on total volumes and price for organic growth in '26. Timothy Knavish: Sure. Let me do the easy one first, and that's pricing. You should expect to see positive price in virtually all of the protective businesses. I'm sorry. Performance businesses and the architectural businesses. You know, you heard my even our most challenged region for architectural in Europe, we've gotten price 39 straight quarters. I don't see us breaking that streak. And, of course, our position, our strength in Mexico we'll capture price there. So you'll see price there. Refinish, aerospace, to a lesser degree, PMC, those two segments will definitely have positive price. Now in industrial segments, I would call it flattish, but we do have two slight negatives. We still do have a little bit of index pricing carryover. And automotive frankly, automotive in China we see some low single-digit price declines frankly, that are offset by lower raw materials than we expected in China. But all in, you'll see performance and architectural offset a little bit of decline in industrial. You know, volume-wise, we're on a pretty good trend. You'll continue to see volume growth in aerospace, PMC, packaging, modest volume growth in architectural. You'll see volume growth in auto OEM, frankly. You know, we have we've had two quarters in a row of beating market there. And we're optimistic about doing that throughout 2026. And that's driven by share gains. And then, you know, as we move through the year, I think you'll start to see some more in general industrial where some of the share gain wins that we've had will actually come to launch. So thank you for the question, Aleksey. Operator: Your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Your line is open. Kevin McCarthy: Yes. Thank you, and good morning. Tim, it was nice to see you finish up the year at plus 3% on organic sales growth. If I look at the EBITDA line, though, it was relatively flat. And so I was wondering if you could walk us through your thoughts on operating leverage. It seems though raw materials are pretty benign, and you've been taking costs out of the company as per your restructuring. And so, maybe why did EBITDA not grow more in the quarter? And more importantly, how do you see that trending as 2026 progresses? Timothy Knavish: Yeah. Hey, Kevin. There's several contributors, but the one that by far drives that math is the refinish destocking. As you know, that refinish is one of our higher margin businesses, so when it's down, you've got destocking, that just I think we were down double digits in Q3, high single digits in Q4. It overwhelms the positivity of the other businesses' organic growth just given its margin profile. So what you should expect to see there, unfortunately, you'll see some of that in Q1 and Q2. Think you'll see it sequentially get better as the other businesses kick it in more. And more pricing kicks in, more of our cost out and productivity kick in, but really, where you'll see that flip is once we get back to the normal buyer buying patterns, which will be the second half of the year. Vincent Morales: Yeah, Kevin. Let me this is Vince. Just, let me remind everybody. Our segment earnings did grow in the fourth quarter. So they were up, about $20 million year over year. Operator: Your next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open. Vincent Andrews: Thank you and good morning. I wanted to dig in a little bit more on Refinish. If I think some of the metrics that have been discussed over the last couple of calls, I think third quarter claims were down mid-single digits, but 4Q claims are back down high singles. So you noted, Tim, that December was only down 2%. And I believe in the answer to Kevin's question, you're still anticipating the sort of second half recovery and normalization of customer shipments. So could you just help us tie all that together with sort of the latest update? What you're hearing from customers as well as and not just how you're interpreting all that claims data. Timothy Knavish: Yeah. Thanks, Vincent. And if you don't mind, I'm gonna take a rather holistic answer here, try to answer all the refinish questions here. Because I wanna make sure we leave time to get to everything in the portfolio here. I'm gonna answer maybe your question and more when it comes to refinish. So the headline I'd say is there's nothing that indicates a huge change for us versus what we told you at the end of Q3. Relative to the industry and to our trajectory. However, we are seeing what I would call some reinforcing green shoots as we move through the quarter. Okay? So, you know, we still we're still very confident in our best-in-class product solutions to Grocery, and that's happening. We have market share momentum. That's happening largely in the US, but also across Europe. You know, this is and will be a very good business for PPG Industries, Inc. as we work through this transitory kinda period just given the strength of our position versus others. I will also add that there is clearly industry anxiety out there partly driven by the pressure that body shops have been on for the last eighteen months. But also driven by consolidations, divestitures in this industry, and what all of those anxieties play to our strength, one, the strength of our productivity offering, but second, because of the certainty of continuity that we provide. Insurance rate spikes were really the key driver to this disproportionate drop in claims over the last year and a half. Or so. Okay? And that led to multi or leading to multi-quarter destocking in our channel. I mentioned last time how it ties to our rebate structure, etcetera. And we said at the last quarter, we expect normalization of buying patterns from our distributors in 2026. In normal, I'll remind everybody, would be kinda low single-digit claims. Down. And that's very good. Normal is very good for PPG Industries, Inc. because our track record for decades shows that at that kind of level, we can put up record after record because of the strength of our offering. If you look at our guide, I'll remind you too, everybody, that we had a very strong 2025. Combined with a pretty weak 2025. So when you combine that with what we're saying now, which is okay, destocking for two quarters, sales volume and EBIT growth in Q3 and '4, that really explains a lot of the EPS difference between the first half of the year and the second half year. So that's kind of the fundamentals. Now updates. Everything we're seeing and hearing from our customers since we last spoke is playing out as expected. Distributors are destocking as we expected. Body shops are starting to see beginning signs of normalization. As we expected. And thus we reinforced our guide today. The few points of reinforcement and green shoots because of the strength of our productivity offering and the anxieties in the marketplace that I mentioned. We're winning a lot of share. We saw you saw one public announcement yesterday but a lot of other ones happening that are not publicly announced, and there are more to come. Second, insurance premiums are normalizing. Okay? So kinda the catalyst for this whole cycle is beginning to normalize. We continue to reinforce the strength of our productivity offering. Two things we did just this quarter we launched the next chapter of digital tools for the body shops, you know, beyond Moonwalk, beyond Link, beyond Visualize. We launched a new digital tool called mix and shake. Which drives further body shop productivity savings. And that's being well received. And we also launched our first AI formulated product, in Refinish to, again, to help body shops be more productive. So the industry is playing out as we expected. We're winning share with our solutions. That reinforces our guide to see destocking in the first half normalized order patterns in the second half. Two other things that happened notably in December. You did see the minus 2% claims. One data point, I get I get that, but you gotta start somewhere. So let's watch that closely as we move through the '26. And we did start to see what we call fill-in orders from our distributors. Okay? So this multi-quarter destocking, you know, you can only destock so far before you've gotta supply the body shops. And that's when you start seeing fill-in orders. And we did start to see those in December. So another reinforcing sign. So all that added up we expect a muted first half for continued destocking. Second half returned to sales and EBIT growth were finished in a more normalized distributor buying pattern. So, you know, just one other thing, more for the segment and to speak to the strength of our portfolio. Despite a challenging back half of the year in one of our best margin businesses, you know, the performance coating segment still put up a record sales year. And record earnings year for the full year of '25. So the strength of our portfolio just, just really comes through there when things like PMC Aerospace and traffic can offset this transitory period of overfinish. So hope I answered your question and more on refinish. It's playing out as we expected. And, obviously, more data points to come as we move through Q1 and Q2. Operator: Your next question comes from the line of David Begleiter with Deutsche Bank. Your line is open. David Begleiter: Good morning. Tim, on aerospace, can you tell us what the growth the sales growth was in 2025? And are you at all capacity constrained in '26? Ahead of the new supply capacity coming on next year? Timothy Knavish: Yeah. We thanks, David. The growth rate for 2025 was double-digit. By the way, it was 20 double-digit and 24 as well. So we expect continued growth. You're starting to lap double-digit on top of double-digit. Denominators are getting bigger. By the way, this business is almost the same size as Refinish now. So the denominator's getting bigger and bigger as you start lapping multiple double digits. So we're guiding high single digits for 2026, I think, for aerospace. We are capacity constrained. No doubt about it. That's why our CapEx has been above our historical norm for the last couple of years. Round numbers I approved about $120 million of CapEx last year that I will call incremental aerospace debottlenecking CapEx expansion. We've also brought in a number of consultants to help us just with debottlenecking on the expense side, and that's why you see some of the margin challenges that I think Kevin asked about. And in addition to that $120 million or so, we announced $380 million new fact that will take about two years to bring online for the sealants and coatings side of the business. And we're working on some other capacity expansions. I can't get ahead of my board here. But, you know, we're not done. This business will be growing likely for the rest of my career, and hopefully, that's longer than Mr. Morales' career here. But so we see that coming for as far as our forecast go. Operator: Your next question comes from the line of John Roberts with Mizuho. Your line is open. John Roberts: Thanks, and congrats on a long career, Vince, and best wishes. Vincent Morales: Thank you, John. John Roberts: Could you talk a little bit more about the depths of the AI reformulation activity going on? You launched the first product and refinish, and how broad is this across the industry? PPG Industries, Inc. have a differentiated position or the consultants sort of bringing AI to all the coatings companies? Timothy Knavish: Yeah. Hey, John. We're super excited about this. There are things in AI that consultants are bringing to everybody. And I would say that's more kind of back office, customer service, you know, the finance transaction processing. Those are things that are kind of table stakes that everybody's doing. Formulation AI this is internally developed working with a few partners but it's organically, internally developed, and we believe it's a differentiator. Now I'm guessing our competitors are out there trying to work on it and catch up, but we believe we're definitely out front here. And we've launched commercialized a refinish clear coat that optimizes performance of the end coating as well as productivity in the body shop for our customers. We launched that. It was a first product fully developed using AI but it's not based on anything public. It's based on scraping all of our internal formulations that we've developed over a hundred years and optimizing. So that is commercialized. Beyond that, we've launched another 50 products already where they were existing products in the marketplace that we've used AI to optimize both from a product performance standpoint and a cost to PPG Industries, Inc. standpoint. 50 products already since we made that first announcement. Going forward, we'll continue to both optimize existing formulations but we've got development projects like we did in refinish across virtually all of our businesses, so more to come there. Hope you hear a little kick in my step on this one, John, because I'm pretty excited not only about where we are, but where we're going. Vincent Morales: Hey, John. This is Vince. Let me add a little here. The precursor to this was really the scraping of the data that Tim described. So we were fortunate a couple of years ago. We digitized a lot of our data. So that we think that puts us in maybe the pole position certainly in the front row in the industry because of that activity was very time-consuming. And we did it a couple of years ago that allowed us to now take advantage of that digitized data. Operator: Your next question comes from the line of John McNulty with BMO Capital Markets. Your line is open. John McNulty: Thanks for taking my question. So Tim, over the last couple of years, you've dialed back investment in inorganic growth. You've really focused internally, and it seems like it's delivered. You've gotten share gains. You know, like you were saying, from technology, from service. The whole nine yards. And it seems like you're able to outpace your markets right now. I guess as we look forward, just given the strength of the balance sheet, the strength of the cash flows, is that still pretty much the main focus where, look, inorganic growth really isn't necessary for PPG Industries, Inc. going forward? And you keep focusing on the internal opportunities, or have you played a lot of that out and now that you're in a stronger position, you start looking maybe a little bit more aggressively at acquisitions? I guess, should we be thinking about that? Timothy Knavish: So hey, John. Great question. So, both important to us. But the tip of the spear, as I always say, continues to be building this organic growth and margin engine because I believe in many, if not most of the cases, we can deliver better shareholder returns by making those investments in organic growth, organic productivity, organic cost out, etcetera. Now, we still will do acquisitions. Either bolt-ons or someday transformational. We still believe that the industry needs some consolidation. And we're supporters of that. We still believe there are acquisitions that will add value to PPG Industries, Inc.'s customers and shareholders that can be tuck-ins from a technology standpoint or reinforce our position somewhere. But I would say that it's organic first. We still look at every opportunity. We put it through a filter of is it the right asset that's consistent with our enterprise growth strategy? Where it gives us a strong number one or number two or reinforces a strong number one or number two. Is it the right ask? Is it the right time given everything else that we have going on so that we can ensure that we can not fall back in a trap where we had this we had built this excellent inorganic muscle but not an excellent organic muscle. So is it the right time we can still do both, if you will? And most importantly, is it the right price? You know, especially given where our depressed or undervalued stock price is, when you do the mathematics and say, well, okay. Organic first. Then on some of these inorganics, man, I'm better off buying shares. So I wanna make sure everybody recognizes that all of those are on the table. Organic investment, inorganic investment, share repos, but we run them through this filter to make sure that all of our decisions are maximizing shareholder value. Operator: Your next question comes from the line of Matthew Dyer with Bank of America. Your line is open. Matthew Dyer: Yes. Good morning, everyone, and you know, and also echo John's comments, Vince. You know? Congrats on the career and the retirement. I wanted to walk through some of the corporate cost inflation and bucket some of this stuff out. Across potential sources? I mean, you're not the only coatings company to talk about health care inflation, and I get that. But where is that coming in? And kind of related? Does it make sense to align compensation fully to organic growth if there isn't commensurate EBIT accretion? Because you know, it's helping the top line, but it also seems to exacerbate the headwinds from some of the other unabsorbed fixed costs. Timothy Knavish: Yeah. Matt, I'll take this first, and then I'll let my short-timer CFO here take it from there. The leading answer here is medical claims in Q4. Vince will explain it. We're a pay-as-you-go company. They exceeded our expectations. The second piece is incentive comp. Now remember, some of that's a year-over-year comp issue. Right? Because we were we were drawn down our incentive comp accruals in Q4 of last year because of overall performance. And in this year, we were we had done the same, but then we came in stronger in Q4 much stronger in Q4, on two of our three metrics. That guide our incentive payout our short-term incentive payout. There's an important point, the short-term versus long-term. I'll get to that in a second. So our short-term incentives are based on three metrics. Organic growth, EPS growth, and cash. Cash flow. So on two of those three, we finished better than expected. So that increases the payout. But a lot of that all came in Q4, so we had to catch up for the full year. Right? So when you compare that to last year's comp, it looks like a big number. I wanna reinforce, though, we are not overpaying ourselves or our team because the total payout is still less than target. Now another point to your point about, you know, kinda how do you balance all these different metrics. If you look at the grand total compensation for our executives, including myself, you know, the TSR payout, which is an important factor if you look through our proxy, you know, that is not paying out. We have not performed there. The other one is on our restricted shares, you know, we did not meet our EPS growth for that payout. So some of our longer-term payouts for the year will be significantly below target, but that kinda just explains how and why you see that delta in the Q4. Vincent Morales: Yeah, Matt, I'll just add a good summary by Tim. The prior year, again, we lowered our Q4 incentive comp as we ended the year lower than we expected. When we came into the Q4 this year, strong fourth-quarter organic growth exceeded a strong cash flow especially the latter part of December. In receivables, I welcomed and our cash from ops was $500 million higher than the prior year. As Tim mentioned, we did not hit our EPS target. So we are not getting the target payout for that. Flipping back to the medical, we are a company that's pay-as-you-go. We as I talk to my peers in the industry, we do see folks we think, pulling some medical expenses into 2025. Ahead of some potential inflation. In 2026. So our medical cost year over year were up significantly in Q4 and particularly in December. So, hopefully, that answers some of the questions you had on corporate expenses. Operator: Your next question comes from the line of Michael Sison with Wells Fargo. Your line is open. Michael Sison: Hey, guys. Couple quick questions. Architectural EME, you know, a business that has struggled to grow. I mean, end markets, I understand. But, you know, why is that a good business? For y'all to keep longer term, and maybe what's the growth algorithm there? And maybe similar on industrial coatings. Again, I understand end markets have been tough, but how do you see those two businesses grow longer term? And then and just curious if Vince is gonna take the Browns coaching job because I don't think anybody else wants it. Vincent Morales: Let me answer that question first, Michael. I think that's a hopeless job. So I'm trying to retire not going to a hopeless job. Timothy Knavish: I think he's already declined it officially too. So, Mike, the two answers to the two businesses you asked about are very different. One is an ongoing macro issue, and that's Architectural Europe. The other one is really kind of a tariff and, you know, time-stamped issue, and that's general industrial. But let me talk about architectural Europe. It's been a depressed volume market for years. As has much of the European economy. Two years ago, I guess three years ago now, 2023, which was depressed, we generated record earnings and record cash. It goes all the way back to 2008. So even in depressed markets, we can generate good earnings and good cash, and we don't spend that cash within the business. We use that cash to supplement what we're trying to do some of our higher growth businesses. What's happened these last couple of years is you know, the volume decline has been pretty pronounced. At this point last year, one of the things we missed, frankly, was we were projecting some upside in the market. We are not projecting upside in the market this year. We're saying flat. Flattish, for the whole year. But we're not waiting. We're not sitting around waiting for this macro to improve. It still makes good money for us, but with the actions we've started to take and will take throughout the year, we'll see margin expansion cash generation expansion out of this business as we move through 2026. So it's not you know, it's not our best growth business, certainly, but it can deliver has delivered good earnings, good cash in a challenging macro. Vincent Morales: Yeah. Before Tim goes on to industrial, Mike, I just wanna remind everybody that you know, this is a maintenance cycle business. We did have significant growth during COVID. So 2020, 2021, so the maintenance cycle clock reset. Typically, this is a five to six-year maintenance window. So we're now getting to that fifth year where repaint typically would occur. So some of the volume declines the past couple of years really have been because we pulled forward maintenance into those COVID years. Timothy Knavish: Yeah. In industrial, very different. It's a bit more cyclical than, you know, probably our most cyclical business is auto. Second most would probably be our general industrial because you're essentially painting big hunks of metal that get moved around the world. And so with the tariff uncertainty and what that's done, the confidence of some of our customers, that's been dialed back, and then what's that's done from consumer affordability? You know? So some of those folks are struggling. But we do see sequential improvement in this business. What's interesting is we see really good sequential improvement in places like Europe. And Latin America, largely driven by share gain. We see sequential improvement in things like heavy-duty equipment, not ag-related, but construction-related. We see some sequential improvements in transportation and powder. And in a broad category of general finishes. But we still see challenges in the US market. And we still see challenges in a small part of what we do in China is exported to the US, about 10% of what we do in China and think electronics and kitchen and bakeware those kind of things remain, you know, compressed a bit. So the industrial story is more of a timing one and we are starting to see green shoots. We are starting to win share, and start to launch those share wins in as we move through 2026. Operator: Your next question comes from the line of Jeffrey Zekauskas with JPMorgan. Your line is open. Jeffrey Zekauskas: Your Performance Coatings revenue expectation for 2026 is flat to up low single digits. And in that segment, you've got aerospace, and you've got auto refinish. If aerospace grows at a high single-digit rate, in order to meet that guidance, Refinish has to contract at a high single-digit rate or a mid to high single-digit rate. Is that the correct conclusion to draw? And for Vince, how many shares did you buy back this quarter and what did you spend? Timothy Knavish: Hey, Jeff. I'll take the first one. I don't think we're seeing that much of a decline, more like low to mid low to mid for a finish in the first half. If you think sequentially, what did we see in Q3, Q4? We saw double-digit then we saw high single-digit. So I'd say you ought to say that that slope continued towards normalization as we move through the quarter. You know, remember, traffic's quite small there, but we also have a nice PMC business in there that's not small that'll contribute to some of the grand total of what we guided to for the year. Vincent Morales: Yeah. Jeff, for us, from a share repurchase perspective, we bought just under 980,000 shares at an average price of about $102. We spent, as we said in the press release, around $100 million in the fourth quarter. Operator: Your next question comes from the line of Ghansham Panjabi with Robert W. Baird. Your line is open. Ghansham Panjabi: Thanks, operator. Good morning, everybody. Vince, congrats from our team as well. The best in retirement. Vincent Morales: I'm still here till July, but thank you. Ghansham Panjabi: Just an early congratulations. Yeah. Thanks. On the raw material side, you know, as it relates to guidance, can you just give us a bit more color to the constituents you think about some of the major ones, TiO2, petros, etcetera, it looks like you've gotten flat for the year and also flat for the first quarter, but some of the spot markets were weaker into fourth from 2025. So just curious as to which categories may be inflating as well. Thanks. Timothy Knavish: Yeah. You know, so first, Ghansham and a public service announcement for everybody. This is not Vince's last earnings call, and I don't want Vince to think it's his last earnings call. He's still got six more months of work to do here. So, but thank you for the kind and lots of kind words as we get closer to his actual date. But, Ghansham, high level it's still a very long favorable to us supply-demand balance. So across the board, that generally means good pricing for us. But what offsets that a couple of things. I put them in three categories. Epoxies are up a bit. Because of tariffs. Right? And that's included in our guide, and you know, that obviously affects more of the industrial businesses. So it doesn't affect deco companies because most deco products do not have epoxy. So when you compare to what others might say, the epoxy is one. Second one is pigments, but let's not put TiO2 in that. I'd say more the specialty pigments. We are seeing some inflation there. Driven by tariffs because those things come from all over the world. Okay? And the other category that's up is metal packaging. And everybody knows what's happening on the aluminum and steel tariffs. Those are really the only categories that I can think of that are up in our guide. TiO2 is still pretty soft. Just given the supply-demand, we've been doing some supplier consolidation. We've been working volume for volume commitment deals for pricing. So that one is still pretty soft. You know what oil's doing, so that drives solvents to be. And then across the board, everything else is still in a very long situation. Add it all together, and we come up with flat for Q1, flat for the year. Vincent Morales: Yeah. And I'll just remind everybody what we said at the outset. You know, we do have targeted pricing that we instituted in 2025 or we'll institute in 2026, including in Q1, so we do expect higher pricing for 2026. Operator: Your next question comes from the line of Joshua Spector with UBS. Your line is open. Joshua Spector: Yes. Hi, good morning. I just wanted to ask on Mexico. I don't know if there's a way you can maybe index your volumes for where you are today in the fourth quarter versus a year ago? Because obviously, there's some easy comps in the first half with all the liberation day disruptions. But it seems like the fourth quarter performance might say you're even above where you were coming into last year. So can you help us square that away a little bit? It'd be helpful. Thank you. Timothy Knavish: Yeah. Let me give a high level, and then I'll let Vince give the details. Because he's doing the math in his head here. So we definitely finished pretty strong in Mexico. And if you look kinda sequentially at how we move through the year, we're down mid-single digits in Q1, up low single digits Q2, up mid-single digits Q3, up high single digits Q4. Now where that puts us relative to year-end '24, I'll give that to Vince. Vincent Morales: Yeah, Josh. If you look at the fourth quarter as a standalone basis, again, there's two parts of our Mexican business. There's the retail or consumer segment, there's also the project segment. The retail segment has continued to grow. The project segment's the one that had contracted the most in the first half of the year. Fourth quarter over fourth quarter, just on the volume basis, we're right around mid-single digits higher. Again, some of that's recovery. And we expect again in the first quarter a good volume based on an easier comp. Operator: Your next question comes from the line of Laurent Favre with BNP. Your line is open. Laurent Favre: Yes. Morning, guys. I want to go back to the M&A discussion. I understand what you're saying on buybacks versus M&A. But there are some pretty obvious situations with assets coming out or potentially coming out of the recent announcements in Germany, Amsterdam, and Philly. Now I think it's unlikely that we'll have any clarity before 2027. So am I right to assume that this might be a very quiet year for buybacks as you wait to get clarity on what's happening on those situations? Timothy Knavish: No. You know, I wouldn't say that, Laurent. I would say, look. Our balance sheet is strong enough that we've got optionality if something gets spit out of either of those two deals and if it makes sense to us at the right price. We've got optionality to do something there in 2027 without it impacting our ability to do buybacks in 2026. You know, we're I think we're on nine straight quarters of buybacks now, and you know, we run a play, Vince, myself, our treasurer, and our corp development guys sit down every quarter and say, what's the pipeline look like? What's cash flow look like? And we make a decision on buybacks, and we'll continue to do that because even if we make a buyback and then all of a sudden I get a phone call saying, hey. There's on the table here from one of these deals that's being spun out. I'm not worried about my ability to do both. Operator: Your next question comes from the line of Frank Mitsch with Fermium Research LLC. Your line is open. Frank Mitsch: Thank you, and good morning, Tim. I hope you can understand some of the confusion we have regarding Vince's retirement date. Since many of us had already assumed that he was. So, appreciate your clarification there. I want to drill into a little bit about the first quarter here. You know, in the script, I don't wanna make too big a deal about it, but, you know, in the script, you just you described the first half as being low single-digit EPS growth. And in your comments this morning, you talked about it being flat to low single digits in the first half of the year. Obviously, you didn't provide any 1Q guidance. Can you just speak to your expectations in terms of, in terms of one Q? I mean, I guess flat down modestly up. All that's in the calculus as we sit here in late January. Timothy Knavish: Yeah. Yeah. Frank, by the way, I made that clarification not only for you, but I made that clarity. Fixed too. So I appreciate it. And I will publicly acknowledge that you were right a year ago that Aaron Rogers would be better with us than anything he could do with the Jets. So we'll leave that out there. So look, here's the easiest way to say it. We're gonna ramp up in our EPS growth. I said flat to low single digits for the first half. So I would interpret that as and then stronger in the second half of the year. Flattish for Q1, low single digits ish for Q2. Operator: Your next question comes from the line of Michael Harrison with Seaport Research Partners. Your line is open. Michael Harrison: Hi, good morning. Tim, in response to one of the first questions you were asked on the call about organic growth and kind of what we're running ahead of expectations. I was surprised to hear you not exactly managing it. She might have. I know. It sounded a little bit like a little bit specific, but it's ahead of expectation. You talk about what you're seeing in China and, like, China's particular thinking about what do you see what you're seeing you know, as we're cutting out in Thank you. Timothy Knavish: Yeah. Hey, Mike. I'm glad you asked that question. Because I wanna clarify. I was responding by business, by vertical. Not as much by geography. So I appreciate the opportunity to do that. Despite all the headlines, we're growing in China. We grew in Q4 in China, and we'll grow in 2026 in China. You know, it's because we have a strong position of local for local businesses. We're well-positioned in the kind of the right industries. But more broadly, Asia Pacific is very strong for us because India is doing great for us. Parts of Southeast Asia are doing great for us. So if you look at specifically China going forward, you know, we'll see low single digits kinda growth, maybe mid-single digits kinda growth in 2026. So it's not the growth of a decade ago, but it's also not the gloom and doom that you see at least for our portfolio because we're in the right places with the right kind of offering for the customers. You know, if you move to India, you know, India is delivered double-digit growth for us throughout most of 2025. We expect that to continue into 2026. So part of that overall Asia Pacific story is China still putting up growth numbers? India contributing with double-digit growth numbers. Operator: Your next question comes from the line of Aaron Boyce with Evercore. Your line is open. Aaron Boyce: Good morning. Thanks. My question is back to Arrow. Appreciate the intra-business mix breakdown as aero becomes a bigger percentage of the segment. From a profitability and margin standpoint, how would you rank order aero coatings, transparencies, and sealants? And then maybe also on customer mix, military versus G and A commercial, and then I think you mentioned the OEM tailwinds, but how do you see the product mix for transparencies and sealants evolving in 2026 and beyond? Thanks. Vincent Morales: Hey, Aaron. This is Vince. As we've never done, we don't give our intra-business profitability by product or by end market. As Tim said in his opening remarks, or in one of the Q&A questions, it's certainly one of our better-performing businesses due to the technology and specification requirements. So but we're not gonna give product-specific profitability. Timothy Knavish: Yeah. And as far as some of your other questions, mix of OEM, military, and aft or general aviation. I think we provided that pie chart. And the growth rates among those three are very similar. Which helps the portfolio. And to Vince's point, look, we get we're giving more detail on aerospace because we don't believe it's fully understood because we have a competitor that has a very, I'll give them props. They've got a very good aerospace coatings business. This is much more than that. And as I said in my opening comments, coatings is actually the minority of our total profile here. So I don't know if I've addressed all your questions. I know you're particularly interested here because I believe you're a pilot or air force pilot. So we're happy to show you how we make F-35 canopy someday or F-16 canopies. Not sure which bird you flew. Vincent Morales: Yeah. And if you look again by end market, we do sell to OEM. We sell to military. And general aviation. All those markets right now are sold out. All the products we have are sold out. Hence, the capital increase we've had the last couple of years. Also, the operating expense increases we have folks trying to debottleneck our existing operations. These operations are specified and qualified so they do require significant handholding as we change processes. Timothy Knavish: And one more point, and then we can move on. But it's also significant R&D in this business. That's why we're able to command a better margin, better than the rest of or better than many parts of our portfolio because of the significant long-cycle R&D investment that it takes to win in this space. Operator: Your next question comes from the line of James Hooper with Bernstein. Your line is open. James Hooper: Good morning, guys. Thanks very much for the question. My question is on auto OEM and the share gains there. Can you unpack a few more of the drivers for us, please? Is this to do with kind of your positioning in China? Or is it to do with your customers gaining share of the OEM market? And can you give us a little update about some of the technology offerings there? Is that a driver of share gains? Thanks. Timothy Knavish: Yeah. Thank you, James. It's a little bit of all of those I mentioned there is some element of customer mix there where one of our customers where we have a fairly large share wallet at a rough couple of years, they're recovering now, and that helps us to some degree. But most of what we're winning on we've been introducing, you know, lower cure products. We've got a new electro coat product out there that brings more productivity and some sustainability benefits to our customers. We've been doing very well with automotive parts in that business. We've been doing well with a particular large EV manufacturer based in China. Who, you know, despite some headlines of what's happening to the EV, EV is doing very well both domestically and export not to the US obviously, but to many other countries. So it's a combination of some customer mix, some new technology wins, and some as Alicia, who runs the business force, calls it targeting the win with the winners, partnering with those that are gonna win in the marketplace, and developing and bringing them their best value proposition, and then growing with them. Vincent Morales: Yeah. As we said all year, we did pick up some significant share in South America as one of our competitors exited the market. We've realized the full quarterly benefit of that in Q4. We had some benefit in Q3. Full quarterly benefit in Q4. That'll carry over into 2026. We've also got, as I said in my opening remarks, in addition to the carryover, there's another significant double-digit millions share wins that will launch throughout 2026 that we won in late 2025. Operator: Your next question comes from the line of Patrick Cunningham with Citigroup. Your line is open. Patrick Cunningham: Hi, good morning. Thanks for taking my question. Just a quick one on Protective and Marine. You seem to call out normalization to industry growth rates. It seems like you still have some nice marine products that are ramping up. So are there any share losses offsetting in 2026? And what would you expect the overall industry growth rate to be across the platform? Vincent Morales: Yeah. Patrick, this is Vince. Just really two factors there. You know, Tim mentioned 11 consecutive quarters of volume growth. Organic growth. That's compounding. So we're running up against some very difficult comparables. This is a project-oriented business. So as projects roll off, we have to win new projects. So those are two of the factors. We do feel good about our technology, as you mentioned. That's gonna continue to allow us to carry the day. Timothy Knavish: And you specifically mentioned marine. Marine is a particular area of strength for us right now. We've been disproportionately winning in aftermarket, also, you know, dry docks. Because of our Sigma Glide technology. This year, we've also been disproportionately winning in Asia new builds. So marine continues to be a real strength for us as well then on the protective side, some of our specialty fireproofing products. Operator: Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Your line is open. Arun Viswanathan: Thanks for taking my question. Congrats on the impending retirement events. Great working with you over the last several years. So I guess, first off, I just wanted to dig back into the operating leverage and corporate expense question. So it looks like you're guiding to about 4% EPS growth. If I back into it, it looks like about 3% EBITDA growth. And as you show on the slide, flat to low single-digit, up organic growth. So I think you mentioned price would be slightly positive, so that would kind of imply flattish to maybe even slightly down volumes. Is that correct? And then I guess as a follow-on, is it really that volume number that we need to see go higher that would drive the operating leverage? Or are the corporate expenses gonna be structurally higher and kinda mute that as you know, for in the foreseeable future? How do we kinda get to the point where you do see kind of a lot of the fruits of your labor paying off and you see that actual EPS growth come through? Timothy Knavish: Yeah. Thanks, Arun. I'll take it first, and Vince will fill in the details. You know, first, we're not seeing structural change in our corporate expense going on. Right? That's or going forward. Vince will explain that. The biggest issue with our lack of leverage with the volume growth that we're getting today is first, second, and third. The refinish destocking. Because it's just such a strong margin for us that a lot of the other gains, until that stabilizes and you'll see it in the second half of the year as normalization happens there. But that's, like, kinda number one, number two, and number three is the reasons why you're not seeing more leverage. We'll continue to gain incremental volume going forward, that'll bring incremental leverage. Pricing will bring incremental leverage. We've got the cost outs, which will continue. Bringing incremental leverage. In 2025, all those happened, but they got overshadowed by two things. One, the refinish destocking, and two, corporate and interest. So with that, let me throw it to Vince and fill in the details. Vincent Morales: Yeah, Arun. If you look at 2026 versus 2025, a couple of the segments are gonna grow mid-single digits or higher. In aggregate. In terms of segment earnings. We do have higher interest costs. Like most companies, we have some very low-cost debt rolling off with three maturities. Two maturities in 2025 roll off, we have another maturity in early 2026 roll off. We're replacing that. In kind in absolute dollars, but not at the same interest rate. So, unfortunately, our interest costs are higher. In '26 versus '25. In addition, and most companies are also seeing this, we're seeing a slight increase in our tax rate. And that's driven around a variety of different factors, especially in different jurisdictions. So those two items are a bit of a detractor, but the segment results are seeing growth in over year in 2026. Operator: Your next question comes from the line of Laurence Alexander with Jefferies LLC. Your line is open. Laurence Alexander: Morning. Just two quick ones. First, on the AI investments, given it's a you're leveraging internal projects, do you have enough data to see what your paybacks are like on incremental investments? And secondly, on the share gains in industrial, do you expect those to be pro or countercyclical? You know, if demand accelerates, you expect the rate of share gain to accelerate. Timothy Knavish: Yeah. Yeah, Laurence. Let me take both, and Vince can fill in anything. The AI first of it's still early days. Right? We are part of our increase in operating expense and capital expense is because of the AI. We've got a few runs on the board that have delivered millions to the bottom line. Not yet material to the company, but very favorable early indicators relative to the investments that we made that this will be a very good ROI for us as we go forward. And you consider the fact that we've only only, air quotes, optimized 50 formulas that are commercialized so far, and we've only launched one that was AI developed so far, if you look at the size of our pipeline, the materiality is yet to come but even today, we are booking savings to the bottom line with what's already been launched. So very confident in the ROI going forward. Vincent Morales: Yeah. On the industrial side, Laurence, we would expect our share gains to be additive if there's a cyclical recovery here. As Tim mentioned earlier, this is one of our early warning businesses, both up and down. Kind of the canary in the coal mine. We have seen in past and expect some point green shoots in this business. And then with our share gains and technology offerings on top of that, we'd expect it to be added. Operator: There are no further questions at this time. I will now turn the call back over to Alex Lopez. Alex Lopez: Thank you, Warren. We appreciate your interest and confidence in PPG Industries, Inc. This concludes our fourth quarter earnings call. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good morning, and welcome to the Perseus Mining Investor Webinar and Conference Call. [Operator Instructions] I'll now hand over to Perseus Mining, Managing Director and CEO, Craig Jones. Thank you, Craig. Craig Jones: Yes. Thanks, Nathan, and welcome to the Perseus Mining quarterly webinar to discuss our December quarterly report. And I'm joined here today with Lee-Anne, our CFO. Let me start by acknowledging the tragic loss of two employees of our haulage contractor, Binkadi, who work at our Bagoé mine, and they are involved in a tragic off-site vehicle accident 2 weeks ago. These deaths have been incredibly sad for the team at Perseus and particularly our Sissingué operations, and we've been supporting the families of both individuals, as well as the entire team at Sissingué since the accident incurred and will continue to do so in this very difficult time. We've commenced an internal investigation into the accident and cooperating fully with the relevant Ivorian authorities to ensure appropriate processes a following. Nothing is more important to Perseus than the safety and well-being of the people that work for us and with us. And this remains our highest priority across the group. We are committed to the rigorous application and oversight of our safety systems and to ensuring that all employees and contractors carry their work in a safe and responsible manner. This tragic loss reinforces the need for constant vigilance in all aspects of our work, including travel associated with remote operations. As we turn to our operations through the December quarter, our performance reflected a period where all of our sites transitioned into new mining areas, transitioning to new mining fronts introduced as new complexities to mining operations. And despite this, we delivered a strong operational result and continue to generate robust cash flows at the same time as making meaningful progress on our growth initiatives. Our gold production for the quarter was 88,888 ounces at an all-in site cost of USD 1,800 per ounce. The increase in our all-in site cost to USD 1,800 per ounce, versus Q1 FY '26 is primarily driven by higher royalties linked to the increased gold price achieved during the period and an additional 2% royalty paid on revenue at Côte d’Ivoire. The payment of the additional 2% was done in good faith as part of ongoing negotiations between the mining industry and the government of Côte d’Ivoire in relation to formalizing a revised fiscal arrangement, which takes into account their inequitable distribution of profits in the current high gold price environment. A total of $20 million was paid in FY '26 Q2 in relation to the additional royalty of which $4 million related to the current December quarter, $5 million related to September quarter and $11 million related to half 2 of FY '25. So just to reiterate, the Q2 FY '26 all-in site cost in this report only includes the additional royalty paid in this quarter. Combined gold sales from all three operations totaled 86,607 ounces sold at an average sale price of USD 3,437 per ounce, delivering a robust cash margin of USD 1,637 per ounce, capitalizing on strong market conditions. The notional cash flow for the quarter was USD 145 million with the quarter ending with a net cash and bullion of USD 755 million. For the December half, the group produced 188,841 ounces of gold at an all-in site cost of USD 1,649 per ounce and an average sale gold sale price of USD 3,241 per ounce, generating notional cash flow of USD 301 million. Yaouré produced just over 32,000 ounces of gold for the quarter, which was down 42% on the previous quarter. The quarter-on-quarter decrease in production is primarily due to lower mill head grade resulting from a higher reliance on lower-grade stockpile material than planned, along with the planned transition in all sources from the CMA open pit to the Yaouré open pit. The implementation of improved grade control practices at Yaouré along with higher strip ratios during the period resulted in lower direct mill feed from the Yaouré pit, and the need to supplement lower grade stockpiles in greater proportions. The grade control process is now well established at Yaouré and mining rates have substantially improved, resulting in increased direct fee of the Yaouré open pit ore. This, along with the addition of higher grade -- the higher-grade CMA underground in half two is expected to result in higher grade mill feed. Production cost for the quarter was USD 1,574 per ounce at an all-in site cost of USD 2,092 per ounce. The jump in all-in site costs versus Q1 was driven primarily or predominantly by lower gold production, resulting in higher fixed cost per ounce, as well as higher royalties and timing related increase in sustaining capital as a result of the timing of the life of mine tailings pipeline relocation. We sold 34,000 ounces of gold from Yaouré at a weighted average sale price of USD 3,243 per ounce, which delivered an average cash margin of USD 1,151 per ounce. National operating cash generated by Yaouré for the quarter was USD 37 million. Reconciliation between the block model and the mill for the last 3 months is 20% positive on tonnes and 11% negative on grade for a 13% increase in contained gold ounces. This continues to trend from the previous quarter with higher mine tonnage offsetting lower grades through the -- though the overall metal reconciliation has slightly improved. The upper levels of the Yaouré open pit is continuing to yield more gold as grade control drilling extend mineralized structures. Edikan delivered a strong quarter with 38,000 ounces of gold produced at an increase of nearly 17% on the previous quarter. Production cost for the quarter was USD 1,097 per ounce and the all-in site cost of USD 1,535 per ounce, which was down 4% on the previous quarter. We sold 37,000 ounces of gold from Edikan at a weighted average sale price of USD 3,700 per ounce, resulting in an average cash margin of USD 2,165 per ounce, and national operating cash generation of USD 83 million. Mill time and recovery were 89% and 87%, respectively, largely in line with the targeted key performance indicators. Reconciliation between the block model and the mill for the last 3 months is 9% positive on tonnes and 3% negative on grade for a 5% increase in contained ounces, which is a substantial improvement on the last quarter. This improvement in operating outcomes for the quarter is largely due to full mining access being available at the Nkosuo pit, allowing the mining sequence to be restored and improving mining conditions. Edikan's gold production is expected to continue to increase over the next 2 quarters as grade from Nkosuo continues to climb. Plan to mine cutbacks of Fetish and Esuajah North pits are currently progressing with applications submitted to the relevant regulators for approval to commence mining in both areas. During the quarter, the Sissingué complex produced 18,000 ounces of gold, which was up nearly 60% on the September quarter. This Sissingué complex results are attributed to mining and processing operations at Sissingué Gold mine, together with satellite mining operations comprising of the Fimbiasso gold mine located approximately 65 kilometers from Sissingué processing facilities and the newly developed Bagoé gold project located approximately 137 kilometers from Sissingué processing facilities. Both the Fimbiasso and Airport West pits were completed during the quarter, and ore is now being sourced from the Sissingué Main Pit and the Bagoé Antoinette deposit. Mining at Bagoé commenced during the quarter at the Antoinette deposit following the completion of the Fimbiasso operations. Production cost was USD 1,545 per ounce, and an all-in site cost was USD 1,044 per ounce. The improvement in the all-in site cost is largely driven by -- driven following the introduction of the high-grade ore from the Bagoé Gold project, partially offset by higher royalties resulting from higher realized gold prices and the additional royalty payment to the government of Côte d’Ivoire described earlier. We sold 14,000 ounces of gold from Sissingué at a weighted average sale price of USD 3,227 per ounce, resulting in an average cash margin of USD 1,383 per ounce and a national operating cash of USD 25 million for the quarter. Mill run time improved to 97% from the previous quarter, 91% the previous quarter is 91%, and gold recovery was steady at 89.5%. A reconciliation between the block model and the mill for the last 3 months is 18% positive on tonnes and 17% negative on grade for a 2% reduction in contained ounces. The lower grade performance is the result of mining narrow variably mineralized structures at Sissingué Main, Fimbiasso West and Airport West Pits with higher-than-anticipated dilution in several benches. Operational controls, including blast design and refinement and improvement -- improved ore mining control initiatives remain in place to minimize dilution and maintain alignment between the model and mill outcomes going forward. As mining is now focused on the Antoinette peak at Bagoé and the Sissingué Main pit as the primary mill feed sources, mill feed grade is expected to increase for the remainder of the year with the introduction of the higher grade ore from Antoinette. Looking ahead for FY '26, our production guidance remains unchanged. Group gold production in the range of 400,000 to 440,000 ounces with production weighted to the second half of the year. The group all-in site cost guidance range has increased from USD 14.60 and USD 16.20 per ounce to USD 1,600 and USD 1,760 per ounce. The group all-in site cost increase in guidance has been updated to reflect increased gold price assumptions and the result in increase in royalty costs. We've also allowed for the 2% royalty increase in Côte d’Ivoire for Yaouré and Sissingué, whilst we discuss fiscal arrangements with the Ivorian government that result in fair and equitable distribution and mining proceeds at these unprecedented gold prices. As we've discussed previously, our gold production is weighted to half 2 of FY '26 with the inclusion of the new high-grade ore sources at Edikan and Sissingué that are included as part of our mine plan. However, due to the performance of Yaouré in Q2 FY '26, it is expected that Yaouré will produce in the lower half of its guidance. Before I hand over to Lee-Anne, I just want to briefly discuss growth. During the quarter, we progressed our organic growth strategy, which focuses on resource to reserve conversion at our existing mines, brownfields exploration and development of greenfields exploration portfolio. We're progressing our update to our mineral reserve estimates for our existing mines with an update -- updated estimate for Nyanzaga anticipated in quarter 3 of FY '26 in the March quarter, followed by an update to Yaouré towards the end of the financial year. Edikan will follow towards December 2026. These updated estimates are focused on extension of mine life of our existing assets. From an inorganic growth perspective, Perseus progressed an offer to acquire the remaining shares of predictive discovery during the quarter. Perseus first acquired a stake in predictive in August 2024 for a total investment of just under AUD 90 million, initially securing a 19.9% stake in the gold explorer and were later diluted down to 17.9%, whilst we remain as predictive largest shareholders. This has been a great investment. And at our current share prices, the investment is now valued at more than AUD 400 million, more than 4x what we paid for it. Our decision to make an offer to acquire the remaining shares of predictive was supported by our knowledge of the asset and Perseus' strategy to build a superior portfolio of African gold assets. At the end of the day, Robex revised matching offer full predictive was ultimately deemed superior by Predictive forward and resulted in the rejection of our offer. While at this stage, we have no plans to revise our position on Predictive, we will continue to monitor the market conditions. In terms of inorganic growth, we're constantly assessing the best ways to execute our growth strategy and provide best value outcomes for our shareholders. Now I'll pass over to Lee-Anne to speak on some of the financial aspects. Lee-Anne de Bruin: Thanks very much, Craig, and hello, everyone, and happy New Year. I just thought it's too late to be doing that. The quarter delivered a very strong closing cash and bullion balance of USD 755 million, which was down $82 million on the previous quarter. And this is built up as a result of the contribution from our operating margin of USD 132 million. We continue to invest strongly in our capital investment programs, about $60 million went into that, which included development capital for the Nyanzaga Gold project of about $28 million and the CMA underground of about $14 million during the quarter. We will continue to make contributions to our host governments with $30 million paid in taxes during the quarter. Perseus balance sheet remains strong with increased liquidity, we're looking forward to further strong forecast cash flows through the fiscal year. We also, as you would have seen in December announced that we refinanced and upsized the debt facility, replacing the existing $300 million facility. The amended facility has been increased to USD 400 million plus a USD 100 million accordion option. It has a 3-year term plus an option to extend for 2 years. So this takes it out to 2031. We achieved very competitive pricing through strong demand, resulting in a total margin reduction of 125 basis points from the existing facility. Amendments were made to provide Perseus with more flexibility across a range of terms, including our financial covenants, and this really reflected the continued enhancement of Perseus' credit profile. And I'd like to thank Nedbank and Citi for their assistance and all the banks that have come on board through the process and our continued support of our financiers. Shifting our head to hedging. In this current rising gold price environment, Perseus has continued to ensure the hedging strategy evolves, ensuring we remain focused on measured downside protection, whilst always maintaining as much upside opportunity as possible. During the quarter, we further reduced the committed hedging position from 14% to 11% of our 3-year production rolling off a large number of the fixed forward contracts. We continue to protect against the downside -- downside with -- and this is obviously to ensure that as we make investment decisions for all life of mine extensions across all our operations, had some level of downside protection, and we have about 215,000 put options, which are all uncommitted in place at an average price of $2,619 per ounce. As always, to provide for clarity reconciliation between the all-in site costs used by Perseus to the all-in sustaining cost metric with the key variances relating to produce versus gold sold as the denominator and corporate administration costs. The average all-in site cost for the quarter, as Craig has mentioned, was USD 1,800 per ounce, which is higher than the Q1 FY '26 restated all-in site cost of USD 1,516. This increase in the -- in this quarter-on-quarter is largely attributable, as Craig spoke to, is to the higher royalties driven by increased gold price achieved during the quarter and the additional 2% royalties paid on revenue in Côte d’Ivoire. The additional 2% was paid to the government of Côte d’Ivoire despite how our stability afforded to Yaouré and Sissingué, and the Sissingué conventions. Agreement was reached with the government to pay an additional 2% for FY '25 in a good phase as part of our ongoing negotiations between the mining industry and the government of Côte d’Ivoire and in relation to formalizing a revised fiscal arrangement, which takes into account fair and equitable distribution of profits in the current high gold price environment. We'll update you as we go through that, but we are appreciative of the nature and the style in which we're engaging with the Ivorian government and which the industry is working collectively together to get an outcome that is -- that works for both industry and the Ivorian government. I'll now hand over to Craig. Craig Jones: Thanks, Lee-Anne. And then we'll move on to our organic growth projects. We'll start with Nyanzaga. So Nyanzaga remains on budget and schedule with first gold anticipated in January 2027. Construction activities on site continued during the quarter with several key workfronts achieving significant progress. A total of $262 million has been committed up to the end of December, which is half of the approved budget, and of the USD 262 million $161 million has been incurred. The resettlement housing project is closing in on completion with the final 10 homes expected to be delivered before the end of January. Fabrication of the SAG and Ball mill continued during the quarter, the construction and installation of which are on the current project schedule, critical path and are progressing well ahead of schedule. The camp construction progressed to 70% complete with 32 senior rooms occupied and a further 30 rooms expected to be handed over by the end of January. And the tailings storage facility remains ahead of schedule with clearing and topsoil removal. Detailed design is complete and procurement is well advanced. Importantly, the pre-strip activities for the Tusker deposit have commenced. At our CMA underground development at Yaouré, Q2 FY '26 saw strong progress with all four declines under development and a total of 800 meters of development achieved to date. We achieved a major milestone this month with -- this is in January with the first ore mine from the Blika portal. First ore was achieved through development mining and the stoping operations are anticipated to commence in Q4 of FY '26. Project development is progressing to plan with USD 44.8 million incurred up until the end of December 2025, and commercial production remains scheduled to be reached in Q3 FY '27. The CMA underground total development capital has increased by $9 million from the approved $172 million to $181 million due to the requirement for remediation of the eastern wall in the CMA pit to medicate access risks from ground instability. Alongside our financial and operating performance, Perseus continues to deliver tangible value to our host communities and governments and this slide captures the breadth of our contribution. In the quarter, our total economic contribution reached USD 269 million across our host countries, and this included $167 million in local procurement, which directly supports national supply chains and local business development. We also contributed $85 million in taxes and royalties and $1.5 million in community contributions as we continue to support local development funds and key community initiatives. Our workforce is overwhelmingly comes from the regions in which we operate with 95% of employees coming from our host countries. This is a reflection of our commitment to building local capability and building the skills base that our future growth depends on. Although our safety indicators reflect very strong safety performance with a TRIFR of 0.83 and an LTIFR 0.00 up until the end of December. The reality is that the true safety performance is ultimately reflected in human outcomes not statistics, and our recent fatalities at Sissingué are a testament to this. Sustainability is at the core of our purpose and guides how we deliver results, creating value and building resilience, and that's what makes Perseus as a trusted partner in achieving its mission of creating material benefits for all stakeholders in fair and equitable proportions. Before I hand over to any questions, I want to acknowledge the hard work and commitment from our teams across the business. The quarter reflected a challenging period as all of our sites transition to new primary ore sources. The teams completed this challenge at the same time as continuing to improve operating practices and discipline. Despite this, we continued to deliver solid operating performance, generate strong financial returns and progress our strategic growth projects. or while maintaining high sustainability standards. With a strong balance sheet, high-margin operations and a clear growth path, we believe we're well positioned to continue delivering long-term value for our stakeholders and shareholders. Thank you. Now I'll open the floor up to questions. Operator: [Operator Instructions] Your first question comes from Richard Knights at Barrenjoey. Richard Knights: Just on Yaouré, can you give us a feeling as if -- are you still feeding the plant with stockpiled ore? Or are you now getting all the ore from the Yaouré pit? How should we think about the grade going forward over the next sort of 6 months to end the year? Craig Jones: Yes. So we're predominantly feeding expert or moving forward for the rest of the year. So a lot of that's dependent on stockpile is behind us. Richard Knights: Okay. Any -- can you perhaps be a little bit more explicit with that in terms of a grade range or... Craig Jones: So if you look at -- I mean, the Yaouré grade, I think, is in our mineral reserve estimates. So that will give you an indication on grade from Yaouré. And then obviously, in the second half, we're starting to bring in the CMA underground ore and with the stoping, so the bulk of the ore really in that fourth quarter is when you'd expect to see the bulk of the underground ore starting to be delivered. Richard Knights: Okay. And maybe just one on the new fiscal regime in Côte d’Ivoire. Can you give us an indication about the kinds of things being discussed? Is it just an increase in royalty rates? Or are there other elements being discussed as well? Craig Jones: So I think -- I mean with gold prices the way they are. Obviously, governments are looking to maximize their sort of recovery of revenues as a result of high gold prices. So we're discussing just general taxation and how governments take their share of proceeds from the operations. So basically, we're having broad conversations at this point in time on that. The reason we decided to pay the royalty in good faith is we wanted to be having a productive conversation on how to best achieve the desired outcomes of both ourselves and the government. And we didn't want to be talking about penalties and all these other things. So that's why we took the decision to do what we did. But the conversation is productive and proactive between industry more broadly and the government, and we're continuing about those conversations. Richard Knights: Yes. And do you have a feeling in terms of the sort of time frame to finalizing the new fiscal region? Craig Jones: No, not really. I think these things are -- they're complex conversations and could take a little while. Lee-Anne de Bruin: Yes. I mean the Ivorian government is obviously formalizing the new mining code, which is understood. So they're wanting to finalize it before they release the new mining code so that they can capture it in that. I think just importantly, it is important for you just to emphasize, we do have stability agreements. But we are -- we do understand the government's position that in these high gold prices, they don't necessarily have the structures in place that they feel can give them an equitable share. To answer your original question, just in terms of are we only talking about royalty, I think we're trying to steer the government to other mechanisms like increases in corporate income tax and other things that we think are sort of more effective in distribution of profits. But it's been a very collaborative engagement, and I probably in my history in mining, I don't think I've ever seen the industry working so well together as we have been in Côte d’Ivoire, so we are looking forward to getting an outcome that's supportive for both the government and industry and ongoing investment in Ivory Coast. Richard Knights: Yes. Okay. Is there any risk that it could be retrospective in nature? Lee-Anne de Bruin: No. I mean, I think just as a bit of background, remember, last year, the Ivorian government implemented this 2% additional royalty into the Finance Act, which doesn't apply to companies that have stability agreements. So that's -- so effectively, the only way it's going to be applicable is in that we've paid the FY '25 with them in good faith and as part of negotiations given that the average gold price for the year was about $3,500 an ounce last year, spot price, remembering that in Ivory Coast, you pay royalty on spot price, not on sales price. And so no, so there's very low likelihood that it's going to be retrospective. The Ivorian government are, in my experience, very -- they do understand investments and they have got a lot of projects ongoing and being developed in Ivory Coast that any sort of retrospective change would be pretty detrimental to those projects. Operator: Your next question comes from Levi Spry at UBS. Levi Spry: Maybe can we just follow up on the royalty piece. So maybe just a refresher or around the grounds on what rate is included in your cost guidance across the 3 sites and the development site? Lee-Anne de Bruin: So hopefully, I'll answer your question correctly. So just to backtrack. So the royalty that was included in the $1,800 that's been reported, for example, includes only the 2% relative to that quarter. So if you talk about the December quarter, yes, we've got -- we've included that. In terms of the guidance, similarly, we have guided conservatively because we don't actually know the outcome of this, but we've included the 2% royalty in the guidance that would apply to the period. So it would apply for -- from 1st of July 2025 to 30 June 2026. We have included a 2% royalty assumption for that period. We have not included in that what we paid for Q3 and Q4 of FY '25. Does that makes sense? Levi Spry: I think so. But can I just confirm the absolute number that you're budgeting to pay in Ghana, in Côte d’Ivoire and then... Lee-Anne de Bruin: So the Ghana royalty is the 5% that we -- plus the 3% GSL. So we've got -- so they've got a 5% royalty and then something that they call a global sustainability levy, which is 3%. So we're paying a total of 8% in Ghana. And then in Ivory Coast, now Ivory Coast has got a scaled royalty, but at current gold prices, you're going to be paying -- we've assumed 6% plus a 2% additional royalty across all of the sites in Ivory Coast. Levi Spry: Yes. Got it. And maybe just moving to PDI. So like can you just flesh out intentions now and the potential to recycle that capital going forward? Craig Jones: We have no plans at this point in time with PDI. So we'll just continue to watch and monitor how that develops. In terms of our position in PDI, there's been no decision on any changes to that position. So I mean, we've -- it's been a pretty good investment for us. So we'll continue to sit on that at this stage. Levi Spry: Okay. And then just Nyanzaga, obviously, big value driver, a key project. Just a bit more detail around next steps as we think about first production only 12 months away? Craig Jones: Yes. I think we've obviously continue to work through the construction phase. So it's really moving into tank erection now. Steel erection will be starting shortly. The concrete is progressing well. We have -- the bulk earthworks are predominantly done, and it's really now start to pre-strip and get ready for all presentation and commissioning in the back end of the year. Levi Spry: And just -- you probably mentioned it, but just confirming critical path sort of type items. Craig Jones: Yes, mainly through the mills. Operator: Your next question comes from David Radclyffe at Global Mining Research. Okay. Looks like there's some mic issues there. There are no further questions at this time. So I'll now hand back to Craig for closing remarks. Craig Jones: Okay. Thanks, Nathan. Well, as I said, at the end of my presentation, it's -- I really do want to acknowledge the hard work and effort by the teams in Perseus. I think they're what make the business tick. And it was a challenging quarter as we went through quite a lot of change in the business, and they performed well and to get through that process, and we're really looking forward to delivering the second half of this year and continue to build on the value that we've created as an organization and progress our growth projects towards commissioning and ultimately production.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Deluxe Quarterly Earnings Conference Call. At this time, I would like to turn the conference over to your host, Vice President of Strategy and Investor Relations, Brian Anderson. Please go ahead. Brian Anderson: Thank you, operator, and welcome to the Deluxe Fourth Quarter and Full Year 2025 Earnings Call. Joining me on today's call are Barry McCarthy, our President and Chief Executive Officer, and Chip Zint, our Chief Financial Officer. At the end of today's prepared remarks, we will take questions. Before we begin, and as seen on the current slide, I would like to remind everyone that comments made today regarding management's intentions, projections, financial estimates, and expectations about the company's future strategy or performance are forward-looking in nature as defined in the Private Securities Litigation Reform Act of 1995. Additional information about factors that may cause actual results to differ from projections is set forth in the press release we furnished today in our Form 10-K for the year ended 12/31/2024 and in other company SEC filings. On the call today, we will discuss non-GAAP financial measures, including comparable adjusted revenue, adjusted and comparable adjusted EBITDA and EBITDA margin, adjusted and comparable adjusted EPS, and free cash flow. All comparable adjusted metrics reflect the removal of impacts from business exits. In our press release, today's presentation, and our filings with the SEC, you will find additional disclosures regarding the non-GAAP measures, including reconciliations of these measures to the most comparable measures under US GAAP. Within the materials, we are also providing reconciliations of GAAP EPS to adjusted EPS, which may assist with your modeling. And with that, I will hand it over to Barry. Barry McCarthy: Thanks, Brian. And good evening, everyone. I am pleased to share our strong fourth quarter and full year 2025 results. Across the past year, our team executed with discipline, and each of our businesses performed well, driving robust growth of all profit metrics directly benefiting our balance sheet. Here are five key highlights for the year. Number one, revenue and profit growth. Comparable adjusted EBITDA expanded more than 6% at the top of our value creation framework, with organic revenue growing 1%. 2025 was the third consecutive year with EBITDA growing faster than revenue, demonstrating our ability to scale profits. Two, EPS and operating income. Comparable adjusted EPS grew 13%, and operating income increased by 23%. Three, cash generation and balance sheet improvement. We generated $175 million of free cash flow, delivering our 2026 goal in 2025, a full year early. We reduced net debt by $76 million, lowering our year-end leverage ratio to 3.2 times, also ahead of schedule. And we have paid our regular dividend for more than thirty consecutive years. Four, strategic mix shift towards payments and data. Payments and data now account for 47% of revenue, up from 43% a year ago, and around 30% in early 2021. The payments and data businesses combined grew 12% during Q4 and 10% for the full year. We expect to achieve our strategic goal of payments and data achieving revenue parity with the print businesses later this year, delivering on our promise of transforming Deluxe into a payments and data company. Five, exit rate provides optimism for 2026. Chip will introduce our guidance in a minute, but we are pleased with our Q4 exit rates, with all businesses performing well, giving us confidence in 2026. You will recall that at our Investor Day in December 2023, we promised Deluxe would be a significantly improved business by 2026. We think our results clearly tell the story of our progress. Put simply, our team executed well in 2025. Chip will provide deeper details for both Q4 and full year financial performance in a minute. But before he does, and consistent with recent quarters, I will discuss overall business performance in the context of our three ongoing strategic planks. One, shifting revenue mix towards payments and data to deliver ongoing profitable enterprise-level organic growth. Two, driving operating leverage and efficiencies across the enterprise. And three, increasing EBITDA, EPS, and free cash flow to both lower net debt and improve our leverage ratio. Starting with our first priority, shifting our revenue mix toward payments and data. We are executing well against our clear strategy to leverage our history as the leader in paper-based payments to build a leading position in the digital payments and data space. We are strategically redeploying the dependable cash flows, sterling reputation, and strong customer relationships from the print segment to build a leading payments and data company. And it is working. As I noted, payments and data now account for 47% of total revenue, increased by nearly 400 basis points from 2024. We expect to achieve parity later this year, affirming our future as a payments and data company. The data segment, in particular, continued its standout performance to finish 2025, expanding its revenue by just over 30% year over year. You will recall, our data business helps our customers across market verticals attract and deepen relationships with high lifetime value customers. We have built what we believe is one of the largest consumer and small business marketing data lakes in the industry. We pair this information with our large-scale Gen AI-enabled data analytics tools to deliver outstanding ROI for our customers' marketing spend. The flexibility of our data lake, AI-enhanced intelligence, and proprietary targeting tools allow us to quickly shift focus across a broad diversity of bank product offerings, while also extending our services to new logo wins across non-FI market verticals. Beyond the continuing growth momentum in data, Deluxe Merchant Services, or DMS, also extended its revenue growth trend across all four quarters of 2025. DMS revenue growth versus prior year improved sequentially across each quarter of 2025 toward our mid-single-digit growth outlook. We also invested to expand our DMS technology platforms and the strong service model throughout the year. The business delivered growth in line with our expectations, even as some levels of macroeconomic and broader peer group volatility persisted. As one example of our ongoing investment in DMS, we recently announced the deepening of our collaboration with the Visa Direct Network via the introduction of the Deluxe Fast Funds solution. This integration, along with other areas of ongoing investment, demonstrates our commitment to innovation across our DMS offerings. We remain encouraged with our prospects spanning both our direct go-to-market channels and through key partnerships, including our robust network of FI partners and embedded software integrations across market verticals. We are particularly optimistic about the many attractive opportunities in the ISV space, where we have made responsible investments in APIs, reporting tools, and new features. We expect to share more news about some of these opportunities over the course of 2026. Our overall DMS sales pipeline remains strong as we enter the New Year. Moving now to the B2B payment segment. Revenue growth for B2B also accelerated as we finished 2025, as we had signaled during last quarter's call. We saw sequential revenue dollar improvement for this segment across each quarter of 2025, reaching a fourth-quarter revenue peak of more than $76 million. This reflected a year-over-year growth rate of 4.5%, consistent with our prior cadence commentary for the segment. We are well-positioned to sustain growth into 2026 as we continue to invest in newer digital offerings, helping transition the B2B portfolio to a more recurring revenue model. Finally, the Print business. For the full year, the stronger margin check portion of the business continued to perform well, aligning with our long-term expectations, with full-year revenue declining just under 2%. We were encouraged to see some improvement in the rate of decline for shorter cycle legacy promo revenue during the fourth quarter period as well. As we have discussed throughout the year, we remain focused on optimizing the long-term margin profile across print through prioritization of our core offerings and consciously foregoing opportunities with unattractive margins. This strategy is clearly reflected within the expanded print EBITDA margin profile during 2025. To summarize this first strategic priority area, the 10% full-year revenue growth rate from our combined payments and data businesses more than offset anticipated secular decline rates across the Print segment. This expansion drove total company organic revenue growth across both the fourth quarter and full-year periods. The payments and data businesses are together on their way to account for more than 50% of company revenue in 2026, affirming our future as a payments and data company. Moving to our second big strategic priority, driving efficiency across our business operations to improve margins and deliver predictable operating leverage. Operating cost discipline remained a core tenet of the company throughout the year, and our EBITDA margins expanded in each operating segment for both the fourth quarter and full-year periods. We reduced overall SG&A expenses by roughly $40 million over the full-year 2025 horizon. This reflected an improvement of more than 4% year over year. Our OpEx discipline contributed to robust 23% growth of full-year operating income and supported the significant improvement of our balance sheet. Our year-over-year growth of adjusted EBITDA, the twelfth consecutive quarter, and margin expansion realized across all four segments simultaneously demonstrate the continuing strength of our operating model. Finally, moving to the third strategic priority area within our capital allocation model. Increasing adjusted EBITDA and EPS, driving cash flows, and lowering our net debt and leverage ratio. As I noted earlier, we finished the year driving more than 6% growth of adjusted EBITDA, reflecting the high end of our value creation algorithm target range. Our adjusted EPS expanded by nearly 13%, further reflecting our improved balance sheet and strengthening interest rate position as 2025 progressed. We also drove improved conversion of profits into 2025 cash flows. This resulted in a year-end leverage ratio of 3.2 times, ahead of our previously signaled timing as we continue to progress our longer-term leverage target of three times or lower. We reduced our net debt by more than $70 million during the year, demonstrating our commitment to continued balance sheet optimization. To summarize, our 2025 results demonstrate clear progress on all three concurrent strategic priorities. One, shifting the mix towards payments and data. Two, driving operating efficiencies. And three, increasing cash flow generation, driving reduction of debt, and improving our leverage ratio. Both our fourth quarter and full-year results illustrate this progress achieved through disciplined capital allocation, strong execution across each operating unit, and sustained focus around the pushing of our value creation algorithm forward. Revenue momentum and our sales pipelines remain robust across each operating segment, giving us confidence toward continued progress in 2026. Before passing this to Chip to share additional details regarding our 2025 performance and solid 2026 outlook, I want to thank my fellow Deluxers for executing so well. I am proud of their unwavering dedication to our customers and the communities that Deluxe has served for generations, especially as we celebrated the company's one hundred and tenth anniversary. It is via these daily efforts that we set Deluxe on a promising path for the next generation as a trusted payments and data company. Chip, now over to you. Chip Zint: Thank you, Barry, and good evening, everyone. As Barry noted in his opening, we were very pleased with our strong 2025 progress, including our better-than-anticipated free cash flow conversion and resulting delevering pace. Expansion of comparable adjusted EBITDA and EPS growth rates, lowered overall operating expense, and reduced restructuring-related spending during the year clearly highlight our progress. Our strong momentum toward key Investor Day outcomes is clearly embedded within our 2026 guidance ranges, which I am pleased to be able to share this evening. Our 2025 results also demonstrate continued improvement in the health of our balance sheet. We are pleased with our recently upgraded credit standing across key capital markets and our strengthened quality of earnings as we execute our clear strategy. I will begin by reviewing some of the consolidated highlights for the year before moving on to operating segment results and our 2026 guidance ranges. For the full year, we posted total revenue of $2,133 million, increasing 0.5% versus 2024 reported results while expanding by 1.1% year over year on a comparable adjusted basis. We reported full-year GAAP net income of $85.3 million or $1.87 per share for the year, improving from $52.9 million or $1.18 per share in 2024. This increase was driven by overall revenue growth, improved operating margins, and lower restructuring spend during 2025. Full-year comparable adjusted EBITDA was $431.5 million, improving $25 million or 6.2% from the prior year results. Adjusted EBITDA margins were 20.2%, expanding by 90 basis points from the 2024 levels. Full-year comparable adjusted EPS came in at $3.67, improving 12.6% from $3.26 in 2024. This improvement was primarily driven by expanded operating profits, along with slightly lower interest expense. Now turning to our operating segment details, beginning with Merchant Services. For the full year, Merchant segment revenue finished at $398.6 million, growing by 3.8% versus 2024 results. We were pleased with this full-year growth trajectory, which expanded sequentially across each quarter, as Barry noted, to reach our mid-single-digit fourth quarter exit growth rate consistent with our longer-term outlook for this business. Segment adjusted EBITDA finished 2025 at $85.9 million, expanding by 9.4% on the improving revenue trajectory and operating cost efficiencies realized versus the prior year. Margins finished at 21.6%, expanding by 120 basis points versus full-year 2024 levels. Merchant revenue for the fourth quarter finished at $101.5 million, which reflected growth of 6.3% versus 2024, inclusive of our sequentially improving growth trend across the quarters. Merchant fourth-quarter adjusted EBITDA finished at $22.3 million or 22% of revenue, expanding by 80 basis points versus 2024. Margin improvement was driven via the improved revenue growth rate, continuing cost discipline, and overall channel mix dynamics across the quarter. Our guidance ranges for 2026 reflect the expectation for growth of Merchant segment revenue in the mid-single-digit range, with continued expansion of margin opportunities across the portfolio as I will discuss in greater detail in a bit. We remain confident in our ability to drive growth across merchant, based on our robust pipeline of new FI, ISV, and ISO partners either currently signed or in queue for 2026, as well as additional merchant adds across our direct go-to-market channels. We have also assumed fairly stable ongoing macroeconomic conditions related to discretionary consumer spending levels across our broader guidance ranges. Shifting to results within the B2B payments segment, B2B revenue finished the year at $290.5 million, reflecting growth of 0.9% versus the prior year. This overall growth rate aligned to our in-year expectations and reflected sequential improvement of B2B revenue dollars during each quarter of the year, driving an improved fourth-quarter revenue exit trajectory. 2025 adjusted EBITDA for B2B came in at $64.4 million, reflecting an overall 22.2% margin. This represented a strong 12.8% expansion of adjusted EBITDA from the prior year results. EBITDA growth was driven via continued efficiencies realized across our operational footprint and ongoing migration of the B2B business model toward expansion of our more recurring revenue offerings. This margin rate was aligned to our expectation, reflecting expansion from the high teens toward low to mid-20s profile consistent with our Investor Day multiyear outlook for the segment. For the fourth quarter, B2B revenues were $76.3 million, expanding by 4.5% versus the prior year. Q4 adjusted EBITDA finished at $18.7 million, reflecting a strong 24.5% rate. In line with the improving fourth-quarter revenue growth trajectory for the segment. Adjusted EBITDA for the quarter improved by 29% versus the 2024, unstable lockbox processing operations and improving segment revenue mix within the specific fourth-quarter prior year comparison. Within our 2026 guidance ranges, we anticipate B2B revenues maintaining an overall low single-digit growth profile as the segment continues to transition toward increasingly digital solutions. Our outlook also includes the continued rollout of our VPN capabilities within B2B, supported by the small acquisition we executed during the third quarter. Our 2026 full-year outlook for this segment continues to incorporate adjusted EBITDA margins in the low to mid-20s range, consistent with my prior comments and the rate reflected within our 2025 results. Moving now to the strong 2025 growth results within the data segment. Overall, as Barry noted, the data-driven marketing business saw standout growth across each quarter of the year, as full-year revenue finished at $307.3 million, reflecting 31.3% growth versus 2024. This trajectory continued to demonstrate our success, partnering with an expanded customer base to deploy our increasingly compelling set of marketing capabilities as we have discussed throughout the year. Data growth was also accompanied by strong margin expansion during 2025, inclusive of certain volume-related vendor rebates executed as part of our broader North Star program, as we specifically discussed last quarter. Overall, data adjusted EBITDA finished at $86.4 million, reflecting a 28.1% margin rate, expanding 42.8% versus the prior year result. Fourth-quarter data revenue finished at $73 million, reflecting the anticipated sequential step down from Q3 on normal course seasonality trends within the segment. Despite this, year-over-year revenue growth remained very strong, expanding 30.6% from the prior year fourth-quarter results, on continuing robust campaign demand during the period. Q4 adjusted EBITDA finished at $17.3 million, expanding just over 40% year over year on the drivers noted within my full-year commentary. The Q4 margin rate finished at 23.7%, returning toward our signaled longer-term low to mid-20s expectation range for the data segment. Our full-year 2026 guidance ranges incorporate a sustaining mid to high single-digit segment revenue growth rate going forward. We remain confident in the growth trajectory of our data offerings, even as we begin to lap the raised prior year comparable results seen across the 2025 periods. Our adjusted EBITDA guidance incorporates data margins to sustain in the low to mid-20s margin profile, consistent with our prior quarter commentary, and the outlook communicated within our multiyear Investor Day trajectory. Shifting finally to our print business. The segment finished 2025 with $1,140 million in annual revenue, reflecting an overall decline of 5.7% versus prior year levels, consistent with our overall low to mid-single-digit secular decline trajectory expectation. As Barry mentioned, legacy check continued to perform well, and consistent with our forecast, with revenue declining by 1.8% versus 2024. Accompanying the check trajectory, printed forms and other business products declined at a 6.5% year-over-year rate. On a combined basis, these two core areas blended to an overall 3% rate of year-over-year decline, in line with our longer-term trajectory expectation for the segment. Full-year revenue trajectory across other promotional product solutions, reflecting some demand headwinds we discussed over the prior two quarters, declined 15.3% year over year, while remaining concentrated toward generally lower margin non-core product offerings. Overall adjusted EBITDA for print finished the year at $366.9 million. The 2.6% rate of adjusted EBITDA decline seen within print aligned favorably to the blended rate of revenue decline for the more core print product focus areas. This drove an overall print margin rate of 32.3%, remaining consistent with our longer-term low 30s margin outlook for the segment. Despite some shorter cycle demand headwinds to the top line, we expanded the overall print margin rate by a full 100 basis points across the full-year 2025 results. Fourth-quarter print revenues were $284.5 million, declining 3.8% versus 2024, as detailed further within the revenue breakdown by product category slide in our materials. On a blended basis, the trajectory across more core products reflected a 1.5% decline rate. While other promotional solutions rate improved sequentially but remained outsized to our longer-term revenue decline expectations. Q4 adjusted EBITDA for Print remained strong, finishing at $92.2 million. This reflected a 32.4% margin rate for the segment, expanding year over year by 50 basis points, while remaining consistent with our longer-term outlook rate expectations. Our overall 2026 guidance ranges continue to reflect our confidence towards a predictable year-over-year trend for secular declines across print, driving an overall revenue trajectory in the low to mid-single-digit decline range. We remain confident in our ability to sustain margin levels across print, continuing to target an overall margin rate in the blended low 30s range over the guidance horizon. Turning now to our balance sheet and better-than-anticipated 2025 cash flow results. We ended the year with a net debt level of $1,390 million, down $76.2 million from $1,470 million last year. Consistent with our ongoing commitment to debt reduction as a top capital allocation priority for the enterprise, as Barry highlighted. Our net debt to adjusted EBITDA ratio was 3.2 times at the end of the year, improving further versus our 3.6 times ratio a year ago. As we have noted, this is ahead of the pacing we previously signaled toward our longer-term strategic target of three times or lower leverage. Free cash flow, defined as cash provided by operating activities less capital expenditures, was $175.3 million, up from $100 million in 2024, driven by lower in-year cash restructuring spend, improved year-over-year adjusted EBITDA results, continuing core working capital efficiency, and lower cash taxes. We remain particularly pleased with the accelerated achievement of our targeted free cash flow expansion and the ability to continue reducing our net debt consistent with our clear balance sheet optimization priorities. During the fourth quarter, we deployed $36 million of cash for investing activities relating to the purchase of residual commission rights for one of our largest ISO partners within the merchant services segment. This investment is not expected to materially impact segment revenues during 2026, as related volumes have consistently been processed via Deluxe Merchant Services. We would, however, expect the fold-in of ongoing residual commissions to improve segment margins by as much as 200 to 300 basis points. This impact migrates our margin guidance for the segment toward the upper end of our low to mid-20s rate outlook band. Finally, supported by our strong cash flows and overall 2025 results, our overall balance sheet remains well-positioned and reflects our ongoing strong liquidity. Over the course of the year, our improving capital structure drove two S&P upgrades, the most recent in late November, and Fitch also moved our outlook to a positive watch position. All our material debt maturities remain aligned to our 2026 capital structure, following our late 2024 refinancing activity. Our flexibility toward potential future portfolio optimization or other opportunistic investments continues to improve as we approach our targeted longer-term balance sheet ratios. Before turning to the details of our 2026 outlook, consistent with the remaining plank of our capital allocation priorities, the Board approved a regular quarterly dividend of $0.30 per share on all outstanding shares. The dividend will be payable on 02/23/2026 to all shareholders of record as of market closing on 02/09/2026. With that, I am pleased to now share our overall guidance ranges for 2026. Our ranges for the full year are as follows. Revenue of $2,110 million to $2,175 million, reflecting negative 1% to positive 2% comparable adjusted growth versus 2025. Adjusted EBITDA of $445 million to $470 million, reflecting between 39% comparable adjusted growth. Adjusted EPS of $3.9 to $4.3, reflecting between 6% to 17% comparable adjusted growth. And free cash flow of approximately $200 million, reflecting 14% growth versus our 2025 results. And to recap my previous segment assumptions, we anticipate the Merchant segment to grow revenue in the mid-single-digit range year over year, B2B growth is expected to expand at low single-digit levels, Data will maintain strong mid to high single-digit revenue growth rates as we lap increased baseline comparables across 2026 quarters, and print will continue to reflect low to mid-single-digit secular decline rates. Margins for merchants are expected to reach a mid-20s profile, while B2B will remain in the low to mid-20s, consistent with 2025, as data also returns to our longer-term low to mid-20s profile expectation. And print margins will remain roughly flat in the low 30s range. Lastly, we would expect significant efficiencies across our corporate operations and spending, in line with our multiyear commitments and conclusion of North Star plan objectives. Finally, to assist with your modeling, our guidance assumes the following. Interest expense of approximately $110 million and an adjusted tax rate of 26%, depreciation and amortization of approximately $135 million, of which acquisition amortization is approximately $45 million, and an average outstanding share count of approximately 46.5 million shares, and capital expenditures between $90 million and $100 million. This guidance remains subject to, among other things, prevailing macroeconomic conditions, as noted previously, including interest rates, labor supply issues, inflation, and the impact of divestitures. To summarize, our solid 2025 execution and strong momentum put us on a strong trajectory heading into 2026. Our guidance for the year shows the significant progress we have made toward our Investor Day commitments of just over two years ago. 2026 is a year where the results of our hard work deliver major advances towards all three of our critical strategic priorities. Payments and data revenues are expected to reach parity with the legacy print side of the business, putting us on a more sustainable, long-term growth trajectory. Our earnings expansion is expected to continue once again outpacing revenue growth as we drive efficiencies and improvements to our cost structure. And our significant free cash flow generation will allow us to achieve our sub-three times leverage target in the first half of the year. Each of these expectations is consistent with our clear ongoing value creation formula, and we remain confident in our overall progress against our focused capital allocation priorities. Operator, we are now ready to take questions. Operator: Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using the speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please limit yourself to one question and one follow-up. You may rejoin the queue with additional questions. Again, please press star 1 to ask a question. And we will take our first question from Kartik Mehta with Northcoast Research. Please go ahead. We are unable to hear you. If you are out of speakerphone, please pick up your handset or depress your mute function. And then hearing silence, we will go on. To our next question from Charlie Strauzer with CJS Securities. William C. Zint: This is Will on for Charlie. You made note about the use of AI-enabled tools supporting the data segment and developments and payments around embedded solutions such as Deluxe Fast Funds. As the largest financial players increasingly discuss investment in Agents e-commerce and the impacts of AI across industries, how would you say Deluxe is positioned to respond to or to take advantage of some of these trends? Barry McCarthy: So Will, appreciate the question. I would tell you that we are very proud and believe that Deluxe is very well positioned. We are a company that actually has applied AI technology in multiple places across our business. We are not experimenting with it. We have gone live, and it is delivering improved performance. So as I mentioned in my prepared remarks, it is a part of how we are winning with our data-driven marketing business. As I said in my remarks, we built what we believe is one of the largest consumer and small business data lakes, and we pair that with great talent but also great tools that are Gen AI-based that get smarter with every campaign that we run. And if you compare our results and the number of at-bats we have, we do thousands of campaigns a year, and any individual bank might do a large bank might do hundreds. So not only do we have more at-bats, but given the nature of Gen AI, we also have the opportunity for some exponential increase in our capabilities and success from a campaign performance perspective. And you can see that in our revenue performance. You know, we grew 30% in the full year, and that is a direct result of having great tools, great technology, great customer support, and being able to move quickly to help an institution solve its problems around growth, customer acquisition, or however we can apply that data to help them be successful. William C. Zint: Very helpful. Thank you. Just to follow-up, given the release of your updated outlook, how are you feeling about macroeconomic or other risks potentially impacting your growth segments in particular? And what factors could drive upside to the higher end of the outlook provided? Barry McCarthy: Sure. I will start to give you some there, and then Chip can jump in too. But on previous calls, during the whole last year, we have been talking a bit about macroeconomic uncertainty, but we will tell you what we have seen in the sort of back half of the year, 3Q4 and even into the start of this year. We are seeing what we would consider just more traditional patterns of consumer behavior. Now the shift has still happened between discretionary and less discretionary categories that we saw earlier in the year, but that shift seems to have stabilized. And so we believe that that gives us a good, you know, it gives us good confidence as we look forward to this new year. We are optimistic that the consumer is going to stay healthy. And that that will help not just our merchant business but our businesses overall that tend to track pretty darn well with the economy overall. Chip Zint: Yeah. I think well said, Barry. I guess two points I would make. First of all, we are just fundamentally in a different place coming out of 2025 and going into 2026 than we were a year ago. If you look at the execution and the performance across all four segments just from a year ago, everything is in a different place in terms of momentum and how we are performing. I think the other thing I would call your attention to is just the data segment in particular. Obviously, that was a business that experienced extraordinary demand last year. And obviously, at times outperformed even our expectations. But what we know is we are going to face some monster comps in the back half of the year. And I will just remind you, this is a campaign-oriented business. And because of that, the nature of it is we have better visibility to the next one to two quarters than we necessarily do the third or fourth one out. So as we think about the momentum of the business, that puts us on a path to see some solid growth continue for data for the first half of the year, not as strong as what you just saw, but we would expect data to continue a nice double growth rate in the first half of the year. And then obviously, once we come up against those comps in the half, things will more normalize, getting to that overall guidance range. So I think to overall answer, we can drift up throughout the year. It is going to be getting more visibility to the pipeline, continuing the momentum across all the segments, and just continuing to execute the way we have over the last four straight quarters or so. Thank you. Operator: Thank you. We will take our next question from Kartik Mehta with Northcoast Research. Kartik Mehta: Hey, good afternoon, Barry and Chip. Sorry about that. I was having phone issues. But, Barry, you know, you talked about the business exiting 2025 with some growth trajectory, which is great to see. As you look at 2026, what are your primary objectives for the business? Maybe, you know, your top two objectives you would like to accomplish in 2026. Barry McCarthy: Sure. So let me just reiterate that we think there are three big strategic planks of what we are continuing to drive in this business. The first one is to shift the mix towards our payments and data business. You heard us say that we added 400 basis points of revenue to our mix there going from 43% to 47%, and we think that we get to parity as the year unfolds. And Kartik is following our story for a while. You know why that is so important because it puts a bigger percentage of our revenue every day on growth segments to make it easier to offset the secular declines on the print side of the business. And as we continue to grow the payments and data business, it gets easier and easier for us to accelerate our overall growth rate. The second area is driving efficiency in everything we do. Coming out of the work we did on the North Star project that has now moved to business as usual. We have built a good amount of muscle in operating the business even more efficiently than ever. And the third, of course, is to generate cash flow through EBITDA, etcetera, to lower our debt net debt, and our leverage ratio. So those are the big three things that we are working on as a company. And each one of the businesses, they are specific strategic things they are trying to achieve, everything from building the ISV channel more strongly in the merchant business, to accelerating the software side of the B2B business and working on the margin. In the data business, of course, continuing the phenomenal trajectory thereon. And in the print business is holding on to those fantastic margins. Renewing customers and continuing the healthy cash generation of that business. So if all those things work together, to deliver what we think is going to be a very another very nice year in 2026. Consistent with our ability to execute that hopefully, we highlighted in our prepared remarks. Kartik Mehta: Very good. And then did you look at the merchant business, I know one of the objectives was to grow the distribution. As you kind of look at the pipeline, you talked a little bit about the ISV distribution system channel. I am wondering, you know, as you look at the pipeline, what does the pipeline look like for 2026 in terms of adding additional distribution? Barry McCarthy: Sure. So, Kartik, I think we talked on the last call about the fact that we have really been working on putting more muscle into our ISV channel. We have a new-ish leader there now that is helping us build a very nice and robust pipeline. We have also paired that with responsible investments in improving our API suite, working on our reporting tools, and other features and functionality that we think will make our program even more appealing to ISVs. And I think you should expect to hear from us about more about the ISV channel and, hopefully, knock on wood, some wins that we can share with you as the year unfolds. But we are very optimistic that we have the right service model as well as the right feature set and now with the right leadership driving distribution, we think we have got a real opportunity there. Kartik Mehta: Perfect. Thank you very much. I appreciate it. Barry McCarthy: Great. Operator: Thank you. Once again, if you would like to ask a question, please. Your next question comes from Marc Riddick with Sidoti. Marc Riddick: Hey, Marc. So, first of all, thanks for all the detail that has already been provided and certainly quite a bit has been accomplished. Was wondering if you could talk a little bit about maybe some of the opportunities that you see before you. And specifically, I was sort of thinking about some of the maybe build versus buy kind of decisions as far as investments. And we had the CheckMatch acquisition over the summer last year. You could talk a little bit about the capabilities that you are looking to continue to enhance and possibly maybe your appetite for a build versus buy kind of decision around those lines. Barry McCarthy: Sure. Let me just start with the point that we believe we are very fiscally responsible and good stewards of shareholder capital. And as you have seen us continue to help this business perform, paying down debt, improving our leverage ratio. We did make two small acquisitions, the one that you mentioned with CheckMatch, which helps our B2B business, and then bought the residuals from an ISO or an independent sales organization that was on the merchant business. Both of those we believe will deliver nicely for us, that there are logical tuck-ins that will help deliver improved performance, particularly around profitability over time. We also have a pretty great track record, Marc, of being able to deliver capabilities ourselves to help the business grow. So, for example, we were one of the first companies in the merchant processing space to get approval and certification from Apple for a program they called Tap on Glass. That allows two different phones to pay each other. You just saw us announce an integration with Visa into our product, Deluxe Fast Pay. You have heard us about our investment in building the database and the AI tools that have led to and created the opportunity for this massive growth in our data-driven marketing business. And even in our check business, we have been very responsible and making responsible investments to secure the margin profile of our check business for the intermediate to long term. So we think about these things all the time and finding a balance between building things ourselves, which hopefully has the highest rate of return for shareholders. But when we see opportunities like we saw with the two things that we have talked about, as long as they are responsible and they meet our high hurdles, we are going to move forward with those because they are accretive to the company. Help us succeed. Chip Zint: Yeah. And, Marc, it is Chip. I will just add a couple more comments. So first of all, you saw us guide $90 million to $100 million worth of CapEx spend. We have been spending at that level pretty consistently the last few years. And as Barry said, we feel like we are good stewards of shareholder capital. So think of that as the right balance of investments that the business needs to drive efficiencies, remain competitive, and invest in new growth opportunities to attack the market and win, obviously, in the competition. So embedded in our guidance is an organic continued investment in the business. And the second point to Barry's comment, we are continuing to stay very clear on our existing capital allocation priorities. So as we watch the generation of free cash flow and as that has been expanding and getting better and more improving north of 40%, last year, in fact, we are able to look at that in the direct impact it has on our leverage ratio and the trajectory we are on, and we are able to balance various levers, which gives us a chance to be opportunistic, as Barry said. Again, if it is the right opportunity with the right returns. So I think the way he described our fiscal responsibility is exactly how I would think about it, and it is how we have said we would prioritize capital allocation from the get-go. Be able to invest internally for organic ads, while also continuing to delever and improve the balance sheet, which just gives us continued optionality as we go on. So I think all of those things are embedded in how you should think about we think of this going forward. Marc Riddick: Great. Thank you very much for that. And then I guess maybe I want to sort of shift over to sort of the AI focus opportunities? And maybe is there sort of an area where you see greater client receptivity? And by that, I am speaking of industry verticals or geography, if that is more appropriate. Are there any particular areas that are sort of leading as far as acting on those opportunities? Through Deluxe that you are seeing currently? Thanks. Barry McCarthy: Sure. Appreciate the question. I really do not think about it as a geography or client type. I really think about how we are applying AI, which is to solve specific problems. And we have applied AI in virtually every part of our company's business. In our B2B space, we are using it in our lockbox operation to improve matching rates very dramatically, taking out labor and cost for our customers. Already talked about in our data business how we are applying AI tools to get better outcomes and better ROI for our customers. And in our merchant business, we are using it specifically to drive our self-service chatbot at a very, very human experience. We also use it in the B2B space for the similar chatbot and even on our deluxe.com. So we are applying AI technology to solve customer problems. And we have seen great receptivity and uptake on each one of those opportunities because they deliver and they fix a problem for a customer. It is not about technology for technology's sake. It is not about having a shiny new toy. It is actually about delivering value, and that is one of the things that this company does so well is find the to help a customer fix or solve a problem and then deliver for them. And AI is one more really big tool now in our toolkit and our toolbox to help solve those problems, and we are doing it across our full portfolio of products and solutions. Marc Riddick: Great. Thank you very much. Barry McCarthy: Thank you. Operator: And at this time, we have no further questions. I will now turn the call back to Brian Anderson for additional and closing remarks. Brian Anderson: Thanks, Rachel. Before we conclude, I would like to share that management will be attending the JPMorgan Global High Yield and Leverage Finance Conference, March in Miami. And the Sidoti Small Cap Virtual Conference, March 19 during the quarter. Thank you again for joining us today, we look forward to speaking with you all again in May as we share our first quarter 2026 results. Operator: This does conclude today's call. Thank you for your participation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Sands Fourth Quarter 2025 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to Mr. Daniel Briggs, Senior Vice President of Investor Relations at Sands. Sir, the floor is yours. Daniel Briggs: Thank you. Joining the call today are Rob Goldstein, our Chairman and CEO; Patrick Dumont, our President and Chief Operating Officer; Dr. Wilfred Wong, Executive Vice President, Sands China; and Grant Chum, CEO and President of Sands China and EVP of Asia operations. Today's conference call will contain forward-looking statements. We will be making those statements under the safe harbor provision of federal securities laws. The language on forward-looking statements included in our press release also applies to our comments made on the call. The company's actual results may differ materially from the results reflected in those forward-looking statements. In addition, we will discuss non-GAAP measures. Reconciliations to the most comparable GAAP financial measures are included in our press release. We have posted an earnings presentation on our website. We will refer to that presentation during the call. Finally, for the Q&A session, we ask those with interest to please post 1 question and 1 follow on so we might allow everyone with interest the opportunity to participate. This presentation is being recorded. I'll now turn the call over to Rob. Robert Goldstein: Thank you, Dan, and good afternoon. Thank you for joining us. Marina Bay Sands delivered EBITDA of $806 million, simply the greatest quarter in the history of casino hotels. We see $2.9 billion of EBITDA this year. Mass gaming and [ spot win ] exceeded $951 million this quarter, which is up 118% in Q4 in 2019, up 27% in Q4 last year. Of course, we are delighted with the results, we look forward to more this year. This is an extraordinary market we have built a product to maximize the opportunity. The question is how much further can we go in the next 2 years. There's has never been a building to my knowledge to deliver these types of results. Macao delivered $608 million of EBITDA for the quarter, and we are disappointed with that EBITDA number. However, mass market revenue did exceeded 25% this quarter of share, up 23.6% in the first quarter of 2025. Macao market is driven by the premium segment which is a highly competitive market. There may be a day when base mass recovers, and we will excel when that day comes, but until then, we will continue to focus on our ability to make the assets work harder to achieve $700 million per quarter. The team is in the right place, and we will deliver better results in 2026. So let's hear it from Patrick. Patrick Dumont: Thanks, Rob. Macao EBITDA was $608 million. If we had held as expected in our rolling program, our EBITDA would have been lower by $26 million. When adjusted for higher-than-expected hold of the rolling segment, our EBITDA margin for the Macao portfolio of properties would have been 28.9%, down 390 basis points compared to the fourth quarter of 2024. We are focused on delivering revenue and cash flow growth across the portfolio. Margin at the Venetian was 32.3%, while margin at the Londoner was 28.8%. We expect growth in EBITDA as revenue to grow. We will use our scale and product advantages together with targeted incentives to better address every market segment. We see opportunity in every segment at every property in the portfolio. In Singapore, Marina Bay Sands EBITDA for the quarter was $806 million at a margin of 50.3%. If we had held as expected in our rolling program, our EBITDA would have been lower by $45 million. The record financial results at MBS reflect the impact of high-quality investment in market-leading product, world-class service and the growth in high-value tourism. Turning to our program to return capital to shareholders. We repurchased $500 million of LVS stock during the quarter. We also paid our recurring quarterly dividend of $0.25 per share. We believe repurchases of LVS equity through our share repurchase program will be meaningfully accretive to the company and its shareholders over the long term. During the fourth quarter, we purchased $66 million of SCL stock, increasing the company's ownership percentage of SCL to 74.8% as of December 31, 2025. We continue to see value in both names. We look forward to continuing to utilize the company's share repurchase program to increase returns to shareholders. Thanks again for joining the call today. Now let's take questions. Operator: [Operator Instructions] The first question today is coming from Dan Politzer from JPMorgan. Daniel Politzer: And Rob, congrats on the storied career at Las Vegas Sands. We'll definitely miss hearing your honest assessment of what's going on in the markets across the world. First, on Singapore -- yes. Another, obviously, a real strong quarter here. I mean the VIP rolling chip volume acceleration was notable. You saw obviously an acceleration across the board on the gaming side. I mean, where -- what particularly is driving that? I mean I know this is the third quarter we're seeing it, but maybe now you have a better pause on what's going on and what's specifically driving that? And are there any additional programming elements or OpEx endeavors that you feel like you need to put in place to further sustain this going forward? Robert Goldstein: I think you're seeing, Dan, the property is extraordinary. The offerings are great, and we have a lot of fantastic customers in Asia. I don't think it's a different story. It's the same story. Just more and more people coming into that property, 1 experiencing and coming away very happy. And the volumes across the border, extraordinary. As I referenced, the greatest building history of casino hotels made of any operating building. Nothing way different, just more of the same, more people showing up with, got lots of money to gamble, lots of appetite. We're very fortunate. It's a very strong customer base across the region. So nothing really different now. Patrick Dumont: Yes, I just want to comment on the last part of your question. There's really nothing that we have to do from an OpEx side, except to continue to improve our service models and our programs there. We're continuing to invest in Singapore. We continue to do some renovations. While the suites are done in the casino area is mostly done, I think we're going to tie to adjust our amenity set and continue to invest in our service there. But from our standpoint, I think where we are and where we need to be, but we'll continue to look to improve as we can. Daniel Politzer: Got it. And then just pivoting to Macao as we try to unpack these numbers. On a hold-adjusted basis, EBITDA margin is down quarter-over-quarter. I mean, how much of this is just the OpEx environment, if there's any other one-offs in the quarter to highlight? I mean, given that we're a few quarters in now to the promotional strategy that you undertook. I mean, where do you feel like it's not really resonating? What strategy do you have in place that you feel like you can start to gain traction there? Kwan Chum: Yes. Thanks, Dan, for the question. Yes, first of all, I think the marketing strategies, leveraging the Londoner Grand ramp-up since May, I think we're moving in the right direction in terms of customer growth, in terms of revenue growth across all the segments. But obviously, Macao right now is driven by the premium segments, both in rolling and non-rolling. And that's where we are getting most of our growth. So in terms of the sequential decline in operating margin, firstly, we have higher reinvestment. But on a sequential basis, that's mostly driven by the segment mix change. So we have more rolling business as a proportion of our total gaming. And within non-rolling is dominated by the super high end on the premium mass. So that's the first factor. Secondly, OpEx was higher, yes. We invested more on event costs and we had higher payroll as we looked primarily as a result of us increasing our operating table hour capacity. And lastly, against prior quarter but also against prior year, the non-rolling home percentage was lower by about 140 basis points. So that obviously impacts ourselves as well. Operator: The next question will be from Lizzie Dove from Goldman Sachs. Elizabeth Dove: And I'll echo my congrats to Rob. You'll definitely be missed. Sticking with Macao, I mean, you've talked in the past about the path long term to getting back to that, somewhere in that $2.7 billion, $2.8 billion kind of range for EBITDA. Curious, kind of tracking on an annualized basis, a little below that right now. How do you think about the pacing to get back there and kind of time line and what needs to happen? Patrick Dumont: So I think, first off, I think we've made a lot of changes over the last couple of quarters, both on our approach to the customer, how we think about service levels we've invested in personnel. We've had additional table hours, which you heard Grant just mentioned. I think we're really focused on both growing revenue and EBITDA. And so I think we've made some great progress this quarter. If you look at some of our top line numbers, we've definitely grown, and we've had success in both rolling and non-rolling at [ thoughts ] as well when you look at year-over-year comps. I think for us, we're sort of working through some of the changes that we've made. And I think the trajectory is heading in the right direction. And I think we've made a lot of important changes. And I think we're in a position to do better over time. And while this quarter may not have produced the results that we want on an EBITDA basis, we see growth, we see better market positioning. We see revenue share growth, but we're heading in the right direction. Elizabeth Dove: Got it. Makes sense. And then you've had so much success in Singapore with side bets and kind of just making gambling more diversified over there. I know you've talked about kind of introducing more of that in Macao. Can you maybe share an update of how far you are in terms of rolling that out in Macao, anything that's kind of different structurally or with the customer base that maybe makes it more or less appealing? And how we should kind of think about structural hold there long term? Kwan Chum: Thank you for the question. I think in Macao, we have been continuously rolling out additional wager options on the baccarat layouts. And we've been having progressively more success in attracting volume against those side wagers. The level of participation in the side wagers is not as high as Singapore, but it is on an increasing trend. And we'll continue to innovate in terms of offering more fun and interesting side wager options in the traditional game of baccarat and also other games as well in terms of additional wager options. So that will continue. But we are seeing a rising interest in these side wagers, but it's just not as high a level as what you see in Marina Bay Sands. Operator: The next question will be from Trey Bowers from Wells Fargo. Raymond Bowers: Great to catch up. Could you guys just talk to what you're seeing in the promotional environment in Macao? Has that changed dramatically in the near term? And what's the expectation as we make our way through '26? Patrick Dumont: So I think the market definitely has become more promotional over time. You heard Grant mention that it's much more premium-focused, and that goes hand-in-hand with that segment. That being said, we're being very competitive. And I think we're seeing the results related to our positioning as we look to be more promotional and as we add the right service levels to ensure that we can take care of these customers in a way that allows them to keep coming back. Grant, I don't know if there's anything you want to add? Kwan Chum: Yes. I think the promotional environment remains intense. And especially in the premium segments, which is really driving the growth in the market. That said, I think we are at a more stable level now in the current quarter, and we can see that progressively in the fourth quarter. But of course, things can change anytime as competitive dynamics change. But at this point in time, I think we are stabilizing at the current levels, at least for our portfolio. And actually, we're hoping to find some headroom to optimize on the reinvestment front into 2026. Raymond Bowers: Great. Then just back to MBS, given the exit rate of where you were in Q4, if we apply seasonal levels of kind of sequential growth to the market, we come up with some pretty big numbers on the top and bottom line in the market. Is there anything to call out that you would just put out there as a put or a take against that as we kind of build our models for the next 12 months? Robert Goldstein: I don't think it's seasonal. I think this is just a building that defines the seasonality of most markets. I think it's more about the right customers showing up, events, et cetera. I don't think that people are dealing with that driven by the seasonality of the market. I think it's just a very, very -- it's the best product in the market, obviously, in one of the best parts of the world. People want to be there if you get the right people to show up. I think it's December, July, it doesn't matter as much as used to in places like Macao or Las Vegas. It's less seasonally driven, I think, and more driven by the building itself in a strong market. So I don't think seasonality figures in. I wouldn't model it based on that. Operator: And the next question is coming from Robin Farley from UBS. Robin Farley: Rob, I just want to add my congratulations and best wishes. I don't even want to say how long I've know anybody, you'll be missed. Robert Goldstein: [indiscernible]. Robin Farley: That will be between us. So I guess 1 question is, any early signs of kind of Chinese New Year levels for demand in Macao, anything you're seeing at this point? Patrick Dumont: I do want to point out that we're going to stay consistent. We're not really going to talk about current quarter. But I will tell you that if you look at the growth in the Macao market overall, it's been very encouraging. So if you look at liquidity in the market, you look at the type of players that are coming in, the value of those patrons, it is premium focused, but it's very encouraging. And I think it's good for the market overall and good for the trajectory of our business and the market. Robin Farley: Okay. Great. And then maybe just a follow-up on Singapore. And Rob, I hear your comments about defining seasonality and kind of -- it seems like every quarter has done better than one would have expected. But maybe so that expectation don't get to -- I mean, is there anything you would say that is like a gating issue or sort of a natural point at which maybe it wouldn't even be reasonable to think that the building could do more early? Where do you see [indiscernible]? Robert Goldstein: We've proved to be very bad in forecasting this. I think last year, I said $2.5 billion is our goal, and people kind of thought that was very ambitious. It proved to be very unambitious. So I think I have a real hard time engaging it because what you now have is this plethora of facts on favor. You have a really great place to visit in Singapore, a wonderful government supporting us. We have a building that a different level was we opened it many years ago, service levels, et cetera, and suite product. It's just the best thing in that region, I think, and people just keep coming to it, and we are pleasantly surprised at the amount of customers, the diversity of the geographic locations they come from. It's got diversity, it's got new customers shift all the time. And any time we think, well, we lost these 4 customers for a reason, 12 more show up. And I think that's the strength of Macao -- Singapore. And I don't think we should pretend to have any great handicapping skills. Can it go to [ 3.2, 3.3, 3.4 ]? I just don't know. I mean, we've had 3 successive quarters that keep getting better and better. It feels like it's sustainable. It feels great. But I think it'll be bullish about to forecast the future and kind of go to [ 3.1 or 3.2 ] as it goes back to [ 2.7, 2.8 ]. I don't know. But I think we've now passed the point of disbelief, realize this is a real building that has real potential to keep growing if the economy stays strong and we continue to deliver a great quality of product. I have a lot of belief in its future. I don't think it's going to fall apart at all. And how much stronger does it get? I don't want to forecast. I can't -- I just can't know. I don't know how to figure out -- more people keep showing up from all over Asia wanting to gamble at Marina Bay Sands. The answer has been thus far this year, absolutely, yes. Operator: The next question will be from Brandt Montour from Barclays. Brandt Montour: The first one is on Macao. The rolling chip volume number is obviously very strong. VIP isn't something that you historically focused on or at least it wasn't a huge part of your mix. But given mix did weigh on the quarter, EBITDA and margins and flow through, the question would be, do you -- has there been any shift in strategy in terms of your relative focus on the VIP part of the business? And is that something we should consider more thoughtfully going forward? Kwan Chum: Brandt, thanks for the question. I think first of all, we have said we are committed strategically to grow in every single segment in Macao that's available to us. And secondly, the growth of the market is currently primarily driven by the premium segments, and that applies both to the rolling segment and the nonrolling. So this quarter, yes, you can see that we've had a pretty significant, terrific increase in our rolling volumes up 60% against prior year, and we're outgrowing a fast-growing market. And I think that reflects a few strategies that we put in place. Number one, we've adjusted some of our commercial programs in that segment. Number two, we've been very successful in attracting the foreign play out of the rest of the Asian markets in the rolling segment, and that's given us a good boost in the volumes. And number three, partly reflecting the strong market in that super high-end segment. We've also been successful in that super VIP rolling segment this quarter as well. So all of these factors contributed to the very strong rolling segment growth. And yes, it's much lower margin than the other segments, but it's still a profitable segment on an absolute gross dollars basis. And of course, our primary focus right now is to grow EBITDA. And of course, if we take advantage of where the market is growing, the rolling segment is definitely a segment that we'll be concentrating on to take advantage of the market growth. Brandt Montour: And the second question would be on Macao and Singapore. The -- there are some concerns out there that World Cup could have some level of impact, folks staying home to watch the games and not traveling as much during that tournament. When you guys look back at your historical performance in prior World Cups, do you see anything that would suggest traffic or the higher end not coming during that term for either Macao or Singapore? Robert Goldstein: I don't believe it matters at all. You watch a telephone, they can I don't think it matters at all. I really -- that's been overblown in the past and overrated. There was a time we got over was coming in to World Cup changed the world for 30 minutes. I just don't think in size of our business is the scale, it matters all that much. You guys feel differently, but I think it's -- I wouldn't -- it's not critical. Operator: The next question will be from George Choi from Citigroup. George Choi: And congratulations, Rob, for your criteria. Firstly, on Marina Bay Sands. At [indiscernible], it looks like MBS generated enough master yard to trigger the higher mass gaming tax rate. Can you confirm if that is right? And is that the reason why we see a slight sequential decline in EBITDA margin given the reported GGR? Patrick Dumont: George, you're very good. I have to hand it to you. We hit the higher tax rate in July. And in the fourth quarter, there was about $44 million of impact. George Choi: Okay. That's good. And encouraging. And secondly, given the CapEx schedule that you guys have for the next few years on Marina Bay Sands, are you guys interested in any other investment opportunities perhaps in Japan? Patrick Dumont: Sorry, are you asking about Marina Bay Sands or Japan? George Choi: I'm just thinking, obviously, you guys have -- just kind of spent a lot of money on Marina Bay Sands. With that in mind, would you be interested in any other opportunities around the region? Patrick Dumont: Yes. I think we're constantly looking at new development opportunities in markets where we think we can do what we do well. And so if Japan were ever to present an investment opportunity that works for us, we'd consider it. But right now, we're really focused on investing on our existing properties, building IR2. We're very excited about that opportunity. That's going to be a step functional growth, we hope. And so you can see the impact that we've had in our investment programs in Marina Bay Sands and the change we have there, and we feel like we're on our way in Macao. So we're very focused on the assets that we have. And if something comes up, we're definitely interested. Operator: The next question will be from Shaun Kelley from Bank of America. Shaun Kelley: Rob, it's been a privilege to work with you for nearly 20 years, which is hard to believe, and congratulations just on everything you've done for the industry. You'll be missed. Maybe just kind of pivoting or kind of 1 directly for Grant, specifically on Macao. Grant, just kind of wondering as some of the initiatives you've worked on, I think we think about some specific things going back 6 to 9 months ago, like adjusting cash comp mix and maybe some more direct cash player rebates in the market, which peers were already doing. Are all those things kind of where you want them to be right now? And have they been stable for a little while? Or are you still tweaking those things at the edges and finding what the right customer balance is for the mix that you're seeing in the market today? Kwan Chum: Yes. Thanks, Shaun, for the question. I think we've been heading in the right direction for some time. And I think we are happy with where we are. You're right, there's been a number of initiatives that we've set out to implement since 6 months ago. I think the sales and marketing programs that were put in place, the product launch that we had in the ground and also some of the adjustments that we made in the rolling segment, those are all feeding through to a higher revenue capture and higher market share. The reinvestment environment, as I described earlier, it's still intense. And also, it's subject to month-by-month change. But at this moment, seeing what we saw in Q4, I think we're reaching a level where yes, I think there is some stability in terms of the way we see our promotional intensity. And we actually hope to be able to optimize some of that across the different segments into 2026. So 2026, I think, is going to be a year where we sustain our revenue growth against the market and then hopefully convert more of that into EBITDA. Shaun Kelley: Great. And maybe just as my follow-up, kind of on the operating expense side of the equation. Could you just talk a little bit about both kind of when traditionally you see some of those annual escalators or market-wide increases you'd see particularly on the labor cost front. Are those primarily in 4Q? Or do they kind of come in more in 1Q? I'm not sure of the timing. And then specifically for the 4Q, did you -- was there any direct impact or a tangible impact from the NBA activities in the market? We know that was probably a big success for Macao broadly, but just wondering if whether it's marketing or operating expenses attached to that could have had an impact on margins? Kwan Chum: Yes. Sure, I referenced that we have higher event costs for fourth quarter, and NBA was the biggest event that we conducted both across the quarter and actually ever in the history of the company. And it was, as you say, tremendously successful. I think the brand projection, I think the stakeholder engagement, the way we're able to bring in new business partners through the NBA China Games Week. And of course, the entertainment we provided to our customers and community stakeholders, I think all of those things, we are absolutely delighted by. And of course, it has a cost impact. But we are very happy that we are continuing with this event in a multiyear partnership with the NBA, and we look forward to doing the event even better in 2026. In terms of the OpEx question, your first point, I think, refers to just general wage inflation, if I'm right, and understand your question. Generally, that those wage adjustments occur in March for us and will occur again in 2026 in March with some wage inflation that we put in place for our frontline staff. Operator: The next question will be from Stephen Grambling from Morgan Stanley. Stephen Grambling: Rob, thanks for all the insights and stories. Given the reinvestment that you all are just mentioning through 2026 in Macao, how does this influence any strategy around renovations or reinvestment into other properties? Patrick Dumont: So I think we're very focused on upgrading our property portfolio, particularly at the high end. We've had some very strong success in the Londoner. Londoner Grand opened earlier in the year, and we're already seeing very strong adoption and strong productivity out of the higher-end suite that we've created there. And of course, we have the Londoner Suites. We have the Londoner Court, which is 1 of our core luxury products. And so as we look around our asset base, we think we have the opportunity to add more amenities, to add better room product and better service over time. So this is part of our ongoing investment cycle in Macao and something that you'll see us do over the coming quarters. Stephen Grambling: And then maybe a quick follow-up on capital allocation. You mentioned spiking buyback and buying the stock in Hong Kong as well as the U.S. Does this eventually shift back to dividends as we get through this reinvestment cycle? Or what -- is this more of a permanent kind of shift towards buyback relative to dividend in, I would say, both entities? Patrick Dumont: I think if you look at the SCL level, just given the market dynamics and I think preferences at the Board level for SCL, hopefully, over time, you'll see the Board there approve dividend increases. And I think that's been the goal. As cash flows continue to grow, the dividend there would increase over time. And we think that's very beneficial to shareholders, including Las Vegas Sands. I think at the Las Vegas Sands level, you see us be very consistent in the way that we repurchased shares. We've done over the last couple of years. I think we'd like to have that continue. We do think the dividend is fundamental to return to capital story. We do look at payout ratios and consider them and look at the flexibility that our cash flows provide to us, given that we do like the idea of investing in new growth opportunities. And we think that the flexibility as well as the accretion from share repurchases is kind of a balance that we like. And so you should see us heading forward in this general direction. And we've been pretty aggressive in the way that we buy back shares previously, and we're going to be positioned to do well with our future cash flows to do the same. So we're excited about it. Operator: The next question will be from David Katz from Jefferies. David Katz: Good afternoon, everybody. Rob, thanks for everything, all the best. I wanted to just focus on Singapore for a minute. There has been a considerable amount of CapEx put in there in a variety of different places. I wanted to just go a little deeper and figure out and understand. Are all of the capital investments that we've been talked about, I know the rooms, gaming floor restaurants, amenities, maybe lobby. Are those all completed and activated at this point? And just thinking about how the property ramps from here continues to strength. Patrick Dumont: So they're not all done. So we still have work to do in other parts of the property gaming floor, yes, rooms, yes. Some public spaces, some mall lobby and SkyParks will have work to be done. So it's not fully completed. And so our goal is to continue to improve the experiences that we offer. The vast majority are done. And so you see the results, and you see how our patrons enjoy the changes that we've made. But over time, we're going to look to improve the property and continue to invest in it to continue to have it being the best in the world. That's our goal. David Katz: Understood. And if I may, as my follow-up, specifically with respect to the lobby, should we be contemplating any disruption as we go through, say, the next couple of years whenever you get to that? Patrick Dumont: No. Operator: The next question will be from Joe Stauff from [ SIG ]. Joseph Stauff: Grant, I just wanted to follow up on some of your comments about that you've -- in Macao, you think you've reached a level of stability regarding investment and the right promo mix. Is that -- could you -- just curious as to why you think that? Is that just a function of you're seeing some of the right KPIs inflecting because of that? Is it because you don't necessarily see a competitive response relative to your higher investment? I was wondering if you could broaden out that answer a little bit more. Kwan Chum: Yes, thanks for the question. No, we can only observe from what we see in the recent months. And I think my comment simply attests to the fact that during the fourth quarter, as we progressed, we see some stabilization in the degree of promotional incentives that we're having to escalate to. I think part of it is we caught up with the market since May, and that was a progressive process. And I think in the fourth quarter, we start seeing, I think, on a stable basis, a higher level of market share and higher level of patronage across all the segments, in particular, in the segments where the market is growing the fastest, which is in the premium segments. And then we also see that dynamic apply to the rolling segment as well. So I think the evidence from the fourth quarter is -- is -- I think, offers good comfort. However, the market changes day to day, minute by minute, so we will have to observe how competitive dynamics evolve in 2026. And one of the key drivers of how dynamics may change is obviously the level of market revenue growth, which is always tough to forecast. So I hope that gives you more color or explanation for my previous comment. Operator: The next question will be from Steve Wieczynski from Stifel. Steven Wieczynski: Congratulations, Rob, I'll add that in real quick. So Patrick, probably for you. If we think about the drop in the Macao margins, which was, I think, about 390 basis points or somewhere in that range, wondering how we should think about margins for the rest of the year, maybe how you guys are thinking about margins for the rest of the year? I'm not looking for guidance, so to speak, but just -- if we don't have visibility into that base mass business and we continue to see this shift towards rolling play and even the high end of non-rolling, should we consider the margins we saw in the fourth quarter a pretty good run rate, at least for the foreseeable future? Patrick Dumont: Yes. I think the way we think about it is that we sort of think about this business as a low 30s margin business, low 30% margin business, just given the mix of play and who's coming to the buildings, the promotional activity necessary to support the patrons. If the base mass comes back in some way, like it existed prepandemic, that's a very high-margin business, and our margin structure can change positively if we overweight towards the IP play, which is a lower-margin business, the margin may be a little bit tighter. But we'd like to believe this is a low 30s margin business and go from there. But I think right now, we're really focused on growing revenue, growing EBITDA and the long-term health of how we grow. And we also believe that our investment over time that we talked about earlier will allow us to attract high-value patrons and position us well for future growth. And we're focused on all those things. Steven Wieczynski: Okay. And then second question probably for Grant. Grant, wondering if you think about that base mass business, which hasn't really returned or improved? One maybe get your updated thoughts in terms of what you attribute that to? Or what factors do you think are kind of continue to hold that segment of the market back? Kwan Chum: Steve, thanks for the question. I think when you see the sequential change in the quarter, obviously, base mass did not really grow, whereas premium mass did. I think what you're seeing is that the lower-end segments, the spend per head has been on a declining trend versus pre-COVID. As to why that is the case, we can speculate different reasons. But I think the most helpful comment we can make on that is simply to observe that, yes, I think since COVID and even in the last few quarters where GGR has accelerated, the base mass, particularly looking at revenue spend per customer in those lower value segments really has been quite stagnant. And of course, you guys might be in a better position to speculate on drivers from the economy to other factors. But we can just tell you what we're seeing on the ground in terms of premium mass versus base mass. And you can see those numbers very clearly in the size that provides. Operator: And the next question will be from John DeCree from CBRE. John DeCree: And Rob, I'll pile on the gratitude, and congratulations as well. My question, Grant, also related to that base mass customer, if I could build on maybe Steve's question. And so spend per head is down, but are you seeing comparable levels of property visitation from that customer? And is there anything you guys have tried to do to stimulate higher spend? Obviously, the premium segment is quite competitive with player reinvestment, but is there anything you can do to maybe help get that customer to open up the wallet a little bit more? Kwan Chum: Sure. We can and we are. I think property visitation across Sands China remains very strong. I think we actually slightly exceeded 2019 in 2025, approaching 100 million visitations in the whole year, but that's where we can also see the lower spend per visitation because it hasn't fed through into the base mass revenues to the extent that you would have expected given this level of property visitation. I think what we have been doing and what we can continue to do is to leverage the assets that we have for that base mass and mid-tier across the retail malls that we have across the entertainment calendar that we provide. And obviously, all of the attractions that we can offer as the most diverse, an extensive integrated resort in Macao. And we're doing all of those things, including, I think, really pushing hard on the event calendar as well as introduce new nongaming loyalty programs into the market, particularly for the retail mall business. And we're seeing good take-up and good success in some of those initiatives. However, when we come back to the base mass gaming, that level of base mass gaming is just not growing as fast as the premium segments. Operator: Thank you. That concludes today's Q&A session. I would now like to hand the call over to Patrick Dumont for closing remarks. Patrick Dumont: One final item today before we complete the call. I would like to mention that Rob is going to be serving in a new role as Senior Adviser to the company for the next 2 years. On behalf of the company's Board of Directors, the senior leadership team, all of our team members, I want to use this opportunity to thank Rob for 30 years of extraordinary contributions to the company and for all of his leadership. Rob served in many important leadership roles for LVS. He's also been a strong and vocal advocate for the gaming industry as a whole. There are not many individuals who have even more of this industry than he has. Rob has hired, led and mentor numerous people over the years. Many of these people serve in leadership roles in the industry or elsewhere because Rob Goldstein took the time to invest in them and their careers. Finally, I want to recognize and thank Rob for his steadfast commitment to the Adelson family. Rob and [ Sheldon ] had a wonderful friendship and achieved so much together. On behalf of Dr. Adelson and the family, thank you, Rob, for everything you've given this company. Your contributions to this industry and this company are too many to list, but they will always be recognized and appreciated. So in closing, I would like to thank you, and I would like our entire team to look forward to working with you in your new role. Thank you, Rob. Robert Goldstein: Thank you, Patrick. Promise better margins in Macao. Stay the course. Thank you very much. Very kind. Thank you for all your kind comments. I appreciate it, and we will improve in Macao and continue to strive for better results. Thank you. Operator: Thank you. And this does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Good afternoon, and welcome to Landstar System Inc. Fourth Quarter Earnings Release Conference call. [Operator Instructions]. Today's call is being recorded. [Operator Instructions] Joining today from Landstar are: Frank Lonegro, President and CEO; Jim Applegate, Vice President and Chief Corporate Sales, Strategy and Specialized right officer; Jim Todd, Vice President and CFO and Matt Dannegger, Vice President and Chief Field Sales Officer; and Matt Miller, Vice President and Chief Safety and Operations Officer. Now I'd like to turn the call over to Mr. Jim Todd. Sir, you may begin. Thank you. James Todd: Thanks, Elmer. Good afternoon, and welcome to Landstar's 2025 Fourth Quarter Earnings Conference Call. Before we begin, let me read the following statement. Following is the safe harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies and expectations. Such information is by nature subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2024 fiscal year described in the section Risk Factors Landstar's Form 10-Q for the 20,251st quarter and our other SEC filings from time to time. These risks and uncertainties could cause results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Landstar undertakes no obligation to publicly update or revise any forward-looking information. I'll now pass it to Lance, our CEO, Frank Lonegro, for his opening remarks. Robert Brasher: Thanks, J.T., and good afternoon, everyone. I'd like to thank our BCOs and agents and all of the Landstar employees who support them every day. The capability, resiliency and level of commitment exhibited day in and day out by our network of independent business owners is unique in the freight transportation industry -- their adaptability and dedication to safety, security and service for our customers is truly impressive. They are exceptional business leaders and key to driving the continued success of Landstar's business model. Before we jump into fourth quarter results, I'd like to take a few minutes to provide a brief reflection on my first 2 years leading this great organization. Despite the unprecedented freight recession continuing longer than many of us had expected. We achieved some significant accomplishments over the past 2 years. We created our key priorities, what we call the 5 points of the start to guide our business, accelerating the model, executing on our growth strategy, managing risk, leveraging our financial strength and enhancing our support. The one at the top of the star is accelerating the model, which is all about our agents and BCOs and -- when they are strong and growing and equipped with the tools and support they need to succeed, the Landstar model really shines, we doubled down on the company's strategic growth initiatives with 2 of those heavy haul and U.S.-Mexico cross-border, representing approximately 20% of our business. While the cross-border business has been impacted by geopolitics, we are more than ready to leverage our new cross-border leadership as well as our strong agent presence and market position when the environment improves. On the heavy haul side with new leadership and strong agent focus, not to mention our ability to do the hard things well, Landstar's heavy haul set a new revenue record of $569 million during the 2025 fiscal year, approximately 14% above 2024s record-setting year. We're continuing to build the leadership team of the future with our executives and VPs, what we call our top 60 with nearly half of that team new to their role, new to their responsibilities or new to the company. That group is collectively focused and incented to drive Landstar's growth and profitability and to maintain our industry-leading transportation and logistics business premised on 3 key elements: safety, security and service. We've reduced the time it takes to become a Landstar BCO while maintaining our highly stringent qualification standards. Huge thanks go to Matt Miller for his efforts here. This year, we will also implement a redesigned BCO onboarding and training program to ensure the delivery of relevant, high-quality instruction and to support Landstar BCOs and upholding the highest standards of service for our customers. We're leaning into the future in deploying technology and specifically AI to benefit our agents, BCOs and Landstar employees. It's all about enhancing our support for the Landstar network. You'll hear more this afternoon about our AI strategy and specific initiatives like the contact center, our path to deploying an ERP and AI-enhanced tools focused on pricing, BCO retention, trailer requests and credit approvals. You'll also hear about our new web portal featuring embedded agentic AI that was built specifically for the needs of Landstar freight agents and that we believe is unique in the industry. As we continue our efforts to find new ways to embed AI in our business, I'm pleased to report that approximately 50% of our IT CapEx budget for 2026 is dedicated to AI enablement and solutions. And importantly, we've continued Landstar's rich tradition of strong capital returns to our shareholders. Over the last 2 years, Landstar returned approximately $261 million to shareholders in the form of share repurchases and another $245 million in cash dividends, we remain committed to our capital return program while continuing to invest capital to improve and grow our business and making our network of entrepreneurs as successful as possible. We've been busy these last 2 years. We're excited about the future, and we look forward to sharing more with you down the road. Turning back to the 2025 fourth quarter results, the challenging demand conditions experienced in the Truckload freight environment over the past 3 years continued during the 20,254th quarter. Volatile federal trade policy and lingering inflation concerns continue to generate supply chain uncertainty. Nevertheless, the Landstar team of independent business owners and employees performed well. Truck transportation revenue in the fourth quarter was nearly flat year-over-year as the slight decrease in total revenue was primarily attributable to decreased ocean revenue. Moreover, as previously disclosed, we are in the process of selling Landstar Metro, the company's Mexican logistics subsidiary. Excluding the revenue contribution from Landstar Metro, for both 2025 and 2024 fourth quarters as well as approximately $16 million in reported revenue during the 2024 fourth quarter that was associated with the previously disclosed agent fraud matter total revenue decreased approximately 1% year-over-year in the 2025 fourth quarter. As disclosed in our prerelease 8-K filed with the SEC on January 21, and the 2025 fourth quarter financial results were negatively impacted by several discrete items impacting insurance and claims expense. First, the company recorded pretax charges of $11 million or $0.24 per share related to 2 separate tragic vehicular accidents involving BCOs leased on with subsidiaries of the company. Second, the company recorded a pretax charge of $5.7 million or $0.13 per share. in connection with the court entry of a judgment in January 2026 that Landstar intends to appeal and which related to a trial that ended in August 2025 relating to an accident that occurred in fiscal 2022. Third, the company recorded a $5.3 million pretax charge or $0.12 per share related to an increase in the company's actuarially determined claim reserves. JT will cover these items in greater detail during his prepared remarks. Nevertheless, we are encouraged by several positive signs. One consistent highlight is the continued strength in the unsided platform equipment business, which posted another strong quarter with an 11% year-over-year revenue increase driven by the performance of Landstar's heavy haul service offering. We generated approximately $170 million of heavy haul revenue during the 2025 fourth quarter or a 23% increase over the 2024 fourth quarter. This achievement reflected a 16% increase in heavy haul revenue per load and a 7% increase in heavy oil volume. Our focus continues to be on accelerating our business model and executing on our strategic growth initiatives, we are continuing to invest in the foundational work that will put Landstar in a great position to leverage the freight environment as it turns our way. We are also focused on our commitment to continuous improvement in the level of service and support we provide to our customers, agents, BCOs and carriers each and every day. Turning to Slide 5. The freight environment in the 2025 fourth quarter was characterized by relatively soft demand from a seasonal perspective, the impact of accumulated inflation remains a drag on the amount of truckload freight generated in relation to consumer spending while the industrial economy remains soft as evidenced by an ISM index below 50 for the entire 2025 fourth quarter. We are pleased to see sequential outperformance by our overall truck revenue per load compared to pre-pandemic normal seasonal patterns despite fiscal October underperforming pre-pandemic seasonal trends. As noted in the press release, we were encouraged to see our overall truck revenue per load increased approximately 6% from fiscal October to fiscal December and appreciate everything the U.S. DOT is doing to support the American trucker. Considering that backdrop, Landstar's revenue performance was admirable in the 20,254th quarter with the number of loads hauled via truck down approximately 1% and almost entirely offset by approximately 1% increase in truck revenue per load compared to the 2024 fourth quarter 2025. Our balance sheet continues to be very strong. And our capital allocation priorities are unchanged. And we will continue to patiently and opportunistically execute on our existing buyback authority to benefit our long-term stockholders. As noted in the slide deck, during 2025, we deployed approximately $180 million of capital toward buybacks and and repurchased approximately 1.3 million shares of our common stock. And yesterday afternoon, our Board declared a $0.40 quarterly dividend payable on March 11 to shareholders of record as of the close of business on February 18. We -- we continue to invest through the cycle in leading technology and AI solutions for the benefit of our network of independent business owners and have allocated a significant amount of capital this year towards refreshing our fleet of trailing equipment with a particular focus on investment in new van equipment. At this stage of the call, I would normally hand it off to JT but we felt it was important to provide analysts and investors with an update on our AI-related activities. I'll now pass the call to Jim Applegate for a discussion of in-flight and planned AI-related initiatives going on at Landstar. Jim? James Applegate: Great. Thank you, Frank. Since 2016, Landstar has been executing a digital transformation strategy to ensure our network of agents and BCOs remains highly competitive in an increasingly technology-driven freight environment. Our goal from the outset was not simply modernization, but enablement, delivering tools that help automate the agent office, simplify the experience in operating as a Landstar business capacity owners and scale the efficiency and effectiveness of our entrepreneurs. Those early efforts branded is Landstar 2020 included the rollout of a new transportation management system, advanced pricing and capacity tools, agent analytics, BCO retention capabilities, mobile applications and trailer management. Landstar 2020 was never viewed as an endpoint. It is the foundation of a long-term commitment to building and deploying industry-leading technology across our entire ecosystem. As we move beyond 2020, that commitment expanded, we invested further into digital capabilities within our corporate operation and the support we provide in the network, including the rollout of modern contact center technology and significant upgrades to our financial, settlements and back office systems. These investments strengthen the overall connectivity and support provided to our entrepreneurial network. What truly differentiates Landstar's technology strategy is how it's conceived and deployed. Our approach is not driven by top-down mandates designed solely to reduce costs. Instead, it's built through close collaboration with our agents and BCOs with a clear focus on enabling growth. By aligning technology investments with the needs of our entrepreneurs, we're able to deliver tools that are adopted and leverage to drive growth and deliver wins in the highly competitive transportation sector. Our agency model growth is often constrained by resources. Without technology, a new agent may reach a couple of million dollars in revenue before needing to add headcount. This is a difficult decision, given the financial risk involved. Our objective has been to deploy technology to fundamentally change that equation. By automating workflows and improving office efficiency, we have helped agents to embrace our tools to significantly increase their revenue base without adding resources. The same philosophy applies to our BCOs by eliminating manual and administrative friction, we enable them to be more productive, all more freight and better serve our agent customers. The end result is a differentiated value proposition for customers, a combination of advanced, purpose-built technology and highly motivated professionals with a direct economic stake in delivering freight safely, securely and with exceptional service. Artificial intelligence represents the next major acceleration of this strategy. The pace of innovation and breadth of potential applications are unprecedented, and we view AI as a powerful enabler of our entrepreneurial ecosystem. Importantly, our AI strategy is evolutionary, not experimental. We're building on the strong digital foundation we already have in place. Today, machine learning is embedded within our pricing and BCL retention tools, allowing them to continuously improve as we scale the available data. Our new contact center platform leverages AI to enhance the knowledge base of the service representatives, analyze sentiment, automate routine tasks, summarize interactions and free our teams to focus on higher-value problem solving. We've embedded AI into our Landstar agent portal, improving access to information, providing actionable business insights and enabling better, faster decision-making. We've also deployed an AI-powered fraud detection solution that analyzes behavioral patterns, documentation, invoice images and shipment characteristics to identify high-risk freight and reduce shipment losses. Looking ahead, beginning in the first quarter of 2026, our AI task force will work with transportation-focused agentic AI start-ups and established technology partners to accelerate AI applications across the ship of life cycle and within agent offices. These efforts are focused on driving efficiency, improving decision-making and further unlocking growth across our network. As technology continues to evolve, Landstar intends to remain at the forefront. We see AI as a strategic enhancement to the competitive advantage of the Landstar business model and the resiliency and capability of our strong network of entrepreneurs. Entering this new era, we believe AI represents another meaningful opportunity to strengthen the safety security and service we provide to our customers every day on every load. Back to you, Frank. Frank Lonegro: Thanks, Jim. Turning to Slide 10 and looking at our network, the scale systems and support inherent and the Landstar model helped to drive the operating results generated during the 2025 fourth quarter. JT will get into the details on revenue, loadings and rate per load in a few minutes. As noted during previous earnings calls, Landstar's Safety First culture is a crucial component of our continued success. Our safety performance is a direct result of the professionalism of the thousands of Landstar BCOs operating safely every day. and the agents and employees who work to reinforce the critical importance of safety at Landstar. I'm proud to report an accident frequency rate of 0.59 DOT reportable accidents per million miles during 2025, and well below the last available national average DOT reportable frequency released from the FMCSA for 2021 and slightly better than the company's trailing 5-year average of $0.61. This long run average is an impressive operating metric that speaks to the strength, skill, talent and dedication of our BCOs and provide the point of differentiation. Our agents are able to highlight in discussions with our freight customers. We remain committed to driving a best-in-class safety culture. I'd also like to take a moment to recognize Landstar's $457 million agents based on our 2025 fiscal results. Importantly, retention within the million-dollar agent network continues to be extremely high. Turning to Slide 11. On a year-over-year basis, BCO truck count decreased approximately 4% compared to the end of the 2024 fourth quarter and approximately 1% sequentially and BCO turnover continues to be influenced by a persistent relatively low rate for load environment, combined with the significant increase in the cost to maintain and operate a truck today compared to before the pandemic. Directionally, we are pleased to see our trailing 12-month turnover rate dropped from 34.5% as of fiscal year-end 2024 to 31.4% at the end of the 2025 fourth quarter. Through the first 4 weeks of the 2026 first fiscal quarter, the number of trucks provided by BCO independent contractors is down fractionally, consistent with typical first quarter seasonality and I will now pass the call back to JT to walk you through the 20,254th quarter financials in more detail. James Todd: Thanks, Frank. Turning to Slide 13. As Frank mentioned earlier, overall, truck revenue per load was up approximately 1% in the 2025 fourth quarter compared to the 2024 fourth quarter primarily attributable to a 7.5% increase in revenue per load on loads hauled by unsided platform equipment and a 2% increase in revenue per load on less than truckload loadings partially offset by a 3.4% decrease in van revenue per load and a 4.2% decrease in revenue per load on other truck transportation loadings. On a sequential basis, truck revenue per load increased 1.5% in the 2025 fourth quarter versus the 20,253rd quarter outperforming typical pre-pandemic normal seasonality increase of approximately 1% despite a relatively soft start out of the gate with fiscal October underperforming normal seasonality. In comparison to overall truck revenue per load, we consider revenue per mile on loads hauled by BCO trucks a pure reflection of market pricing as it excludes fuel surcharges billed to customers that are paid 100% to the BCO. In the 2025 fourth quarter, both revenue per mile and unsided platform equipment hauled by BCOs and revenue per mile on van equipment hauled by BCOs were 1% below the 20,244th quarter. Delving deeper into seasonal trends, revenue per mile on loads hauled by BCOs on unsided platform equipment declined 2% from September to October, was flat from October to November and increased 4% from November to December. The September to October decline underperformed prepandemic seasonal trends, while the October to November approximately equal and the November to December increase, both outperformed pre-pandemic historical trends. Revenue per mile on van equipment hauled by BCO sequentially decreased 1% from September to October and an additional 1% from October to November. Underperforming pre-pandemic historical trends. However, in what we hope was a possible inflection point, revenue per mile on van equipment hauled by BCOs increased 3% from November to December, slightly above pre-pandemic historical trends. It should be noted that month-to-month seasonal trends on unsided platform equipment are generally more volatile compared to that of band equipment. This relative volatility is often due to the mix between heavy specialized loads and standard flatbed volume -- as Frank alluded to, we've been pleased with the recent performance in our heavy haul service offering. Heavy haul revenue was up an impressive 23% year-over-year in the fourth quarter, significantly outperforming core truckload revenue. Heavy haul loadings were up approximately 7% year-over-year and revenue per heavy haul load increased 16% year-over-year. This represented a mixed tailwind to our unsided platform revenue per load as heavy haul revenue as a percentage of the category increased from approximately 38% during the 20,244th quarter to approximately 42% in the 2025 fourth quarter. Non-truck transportation service revenue in the 2025 fourth quarter was 28% or $30 million below the 2024 fourth quarter. Excluding approximately $16 million in revenue reported during the 2024 fourth quarter that was associated with the previously disclosed agent fraud matter, transportation service revenue in the 2025 fourth quarter decreased by approximately $14 million or 15% compared to the 2024 fourth quarter. Turning to Slide 14. We've provided revenue share by commodity and year-over-year change in revenue by commodity. Transportation & Logistics segment revenue was down 2.9% year-over-year on a 2% decrease in revenue per load and a 1% decrease in loads compared to the 2024 fourth quarter. Within our largest commodity category, consumer durables, revenue decreased approximately 2% year-over-year on a 3% decrease in volume, partially offset by a 1% increase in revenue per load. Aggregate revenue across our top 5 commodity categories, which collectively make up about 71% of our transportation revenue increased approximately 2% compared to the 2024 fourth quarter. While Slide 14 displays revenue share by commodity, we thought it would also be helpful to include some color on volume performance within our top 5 commodity categories. From the 2024 fourth quarter to 2025 fourth quarter total loadings of machinery increased 6%. Automotive equipment and parts decreased 5%. Building products decreased 11% and hazmat decreased 3%. Additionally, substitute line haul loading is 1 of the strongest performers for us during the pandemic and 1 which vary significantly based on consumer demand, increased 3% from the 2024 fourth quarter. As we've mentioned many times before, Landstar is a truck capacity provider to other trucking companies, 3PLs and truck brokers. During periods of tight truck capacity, those other freight transportation providers reach out to Landstar to provide truck capacity more often than during times of more readily available truck capacity. The amount of freight hauled by Landstar on behalf of other truck transportation companies is reflected in almost all of our commodity groupings, including our substitute line all service offering. Overall, revenue hauled on behalf of other truck transportation companies in the 2025 fourth quarter was 15% below the 2024 fourth quarter, an indicator that capacity is reasonably accessible in the marketplace. Revenue hauled on behalf of other truck transportation companies was 11% and 13% of transportation revenue in the 2025 and 20,244th quarters, respectively. Even with the ups and downs in various customer categories, our business remains highly diversified with over 20,000 customers, none of which contributed over 8% of our revenue in the 2025 fiscal year. Turning to Slide 15 and the 2025 fourth quarter, gross profit was $85.6 million compared to gross profit of $109.4 million in the 2024 fourth quarter. Gross profit margin was 7.3% of revenue in the 2025 fourth quarter as compared to gross profit margin of 9% in the corresponding period of 2024. In 2025, fourth quarter, variable contribution was $166 million compared to $166.5 million in 2024 fourth quarter. variable contribution margin was 14.1% of revenue in the 2025 fourth quarter and 13.8% in the 20,244th quarter. Turn to Slide 16. Operating income declined as a percentage of gross profit, primarily due to the impact of highly elevated insurance and claim costs in the 2025 fourth quarter the impact of the company's fixed cost infrastructure, principally certain components of selling, general and administrative costs in comparison to a smaller gross profit base. Operating income declined as a percentage of variable contribution primarily due to the impact of the highly elevated insurance and claim costs in the 2025 fourth quarter and the impact of the company's fixed cost infrastructure, while the variable contribution basis were essentially equal. Other operating costs were $14.6 million in both the 2025 and 2024, fourth quarters. Insurance and claim costs were $56.1 million in the 2025 fourth quarter compared to $30.1 million in 2024 and Total insurance and claim costs were 12.3% of BCO revenue in the 2025 fourth quarter as compared to 6.7% in the 2024 fourth quarter, the increase in insurance and claim costs as compared to 2024 was primarily attributable to on $11 million of costs related to 2 separate tragic vehicular accidents involving BCO independent contractors leased on with subsidiaries of the company, each of which occurred during the 2025 fourth quarter. Two, a $5.7 million -- $5.7 million pretax charge associated with a broker liability judgment entered on January 13, 2026, where a trial court in El Paso, Texas, found Landstar Ranger responsible for 100% of the $22.8 million of total damages awarded rather than the 15% a portion to Landstar by the jury during the summer of 2025. Landstar disagrees with the judgment and plans to vigorously appeal this matter. And three, the impact of a $5.3 million increase in actuarially determined IBNR reserves relating specifically to loss exposure in excess of $1 million per claim. During the 2025 and 2024 fourth quarters, insurance and claim costs included $9.2 million and $2.2 million of net unfavorable adjustment to prior year claim estimates, respectively. Importantly, $5.7 million of the $9.2 million of prior year development reported in the 20,254th quarter was attributable to the El Paso broker liability judgment entered during January 2026. The Selling, general and administrative costs were $56.2 million in the 2025 fourth quarter compared to in the 2024 fourth quarter. The increase in selling, general and administrative costs were primarily attributable to an increased provision for incentive compensation, increased stock-based compensation expense and increased wages, partially offset by a decreased provision for customer bad debt. The provision for incentive compensation was $700,000 during the 2025 fourth quarter compared to a reversal of $200,000 during the 2024 fourth quarter. Stock-based compensation expense was approximately $800,000 during the 20,254th quarter as compared to a $100,000 reversal of previously recorded stock-based compensation costs during the 2024 fourth quarter. We continue to manage SG&A in part by closely managing headcount at Landstar. Our total number of employees based in the United States and Canada is down approximately 45% since the beginning of 2025. Depreciation and amortization was $10.5 million in the 2025 fourth quarter compared to $12.7 million in 2024. This decrease was primarily due to decreased depreciation on software applications and decreased depreciation on trailing equipment. The company recorded an additional $2.1 million or $0.05 per share as a noncash impairment charge during the 2025 fourth quarter relating to the ongoing sales process of Landstar Metro. The effective income tax rate was 18.3% in 2025 fourth quarter compared to an effective income tax rate of 21.4% in the 2024 fourth quarter. The decrease in the effective income tax rate was primarily due to the favorable resolution of certain state tax matters during the 2025 fourth quarter. Turning to Slide 17 and looking at our balance sheet. We ended the quarter with cash and short-term investments of $452 million. Cash flow from operations for 2025 was $225 million and cash capital expenditures were $10 million. The company continues to return significant amounts of capital back to stockholders with $125 million of dividends paid and approximately $180 million of share repurchases during fiscal 2025. The strength of our balance sheet is a testament to the cash-generating capabilities that Landstar model. Back to you, Frank. Frank Lonegro: Thanks, JT. Given the highly fluid freight transportation backdrop and an uncertain political and macroeconomic environment, as well as challenging industry trends with respect to insurance and claim costs, the company will be providing first quarter revenue commentary rather than formal guidance. Turning to Slide 19. The number of loads hauled via truck in January was approximately 1% below January 2025 on a dispatch basis, while revenue per load in January was approximately 4% above January 2025 on a processed basis. As a result, we view truck revenue per load in January as modestly outperforming normal seasonality, while January truck volumes are trending essentially in line with normal seasonality. Looking at historical seasonality from Q4 to Q1, pre-pandemic patterns would normally yield a 4% decrease in both -- the number of loads hauled via truck and truck revenue per load yielding a top line that typically decreases by a mid-single digit to a high single-digit percentage. As just noted, though, fiscal January truck revenue per load outperformed normal seasonality, while truck volumes trended essentially in line. It should be noted that we faced a challenging year-over-year truck volume comparison during the first quarter as 2025 first quarter truck volumes exceeded the immediately preceding fourth quarter truck volumes for the first time in 15 years, with tariff pull-forward behavior likely driving the strength. Moving through the first quarter. Historically, truck revenue per load sequentially declined approximately 1.5% from fiscal January to fiscal February before improving approximately 1.8% from fiscal February to fiscal March, we estimate that in the event fiscal February and fiscal March truck revenue per load outperformed normal seasonality, in line with the outperformance we experienced in fiscal January, the sequential revenue change experienced during the 2026 first quarter could be down low single digits versus the fourth quarter of 2025. With respect to variable contribution margin, the company typically experiences a 40 to 60 basis point expansion in variable contribution margin from the fourth quarter to the first quarter, typically driven by increased BCO mix However, I would note, we had a very strong BCO utilization in the fourth quarter of 2025 at plus 8% year-over-year. In addition, winter storm activity experienced in January could have a negative impact to first quarter 2026 BCO utilization, resulting in a first quarter 2026 VCM performance that does not necessarily follow normal seasonal patterns. With that, Elmer, we'd like to open the line for questions. Operator: [Operator Instructions] Our first question is from Jason Seidl from TD Cowen. Jason Seidl: Maybe sticking on that last comment, in terms of maybe a sequential decline in utilization for your BCOs, where are you standing right now with the big storm that just swept through the country? Unknown Executive: Yes, that's a good question. And look, that's off to the BCOs who are out there and doing it safely every day. We certainly have had folks with a little bit of equipment challenges and also some customers who aren't open to either allow us to pick up or to allow us to deliver. JT can get into the very specifics on the the day-to-day loading challenges that we've had. Typically, if you look back at his again, JT will get into more detail, we generally recover that. So we're kind of early to mid-quarter. So the hope is that we'll be able to recover it. But this is a fairly with swap of weather that impacts geographically all throughout the country. So let me let JT maybe just chime in on the specifics there because we are watching it very closely, as you would expect. James Todd: Yes. No, absolutely. Jason. So I would estimate the storm impact to the fourth week of fiscal January and the first week of fiscal February, probably 5,000 to 6,000 knockdown impacted dispatch loads. But to Frank's point, unlike a dedicated carrier contract carrier, if a plan is shut down and they're not producing and you're not picking up your 15 loads a day, that freight is gone. In our business, we tend to gap back up when the weather eventually clears. So we'll continue to keep an eye on it. Frank Lonegro: But I do think, to the point you made on BCO utilization, and I'll also get Matt Miller to chime in here in a second. We've had a nice run of BCO utilization even with the the count coming down some in the fourth quarter and as expected in the first quarter. So the folks are out there responding to the demand. And obviously, we're pushing folks to load BCOs as much as possible, and those guys do a really good job on the 3 things that are really important to customers. meaning safety, security and service, but maybe Matt a little bit on the BCO utilization. Matthew Miller: Sure. No, we're definitely encouraged by the utilization we saw in the fourth quarter. When you look at the fourth quarter compared to prior year, we were up 8% compared to fourth quarter of '24. And that compares to the third quarter '25, we were up 6% compared to the third quarter of '24. So that trajectory was absolutely something we were encouraged by. Jason Seidl: I appreciate the commentary. If I could slip 1 more in. On the AI stuff, obviously, 1 of your competitors out there,.Robinson has been talking a lot about AI and really showing some results to the bottom line. Where are you guys in AI helping you get more bids out there in the marketplace in general? Frank Lonegro: Yes. I mean I think the AI for us is a little bit different than Robinson for a couple of different reasons. Obviously, we've got a different business mix. We also have a different model with essentially all of their folks inside the building and the majority of the folks who support Landstar are not W-2s, which is why you heard Jim Applegate talk about here's what we're doing for the network, which would include the agents in the BCOs. And then obviously, on the inside, what we're doing for Landstar employees to help support the network. I think where you're going to see the benefit for us is not going to be on the cost line given the fact that we have of the employee base that Robinson does. So I really did say 10% of. So they have 10x more employees than we do. So they're certainly going to see it in the cost line. But what we're doing and going to do is enable the agent offices, the Landstar independent agents to go out there and be able to work smarter and to work faster. And to one of the points that Jim Applegate raised to not have to add employees until much later in their growth trajectory, which obviously allows them to grow faster. But I mean let Jim, you pick up on that? James Applegate: Yes. No, I think I didn't bring great explanation around the strategy. I think the specific question was around bids at the very end of that comment. We operate in a much different model, specifically in the spot market as it relates to pricing. And we've been kind of underway, and I mentioned in my opening comments in 2016, pricing was one of the first things that we hit, and we built a big machine learning model with our pricing tools they just give our agents just a wealth of information. And really, the keys for us winning in the spot market is just making sure that we give our agents the confidence, right, to go out there and price the business and to do it quickly. So they got to assess a ton of information depending on the types of customers that they're trying to serve in a very short time period. And the winner in that game is the one that can do it quickly and confidently. So we'll continue to invest into that. AI is going to help that. We're doing a lot specifically around our complex freight segments around permitting, routing really being able to kind of hone down our pricing down where our agents kind of feel that they have the right information and they can support that and back that up with the capacity that they're out there looking forward within the industry. So I feel like our model is a little bit different when you start hearing about some of the kind of numbers that CH is putting out there, I will tell you the investment in growth that we're giving for our agents, a lot has to do with pricing. A lot has to do with the matching of different capacity, getting utilization for our BCOs up and just being able to kind of operate within that spot market. And I think we're ahead of the game there, and we'll continue to invest there when we find opportunities to utilize more data sources. May I should open that up for us. Operator: Our next 1 is from Jordan Alliger from Goldman Sachs. Paul Stoddard: This is Paul Stoddard on for Jordan Alliger. I guess 1 of the questions I have is just with the BCO count. We see that it came down in the fourth quarter. I mean, typically, you tend to see that come down a little bit, I believe, into the first quarter as well. I guess I'm just curious, what are you guys thinking about when it comes to the first quarter? And do you guys think that you can hold on to those BCOs, especially if rates are starting to come up. Frank Lonegro: Yes. I think the case for us, as we've talked about many times before, when the rate environment sustainably improves, we generally see an uptick. Obviously, seasonality plays a part of it. We -- I'd say at least half of the time in the fourth quarter, we see a downtick in the BCO count. We almost always see a downtick in the first quarter, so we would expect some seasonality. We're only down fractionally in the first month or so of the quarter. So I'd say the trend relative to the prior year feels pretty good so far in the first quarter. What's interesting, and I'll let Matt Miller talk more about it because he's living it every day. The additions are still coming in better than expected. So I feel good about the model and the attraction of BCOs to the model. We just got to make sure that the retention keeps up with us. Matthew Miller: Sure. Appreciate that, Frank. And Paul, I appreciate the question. So net truck count declined 104 trucks in the quarter. When we compare that to the fourth quarter of last year, we were down $184. So some improvement on a quarter fourth quarter 2024 compared to to fourth quarter of 2025. The gross truck adds were up 8.9% to Frank's point compared to the fourth quarter of 2024. And the gross truck cancels are down 5.1% compared to the fourth quarter of 2024. And this marks our eighth consecutive quarter of turnover improvement where we hit the high water mark back in the fourth quarter of 2023 at 41% and followed by 2024's fourth quarter at 34.5% and then finished this year at 31.4%, approaching our longer-term average of 29%. And turnover over a longer period of time. And really, our emphasis is on controlling what we can control. We can't control rates -- we cannot control rate and rate really hasn't been too big a friend to us of late. But our emphasis is on what we can control. And so we're focusing heavily on recruiting and qualifications and how we get those folks in the door and how we get them in the door when they express interest in coming to the Landstar to the time that they can be out there on the road hauling loads. And so over the course of 2025, we've made significant improvements by focusing on people, by focusing on process and focusing on technology, driving efficiencies into that process without sacrificing safety. That's something we're not going to sacrifice. However, meaningful progress on driving down the time that it takes to get in the door ready to haul your first load and at the same time, improving the conversion rate on those folks expressing interest to come in the door hitting a higher bogey when it comes to that conversion rate. What we're we're intending to do in 2026 is drive that onboarding experience further by refreshing our orientation and our ongoing education really setting up the BCOs for success within the network once they're out there on the road. Frank Lonegro: So Paul, if rate helps us a little bit this year and the things that Matt is working on, combined with some of the AI things that Jim Applegate talked about, we're certainly expecting to grow the fleet in 2026. Paul Stoddard: That's great. And if I could follow up I guess when I -- how I understand is that the BCO trucks tend to have a higher variable contribution margin. So as we start to see more trucks coming in, could we see that margin improve throughout the year? James Todd: Yes, Paul. Certainly, can. To your point, the BCO business tends to be round numbers over several cycles, about 2.5x more lucrative on the VCM line. But remember that we've got cost in between BCM and operating income with trailers and insurance and claims costs, et cetera, et cetera. So to the extent you get growth in the fleet count in '26 and some spot rate improvement, that will absolutely be supportive of VCM and a high degree of drop-down operating leverage rising rate environment. The flip to that, Paul, is when demand comes back, so think about the second quarter, historically, you get a 7% to 8% sequential lift in loadings I'd love for Miller to grow the BCO count 7% to 8% in the quarter, but typically, that volume growth would get picked up by third-party trucks, which will somewhat -- it's positive variable contribution dollars, but it will work against us a little bit from a variable contribution margin, if that makes sense. Operator: Our next one is from Bascome Majors from Susquehanna. Bascome Majors: Just to put a period on the BCO discussion, has utilization been a leading indicator in your own analysis of fleet growth? Or is it really just rate that drives that historically? James Todd: Bascome, we certainly see utilization tend to pick up when rates go up. The only thing I would say to caveat that is in fourth quarters historically, if BCOs are having a good year, they tend to take a little holiday time in the fourth quarter. So the utilization acceleration that Miller talked about from plus 6% year-over-year in the third quarter to plus 8% was a positive surprise for us. But yes, longer term, rising rates tend to drive higher utilization. Bascome Majors: And Jim, why don't we have you, can you walk us through some of your expense sort of views in a little more detail at any kind of pacing or cadence, things that we should be considering? James Todd: Yes. No, happy to, Bas. And the big one, as you're aware, if we kind of reset here in 2026 as we start a new year, a new calendar year and rebuild the variable compensation programs, incentive comp and stock comp comping off 2025 where we had about $10 million in the P&L for that. We've got a hypothetical $12 million headwind if we hit plan right on the nose in 2026. If we don't hit plan in 2026, that cash comp headwind doesn't come back in, but I would still expect probably $2 million to $3 million headwind on stock-based compensation as a tranche, for which we didn't have any compensation recorded and '25 falls off and a new equity tranche comes on board in '26. We will very much endeavor Bascome, as you're aware, to offset as much of that as possible. We've got a big van trailing equipment refresh on the books for -- so while that could have about a $750,000 impact on the depreciation line, we typically will ring the register nicely on gains on disposal of used trailers to offset that. And then also, as you'd imagine, maintenance and tires on a brand-new trailer versus a 7- or 8-year old trailer that we'll be replacing, you typically get $2,000 to $3,000 a trailer, a good guy on the maintenance line. So those are kind of the big ones. Clearly, on the insurance line, which is hard to predict, 90 days to 90 days, we had an elevated experience in the fourth quarter, and the cargo claim environment continues to be tough. We'll work to combat that and hopefully have some tailwinds year-over-year and 26% on the insurance line. Operator: Our next one is from Stephanie Moore from Jefferies. Stephanie Benjamin Moore: Maybe it would be helpful if you could talk a little bit about what you're seeing in the current environment. You noted some better than seasonal trends to start January any green shoots that you're seeing in specific end markets or any other supply commentary that would suggest the above seasonal performance. Unknown Executive: Thanks, Stephanie. I think if you look at the DOT -- U.S. DOT and everything that they've done, I think the cumulative effect of all of those things, which you would know as English language proficiency, nondomiciled CDL, the CDL schools that are otherwise known as CD mills, some of the ELD providers coming out of the network. I mean I think the cumulative effect of all of those have hit at a point in time during the year, where you generally see a little bit of either seasonal demand or a little pullback in capacity given the holidays. So I think if you looked at the the DAT rates in December relative to November. On the van side, you saw a pretty significant uptick. It was flattish on the flatbed side, our business mix is a little bit different there. But we saw a sequential improvement month-over-month in the quarter. And so far, as JP mentioned, when you look at how we're trending in January, that seems to have a little bit of sustainability to us. We haven't had that type of sustainability in a while. But we do think it is largely supply side driven across your fingers hope is that we get the impact of tax refunds and bonus depreciation and some of the fiscal policies as well as a lower monetary rate environment, like all of those things combined, plus all the announcements of of investments in the U.S. infrastructure made by both domestic and foreign companies. When that unlocks, there's a lot of freight that comes along with it. Have we seen that yet? No, but there certainly is the prospect for those things to unlock freight. And that would be helpful. If you look at what was sort of the goods and the bads of the fourth quarter, and JT help me a little bit on this one, but the data center ecosystem continued to provide real benefits for us that obviously helped us both on the band but predominantly on the platform in the heavy haul side machinery, some of the hazmat mat business units were up. Energy was up, but then you look at the flip side, the building products, if you exclude the data center business was a challenge given where the housing economy is. The automotive side for the interest rate environment and then some of the cross-border subline haul peak type things were also down. We have a bit of a barbell set of commodities there. Some are doing really well and others aren't doing as well. But when the things that I mentioned earlier that could stimulate demand happen, especially in a lower rate environment, the -- I'll say, the hypothetical bull case is certainly out there. We just got to see some of that transition from hypothetical to reality. Stephanie Benjamin Moore: Absolutely. And then maybe just a follow-up. I think we're all very aware of the hypothetical bull case, and we've been waiting for it for some time now. But let's just say that bull case doesn't materialize this year and maybe that gets pushed into 2027 for whatever reason, what is the strategy or business plan for 2026 if we still see these mining less on the supply side, but the demand just doesn't come through? Frank Lonegro: Yes. I think if the supply dynamics still stay there, I think we'll continue to see a little bit of rate positivity on a year-over-year basis. I think that our strategies I talked about heavy haul, I talked about cross-border, but I would also mention hazmat and cold chain and some of the other things that we're working on. We're going to continue to double down in those areas, and we're going to make sure that we have the agents focused on those areas that we have the BCOs helping in those areas and moving that type of freight. So I wouldn't count against this in 2026. We're going to do everything we possibly can to win in the marketplace in areas that we think we have a competitive advantage. You heard me talk about doing the hard things well. I mean that's -- that's a Landstar keynote. We do that type of stuff really, really well, and we've got a really good track record of being able to sell safety, security and service. And that's what our agents go out there to the customers with every single day. Otherwise, you're having a conversation around rate and that doesn't help anybody. Operator: Our next one is from Bruce Chan from Stifel. Andrew Baxter Cox: It's Andrew Cox on for Bruce. I just wanted to get some more information and discuss what may be the challenge is, if there are any to disseminating new technologies, particularly the AI tools you guys are building out through the centralized agent network. You guys spoke that it's a different model than CH. I just wanted to see if you guys are coming up against any incremental challenges in training or in data safety or if there's any additional cost there. And then not -- if there's another way to frame this, if there's any data or anecdotes of maybe some early adopting agents of the tools? Just trying to understand what the opportunity is here and how quickly it could come to life. Frank Lonegro: Yes. No, really, really good set of questions. We've done a bunch of agents segmentation work over the last couple of years, which gives us a sense of whether it's the size of the agents or the types of businesses that they do, the split between how much spot and how much contract they do, things like that. So we have a pretty good handle of where some tools would apply to everyone. Pricing would be an example of that one who doesn't want to have good information around what the market price is, and others are going to be a little bit more segmented to it. One of the unique things is we can't force adoption of tools. We can certainly provide them. And obviously, the agent uptake of that is something that we're going to be accountable for ourselves. And most agents, if they believe it will provide them a competitive advantage in the marketplace. They're going to want to use those tools. So I feel pretty good about that one. There are tools that are also fraud-related and BCO related and and things like that. So I think the tools that we're providing, the first layer is going to be applicable to all and then there are going to be some other ones that are going to be a little bit more tailored to folks who have certain types of businesses relative to others. And then obviously, we got all of the work that we're doing inside the building. The data sources, I mean, one thing we have is a lot of data. When you have 2 million transactions a year over a long period of time, you have plenty of data points to be able to figure out trends. We'll also access data sources outside the company to educate those tools. And as you know, AI is all about getting smarter as it learns more and more from future data. So I think we're well positioned on the data front. And we're working with some pretty neat folks in the AI ecosystem that are going to be able to help us understand what others are doing and what the opportunities are that maybe your ideas from outside the building rather than just the ones that we have inside the building. Jim? James Todd: Yes, I think it's a great question, right? And I think it goes back to -- this is something that we're not new at, right? We've been doing this since 2016 and going through this digital process. I will tell you the entrepreneurial model does have challenges -- but at the end of the day, there is no better resource that you have that an entrepreneur that's armed with all these technology tools that can adjust, pivot and really utilize them the right way to service the customer. And again, it goes back to that safety security and service, these tools that we're building really allow those agents to do that. I will say we're seeing success. We've got different groups. We've got our AI task force that I talked about. We've got certain instances where we've automated data entry, off a bill [indiscernible] where we can shoot that information right back to customers, and we're doing that for agents today. We're doing some intelligent load matching. We're optimizing some of our BCOs for some of our larger BCO accounts. When I talked about pricing tools and some of the things that we're doing with pricing tools and adding some of that stuff back in tracking. We're investigating some things with agents today over on the tracking side and analytics as well, too. So as we go through this, as AI comes about we've got resources, we've got beta agents. We've got a process in place to make sure that as we're identifying opportunities. We've got a team of people that can really develop those opportunities, work with vendors and do it safely and do it in a way that we can really have a meaningful impact across the organization. So the muscle is there. Now we've got this great new opportunity with AI that we can actually use the muscles that we've built as we've gone through this digital transformation strategy. And just kind of leverage more tools on top of it. So I think it's really exciting to think about all these different areas that we can really impact our agents and really what they're going to do with those tools. It's going to be a neat thing to see. So we're excited about it. We see there's a big opportunity. Unknown Executive: I'll leave you with 1 final thought. We have an annual agent pickups. We're doing all the agents together virtually, and we talked to them about what the plans are for this year and obviously get some feedback from them. And we ask them in advance, what are the key topics you want to hear from us and the largest by far topic that they wanted to hear was what are we doing on the technology and the AI side. So the poll is definitely there. And obviously, through all the work that you heard Jim Applegate talk about we are ready, willing and able to fulfill that need and have some pretty neat things on the deck for this year. Operator: Our next one is from Chris Wetherbee from Wells Fargo. Unknown Analyst: It's Rob on for Chris. We're seeing the BCO productivity kind of achieve levels where historically, it's kind of peaked out at in the quarter. Maybe could you talk a little bit more about are all your AI initiatives can get us above and beyond where we've historically peaked out from the BCO productivity and thoughts about where that can go. Frank Lonegro: Yes. I would give you 2 thoughts on that 1 and then let others chime in. Can the AI tools help? If it helps match a BCO to a load more quickly, it has them out of route fewer miles to get the next load. Of course, it can impact BCO productivity. At the same time, we sell, what we say, is freedom and opportunity for the BCO. So there will be some. Again, the average number of loads really belies the truth. You've got people who haul many more loads than the average on the BCO side and some who haul less than that. The mix of the business obviously plays into that as well. given some loads are longer haul than others. So some loads are not long haul, but require a lot of prep work, and therefore, it may take you 2 or 3 days to reach destination rather than 1 or 2 days. So all of those factors play into that. But Matt, commentary or? Matthew Miller: Yes. I would just really echo what you said, Frank, I think the tools that we're building allow for the BCO to become more efficient, being able to do paperwork more rapidly having to spend time in a truck stop where they otherwise would have to do scanning and e-mailing things back and forth. -- the tools allow for more effective load selection. So providing those tools to allow for them to optimize load opportunities. But again, to Frank's point, we sell that freedom. We sell, you get to haul what you want when you want, where you want. And so that freedom and opportunity that is there is available to them, but certainly, the tools allow for them to become more efficient in their daily lives. James Todd: And Rob, just real quick on historical perspective. It's certainly true that this is the highest BCO utilization year at Landstar in the last 7 years. But if you go back a little further, trailing 15-year average on BCO loads per year, is actually 92.1%, and we finished a little bit better than that at 92.4%. If you look back to '18 and '17, we were at 94% and 96%, respectively. And then similar '14 and '13, we were 95% and 94%. So if we get the efficiencies that Miller is talking about, plus a good tailwind in rate environment, I think you can get another 1, 2 or 3 loads a year out. Unknown Analyst: That's really helpful. Shifting gears a little bit to the $1 million agents, that's stepped down a decent amount in '25 off of flattish revenue and flattish loads. What was the big driver of that? And are there a bunch of agents that are just below the $1 million mark in '25. Frank Lonegro: Good question. I'm glad you're watching it. We're watching it just as closely. So yes, nothing to be concerned about there. Obviously, some agents grow and some agents don't depending on the environment and some of the business mix that I was talking about earlier. So nothing to be concerned about, but JT will give you the numbers here. James Todd: Yes, Rob, I'm starting to think you've got my office bug. But no, we had all kidding aside. We had 37 agents, Rob, they just fail below $1 million, they're still with us. So that's a 37 count reduction. Then we had $4 million agents that were acquired during 2025 by other million-dollar agents. Our $1 million age of turnover was just over 1% in 2025. So right in line, maybe a little slightly better than long run history. Operator: At this time, I show no further questions. I'd like to turn the call back over to you sir, for closing remarks. Thank you. Frank Lonegro: Thank you, Elmar. In closing, while the demand for freight transportation services remains challenging, including an unfavorable impact on dispatch loadings at the end of fiscal January, likely driven by winter storm activity, we believe we have seen some positive signals we were encouraged by the pricing improvement we experienced from fiscal October to fiscal December and with a choppy industrial economic backdrop, we were extremely pleased with a 23% year-over-year increase in our heavy haul service offering. We also believe the potential impact of various federal regulatory developments could provide some positive lift to our BCO business, in particular, and regardless of the economic environment, the resiliency of the Landstar variable cost business model continues to generate significant free cash flow. Landstar has always been a cyclical growth company, and we are well positioned to navigate the coming months as we continue to look forward to higher highs when freight demand turns our way. Thank you for joining us this afternoon. We look forward to speaking with you again on our 2026 first quarter earnings conference call in late April. Thank you. Operator: Thank you for joining the conference call today. Have a good evening. Please disconnect your lines at this time. Thank you.
Operator: Good day, and welcome to the Nickel Industries Limited December Quarter Activities Webcast. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Justin Werner, Managing Director, Nickel Industries Limited, to begin the conference. Justin, over to you. Justin Werner: Thank you, and thank you, everyone, for attending the Nickel Industries December 2025 quarterly results call. If I could ask the moderator to please move to the next slide. Pleasingly safety for the 12 months work till the end of last year, 17.7 million man hours without a single LTI occurring, so it's a tremendous achievement. The company was awarded the Excellence in Sustainability Leadership award by CNBC Indonesia, highlighting our leadership in ESG implementation and environmental management and our contributions to the development of sustainable nickel in Indonesia. Also, our solar project, which we will be an offtaker of, it achieved financial close and it is on track to be the largest solar project in Indonesia, 262-megawatt peak with 80-megawatt battery energy storage system. And it will allow ENC to reduce its carbon footprint but also, the power offtake agreement is at 25 years at a fixed rate with no inflation escalation. So we think that's a big positive in that we've been able to lock in a big part of our power costs at very attractive rates. If we could just move to the next slide, please. Frustration during the quarter of meeting our RKAB limit of 9 million wet metric tonnes, which did mean that most of our mining operations were halted for majority of the quarter. There was a number of positives during the quarter, which includes record EBITDA margins from HNC, which bodes well for ENC; and the approval of our AMDAL, which will support our current application of moving from 9 million to 19 million wet metric tonnes. Adjusted EBITDA from operations was USD 37.3 million. And RKEF nickel metal production was slightly up, so the RKEF plans continue to perform well. EBITDA was down, driven mostly by higher costs. And with the Hengjaya mine being unable to supply the RKEFs for a majority of the quarter, that resulted in the requirement to buy cost at the third-party ore so that did slightly push our costs up. HPAL HNC continues to operate well above nameplate capacity, delivered USD 17.2 million in EBITDA, which was a 32% increase on the September quarter. Mine sales, we received approval to restate our operations on the 12th of December with an increased RKAB for 2025 to 10.5 million tonnes. And so in the last 19 days, we were able to deliver close to 1 million tonnes. So I think what's pleasing there is the operations despite being out for almost 2.5 months, we're very quickly able to ramp up, and we're currently tracking very well in January looking at delivering 1.4 million tonnes. The standby costs and the lack of any ore sales or mining unfortunately did deliver a loss, USD 14.9 million EBITDA loss for the quarter. But as I said, things are trending very strongly so far for January and this quarter at the mine operations. So if we could just go to the next slide, and then the following slide after that on RKEF operations. RKEF operations increased 1%. As I mentioned, cash costs slightly higher, higher nickel ore costs. However, that was offset by lower electricity costs. The NPI contract pricing of $11,100 broadly in line with the previous quarter. However, the current spot NPI price is around $13,200. So at the moment, currently, almost 20% above the December quarter average. So we've had a very strong start to the year. particularly around nickel pricing. And so that does bode well for this quarter, and we believe for the remainder of the year. If we could just go to the next slide, please. I mentioned real EBITDA, EBITDA per tonne margins at an HNC. You can see they increased from $629 a tonne in Q3 to over $8,000 to $812 a tonne for the December quarter. And MSP contract prices increased by 18% to $17,110 a tonne. Current LME spot is over $18,000 a tonne and obviously compares very favorably to the average LME price for the whole of 2025, which was 15,162. So we've seen a significant increase in the nickel price, as well as cobalt. Current cobalt spot prices are over $55,000 a ton a tonne. The average for 2025 was around $39,967. So again, this bodes extremely well for the imminent ENC commissioning, which if we could just move to the next slide, please. Pleased to give an update on the ENC project. We're starting some unit testing and wet commissioning in anticipation of final commissioning targeting end of this quarter. The installation of crystallizers to produce nickel and cobalt sulfate has been completed and has been integrated with the rest of the circuit. And the refinery, the cathode and nickel sulfate refineries will look to ramp up production once the HPAL smelter commences commissioning. In terms of the HPAL itself, we've begun purchasing sulfur and testing has commenced on the first line of the sulfuric acid plant. Mechanical tests have commenced on the countercurrent decantation, circuit thickness, precipitation tanks, slurry storage tanks, reagent storage tanks. And so really all of the key equipment, we've started all the mechanical tests. And then there's been allocation of additional resources just to ensure that we can complete the slurry pipeline, which will take off from the Hengjaya mine to ENC and also return the tailings to dry stack tailings storage facility. I would encourage people, if you had already seen it. There is a link to a video in the quarterly, and you can really see the size and the scale of ENC and just how advanced it is at the moment. If we could just go to the next slide, please. Mine operations, as I mentioned, unfortunately, impacted by RKAB delays. So as a result, that did result we moved from a $32.8 million EBITDA in the third quarter to USD 14.9 million EBITDA loss. But as I said, January is looking very good. Approval of the AMDAL was a significant milestone, and we do still remain very confident of achieving an increased RKAB to $19 million for this year. I think that was sort of well supported by the fact that at the end of last year, we were able to go from 9 million to 10.5 million. So I think that bodes well, as I said, for the increase this year. If we could just go to the next slide, please. Development of the Sampala project continues to track very well. The ETL feasibility study has been submitted some time ago, and we're hopeful of receiving approval for an RKAB at the end of 2026. The initial target from ETL will be somewhere around sort of 6 million tonnes per annum. At the ANN IUP, we've just completed a feasibility study. That feasibility study will actually incorporate a slurry plant, the same that we have at Hengjaya mine for any future potential sales of limonite ore. And in terms of the haul roads between ETL and ANN, the 72% complete. And during the quarter, we drilled about 18,000 meters of exploration drilling, a mix of exploration and infill drilling to support detailed mine planning. If we could just go to the next slide, please. We're very pleased to announce the acquisition by Sphere Corp of 10% of the ENC project at a valuation of USD 2.4 billion, so at a premium to the USD 2.3 billion that NIC has invested it. Sphere is the South Korean KOSDAQ-listed premium alloy and precision materials manufactured manufacturer for the global aerospace industry. They're one of only 5 global key vendors to SpaceX and they recently announced a 10-year supply contract of significant value, and this is to support SpaceX's rapid growth. Funding of that transaction expected to collect Q1 2026. We see this as a significant endorsement. It represents our entry into Western supply chains and particularly the aerospace and aeronautical sectors, which demand the highest product quality and have the strictest qualification standards. And so we think this is a strong endorsement of the quality of ENC. Not only that, it does access and open up opportunities to supply to additional North American aerospace end users. So we're very happy with the transaction. If we could just go to the next slide, please. That reduces the quarterly results presentation. As I said, despite the frustrations of the a number of positives, including a very strong LME nickel price and NPI price at the moment, which bodes well for a strong quarter. Mining operations are back up to where they were. We remain confident of an increased RKAB. and as I said, with HNC margins over $8,000 a tonne. It bodes extremely well for the commissioning of ENC at the end of this quarter. So with that, I hand over to questions. Operator: [Operator Instructions] And your first question comes from the line of [ CW Mu ] from [ Arken ]. Unknown Analyst: Can you hear me? Justin Werner: Yes. . Unknown Analyst: So I just wanted to get a little bit more clarification on the RKAB I guess, quota, right, so for this year, for '26. So it hasn't been announced, right, this year? And I think in the previous presentations, you've kind of guided to or kind of expecting million tonnes, right, versus kind of 10.5 that you have currently. We've seen headlines and industry news that the RKAB aggregate for Indonesia is actually, I think, down 1/3 year-over-year. So I guess like I'm just trying to figure out what's the risk of you guys not getting to the 19 million tons that you guys are expecting? That's number one. And then number 2 is the 19 million tonnes, I think gets you guys 100% self-sufficient, including ENC. So what is the actual number to get you guys 100% so sufficient completely? Justin Werner: Yes. So look, the first question, the government has announced its intention to reduce the RKAB quota from last year. We've shown that they will be favoring those that have integrated operations, of course, which we do. We have a number of RKEF lines. We have ENC as well. I think the evidence that we were able to go at the end of last year from $9 million to $10.5 million supports the fact that the government is supportive of increasing our RKAB. And looked at there's always risks. But given that we've had an environmental study that's been approved for the 19 million tonnes, we still remain confident of achieving it. Where will the RKAB cuts come from? I think it will -- what we're hearing and seeing is that it will come from a lot of the smaller producers that don't have any integrated RKEF or HPAL operations, of which there is many. And a lot of those smaller producers don't have the best environmental reward. And so again, I think this is just a way of ensuring that those who are operating properly. We believe there shouldn't be too much risk on the RKAB. And then sorry, your second question was? Unknown Analyst: What level of cutoff -- the cutoff level for us achieving self-sufficiency across our operations. Justin Werner: So the 19 million will get us to 100% self-sufficiency of limonite ore for ENC and it will get us very close to 100% or self-sufficiency at our RKEF operations, which is 8 lines within the IMIP. Unknown Analyst: So does that -- so okay, so maybe dig a little bit deeper on this, I'm sorry. So you guys are operating at overall like 25% to 30% above nameplate, right. And so when the government kind of takes into account of kind of your integrated kind of midstream processing capacity. Are they looking at nameplate? Or are they looking at kind of what the run rate that you guys are producing at because that's kind of different by almost 30%, right? So like I think 19 gets your 2 sales are sufficient on the nameplate? Or is that 100% on nameplate plus 30% is kind of my question? Justin Werner: Yes, it's 100% self-sufficiency on nameplate, which is about 11 million to 12 million tonnes. And so obviously, with '19, there's a significant buffer there if we're offering operating significantly above nameplate capacity. Operator: [Operator Instructions] And there are no further questions at this time. So I'd like to hand back to management for closing comments. Thank you. Justin Werner: Thank you, everyone, again and as I said, we look forward to hopefully providing the market and investors with an update on our RKAB in the coming weeks as we continue to work closely with the government to secure it. So thank you, everyone. Operator: That does conclude our conference for today. Thank you for participating. You may now all disconnect.
Parmjot Bains: [Audio Gap] Grant, our CFO. We'll be referring to the 4C quarterly activity report and presentation we lodged this morning with the ASX. The presentation is a summary of the more detailed 4C quarterly activity report. After our remarks, we'll be answering questions. You can lodge questions throughout the presentation using the Investor Hub QA function. So let's begin with Slide 3 with a quick overview of the agenda for today's call. We'll start with a business overview, including key highlights and take you through the updates for the 3 business segments. I'll then hand over to McGregor Grant to present the financials. And to finish off, I'll cover the outlook for the balance of the financial year before commencing the Q&A session. Now turning to Slide 5, we will touch on the key highlights for Q2. We have made a lot of progress as a business to capture the value of SOZO and the new SOZO Pro in 3 large and growing market segments: breast cancer-related lymphedema; heart health; and wellness and weight management. While the rest of world sales were positive. And while U.S. BCRL sales for the quarter were disappointing, we remain very positive about the growth potential due to strong clinical demand, a strong sales team led by Scott Long, a growing emphasis on cancer survivorship and reimbursement now well in place. There are over 700 opportunities in our pipeline that we are focused on converting as well as growing with the extensive conference attendance and direct sales activities underway. In terms of the financials, McGregor will go through the metrics in detail later in the presentation. But clearly, there were some positives and some negatives. The sales metrics are well below where we would like to see them, but the quarter-on-quarter revenue has increased as did customer receipts. And importantly, we saw a significant reduction in operating cash flow, extending our runway. This will continue to be a strong focus for the business. We are very, very encouraged by the increase in reimbursement, now at 93% national coverage. Now more than ever, reimbursement is critical when hospitals are evaluating purchasing decisions. Importantly, SOZO and BCRL are new service line opportunities, not a cost item. National coverage now sits at 93%, representing 323 million covered lives. This is another 5% increase on last quarter and gets us closer to our goal of 100% coverage for breast cancer survivors. In terms of sales, overall unit sales were up on the prior quarter, but U.S. sales were softer than anticipated. Rest of world sales were stronger and on the back of our Australian distributor ordering SOZOs as well as our new SOZO Pros in advance of our expansion into the Australian heart health market. In the U.S., we saw a continuation of what we experienced last quarter. Contracts approvals were being delayed due to budget pressures or constraints in hospitals, but the BCRL opportunities are there and real as evidenced by our opportunity depth and continued discussion and dialogue with clinicians. We remain confident in the BCRL market, supported by the market outlook that operating conditions for U.S. health care providers will stabilize in the coming year. With reimbursement at 93%, SOZO is a profitable service line, and we continue to reinforce this messaging with providers. We are accelerating activities in the growth segments of heart health and wellness and weight management. Over the last 12 months, we have made enormous progress. Our first heart health sales are now actively in progress, and wellness and the weight management team is in place and the go-to-market activities and sales are well underway. Today, we launched a new revamped ImpediMed website and Wellness microsite to support our growth in these areas. On other very positive news, we received FDA clearance this morning for our new bilateral lymphedema algorithm, enabling physicians to monitor the subset of patients who are at risk of bilateral lymphedema. On Monday this week, we also filed a new 510(k) for an expanded body composition offering that better targets that wellness and weight management market as well as cancer survivorship. Turning to Slide 6. The value proposition that the SOZO Digital Health platform provides is becoming more evident as we address now 3 of the fastest-growing healthcare needs across the world, cancer survivorship, GLP-1 therapy and heart failure. The SOZO Digital Health platform is a best-in-class platform, providing valuable patient information for clinicians. The company has made a significant investment over the years in SOZO Pro, and we have now launched this into the market. The in-built scales, the ability to measure patients up to 220 kilos and the removal of the cardiac implantable contraindications better helps us target the heart health and wellness and weight management opportunities that are significant. Clinicians find the device quick and easy to use and in larger hospitals, they continue to add their devices across new departments with different use cases. We're in a unique position. We have the only device of its type, a best device with multiple applications that stand apart from the competition in terms of multiple FDA clearances, accuracy, usability and applicability. We have a platform we can build off to attack these new growth segments with over 600 devices now across the U.S. healthcare system, including SOZOs in 18 of the top 25 U.S. hospitals and 27 master service agreements with major IDNs covering pricing, IT and BAA approvals, which are contract approvals with customers, making it much faster to deploy additional devices. Now let's turn to Slide 7, where we look at this value proposition across these 3 market segments. You're all very familiar with the BCRL value proposition. SOZO offers hospitals a revenue-generating early lymphedema detection program to improve breast cancer survivorship. This is FDA approved, guideline endorsing clinical validation. All of the hard work has been done. We are now executing these into sales. The cardiometabolic health area covers both heart health and wellness and weight management. In wellness and weight management segment, the value proposition is different. In this segment, SOZO is providing objective clinical data to allow clinicians to engage, inform and ultimately retain their customers. This is primarily an out-of-pocket market segment. For heart health, weight is not a reliable indicator of fluid status, particularly in a GLP-1 world where weight can and does change rapidly, both up and down as compliance decreases. SOZO provides a valuable noninvasive fluid and body composition insight to aid clinicians to guideline -- to optimize guideline-directed medical therapy, essentially helping physicians to catch increases in fluid, enabling them to adjust therapies and reduce the potential for readmission, a major drive of U.S. healthcare system costs. Now let's turn to Slide 8, and I'll give some more details about the BCRL operating environment and how we are positioning SOZO. Although we had a sluggish quarter for U.S. BCRL sales, we continue to believe that we are very well positioned, and there are several tailwinds that will drive long-term growth. Clinical demand does remain strong, and there continues to be a growing acceptance for the need for cancer survivorship programs. We have built a strong foundation across many of the top hospitals in the United States. We have guideline support, and we have seen a significant improvement in reimbursement over the last 6 months. And now more than ever, reimbursement is critical when hospitals are evaluating purchasing decisions. As I noted, coverage sits at 93%, representing 323 million covered lives. Since the beginning of the financial year, we have had significant increases in the depth of coverage. States with over 90% coverage has increased fivefold from 7% to 39%. Last quarter, you met Scott Long. Scott has built a strong sales and clinical support team with considerable experience in breast cancer medical devices and has built out our BCRL pipeline with this team. All these factors combined to paint a very positive picture for BCRL. In the short-term, we have seen some headwinds. Hospital budgets are under pressure, wage inflation and the cost of imported products, along with the reduction in grants and funding for Medicaid insurance have impacted hospital budgets. However, we remain confident in BCRL and is supported by the market outlook that operating conditions for U.S. health care providers will stabilize. Importantly, we continue to reinforce the messaging to multiple stakeholders within hospital systems that this is a service line, which strengthens as reimbursement increases. The good news is we have a very strong story to deliver. We are launching SOZO Pro into lymphedema, where in addition, the scales better enable SOZO to fit with the established patient workflow where weight is taken at the start of the patient journey. In addition to improve customer experience and stickiness, we are improving the EHR interface to optimize clinical workflow, and we are also building out AI programs to improve customer responsiveness. Over to Slide 9. I want to touch base a bit on cancer survivorship. One of the areas that we see the potential to increase penetration is medical oncology. This also helps us build program depth, so both in the breast cancer surgeons as well as downstream into the medical oncologists. Although breast cancer care pathway starts with breast surgeons, medical oncologists usually have the long-term relationship with the patient and support survivorship. Cancer survivorship is experiencing a significant upward trend with 5-year survival rates for all cancers combined now reaching approximately 70%, up from 50% in the mid-1970s. Driven by early detection, advanced therapies in an aging population, the number of people living with a cancer diagnosis is at a historic high. This shift treats many cancers as chronic conditions requiring long-term management. Across the U.S., there are now 1,500 commission on cancer centers that require a cancer survivorship program for accreditation. Breast cancer is one of the largest cohorts of survivors with physical issues such as lymphedema, maintaining muscle mass and bone loss in addition to the emotional and social needs that need to be addressed over the long-term. SOZO fits in very well with survivorship, both in BCRL as well as in body composition changes that occur during treatment, tying in with a renewed focus on the positive effects of exercise during chemotherapy. We are actively expanding our messaging on body composition to treat both to breast surgeons as well as medical oncologists with over 3 abstracts accepted at ASBS, news that we found out this morning, which is fantastic. Following a detailed voice of customer survey with medical oncologists, we have refined our body composition offering to these clinicians. And on Monday, we filed a new 510(k) regulatory filing with the FDA to further support this. Now going to Slide 10. Heart health and wellness weight management opportunities are compelling and are a strong fit with SOZO Pro. Heart failure is a substantial opportunity as it poses a significant economic burden in the United States with costs projected to reach $70 billion by 2030. One of the primary guides to determine rapid changes in fluid level in patients, a sign of decompensation has been weight. However, cardiology patients are now indicated to be to use GLP-1s, which basically reduces weight and also potentially causes a rebound weight gain post discontinuation, making weight a less reliable surrogate marker for fluid and additional noninvasive data is needed. Feedback from U.S. cardiologists on SOZO Pro has been very positive. I've been impressed by the clinical utility of SOZO and its ability to monitor fluid levels as well as body composition. We have the first heart health sales in progress, and we are very positive about the potential and have established a lean, dedicated heart health team to build out this opportunity and validate the go-to-market pathway. Now moving to Slide 11, wellness and weight management. Our view on wellness and weight management opportunity only gets brighter as we spend more time with potential customers. In the U.S., there are over 30,000 sites of care have been identified across various market segments, including specialty medicine, exercise oncology and rehab, weight loss clinics, wellness clinics, IV clinics and sports medicine and research. The segments we'll be focusing on directly at the moment have an addressable market size of over $200 million. Wellness and weight management activities have commenced with the appointment of an experienced commercial lead managing a team of 3 dedicated body composition reps in the U.S. This team has already actively identified over 3,000 leads in this space, which they are validating and converting into direct sales. Feedback has been very positive from the first 3 conferences the team has attended with another 6 conferences planned for the second half of the year. With a strong pipeline in place, we're expecting sales to build over the calendar year. Over to Slide 12. We are tailoring our messaging for different market segments, particularly within this wellness and weight management space. This is an example targeted towards lifestyle medicine, which is a more clinical approach. On to Slide 13. We're excited to share that we have launched a new wellness microsite. This is a different look and feel of our wellness offering that's targeted towards the med spa space. As I noted, all of our new sites, including our new ImpediMed website and this wellness microsite have been launched today. Many thanks to our marketing team. We have done a lot of work in getting these ready to go. I'll now turn over the presentation to our CFO, McGregor Grant, to go through the financials. McGregor Grant: Thanks, Parmjot. We'll start on Slide 15. As mentioned last quarter, we expected a substantial improvement in cash outflow this quarter. The result was slightly better than we forecast at $2.9 million and well down on the $5.6 million reported in quarter 1. The improvement was driven by higher cash receipts that rebounded to $3.8 million, nonrecurrence of a one-off payment for long lead time electronic components and the expected receipt of the $1.2 million in relation to the R&D tax incentive. You will notice that staff costs of $5.3 million were slightly above the previous quarter's $4.9 million. This was largely a result of redundancy payments made during the quarter. Financial discipline continues to be a core goal of this business, and the company maintains an ongoing program of cost control as part of the target to reach cash flow breakeven. We continue to adjust our cost base as required. The strengthening Australian dollar relative to the U.S. dollar resulted in further unfavorable impacts on cash as well as affecting items such as ARR. The company's cash balance at 31st December was $18.9 million, equating to 6.5 quarters of operating cash flow. Moving on to Slide 16. TCV for the quarter reduced from $4.7 million to $4.1 million. The reduction was a result of fewer devices sold in the quarter and a smaller number of contracts due for renewal compared with the previous quarter. We continue to be very pleased with the quality of accounts initiated or renewed in the quarter, together with continued solid price increases on renewal, averaging 14% for the quarter. Contracts in place at 31st December 2025 are expected to generate core business annual recurring revenue or ARR of $14.4 million for the 12 months to 31st December 2026. That equates to a 15% year-on-year increase. The stronger Australian dollar reduced the increase in ARR as the FX effects applied to the whole balance. Moving on to Slide 17. Revenue for the quarter was a record at $3.9 million, up 18% year-on-year and 8% on the previous quarter. This was despite the U.S. revenue result being affected by the Australian dollar as we discussed. The strong increase in rest of world revenue, up 67% on quarter 1 was on the back of the company's Australian distributor ordering SOZOs as well as SOZO Pros for our expansion into the heart health market. As forecast, cash receipts from customers rebounded to $3.8 million, up 12% quarter-on-quarter. On to Slide 18. As Parmjot has already discussed the sales, as you can see, patient testing continues to trend upward, up 1% on the prior quarter with a 3-year compound growth rate of 15%. The Thanksgiving and Christmas holidays affects the testing volumes as it has in previous years. I'll now pass back to Parmjot to wrap up before we go to questions. Parmjot Bains: Thanks, McGregor. Over to Slide 20, the outlook for the rest of the financial year and some comments on the company. When we look back at the outlook statement for the first half, we've achieved most of the goals that we've set with a very small -- with a small but very focused team of 75 experts across our business. Sales for the quarter were behind our expectations, but we are confident of growing the business with over 700 validated opportunities in the pipeline that the team is actively working through. These opportunities will continue to grow with the upcoming conference attendance and direct sales team promotion. Improvements in reimbursement were excellent and many thanks to our market access lead who is remarkable. And we continue to focus on expanding coverage with a target of 100% reimbursement across breast cancer-related lymphedema. Heart health and wellness and weight management opportunities are exciting growth opportunities that are being executed with the data and product that we have today. Heart health already has a CPT code, which has extensive coverage. We will continue to validate and refine the offering and the go-to-market pathway with customer feedback as we move into these new market segments. And we do all of this while driving our financial discipline and constantly refining our cost base. Many thank you for your support. I'll open the webinar up now for questions. Unknown Attendee: [Operator Instructions] The first question comes from [ Shane Store ]. And it is, can you describe the clinical settings where the body composition aspect is to be commercialized first? We'd like to understand how this assessment is introduced in a typical GLP-1 patient care pathway, for example. Parmjot Bains: Absolutely. So the body composition, as I noted, has over -- opportunities have over 30,000 sites of care. SOZO is a prescription medical device. So we are targeting areas where there is clinical oversight for the product. In terms of where it's being used, it's basically being targeted towards lifestyle medicine is a key area, an example of that. A number of these hospital systems, many of which were already in have got extensive lifestyle medicine practices. Part of this GLP-1 is being prescribed quite extensive around the United States with over 13 million people having GLP-1s. The SOZO is used both in terms of helping support the baseline body composition for patients. So looking at their muscle mass and fat mass and their weight and then helping them track that and trend that as they go through treatment. And so we've got some great case studies and including on our new website, you can look at patient tracking of GLP-1 use, looking at their fat and muscle mass and then helping both create the patient understanding of their journey. It helps create stickiness for the customers, our customers in terms of clinicians where patients will come back in and get repeat measurements and can be monitored for their care. That -- the other area that we are actually extending the body composition space is really linked around cancer survivorship. And as I noted, we've done some extensive voice of customer research with medical oncologists. And really, they're interested in looking at the body composition outputs, particularly as these patients reduce muscle mass during chemotherapy care. And now exercise oncology is being validated as an outcome as a potential mechanism of helping address muscle mass loss, they are using body composition to help monitor patients kind of muscle mass in that. So the 3 abstracts that were accepted at the ASBS conference, which is coming up in end of April, early May, we've actually got use cases of clinicians that have been using the body composition aspect of our device to help support cancer survivorship. So kind of multiple areas. And right now, there's kind of multiple use cases. What we're really doing is focusing on which ones are resonating the most because we have got a very small team and then which ones we can kind of really focus and target in more depth. Unknown Attendee: The next question comes from [ Jeremy Thompson ]. It is the 2 first half results following the NCCN guidelines released in March 2023 represent a growth rate of approximately 25% year-on-year. Noting the reimbursement coverage progress over the last 2 years, is the revenue growth rate expected to increase above 25% current rate? Parmjot Bains: We have got -- we would hope so. We've got a very strong pipeline in place with over 700 opportunities identified and a new sales team. And so we are kind of confident that this will continue to grow the BCRL business in particular. We were also looking to see growth from those new indications of heart failure and that specific body composition targeting. Unknown Attendee: We have a few questions from [ Andrew Hewitt ]. First one is, if SOZO is a cost benefit to hospitals, why is budget constraints an issue? Parmjot Bains: Because when they first look at making the assessment, the hospitals will always look at what budget is allocated. So it is still there as an issue. And so what we are just making sure we do is reinforcing the message that it's a service line, so i.e., a revenue-generating opportunity towards hospitals. So we just need -- we are continuing to make sure we are very strong in that messaging. That increase of reimbursement up to 93% across many states with multiple states over 90%, it's going to be a really strong reinforcing point in this one. Unknown Attendee: A follow-up from Andrew. What do Australian hospitals see compared to U.S. in the value of SOZO as we have 500 machines servicing 30 million people compared to 300 million people in the U.S.? Parmjot Bains: Yes. I think Australia has actually benefited from a number of KOLs and clinicians led a lot by the alert system and Louise Koelmeyer at Macquarie University and Professor John Boyages, who have really established a very strong model of care in the prevention of breast cancer-related lymphedema. So there is a very strong established ecosystem in Australia that has rebuilt this and it has been a focus for a large number of years in Australia. Australia was really unique and now the U.S. is moving up towards that space. Australia basically was just kind of clinical practice and standard of care. The U.S., fortunately is now moving up to standard of care. But as I noted in previous quarter, we went up into the European market, and it's really not standard of care there. So that's why we're kind of focusing primarily on the U.S. market. And with the NCCN guidelines, NAPPC, healthcare reimbursement, it is now becoming standard of care, but it is just taking time. Unknown Attendee: I have noticed on social media, a biz measuring device that's available to the general market. It looks a little bit like a standard weight machine and you pull bar from the base that's attached to a core. I realize it's not FDA, but what are the competitors in both the medical and cosmetic side of the business? Parmjot Bains: Yes. So in terms of that body composition space, it is highly competitive. So we are not -- so there's a number of these devices. I suspect the one you're seeing maybe the human health one, which my husband also says he's being spammed with. So they are very cheap kind of $200 devices that are primarily targeted into the telehealth space or at home consumer space where patients are tracking body composition. They're not as accurate. We had feedback from clinicians that they're not a device that you put in the home. And so our target space in the weight management space is a device that supports the clinician to generate validated clinical data that enables them to help retain their customers and increase their revenue flow. In terms of that clinical setting, the kind of devices and we've mentioned before is the InBody, Seca, Tanita. So there are devices that are out there in that clinical space, the kind of large established devices that fit within that clinical workflow. I guess maybe just one final point, but our differentiating point within that clinic and it is resonating is the fact that we are the only device that's got that FDA clearance. We are a prescription medical device. That clearance and that accuracy is really resonating with these clinicians. Unknown Attendee: A question again from Andrew Hewitt, but also I'll roll [ Rod W's ] call into -- question into it as well. They're both asking about what the U.S. sales reps are doing in terms of if there's no sales eventuating. And Andrew mentioned that last call, I think it was Scott that suggested that 80 sales per quarter would be a pass. And so looking at this quarter, it suggest that it's significantly lower than that and a failure. And also that there was a number of units were close to sale but missed on the last quarter, if that's the case that the quarter would seem even poorer. Why the fall away? And is there a pent-up demand for the Pro version? And could this be a cause of the delay of purchase in the last quarter? Parmjot Bains: Yes. Okay. So lots of questions there. We have got a new sales team. So Scott has really built a new sales team and a very strong sales team that we do have confidence that they will get up to speed and they will get their sales through. There are a number of large kind of multisystem sales sitting in that pipeline. They have still -- we are chasing that final purchase order signature on a number of these sales. So -- and we acknowledge they were disappointing, right? It was an extraordinarily frustrating quarter, but we are confident and the sales team is confident that these numbers will come up. In terms of SOZO Pro, we haven't actually marketed that proactively previously. But in this last quarter, we have been looking at customers where that SOZO Pro may help get the sale across the line. And I'll give you some examples, particularly in smaller breast surgeon offices, we can use it to replace the scale with the limited space. Basically, SOZO Pro has a built-in weight scale. It can actually fit in kind of better with workflow. And so we are, quite frankly, leveraging every opportunity right now. The market has not been that aware of SOZO Pro, and we've done that on purpose just as we kind of get the SOZO moved out, but we are launching into the SOZO Pro, and it is now being offered into the customers. Unknown Attendee: A couple of device questions. How does SOZO compared to a DEXA scan? Parmjot Bains: Really interesting. Comparable. So we've kind of -- a lot of the data just shows that from a muscle mass perspective, it's comparable, and we are actually working on an output right now, which has got comparability from a bone mineral density perspective, but that's going to require a filing. So we're very confident in that. We're actually better than DEXA at fluid. DEXA does not measure fluid well, and that's really one of the areas that we can differentiate, and we're kind of working on some updating algorithms that actually improve our output with regards to fluid in that space. So kind of DEXA has been established as a bit of a gold standard. So we're confident against DEXA. We actually think in some areas, we're actually better than DEXA. So we see a vision where particularly in that body composition space, we can replace DEXA because we know DEXA causes kind of radiation exposure to patients, particularly those in the cancer space, you want to limit that. And that was one of the points that really resonated with medical oncologists as well. Unknown Attendee: Is it possible to link data from SOZO to patient Apple Health? And is it something that you could look at to create patient stickiness? Parmjot Bains: Yes. We are -- there's a number of -- I think telehealth is growing substantially and this kind of remote wearables and monitoring space. We are actually in discussion with potential partners, particularly around the body composition and heart failure space, both to kind of help manage that patient journey from the clinic into the home. So we are actually exploring a number of these opportunities with some direct and proactive discussions underway, which as we progress, we can bring forward to the market. Unknown Attendee: And a question from [ Grant Percy ]. Will CHF SOZO be placed in hospitals and the home? Parmjot Bains: Primarily hospital, clinical. So SOZO is just by the virtue of its size as SOZO Pro will actually be the device with the cardiac implantable removed, will be in primarily the hospital and the outpatient department as well as private cardiology clinic department. We are not -- we do not have an at-home device, but that's one of those opportunities that we're looking at that collaboration on. Like can we kind of do a follow-up pathway all the way into the home for patients for heart failure. But right now, the focus very much because we're just launching is hospitals. So within the heart failure wards at discharge and then a follow-up care within the outpatient department where we will track -- we can track patients' fluid status and hopefully prevent that decompensation and readmission as well as kind of ongoing private clinic follow-up. Unknown Attendee: That was the final question. There are no more questions. I'll hand back over to Dr. Bains for closing remarks. Parmjot Bains: Okay. Thank you. Thank you, everybody. So just to kind of -- I guess, many thanks often to the team at ImpediMed who has done a lot of work. So this morning, we launched a whole new website. We got an FDA clearance on bilateral. On Monday, we launched -- we submitted a new 510(k). We've got a heart failure -- sorry, a sales team that is out in the market. We've got 19 conferences coming up over the next quarter. There is a lot of work underway. And so we are working very hard on launching into these new spaces and making sure that SOZO gets to those patients that need it. So -- and many thanks to you all for listening. Thank you.
Martijn Massen: Good morning, everyone. Thank you for joining and welcome to our 2025 Full Year Results Analyst Call. Today, our CEO, Bernd Stahli, accompanied by our CFO, Elke Snijder, will comment on the results presentation published on our website this morning. At the end of the call, you will have the opportunity to ask questions. For now, I would like to hand over to our CEO, Bernd Stahli. Bernd Stahli: Thank you, Martijn, and good morning, everyone. Welcome to the results presentation. Let's dive straight in. Slide 4 shows you what we stand for. These will be known, but I'll repeat them anyway. We're predominantly invested in Amsterdam. We're open to other sectors than offices. We appreciate that happy customers are key to the long-term success of the business. Sustainability is a must. And if the opportunity is there, we would like to grow into a larger, even better, more resilient business. Looking at 2025, lots of things have moved. For us, the 4 highlights of this year. The redevelopment of HNK Rotterdam Alexander, will talk about that later. All the permits are ready and the contractor is at the point of signing for Vitrum. So that's going to be the story for '26. We've delivered on our asset rotation, and we've exited a few more markets. And we've successfully refinanced EUR 400 million in loans successfully at better terms. Slide 6, we highlight the key performance indicators, some good, some bad. Earnings slightly higher than last year, EUR 2.10. The dividend, therefore, up by EUR 0.01 as a result as well, given that we have got a minimum payout ratio of 75%. Our balance sheet is under control. Our cost of debt remains low. But in terms of vacancy, and we'll talk about that later as well, it has increased. We see it as something that we will be able to address over the coming period, but it's something that we know, we need to address because 9% is not something that we're very happy about. Portfolio performance. If we look at the portfolio that we have today, anyone who was in the call 8 years ago remembers the map of the Netherlands where we had dots in some 72 cities. It's a lot more clean now this map. We're down to 5 cities. We exited Eindhoven, we exited Hoofddorp, which actually is very clear on Slide 9. Three assets sold, Eindhoven, Hooghuisstraat, we actually delivered to the buyer yesterday at 3:00. The 2 assets that you see at the top that were sold at the end of the list -- at the top of the list were sold at an 80% premium to book. The assets in first half of '26, Eindhoven is actually also sold at a similar sort of premium. So the trajectory in terms of asset rotation is good. What you see also on this slide is that we -- it looks like we have not done any acquisitions in '25. That is correct, but that doesn't mean we didn't invest. We actually invested quite heavily in HNK Rotterdam Alexander. And again, in '26, there will be further investments, particularly as Vitrum will start. The vacancy rate on Slide 10 is up. And we've indicated there's a slightly further increase at the start of 2026 as we got another building back in Leiden. So today, the pro forma number is just under 12%, and this is for us the level from which we have to start working it down again. If you look at the vacancy, we basically, over the years, as a result of strong asset management, asset rotation, investments in our assets, we have managed to keep the vacancy low. But obviously, there will always be tenants vacating, moving on. And this year -- last year, 2025 was the year that we actually had some adjustment as a result of it. And with a small portfolio, a vacancy returning to us will have a significant impact on the overall number. It's something that we know we need to address and we are addressing head on. Why, how do we do that? By just continuing to invest in our assets. And HNK Rotterdam Alexander is a very good example of this. This is going to be the best asset in the Alexander submarket of Rotterdam opening on February 9. Due to its quality and service offering, the building has attracted significant tenant interest during the development phase. And as a result, we are now leased 85% ahead of completion with conversations ongoing for most of the remainder of the space. Rents are above our original business case and with costs under control, we look forward to generating an attractive yield on cost of 8.4%. Alexander follows a trend of successful rebrands and upgrades at other HNK as we show on Slide 13. In 2026, we're doing a major rebrand of HNK Houthavens in Amsterdam and of HNK Utrecht Central Station, where we also expect to see good increases in ERV post the upgrades. We know the demand for offices is changing. And what is clear is that if and when you invest in your assets, as long as you're in the right location, it does get recognized in higher occupancy and higher rents. We also see this in how our tenants are using the space. We're getting more and more data on the actual usage of our buildings, and we are now on Slide 14. The actual physical occupational levels are stable at a good level, especially for the buildings that fit modern day tenant demand. We're optimistic that for the portfolio that we have, these occupancy levels will actually continue to improve. Slide 15 shows Vitrum. It's a project that you've seen coming back on our presentation for the last years. It's taken its time, but we're planning to make as much of a success of our development as we have done on some of the other redevelopments in our portfolio. In 2025, we've overcome all the legal hurdles, and we're close to the point now of finalizing and signing the contractor, confirming an actual start date, confirming a delivery date. Anyone that is driving by the location today can see the preparatory works already taking place at this time. It will be a great addition to the portfolio, adding just under 15,000 square meters of high-end space in a highly visible location, and we're optimistic about the leasing prospects as there is not that much comparable space available in the market now or in 2028. All the relevant details you can see on Slide 13. Slide 15 highlights Glass House. We announced in the press release because it's a big vacancy for us that is coming up, that it's going to become vacant in December 2026 after KPN has been there for just over a decade as a tenant. You can actually on the map, see where its location is. It's in terms of location, the best assets in the Sloterdijk area. And it's up to us now to make sure that -- it's also going to be again the best asset in terms of not only location, but in terms of product for this market as and when we deliver the project in probably 18 months' time post the delivery -- the return of that building in end of 2026. We'll make it future-proof. We know how the occupier market has changed. It will be a multi-tenant building, high quality, and we expect it will cost money. We don't yet know how much. But as and when we know the details with respect to the cost of the project, the timing of the project and the returns of this project, we will clarify this to you probably in one of the future presentations for the results. And with that, I would like to hand it over to Elke for the revaluation and the financials. Elke Snijder: Thanks for the introduction, Bernd. On this slide, you can see that the overall revaluation for the full year was negative. In the second half of the year, we recorded a downward adjustment of EUR 31 million. This was almost entirely driven by the revaluation of Glass House, the building that we just talked about that KPN will be vacating by the end of '26 and to a lesser extent, by Leiden assets following Johnson & Johnson's departure from the lab space on Newtonweg and overall, the change in sentiment in the bioscience industry that there has been lately. On this slide, the left shows the euro amount and the breakdowns between positive and negative full year revaluations. And on the right, we highlight that excluding Glass House and Leiden, our H2 valuations remained pretty much stable. Okay. We wanted to dive a little bit deeper into valuations and ERV. That's why we made the next slide. And here, we take a closer look. We've created this chart for you. And what it illustrates is that the development of both market rents, ERV and asset valuations for our like-for-like portfolio using 2020 as the base year and how that develops. Over a longer period, you would generally expect that if anticipated rental income increases, the corresponding asset values would rise as well. However, the chart shows a disconnect over this time frame, interestingly. While ERV was increased by 20% across our like-for-like portfolio, valuations have declined by 17% over the same period. Moving on to the next slide. You can see that while ERV growth has been slightly lower than inflation, we have seen that our gross rental income does grow ahead of inflation, which, in essence, is good news. Our new leases are signed significantly above ERV, almost 14% in 2024 and 11% in 2025. Okay. Let's now move on to sustainability. I think this is a familiar slide for you, but of course, with updated numbers. As one of our key strategic pillars, sustainability remains an area where we can truly show our commitment and really continue to lead the sector. We assess our progress against multiple indicators, giving us a well-rounded view of our performance. Our EPC continues to stand out. Nearly our entire portfolio is now labeled A or better. And within the A category, we can see further improvement as more assets climb to higher label tiers. On this slide, you can see that reflected on the top right, where the dark blue segment grows significantly in 2025 versus '24. A major focus area is reducing our actual energy use as we believe that, and I've explained this before, together with CO2 impact, this is the most meaningful driver of our sustainability trajectory. We track this through CRREM, targeting improvements in kilowatt hour per square meter per year. And this requires both investing in the technical performance of our buildings, but also supporting our tenants in adopting more energy-conscious behaviors. On the left-hand graph, you can see that we achieved another reduction in energy intensity. This is even more encouraging and now it gets quite interesting given that '25 was relatively cold with 5.7% additional heating days or in Dutch, we call them [Foreign Language]. Pro forma, had conditions been more typical, energy intensity would have likely landed around 105 or 106 for this scope versus the 109 that you see here in the chart. Our performance still remains well ahead of the Paris Proof pathway. And as mentioned, progress will not always be linear, some investments deliver larger steps than others and weather can create year-on-year fluctuations. But the overall trajectory remains strongly positive. Finally, on BREEAM, on the bottom right, you can see that 75% of our portfolio scores is very good or better. But more on that on the next slide. Okay. Here, you can see on the left, our ratings in '24 at the top. Then in the middle, you can see how our ratings would have looked if we wouldn't have done anything with the new certification that we did this year. And in the bottom, you can see how our ratings were finalized in '25. We recertified a large part of our portfolio in December, and this is the result. While we still have roughly 3/4 of the portfolio in very good or better, you can clearly see a shift from excellent in '24 at the top chart to more very good ratings in the bottom chart. At first glance, this might suggest our assets are performing worse, but I'm trying to explain that's not the case. In reality, our assets have continued to improve. However, the thresholds for each BREEAM rating level have become significantly stricter, which means the same level or even better performance may still result in a lower label. Now as for most of you, BREEAM is not day-to-day work, let me explain a little bit about how BREEAM ratings work. They are a moving target, not a static achievement. The assessment framework is regularly updated, and the assets are typically reassessed every 3 years against newly tightened criteria. As a result, the benchmark effectively resets each certification cycle, meaning that simply maintaining your rating usually requires additional investment and efforts. In years with widespread reassessments, for us, '25 was a biggy, it becomes inherently more difficult to maintain previous labels even if the environmental performance of the underlying assets has stayed the same or even improved. Part of what we're seeing was expected as we rolled out extensive planned sustainability upgrades, but some outcomes also stem from methodological updates introduced during the certification process. What does remain unchanged is our commitment. We continue to invest in and further enhance the quality and sustainability and long-term resilience of our assets. Okay. Now let's dive into the financials. EPRA earnings, a familiar chart here. It shows the bridge from GRI to NRI to EPRA earnings. Let me highlight a few points. Service costs not recharged increased as higher vacancy meant a larger share of these costs were not passed on to tenants. OpEx, noticeably higher than in '24 and driven really by 3 main factors. We saw a significant increase in municipal taxes. It was roughly EUR 0.5 million. In '24, but this was a little bit of a minor cost. We had a one-off insurance compensation that, of course, did not come back in '25. And we had higher sustainability-related consultancy expenses, including work tied to the BREEAM recertification. And again, we did a lot of those in '25, and we do not expect those to return in this magnitude in '26. Net financing result improved. I will elaborate on this later. And finally, corporate income tax lands at a direct rate of around 5.5%, comfortably within our guidance range of 5% to 7%. Moving on to EPRA earnings per slide. It's a bridge from '24 to '25. From left to right, the big ones. First, you can see the impact of the Sypesteyn acquisition that came in for December '24. So we have the full year impact in '25, hence, the EUR 0.06 of GRI that you see. Negative impact of disposals consists of full year impact of the '24 disposals. To remind you, that was Binnenhof Den Bosch and Fellenoord Eindhoven and the partial impact of the disposals of '25, and there we see Beukenhaghe Hooghuisstraat that was [ Beukenhaghe ] and Kennedyplein in Eindhoven for December. Like-for-like GRI shows the impact of mainly indexation, as you're familiar with. And as said, service costs not recharged increased due to higher vacancy. OpEx was higher, as explained, mainly due to higher municipality taxes and sustainability consultancy. Financing costs lower, and that was due to mainly on average, lower debt outstanding. Corporate income tax direct is about EUR 0.9 million higher than in '24. That's the EUR 0.04 impact, and that all ties up to an EPS of EUR 2.10, which is EUR 0.01 higher than '24. So I hope everybody is still with me because we're moving on to the EPRA NTA per share from again, end of '24 to end of '25. From left to right, more familiar stuff coming in, so I'll speed up a little bit. Total dividend of EUR 1.57. Over the year, the EPS we just talked about of EUR 2.10. Impact of revaluation comes down to EUR 3.06. And the sold assets in '25, good news, sold above book value, hence, the result on sales. Deferred tax relates to an increase of the deferred tax assets because of the negative revaluation over the year. The effect of stock dividend here is EUR 0.27. Simply put, the denominator of NTA per share has increased and results all in all, in a decrease of the NTA from '24 to '25 of EUR 2.24. Okay. Let's move on to financing. You have been able to read in a recent press release, but we are very pleased to have successfully closed a new EUR 50 million 7-year private placement with MetLife Investment Management. This strengthens our long-term funding profile, and we're happy to do it with an existing partner. Our EUR 40 million Pricoa placement, which matures at the end of this month, well, it's actually that's the end of this week, is being refinanced through this transaction, and we're adding an additional EUR 10 million to support continued investment in our portfolio, and we have investment plans enough planned for '26. Commercial terms are attractive. And as a result, average cost of debt remain well under control, increasing only to 3.2% after closing. Okay. Another sheet on our maturity and hedging profile. On the left side of this slide, you see the pro forma. So after we've paid back the Pricoa private placement loan maturity profile. And we're quite happy with that. It's a well-staggered schedule. No refinancing needs until '28 and also highlights that we still have substantial capacity on our RCF. With the completion of the new private placement, average debt maturity is extended to 4.6 years, which is illustrated on the top right of this slide. Overall, very satisfied with refinancing in '25. Over the past year, we secured the extension of both the term loan and RCF with our bank syndicate before the summer and closed the USPP just last week. Importantly, our entire debt structure remains fully unsecured, preserving maximum financing flexibility. Okay. Last slide for me. Looking at our balance sheet KPIs, a familiar slide again. On the left side, you can see that our cost of debt has remained stable. As mentioned, it will tick up slightly in '26 due to the new private placement. But do remember, this was priced in a very different base rate environment than the Pricoa private placement that expires at the end of this week. LTV, really healthy, well within external covenant thresholds, but also even a bit still below our own internal guidance. And we did share in the press release that pro forma for the Hooghuisstraat asset that's transferred yesterday, our LTV is 32.2%. So well, it provides some room to invest. All the other numbers, I think, are looking healthy. ICR is looking healthy and also net debt-to-EBITDA improved further, supported by the lower net debt position. Okay. So this is it for me now. Back to Bernd for the outlook '26. Bernd Stahli: Thank you, Elke. That's on Slide 31, the last slide of this presentation. You see the EPRA EPS guidance for 2026 of EUR 1.90 to EUR 2.05. That's middle of the range would be more or less a EUR 0.12 decline in earnings. That is entirely related due to the disposals that we did last year and the full year effect of Hooghuisstraat being sold earlier this month -- or actually yesterday. That underlying the business, actually, we are still getting like-for-like rental growth at the top line level. Obviously, an increase in vacancy diminishes the positive impact on that, but the indexation and like-for-like rental growth, they more or less offset themselves in 2026. If we look at the business more generally, we do see that the outlook for offices is improving. Liquidity is returning to the investment market and tenant demand is healthy for high-quality buildings in prime vibrant locations. People are willing to pay up for being in the best locations. We see more and more evidence of that. Over the years, we've moved to the right locations. And as we continue to invest and are able to provide the high-quality building that the market now wants, we should benefit. 2026 will see us further invest in the portfolio. Vitrum is a clear example. Glass House will be an upgrade and the rebrands of 2 further HNKs, they may be smaller investments, but we'll also make sure that these assets will continue to perform their best over the coming years. Offices are becoming more operational, hands-on assets. We know this. We're prepared for it, and we believe we're firmly on the right side of this transition, and that should ultimately drive future returns for our shareholders. We're optimistic about the outlook, but the vacancy is the key issue that we know we need to address this year, and it's something that the entire team is fully aware of and should be capable on delivering on. Finally, those of you who received the e-mail this morning will see that we've actually also put out a video of Elke, myself. I don't necessarily like to look at myself. But for those who haven't seen it yet, it's an interesting way to see how our communication is going to evolve as an extra add-on. There is an avatar video on the website. Have a look, give us feedback and let us know if you like this sort of thing. We're looking forward to doing more of this. AI is not going to go away. It will impact our business as well. It will impact our tenants. It's something that we're again fully aware of, and it means that we need to continue to deliver the product that the market wants. It will continue to evolve. With that, I would like to hand it back to Martijn for Q&A. Martijn Massen: Yes. So as this was the last slide of the presentation, we will now be continuing with the Q&A. Operator: [Operator Instructions] Martijn Massen: Vincent should be -- Vincent Koppmair from Degroof Petercam should be in the call right now, but I don't think we can hear him. Vincent Koppmair: Can you hear me? Martijn Massen: Okay. There we are. Vincent Koppmair: Apologies I didn't hear any sound effects. Congrats on the results. Apologies for the delay then. I just had maybe 2 quick questions. First of all, you've highlighted, of course, the EPS guidance and let's say, a bit wider range of the guidance. Could you give a little bit of color on what are the underlying assumptions that you're assuming for some of those guidance? And then my second question is, do you consider any further disposals in 2026, given your, let's say, maybe successful disposals at high valuations or above book value that you've done in the past month? Bernd Stahli: Have more guidance. The range is wider than we normally do. What I indicated is that the middle of the range is EUR 1.98. And there you get basically with the disposals that we did in the back end of '25 and the last one in Eindhoven yesterday. The increase in vacancy as a result of our efforts in Leiden that we had as per the start of this year will have a negative impact on income. That should be more or less offset by this increase in occupancy that will happen in Vivaldi II during this year. Beyond that, obviously, you get some indexation. We've guided for that as well. So we are -- this is the early -- the first EPRA EPS guidance that we give. Hopefully, we can narrow the range in subsequent quarters to give you clarity as to where the number actually will ultimately come out. With respect to further disposals, possibly, yes. We'd rather just do them first and then explain to you why we did what we did. But there are a small number of assets that we are currently preparing for disposal that should not necessarily be the biggest assets, but assets that where we see longer term a trajectory that doesn't fit where we think the office market is going. So assets that may ultimately move to change of use where we don't see a role for ourselves in that change of use. I hope that answers your question. Vincent Koppmair: It's, clear. I would have 1 follow-up question potentially if I may. The last question would be on the investment plan. So of course, you now have announced the figure and the yield on cost on Vitrum, that's EUR 80 million. But of course, you will also now have the renovation of Leiden and potentially Glass House. Where do you see basically your LTV landing over the next, let's say, 2 years, end of 2027, given the entire, let's say, CapEx plan? Bernd Stahli: Starting at the pro forma number of EUR 32 million today, assume that we basically get our earnings and that we pay out the dividend and take into account an element of CapEx, then that, by and large, is a wash. The increase in LTV will indeed come from the CapEx of Vitrum, the CapEx -- the remaining CapEx on Alexander and the start of CapEx of Glass House will end up above EUR 35 million but will stay well below EUR 40 million. Martijn Massen: Our next caller is [indiscernible] from ING. Unknown Analyst: So I have 2 questions. So first on -- you mentioned that Well House remains challenging in the current market. You also talked about building costs and pre-leasing. Could you maybe elaborate on that, please? Bernd Stahli: Well House is a wood hybrid structure that is going to be built upon an existing parking garage. That is complicated, expensive and actually takes a lot of time. The entire development period for this project is currently estimated somewhere between 34 and 40 months, where typically you would only probably need 2 years for a project that is basically ground up on a greenfield. Of that period, it's about 14 to 16 months that the excavation of the parking needs to take place. If you take into account that construction period, it means that all your costs capitalize over a period of time that your leasehold costs are quite extensive over that period of time when there is no income forthcoming. So it's actually the lead time before you actually have your building that is making it hard to make the economic stack up. What is a positive is that the rental assumptions are better today than they were 2 years ago, 2.5 years ago when we canceled project. But the rising construction costs that have happened since, partly offset this. The return that we need is slightly higher than average for the very simple reason that -- given the floor plates that this building will have, which is about 1,000 meters per floor, it's not the type of building that you would expect to pre-let where you get one anchor tenant taking 5,000 or 6,000 square meters for the very simple reason that people then want to like to have that space on maybe 1 or 2 floors, not on 6. This is a building that will be multi-tenanted and probably will only lease up towards completion. So we have full conviction of costs and timelines, but less clarity on revenues, and that's a trade-off that we need to square over the coming period to see whether or not we can justify the investment. Unknown Analyst: Okay. Great. That's very clear. And then a second question on the Bioscience Park. Could you maybe elaborate on the negative sentiment shift? And how would that impact the re-leasing options for the assets and also potentially any impact on other assets you have in that park? Bernd Stahli: Fair question. The life science cluster in Leiden that we have and the entire area is to a very large extent, driven by Johnson & Johnson as a major tenant in the entire area. Over the last couple of years, there have been some changes with respect to the available funding, venture capital, capital available for start-ups that has sort of become less prevalent as cost of capital generally across the board has gone up. And at the same time, what we also see is that the improvements in AI means that you need less lab space because more of the analysis can be done computer generated. And so the market is shifting. There is a little less confidence than there was 3 years ago about -- over the prospects of this industry. What we know is that it's a very cyclical industry, and we're now at the wrong part of that cycle. It will come back, but it's harder to judge when that will happen. Unknown Analyst: Okay. Great. And maybe 1 last question, if I may, on Vivaldi II, is there any update on the leasing? Do you see also interest from larger tenants to lease more space? Bernd Stahli: We got that building back in August. We've basically with our joint partner on this, established a new plan for the upgrade of the ground floor that basically should complete this month. We've had some leasing so far at rent levels above what we were sort of anticipating. But actually, the leasing should really sort of start to pick up from this month onwards. And we indicated at the time that we wanted to go back to a normal occupancy in 18 months. So basically, if we meet that target by the end of this year, we should be at close to 75%, 80%. That's -- if we get that, that we would be okay with. But we're not there yet. Operator: [Operator Instructions] Martijn Massen: Given that there are no further questions, I would like to thank everyone for listening and wish you a pleasant rest of your day. Thank you.
Martijn Massen: Good morning, everyone. Thank you for joining and welcome to our 2025 Full Year Results Analyst Call. Today, our CEO, Bernd Stahli, accompanied by our CFO, Elke Snijder, will comment on the results presentation published on our website this morning. At the end of the call, you will have the opportunity to ask questions. For now, I would like to hand over to our CEO, Bernd Stahli. Bernd Stahli: Thank you, Martijn, and good morning, everyone. Welcome to the results presentation. Let's dive straight in. Slide 4 shows you what we stand for. These will be known, but I'll repeat them anyway. We're predominantly invested in Amsterdam. We're open to other sectors than offices. We appreciate that happy customers are key to the long-term success of the business. Sustainability is a must. And if the opportunity is there, we would like to grow into a larger, even better, more resilient business. Looking at 2025, lots of things have moved. For us, the 4 highlights of this year. The redevelopment of HNK Rotterdam Alexander, will talk about that later. All the permits are ready and the contractor is at the point of signing for Vitrum. So that's going to be the story for '26. We've delivered on our asset rotation, and we've exited a few more markets. And we've successfully refinanced EUR 400 million in loans successfully at better terms. Slide 6, we highlight the key performance indicators, some good, some bad. Earnings slightly higher than last year, EUR 2.10. The dividend, therefore, up by EUR 0.01 as a result as well, given that we have got a minimum payout ratio of 75%. Our balance sheet is under control. Our cost of debt remains low. But in terms of vacancy, and we'll talk about that later as well, it has increased. We see it as something that we will be able to address over the coming period, but it's something that we know, we need to address because 9% is not something that we're very happy about. Portfolio performance. If we look at the portfolio that we have today, anyone who was in the call 8 years ago remembers the map of the Netherlands where we had dots in some 72 cities. It's a lot more clean now this map. We're down to 5 cities. We exited Eindhoven, we exited Hoofddorp, which actually is very clear on Slide 9. Three assets sold, Eindhoven, Hooghuisstraat, we actually delivered to the buyer yesterday at 3:00. The 2 assets that you see at the top that were sold at the end of the list -- at the top of the list were sold at an 80% premium to book. The assets in first half of '26, Eindhoven is actually also sold at a similar sort of premium. So the trajectory in terms of asset rotation is good. What you see also on this slide is that we -- it looks like we have not done any acquisitions in '25. That is correct, but that doesn't mean we didn't invest. We actually invested quite heavily in HNK Rotterdam Alexander. And again, in '26, there will be further investments, particularly as Vitrum will start. The vacancy rate on Slide 10 is up. And we've indicated there's a slightly further increase at the start of 2026 as we got another building back in Leiden. So today, the pro forma number is just under 12%, and this is for us the level from which we have to start working it down again. If you look at the vacancy, we basically, over the years, as a result of strong asset management, asset rotation, investments in our assets, we have managed to keep the vacancy low. But obviously, there will always be tenants vacating, moving on. And this year -- last year, 2025 was the year that we actually had some adjustment as a result of it. And with a small portfolio, a vacancy returning to us will have a significant impact on the overall number. It's something that we know we need to address and we are addressing head on. Why, how do we do that? By just continuing to invest in our assets. And HNK Rotterdam Alexander is a very good example of this. This is going to be the best asset in the Alexander submarket of Rotterdam opening on February 9. Due to its quality and service offering, the building has attracted significant tenant interest during the development phase. And as a result, we are now leased 85% ahead of completion with conversations ongoing for most of the remainder of the space. Rents are above our original business case and with costs under control, we look forward to generating an attractive yield on cost of 8.4%. Alexander follows a trend of successful rebrands and upgrades at other HNK as we show on Slide 13. In 2026, we're doing a major rebrand of HNK Houthavens in Amsterdam and of HNK Utrecht Central Station, where we also expect to see good increases in ERV post the upgrades. We know the demand for offices is changing. And what is clear is that if and when you invest in your assets, as long as you're in the right location, it does get recognized in higher occupancy and higher rents. We also see this in how our tenants are using the space. We're getting more and more data on the actual usage of our buildings, and we are now on Slide 14. The actual physical occupational levels are stable at a good level, especially for the buildings that fit modern day tenant demand. We're optimistic that for the portfolio that we have, these occupancy levels will actually continue to improve. Slide 15 shows Vitrum. It's a project that you've seen coming back on our presentation for the last years. It's taken its time, but we're planning to make as much of a success of our development as we have done on some of the other redevelopments in our portfolio. In 2025, we've overcome all the legal hurdles, and we're close to the point now of finalizing and signing the contractor, confirming an actual start date, confirming a delivery date. Anyone that is driving by the location today can see the preparatory works already taking place at this time. It will be a great addition to the portfolio, adding just under 15,000 square meters of high-end space in a highly visible location, and we're optimistic about the leasing prospects as there is not that much comparable space available in the market now or in 2028. All the relevant details you can see on Slide 13. Slide 15 highlights Glass House. We announced in the press release because it's a big vacancy for us that is coming up, that it's going to become vacant in December 2026 after KPN has been there for just over a decade as a tenant. You can actually on the map, see where its location is. It's in terms of location, the best assets in the Sloterdijk area. And it's up to us now to make sure that -- it's also going to be again the best asset in terms of not only location, but in terms of product for this market as and when we deliver the project in probably 18 months' time post the delivery -- the return of that building in end of 2026. We'll make it future-proof. We know how the occupier market has changed. It will be a multi-tenant building, high quality, and we expect it will cost money. We don't yet know how much. But as and when we know the details with respect to the cost of the project, the timing of the project and the returns of this project, we will clarify this to you probably in one of the future presentations for the results. And with that, I would like to hand it over to Elke for the revaluation and the financials. Elke Snijder: Thanks for the introduction, Bernd. On this slide, you can see that the overall revaluation for the full year was negative. In the second half of the year, we recorded a downward adjustment of EUR 31 million. This was almost entirely driven by the revaluation of Glass House, the building that we just talked about that KPN will be vacating by the end of '26 and to a lesser extent, by Leiden assets following Johnson & Johnson's departure from the lab space on Newtonweg and overall, the change in sentiment in the bioscience industry that there has been lately. On this slide, the left shows the euro amount and the breakdowns between positive and negative full year revaluations. And on the right, we highlight that excluding Glass House and Leiden, our H2 valuations remained pretty much stable. Okay. We wanted to dive a little bit deeper into valuations and ERV. That's why we made the next slide. And here, we take a closer look. We've created this chart for you. And what it illustrates is that the development of both market rents, ERV and asset valuations for our like-for-like portfolio using 2020 as the base year and how that develops. Over a longer period, you would generally expect that if anticipated rental income increases, the corresponding asset values would rise as well. However, the chart shows a disconnect over this time frame, interestingly. While ERV was increased by 20% across our like-for-like portfolio, valuations have declined by 17% over the same period. Moving on to the next slide. You can see that while ERV growth has been slightly lower than inflation, we have seen that our gross rental income does grow ahead of inflation, which, in essence, is good news. Our new leases are signed significantly above ERV, almost 14% in 2024 and 11% in 2025. Okay. Let's now move on to sustainability. I think this is a familiar slide for you, but of course, with updated numbers. As one of our key strategic pillars, sustainability remains an area where we can truly show our commitment and really continue to lead the sector. We assess our progress against multiple indicators, giving us a well-rounded view of our performance. Our EPC continues to stand out. Nearly our entire portfolio is now labeled A or better. And within the A category, we can see further improvement as more assets climb to higher label tiers. On this slide, you can see that reflected on the top right, where the dark blue segment grows significantly in 2025 versus '24. A major focus area is reducing our actual energy use as we believe that, and I've explained this before, together with CO2 impact, this is the most meaningful driver of our sustainability trajectory. We track this through CRREM, targeting improvements in kilowatt hour per square meter per year. And this requires both investing in the technical performance of our buildings, but also supporting our tenants in adopting more energy-conscious behaviors. On the left-hand graph, you can see that we achieved another reduction in energy intensity. This is even more encouraging and now it gets quite interesting given that '25 was relatively cold with 5.7% additional heating days or in Dutch, we call them [Foreign Language]. Pro forma, had conditions been more typical, energy intensity would have likely landed around 105 or 106 for this scope versus the 109 that you see here in the chart. Our performance still remains well ahead of the Paris Proof pathway. And as mentioned, progress will not always be linear, some investments deliver larger steps than others and weather can create year-on-year fluctuations. But the overall trajectory remains strongly positive. Finally, on BREEAM, on the bottom right, you can see that 75% of our portfolio scores is very good or better. But more on that on the next slide. Okay. Here, you can see on the left, our ratings in '24 at the top. Then in the middle, you can see how our ratings would have looked if we wouldn't have done anything with the new certification that we did this year. And in the bottom, you can see how our ratings were finalized in '25. We recertified a large part of our portfolio in December, and this is the result. While we still have roughly 3/4 of the portfolio in very good or better, you can clearly see a shift from excellent in '24 at the top chart to more very good ratings in the bottom chart. At first glance, this might suggest our assets are performing worse, but I'm trying to explain that's not the case. In reality, our assets have continued to improve. However, the thresholds for each BREEAM rating level have become significantly stricter, which means the same level or even better performance may still result in a lower label. Now as for most of you, BREEAM is not day-to-day work, let me explain a little bit about how BREEAM ratings work. They are a moving target, not a static achievement. The assessment framework is regularly updated, and the assets are typically reassessed every 3 years against newly tightened criteria. As a result, the benchmark effectively resets each certification cycle, meaning that simply maintaining your rating usually requires additional investment and efforts. In years with widespread reassessments, for us, '25 was a biggy, it becomes inherently more difficult to maintain previous labels even if the environmental performance of the underlying assets has stayed the same or even improved. Part of what we're seeing was expected as we rolled out extensive planned sustainability upgrades, but some outcomes also stem from methodological updates introduced during the certification process. What does remain unchanged is our commitment. We continue to invest in and further enhance the quality and sustainability and long-term resilience of our assets. Okay. Now let's dive into the financials. EPRA earnings, a familiar chart here. It shows the bridge from GRI to NRI to EPRA earnings. Let me highlight a few points. Service costs not recharged increased as higher vacancy meant a larger share of these costs were not passed on to tenants. OpEx, noticeably higher than in '24 and driven really by 3 main factors. We saw a significant increase in municipal taxes. It was roughly EUR 0.5 million. In '24, but this was a little bit of a minor cost. We had a one-off insurance compensation that, of course, did not come back in '25. And we had higher sustainability-related consultancy expenses, including work tied to the BREEAM recertification. And again, we did a lot of those in '25, and we do not expect those to return in this magnitude in '26. Net financing result improved. I will elaborate on this later. And finally, corporate income tax lands at a direct rate of around 5.5%, comfortably within our guidance range of 5% to 7%. Moving on to EPRA earnings per slide. It's a bridge from '24 to '25. From left to right, the big ones. First, you can see the impact of the Sypesteyn acquisition that came in for December '24. So we have the full year impact in '25, hence, the EUR 0.06 of GRI that you see. Negative impact of disposals consists of full year impact of the '24 disposals. To remind you, that was Binnenhof Den Bosch and Fellenoord Eindhoven and the partial impact of the disposals of '25, and there we see Beukenhaghe Hooghuisstraat that was [ Beukenhaghe ] and Kennedyplein in Eindhoven for December. Like-for-like GRI shows the impact of mainly indexation, as you're familiar with. And as said, service costs not recharged increased due to higher vacancy. OpEx was higher, as explained, mainly due to higher municipality taxes and sustainability consultancy. Financing costs lower, and that was due to mainly on average, lower debt outstanding. Corporate income tax direct is about EUR 0.9 million higher than in '24. That's the EUR 0.04 impact, and that all ties up to an EPS of EUR 2.10, which is EUR 0.01 higher than '24. So I hope everybody is still with me because we're moving on to the EPRA NTA per share from again, end of '24 to end of '25. From left to right, more familiar stuff coming in, so I'll speed up a little bit. Total dividend of EUR 1.57. Over the year, the EPS we just talked about of EUR 2.10. Impact of revaluation comes down to EUR 3.06. And the sold assets in '25, good news, sold above book value, hence, the result on sales. Deferred tax relates to an increase of the deferred tax assets because of the negative revaluation over the year. The effect of stock dividend here is EUR 0.27. Simply put, the denominator of NTA per share has increased and results all in all, in a decrease of the NTA from '24 to '25 of EUR 2.24. Okay. Let's move on to financing. You have been able to read in a recent press release, but we are very pleased to have successfully closed a new EUR 50 million 7-year private placement with MetLife Investment Management. This strengthens our long-term funding profile, and we're happy to do it with an existing partner. Our EUR 40 million Pricoa placement, which matures at the end of this month, well, it's actually that's the end of this week, is being refinanced through this transaction, and we're adding an additional EUR 10 million to support continued investment in our portfolio, and we have investment plans enough planned for '26. Commercial terms are attractive. And as a result, average cost of debt remain well under control, increasing only to 3.2% after closing. Okay. Another sheet on our maturity and hedging profile. On the left side of this slide, you see the pro forma. So after we've paid back the Pricoa private placement loan maturity profile. And we're quite happy with that. It's a well-staggered schedule. No refinancing needs until '28 and also highlights that we still have substantial capacity on our RCF. With the completion of the new private placement, average debt maturity is extended to 4.6 years, which is illustrated on the top right of this slide. Overall, very satisfied with refinancing in '25. Over the past year, we secured the extension of both the term loan and RCF with our bank syndicate before the summer and closed the USPP just last week. Importantly, our entire debt structure remains fully unsecured, preserving maximum financing flexibility. Okay. Last slide for me. Looking at our balance sheet KPIs, a familiar slide again. On the left side, you can see that our cost of debt has remained stable. As mentioned, it will tick up slightly in '26 due to the new private placement. But do remember, this was priced in a very different base rate environment than the Pricoa private placement that expires at the end of this week. LTV, really healthy, well within external covenant thresholds, but also even a bit still below our own internal guidance. And we did share in the press release that pro forma for the Hooghuisstraat asset that's transferred yesterday, our LTV is 32.2%. So well, it provides some room to invest. All the other numbers, I think, are looking healthy. ICR is looking healthy and also net debt-to-EBITDA improved further, supported by the lower net debt position. Okay. So this is it for me now. Back to Bernd for the outlook '26. Bernd Stahli: Thank you, Elke. That's on Slide 31, the last slide of this presentation. You see the EPRA EPS guidance for 2026 of EUR 1.90 to EUR 2.05. That's middle of the range would be more or less a EUR 0.12 decline in earnings. That is entirely related due to the disposals that we did last year and the full year effect of Hooghuisstraat being sold earlier this month -- or actually yesterday. That underlying the business, actually, we are still getting like-for-like rental growth at the top line level. Obviously, an increase in vacancy diminishes the positive impact on that, but the indexation and like-for-like rental growth, they more or less offset themselves in 2026. If we look at the business more generally, we do see that the outlook for offices is improving. Liquidity is returning to the investment market and tenant demand is healthy for high-quality buildings in prime vibrant locations. People are willing to pay up for being in the best locations. We see more and more evidence of that. Over the years, we've moved to the right locations. And as we continue to invest and are able to provide the high-quality building that the market now wants, we should benefit. 2026 will see us further invest in the portfolio. Vitrum is a clear example. Glass House will be an upgrade and the rebrands of 2 further HNKs, they may be smaller investments, but we'll also make sure that these assets will continue to perform their best over the coming years. Offices are becoming more operational, hands-on assets. We know this. We're prepared for it, and we believe we're firmly on the right side of this transition, and that should ultimately drive future returns for our shareholders. We're optimistic about the outlook, but the vacancy is the key issue that we know we need to address this year, and it's something that the entire team is fully aware of and should be capable on delivering on. Finally, those of you who received the e-mail this morning will see that we've actually also put out a video of Elke, myself. I don't necessarily like to look at myself. But for those who haven't seen it yet, it's an interesting way to see how our communication is going to evolve as an extra add-on. There is an avatar video on the website. Have a look, give us feedback and let us know if you like this sort of thing. We're looking forward to doing more of this. AI is not going to go away. It will impact our business as well. It will impact our tenants. It's something that we're again fully aware of, and it means that we need to continue to deliver the product that the market wants. It will continue to evolve. With that, I would like to hand it back to Martijn for Q&A. Martijn Massen: Yes. So as this was the last slide of the presentation, we will now be continuing with the Q&A. Operator: [Operator Instructions] Martijn Massen: Vincent should be -- Vincent Koppmair from Degroof Petercam should be in the call right now, but I don't think we can hear him. Vincent Koppmair: Can you hear me? Martijn Massen: Okay. There we are. Vincent Koppmair: Apologies I didn't hear any sound effects. Congrats on the results. Apologies for the delay then. I just had maybe 2 quick questions. First of all, you've highlighted, of course, the EPS guidance and let's say, a bit wider range of the guidance. Could you give a little bit of color on what are the underlying assumptions that you're assuming for some of those guidance? And then my second question is, do you consider any further disposals in 2026, given your, let's say, maybe successful disposals at high valuations or above book value that you've done in the past month? Bernd Stahli: Have more guidance. The range is wider than we normally do. What I indicated is that the middle of the range is EUR 1.98. And there you get basically with the disposals that we did in the back end of '25 and the last one in Eindhoven yesterday. The increase in vacancy as a result of our efforts in Leiden that we had as per the start of this year will have a negative impact on income. That should be more or less offset by this increase in occupancy that will happen in Vivaldi II during this year. Beyond that, obviously, you get some indexation. We've guided for that as well. So we are -- this is the early -- the first EPRA EPS guidance that we give. Hopefully, we can narrow the range in subsequent quarters to give you clarity as to where the number actually will ultimately come out. With respect to further disposals, possibly, yes. We'd rather just do them first and then explain to you why we did what we did. But there are a small number of assets that we are currently preparing for disposal that should not necessarily be the biggest assets, but assets that where we see longer term a trajectory that doesn't fit where we think the office market is going. So assets that may ultimately move to change of use where we don't see a role for ourselves in that change of use. I hope that answers your question. Vincent Koppmair: It's, clear. I would have 1 follow-up question potentially if I may. The last question would be on the investment plan. So of course, you now have announced the figure and the yield on cost on Vitrum, that's EUR 80 million. But of course, you will also now have the renovation of Leiden and potentially Glass House. Where do you see basically your LTV landing over the next, let's say, 2 years, end of 2027, given the entire, let's say, CapEx plan? Bernd Stahli: Starting at the pro forma number of EUR 32 million today, assume that we basically get our earnings and that we pay out the dividend and take into account an element of CapEx, then that, by and large, is a wash. The increase in LTV will indeed come from the CapEx of Vitrum, the CapEx -- the remaining CapEx on Alexander and the start of CapEx of Glass House will end up above EUR 35 million but will stay well below EUR 40 million. Martijn Massen: Our next caller is [indiscernible] from ING. Unknown Analyst: So I have 2 questions. So first on -- you mentioned that Well House remains challenging in the current market. You also talked about building costs and pre-leasing. Could you maybe elaborate on that, please? Bernd Stahli: Well House is a wood hybrid structure that is going to be built upon an existing parking garage. That is complicated, expensive and actually takes a lot of time. The entire development period for this project is currently estimated somewhere between 34 and 40 months, where typically you would only probably need 2 years for a project that is basically ground up on a greenfield. Of that period, it's about 14 to 16 months that the excavation of the parking needs to take place. If you take into account that construction period, it means that all your costs capitalize over a period of time that your leasehold costs are quite extensive over that period of time when there is no income forthcoming. So it's actually the lead time before you actually have your building that is making it hard to make the economic stack up. What is a positive is that the rental assumptions are better today than they were 2 years ago, 2.5 years ago when we canceled project. But the rising construction costs that have happened since, partly offset this. The return that we need is slightly higher than average for the very simple reason that -- given the floor plates that this building will have, which is about 1,000 meters per floor, it's not the type of building that you would expect to pre-let where you get one anchor tenant taking 5,000 or 6,000 square meters for the very simple reason that people then want to like to have that space on maybe 1 or 2 floors, not on 6. This is a building that will be multi-tenanted and probably will only lease up towards completion. So we have full conviction of costs and timelines, but less clarity on revenues, and that's a trade-off that we need to square over the coming period to see whether or not we can justify the investment. Unknown Analyst: Okay. Great. That's very clear. And then a second question on the Bioscience Park. Could you maybe elaborate on the negative sentiment shift? And how would that impact the re-leasing options for the assets and also potentially any impact on other assets you have in that park? Bernd Stahli: Fair question. The life science cluster in Leiden that we have and the entire area is to a very large extent, driven by Johnson & Johnson as a major tenant in the entire area. Over the last couple of years, there have been some changes with respect to the available funding, venture capital, capital available for start-ups that has sort of become less prevalent as cost of capital generally across the board has gone up. And at the same time, what we also see is that the improvements in AI means that you need less lab space because more of the analysis can be done computer generated. And so the market is shifting. There is a little less confidence than there was 3 years ago about -- over the prospects of this industry. What we know is that it's a very cyclical industry, and we're now at the wrong part of that cycle. It will come back, but it's harder to judge when that will happen. Unknown Analyst: Okay. Great. And maybe 1 last question, if I may, on Vivaldi II, is there any update on the leasing? Do you see also interest from larger tenants to lease more space? Bernd Stahli: We got that building back in August. We've basically with our joint partner on this, established a new plan for the upgrade of the ground floor that basically should complete this month. We've had some leasing so far at rent levels above what we were sort of anticipating. But actually, the leasing should really sort of start to pick up from this month onwards. And we indicated at the time that we wanted to go back to a normal occupancy in 18 months. So basically, if we meet that target by the end of this year, we should be at close to 75%, 80%. That's -- if we get that, that we would be okay with. But we're not there yet. Operator: [Operator Instructions] Martijn Massen: Given that there are no further questions, I would like to thank everyone for listening and wish you a pleasant rest of your day. Thank you.
Operator: To all sites on hold, we would like to thank you for your patience. Please continue to stand by. Your personal begin here shortly. Please standby. Good day, everyone. My name is Nikki, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's Fourth Quarter 2025 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two on your telephone keypad. I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference. Good morning, everyone. John Bedford: Thanks for joining us on the call. With us today are Rainer Blair, our President and Chief Executive Officer, and Matt McGrew, our Executive Vice President and Chief Financial Officer. I would like to point out that our earnings release, the slide presentation supplementing today's call, the reconciliations and other information required by SEC Regulation G, and a note containing details of historical and anticipated future financial performance, are all available on the investors section of our website www.danaher.com, under the heading Quarterly Earnings. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A dial-in replay of this call will also be available until February 11, 2026. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to results from continuing operations and relate to 2025. All references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I would like to turn the call over to Rainer. Rainer Blair: Alright, John. Thank you, and good morning, everyone. We appreciate you joining us on the call today. We delivered a strong finish to the year with better-than-expected performance across the portfolio. We were particularly encouraged by continued strength in our bioprocessing business, along with improving momentum in diagnostics and life sciences. Our team's disciplined execution also enabled us to exceed our fourth-quarter margin, earnings, and cash flow expectations. Now during the quarter, end market trends across our businesses were broadly consistent with what we saw through the first March of the year. In pharma, global monoclonal antibody production remained robust, and we were encouraged to see a modestly more favorable capital spending environment. We also continue to see a recovery in pharma R&D spending, while biotech demand remained stable. Academic and government demand remain muted but was stable sequentially, while clinical and applied end markets continued to perform well. Now I would like to take a moment to thank our associates for their efforts in 2025. They did a tremendous job leveraging the Danaher business system to navigate a dynamic geopolitical and policy environment while continuing to deliver for our customers and drive productivity gains across our businesses. Their dedication and passion for serving our customers enabled the launch of innovative therapies and diagnostic solutions, drove share gains in many of our businesses, and reinforced Danaher's reputation as a trusted leader in life sciences and diagnostics. Now looking ahead, we expect the gradual end market improvements we saw through 2025 to continue, and we believe the combination of our differentiated portfolio, the power of the Danaher business system, and the strength of our balance sheet positions Danaher for long-term value creation as we move into 2026 and beyond. So with that, let's take a closer look at our full-year 2025 financial results. Sales were $24.6 billion, and core revenue increased 2%. Our adjusted operating profit margin was 28.2%, and adjusted diluted net earnings per common share of $7.80 were up 4.5%. We also generated $5.3 billion of free cash flow, resulting in a free cash flow to net income conversion ratio of approximately 145%. Strong free cash flow generation is one of the most important metrics at Danaher, and 2025 marks the thirty-fourth consecutive year our free cash flow to net income conversion ratio exceeded 100%. Our earnings growth and strong free cash flow generation in the face of tariff-related cost pressures and significant productivity investments underscore the differentiated quality of our earnings and business models. Now, our continued investments in innovation drove an accelerated cadence of new product introductions across Danaher in 2025. These new technologies are helping customers develop and manufacture therapies and diagnostic tests faster and more efficiently, ultimately helping to improve healthcare outcomes. In biotechnology, Cytiva launched more than 20 new products across the biologics workflow. Upstream, new 2,000-liter formats of the AcelRx X platform bioreactor are helping drive higher yields while reducing the time and cost of biologic drug manufacturing for our customers. Downstream, Cytiva strengthened its purification portfolio with the launch of two new protein A resins, MabSelect SURE 70 and MabSelect PRISMA X, delivering cost-effective solutions for preclinical and clinical production without compromising quality. Now, these launches reinforce Cytiva's commitment to helping customers improve yields and lower manufacturing costs while maintaining high performance across the drug development life cycle. In life sciences, SCIEX reinforced their leadership in mass spectrometry with the introduction of the Xenotop 8,600. The 8,600 delivers up to 30 times increased sensitivity versus previous platforms, accelerating proteomic research and enabling faster understanding of disease pathways to help accelerate drug development timelines. Meanwhile, Beckman Coulter Life Sciences expanded its flow cytometry portfolio with the MosaiQ spectral detection module, bringing spectral capabilities to the CytoFLEX platform that enable flexible, high-precision, multi-parameter characterization for pharmaceutical researchers. In diagnostics, Beckman Coulter Diagnostics expanded the DXi9000 assay menu, highlighted by progress in neurodegenerative disease, including the first-to-market automated high-throughput BD tau research use only immunoassay, while continuing to expand cardiac and blood virus menus. These advances, combined with sensitivity up to 100 times greater than traditional immunoassay systems, enable faster, more accurate patient diagnoses and help pave the way for precision diagnostics. Finally, last week, Cepheid received FDA clearance for its expert GI panel, a multiplex PCR test that quickly detects 11 common gastrointestinal pathogens from a single patient sample. Leveraging Cepheid's advanced 10-color multiplexing technology on its GeneX installed base, this test simplifies GI testing workflows, helps guide appropriate treatment for high-risk patients, and can aid in reducing the risk of outbreaks in healthcare and community settings. This panel marks another step forward in Cepheid's multiplex testing strategy, building on momentum from the four-in-one respiratory panel, the MVP panel in women's health, with further multiplex introductions planned over time. So these are just a few of the innovations from across Danaher delivering meaningful customer impact while also driving clear financial results, including approximately 25% year-over-year growth in new product revenue. So with that, let's turn to our fourth-quarter 2025 results in more detail. Sales were $6.8 billion in the fourth quarter, and we delivered 2.5% core revenue growth. Geographically, core revenues in developed markets increased low single digits, with North America essentially flat and Western Europe up mid-single digits. High growth markets were up mid-single digits, with solid growth outside of China more than offsetting a low single-digit decline in China. Our fourth-quarter adjusted gross profit margin of 58.2% and our adjusted operating profit margin of 28.3% were both down 130 basis points as the impact of cost savings initiatives more than offset the positive impact of volume leverage. Adjusted diluted net earnings per common share of $2.23 were up 4% year-over-year, and we generated $1.8 billion of free cash flow in the quarter. So now let's take a closer look at our fourth-quarter results across the portfolio and give you some color on our end markets today. Core revenue in our Biotechnology segment increased 6%. Core revenue in Discovery and Medical declined at a single-digit rate in the quarter, driven by a difficult prior year comparison in our medical filtration business and by declines in protein research instrumentation as academic research customers continue to face funding constraints. Core revenue in bioprocessing grew high single digits, with high single-digit growth in consumables and mid-single-digit growth in equipment. Consumables growth was supported by continued robust demand for commercialized therapies, particularly monoclonal antibodies. We were also encouraged by the return to equipment revenue growth in the quarter and by the third consecutive quarter of sequential equipment order growth. The orders remain below historical levels. Current momentum in our equipment order book and funnels is concentrated around shorter cycle projects such as line additions and brownfield expansions, with U.S. reshoring-related greenfield investments expected to provide incremental upside over time. Now given the sustained and substantial activity levels at our customers over the last year, we anticipate high single-digit core revenue growth in bioprocessing for the full year 2026. Growth is expected to be led by consumables, with our current backlog and order trajectory supporting the equipment revenue improving to approximately flat for the year. So we see a bright future ahead for Cytiva. Underlying biologic demand, which is the primary growth driver of our business, has grown at double-digit rates annually for more than a decade, and we expect strong demand growth to continue into 2026 and beyond. This outlook is supported by another year of robust FDA approvals for biologic medicines in 2025 and increased uptake of existing therapies during this year, which taken together drove global biologic revenues to surpass small molecule drugs for the first time. The development pipeline also remains strong, with biologics expected to represent more than two-thirds of the top 100 drugs by 2030. So these positive trends reinforce our confidence in the durability of long-term growth in the bioprocessing market and for Cytiva's leading franchise. Turning to our life sciences segment, core revenue increased 0.5%. Core revenue in our life sciences instrument businesses was essentially flat in the quarter. Looking across end markets, we continue to see a modest recovery in Pharma, particularly in Europe, while biotech demand remained stable. Academic and research demand was muted, especially in the U.S. and China, but was generally stable on a sequential basis. Clinical and applied markets remained healthy. Core revenue in our life sciences consumables businesses declined in the quarter, primarily due to lower demand for plasmids and mRNA from two of our larger customers, as well as continued funding pressure across early-stage biotech and academic research. We were encouraged to see another quarter of sequential improvement at AFCAM as key commercial initiatives in pharma and recombinant proteins delivered solid growth, partially offsetting ongoing softness in academic research. Moving to our diagnostic segment, core revenue increased 2%. Core revenue in our Clinical Diagnostics businesses grew mid-single digits, with high single-digit growth outside of China. Notably, Leica Biosystems and Radiometer were each up nearly 10%, with broad-based strength across both instruments and consumables. Beckman Coulter Diagnostics also delivered another strong quarter with mid-single-digit growth globally, led by high single-digit growth in immunoassay. This is Beckman's sixth consecutive quarter of mid-single-digit or better core growth outside of China and caps off a year of sustained momentum across its innovation and commercial engines. In molecular diagnostics, respiratory revenue of approximately $500 million exceeded our expectation, as customers purchased in anticipation of an active respiratory season given the high prevalence of currently circulating respiratory viruses. Over the past several weeks, we have worked closely with the team to better understand seasonal trends and revisit our assumption for respiratory revenue in a typical year. As a result, we expect respiratory revenue of approximately $1.8 billion for the full year 2026. This assumes a normal respiratory season and that testing protocols at our customers remain broadly consistent with what we have seen the last few years. Low double-digit growth across Cepheid's core non-respiratory test menu was highlighted by nearly 30% growth in sexual health and mid-teens growth in hospital-acquired infection assays. This strong performance reflects continued traction in Cepheid's growth strategy, including new menu additions such as the MVP panel in women's health, enabling entry into new care settings, and existing customers continuing to add both menu and instruments across their healthcare networks. So looking ahead, we are excited about the long runway for durable growth at Cepheid, supported by a robust pipeline for future menu additions and anticipated continued expansion of our leading global installed base. Now let's briefly look ahead at the expectations for the first quarter and the full year 2026. Looking across the portfolio, we are assuming bioprocessing growth will be similar to 2025, including continued strength in consumables, driven by healthy growth in monoclonal antibody demand and our strong positioning across the biologics workflow. In life sciences, we are assuming a modest improvement in end markets, but assume growth will remain below historical levels given the current macro environment. In diagnostics, we are assuming higher growth in 2026 due to moving past the peak of headwinds from policy changes in China and our expectation that we will continue to execute well globally. For the full year 2026, we anticipate core revenue growth in the 3% to 6% range. Additionally, we are initiating full-year adjusted diluted EPS guidance in the range of $8.35 to $8.50. In the first quarter, we expect core revenue to be up low single digits. Additionally, we expect the first-quarter adjusted operating profit margin of approximately 28.5%. So to wrap up, we are pleased with our solid finish to the year and proud of the work our teams did in 2025 to reliably support our customers through a dynamic macro environment. They did a tremendous job staying focused on what we can control, running the Danaher business system playbook to offset cost pressures and deliver productivity gains while continuing to invest in innovation for the long term. So looking ahead, we are encouraged by the momentum building across our portfolio and expect growth to accelerate as end markets continue to improve. Our strong positioning in attractive end markets and high recurring revenue business models support our long-term expectation for high single-digit core growth with a differentiated margin and cash flow profile. So with the powerful combination of our differentiated portfolio, talented team, and strong balance sheet, all powered by the Danaher Business System, we feel well-positioned to create long-term shareholder value while making a meaningful positive impact on human health. So with that, I will turn the call back over to John. John Bedford: Thank you, Rainer. That concludes our formal comments. We are now ready for questions. Operator: Thank you. If you would like to ask a question, please press star 1 on your keypad. To leave the queue at any time, press star 2. Once again, that is star and 1 to ask a question. The first question comes from Michael Ryskin with Bank of America. Please go ahead. Your line is open. Michael Ryskin: Great. Thanks for taking the question, guys, and congrats on the front. Rainer, maybe just to kick things off, you are opening with a 3% to 6% core revenue guide that's consistent with the kind of framework you laid out on the 3Q call. But if you look at the various segment details you provided, it looks like the segment levels, if you kind of do the sum of the parts, it gets you closer to that 3%, which you hinted in the past. I am just curious if you could talk about how much conservatism is embedded in that, or maybe what are the levers or what are the drivers you could see getting you closer to that six? Where do you see potential for upside as you go through the year? If there's one segment or another that kind of sticks out to you? Rainer Blair: Sure, Mike. Well, how about I level set first on the guide, and then I can talk to those upside levers. First of all, we had a good finish to 2025 with the business performing better across the board in Q4. That really reinforced that 3% to 6% core growth outlook that we talked about in October. Now we have converted that into our core growth guide, which is based on the expectation of continued recovery in our end markets. To your point, let me give you a little color on those. First of all, we expect bioprocessing to remain strong at high single digits. We had an excellent finish to the year. In fact, I have just spent time out with customers and with our teams, and things are going really well for us there in terms of spec wins and orders, and, of course, sales as well. This momentum should lead to continued strength in consumables, and for equipment, we are encouraged by that momentum that we saw in the fourth quarter. We are assuming that equipment is flat for 2026, which is off of a mid-teens decline in 2025, but that is supported by our current backlog. As we think about life sciences and our discovery and medical businesses, we expect those to be flat, and we are assuming some modest improvement in our end markets there. That said, we do expect growth will improve through the year as our own comps ease, particularly in our life science consumables businesses. Lastly, we expect diagnostics to grow in a low single digit. We are assuming consistent mid-single-digit growth outside of respiratory in China. With China, we think the volume-based procurement headwinds will moderate as we move through the year. In respiratory, we have taken a look at that number again here in terms of the endemic level, and we think that's probably fairly consistent with 2025. This is how we are setting up the year based on these improving end markets and some of the momentum that we saw coming out of Q4. Now, Mike, to your point, as to upside levers, there's probably two larger drivers that are most relevant there. One is to see continued improvement across our life science end markets. We are seeing some of that. We want to see more of that, especially some of those policy headwinds that we are seeing here in the U.S. in particular. We would like to see that improved biotech funding environment fall through now to an increasing order book in that particular segment. So encouraged, but we do not see that yet. Then, of course, China continuing an acceleration in life science research would be helpful in those life science end markets as well. The other level is bioprocessing, where seeing better than high single-digit growth for the year with equipment potentially accelerating or even consumables accelerating more as we see more biosimilars and mAb production increasing. Those would be two areas that could produce additional upside to the guide. Michael Ryskin: Okay. That is helpful. If I could follow-up just on the bioprocessing outlook for 2026. Can you talk a little bit about the order book, maybe book to bill, how that shaped up in the fourth quarter? For consumables and for equipment? Just give us a little bit more clarity on the confidence that's driving that '26 outlook. You know, you still have easy comps and equipment, but a little bit tougher comps in consumables. So for both the equipment and the consumable side, what did the orders look like exiting the year and how that supports next year's outlook? Rainer Blair: Sure. The order book fully supports the high single-digit growth that we have been talking about for 2026. As you know, the lead times have gotten much shorter on the consumable side, so having a book to bill there of around one is exactly where it needs to be. So we feel very good about that. We have talked about equipment orders increasing sequentially here the last three quarters in a row. Then, of course, we grew revenue in the fourth quarter, so we feel comfortable that we are starting to head in the right direction there in equipment as well. But one quarter of growth, we are not ready to call that a trend yet, but the orders coming out of the last three quarters are encouraging. Michael Ryskin: Alright. Thanks so much. John Bedford: Thanks, Mike. Operator: Thank you. We will move next to Tycho Peterson with Jefferies. Please go ahead. Your line is open. Good morning, Tycho. Tycho Peterson: Hey. Good morning. Rainer, would love to just hear a little bit more about the strength on SCIEX and how much of that is the new product versus maybe end market recovery? What specifically are you seeing in end markets turn for the better there? Rainer Blair: SCIEX did nicely with mid-single-digit growth here in the fourth quarter, and we are seeing a number of factors contribute to that. Certainly, innovation with the Xenotop 8,600 getting some nice traction, but we also see continued improvement in the pharma end market there at the third quarter in a row that we saw in life sciences, the pharma end market being at growth. The clinical and applied markets were robust as well. As you know, SCIEX is the gold standard there in PFAS testing as just one example. Lastly, I would say in the academic and government segment, that continued to be muted, so it's stable but not growing in the last quarter. Generally speaking, we see the end markets continuing to improve, and that also contributed to SCIEX's performance in the instruments group there in the fourth quarter. Tycho Peterson: Okay. Then maybe one for Matt on margins. We got the first-quarter operating margin guide, but how should we think about the flow-through of incrementals? You didn't really touch on the incremental cost-out initiatives on the call, but how should we think about a full-year margin target and progression throughout the year? Matt McGrew: Yeah. I think the way I would sort of think about it is very similar to core growth. Right? So I think we are kind of starting out the year at low single-digit core growth, and that is going to sort of accelerate through the year, very similar to what we saw here in Q4. So you will see kind of a little easier comps here in life science consumables in the second half, some modest end market improvements in life sciences that Rainer just alluded to, put in the easier comps in China, DX, and respiratory. I think what we will see is sort of that low single-digit growth kind of build through the year, and earnings are going to follow that. I think you will see that follow the trajectory of the core growth, with certainly the second half and the fourth quarter probably being the biggest beneficiary of the 2025 cost actions. So if you kind of go through that, I think you will see the second half is certainly building up, but that's largely almost all the benefit from the cost actions in the fourth quarter. Tycho Peterson: Okay. Then just lastly, quickly on bioproduction. I appreciate all the incremental color. Any commentary specifically on China? There were mixed data points earlier this week from one of the companies that reported on China bioprocess. So curious if you are seeing anything abnormal there in terms of trend? Rainer Blair: We are not. Our fourth-quarter bioprocessing business in China is coming off of a large comp, but the underlying activity level continues to strengthen there. You know that the biotech market there, in particular, has found some new momentum here as they are able to monetize some of those molecules that they are developing there, some new to the world, through licenses, through going public, and other types of monetization opportunities. So for us, bioprocessing should continue to have a positive development, and certainly, we expect China bioprocessing to grow in 2026. Tycho Peterson: Thank you. Operator: Thank you. Our next question comes from Scott Davis with Melius Research. Please go ahead. Your line is open. Scott Davis: Morning, Scott. Hey. Good morning, guys. Seems pretty encouraging commentary, particularly around bioprocess. But guys, I want to back up a little bit. You did a fair amount of restructuring and such, and that can be defined in a lot of different ways. But can you help us understand a little bit of the postmortem other than just the margin impact? What did you actually do as it relates to other rooftops or headcount? Was there tangible change in fixed assets or anything that you can talk about publicly here? Rainer Blair: Scott, I mean, this is traditional Danaher business system type of productivity improvement, where we are certainly consolidating rooftops but also driving process efficiency. Yes, that has resulted in reducing associates as well. We expect the cost savings that we have generated there to sustain here for the long term. As we noted in previous calls, those are pretty significant. Scott Davis: Yeah. Okay. That's a good non-answer, Rainer. I get it. Understood. The flu season has been pretty nasty. God knows it's cold up here. Cold where you are at too. But are you seeing a big pickup in orders here in January? I know that you had a strong preorder season in April and such, but have you seen a pretty sizable reload as the cases have picked up? Rainer Blair: Well, we certainly in the second half of the fourth quarter saw the cases pick up quite significantly. You probably noted that the IOLI being as high as it's nearly ever been. That was manifested then also in the respiratory beat that we showed in the fourth quarter. Now since then, we have seen that IOI come down. But testing continues to be robust, and we have put out the perspective that we expect our first-quarter respiratory to be around $500 million of revenue. Scott Davis: That's helpful. Thank you, Rainer. Best of luck. Thank you. See you guys. Matt McGrew: Yep. Operator: Thank you. We will move next with Doug Schenkel with Wolfe Research. Please go ahead. Your line is open. Doug Schenkel: Good morning, Doug. Starting on bioprocessing. Given the strength of equipment growth in the fourth quarter and favorable comparisons for really at least 2026, it's a smidge surprising you didn't guide for maybe a little more growth at that line. Was there any pull forward of demand into Q4? And or is this just maybe some extra prudence as we sit here in January in what's been a tough environment and an unpredictable environment over the last few years? Matt McGrew: Yeah, Doug, maybe I'll take that. I think not too dissimilar to what we saw sort of on the consumable side maybe six or eight quarters ago. It's encouraging to see some growth, mid-single-digit growth out of the equipment, but it's just one quarter. One quarter, a trend does not make. I think we still are in that environment, similar environment like you talked about to where we've been. So while encouraging in the fourth quarter, I just think it's, you know, until we have a little bit more a few more data points to point to on the equipment side, I think it's, again, kind of demonstrated ability over the past year that we're just going to go ahead and guide the flat. I think it's a good place to start. Let's see how the year progresses, and we'll go from there. Doug Schenkel: Okay. That is helpful, Matt. Pivoting to capital deployment, the business is clearly stabilizing. You got solid free cash flow as always. Debt to EBITDA is below two. Can you just describe the M&A environment and your readiness and your priorities to potentially get a little more aggressive than you've been recently? I'm trying to get at whether or not you feel that you're in a better spot now than maybe you were a couple of quarters ago to move on something potentially more sizable and more aggressive if the opportunity were to present itself. Thank you. Rainer Blair: Doug, I would say the M&A environment is more constructive. We have seen some valuations moving in the right direction. Interest rates have moderated a little bit, and our cultivation and our bias towards M&A and our cultivation of those M&A targets remain as strong as ever. As you point out, our cash flow generation not only is differentiated but puts our balance sheet in a place where we are able to act on opportunities. We are going to stick with our discipline of looking at end markets that we believe have long-term tailwinds, attractive assets within that market that have defensible value or value creation opportunities that we can compound over time. Then, of course, the financial model has to work as well. We do see that that continues to progress in the right direction. We like the setup. We see improving end markets. Our team is executing well as manifested by the fall-through that you see on the business and the cash flow. Of course, the balance sheet is prime. Operator: Thank you. We will move next with Jack Meehan with Nephron Research. Please go ahead. Your line is open. Jack Meehan: Morning, Jack. Good morning. Hope you're doing well. I want to push on a couple of the guidance assumptions a little bit. The first is in life sciences. So 2025 is obviously an unusual year in terms of customer spending patterns. I was curious about your thoughts on 4Q as a jumping-off point for 2026. Is it possible there were some push-outs from earlier in the year that might have come in around year-end? So, like, what can you build off of in April versus what might be like an elevated base? Any thoughts on that? Rainer Blair: So, Jack, I think we continue to see improvement in the pharma end market. That would be the third quarter in a row that we have seen that improvement, and we would expect that to continue here going forward. The clinical and the applied markets have been solid and stable for several quarters, and we would expect that to be the same. I think in academic and government, that's where the activity level has been muted. We could still have a bit of choppiness ahead of us with the discussions that we hear currently in the market. But over time, we also expect that to moderate. Generally speaking, we would expect the life science end market to continue their gradual improvement here through 2026. Jack Meehan: Sounds good. Okay. Then Matt, I wanted to push a little bit more on the margin puts and takes for 2026. So you talked about the $250 million cost actions. You also have the biotechnology segment, your highest margin segment, growing the fastest. There's the VBP. Is there anything else that stands out? I'm just trying to think about the 100 bps. Matt McGrew: Yeah. Or more for the year. Yeah. No. Maybe let me give you just a little color on how we constructed the EPS guide of $8.35 to $8.50 just to give you a simple frame of kind of what that is. I think that might be helpful. So we are assuming the low end of the core growth like we've talked about. So think 3% to 4%. Assuming 35% to 40% fall through. We have got a 30¢ benefit from the 2025 cost actions. So that's in that 100 basis points of margin expansion. It is inclusive of this 30¢ benefit. That, as you remember, was the Q4 actions plus the savings. So it's $250 million. So that benefit is about 30¢. Then there's kind of some below-the-line stuff in FX, which, you know, obviously could go either way. So I just assume all that stuff kind of nets to zero. If you do that math, you get kind of $8.35 to $8.50. So if we do better from a core growth perspective, then 30% to 4%, you know, there's probably likely some upside here to EPS. But, you know, we're just going to kind of start the year with what I laid out. See how the year progresses, and then we'll go from there. Rainer Blair: Thank you, guys. Jack Meehan: Thank you. Operator: Our next question comes from Patrick Donnelly with Citi. Please go ahead. Your line is open. Patrick Donnelly: Good morning, Patrick. Rainer Blair: Hey, guys. Thanks for taking the question. A follow-up on Jack there on the LifeSci business. Rainer, it sounds like things are improving across the board, Abcam, Aldevron, SCIEX. Can you just run through what you saw into year-end on that front? Was there a good budget flush? Then similarly, as we look at '26, it seems like that still flattish for the year. It feels like there's some upside there. Can you just talk through what you need to see to get that number going to a few percent growth? Again, we'd love to dig into some of those verticals, Abcam, Aldevron, in particular. Rainer Blair: Sure. Let's start with the fourth quarter. Like we said, the Life Science business was a little bit ahead of our expectations there. That was led by SCIEX and technical life sciences. With what we saw the pharma end market in particular do a little bit better than anticipated. There was probably a little bit of a budget flush. We saw that especially in Europe. Not enormous, but we did see a little bit of a flush. We're not a great read-through read across for that. The size of our instrument business there. But nonetheless, we did see some. Now as we think about '26, we expect that end markets such as pharma will continue to improve, that clinical and applied markets will stay stable. I think the upside that we're looking for in life sciences comes sort of out of two categories. One being in the academic and government area. We need to see more stabilization there around the spending discussions and the budgetary discussions. So that would be one point. Then we'd like to see biotech in particular take advantage of the improved funding environment that we've seen here over the last two, three quarters. Start seeing that fall through into the order book. So that, I think, would be what we'd like to see to think about upside in the life sciences. Patrick Donnelly: Yep. Then maybe just the Abcam piece, Rainer, you talked about seeing improvement throughout the quarter. It seemed like that was firming up a little bit. Just wanted to dig in. Rainer Blair: I mean, we're really encouraged by what we're seeing here at Abcam. The business continued to improve here in the fourth quarter. In fact, we've seen now three months of growth, particularly driven by the recombinant protein in the pharma segment that we've been talking about. Of course, the team has been working very hard on rightsizing the cost picture there to the business and to our earnings expectations going forward. We see that. In fact, the operating margins are 500 basis points higher than when we acquired the business. So, like what we see here for Abcam and expect to continue to see that trend here in 2026 as well. Patrick Donnelly: Understood. Then maybe a little bit of a longer-term one. Think as you build this year, it seems like again, Rainer, think you touched on the gradual recovery a few times. As we exit this year and move forward, it certainly feels like we're approaching more level of normalcy. What is the path back to the LRP that you guys have out there? Is that on the table as we look ahead? I know it's January '26, but as we look ahead to future years, what is the path there? What do you need to see to believe that that's on the table next? Rainer Blair: Well, I mean, would say it's too early to comment on 2027 and beyond. To the point you just made. Here's how we're thinking about it. I mean, fundamentally, our businesses are in excellent end markets. Those growth drivers that we've talked about are very much intact. We expect those growth drivers to continue to recover here. What are some of those? Well, the proliferation of biologics, some of the advancements that we see in life science research, and then, of course, the diagnostics area, bringing those diagnostics much closer to the patient. So, we don't see any change to our long-term framework. As these end markets continue to recover, we'll get back to that high single-digit growth over time. Patrick Donnelly: Understood. Thank you, guys. Rainer Blair: Gotcha. Operator: Thank you. We will move next with Dan Leonard with UBS. Please go ahead. Your line is open. Dan Leonard: Hi, Dan. Thank you very much for taking the question. You've talked a couple of times about the importance of an improving biotech funding environment on your life sciences business. Can you remind us how sensitive would the biotech business segment be to an improvement in biotech funding? Rainer Blair: So that emerging biotech sector for us is traditionally been in the sort of 15% of the business overall. It's probably a little bit better. Yeah. Probably more like 5% of overall, Danaher, or 15% of bioprocess and 10, 15%. So, I mean, it's not it it's there is some level of exposure, but it's not the majority of what we do, obviously. Matt McGrew: Yeah. I mean, we'll Dan, just to just to reaffirm, most of our business in bioprocessing is driven by commercial volume. 75%, we talk about that. Then you have a mix of clinical and biotech in the remaining 25%. So let's say 10 to 15% is probably in the biotech area. We have been seeing some improved orders there in bioprocessing out of that space. But early days. Dan Leonard: Understood. Thank you. A quick follow-up. Rainer, you mentioned the reshoring topic as a longer-term theme in bioprocessing. Can you update us on how any of those conversations with customers have been trending over the past three months? Rainer Blair: Sure. I mean, as I mentioned earlier, I've been out in the market a great deal with our teams and meeting with our customers, pharma customers, CDMOs, CEOs, you name it. To get a real sense of what's going on here as it relates to the demand picture and the reshoring question. I think the takeaway here is that one, equipment investment has been muted here for the last couple of years. Despite the fact that demand has been fairly strong as we see in the consumables demand. But you have this aspect of the fact that there's probably some catch-up required here over time just to meet the existing demand. Then you add on top of that the reshoring topic which continues to advance. There's no question that that is going to happen. It's just a matter now of bringing that timing together. Again, it's a little difficult to pinpoint the timing, but demand. We've been encouraged certainly on the former aspect. So the need to keep up with in our order book here for equipment. We want to see how this now plays out going forward. But we really believe we could be in the early innings of a long-term investment cycle. As you know, we're really quite well positioned to support those investments going forward. Dan Leonard: Thank you very much. Rainer Blair: Thank you. Operator: Thank you. We have time for one more question. That question comes from Dan Brennan with TD Cowen. Please go ahead. Your line is open. Dan Brennan: Great. Thanks. Hey, good morning, Rainer and Matt. Thanks for the question. Maybe to start just back to bioprocess, if you don't mind. You know, with the biotech guide, it's 6% for the year. I think you guys talked about Discovery Medical flat. That gets us to bioprocess growth, I think, around 6%, which is a bit lower than what I think you guys did in '25. So is that math correct? I'm just wondering, would that imply, like, a bit of a slowdown that you're starting the year at for consumables? Given equipment is stronger? I know, Matt, you talked about conservatism. But this is such a focus. I just want to kind of flush out how you're thinking about the starting point for the '26 guide. Matt McGrew: Yeah. I'm making it very, very clear here. Bioprocessing on the consumable side for the year and for Q1, our assumptions are that will grow high single digits. It's probably going to be at the upper end of high single digits. We are assuming equipment is going to be flat for the year. Bioprocessing will be all up all in high single digits for the year. I think what you're probably referring to is if you look at bioprocessing, the statement, you've got discovery and medical in there as well. I think Discovery and Medical for Q1 we've kind of said it's going to be flat. It might be up a bit. I think the rest of the year for discovery and medical is going to be flat, maybe down a little. To kind of balance that out, you're going to have high single digits out of bioprocessing. No change whatsoever to what we've seen in the end markets and no change to what we have been talking about for a while now. I think, really, the wild card is what does DNM do for the segment. But just to be perfectly clear, we are not seeing any sort of change or slowdown in bioprocess. Dan Brennan: Okay. Great. Then maybe just final question just back to life sciences. I know Rainer, you gave a lot of color so far on the kind of moving pieces there, but academic, I don't know, maybe it's, like, 15% to 20% of life sciences, I'm guessing. So that remains muted. I know in your guide, you kind of mentioned ongoing macro pressure. But would think pharma is a big part of life sciences, and I would think with MFN and tariffs kind of us, hopefully, you could see a really nice recovery on easy comps from pharma. Could you just unpack a little bit, like, on the pharma piece? Kind of what you're seeing in life sciences and kind of how you kind of guide in and, you know, is there the chance to get better in '26? Rainer Blair: Thank you. So our life science end markets and order of priority and size are pharma, clinical, applied, academic, and government. Pharma has shown growth here for three quarters in a row in our business, and that's the recovery in investment that we've seen out of pharma once the most favored nation deals have come to fruition. More confidence has returned to that market. When we say we expect end markets in life sciences to continue to improve, we're referring specifically to the pharma end market. We expect the clinical, think of research use only, testing that sort of thing. We expect that to remain stable as do we expect the applied market to remain stable. So, no significant change there. Those are robust. They're doing fine. Then you have academic and government that's muted. Softer, there's still some noise there. That represents another potential upside as the policy situation stabilizes and finds its momentum again. Dan Brennan: Great. Thank you. Operator: We have reached our allotted time for questions. I will now turn the call back to John Bedford for closing remarks. John Bedford: Thank you, Nikki, and everybody. We're around for counts the rest of the day. Thanks. Thank you. This brings us to the end of Danaher Corporation's Fourth Quarter 2025 Earnings Results Conference Call. We appreciate your time and participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Textron Fourth Quarter 2025 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I'd now like to turn the call over to Scott Hegstrom, Vice President of Investor Relations and Treasurer. You may begin. Scott Hegstrom: Thanks, Rob, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings, and also in today's press release. On the call today, we have Scott Donnelly, our Executive Chairman, Lisa Atherton, our Chief Executive Officer, and David Rosenberg, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. With that, I'll turn the call over to Scott. Scott Donnelly: Thanks, Scott, and good morning, everyone. Textron closed out the year with another solid quarter, driven by significant revenue growth of 16% and segment profit growth of 34%, resulting in an adjusted EPS of $1.73. For the full year, Textron finished the year with revenue growth of 8%, segment profit growth of 14%, resulting in adjusted EPS of $6.10. Looking at the segments, 36% for the fourth quarter and 13% for the full year, reflecting higher aircraft deliveries and increased aftermarket volume as we recovered from the strike in late 2024. In the quarter, we continued to see solid order flow and customer demand across our portfolio, ending the year with $7.7 billion of backlog. In 2025, we delivered 171 jets, up from 151 last year, and 146 commercial turboprops, up from 127 in 2024. Also in the quarter, we continued to upgrade the product portfolio with Citation Ascend, CJ3 Gen 2, and the M2 Gen 2 with auto throttles all receiving FAA certification and beginning deliveries. During 2025, strong aircraft utilization within the Textron Aviation product portfolio resulted in 6% growth in aftermarket revenues. Bell also had a very strong year with revenue up 11% for the fourth quarter, 20% for the full year. With the acceleration of the MV-75 program, 2025 marks Bell's second consecutive year of 20% growth in military revenue. We've talked a lot about accelerating the MV-75 program in 2025. To provide some examples of our progress on this, we've completed over 90% of the engineering drawings, put nearly 2,000 tier one and tier two suppliers on contract, issuing 45,000 purchase orders, opened new manufacturing capacity in Wichita for the fuselage, and Fort Worth for the advanced manufacturing center, the drive systems test lab, and the Weapon Systems Integration Lab. And we've begun manufacturing components for the first six aircraft. So acceleration is not just design work. It's establishing real production capacity as we pull forward production by a couple of years. Earlier this month, we hosted the Secretary of the Army and representatives from the MV-75 program office at our Wichita Assembly Center where we are building the fuselage for the aircraft. During this visit, we were able to demonstrate our production capabilities and progress on the first six aircraft that are currently in work. Across Bell's other sites, we're seeing the results of our prior investments in manufacturing process development, which led to efficient manufacturing of major parts like our wing skins and spars. On the commercial side, Bell continued to see strong order activity in 2025. For the year, Bell delivered 169 commercial helicopters compared to 102 in 2024. Moving to systems, the team also delivered revenue growth for both the quarter and the full year with revenue up 4% in the quarter and slightly up for the full year. The team generated this revenue growth while facing headwinds that it had to overcome, including the challenging comparables resulting from the wind-down of the Shadow program. The Ship to Shore Connector program has proven to be a real strength for the segment. We are now about 15 units into a 73-unit program of record. The program has scaled up and is now running efficiently and has received over $450 million of awards this year. During the quarter, systems received an IDIQ contract valued at $200 million for its ATAC business to provide airborne standoff jamming services to the U.S. Navy and U.S. Marine Corps. This program will support Navy fleet customers with a wide variety of airborne threat simulation capabilities to train, test, and evaluate shipboard and aircraft weapon systems. At Industrial, the segment ended in a positive year with a positive organic growth of about 1% in the fourth quarter after streamlining the portfolio with the divestiture of the powersports business. In summary, 2025 was a strong year for Textron. We continue to execute on our growth strategy of ongoing investments in new products and programs, drive organic growth and margin expansion. As we wrap up 2025, this will be my last earnings call. I want to express my thanks for all your support over the years. I feel very good about where the business stands, the team that we have in place, and the leadership that Lisa brings to the table. With that, I'll hand it off to her to talk about the business more broadly and our plans for 2026. Lisa Atherton: Thanks, Scott. And I want to extend my sincere gratitude for your exceptional leadership and your commitment to Textron over the years. And on behalf of the entire team, thank you for your many contributions and the lasting legacy that you leave. We wish you all the very best. For those of you that may not know me, I graduated from the United States Air Force Academy. I was a contract officer and then a civilian contractor at the Director of Requirements at Air Combat Command. I left ACC in 2007 and joined Textron, holding various leadership positions within Textron Systems and Bell. I was fortunate enough to spend several years leading systems before my last position as CEO of Bell. In these roles, I led numerous development and program activities, including the Future Long Range Assault Aircraft, now the MV-75 program. When we look across Textron, I am very excited for the opportunities that lie ahead. Textron Aviation, our largest segment, is a clear leader in general aviation, with its Cessna and Beechcraft brands. It has a great product lineup, an unmatched installed base driving a powerful aftermarket business, and world-class customers. 2025 was a very strong year for aviation, and the business is well-positioned for the future. In addition to our successful certification efforts, we continue to progress on the Beechcraft Denali development program. The Denali finished the year having logged over 3,200 hours of flight testing. On the defense side, Textron Aviation entered a contract to deliver the first two Beechcraft T-6 to Japan's Air Self Defense Force, with additional contracts anticipated. Deliveries of the two aircraft are scheduled for 2029. From a market perspective, the general aviation industry is very healthy. The business has nearly an $8 billion backlog, and we continue to experience strong order flow. As a result of the team's continued product innovation and operational execution, we remain at the forefront of the industry. Turning to Bell, the MV-75 program continues to be a great success story. What began as internal research and development and turned into the V-280 Joint Multi-Role Technology Demonstrator program is now a core component of the Army's transformation initiative. Over the last year, we have worked closely with the Army as they accelerate the program. Bell is now poised to begin testing on the first unit later this year, deliver EMD articles throughout 2027, and then transition into LRIP deliveries in 2028. Our military opportunities are not limited to just the MV-75 program. Earlier this month, Bell was notified of its selection to proceed to the next phase of the Flight School Next competition. This would be a new program to train Army aviators at Fort Rucker. This opportunity leverages our 505 helicopter and our expertise in flight training, where Bell currently trains nearly 2,000 pilots per year at the Bell Training Academy. Of our long-term investment strategy, our defense and commercial product mix, and our agility in adapting to and embracing acceleration with a wartime footing mentality, I think Textron is demonstrating the characteristics valued by the Department of War in support of the arsenal of freedom. As I mentioned, I previously ran Textron Systems as well and believe that this business has long been one of the cool kids in the defense industry. We developed and have been flying unmanned systems for over 25 years, with more than 2 million flight hours on our platforms. We developed our first unmanned surface vehicle in 2007. We have manufactured and fielded high-temperature materials that operate in hypersonic environments dating back to the 1960s. We are currently on Mars as part of the Perseverance rover. Our technology is being utilized on the heat shield for Orion as it prepares to travel to the moon. And we are developing the reentry vehicle system for Sentinel, as well as working on various other hypersonic applications. We are also ramping our land offerings in support of Ukraine with our MSF platform, which is part of the Commando family, and continuing development on major opportunities like the Armed Reconnaissance Vehicle and the XM-30. We also have proven commercial business models that have demonstrated across multiple platforms, including Arison and ATAC, that are directly applicable to opportunities like Flight School Next. Thanks to our leading-edge capabilities and recent program wins, Textron Systems is well-positioned to drive future growth. Moving to industrial, the teams at Kautex and TSV have done a good job executing and dealing with challenging end markets. At Kautex, the hybrid volumes continue to grow, and due to our investments in the Pentatonic offerings, we are gaining more exposure to pure electric vehicles. In fact, the Pentatonic offerings present the opportunity for both fuel tank and battery enclosure revenue on hybrid platforms. At TSV, the team continues to introduce new products and work to address the cost structure. For example, TSV rolled out the Cushman Hauler XL with larger hauling capacity, and at EZ-GO, our PACE technology is expanding beyond golf into new markets. Before we move to the outlook for 2026, I want to highlight that our $14.8 billion of revenue in 2025 is the highest we have ever had as a company. In 2026, we're projecting revenues of about $15.5 billion, up about 4.5% from 2025. Textron's 2026 fiscal year. We are projecting adjusted EPS in the range of $6.40 to $6.60. Manufacturing cash flow before pension contributions is expected to be in the range of $700 million to $800 million. This cash flow outlook reflects approximately $350 million of higher CapEx and long lead material to support LRIP on the MV-75 program. With that, I'll turn the call over to David to walk you through a recap of 2025 financials and the 2026 outlook. David Rosenberg: Thank you, Lisa, and good morning, everyone. First, Scott, I would like to echo Lisa's comments and extend my gratitude to you as well. It has been a pleasure working with you over the years. Turning to Slide 5 of the earnings presentation. Revenues in the quarter were $4.2 billion, up 16%, or $562 million from last year's fourth quarter. Segment profit in the quarter was $380 million, up 34%, or $97 million from 2024. During this year's fourth quarter, adjusted income from continuing operations was $1.73 per share compared to $1.34 per share in last year's fourth quarter. Manufacturing cash flow before pension contributions totaled $510 million in the quarter, up $204 million from last year's fourth quarter. For the full year, revenues were $14.8 billion, up 8%, or $1.1 billion from last year. In 2025, segment profit was $1.4 billion, up 14%, or $163 million from 2024. Adjusted income from continuing operations was $6.10 per share, as compared to $5.48 per share in 2024. Manufacturing cash flow before pension contributions was $969 million, up $277 million from 2024. Now on Slide 6, let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.7 billion were up $467 million, or 36% from 2024, reflecting higher aircraft revenues of $400 million and higher aftermarket parts and service revenues of $67 million. The increase in aircraft revenues was primarily due to higher volume and mix, largely reflecting higher Citation jet and commercial turboprop volume as we recovered from the strike in 2024. Profit was $208 million in the fourth quarter, up $108 million compared with 2024. Largely due to higher volume and mix. On a full-year basis, Textron Aviation generated revenue of $6 billion, up 13% over the prior year, with $694 million of segment profit, up 23% from 2024. Backlog in the segment ended the year at $7.7 billion. Revenues at Bell of $1.3 billion were up $128 million, or 11% from 2024. The revenue increase in the quarter was driven by higher military revenues of $139 million, primarily due to higher volume on the U.S. Army's MV-75 program, partially offset by lower commercial revenues of $11 million, reflecting the mix of aircraft sold in the period, offset in part by higher pricing. Segment profit of $101 million was down $9 million from a year ago. On a full-year basis, Bell generated revenues of $4.3 billion, up 20% over the prior year, and $363 million of segment profit, down $7 million from 2024. Backlog in the segment ended the year at $7.8 billion, an increase of over $300 million from the prior year, reflecting growth in both military and commercial businesses. At Textron Systems, revenues of $323 million were up $12 million, or 4% from last year's fourth quarter, primarily due to higher volume. Segment profit of $43 million was up $1 million from last year's fourth quarter. On a full-year basis, systems generated revenue of $1.2 billion, up slightly over the prior year, and $175 million of segment profit, up 14% from 2024. Backlog in this segment ended the year at $3.3 billion, an increase of over $700 million from the prior year, related to awards across multiple domains, including ATAC, marine systems, and land systems. Industrial revenues were $821 million, down $48 million from last year's fourth quarter. Textron Specialized Vehicles revenues decreased $69 million, largely reflecting a $72 million impact from the divestiture of the powersports business. Kautex's revenues increased $21 million, or 5%, largely due to a favorable impact from foreign exchange rate fluctuations. On an organic basis, Industrial revenues were up slightly from last year's fourth quarter. Segment profit of $30 million was down $18 million from 2024, largely due to higher selling and administrative costs and lower volume and mix. On a full-year basis, Industrial generated revenue of $3.2 billion, down 9% from the prior year, or down 4% organically, and $145 million of segment profit, down $6 million from 2024. Textron eAviation segment revenues were $7 million in 2025, as compared to $11 million in last year's fourth quarter, and segment loss was $15 million, as compared to a segment loss of $22 million in 2024. On a full-year basis, eAviation generated revenue of $27 million and a segment loss of $63 million. Finance segment revenues were $18 million, and profit was $13 million in 2025, as compared to segment revenues of $11 million and profit of $5 million in 2024. The increase in revenues and segment profit included a $5 million gain on the disposition of non-captive assets in 2025. On a full-year basis, the Finance segment generated revenue of $75 million and segment profit of $49 million. Moving below segment profit, corporate expenses were $44 million, net interest expense for the manufacturing group was $31 million, LIFO inventory provision was $84 million, and intangible asset amortization was $8 million, and the non-service component of pension and postretirement income were $66 million. During the quarter, we repurchased approximately 2.3 million shares, returning $107 million in cash to shareholders. For the full year, we repurchased approximately 10.7 million shares, returning $822 million to shareholders. Turning now to our 2026 outlook on Slide 19. We are expecting adjusted earnings per share to be in the range of $6.40 to $6.60. We are also expecting manufacturing cash flow before pension to be about $700 million to $800 million. As Lisa mentioned in her remarks, this cash flow outlook reflects investing approximately $350 million of higher CapEx and long lead materials to support LRIP on the MV-75 program. Before we move to the segment outlook, as you may recall, Textron is eliminating Textron eAviation as a separate reporting segment, realigning the eAviation business activities across Textron Aviation, Textron Systems, and Corporate to leverage our existing sales, business development, and engineering capabilities. Our segment-level guidance for 2026 reflects this new operating structure. In the earnings presentation that is posted on our website, we recast 2025 so you can see 2025 actuals and 2026 guidance on a comparable basis. Moving to segment outlook on Slide 20, and beginning with Textron Aviation, we're expecting revenues of about $6.5 billion, reflecting growth of approximately 9% over 2025. Segment margin is expected to be in the range of approximately 11% to 12%. The margin range compares to Textron Aviation's 2025 recasted margin of 11.1%. Looking to Bell, we expect revenues of about $4.4 billion, reflecting low single-digit growth over 2025. We're forecasting a margin in a range of about 8% to 9%. As the MV-75 program continues to accelerate, we anticipate that we will be awarded the long lead, low rate initial production or LRIP phase of the contract in late 2026 or early 2027. Upon award of the LRIP option, which is largely fixed price, we expect to record an unfavorable cumulative catch-up program adjustment, reflecting higher costs than originally anticipated when the program was bid in 2021, in the range of $60 million to $110 million. Overall, the MV-75 program will continue to generate a positive margin after the adjustment. In light of the uncertainty of the timing of the award, this has not been reflected in our guidance for the year. At Systems, we're estimating revenues of $1.35 billion, reflecting growth of approximately 7% over 2025. Segment margin is expected to be in a range of approximately 12% to 13%. At Industrial, we're expecting segment revenues of about $3.2 billion. This reflects low single-digit growth when adjusting for the powersports divestment in 2025. Segment margin is expected to be in the range of about 4.5% to 5.5%. At Finance, we are forecasting segment profit of about $20 million. Looking at Slide 21, we're projecting about $180 million of corporate expenses. We're also projecting about $140 million of net interest expense for the manufacturing group, $200 million of LIFO inventory provision, $30 million of intangible asset amortization, and $280 million of non-service pension income. We expect a full-year adjusted effective tax rate of approximately 20.5%. Turning to Slide 22, R&D is expected to be about $480 million, down from $521 million last year. As I mentioned, we are estimating higher CapEx on the MV-75 program, resulting in our 2026 CapEx to be about $650 million, up $383 million from 2025. Our outlook assumes an average share count of about 175 million shares. So for 2026 companywide, we expect to see revenue of approximately $15.5 billion and segment profit of approximately $1.5 billion. All of this rolls up to an adjusted EPS forecast in the range of $6.40 to $6.60. This concludes our prepared remarks. So, operator, we can open the line for questions. Operator: Thank you. We will now begin the question and answer session. To ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, simply press 1 again. Your first question comes from the line of Sheila Kahyaoglu. Please go ahead. Sheila Kahyaoglu: Morning, guys. And, Scott, congratulations on your career and building up Textron and handing the baton over to Lisa. Lisa, congratulations to you as well. Maybe if you could talk about your top priorities for the company now that you're CEO. Lisa Atherton: Thanks, Sheila. Look, as I outlined in the remarks, we are really starting from a very strong foundation. And so as I look at my priorities, I think about them in three parts. First off, execution. Each business has to deliver on their commitments, with that operational rigor and cash discipline and have the accountability to do so. I have a phrase that's, we have to do what we say we're going to do. And so we're going to hold each business to that. And the second will be a portfolio focus, how we allocate that capital return opportunities across our A&D assets. We have to be very clear about where we lean in and equally clear about where we don't. An example here of how we've been leaning in is on the MV-75 long lead and factory investment to ensure success as the Army pulls that program forward. And lastly, we have to really keep building resilience so that all of our businesses perform well across cycles. And you could think about this as investing in our manufacturability, investing in our supply chain, and really investing in our talent. So that's the what we have to do. I think the how we have to do it is with clarity. We have to very clearly define those execution goals, clearly define our allocation of our capital, and that strategic focus across our business. I think having that rigor is going to result in us continuing to execute reliably while we make clear choices of what we invest in, what we protect, and, frankly, what we don't pursue is equally as important. Sheila Kahyaoglu: Got it. Thank you for that. And maybe one for Dave. You're guiding to aviation revenues up 9%, but orders were down 3% over the last twelve months. Can you maybe just discuss how the buildup to aviation guidance and the cadence for aviation throughout '26? David Rosenberg: Sure. So, you know, our overall guide is $6.5 billion, up from $6 billion last year. Obviously, implied in that guide, we expect higher deliveries in 2026, and I would expect a similar aftermarket growth profile of around 6%, just like we had in 2025. When you think about the margin cadence, I think you'll see a similar level of seasonality as we had in 2025. So it'll probably be about 100 to 150 basis points below the midpoint of the guide to start the year. And I'd expect by the end of the year, we'll be one to 150 basis points above the midpoint. And Q2 and Q3 will kind of be in between that. Sheila Kahyaoglu: Got it. Thank you. Operator: Your next question comes from the line of Peter Arment from Baird. Your line is open. Peter Arment: Hey. Thanks. Scott, Lisa, and Dave. Congrats, Lisa. And, Scott, thanks for all the support. I can't believe you leave all these quarterly conference calls. But, anyway, Lisa, how should we be thinking about the MV-75 in the near and medium term just given the Army's push to accelerate this program? And, obviously, you've been intimately involved, and you've probably seen a lot of different versions of what the plans have been. But, you know, how should we think about, you know, the current setup? Thanks. Lisa Atherton: Yeah. Sure. So, I mean, I think the RA has been crystal clear about their desire to move faster. The mandate that came out from the Secretary and the Chief earlier in 2025 with the Army Transformation Initiative put this program as a centerpiece to what they want to execute for the warfighter in the really very near term. So as we mentioned in the prepared remarks, we had some exponential increase in the tangible output because of them kind of clearing the decks to allow the program team to work. We got the drawing releases out, tooling, we're building parts across the MV aircraft. But equally as important, and you guys know this, sometimes just getting through the process is as cumbersome as building the product. And so the Army has kind of cleared the deck for the program team, and we've seen this at the program office in Huntsville. They have really accelerated the speed of acquisition. And so that has helped us get to a position where we can push these aircraft into testing sooner. And so at a high level, what that does is it pulls the entire program forward by about two and a half to three years. So instead of having that gap, which the original program had, which, you know, we were going to kind of go into this testing phase and no production. So we would have two years of nothing. Well, that now has been filled in. So within months after aircraft number eight is delivered, you'll see aircraft number nine followed by 10, etcetera. And so that acceleration of production in and of itself gets capability out to the warfighter, gets the Army training with this tiltrotor aspect, and allows us to get to full rate production within about five to six years. So I think you're really seeing the Army lean in, and we're right there with them. Peter Arment: Great. It's great color. I'll leave it to one. Thanks again. Operator: Thank you. Your next question comes from the line of Kristine Liwag from Morgan Stanley. Your line is open. Kristine Liwag: Hey. Good morning, everyone. You know, and congrats, Scott and Lisa. Lisa, you highlighted your focus on the portfolio and being deliberate about your investments. When you look at the portfolio today, do you intend to grow or prune? Where do you see incremental opportunities? Lisa Atherton: Yeah. Thanks, Kristine. So I really don't see that management as a binary choice. I think we have to, you know, have this ongoing process. And so while I won't necessarily comment on specific assets right now, we do have to evaluate every single business against that same criteria. They have to have the returns, the cash generation, and the strategic fit for our long-term approach here. I certainly want to accelerate growth and scale in some high-quality aerospace and defense areas. But, again, that's going to have to fit with the proper evaluation and strategic alliance to what we're doing in order to make sense. So we've had really historic success with aspects like ATAC that we talked about. It was a pretty small company when we acquired it. It was focused on some fleet exercises for the Navy, and now it's expanded into the Air Force, Marines, scope with the standoff jammer and adding over $450 million of backlog. So when we look at our assets, it doesn't necessarily have to be a big bang. It's sometimes these little assets that have really great long-term potential. So we'll look at that. I think we also, as I mentioned in the priorities, have to have some vertical integration efforts. We've seen a lot of success with that as we try to control our destiny when it comes to supply chain weakness, areas like actuators, interiors, key repair components that we have to have. And I think we need to really lean in and build on that to have that resilience that we need for the long term. So and obviously, earlier in '25, we disposed of the powersports business. I think that was the exact right move. And so, you know, stated from the beginning, whether it's to grow or prune, we really have to have demonstrated performance by the business that we either are acquiring or can continue to have that performance internal to our portfolio to make sure it's relevant to the future. Kristine Liwag: That's super helpful. And if I could, add a second question. With your history at Textron Systems, I guess Textron Systems is a disruptor in autonomous systems. And when you look at capabilities today and you have one of the broadest set of capabilities with unmanned ground, air, sea, command and control software. Now we're seeing more new players wanting to enter this autonomous space. I was wondering, can you give us the lay of the land of how to think about your offering, where you see your strengths are, and how you think this market evolves, and where Textron is differentiated versus these new players? Lisa Atherton: Sure. I mean, look. I think one of our key differentiators is that we have decades of experience here. We know how to manufacture, with high rate, affordably, for our customer. We've seen, as I mentioned, you know, millions of hours of this across various aspects. We've got aircraft on the back of ships right now outperforming ISR capabilities. And so we know that in these austere environments, how to build products that are reliable for the warfighter. And so I think, you know, because of that history and heritage, I'm pretty bullish on our opportunities there. And as you mentioned, we've done it not only on, I'll say, smaller unmanned drones in the air, it's actually harder to do it on land and in the sea because of the terrain environment. So we've demonstrated that capability as well. So, look, I think as the government figures out the new way of warfighting, we need to be right there with our offerings, and watching these entrants as they come in. And in some cases, there might be partnerships. In some cases, it'll be head-to-head competition. But I think Textron Systems has a strong offering to maintain as a key partner to the Army, Air Force, and Marines in this. Kristine Liwag: Thank you very much. Operator: Your next question comes from the line of Myles Walton from Wolfe Research. Your line is open. Myles Walton: Thanks. Good morning. Lisa, you just talked about investing in the supply chain, doing some verticalization. I guess the question I'd have on aviation is that still, do you think, your limiting function to getting to higher production rates? And where are you in that recovery of supply chain control? And maybe how much extra cost is flowing through the numbers to facilitate your deliveries as you've otherwise planned by expediting supply? Lisa Atherton: Yeah. So productivity in aviation is certainly a key focus for us as we go into 2026. I think it's two parts, right? I mean, it is continuing recovery of the supply chain. I think in large part, and we saw this at Bell as well, the majority of it, I think we have gotten that recovery. It's still those key components that continue to be head herders. And so I think we're starting to see recovery. We're starting to see folks responding to the needs and the demands, but I mean, candidly, engines, just to call it a key component, which you have to have for these aircraft, has been a laggard for us. And we have to keep working with our partners there in order to get the engines to our aircraft. The other part, though, I think that we see is workforce. We've had a high attrition, I'll say, in the early workforce. Folks are, say, a year or two years into working with us. So the response of the team there, we created an in-house training program to upskill the talent there to create more longevity and resiliency of our workforce. And so those two pieces together are what we really have to have in order to improve the efficiency on the factory floor. And I would say that's broader than just aviation. It's also at Bell. We saw the same type of things that we need to work on and fix. So look. I would say it's both. I think the team has some good plans. And, David, I don't know if you want to add color there on whether or not we've priced that in, but I think there's good progress, and we'll hold them accountable to it. David Rosenberg: Yeah. I'd just add. You know, if we look at 2025, you know, we certainly saw a moderate improvement in the supply chain. We earned more hours in the factory. Did we get all the efficiency and productivity we hope to get in the year? No. So there's still opportunity to drive better efficiency in the factory. So, you know, that can still be a slight headwind to our overall numbers, which, of course, are reflected in our guidance, but also represents a strong opportunity for us as we go forward. And as you see from our guidance, we do expect to be able to deliver more airplanes in 2026 than we did in 2025. Myles Walton: Okay. Quick follow-up, Dave, on the CapEx for '26. Is that spike expected to continue beyond '26? David Rosenberg: So as we've talked about over the last, you know, six months as acceleration to coal, essentially, we're moving about two years to the left in terms of investments. So you'll probably see the elevated level in 2026 and 2027, all driven really by the MV-75 program. Simply moving investment that would have been in 2028 and 2029 to the left. Myles Walton: Okay. Thank you. Operator: Your next question comes from the line of Robert Stallard from Vertical Research. Your line is open. Robert Stallard: Thanks so much. Good morning. Lisa Atherton: Morning. Robert Stallard: And all the best, Scott. And congrats, Lisa. Welcome to the call. I wonder if I could ask you a couple of questions about MV-75. You've given us the additional CapEx cost or pull-forward CapEx cost you're going to see in '26 and '27, and there's this potential charge when you get the LRIP contract sorted out later this year. So what's the flip side of this? I mean, how much could revenues go up by versus previous expectations as we look out to '27, '28, '29? And what could the returns be on those revenues versus what you might have expected before? Thank you. David Rosenberg: So, you know, I'll talk on the as we've described this program, ultimately, the opportunity is between 40 million and 60 units per year. And you can average that out, it's going to be a significant increase on the overall revenue profile of the business. And we expect that that would start rolling in later this decade, quicker than originally expected. The other point I'd make, you know, historically, in the past, Bell was a double-digit margin business. And certainly, as the program matures and we get into the initial lots of productions, our expectation would be that Bell would return to that. All these actions we're describing to you today mean that's accelerated versus where it previously would have been, which, you know, they would have taken a lot longer time this decade. Robert Stallard: Okay. A quick follow-up, Dave. When you if you take this charge later this year, where would it leave booking margins on the MV-75 going forward? They'd like low single digit then eventually move up to those low double-digit levels. David Rosenberg: Yeah. I mean, as you know, Robert, we're treating this as one program from a booking rate as new contract line items get awarded. If you look, for example, in 2024 when the two LUT units got awarded, that resulted in us having to do a cumulative catch-up that lowered our booking rate. Still in the low single digits margin percent. And in February '25, we had an additional point awarded that actually resulted in us raising the booking rates. Again, still in that range. So this is still in the, you know, mid-low single digits as we go forward. And each time a new contract line item is awarded, we adjust it up or down. But this isn't, you know, the first time this has happened, and you can actually see that if you look at our EACs, you know, from, you know, Q4 2024, our 2025. But the program, it's important to emphasize that the program will continue to be profitable as we go forward. Robert Stallard: That's great. Thank you so much. Operator: Your next question comes from the line of Seth Seifman from JPMorgan. Your line is open. Seth Seifman: Hey. Thanks very much, and congratulations to Scott and to Lisa. Wanted to ask with even with the CapEx that you're planning for this year, you know, still have some cash to deploy. No debt due this year. It seems from the release that the share count is down a bit. How do you think about using your cash here? Lisa Atherton: Yeah. Look. I'll start, and, Dave, if you want to pile on there. But we're going to continue to deploy that as appropriate. We're going to make sure that we do proper research and development where it makes sense across the business. And get ready, as we said, for the MV-75 acceleration, and we'll continue to share buybacks as it makes sense. David Rosenberg: Yeah. Our expectation is we'll continue to deploy our, you know, the relatively similar percentages that we've had in the past from our free cash flow, and we're really comfortable where we are currently on a debt level, our ratios, etcetera. You know, we're good mid-triple B, and that's where we expect to continue to be. Seth Seifman: Excellent. Very good. And then, Lisa, I've bugged Scott with this question a couple of times in the past, but just with the acceleration of the program, maybe I can ask you since you've been so close to it. How do you think about concurrency risk? With moving straight into LRIP? And, you know, what gives you kind of confidence that we won't see future charges? Lisa Atherton: Yeah. So for we've been working on this program for fifteen years. And so with the prototype, and the over two hundred hours of flight that we had on the demonstrator, the fact that we're seeing on the digital engineering yield that we have in these programs that I mentioned, we've got parts that are already being built. We're having one hundred percent first pass yield. What that means is the parts are coming out exactly as designed. And so the fact that we're seeing that kind of performance out of the program gives me the confidence that what we build is what we designed. And so when you put that through test, I mean, certainly, we'll discover some things, but I mean, I think there's we have high confidence that we have wrung out a lot of the concerns that you might have seen in older generation type development programs. Seth Seifman: That's very helpful. Thanks. Operator: Your next question comes from the line of Noah Poponak from Goldman Sachs. Your line is open. Noah Poponak: Hey, good morning, everyone, and congrats, Scott and Lisa. And Scott, thanks for all the time you spent with us over the years. Scott Donnelly: Thank you. Noah Poponak: I was hoping to talk more about the aviation margins. You know, we see the recast taking 60 basis points out of the reported. I guess, Dave, I don't know if you could just sort of tell us what the incremental was kind of fully adjusted in '25 and in your '26 guidance. And I guess, you know, the '25 guide had been 12 to 13. If we take the 60 basis points out of that, you know, the guidance for '26 is flat to down, I guess. So are we just recasting the aviation margin, or are we also resetting the aviation margin expectation for some reason? David Rosenberg: No. We're certainly just recasting. I mean, I think, you know, if you look about you're correct. We guided last year at 12 to 13% and ended up slightly below that. I mean, I think that's largely around the volume story. While we did have higher volume year over year, we ended up with a little less volume than we expected. But, I mean, as you go forward, if you look at our incrementals this year, you know, depending on where you end up in the range. I mean, we're probably between, you know, 15 to 20%. We've often said that this business should have incrementals of 20 to 25%, and that view has not changed. You know, I think the key to just us getting there is continuing to have efficiency and productivity improvements in the factory that will drive higher volume. And of course, where we've established the market over the last five years, you know, pricing remains solid. So that business should continue to convert at 20 to 25%. And, also, I should mention with a very strong aftermarket business. We grew 6% last year. We expect to grow 6% this year. So it's certainly not, you know, a restatement of what we expect margins to be. You know, we feel comfortable where we're at and plan to continue to grow the business as we go forward. Noah Poponak: Okay. And then, Dave, you've talked about holding Bell EBIT flat as you ramp MV-75 and grow revenue, but work through the margin. With what you're telling us today, on the LRIP, and once you take the charge, is that still the view? Or do we think about that differently? David Rosenberg: That's still the view. Noah Poponak: Okay. So this year, you're growing revenue in the guidance is for the margin to be flat. So that would grow EBIT a bit more before then eventually going back up? Therefore, that implies the margin still goes down a little. David Rosenberg: I mean, we're going to be probably going to be in a relatively steady state over the next couple of years, and then, you know, you'll with the acceleration, you'll start seeing more of the benefit of that. But I think I view this as a relatively steady state, which is consistent with the message we've been sharing. Noah Poponak: Okay. Alright. Thanks a lot. Operator: Your next question comes from the line of John Godin from Citi. Your line is open. John Godin: Hey, thanks for taking my question. Lisa, I wanted to just sort of brainstorm, you know, the world of a much bigger budget, not necessarily $1.5 trillion but obviously kind of those sound bites are out there. What I'm trying to think through is, you know, between Bell and systems, by the math, you guys have a lot of defense exposure. But more specifically, where do you think the points of leverage would be to the upside? In a world where the budget was much higher? Lisa Atherton: Look. I think what you see is what the Department of War is trying to prepare for. I mean, we have aspects of our business across all of that. So particularly around the Sentinel program and what our team is doing at Systems, around hypersonics and the thermal protective materials. I think there's points of leverage there. With their emphasis on the XM-30 and the Marine Corps' Armed Reconnaissance Vehicle and where those programs are in terms of their development, I certainly think there's opportunity for growth and acceleration in those programs. And then as we've stated multiple times already, with the MV-75 and their continued push quickly into full rate production. And so that along with the Ship to Shore program will be steady. I mean, we're producing those really about 15 through a program of record of 73. And so there's just, I'll say, foundation and solid support for these programs across all of our defense portfolio. John Godin: Got it. That's very helpful. And there was a bit of a discussion earlier about adding capabilities. In a world where the budget was higher, is that part of, you know, a guiding light for adding capabilities, accelerating growth in what you call high-quality areas of A&D? Just want to connect the dots there. Lisa Atherton: Yeah. Sure. So, I mean, particularly around the space side of things, I think the Department of War is also kind of leaning into that, and I would like to see us move into areas of the space side of defense. Either with assets that we have or, you know, as we look to the future. So I certainly think that that is a key growth area that we need to be focused on. John Godin: Thanks a lot. Appreciate it. Operator: Your next question comes from the line of Gavin Parsons from UBS. Your line is open. Gavin Parsons: Thank you. Good morning. Lisa Atherton: Morning. Gavin Parsons: Also, my congrats to Scott and Lisa. Business jet demand is pretty strong overall, but it does seem like large cabin maybe is the strongest segment at the moment. Is there any opportunity there to add a larger aircraft to the Cessna family? Lisa Atherton: Yeah. Look. I think, you know, this year, we brought in three Blockpoint upgrades. And, you know, that wasn't necessarily the plan as we went into the year. I think that kind of all kind of jammed up towards the end of the year, which created a little bit of a bumpiness for us. I think our plan would be to try to do one of those at a time, and do one clean sheet at a time. And right now, the focus on the Denali and getting that entered into service is the focus for the team. Gavin Parsons: Okay. And then if I could just dig into the industrial margins a little bit, light in '25, but expanding in '26. David Rosenberg: Yeah. I mean, I'll take that one. I mean, I think that, you know, obviously, I think Kautex did a really good job last year, you know, despite where the market is. And have continued to see improvement in their own profitability. TSV still has some challenges, kind of where the end market is. They, you know, they've absorbed a certain level of tariffs, which has also been a headwind. But overall, we do see golf continues to be a pretty steady business. And along with their cost reduction activities that they've been continuing to do, those are kind of the combination of the two that are driving the improvement. Gavin Parsons: Thank you. Operator: Your next question comes from the line of Ron Epstein from Bank of America. Ron Epstein: Hey, guys. Good morning, and congratulations, everybody. Scott, hard to believe. It's been a while. So thanks for everything. Scott Donnelly: Thanks, Ron. Ron Epstein: So maybe a couple of questions. Just a first one. We haven't talked about much. On the MV-75, how are you all thinking about the logistics and support for the aircraft? Because once aircraft are on the field, logistics and support can be pretty profitable. And, you know, what's the model around that? And how are you thinking about that? Lisa Atherton: Yeah. Sure. So, you know, if we model it off what we've done with most of our programs on the military aircraft side, there's typically kind of a performance-based logistics type approach that the military works with us on. I think the Army and the approach also has been very intentional on how they have gone with their purpose rights. They want to have some organic capability themselves, so we will work with them to help them stand up that capability. Obviously, service parts repair, a lot of that will be probably stationed near where a lot of the center of their aircraft are. They're likely going to be at Fort Campbell to begin with. So look. We'll be working with them to ramp that and how those spares packages would look as they lay the program out into the various aspects of the Army. They're different than how we deal with the Marines. You know, the Marines have kind of two centers of location. The Army supports their aircraft where the Army is. And so we will have to support them in that, in a more disparate way. Ron Epstein: Got it. Got it. Got it. And then maybe just, you know, they're going to pull something out of the garage, and you'll know what I mean in a minute. Something we should talk about a little bit and sort of faded away was Scorpion. And the reason I bring that up is not that maybe there's an immediate event for Scorpion, but you guys were ahead of the game doing something, you know, that was a lot of commercial on your own dime. And at the time, you know, the DoD dropped the ball and didn't get them. Right? And, you know, I think y'all would agree with this. I think they should've. You probably think they should've, but they didn't. Things have changed. You know? And given that you've got this awesome toolkit of a lot of commercial parts and, you know, you're doing, you know, a bunch of good military stuff and commercial stuff at Bell, a bunch of really good largely commercial, but some military Textron Aviation. Is the environment coming together for you guys to start doing something like a Scorpion or whatever again where it can be largely commercial with a military application at a cost point that's better? And, you know, is there receptivity for that? You know, was Scorpion just maybe a decade ahead of its time? Lisa Atherton: Yeah. Like, I think that's right. I mean, I do think we were just a little bit ahead of its time. But when you look at what we're hearing in the last eight months, it echoes exactly what we tried to do with Scorpion, which was take a commercial mentality, commercial practice off-the-shelf parts, and put together a low-cost, affordable platform that is beneficial to the warfighter. And so I think because of that being a part of our DNA, I think that's something that we would lean into. We do that, frankly, now with some of our aircraft at Textron Aviation Defense and inside of Bell. We have military Bell commercial aircraft that go into certain special missions around the globe. But as we look to where the government currently is leading us with this, you know, I'll say their new arsenal of freedom, it's what they've titled that as, where we have aspects that we can lean into that, we certainly will. I think that's what they've asked of us, and I think we're well-positioned to do that. Ron Epstein: Got it. Got it. And then sorry. Just one last one quickly. Could there be a new life for Scorpion? I mean, you know, the role that you built it for is still out there. Right? Just saying. Lisa Atherton: Yeah. I haven't heard of it yet, but, you know, certainly, if it comes out, you guys will be the first to hear about it because we'll be talking about it. But I think there's Yeah. So but, look, I agree with the sentiment. Right? There is opportunity here, and we are positioned as a company that knows how to respond to that. Ron Epstein: Cool. Alright. Thank you very much, and congratulations. Lisa Atherton: Thank you. Operator: And that concludes our question and answer session and also concludes today's conference call. An audio replay will be available approximately two hours following the conclusion of this call. To access the replay, please dial +1 807702030 and enter conference ID, 6969175 and press the pound key. Thank you for your participation. You may now disconnect.
Operator: Hello. Thank you for joining us, and welcome to the Extreme Networks Q2 fiscal year 2026 financial results. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. I will now hand the call over to Stan Kovler, Senior Vice President of Finance and Corporate Development. Stan, please go ahead. Stan Kovler: Thank you, operator. Good morning, and welcome to the Extreme Networks second quarter fiscal year 2026 earnings conference call. I'm Stan Kovler, Senior Vice President of Finance and Corporate Development. With me today are Extreme Networks President and CEO, Edward B. Meyercord, and Executive Vice President and CFO, Kevin Rhodes. We just distributed a press release and filed an 8-K detailing Extreme Networks' financial results for 2026. A copy of the press release, which includes our GAAP to non-GAAP reconciliations and our earnings presentation, is available in the IR section at extremenetwork.com. Today's call and Q&A may include certain forward-looking statements based on current expectations about Extreme's future financial and operational results, growth expectations, new product introductions, and strategies. All financial disclosures made on this call will be on a non-GAAP basis unless stated otherwise. We caution you not to put undue reliance on these forward-looking statements as they involve risks that can cause actual results to differ materially from those anticipated by these statements. These risks are described in our risk factors in our 10-Ks and 10-Q filings. Any forward-looking statements made on this call reflect our analysis as of today. We have no plans to update them except as required by law. Following our prepared remarks, we will take questions. And now, I will turn the call over to Extreme's President and CEO, Edward B. Meyercord. Edward B. Meyercord: Thank you, Stan, and thank you all for joining us this morning. The second quarter marked our seventh straight quarter of revenue growth driven by strong demand for our AI-powered platform, fueling share gains and double-digit year-over-year growth. Over the past twelve months, we've grown three times faster than our largest competitors in the enterprise networking space, highlighting the fact that we're winning market share. Our revenue was $318 million this quarter, exceeding our guidance and a 14% year-over-year increase driven by continued competitive wins with large customers across all verticals. Product revenue increased double digits year over year for the fourth consecutive quarter. Cloud subscription momentum lifted SaaS ARR to 25% year-over-year growth, landing at $227 million. And finally, we experienced our strongest subscription bookings on record with Extreme Platform One leading the way. Our technology differentiation and the quality of our team's execution are driving growth and enabling us to move upmarket and win larger enterprise networking projects. This quarter, we closed 34 deals over a million dollars, highlighting confidence in our differentiated technology and our ability to win in highly contested head-to-head competitive situations. Our innovation is translating into purpose-built solutions for larger, more demanding enterprise environments. Why are we winning? Competitors can't match the capabilities of our end-to-end campus fabric, which continues to be a major driver of large enterprise wins. Differentiated by capabilities like zero-touch provisioning, subsecond convergence, and the creation of hyper-segmented networks that hide IP addresses and thereby limit the blast radius of lateral cyber attacks—a major security benefit. For those of you who recall our Investor Day, a Fortune 100 customer remarked that what takes Cisco six hours takes Extreme six minutes. And this is the power of our fabric. Platform One is unique, with a true agentic AI core. Our AI agents can autonomously diagnose issues, guide resolution, and provide clear actionable insights. Our platform is particularly useful for troubleshooting, evidence collecting, and solving complicated network issues, turning days and hours of work into minutes. We're the only vendor that delivers true cloud choice, whether public, private, or hybrid, including sovereign cloud solutions. We meet the data residency, compliance, and security demands of regulated environments, unlike competitive solutions that are locked into public cloud only and expensive purpose-built architectures. And no one delivers complex Wi-Fi solutions better than Extreme. This is why we're the preferred Wi-Fi vendor for dense environments like the NFL and Major League Baseball stadiums, as well as large, highly distributed environments like Kroger, FedEx, and other large retailers. Given this ongoing innovation and strong competitive differentiation, we expect to accelerate our leadership position and continue to drive share gains. In the quarter, we had several large wins across verticals and geos, including a multimillion-dollar sale of Platform One to a large retail customer to centrally manage their network across 3,000 stores, Baylor University, Henry Ford Health, University Hospital Birmingham NHS, and the Pittsburgh Steelers, all leveraging Extreme's Wi-Fi 7 solutions. TJ Regional Health in Kentucky and Groupe Jolimon, a large healthcare provider in Belgium, completed modernization of their networks with Extreme Fabric to deliver reliable, high-quality patient care. One of the largest school districts in the United States selected Extreme over Juniper after a head-to-head evaluation in a multimillion-dollar full network refresh of wired, wireless, SD-WAN, and importantly, our AI platforms. And SK Bioscience, a leading South Korean biotech company, is deploying Platform One to support rapid growth across its expanded offices and new R&D center. We continue to see strong momentum across our commercial models, with MSP partners nearly doubling and billings up more than three times year over year. Our consumption-based billing eliminates upfront costs, while poolable licensing enables MSPs to easily scale across devices, locations, and customers. In addition to product innovation, we're helping partners make more money with enhanced commercial terms. Last week, we launched Extreme Partner First, our new partner program which simplifies deal registration, delivers transparent pricing and rebates, and embeds AI directly into the partner experience. We help partners access critical sales content in seconds, close deals faster, and scale profitably with role-based dashboards, faster approvals, real-time deal visibility, and accelerated rewards. Partners can make 20% more profit at Extreme than our competitors. And we've dramatically simplified the way customers are buying from us with a single bundled license that offers AI, fabric, hardware, and security. Platform One keeps getting stronger with continuous updates that materially increase customer value. Today, we're attracting highly sought-after talent from across the industry, and our retention remains at all-time highs. Recently, we were able to recruit top-level talent from Juniper, seeing tremendous opportunity at Extreme, including two at the SVP level leadership positions, global channel, and EMEA sales. Looking ahead, the strength of our funnel reflects a robust demand environment across all our industry verticals, double-digit pipeline growth in state, local, and education, and continued momentum across manufacturing, healthcare, and general enterprise. On top of these dynamics, a return of government spending in Europe, expansion in APAC, and continued momentum in the Americas underpin these trends. A major end-of-life refresh cycle and changes to the partner program at Cisco are creating a significant multiyear growth opportunity for Extreme worth billions in total addressable market. And the HP Juniper merger is creating share gain tailwinds for us as well. These market trends create openings for Extreme as new AI requirements, aging hardware, and next-generation technologies like Wi-Fi 7 are driving customers to reassess their vendor choice. Many are turning to Extreme to modernize their networks. As it pertains to supply chain, networking is mission-critical. It's not a nice-to-have. Everything our customers run depends on the network, which means demand remains strong even in a higher cost environment. Net-net, our experience and industry analysts show low elasticity of demand for networking infrastructure, giving us price flexibility to protect our margins. And this is an industry phenomenon. Given our operational agility, we're confident in our ability to meet customer demand going forward. One of the ways we solve for component shortages has been a replacement strategy. In the COVID era, for example, our teams replaced over 125 components in a year—10x the normal rate. And most recently, we identified and swapped out a new source of DDR4 memory chips that Broadcom has already qualified. Our teams are nimble and get us in front of the curve. In the case of component scarcity, our size and scale can be an advantage as we are chasing lower volumes and can be more focused. For the remainder of fiscal 2026, we expect to continue to grow profit faster than revenue, with expected profitability growth of around 20% on double-digit revenue growth for the year. We're set up with a solid foundation exiting the second quarter, with well over $200 million of annualized EBITDA at a healthy net cash position. Now let me turn the call over to Kevin to discuss financial results and guidance. Kevin Rhodes: Thanks, Ed. Total revenue of $318 million grew 14% year over year and exceeded the high end of our guidance range. And as Ed mentioned, this is our seventh consecutive quarter of revenue growth. Earnings per share of $0.26 also exceeded the high end of our guidance range. Earnings per share grew from $0.21 in the prior year quarter, a 24% year-over-year improvement. So our profit growth rate outpaced our revenue growth rate by 10 percentage points. SaaS ARR also accelerated to 25% growth on a year-over-year basis, driven by our success with Platform One subscriptions. Platform One bookings were well ahead, even twice the amount of our target, resulting in accelerating year-over-year performance in subscription bookings. The expected acceleration in growth for the high-margin subscription revenue we laid out at our Investor Day in November is playing out as expected. We are excited about the continued growth in our recurring revenue base, up 12% year over year, and we have a strong pipeline for Platform One sales. Geographically, we had strong year-over-year revenue growth across all regions. This speaks to our improved alignment between our go-to-market teams, a robust demand environment for critical IT infrastructure, and our ability to target larger partners and deals across the globe. We continue to gain traction with new, larger partners and associated new customers when it comes to our new logo wins. Subscription and support revenue reached $120 million, up 12% year over year and up 3% sequentially. Our SaaS deferred revenue continued to grow to $334 million, a 15% year-over-year increase. Overall, deferred recurring revenue climbed to $628 million, a 9% year-over-year improvement. We are pleased with the predictability that this high-margin revenue gives us. Non-GAAP gross margin was 62%, an increase of 70 basis points from the last quarter and at the high end of our guidance range, which we highlighted at our Investor Day. Product margin increased due to mitigating actions that we have taken to offset higher component costs, including a price increase we implemented last quarter. Higher support margins were driven by improved product quality and lower warranty costs. And subscription margins also rose on higher revenue, which also helped our mix. Our teams are doing a great job managing an ever-evolving supply chain environment, taking actions to mitigate component price increases and qualifying other third parties, and continue to proactively secure our forward supply needs. In addition, we have the flexibility to further increase prices to offset any increases in memory or other components. We are confident in our ability to meet customer demand and deliver critical networking products without disruption. One item I'd like to point out, which is built into our guidance quarter, is that we have several multimillion-dollar deployments at large venues, which we will deliver during the third and the fourth quarter. These customers have asked Extreme to run the point on the installations with our professional services team. Installation services carry a much lower margin profile than our traditional subscription and support margins, and we expect these implementations to impact our mix during that third and fourth quarter time frame. We expect the combination of the actions that we have taken and a vigilant approach to supply chain planning to result in further improvement in our gross margins over time. We're still very confident in our ability to achieve our long-term gross margin goal of 64% to 66%. Turning to the second quarter operating expenses, they were flat from last quarter at $149 million and down as a percentage of revenue from last quarter and the last year, providing further operating leverage. This was despite higher than expected sales commissions due to higher revenue. Operating margin was 15%, up from 13.3% last quarter and 14.7% in the prior year quarter. I'm pleased to report that we generated $52.4 million in adjusted EBITDA, and our adjusted EBITDA margin was 16.5%. We generated $43 million in free cash flow in the second quarter and continued to reduce inventory levels and days on hand. This demonstrates our continued focus on working capital management. Now turning to guidance. We expect our third quarter revenue to be in a range of $309 million to $314 million. This reflects normal seasonality in our underlying business, which we expect to carry forward. As I mentioned earlier, we expect third quarter gross margin to be impacted by these larger professional services deployments, and therefore, margin is expected to be in a range of 61% to 61.4%. We do expect improvement in product gross margin in the third quarter and expect it to carry forward for the remainder of the fiscal year. Operating margin is expected to be in a range of 13.6% to 14.8%, and earnings per share in the third quarter is expected to be in a range of $0.23 to $0.25. Our fully diluted share count is expected to be around 136 million shares. For the full fiscal year '26, we expect guidance as follows. Revenue is now increasing another $10 million at the midpoint from our last quarter, to be in a range of $1.262 billion to $1.270 billion. The midpoint of this range suggests 11% growth year over year. We expect earnings per share in the range of $0.98 to $1.02. And with that, I'll now turn the call over to the operator to begin the question and answer session. Operator: We will now begin the question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please standby while we compile the Q&A roster. Your first question comes from the line of Michael Genovese with Rosenblatt Securities. Michael, your line is now open. Michael Genovese: Great. Thanks very much. Congratulations on the good quarter. I think you guys gave some compelling metrics about share gain. Can you talk about, you know, more about that, though? Like, you know, the evidence that you use to show that you're gaining share and to prove that you're gaining share and, also, you know, kind of restructuring that you did in the kind of the go-to-market model during the quarter, whether that, you know, had, you know, in terms of putting Norm in charge and other types of restructuring, you know, how you approach share gain, whether that had an impact in the quarter or whether that impact is more in front of us. Thank you. Edward B. Meyercord: Thanks, Mike. I'll take that. Yeah. We don't make up the numbers in terms of share gains. We use third-party analysts and we look at, like, 650 Group and Dell'Oro, etc. When you look at Extreme and you compare us to Cisco or now HPE, they have a lot of other businesses. They play in a lot of other market segments. So it could be difficult to dive in and really understand what's happening in the enterprise market, which is where we play. So the analysts do a really nice job of getting the information and kind of zeroing in on how competition is performing where we compete. And so when I say we're growing at three times the market, we're using third-party industry data looking at enterprise deployments, which is campus enterprise data, etc. Data center, etc. So that's how we get the data in terms of how we know we're winning. I think everybody here knows we compete every day head-to-head with now HP and Juniper is turning into HP, and they've got their hands full. And then Cisco. So we have hands-on information of our competitive wins and win rates and we understand kind of how and why we're taking share from that standpoint in terms of winning new customers from those larger accounts. To your point, Mike, Norman has been in charge as Norman Rice is we put him in charge of sales. It's hard to believe it's been two years, but he's brought a lot of discipline into the process in terms of how we forecast, driving accountability, and then making a lot of changes in terms of the personnel and leadership. And so I would say we have more confidence today than we've ever had in our bookings outlook and our bookings forecast. With, I would say, top grades across the channel and our direct selling organization. We also brought in Monica Kumar a couple of years ago, our Chief Marketing Officer, who has done a phenomenal job overhauling our marketing team and effort. And, you know, we've created very targeted, we call them pods. We have 19 of them where we have our direct sales team partnered with localized event marketing teams, partnered with channel resources, focused on events and activities that drive funnel and then focused on how we drive and convert that funnel. So it's a concerted effort. Obviously, all this connected with our product teams and our service and support teams. But working together. So we have 19 different pods that we forecast each quarter in terms of funnel creation, in terms of conversion. And, obviously, that gets down and ties the bottoms-up bookings forecast from our sales team. So we've come a long way. We have a lot of confidence in the demand outlook and, you know, we're really confident in our ability to take share. And as we talk about moving upmarket, we're excited about what we have in the funnel. And that especially with some of these larger opportunities, that, you know, would be meaningful share gains for us at Extreme. Michael Genovese: Great. That was such an extensive answer that I almost feel hesitant to ask a follow-up, you know, for time's sake and other analysts, but I will ask a follow-up. Which is, you know, I don't think that you guys, you know, mention if we looked at AI mentions on this conference call, there probably weren't a ton of them. So in either, you know, in terms of sort of, you know, agentic offerings or, you know, enterprise switching upgrade cycles, and confidence that that's gonna happen. Can you just talk about, you know, the importance of AI and what you're seeing, you know, from your offerings and from your customers' activity related to AI? And then I'll pass it on. Thank you. Edward B. Meyercord: Sure. Well, look. AI, you know, continues to be top of mind for all of our customers. Everyone's trying to figure out, hey, what's the use case for AI? You know, how can I use, you know, modern AI technology in my environment to drive better business outcomes? And we're all over that. You know, we had our AI summit in Major League Baseball headquarters in the fall with a great, great response. You know, we are probably the only networking vendor that has an agentic AI platform where our AI sits at the core of the platform. And it's something that gives us a real advantage when we're having conversations today as people are contemplating AI, they want to look at players that have developed platforms. And this is, again, a place where our size becomes an advantage for Extreme because of the capabilities that we've built and then what we're going to be able to do in terms of integrating our network capabilities with ecosystem partners of our customers when we start looking at AI agents, creating an agent exchange, creating the ability to create workflows and drive outcomes for customers. So we've always been a leader in cloud. We've been a leader in AI, kind of gen one, if you will. I'd say alongside Juniper Mist and Meraki. Now we feel like we're in a position to pull ahead because we've created this platform. And, again, as I said, it's the only one with a pure agentic AI core. And we think this is gonna give us enhanced capabilities as we go forward. And so, yeah, it's top of mind for customers. Everybody wants to know about it. This is an advantage for Extreme. I will say we doubled our forecast for subscription bookings for Extreme Platform One, which is our AI platform. So things are going really well. Our sellers are having a great time with this out in the market. Michael Genovese: Perfect. Thanks again. Operator: Your next question comes from Tomer Zilberman from the Bank of America. Tomer, your line is now open. Tomer Zilberman: Great. Hey, guys. Good morning. Maybe going back on the share gain question. When we look at the opportunity that you're seeing from these competitive displacements, are you coming in all at once both the Wi-Fi piece and the switching piece? Or are you seeing it start in one area, kind of landing in one or the other, and then further expanding? And then I have a follow-up. Edward B. Meyercord: Yeah. Tomer, it's, you know, each project will have a life of its own. So, you know, we'll have a unique opportunity because we're the only player that can provide data sovereignty. So cloud choice becomes an issue in Germany where a customer has data sovereignty requirements, and we bring a unique solution with our cloud choice. Interestingly, our fabric over SD-WAN won the day with the Japanese government and the huge wins that we've had over there. So it was really about the differentiation of our fabric technology and the fact that we were able to bring fabric over the wide area network with SD-WAN to create this unique solution that none of our competitors could replicate and therefore, it opened up the channel and opened up huge opportunities in Japan. The hottest technology for us today is our fabric. Everybody has an IP fabric in the industry. And IP fabrics for data centers, that's great. Nobody has a fabric for campus. That's layer two, and that's what we have. And so when we get into beauty contests, where customers let's look at the Cisco refresh and now it's time to upgrade the network. And now a customer says, alright. Well, bring in a few other competitors. People are blown away. My comment, what takes Cisco six hours takes Extreme six seconds. That is a real quote from a Fortune 100 customer. The agility and the speed of turning up network and provisioning network as well as the delivery of service as well as the resiliency of the platform, the ability to create networks in the network. Again, this is, you know, Miami Dade County. You know, I could go across to huge government customers around the world, huge manufacturers, healthcare providers, when we get into a head-to-head competition, you know, we physically show customers what we can do and let them play with the technology and our competitors can't replicate it. So all of a sudden, Extreme goes from maybe a distant third or fourth, you know, right into contention as a finalist, and our teams are doing a great job executing and winning in some of these competitive projects. Tomer Zilberman: Got it. Maybe as a follow-up, talking about memory prices, you started talking about it last quarter, and I think in between, or maybe it was last quarter you implemented a mid-single-digit price increase. So my question is, how did customers first, how did customers react to that? And since we've seen memory prices continue to rise, you know, what's the signal for another price increase and are you seeing any decommitments from suppliers? Edward B. Meyercord: Yeah. Tomer, great question. And I'm yeah. We're well aware that supply chain and component availability is top of mind for everybody out there. Yeah. We implemented the price increase earlier, a 7% price increase, and I can say, you know, it's like a tree falling in the forest. A total nonissue. You know, I mentioned the price inelasticity of networking. If you think about an organization, think about your organization. There's no discussion about whether or not you need a network. And that you need a modern network with modern networking tools. So this is true for all of our customers. It's kind of a nonnegotiable. So I'd say our customers are very resilient from a pricing perspective. Going forward, we will evaluate price increases as we go forward and use that, you know, where we need to. We're very good at it as a company, and I'd say we're very good at it as an industry. Specifically, you know, meeting demand for things like DDR4 memory, I believe size is an advantage for Extreme here. First of all, we have a very strong team. It's the same team that we've had going back into the COVID era, and, you know, supply chain disruption is normal for us. Our business. And so our teams are very strong. We have excellent vendor relationships. So I'd say we get out in front of these things before our competitors. Size is an advantage. We're solving for fewer problems. We're solving for enterprise networking, switches, and access points. Our competitors have much bigger portfolios that they're trying to solve for. And then what we need, what we're chasing for is lower volume. So in a way, it's easier for us to get our hands on it. So these are some points that allow us to be kind of resilient in that environment. I'll give you an example. With DDR4 memory chips. We're working with a vendor and, yes, prices are going up. We talked about raising price. But we talked about how we can find other sources of supply and we were able to unlock DDR4 chips that had been designed and developed for another industry. And they were actually aging inventory for another industry we were able to pull in the chip, bring it to our vendor, bring it to Broadcom, work closely with them, and they certify the chip and that opened up a new source of supply, for example, of memory. That's the kind of thing that Extreme does that I think is a little different from our competitors. And so our teams are out there very creative finding ways to replace components and find alternative sources of supply in the market. Again, our size is somewhat of an advantage for us to meet demand. Tomer Zilberman: Got it. Thank you. Operator: Your next question comes from Ryan Koontz from Needham and Co. Ryan, your line is now open. Ryan Koontz: Great. Thanks. Nice quarter, guys, and nice to see the outlook hanging in there strong. Maybe unpacking the ARR bit, the cloud ARR, in the quarter a bit. Can you maybe talk about, you know, puts and takes where you're seeing, you know, strength in selling subscription and areas you're still working on within that sales process? Edward B. Meyercord: Yeah. Thanks, Ryan. I mean, the strength has been with Platform One. Ryan, I mentioned that, you know, we don't disclose our internal plans, but we had an internal plan for Platform One that we more than doubled in the quarter. And, you know, people are the way that we structured our commercial terms is that our customers can buy Platform One. Then they can move at their own pace and migrate from XiQ and our other, you know, our cloud platforms. And so our customers have really embraced that. And so I'd say that's where we're seeing most demand. Kevin, do you want to comment? Kevin Rhodes: Yeah. I think you're right. And we've laid this out the day, right, that we expected, you know, mid to high, you know, twenties, growth rates, and we're seeing that now with the 25% growth rate in ARR. It is absolutely just a product of a really good platform, a simple licensing model, you know, that includes the cloud management, includes the agent AI, it includes, you know, the support contracts and everything that we talked about. And then people like that model. And it's simple for them. It's easy. They understand what the pricing is. They're not gonna have hidden costs in the future, etc. And then our customers really enjoy the Agendaq AI, and how that's, you know, making their network operations just that much more efficient. It's like adding an extra engineer to their team is what they're saying. Ryan Koontz: That's great. Thanks for that color. And, you guys just some really strong results in EMEA. It looked like a record from what I can tell, or close to it, at least for several years. You know, can you maybe unpack what's behind that strength? We heard from kind of a private networking peer last night that also had very strong EMEA sales and noted there that there were some regulatory requirements around sovereignty coming down from the EU. Maybe you can explain if there was any impact on some of your sales due to regulatory. Edward B. Meyercord: Yep. And, Ryan, I'd say I don't think we've seen the benefit of that yet. I think that portends good things to come for Extreme. You know, when you talk about data sovereignty, if you talk to the Gartner group, they'll tell you that Extreme is the only player in the networking space that can deliver a data sovereign solution in networking. And so and that goes back to Cloud Choice. And, you know, when you look at our competitors in a public cloud that doesn't quite get you there, or you have a purpose-built cloud that, you know, isn't built and operated, you know, in-country, this is an area where, you know, we have an opportunity. I will say we are seeing, you know, as governments, government coalitions in, you know, Europe form and get organized, and get united around creating budgets and spending. For us, I'd say it's taken longer than we've expected for spending to be unlocked, but we're starting to see government spend come back. We put that in our comments. So we expect that to be Europe to be a tailwind for us going forward. Kevin, do you want to add anything? Kevin Rhodes: No. I think you covered it, Ed. The only other thing I'd add is we just added a new leader to our EMEA sales group, and he's come in and he's been very impressed with the opportunities that are in the EMEA market, and he's very excited. So I think that we've got the right team in place and there's plenty more opportunity there in EMEA for us to continue as well. Ryan Koontz: Super. Appreciate the commentary. Edward B. Meyercord: Yep. That's right. Operator: Your next question comes from Dave Kang from B. Riley. Dave, your line is now open. Dave Kang: Thank you. Good morning. Just a question on the rumor about this ruckus, and you guys just wanted to hear from you directly. Edward B. Meyercord: Yeah. Thanks, Dave. Yeah. I would just say, you know, at Extreme, our policy, if assets or businesses are potentially for sale or if potentially available in the marketplace, we're always gonna have a look. So at Extreme, you'll always see us, and I would say we're always in the market looking at different assets, be it adjacencies or being it or being, you know, players in our direct space. So yeah, I think you could always expect us to be engaged in dialogue to get smarter and to learn. And I would say to the extent that there's an opportunity that presents itself, we will always have the condition that anything that we do would be accretive. But I would say, you know, at this point, you know, that's conjecture. There's really nothing for us to comment on on that front. Dave Kang: Got it. And my follow-up is, tariff situation. Just any changes, anything that we should be concerned about? Edward B. Meyercord: No. I mean, you know, it goes back to, you know, supply chain, etc. Changing tariffs is a way of life for all of us, especially with the current administration in the US. So this is a core competency at Extreme, so we're well-versed in manipulating and managing through a changing tariff environment. So at this stage, I'd say it's a nonissue for us at Extreme. Dave Kang: Got it. Thank you. Operator: Your next question comes from Christian Schwab at Craig Hallum. Christian, your line is now open. Christian Schwab: Great to take my questions. So thanks for the guidance for fiscal year '26. But as we look a little bit longer term, Ed, given market share gains, you know, in conjunction with, you know, we'll call it better solutions, as well as the disruption by two of your leading competitors and recent strong sales strength. Is it safe to assume that we should expect a continuation of double-digit top-line growth in '27 over '26, without any unforeseen, you know, macroeconomic dislocation? Edward B. Meyercord: Yeah. And I don't want Kevin and Stan to have provided you, Christian, as far as the outlook for '27. You know, what you're saying makes a lot of sense to me. Because, yeah, we're seeing this continuation of, you know, not only demand in the marketplace but the strengthening of our competitive position, especially considering what's going on with the larger two players. So us nibbling away in small share gains for Extreme has a big impact on our top line. Kevin, I might let you jump in and comment on the official sponsor. Kevin Rhodes: Yeah. I mean, my comment would be, you know, we feel confident with and positive about all the improvements we've made from the go-to-market perspective. I'd say we feel comfortable with the FY '27 setup. Obviously, we are not guiding to '27 yet. We still have plenty of time, and I would say this market's pretty dynamic right now. And so it's really hard to get, you know, that far out, like, a year and a half somehow. We feel really good about our guidance for FY '26, and I'd say, you know, we'll circle back, you know, on '27 in the coming quarters. Just don't want to comment too much about that far out, given where we are in the market. Christian Schwab: That's fair. And, unfortunately, we're gonna ask another long-term question. You know, given the gross margin headwinds in the near term, you know, given the big installation of large deal contracts but still restating the goal of 64 to 66% gross margins. I won't ask you to give me the level of improvement with clarity. But is, you know, and your ability to raise prices, which appear to be currently happily absorbed by the given their networking technology needs, given memory component cost in particular. Would we should we expect gross margins in aggregate to improve, you know, in '27 over '26 as we begin the march towards that 64 to 66% goal? Kevin Rhodes: I mean, I think that's a safe bet, you know, to say that we will expect improvement. Just a reminder, the product gross margins coming out in Q3 and Q4 will improve, Christian. Right? So you've got the product margin improvement happening there already. It's really just these lower margin, you know, professional services that will overhang in the third and fourth quarter. You know, as we do those installations. And those are just, you know, that's higher installation revenue than we normally have there. But, you know, naturally, in '27, and I can't predict how many installations we might have in '27 at this moment, but naturally, if we have a normalized amount of professional services revenue in '27, you would certainly see a mix improvement in margin in '27. Christian Schwab: Okay? Kevin Rhodes: Yeah. That's a fantastic answer. Congrats again on the great results and outlook. Thank you. Edward B. Meyercord: Yeah. Sure. Operator: Your next question comes from Eric Martinuzzi from Lake Street Capital Markets LLC. Eric, your line is now open. Eric Martinuzzi: Also wanted to focus on the gross margin color that you gave. Just at the bottom line, the 98¢ to a dollar $0.02 for FY '26, relatively in line with where you were before. Is that to say then that there's not a substantial incremental contribution then from the professional services? In other words, are we talking no margin on the professional services that we're taking on? Because I would have expected, given the beat for Q2, that the guide for the EPS for the year would have risen. Kevin Rhodes: Sure. I mean, you would expect, Eric, right, that the overall deal is a good margin deal. Right? But that we do tend to price the professional services installation with a much lower margin than our subscription and support, which tends to be in the 70% range. And it's just low margin. And these all have a different, you know, margin profile to them, but I would say they're in the, you know, 15 to 20% range, you know, of margin, not certainly at the 70% level like you see, you know, in subscription and support. And so that's where I would comment that that's why you see a mixed shift in the third and fourth quarter being a little bit overall lower margin but, again, product margins improving in the second half of the year. Edward B. Meyercord: Yeah. I guess, Kevin, I'd jump in and add. I would just jump in and add, Eric. Like, in some cases, we get involved and a customer says, we'd really like you to do the cabling work, for example. And then we'll bring in a contractor and mark it up ten, 15%. Right? And that's not, you know, our traditional business, but it's almost like us doing a favor for a customer in a large, complicated project. And we have some large, complicated projects going on right now where customers have said we feel more comfortable if you would manage this, you know, through your professional services organization. So again, you know, where we have subscription at an 80% margin, we have, you know, support and other services in the 60, 70% range. You know, it gets pulled down when we get pulled into some of these large projects. It's the right thing for us to do for customers, but it has a near-term effect. Over the long term, you know, once we've deployed, once we're in the stadium, then, obviously, those margins go up as we continue to work with those customers. Eric Martinuzzi: Got it. Thanks for taking my question. Operator: Your final question comes from David Vogt from UBS. David, your line is now open. David Vogt: Great, guys. Thanks for squeezing me in. I have actually kind of a three-part question here, Ed and Kevin. I appreciate all the detail. But the question I have is on sort of pricing demand and margin. And I'm just trying to triangulate all the comments that you made in your prepared remarks and in response to questions. So maybe just from a demand perspective, obviously, we understand that you took prices up 5-7%. Are we just are you suggesting that the price increases are not filtering into revenue this year in fiscal '26 relative to where you thought you'd be, you know, three months ago or six months ago, given Kevin mentioned you have several multimillion-dollar deployments in the outlook going forward? And is the guidance raised just those multimillion-dollar deployments? And I'll give you the second question along that. So even if I take that into consideration, the low margin of the installments, it sounds like gross margins on a pure product basis adjusted for the installments are down relative to where you were three months ago. Can you talk to, like, what that dynamic looks like if pricing is not going into effect just yet? And then the final point I would ask is when I think about '27, I know it's quite a ways away. Would you imagine that pricing has a much bigger impact on margin next year? And demand versus where we sit here in 2026. Edward B. Meyercord: Kevin, if you want, I can jump in. And then you can Yeah. Go ahead. Yeah. I'll then I'll follow-up. Yep. David, the pricing it comes in pretty quickly. I mean, I think yeah. So you'll see the impact. Kevin mentioned that our product margins are going up. So our product margins are up this quarter over last quarter, and will be the second half of the year. So there are just a few of these large projects that have professional services that drive the margin down. But, you know, they're on the services side. But on the product side, you know, we're expecting growing product margins in this environment. The other thing that I'll say is when, you know, as we go forward, you know, we still have the ability to use pricing, you know, as a lever. And so you'll see us and you'll see the other players in our industry, you know, passing through pricing, you know, as we make adjustments for what's happening in the supply chain. Kevin, do you want to add to that? Kevin Rhodes: Just from a timing perspective, Ed, where we put some price increases through in the second quarter. We had minimal effect on our results in the second quarter. We expect more to flow through in the third and fourth quarter from those price increases we made in November. David Vogt: And can I just ask for clarification, is the guided range for '26 updated reflecting the multimillion-dollar installment revenue in Q3 and Q4? Or are you seeing a price increase driven revenue uplift in the guide? Or a combination of the two? Kevin Rhodes: Our guide reflects, you know, a, the installation revenue and the lower margin relates to that. And, b, all of the decisions we've made so far on pricing today. You know, we haven't made any other decisions yet. And we can't reflect anything in our guide that has enough. David Vogt: Great. Alright. Thank you, guys. Edward B. Meyercord: Yeah. Sure. Operator: There are no further questions at this time. I will now turn the call back to Edward B. Meyercord, President and CEO, for closing remarks. Edward B. Meyercord: Thank you. Thanks, everyone, for participating on the call. We appreciate it, and we always appreciate the questions. We also want to thank employees tuning in and customers and partners who are listening in and more importantly to them for the partnership and driving an excellent quarter. So we're looking forward to continuing on the journey in terms of our innovative solutions, driving growth, and we look forward to meetings upcoming. And then delivering on another quarter. Thanks, everybody. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Morning, ladies and gentlemen, and welcome to Monro, Inc. Earnings Conference Call for the 2026. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the call, please press star followed by 0 on your touch-tone phone. And as a reminder, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company. I would now like to introduce Felix Veksler, Vice President of Investor Relations at Monro. Please go ahead. Felix Veksler: Thank you. Hello, everyone. And thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the Investors section of our website at corporate.monroe.com/investors. If I could draw your attention to the safe harbor statement on Slide two, I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise except as required by law. Additionally, on today's call, management's statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures. Of such supplemental information to the comparable GAAP measures are included as part of today's presentation and in our earnings release. With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Peter Fitzsimmons. Thank you, Felix, and thanks to everyone for joining us. Peter Fitzsimmons: Great to be with you today. This morning, I'd like to update you on our progress. And the momentum we've continued to build at Monro during our fiscal third quarter. As we have done before, I will focus on the four key areas identified as opportunities for performance improvement which are shown on slide three of our presentation materials. As a reminder, these are driving profitable customer acquisition and activation, improving our store-based customer experience and selling effectiveness, increasing merchandising productivity, which includes mitigating tariff risk and real estate dispositions related to the previous closure of 145 underperforming stores. After that, I'll briefly touch upon our fiscal third quarter results, which represent another step forward as we continue to implement our performance improvement plan to enhance Monro's operations drive profitability and increase total shareholder returns. Let's start with driving customer acquisition and activation. During the third quarter, we continued to advance our acquisition marketing efforts through the expansion of a multichannel digital media plan, to target high-value potential audiences. We expanded marketing to more than 340 additional store locations in the third quarter, while maintaining a disciplined phase rollout to ensure appropriate returns. We also completed an operational readiness assessment to determine which stores were best positioned to receive marketing support. As part of these efforts, we implemented a measurement framework that provides visibility into marketing's impact on key performance indicators, including calls, sales, and gross profit dollars. We also continue to activate Monro's customer relationship marketing or CRM, database to attract existing customers to revisit our stores through specific offers for additional services that would improve the overall safety of their vehicles. And as a third component of our marketing efforts, we have added call center support to 114 additional store locations. We now have more than 830 stores benefiting from our customer call center, and we expect to add the remainder of our stores in the near future. Now let's discuss the things we are doing to improve the customer experience and selling effectiveness in our stores. As we've previously communicated, during the third quarter, we continued to work toward expanding the usage of our Confidrive inspection tool on every customer vehicle visiting our stores. Work closely with all of our technicians to ensure the accuracy and full completion of every inspection every time. This has allowed our store managers to provide our customers with a window into the overall condition of their vehicle. Both from the standpoint of what is operating well and what things might need some attention. Our goal is to provide transparency and ensure that we hand back the keys to a safer vehicle when we return it to the customer. Last quarter, we indicated that we had completed a field realignment to right-size and streamline our field management following the closure of 145 underperforming stores. While this resulted in an overall reduction of district managers, it has also resulted in an overall increase in the quality of district managers across the chain. Our streamlined and agile field organization enables us to communicate faster within our field network, which has improved our ability to serve guests more quickly, and more effectively. Further, we've created and now implemented useful analytical tools such as the district manager toolkit as well as a labor force optimization capability that enables our field leaders to better develop our store-based teammates. Finally, we've made an investment in a team of field compliance support specialists. Whose work enables us to reduce the volume of certain administrative tasks previously handled by our district managers. This allows our field leadership to focus more of their time on training and coaching our store teams. Now let's turn to merchandising, including mitigating tariff risk. In the third quarter, we continued to build out our foundational vendor and assortment strategy. In our tire category, we focused heavily on ensuring inventory availability to present a well-developed product assortment to our guests during the fall and early winter selling season. As the weather changed, we leveraged our strong supplier and distributor relationships to expand availability where needed. To deliver the right products to our customers in each of our tire tiers. As we approach midwinter, we are refining our tire assortment for the next selling season with an emphasis on achieving our objective to narrow our overall tire assortment to better serve customer needs. At the same time, we also continued to assortment and availability of stock parts. So that we can continue to be well prepared to grow our service business. As it relates to tariffs, we continue to carefully manage their impact on our overall product acquisition cost and on our market pricing. So far, and as communicated earlier, tariffs have not been as significant on either our customer pricing or our product cost as we anticipated when higher tariffs were first announced. Generally, we've been able to strike the right balance between costs and price adjustments, which has enabled us to maintain solid gross margins in an uncertain economic environment. We believe this positions us well moving forward. And finally, just to provide an update on closed store real estate dispositions, Following the closure of 145 underperforming stores, in the early part of this fiscal year, we initiated a process to exit the real estate at these locations. Which included 40 stores that we own. During the third quarter, we exited 32 leases and sold 20 owned locations. Which resulted in proceeds of $17,300,000. This brings us to a total of 57 leases exited and 25 locations sold. Resulting in cumulative proceeds of $22,800,000 fiscal year to date. As a reminder, this process is expected to generate positive cash flow and be largely completed during the next few quarters. Importantly, and as discussed previously, this enables us to focus on improving performance in our continuing locations in the 2026. Now let me briefly touch on several key highlights of our fiscal third quarter results. Which Brian will cover in more specific detail in just a few moments. Turning to slide four of our presentation materials. After we saw some softness in consumer demand in October, the Monro team drove growth in comparable store sales in November and December. Further, when adjusting for a shift in the timing of the Christmas holiday in the prior year, the months of November and December as well as the third quarter marked the first time we delivered positive comps on a two-year stack in over two years. This has also enabled us to report our fourth consecutive quarter of positive comps for the first time in several years. We believe we were able to take share in our tire category as soon as winter hit, as our stores were well prepared with proper staffing, an updated tire assortment, and additional marketing spend. In addition, for the second quarter in a row, we delivered solid gross margin performance, This time, with a gross margin rate that expanded 60 basis points year over year to 34.9%. We also reinvested the selling, general and administrative expense savings from our closed stores into additional marketing to support top-line growth. Lastly, for the third quarter in a row, we reduced inventory levels across the system this time by over $7,000,000. We've now achieved an overall inventory of more than $28,000,000, which is 16% since the March just nine months ago. This is a clear indication of how we've continued to manage our inventories more efficiently in fiscal twenty twenty six. Our sales momentum has continued into fiscal January with preliminary comps store sales up almost 1%. Looking forward, and coupled with our increased marketing spend, we believe higher expected consumer tax refunds should provide a tailwind to top-line trends for the remainder of fiscal twenty twenty six. We continue to expect to deliver positive comp store sales for the full fiscal year. To summarize, we are pleased with the progress we've made implementing our four key areas of focus. Which is allowing us to build momentum in our business. Two of the key areas of focus for fiscal twenty twenty six are largely complete. With the successful closing of 145 underperforming stores and associated real estate monetization, as well as the strengthening of our merchandising team. Optimizing our marketing investment and improving our store performance will remain important activities for the remainder of fiscal twenty twenty six. Our fiscal third quarter results serve as another positive step toward accelerating the pace of the company's performance improvement as well as better capitalizing on positive industry trends to unlock Monro's full potential. Before I hand the call over to Brian, I want to thank our more than 6,000 valued Monro teammates in our 1,115 stores for their hard work every day and night serving our customers. I also want to recognize and thank our leadership team. During the last nine months, we have meaningfully added or promoted talented colleagues in nearly every critical area. Among them, merchandising, marketing, stores, and finance. We are well positioned to continue our positive momentum. And with that, I'll now turn it over to Brian, who will provide an overview of Monro's third quarter performance strong financial position and additional color regarding the remainder of fiscal twenty twenty six. Brian? Brian D'Ambrosia: Thank you, Peter, and good morning, everyone. Turning to slide five. Sales decreased 4% to $293,400,000 in the third quarter. This was primarily driven by a reduction in sales from the closure of 145 underperforming stores in the 2026. Partially offset by a 1.2% increase in comparable store sales from continuing store locations. For reference, comps were down 2% in October, up 4% in November, and we exited the quarter up 1% in December. Our tire category was up 5%. And while tire units were down 1%, we believe we outperformed the industry in the quarter. Gross margin increased 60 basis points compared to the prior year. This primarily resulted from lower material costs and lower occupancy costs as a percentage of sales. Which were partially offset by higher technician labor costs as a percentage of sales. Mostly due to wage inflation. Total operating expenses were $83,800,000 or 28.6% of sales. As compared to $94,800,000 or 31% of sales in the prior year period. The decrease was primarily driven by $14,000,000 of net gains from closed store real estate dispositions and $7,300,000 of lower cost from the closure of 145 underperforming stores in the 2026. This was partially offset by $6,200,000 increased marketing costs to support top-line growth and $4,700,000 of costs incurred in connection with consultants related to our operational improvement plan. Operating income for the third quarter was $18,600,000 or 6.3% of sales. This is compared to operating income of $10,000,000 or 3.3% of sales in the prior year period. Adjusted operating income, a non-GAAP measure, for the third quarter was $10,300,000 or 3.5% of sales. As compared to $11,700,000 or 3.8% of sales in the prior year period. Net interest expense decreased to $4,000,000 as compared to $4,200,000 in the same period last year. This was principally due to a decrease in weighted average debt. Income tax expense was $3,400,000 or an effective tax rate of 23.6%. Which is compared to income tax expense of $1,200,000 an effective tax rate of 21.2% in the prior year period. The year-over-year difference in effective tax rate is primarily related to the impact of an income tax benefit in the prior year period, from the settlement of certain state income tax returns and the impact from other discrete tax adjustments. None of which are individually significant. Net income was $11,100,000, compared to net income of $4,600,000 in the same period last year, Diluted earnings per share was $0.35. This is compared to diluted earnings per share of $0.15 for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure, was $0.16. This is compared to adjusted diluted earnings per share of $0.19 in the 2025. Please refer to our reconciliation of adjusted operating income adjusted net income, and adjusted diluted EPS in this morning's earnings press release and on Slides nine, ten and eleven. In the appendix to our earnings presentation for further details regarding excluded items in the third quarter of both fiscal years. As highlighted on slide six, our financial position is strong. We generated $48,000,000 of cash from operations during the first nine months fiscal twenty twenty six. Our AP to inventory ratio was 196% at the end of the third quarter versus 177% at the end of fiscal twenty twenty five. We received $25,000,000 from the disposal of property and equipment, primarily related to the successful disposition of real estate associated with the underperforming stores that we closed in the first quarter. And we received $3,000,000 in divestiture proceeds. We invested $22,000,000 in capital expenditures, spent $28,000,000 in principal payments for financing leases, and distributed $26,000,000 in dividends. At the end of the third quarter, we had net bank debt of $40,000,000 availability under our credit facility of approximately $425,000,000 and cash and equivalents of approximately $5,000,000. Now turning to our expectations for the full year of fiscal twenty twenty six on Slide seven. We continue to expect to deliver year-over-year comparable store sales growth in fiscal twenty twenty six primarily driven by our improvement plan. As well as tariff-related price adjustments to our customers. We continue to expect that the results of our store optimization plan will reduce total sales by approximately $45,000,000 in fiscal twenty twenty six. Given baseline cost inflation, as well as tariff-related cost increases, we expect that our gross margin for the full year of fiscal twenty twenty six will be consistent with fiscal twenty twenty five. We continue to expect to partially offset some of this baseline cost inflation as well as some of the tariff-related cost increases with benefits from our store closures and operational improvements from our improvement plan. Expect to reinvest the selling, general and administrative expense savings from our closed stores into additional marketing to support top-line growth our continuing stores. We continue to expect to generate sufficient cash flow that will allow us to maintain a strong financial position and to fund all of our capital allocation priorities including our dividend during fiscal twenty twenty six. Regarding our capital expenditures, we continue to expect to spend $25,000,000 to $35,000,000. And with that, I will now turn the call back over to Peter for some closing remarks. Peter Fitzsimmons: Thanks, Brian. As previously indicated, through our national retail network, economies of scale, and durable business model, we believe we can provide our customers with the services they need and generate meaningful value for our shareholders. In any economic environment. Our balance sheet is strong, and our business generates healthy cash flow. We remain encouraged by the progress we've made and are keenly focused on executing our plan to improve operations, drive profitability and enhance total shareholder returns. With that, I will now turn it over to the operator for questions. Operator: Thank you. If you change your mind, please press star followed by 2. When preparing to ask your question, please ensure your device is unmuted locally. Please note we request that you limit yourself to one question with one or two follow-up questions only. First question comes from Thomas Wendler from Stephens. Your line is now open, Thomas. Please go ahead. Thomas Wendler: Hey, good morning, everyone. Congratulations on the great quarter. Happy to see another quarter of positive comps here. I wanted to dig in on the digital marketing efforts can you maybe help us gauge the impact it had on the the same store sales this quarter? Peter Fitzsimmons: Hi, Tom. Sure. As you will remember, we have steadily increased the amount of digital marketing we provide to our store network. And we significantly increased it in the third quarter, month by month. And as you will also remember, every time we've done that, the stores that get additional support perform better than they did before, and the rest of the network on calls comp store sales, and gross margin dollars. That has absolutely continued. I also wanna call out that it's not just digital marketing. We also use our CRM and our call center to support our stores. And so I think the collective impact of our marketing efforts are gonna continue to drive incremental comp store sales. Thomas Wendler: Perfect. Thank you. And maybe just one more follow-up there on that. How should we be thinking about the rollout of the digital marketing to the remainder of the stores? I think you mentioned the operational readiness of the location plays into the rollout. What are you seeing for operational readiness at the remaining stores? Peter Fitzsimmons: So one of the benefits of the way we've approached this is we're pretty about looking at return on investment. We're gonna continue to invest significantly in marketing, And which stores which regions, when, how much dollars we invest will vary based on what we think we're getting from all of that investment. There are some stores that haven't yet received digital support, and I wouldn't read anything into that other than they might be understaffed. They might have other issues that would make us think we should wait before we provide support there. In some cases, we might decide that they're going to more from CRM than from digital marketing. So, again, I would say it's the collective impact of marketing that's the most important thing. And all of the stores will get some support. Thomas Wendler: Perfect. Thanks for the color, guys. And, again, great quarter. Peter Fitzsimmons: Thanks for that, Tom. Much appreciated. Operator: Thank you. Our next question comes from David Lantz from Wells Fargo. Your line is now open, David. Please go ahead. David Lantz: Hi, good morning, and congratulations on a nice quarter. I was just curious if you could talk about the puts and takes in gross margin in a little bit more detail for Q3 across distribution and occupancy and material costs in technician labor as well as what the expectations are for Q4? Peter Fitzsimmons: Absolutely, David. So we were 60 basis points better than the prior year in our gross margin as we said, at 34.9%. That was benefited by lower material costs of 80 basis points primarily driven by better price and mix in both our service and tire categories offset by a little bit of a headwind related to a higher tire mix in the quarter. We also saw 30 basis points of benefit from our occupancy cost as a percentage of sales. Largely related to higher comparable store sales as well as the benefit from our store closures. Those were both partially offset by 50 basis points of technician labor costs going up as a percentage of sales. Primarily due to, wage inflation, but noting that that's a better run rate number than than where we are from a year to date standpoint. So seeing improvement in Q4 relative to The the fur Q3. Through relative to the first six months of the year. As it relates to our fiscal fourth quarter, we said in our prepared remarks that we expect our full year gross margin to be consistent with the prior year through nine months we're about 20 basis points behind largely driven by the tough Q1 compare that we had earlier in the year. But what that means is we expect to have gross margins above prior year in Q4 in order to achieve that consistency on a full year basis. David Lantz: Got it. That's helpful. And I recognize we're only a couple days after winter storm burn, but curious if you can help us frame what you think the potential benefits from that for your store base and and comps could be over the next couple months. Peter Fitzsimmons: Sure. First of all, as the threat of the storm unfolded towards the end of last week, we were able to meet consumer demand in all the stores across our network, which is terrific. We were ready for that. Second, I think everybody in the world or at least the North American world, has been impacted by the storm. And so we have got all of our stores back online by now. And expect that over the next couple of weeks, we're gonna see some nice incremental sales resulting from people recognizing that they really need need to these do something to keep their vehicle safe. So really good positive impact from the developing storm and we're in pretty good shape going forward. David Lantz: You're welcome. Thank you. Operator: Thank you. Our next question comes from Bret Jordan from Jefferies. Bret Jordan: Hey, guys. Good morning, Brett. Did you talk about the comp ticket versus traffic contribution? Brian D'Ambrosia: Yes. Our traffic was down mid single digits. In the quarter, offset by mid single digit, repair order increase, so average ticket increase. Netting out to the, the up 1.2% total comp. Bret Jordan: Okay. Any regional dispersion? Brian D'Ambrosia: And We we saw, strength in the in the Northeast. consistent performance performance in the Mid Atlantic and South. If there if there was any weakness, it was in the West. Okay. Bret Jordan: I guess when you think about the 15 locations left to be sold, the value is probably roughly similar to what you've already sold? I mean, think about the cash contribution for those coming forward. Brian D'Ambrosia: Well, not all of the stores that are left are owned stores. There's there's a good amount of leases as well. But for the owned stores that we have remaining to be sold, we have them reported on our balance sheet as a separate line called assets held for sale. It's approximately $5,000,000 a little less than $5,000,000. And that's kind of the minimum value we expect to achieve. So, you know, something there or higher, related to our own stores. Bret Jordan: Great. Thank you. Brian D'Ambrosia: Yep. Thanks, Brad. Operator: Thank you. Our next question comes from Brian Nagel from Oppenheimer. Your line is now Brian Nagel: Hey, good morning. Hey, Brian. Congratulations Peter Fitzsimmons: Hey, Thanks. Brian Nagel: So I wanna ask maybe a little longer term question. Right? You're is there seeing the, you know, you've had a number of initiatives now that are taking hold. I think we're starting to see those results know, the effects of those those efforts you know, show up in the results. I guess and I've asked this question before, but I'll ask again. Like, if you look at the the model now, what are we playing for? You know, and I guess obviously, there's a lot of, you know, transitory factors that can impact your sales such as weather. You talked about the tax refunds etcetera. But, you know, as as you're watching these initiatives take hold, I mean, how should we be thinking about know, what comp store sales your chain should be? And then with that, at at what point do we get expense leverage as a result of these these improving sales? Peter Fitzsimmons: Sure. So I think from experience, the impact of marketing and the store improvement efforts takes quarters to really fully reveal itself. I do think that we have stayed focused on the things that we think are most impactful, and we've seen good results. I think that our expectation is that as the quarters pass, fourth quarter or first quarter next year and so on, we'll see a lift in comp store sales, and we'll see solid gross margin. And the combination of those two things together with managing our operating expenses well should drive incremental profit. It there'll be ups and downs, and if when I look at the period that's just passed, if you look at November through January, we had a really good early winter. With good tire sales, good service, There are many things that are clicking, that over the longer term will impact continued growth in comp store sales. So I do think we're going to get some operating leverage benefits, but there are those other factors that we have to remember, which is we've got wage pressure in the stores, And to be honest, we have some other initiatives that we wanna put into place that may require some additional investment. But the key will be increasing the comp store sales and having a very good solid gross margin rate, you know, aligned with where we are and and you know, the product of good vendor relationships good marketing support for our vendors, and other things that we're doing as a good partner with both our consumers and our suppliers. Brian Nagel: That's very helpful. And then I go I wanna go back. I think someone you know, kind of asked this question before, and I'll ask it a little maybe differently. So as you look at these potential benefits, you're in the near term. You know, with the the weather, you know, with with the the for how storm Fern and potentially other storms coming here. And then you have, you know, these a lot of people are talking about this, you know, higher what are what's expected to be higher tax refunds, you know, in in twenty six. How do you think about the duration of those benefits? Is you know, it it would it we're gonna see the majority here in in the fiscal Q4. It was a longer tail on these type of these type of drivers. Peter Fitzsimmons: So I think a challenging winter, which we're in the middle of right now, is good for us. Of course, there's gonna be disruption as there was with with the severity of the storm that just ended, but as long as we can work our way through the disruptions, it creates consumer need and immediacy. So I really like fact that the winter right now seems to be a difficult one. And the fact that consumers may have a little bit more money in their pockets You know, if you think back to COVID, when the government distributed quite a bit of cash to consumers, they spent it. And they spent it on things that they needed to spend it on. We know that there's a need to continue to keep your vehicle safe. And so the combination of the tax refunds and the likely tough February, let's call it that, are are pretty important to to short term growth. Now in the longer term, as we move our way into the spring selling season, we do sell a lot of tires in the early spring. And if you think about the things we put into place, which includes ConfuDrive, in January alone, we drove some incremental service revenue, which is all the result of the inspection tool. And as that continues to mature month by month by month, that will also drive incremental high margin revenue because service, is a higher margin than tires. Brian Nagel: Appreciate all the color. Congrats again. Thank you. Peter Fitzsimmons: Thank you. Operator: Thank you. As a reminder to ask a question, please press We currently have no further questions, and I would like to hand back to CEO, Peter Fitzsimmons, for any closing remarks. Peter Fitzsimmons: Well, thank you again, everyone, for joining us today. We're pleased with the progress Monro has made this fiscal year and we're optimistic about the opportunities in front of us. I believe the company is now well positioned to capitalize on the additions to the team and the operating improvements we put in place during fiscal twenty twenty six. Together with positive industry trends, we're well positioned for growth. I look forward to keeping you updated on our progress in the quarters to come. Have a great day. Thank you. Operator: Thank you. This now concludes today's call. You all for joining. You may now disconnect your lines.
Per Hillström: Good morning, ladies and gentlemen, to this presentation of the SSAB Q4 report. My name is Per Hillström. I'm Head of IR at SSAB. And presenting today, we have our President and CEO, Johnny Sjöström; and CFO, Leena Craelius. And if we look at the agenda, Johnny will start with an overview of the year and the quarter. Then Leena will cover the financials more in detail and then Johnny at closing with the outlook and the summary. And at the end, we will have good time for questions. So by that, the floor is yours, Johnny. Johnny Sjöström: Thank you very much, Per, and good morning to all of you. I will start by going through the summary of 2025. First of all, if you look at our safety performance during 2025, we can see that we had, again, an improvement in our lost time injury frequency, so we came down to the level of 0.56 which is, according to me, a good achievement. I think also, I want to point out that the total recordable also reduced, and that's also a work that we've been focusing on for quite some time. Now going over to the revenues. The revenues were slightly lower than they were last year, if we look at the full year outcome, then again, the market has been weak. So it's understandable. There's been a lot of turbulence related to the geopolitical situation, tariffs, et cetera, that has created a lot of uncertainties. Hence, one of the reasons why we ended up on a slightly lower revenue level. Then if you look at the operating result, we came out on SEK 6.1 billion for the full year. I think that even though the market has been very weak, first of all, we have a very strong geographical diversification with significant production in United States as well as Europe. But also, I think that our premium strategy, selling unique products, generating unique customer value is supporting us when times are a little bit tougher than they usually are. And then, of course, I think that especially the SSAB Europe worked on the cost side, and we're able to improve the financial performance slightly. We also came out the net cash position for the end of the year ended up on SEK 11.6 billion. I think that's also a good achievement based on the fact that we have a lot of investments ongoing. We have a very strong balance sheet. I think also I'm very happy with the financing package that Leena was able to put together that strengthened our situation and our position. Then also the Board has proposed that we should have a SEK 2 dividend per share that will be decided in the AGM meeting further on this year. Speaking of premium strategy and the direction we're heading, there are a few things that I want to point out. Continuously, we develop new grades for certain applications or environments. One of the grades that we have developed recently is a grade called Hardox HiAce. It is designed for wear assistance in application where you have sort of a corrosive environment, targeting the stainless steel grades. It comes with a superior hardness, but also a superior wear resistance in aggressive environment, and it's very, very cost competitive because it's much leaner compared to stainless steel. I also want to point out the investment ongoing in Mobile to increase our capacity of unique grades. Not long ago, we extended the [indiscernible] furnace giving us more capacity, but we are also currently investing in what we call a tempering loop to be able to produce more of the advanced steel grades. Even though we had some turbulence last year when it comes to tariffs and the challenge to import material from Sweden into United States, we were still on a higher level when it comes to advanced high-strength steel to the automotive segment. So I think we came out pretty much on the same level as 2024. We haven't seen much of the reduction of volumes being sold in the United States so far. I think also that one of the things that I want to point out is that we have developed tailor-made steel grade for the automotive segment, which is the Docol high edge, which comes with a high edge ductility. So when it's stamped or processed, if we have edges, which are much, much more leaner and not -- we don't have those kind of shipments you can get for advanced high-strength steel. So tailor-made for certain applications in the automotive industry, highly appreciated by the market. And then also, we launched a new complex phase deal. It's a collaboration together with Gestamp. I think what's unique in this case is that we're sort of targeting to increase the strength in the chassis, which is quite new, actually. So the chassis will then have a higher strength, and with the high strength, you can actually reduce the thickness of the sheet material, making the car lighter, but also you consume less material, which is also good for the environment, but also good from a cost perspective. And then last, but least -- not least, I want to point out that we have for our color-coated side produced by SSAB, but then further processed and sold by Ruukki Construction that we are now continue to develop our sort of environmental offer to the market. And here, we were able to produce a coating using sort of what we call a rapeseed oil, which is quite unique, and it makes it very, very bio, very much environmental friendly, which is also an area we are continuously working on. So very pleased about that. So there has been a lot of talks about the tariffs and the turbulence we have related to it. It creates a lot of uncertainties on the markets, of course. But once again, I just want to highlight that we have significant production in the United States, and we have significant production in Europe. And that makes us less vulnerable to these kind of initiatives. I also want to point out that CBAM was implemented in Europe from the 1st of January, that will have a positive impact. It increases prices, but also will change some of the trade flows because there will be difficult for some of the countries to actually export to Europe. And then again, we also have on the table of the European Parliament to decide on the safeguards and that will also, what we believe have a positive impact on the European market. I also want to highlight the transformation projects that we have ongoing. What you see on the picture to the right is the transformation project in Oxelösund. Here, we are replacing old blast furnaces with a new electric arc furnace. And the building you see to the right is actually the electric arc furnace building. It is developing really well. I think that we have done a good job when it comes to project completion. And we have planned a production start-up in the beginning of 2027. And then if we look at the Luleå project, which is a larger project, it is also a way for us to reposition SSAB Europe to produce and sell more of the unique premium steel grades, primarily for the automotive industry. So we have done the groundbreaking ceremony. We got the environmental permit, and we also continue with agreements with both customers as well as suppliers. One thing I want to point out is the sort of the agreement to get our hands on high-quality scrap and one of the things that we signed during 2025 is the Volvo Car agreement, which is also seen as a highlight for both parties for them more the circularity, but for us, it's more getting our hands on the premium scrap material. Then going into the divisions, looking at Special Steels, we believe that the shipments, even though they were somewhat lower in Q3, then again, we had a very extensive maintenance outage during Q4 in Special Steels that had a big impact on our ability [Technical Difficulty] material, but still, I think that we delivered on a higher level than we did Q4 last year when we had the same situation. Special Steels can also see some improvements in the activities on the European market. I think that's quite positive. The market has been quite -- on the lower side for quite some time. And now gradually, we see some positive signals on sort of the European market, and that has been identified by Special Steels, particularly. And of course, we have an increasing demand for protection steel because of the market situation. The operating result came in on an expected level. Then again, I mean, if you have a maintenance outage, it comes with a cost and it comes also with higher unabsorption. So we -- this was expected. So nothing strange. We also have to say that prices went down a little bit, but we also have some exchange rate effects on that. Leena will get back to that in her presentation. And then if we move into SSAB Europe. I think that, first of all, they marketed for SSAB Europe is weaker. They are more sensitive to the spot market and the hot-rolled coil prices than other divisions. But despite that, I think they had delivered above our expectations when it comes to shipments, and they had higher shipments in Q4 compared to Q3. And we were a little bit concerned about their operating results, but they did a lot of measures, first of all, cost saving measures, but they also improved the capacity utilization hence, giving us a better performance than we expected. Looking at SSAB Americas. I think that also they came in -- we had a maintenance period as well as SSAB Americas and normally the sort of the shipments goes down. But I think that they had a great achievement, especially in December, shipping out a lot of material. They've had a strong order intake; hence, they were able to sort of fulfill the demand and ship out as much as they could, a great achievement by the whole team in Q4. And they ended up now on expected result level. And I think that they have been suffering from a weaker U.S. dollar, if we translate this into Swedish krona; otherwise, the outcome would have been much better. And then for our 2 subsidiaries, supporting the business plan for SSAB Europe. We can see that the shipments for Tibnor were slightly higher than Q3, but it's still a very weak market, and we also have a very strong seasonality into North, just like we do in Ruukki Construction. And of course, the operating result came out on a lower end. We were expecting the volumes to be higher; hence, it has a negative impact on the result and that's exactly the same situation for Ruukki Construction, where both the volumes and the volume -- the lower volumes has a big impact on the operating result and that's mainly due to the weak market conditions. But we have high hopes for 2026, where we hope that and think that the construction segment is going to improve. So once again, I want to highlight our strategic direction and also the uniqueness of our grades. This is an application, not a big application, but it shows that our grades are unique. So this application is for power booster to charge cars and if you are on a sort of remote side on the country side where the sort of power lines are maybe not as strong, you're not able to actually charge the car very, very fast. But with this power booster, you can actually gradually use the power to transform it into kinetic energy. So you have a rotating part inside of this container. It rotates extremely fast. And with these loads and with this velocity, you need a material that has a very good fatigue strength, and that's exactly what our material can offer; hence, the reason why they choose our material. I think in this case, it was pretty much the only material that they can use; otherwise, they would have fatigue cracks very, very, very fast. But it shows that we are selling into unique applications, but also that our products are unique and creates a lot of unique customer value. With that, I leave the word over to you, Leena. Leena Craelius: Thank you, Johnny. On the fascinating product description to fascinating financials. Let us start by looking at the shipment volumes first. Q4 performance was 1,515 kilotonnes, and it was actually improvement compared to Q3 as also illustrated by Johnny already. The improvement was 49 kilotonnes and 3%. And then comparing to previous year Q4 improvement was even further 67 kilotonnes and 5%. And if we reflect against the guidance we gave for Q4, we were actually spot on with Special Steels and Europe division and even slightly better in SSAB Americas. If we then continue to analyze the revenues, the Q4 revenue performance, SEK 22.1 billion, compared to previous quarter, a reduction of 4% and compared to previous year Q4 reduction was 6%, and this is indicating that the prices have developed downwards. And I will dive into that more in detail shortly. EBITDA performance. Q4 SEK 1.8 billion, a reduction compared to Q3, which was at SEK 2.9 billion. However, improvement compared to previous year Q4, which was SEK 1.6 billion. And in relative terms, this means that the Q4 '25 was 8% improvement compared to previous year level of 7%. Let us walk through the analysis related to operating result, and this is now comparing Q4 with the previous quarter. Q4 operating result, SEK 756 million compared to SEK 1.9 billion during previous quarter. And here illustrated in the graph, we have a negative impact with the price development. On average, prices were 3% lower. And the biggest contribution here coming through Europe division, with just over SEK 0.5 billion negative impact, followed by Americas SEK 240 million and Special Steels SEK 165 million. Tibnor prices were flat and Ruukki Construction prices slightly lower. And as already Johnny mentioned, here, we also have a slight impact with the FX and also with the product mix. But that's illustrating rather the seasonality during Q4. Volumes were 3% higher and positive impact, a net SEK 115 million. Europe division, 41 kilotonnes higher; Americas 10; and Special Steel volumes were flat quarter-on-quarter. Variable cost positive impact. Raw material costs were lower. However, we have offsetting effect here with the maintenance outage cost. And also maintenance outage costs impacting the fixed cost. But to remind that these are also seasonally higher during Q4 compared to previous quarter, which was the vacation period. And also to highlight that, yes, we did have saving actions both in Q4 and Q3. So perhaps the year-over-year is illustrating better the savings performance. But here, the net effect is SEK 570 million negative impact on EBIT. During Q4, the production activity was higher and thus the positive impact related to capacity utilization. And this is mainly now related to the Europe division rolling performance. Maybe to remind that during Q3, the maintenance outages were in Raahe, Borlänge and Luleå. And during Q4, the maintenance took place in Oxelösund, Mobile and Hämeenlinna and the cost of the maintenance was quite much higher during the fourth quarter. Similar comparison, but now year-over-year. Q4 performance '25 over Q4 '24. Performance Q4 '24 was SEK 487 million. And the only negative impact coming through with the prices, while all the other elements having a positive impact. Prices were 8% lower. Europe division, Special Steel division, both contributing over SEK 600 million negative impact, while Americas had a positive impact. But as already mentioned, the FX did have a big significant negative impact in prices. Total FX impact in this analysis is SEK 840 million negative, which, on the other hand, is having a positive impact in the variable cost side but on a lower level. Volumes already mentioned, 5% higher. And here, the biggest contribution coming through Special Steel division, 17 kilotonnes higher volumes followed by Europe division, 28 kilotonnes and Americas 12 kilotonnes. So all steel divisions performed better year-over-year. Variable costs, positive, SEK 345 million; raw material costs were lower, but this partially offset by the maintenance cost. And this year, it was slightly higher than the previous year. And already mentioned the saving actions and here illustrated well that the fixed cost year-over-year were lower, SEK 430 million. We had the time banks in use and a lot of saving actions throughout the organization and the outcome illustrated here in this graph. Production activity was higher and a positive impact with the capacity utilization and the revaluated balance sheet items also just below SEK 70 million positive impact. Cash flow. If we firstly look at the quarterly performance over previous year Q4. EBITDA, as already described, slightly higher than last year. Very similar trend when it comes to working capital, a positive impact during both years. And here to remind that we have the seasonal impact, we have winter stocking taking place during Q4. So rather large raw material invoices posted to Q4, which will be paid out in Q1, which will then lead that Q1 will be seasonally negative impact. R and C CapEx, maintenance CapEx, slightly higher but well in line with our guidance, just below SEK 3 billion the full year. The other line here is related to the CO2 emission allowance transactions. During Q4, it was a positive. Financial items here. As you can see, during this year, we do have the cost related to Luleå financing, the prepayments and premiums being paid out. This has a cash flow negative impact. However, we are activating these to the balance sheet, so not the same effect in the P&L. And of course, also the cash position is slightly lower compared to previous year and to remind that the interest rates has also developed lower when it comes to interest rate on cash. Strategic investments, significantly higher. And here, of course, the driver being the Luleå investment project. And on full year level, to remind that the dividend was during '25 lower and '25 Q1, we still had the share buyback program ongoing, which we didn't have during '25. This leads to net cash position, SEK 11.6 billion at the end of '25. And this is still very well in line with our financial target when it comes to net debt equity ratio plus/minus 20% as the outcome is minus 17%. If we do a short bridge over previous year, end cash position versus the outcome this year, we start from the SEK 17.8 billion, and then we add the cash flow from current operations, SEK 6.5 billion and then we subtract the strategic investments, SEK 7.2 billion, the dividend SEK 2.6 billion, then we need to take into account the revaluation of U.S. dollar-related items. As Johnny already mentioned, the Swedish crown has developed during '25 around 20% stronger versus U.S. dollar. So that does have an impact in the net cash position as well. And the proposed dividend is SEK 2 per share, and that will be proposed to the AGM and then paid out in Q2 '26. Raw materials prices, market prices have been developing slightly downwards during second half of '25. And that is also illustrated in our savings in variable costs. We don't foresee that the prices would develop upwards, rather remain stable and our consumption cost as well or slightly even downwards. When it comes to iron ore, to remind that the lag in the cost impact is 1 quarter and with coal -- coking coal, it is slightly longer, it is 1.5 quarter. It's a bit different view with the scrap prices. They have remained flat during the second half, but have started to increase towards the end of '25, and we have seen that they have continued to increase. So they will have an impact in the margins for the Q1. Maintenance cost. This table is illustrating the plan for '26. The outcome '25 was SEK 1.410 billion and on the similar level planned to be '26. The difference with the '25 and '26 is the schedule when it comes to U.S. mills. During '25, we were maintaining Mobile mill; while during '26, the plan is to maintain Montpelier mill, thus a bit different spread over the quarters 3 and 4, but on a very similar level. And then the guidance, CapEx guidance. This we have already presented during our Capital Market Day. The performance during '25 was just above SEK 10 billion. That was well in line with what we have been guiding for this year. Strategic CapEx landing on a level of SEK 7.2 billion and maintenance just below SEK 3 billion. Plan is to have similar maintenance CapEx for '26; however, increase the strategic CapEx, which will be SEK 10.5 billion for '26. And if I split this SEK 10.5 billion to major strategic projects, just below SEK 3 billion belongs to Oxelösund, around SEK 6 billion to Luleå and just below SEK 2 billion to other strategic projects. And also refer to the emission allowance plans for '26. Our estimate is that the cash flow impact will be very similar during '26 as it was during '25. The impact during '25 was this SEK 724 million and around SEK 740 million, we have estimated to be the impact on '26. And we also want to point out that we have started our digital renewal project to modernize our IT landscape. Of course, this is needed. And also this is supporting the strategic investments, especially Luleå minimal investment. We started during '25 to do the design phase for these digital projects and now we are progressing with the build phase. And these projects will be followed under the Other division, and they will be posted as operating cost. We cannot capitalize all of it. And our estimate is that on annual level, the increase in the operating cost when it comes to Other division is around SEK 200 million. This is the annual estimated impact of these projects. But with this, I give it back to Johnny. Johnny Sjöström: Thank you very much, Leena. And I will try to give you a short outlook for 2026, and I will start by going through the customer segments. I think besides this, I think the largest impact on the European steel industry is going to be the safeguard decision done by the European Parliament as well as, of course, the CBAM, which is already implemented. But besides that, I think for SSAB, we believe that the heavy transport segment is going to sort of remain neutral for us. We believe that there is some strong upside in the shipbuilding not only here in Europe, but also in the United States. So that is clearly a sign, but also we see the rail transport in the United States is stable or maybe a little bit stronger than stable, that's what we see. And then we have the Automotive segment. We know that our advanced high strength steel sales are increasing. And now when we might need to move some of the sales that we do ship material from Europe to United States that might be moved to European customers as well. Since we have a limited capacity, we will be able to sell this to European customers, I'm not so concerned about that because there is an interest for advanced high-strength steel where they are able to make the cars much lighter, so there is sort of a demand for it. But of course, so the red part of it is uncertainty regarding the tariffs and the turbulence related to United States and the timing here. And then we have the Construction Machinery. We see some improvements in North America. It's been also a very turbulent and production being moved from Mexico to United States and so on. And a lot of our customers are a little bit confused, but it's stabilizing right now. We see sort of increased demand, and that's also helping us. I think material handling, which is mainly related to mining, that is a very strong segment, it has been strong for quite some time. It is a very important segment for us and also especially for Special Steel, where I think that maybe more than 50% of their sales is related to sort of mining in some -- one way or another. And that is -- and it's upgoing with the gold prices, the silver prices, rare earth metal prices going up, new mines are being opened up everywhere. So even though it says neutral here, I think it's on a higher level. And then we have the Energy segment where we see a strong demand, especially United States, we see -- we've never had as much pipe orders as we have right now, mainly related to oil and gas. But we also have energy transmission, which is also very, very strong. And here in Europe, we have sort of the renewables, wind power, et cetera. The Construction segment is on the lower side. We are carefully thinking that the segment will improve second half of 2026. But it's -- right now, we -- it's rather low activity. And then the service centers, they have a low inventory level in the United States. It's likely that they will be restocking, which is the seasonality that we see, the pattern that we see. And to some extent, the inventory levels in Europe are somewhat high. I think that a lot of service centers took opportunities to buy some extra material before the CBAM and potentially also the safeguards. But of course, those inventories will not last forever. So what we're guiding for, for Q1 2026, and here, we have a very strong seasonality. So we're quite confident when we look at the shipments, same pattern as last year that the shipments will be significantly higher for Special Steels. It will be higher for SSAB Europe and then somewhat higher for Americas. And prices remain stable for Special Steels, but we expect the prices to somewhat increase a year for Q1 and then the same thing in the Americas. Remember that there are some lead times to order intake price and then when we actually get the invoiced price increase. And then to conclude, we have a weak market situation, we had for some time, but we are mitigating it with our strategy, our very clear strategy to develop and sell more premium strategy, more focusing on generating unique customer value. But we also have a geographic diversification that supports us when there are tariffs, let's say, in the United States. And we have done cost measures that resulted in a positive outcome. We have had a strong focus on safety and that also given results. And we had stable earnings, especially in SSAB Special Steels that continue to develop even if the market is sort of tough. Our strategic investments are according to plan. And then last, but not least, the Board are proposing a dividend level of SEK 2 per share. So with that, that's my conclusion, my summary. Per, so I'll leave the word over to you. Per Hillström: Thank you, Johnny, and thank you, Leena. We can then prepare for the Q&A. [Operator Instructions] So by that, operator, please present the instructions for the Q&A. Operator: [Operator Instructions] And now we're going to take our first question, and it comes the line of Kaleb Solomon from SEB. Kaleb Solomon: First, maybe on your price guidance for Americas. It was somewhat higher for Q1 despite sort of a significant currency headwinds given that the dollar has continued to weaken this quarter. So can you just clarify, is that based on USD spot prices, meaning does that exclude translation effects? Leena Craelius: In the price guidance, we don't speculate with the FX impact. So we are discussing in that aspect only, the underlying pricing activities. So no speculation on FX. Kaleb Solomon: Okay. That's clear. And on Nucor's call yesterday, they sort of mentioned the EFA ramp-up costs totaling around $500 million for '25. And I know that's across a few projects, but can you give us any sort of indication of what that figure could look like for Oxelösund? Per Hillström: You mean a specific cost for the ramp-up phase, is that what you refer to? Kaleb Solomon: Yes. Per Hillström: Yes, we've been talking about a little bit double manning, but we haven't specified... Johnny Sjöström: We -- yes, we have a clear plan. We know exactly where the costs are going to be, but that's not something that we go out with public. It's a part of our sort of cost structure where we will have some double manning. We run the blast furnace as well as electric arc furnace for a period of time. So we have a clear plan for -- we also know exactly the impact of it that was taken into account when we did the budget for 2026. But we haven't really published any numbers related to it, and we prefer not to do it either. Operator: Now we're going to take our next question, and the question comes from the line of Adrian Gilani from ABG Sundal Collier. Adrian Gilani Göransson: Yes. Just starting off with a follow-up question on the Oxelösund transition, not so much on the cost, but rather the time line. How long do you expect to actually -- for it to take to ramp up the electric arc? And how long do you plan to run the 2 furnaces in parallel? Johnny Sjöström: No. I mean, I think the difference between other projects is that we're only replacing sort of the melting part, the primary part of the production. So it's replacing the blast furnace with electric arc furnace. Hence, the other processes doesn't need to be qualified. As long as the chemistry is right, the qualification period is going to go pretty fast. So we have -- it's -- can I say how much time we're planning for or is that something, we can... Per Hillström: Yes, yes, we can indicate... Johnny Sjöström: So the plan we have is 6 months for the total qualification of the new grades. And for the grades that we are producing in Oxelösund, there are not a strict customer qualifications. So it's more what we can promise to the market. So it is easier than it normally is to other sort of segments and applications. So hence, the reason why we're very confident on the time frame here. Adrian Gilani Göransson: Okay. Understood. That's helpful. And then another one more short term on the Q1 guidance for Europe, where you guide for 0% to 5% higher prices. Just looking at the market indices and factoring in your typical lag effect, it doesn't seem like you're realizing the full uptick on the market price in -- at least in your guidance. Can you say a few words about why that's the case? Johnny Sjöström: I think what you said as well is just the delay and the lag. So normally, when we enter Q1, most of the orders has already been planned for. We have already agreed with the customers. We have a lot of quarterly pricing and so on. So hence, the reason that the effect will be postponed, so we will rather see a bigger impact in Q2. Leena Craelius: And as Johnny mentioned, we have these quarterly contracts and annual contracts, so those are not priced according to spot pricing. So not the full spot price development can be impacting the Europe division. Operator: Now we're going to take our next question, and the question comes from the line of Alain Gabriel from Morgan Stanley. Alain Gabriel: Back to the Q1 guidance, on the Special Steel pricing, you're talking about flat Q-on-Q, which -- and I guess, which reflects also the weakened markets that you've touched on. But can you give a bit more color on why prices are not following the upward trends in European HRC? And is that a mix effect as we head into Q1? That's my first question. Johnny Sjöström: Yes. I think for the Special Steel pricing, it doesn't really follow the hot or cold pattern at all. It's more related to what kind of segments you're planning to sell to and kind of geographies you're planning to sell to. Special Steels is different compared to the other 2 divisions because they have global sales and active in a lot more segments. And so I think that the indications that we've given now for Q1 is because we believe that we will be selling in sort of other geographies that we know that the average prices have been somewhat lower. So that gives you some explanation. But we believe that we do have some potential to increase prices both in Europe and also in the United States going forward. But for Q1, we pretty much know what's going to happen. Alain Gabriel: Okay. And then my second question is on the Oxelösund start-up as well. I think the wording in your statement is heavily caveating the power connection and the appeal process. Should we interpret this as suggesting that you are less confident about the start-up date as compared to last quarter, for example? Johnny Sjöström: I mean, first of all, I just want to address that the project is following and developing according to our time plan. And we're doing a great job with that. But we are dependent on getting the power to the site. We're depending on the company erecting this power line, which is 72 kilometers long. And we can only listen to what that company tells us. And they tells us that it's according to plan, and that's all we know for the time being. We know also that there has been some appeals for the -- some of the permits, and that's also what we included in the report. The consequences and effect of that, we cannot really assess at this point. So we thought it was vital information, so we added it into our report. Operator: Now we're going to take our next question and it comes from the line of Reinhardt van der Walt from Bank of America. Reinhardt van der Walt: I just want to go back to your comments around inventories. So you mentioned that inventories are somewhat higher. Can you just give us any details around which specific grades and products you're seeing those elevated inventories in? And then can we also just get a read on what you're seeing in January so far? And whether the inventory build you think has been more CBAM related? Or is this maybe some kind of demand anticipation? Johnny Sjöström: Our interpretation at least is that it's probably more CBAM related, especially in some areas and from some geographies, we can see that there was a massive pickup of inventory. One of the areas I want to point out is the color coated. We saw a significant amount of color coated material coming in from especially Korea to Europe because they knew that the CBAM would have a negative impact on the prices and so on. That's just one example, but we could also see that on hot-rolled coil, to some extent, cold-rolled as well, especially in Italy for some of the countries delivering where they will be concerned about what's around the corner. But I guess that's all I can go into right now when it comes to details. Otherwise, it's going to take too much time. But like I said, the inventory will not last forever. So this is probably a quarterly effect or a quarterly consequence. Reinhardt van der Walt: Yes. That's fair. And can I just check on construction. You mentioned a neutral outlook. We have seen some of the leading indicators in the construction industry pick up and in some cases, quite sharply. So is the neutral 1Q outlook just because of some lags, some delays in that activity coming through? Can you maybe just give us any sort of read on at least where you see the trajectory of construction activity maybe as the year goes on? Johnny Sjöström: Now well -- especially for Q1, we have a hard time to see that there's going to be any great improvements for Q1. However, with the German infrastructure project and so on, there are a lot of things ongoing. There are a lot of things around the corner and things are about to pick up. And when I speak to the CEOs of big construction companies here in Sweden, they are more pointing at that it's very likely that things will start to happen more in the second half of this year and that is also what we are sort of hoping for or seeing as well when we're assessing the market. But for the time being, we don't think there's going to be any rather -- any pickup in Q1 at least. That's our take on it. Operator: And the next question comes from line of Tom Zhang from Barclays. Tom Zhang: So both on the U.S. The first one, just on your raw material cost guidance. And I guess you've guided 0% to 5% higher raw material costs, but we've seen scrap sort of add $50, $60 year-to-date basically. So is that 0% to 5% higher raw material costs already baking in spot scrap prices or was that set maybe a little bit earlier because I would have seen scrap up at least 10% already? Per Hillström: Yes. Sorry, Tom, there is no -- when it comes to the percentages that refers to the prices; when it comes to raw material, our commentary is a bit more loose and it's not related to these percentages. So just a start there, it can be a little bit deviation from what you see on the price guidance, which is much more stricter. Tom Zhang: Okay. Okay. But still, you're saying cost of raw materials are expected to be somewhat higher compared to prior quarter and spot scrap is up 13%. I guess my question is, is somewhat higher raw material costs in Americas consistent with what you're seeing in spot scrap markets? Johnny Sjöström: For the quarter, I would say yes. And what we do is we look at reports and make a lot of assumptions based on those reports. And then we have the seasonality. Typically, the scrap prices in United States goes down in Q4 and then it goes up again with the demand in Q1. The scrap market is very supply-and-demand sensitive like most of the business in the United States, and the demand is now increasing, hence, the reason why the prices are going up. Tom Zhang: Okay. Fair enough. And then just on U.S. pricing and plate pricing. So you flagged a bit of demand now coming back in energy. You flagged low inventories in the U.S. I guess, imports have started to come off in Q4. So the pricing dynamics that we've seen, I guess, kind of makes sense to pay prices coming up. But then it looks like it's mostly just been offsetting these higher scrap prices so far. Do you see the room for actual plate spread expansion through the next couple of quarters? How quickly do you think that can come or do you think demand is still just a bit too muted? Johnny Sjöström: No, I think there's room -- we have room to increase the spread. I think that when we announced our price increases we were not aware that the scrap prices were going to go up as they did. So I think that we're going to work on pricing going forward. I think there is room for us to sort of increase our spread. That's what we think at least. Operator: And now we're going take our next question, and it comes from the line of Igor Tubic from DNB Carnegie. Igor Tubic: I just wanted to ask you about Special Steels. In the Q3 guidance, you indicated that both prices and raw material costs would be somewhat lower, but given that volumes were relatively flat in Q4, margins still declined. So could you please elaborate a little bit around the drivers behind this and what we should expect going forward? Johnny Sjöström: Yes. I think Special Steels is probably the division has the longest sort of lag between purchase price and consumption price. So it's extremely long. It's maybe -- sometimes it's 6 months, 7 months before we buy raw material and then the consumption price. So -- and it's -- when we do this kind of guidance, we're looking at sort of the purchase price compared to -- and I guess that's where it gets a little bit confusing, but that's really what it's related to. Igor Tubic: Okay. And the other question is, have you seen any -- with regards to the CBAM, has there been any impact on volumes? or would you say that import levels remain broadly unchanged compared to before? Johnny Sjöström: I think imports level now in the beginning, at least, have slightly being reduced. There's a lot of confusion on how to do it. And also, if you're qualified and get also the approval for sort of importing into Europe. Hence, the reason why the import level has reduced somewhat. I mean, eventually, of course, importers will learn and they will understand how it's done. But we also strongly believe that the import supply chains will change significantly, and there will be some countries that will go down to almost nothing. It's very, very likely. So there will be a time now where supply will change -- the supply flows will change, also some time for importers to understand how it's done. And also, how do you pay for it at the end, when do you buy the certificates. A lot of confusion right now. And that's, I guess, beneficial for the European steel producers. Operator: And now we're going to take our next question, and the question comes from the line of Anders Akerblom from Nordea. Anders Akerblom: So firstly, I wanted to ask just high level on EU safeguards. If we see the sort of reduction in the magnitude that might be expected, could you share anything in terms of what market share gains you expect to have versus competitors? And also, how quickly you can adjust production to sort of capture these volumes? Johnny Sjöström: First of all, SSAB's utilization level has always been quite high. I think European utilization in general has been rather low. I think it is communicated to be around 60% to 65%. We are way much higher than that, which means that if, let's say, that this decision is made and the safeguards are in place, of course, we will be able to ramp up a little bit, but we already have a high utilization level. I think the big impact will be the price changes and the supply and demand change. So there will be a period of time where the demand will be high and the supply will be limited because during the last 2, 3 years, blast furnace has been closed down, capacity has been closed; hence, there's going to be a gap between supply and demand in the beginning and hence, the reason why we believe that there's going to have an impact on prices. And that, of course, is going to be very beneficial for SSAB. I think -- did I cover all your questions there or your question? Anders Akerblom: Yes. Yes, you did. And with regards to a lot of tariff questions, but in the U.S. Section 232 tariffs, could you share anything on your sort of long-term plan for Docol AHSS exports to U.S. automotive? Will you continue sharing costs with customers, requalify with European OEMs, develop domestic U.S. capacity? So anything there would be interesting. Johnny Sjöström: Yes. So we're looking at all of those options, of course. And first of all, when it comes to this continuous [indiscernible] that we have, where we can actually produce these unique products, it has been pretty much fully utilized for the last 4, 5 years. We have decided to sell this capacity into United States or some of this capacity into United States because the margins has been -- have been higher. But it's not like we have to. There is a demand for it also in Europe. So there is a list of potential customers that we are now talking to and has -- we also been qualified to supply to them. So when there is a sort of lower demand from the United States, we will shift it over to supply to European customers instead, and that is sort of in the making as we speak. And then, of course, there is still a demand for our products. So it's -- and we don't really understand where they're going to get these products from because you cannot produce it locally. So they either have to downgrade or, I don't know, some other solution. We are, of course, looking at all options, but the volumes are not big enough to do any large initiatives, especially if you can sell these capacities to someone else. Yes, we're looking into all options and see what we're going to do on that. Operator: And now we're going to take our next question, and it comes from the line of Cole Hathorn from Jefferies. Cole Hathorn: Just 2 my side. The first one is on the order books for your plate business in the Americas, and we had Nucor talking about a substantial improvement in the order books. I just love comments around what are you actually seeing in your order books there? And then secondly, it's just a follow-up on how do you think the wider industry is going to adapt to the import quotas? I mean you've been quite clear that you've got higher operating rates versus the industry, and you're going to benefit from the pricing. But if we're going to need an incremental 10 million tonnes of domestic European production to displace imports over time, where do you think those 10 million tonnes of production is going to come from? Is Europe in a position where we can ramp up the volumes to meet that need? Johnny Sjöström: Yes. And -- I mean, if you go back 10 years ago, for sure, we had that capacity in Europe. And then some of the factories and some of the blast furnaces have been idled. And I honestly don't know if they can be restarted again. It's likely they could. But I'm thinking that there will be a delay. There will be a gap. It's going to be hard to fill that you still need to import some volumes into Europe. I don't -- I'm not so sure that we will be able to ever fill the full gap because of the time that we've had with limited prices or margins to support sort of some of the production in Europe that we've had, to answer that question. I think your first question was related to... Per Hillström: U.S. order book. Johnny Sjöström: U.S. order book, okay. And for just to say, and maybe I'm revealing something that wasn't in the quarterly report, but we have been fully utilized in the United States in our 2 factories. And our utilization levels are extremely high. So of course, we are continuously working on operational excellence, we're working with AI to optimize our output and we have been quite successful during last year, enormously successful, I have to say, to get more material out from the factory that we are using. I think the difference between us and Nucor is that they have a new factory where they have sort of a lower utilization. For them, this will sort of have make a difference. I think, again, coming back to what I said about Europe, I think what is the main driver for us is the price increase that we will see around the corner. Operator: Now we're going to take our next question, and the next question comes from the line of Maxime Kogge from ODDO BHF. Maxime Kogge: So first question is on the cold weather conditions in the U.S. I was wondering what kind of impact it would have on your shipments and your scrap procurement in Q1? If all of that was already incorporated in your guidance? Johnny Sjöström: No, I think that we learned a little bit last year where we had some impact from extreme weather that had an impact on transport of scrap to Montpelier. The consequence was only for a few days. But since we have sort of this lean concept and try to keep the inventory levels as low as possible, I think we learned from that and we built up a slab inventory that was much, much higher than it usually is. And that was a safeguard, just to be on the safe side, just in case something happened. So to answer your question, we are more prepared for this year than we were sort of last year. Maxime Kogge: Okay. Fair. And the second question is on the defense business. If we take stock of 2025, how are volumes compared to 2024? Are you perhaps going to increase transparency on the volumes the same way as you do on auto for this business because there's a lot of market expectations on this topic? And yes it's just related to your recent Rheinmetall contract, are you facing any limitations in terms of quality due to the use of green steel? That would be my second question. Johnny Sjöström: Yes. We haven't decided yet whether we're going to reveal the volumes and be that transparent on it. And we also need to be a little bit cautious because we don't want to say to potential tariff or whatever, where we produce and how much we produce, it might have a negative impact. However, we know that companies like Rheinmetall, [ KDW, ] we also have Patria in Finland and Hägglunds in Sweden, they have tripled their capacity just to be able to supply what the market needs. And even if they've done that, they still have very long lead times. This will have a positive impact on us going forward. But it's -- the delay and the lag here is much longer than you might think. It takes years until we actually start supplying to these kind of projects because they want to secure that they have cabling, semiconductors, computers, all of that before they start ordering the steel plates. And I think they've had some challenges in the past. I think it's been resolved a little bit right now, but if you ask me in 2 years, the situation is going to look much, much better when it comes to deliveries and a major increase, I guess, in protection steel compared to now, but even though it's better than '24, we believe it's going to be much better in a couple of years. Per Hillström: Operator, just reminding of the time. We have time for 1 more question. Operator: Yes, of course. And now we're going to take our final question for today, and the question comes from the line of Bastian Synagowitz from Deutsche Bank. Bastian Synagowitz: Just maybe a quick one on Specialties. Just from the demand you see in the customer conversations you have, would you be confident enough to say that 2026 will be the year when you will get back on the growth track you are aiming for the business? Or is it just too early to say? That would be my first question. Johnny Sjöström: No. I mean, I've learned after Russia attacking Ukraine and after the pandemic and after the tariffs, I've learned, that's really, really hard to predict what's going to happen in the future. But if there aren't any geopolitical issues or topics then I'm very optimistic that we will have a growth. And this growth can come fast. It's just a stability on the market, then the growth will come fast. Bastian Synagowitz: Okay. Great. And then one more question on the FX side where we've seen significant volatility and maybe one for Leena. But from the presentation, it seems like we have not seen much of the effect in your results yet. But from [Technical Difficulty] you provide, I guess, this could be more than a SEK 1 billion impact given that it's mostly a dollar market, and there would obviously be some impact from translation. So could you please help us to understand how far you are hedged short term? And how we shall expect the FX to flow through your numbers? Maybe also, can you help us to understand how your commercial approach works, particularly in the business like the Specialty Steels business where you're obviously doing a lot of, I guess, overseas business. So which percentage of your invoicing here is actually in dollars and euros versus krona? That would be very helpful. Leena Craelius: I don't have the percentage to give you, but you're absolutely right that Special Steels sales currencies are sort of in U.S. dollars, euros and also other exotic currencies. And we do hedge the net cash position with accounts payable and receivables. So we are hedging, but we don't do, for example, equity hedging. And as already mentioned, the benefit with the prices or the negative impact of FX in prices is to some extent then offset by the positive or negative impact in raw materials because we are purchasing a significant amount of raw materials in U.S. dollars. So the combination of all these then is sort of the hedging policy that we have. Bastian Synagowitz: And what is roughly the duration in these hedges? Is this the 6 months, is it a 12-month rolling or... Leena Craelius: No, we do it on an ongoing basis. Bastian Synagowitz: And -- but how long, like for example, we have like obviously roughly an 8% move in the currency in the course of the fourth quarter. So how long would it typically take then until we see this coming through via the translation effect? Leena Craelius: I don't have that kind of answer to give you. Johnny Sjöström: I think what Leena also said in her statement is that, I think the biggest impact comes from the natural hedging, which is that we purchase so much in U.S. dollars, we purchased U.S. dollar for the European production if you talk about iron ore or coal or whatever it is, all of that is purchased in U.S. dollar. But then for Europe, we sell in euro. So we have a very strong natural hedging. Bastian Synagowitz: And the fact that you're guiding for stable input factor prices, I guess, dollarized or SEK terms for iron ore and coal, obviously, have been down 16% to 24%, so are you fully hedging the raw materials as well? Leena Craelius: No. No, we don't. We have very small portion of commodity hedging, but that's very, very limited. So I would not even mention it. Johnny Sjöström: Yes. And hedging comes at a cost as well. So yes. Bastian Synagowitz: But then why are you guiding for flat cost in Q1? Johnny Sjöström: Because most of it we have already purchased and agreed on. Leena Craelius: Yes. It is the consumption cost that we have for the inventory. Per Hillström: Exactly, Bastian, is the estimated consumption cost, you can say, slab cost now looking into Q1. Leena Craelius: Yes. Per Hillström: Okay. Thank you. And that concludes today's conference. Thank you, Johnny. Thank you, Leena. Thank you, the participants. And we wish you a nice day.