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Operator: Good day, and welcome to the BankUnited, Inc. Fourth Quarter and Fiscal Year 2025 Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jacqueline Bravo, Corporate Secretary. Please go ahead. Jacqueline Bravo: Thank you, Nick. Good morning, and thank you, everyone, for joining us today for BankUnited, Inc.'s Fourth Quarter and Fiscal Year 2025 Results Conference Call. On the call this morning are Rajinder P. Singh, Chairman, President, and CEO; Jim Mackie, Chief Financial Officer; and Thomas M. Cornish, Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries, or on the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks, uncertainties, and assumptions, including those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's direct control, such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 2024, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website. With that, I'd like to turn the call over to Mr. Rajinder P. Singh. Rajinder P. Singh: Thank you, Jackie. Good morning, everyone, and welcome to our earnings call. Before I walked in here, I was looking at, I think, CNN or CNBC and realized that we're competing with President Trump's speech at Davos. So for those of you who are listening in, a special thank you because I know we have stiff competition this morning for your attention. Honestly, if it is up to me, I'd probably be listening to this speech as well more than our earnings call. But nevertheless, thank you, and I'm going to walk quickly through the earnings for the quarter. But before we get into the quarter, just a couple of minutes on how the year turned out to be. I'll talk about the year, talk about the quarter, give you some guidance for next year. And then I'll turn it over to Tom, who will then turn it over to Jim. By the way, Leslie sends regards from the beach. I believe she's on the call listening in. But coming back to our 2025, this was a great year for us. I mean, there is no other way to describe it. If I was to summarize everything in one sentence, I would say, double-digit EPS growth came from double-digit earnings growth, which came from double-digit PPNR growth, which came from double-digit NIDDA growth, which caused the margin to expand by, like, 22 basis points. I mean, there's a lot more nuance to it. There's fee income, this, that, and the other. But, you know, if I had to summarize it in twenty seconds, that's how I would. We pretty much hit everything we were trying to hit, and it just turned out to be an awesome year. Turning to the fourth quarter, again, this is a very strong quarter for us on just about every metric. Earnings came in at $69.3 million, $0.90 a share. There were some one-times, which Jim will walk you through. Some software write-downs that we took at the end of the year. But adjusted for that, I think our EPS would have been $0.94. I think consensus I checked last week was $0.89. PPNR for the quarter was $115 million compared to $109.5 million last quarter. I think it was $104 million in the fourth quarter of last year. Margin, you know, continued to expand, which has been a story with us. Last quarter, we were at 3%. Now we're at 3.06%. If you compare it to the fourth quarter of last year, we're up 22 basis points. Annualized ROA came in at 78 basis points. But if you adjust for that software write-down, it was about 81 basis points. Deposits and loans, this is, like, a really strong quarter on both sides of the balance sheet. NIDDA grew on a spot basis by $485 million, and for the year, it was up $1.5 billion. But to be honest, the right way to look at our balance, especially deposits, is always on an average basis because there's a lot of noise that comes seasonality. There's a lot of noise that comes in from just the last couple of days of the quarter. Our average NIDDA for the quarter was up about $500 million, about $505 million. And for the year, average NIDDA was up $844 million. Those are pretty solid numbers, and we're very proud of it. Now this quarter, we had guided to you that this is a seasonally slow quarter for us. And, you know, your question might be, so did the seasonality not show up? The answer is no. The seasonality very much showed up. NTS, which is our title business, was down as it always is in December. So that happened. What really made up for that and then some was all the other business lines came in very strong on deposit growth, especially on NIDDA growth. And we ended up where we did. So very happy with that performance. NIDDA now stands at 31% of total deposits. Last quarter, we were at 30%. And we want to recapture that peak that we hit during COVID years of 34%, and we are more and more confident of getting there soon. There was obviously a Fed rate move this quarter. Spot cost of deposits came down. Spot cost of deposits declined by 21 basis points to 2.10% at the end of the year, which was 2.31% in September. So just, you know, compared to December, spot cost of deposits is down 53 basis points. Quickly turning to loans. The last couple of quarters, we've been seeing a lot of payoffs, and some expected, some unexpected. But this quarter, we've made up a lot on the loan growth side. Core loans grew by $769 million. By core, I mean commercial and CRE and small business and all that stuff, excluding residential and, you know, that we've been running off. So the core loans growing $759 million, this is a very big quarter for us. We were very busy all through the end of the year. We're very happy about that, and Tom will talk a little more in detail about where that growth came from. Quickly turning to credit. Criticized classified loans were down a little bit by $27 million. NPLs were down a little by $7 million. We did see slightly elevated provision and charge-offs. We are in a lumpy business when these, you know, credit hit costs hit us. They do come in, you know, in large chunks. As an example, of the $25 million loan, which was a fraud that we got hit by in the fourth quarter, was $10 million. It's very hard to predict these things. It's very hard to protect yourself against fraud, but it did happen. And we had a complete write-off on a $10 million loan, and that's in the numbers. So, but overall, we're feeling good about credit and expect NPLs to continue to decline into the year. Capital CET1 was a little lower at 12.3%, partly because of growth, partially because of a little bit of buyback that we did in the fourth quarter. And on a pro forma basis, including AOCI, CET1 is 11.6%. Tangible common equity to tangible assets got to 8.5%. And tangible book value per share is now over $40 at $40.14. I think that's a 10% growth year over year. So the board met just yesterday, looked at our plan, looked at our numbers, and authorized us for an additional $200 million share buyback. Of the $100 million that they had authorized a few months ago, we've already used up about half that. So we will have about, you know, $50 million left over roughly from the previously announced buyback authorization and another $200 million to it. So we'll have $250 million or so of dry powder. Also, they increased dividends by 2¢ as they often do at this time. In terms of philosophy on buybacks, you know, I think you heard me say that in the past. We, you know, we want to stay in the middle of the pack of our peers. We think our middle of the pack is somewhere in the mid-eleventh. And that's what we're shooting for. Now that you know, where the herd moves, only time will tell. That number could go lower, and we will address it if it does. But right now, it feels like mid-eleventh is the middle of the pack. And we'll, you know, end of mid to low twelves and we're at the top of the end of that range. And the buyback will bring us in line. So before I hand it over to Tom, let me quickly talk about guidance. And you know, we put a deck out so you can look at it at your leisure. But I would just for guidance, I would ask you to look at page 14 and then page 15. Page 14 is sort of a look back of what guidance we gave last year. And what were we able to deliver in actual results. We gave you guidance about deposits and NIDDA and loans and expenses and net interest margin and so on. We pretty much got there on everything and did better. On most things, and I was up 8%. Margin, you know, we got it to ending the year at three. We ended at 3.06. Deposits, we said mid-single digits. We did mid-single digits. NIDDA, we said low double digits. We did, you know, period end, we did 20%. On the average, we did about 12%. The only one that we missed was core loan growth. We thought we would be in high single digits, but we ended up at 5%. And expenses, said, they'll be controlled or be mid-single digits, and we ended up at 3%. So very happy with what the guidance last year worked out to be. So with that in, you know, keeping that in perspective, our guidance for next year is on page 15. It might look like, you know, almost, you know, we were being too lazy or this is a little, you know, it's almost the same guidance that we gave you last year. You know? It's so boring that we think loan growth, deposit growth, the, you know, between NIDDA and total revenue growth, everything will be very similar to last year. The loan should grow, core loan should grow about 6%. Resi and others will shrink at about 8%. Total loan growth will be in the 2-3% range. Deposits NIDDA will continue to grow at the 12% rate that it has been growing at. Total deposits, excluding broker, will be at about six. Revenue, which grew last year at 8%, should grow again at 8%. Margin slightly more, fee income slightly less simply there's lease financing income and fee income that is coming down, which has dragged it down a little bit. And expenses will stay controlled. For provision, we're using an assumption that the provision will be similar to last year. Though it's a little hard to, you know, all to pinpoint that. But our best assumption is it will be the same. The difference this year is we're announcing capital actions, which we did not announce last year, like I just mentioned, the $200 million additional buyback, that's different this year. And all of our assumptions that everything was built on, you know, the economic environment staying pretty much what it is. And, spreads are tight. And tightening. So we did take that into account, which is why you see margin improvement only going from 3.06 to 3.20. It's largely because we're seeing much tighter spreads this time than we did twelve months ago. And two Fed rate cuts, but, you know, our numbers aren't very sensitive whether it's one cut or two cuts or three cuts. The balance sheet is fairly hedged. So with that, did I miss anything? Sure. Turn it over. Alright. Let's turn it over to Tom. Great. Thank you, Raj. Thomas M. Cornish: Just to follow-up on Raj's earlier comments on deposit growth. Total deposits increased by $735 million during the quarter. $1.5 billion for the year and NIDDA was up this quarter by $485 million and $1.5 billion for the year. As Raj mentioned, despite the normal seasonality, we have numerous business lines that contributed to strong growth in the fourth quarter, which was really good to see. Now I would also say if you look at the lending business that we did in the quarter, which was also up strong, the treasury pipeline, operating account pipeline going into the early part of the year, is very good because you tend to fund loans first, and then you tend to migrate the deposits afterward. So given the strength that we had in the lending teams, at the end of Q4 or during Q4, we'll see some lag time in the development of those operating account businesses. So we remain really optimistic about that. And as Raj said, core loans grew by net $769 million for the quarter. If you break that down, CRE was up by $276 million. The C&I segments were up by $474 million and mortgage warehouse was up by $19 million. We talked in the last few quarters about the fact that production throughout the year remained relatively strong, but we did have, you know, these headwinds of, you know, strategic exits and payoffs and sales of companies and whatnot. One of you asked me on the last call, you know, what inning we were in of the exit process. And I said we were kind of in the bottom of the ninth inning. I think if you look at the walk-through that Jim did on page nine of the deck, you know, you'll see that the production was very strong. And the level of exits was, you know, fairly minor compared to what it had been in previous quarters. So as we move into this year, you know, while there certainly will be, you know, one or two things we exit from for various reasons, overall, I think we're in a year where production will continue to be strong, and we've kind of finished the game of looking at things that we want to get out of. Overall, RESI was down by $148 million. While franchise equipment and municipal finance were down a combined $50 million. In aggregate, that gets you to your $571 million of total growth. The loan to deposit ratio finished the quarter at 2.7%. A few comments on the commercial real estate portfolio. It was a good year for CRE. We grew by 9%. On the team. Overall exposure totaled $6.8 billion or 28% of total loans. And as you can see from the supplemental deck, pretty well diversified across all major asset classes. Again, consistent with last quarter, at December 31, the weighted average LTV of the CRE portfolio was 55%. And the weighted average debt service coverage ratio was 1.82. So both very strong metrics. 48% of the portfolio was in Florida. 22% in New York, and, obviously, the remainder in other areas where we've emphasized growth in the Southeast and Texas over the last couple of years. Our exposure to CRE office was down $98 million or about 6% from the prior quarter end. Criticized and classified CRE loans declined by $36 million in the fourth quarter primarily as a result of payoffs and paydowns. I think at this point, we continue to see generally positive trends in the overall office book. Obviously, it's down significantly over the last few years. I think this will be a year where we see a lot of rent abatement improvements. And in most of the markets that we're in, when we kind of break it down submarket by submarket, we're seeing continued improvement in each of the submarkets. Page eight of the investor deck provides greater detail on the CRE portfolio. So with that, I'll turn it over to Jim. Jim Mackie: Thanks, Tom. Gonna tick through a couple of things for the quarter, try not to repeat too much what Raj and Tom mentioned, but I do want to highlight a few things. So as reported, $69 million, a little north of $69 million of net income for the quarter, $0.90 a share. We did call out for you a one-time write-down of previously capitalized software as we were going through our tech stack during our strategic planning. Determined to go in a different direction, so we took that charge during the quarter. If we adjust that net income, it would be $72 million or $0.94 a share. So that's roughly consistent with the prior quarter. Up about $3 million from a year ago. And importantly, we're seeing PPNR grow about 14% year over year. On NII and NIM, you know, where NII is up 3% from the prior quarter, 7% from a year ago. The NIM expansion story that Raj mentioned, six basis points up to 3.06%. It's really a pretty simple story. It's our cost of deposits is declining by more than our loan yields are declining. You know, we talked about the NIDDA growth of average balances of $505 million during the quarter. Interest-bearing deposits were down. Average bearing deposits were down about $347 million. So that brings our NIDDA mix up to about 31%. We were successful as we've been all year long passing along rate cuts timely. So that certainly helped margin. And our loan growth, timing of the loan growth during the quarter was helping us as loans were put on throughout the quarter. And then we're also helped by the RESI loans that paid down. We did see a favorable mix in the lower coupons, maturing. So all of that combined for the six basis point improvement. Just a reminder, NIM was up 22 basis points for the full year. NIDDA up a billion and a half. So our mix is, you know, up from 27 to 31 at the end of the year. Couple comments on credit provision and reserving. So our charge-offs were just shy of $25 million or 30 basis points for the quarter, slightly elevated from where we'd like to see it. You know, we sort of underwrite to about a 25 basis point charge-off rate over time. So a little elevated. You know, we remind you constantly, we are a little bit episodic. Raj talked about a couple of items during the quarter. Provision was $25.6 million for the quarter. Again, a little bit elevated, but it was really a function of the specific reserves that we booked and to a lesser extent, the previously reserved charge-offs. We provide a walk for you in the deck. Allowance for credit losses, roughly flat. Right around $220 million. The coverage ratio is slightly down, but it's really just a bunch of model noise and rounding. So it's, you know, I'm gonna call the coverage ratio flat as well. Again, on page 10, we lay out all the moving parts in a walk. As Raj mentioned, non-performing loans are down and criticizing classified loans are also down. On non-interest income and expenses, again, non-interest income is a very positive story for us. You know, we're up $30 million. I mean, we're up to $34 million growth quarter over quarter and over year. And, you know, that is despite our leasing income falling. Capital markets related revenue is continuing to steadily improve over time. So if we exclude that $13 million of leasing income that we saw in 2025, we had full year non-interest income grew by about 28%. So while the numbers are still small, it's definitely a positive growth area for us that'll continue to help us moving into the next year. On the non-interest expense side, we were up $6.6 million from the prior quarter. The majority of that was two things. One was the capitalized software charge that I mentioned earlier. And an employee compensation expense, the impact of the stock price movements, that impact on equity-based compensation. Makes up the other portion. For the full year, non-interest expense was up 3%. It's largely comp and bennies up as we've been hiring revenue-producing people, technology expenses as we continue to invest and grow our business. We also had a credit in '24 just to remind you of that that didn't repeat. Deposit costs are growing as we grow our deposit base. And that's being offset by lower FDIC premiums and lower leasing costs. So, sorry. Before I turn it back to Raj for some concluding remarks, I just want to make a quick comment on '26 guidance in addition to what Raj mentioned. Again, all that guidance is on page 15. It's a full-year view. Just want to remind you that we do have some seasonality in our results during the year. For example, loan volume is typically seasonally low for us early in the year. And our non-interest-bearing deposit balances are typically highest in the second and third quarter. You know, while we do think provision is gonna be flat year over year, you know, the timing of which in what and where, you know, will be determined as everything is a little bit episodic. That, I'll turn it back to Raj. Rajinder P. Singh: Yeah. You know, the one part that I usually talk about, and I forgot this time, is generally, you know, how's the economy and how's the stuff that we don't control. Right? So that's economy, that's rates. And the sort of the regulatory environment. So the regulatory environment is constructive. There's no surprising news over there. In terms of the economy, it feels very good. But at the same time, you know, if you watch the news too much, it can scare you a little bit. That's what has been the case for the entirety of 2025. You know? A lot happened, but it didn't really impact the economy. In fact, the economy is doing reasonably well. And we're gonna stay optimistic until proven otherwise. But it feels really good both in New York and over here. Business in New York also is doing very well. And it's not just Florida. So the economy is doing well. And as far as we can see it, it will continue to. Despite, you know, heightened geopolitical risk and noise. And rates, again, you know, the monetary policy looks pretty straightforward what'll happen this year. But you know, it's hard to predict too far out in the future what will happen with rates. We think two rate cuts might be one, might be two, might be three. Nobody's predicting, you know, eight rate cuts or anything crazy like that or for that matter, the rate start to go the other direction. We have hedged ourselves as best as we can and we're not worried about, you know, rate cuts being a little bit more, a little bit less. But if there's something crazy, if there are, you know, if it's let's go back to zero or something. Something like that. That'll impact our earnings and everyone's earnings. But outside of that, you know, the environment feels fairly straightforward. And we're running the business with those assumptions in mind. So with that, let me turn it over, and take some questions. Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And the first question will come from Wood Neblett Lay with KBW. Please go ahead. Wood Neblett Lay: Good morning. Wanted to start on the fourth quarter non-interest-bearing deposit growth. As you mentioned, in your comments, you know, it's pretty remarkable to see the growth when you also saw the downward seasonality in the title business. I was just wondering if there were any specifics on what drove that growth and, you know, and what you would attribute it to. Rajinder P. Singh: So first, I will say, actually, just before this call, we might get this question. Tom and I were discussing this. I look at business line by business line, you know, where the growth came from. And to see if there were any outliers. Happy to report there are no outliers. Every business line contributed. It's pretty even. Small business, middle market, corporate, even CRE, everything brought in deposits. HOA, every, you know, the only one with the negative number was title, which we knew. Right? This is a seasonal time when NTS slows down, and then they pick back up, you know, in late first quarter. So it's not concentrated in any one place. However, we do see from time to time like, you know, last day of the quarter, some deposits may come in, which may leave, then a couple of weeks later. And I wouldn't call that core growth, which is why, you know, $1.5 billion of NIDDA growth for the year is probably not the way to look at it. I think the right way, the honest way to look at it is what happened to our average NIDDA. Our average NIDDA was up $844 million for the year. And our average for the quarter was $505 million. I'm very happy. Like, listen. I'm very happy that, you know, we ended the year where we did. But, average is the right way to look at this, not period end. Wood Neblett Lay: I would also add that when we look at this, we tend to think of dividing the world into two segments. One, I would call new wallets and one, I would call expanded wallets. So if we look at the quarter from a, you know, core operating account growth, I would probably say just roughly about two-thirds of the growth were new wallets, meaning new relationships. And about a third were expanded wallets in terms of deeper cross-selling across relationships that we're already in. So we thought that was a pretty healthy mix. Wood Neblett Lay: Got it. That's helpful color. And then embedded in the NII guide, could you just walk through some of the loan and deposit beta assumptions y'all are assuming there? Rajinder P. Singh: The beta assumptions for deposits are the same betas that we've realized so far. It's about 80%. So the two rate cuts that we have baked in here, we will achieve 80% just like we have been achieving. On loans, it's really a matter of which business line you're talking about. You know, we do a lot of fixed-rate, sorry, floating-rate loans. So we're more of a floating-rate shop than a fixed-rate shop. Even our CRE business has become predominantly floating rate. So, you know, it depends on if the floating rate, the beta is 100%. And if it's fixed, it's zero. So you'll be able to find in our disclosure the mix of floating and fixed. Jim Mackie: Yeah. You know, it's not until you see a significant number of rate cuts before you really start to see betas materially drop before repricing. You know, we talked about this before. We're modestly asset sensitive. So, you know, if you, you know, a few rate cuts up or down really doesn't move the needle for NII. And you know, I know there's a lot of talk now of, you know, is there gonna be less Fed rate cuts than what the Fords are. And so, again, we're pretty neutral, so we would be slightly benefited, but not much at all. Yes. Yes. Rajinder P. Singh: And always remember, a positively sloping yield curve is good for bank earnings, especially our bank earnings. Which is where we find ourselves today, and we have been over the last few, you know, few months. So we're happy about an upward sloping curve. Wood Neblett Lay: Got it. And then last for me, you know, it's positive to see the buybacks in the fourth quarter. You upped the authorization at, you know, I would expect the stock to react pretty well to the quarter. How do you balance sort of price sensitivity of the buybacks with wanting to get capital levels down to more peer-like numbers? Rajinder P. Singh: Yeah. I think there is still, we're still living in pretty volatile times. Stock prices can move for nothing that you do. Though something might happen in the market and prices can move a lot. I mean, I remember the day the administration said they were gonna cap credit card interest rates by 10% or to 10%. And our stock took it on the chin even though we're not even a credit card company. So on days like that, when you see, you know, overreaction, we'll lean in a little bit more. Other days, we'll lean in a little less. So we'll stay opportunistic like that. I do expect volatility to continue because this twenty-four-hour news cycle, you know, just stuff comes at you and then it distorts prices for a period of time, and then it gets better after a couple of days. People forget about it, life goes on. But it'll create those opportunities, which we will take advantage of. Wood Neblett Lay: Alright. That's all for me. Thanks for taking my questions, and congrats on the good quarter. Jim Mackie: Yep. Thank you. Thank you. Operator: The next question will come from Jared Shaw with Barclays. Please go ahead. Jared Shaw: Hey, guys. Good morning. Rajinder P. Singh: Morning. Morning. Jared Shaw: Hey, just following up on the deposit side, with the 80% beta. It's great that you think that you can maintain that. Can you just walk us through what percentage of the non-DDA are indexed or brokered and how, you know, I guess, how you feel that you can still keep that 80% beta? Rajinder P. Singh: I think the broker, we will have in our disclosures probably around 15% of our deposit. I don't have that number in front of me exactly. But in terms of index, I don't think we have disclosed that, and it's actually very hard to disclose because some of the indexing might be just contractual, but a lot of it is just handshakes. So I'm not sure we could actually give you an exact number. It does come down to, you know, pushing our salespeople who then push our clients. And sometimes it's just, you know, client to client sort of how much you can push. Overall, we feel we can get to 80%. We have been getting there. Without much trouble, and over the next couple of cuts, we'll do the same. Like Jim said, if, you know, if it's, you know, eight cuts, then this is a very different story. And while nobody's expecting that, we do run sensitivities along that as well. And while margin, you know, in an extreme scenario like that will be hurt, it's not like, crazy. We can manage even some pretty dramatic cuts if it comes to that. Jim Mackie: 16.6% for the fourth quarter. Rajinder P. Singh: Yeah. Broker to 16.6%. Actually, broker was up this quarter a little bit because we were, ourselves, not expecting this level of deposit growth. So we had expected deposits to be not as good, and we had bought some brokered. Which, you know, December turned out to be better than we expected. Jared Shaw: Then maybe shifting to CRE. You know, good to see, you know, that CRE growth, and you've spoken in the past about having a lot of capacity under the capital concentration. How should we think about CRE growth as a percentage of overall growth? Where you'd like to bring that? And maybe just comment a little bit about the competitive market on the CRE side. Rajinder P. Singh: I don't think we're constrained in CRE by, you know, room in the bucket. There's lots of room to grow. What we're constrained by is our assessment of, you know, the kind of business we want to do. We're still not doing much in office or any in office. We're contracting that. We're not doing much any in hospitality. But we are focused on, you know, we have room on the other asset classes, which is where the growth is coming from. So, Tom, you want to add to that? Thomas M. Cornish: Yeah. I would say if you look at the breakdowns in the supplemental package, you can see that virtually all of our asset classes today are kind of in the low 20% range. And I would get there by if you take the multifamily number at 14%, and add in the construction book. The construction book is almost entirely multifamily. You know, we kind of like to look at the major asset class as being under 25%. It's important for us from a risk perspective to keep the portfolio, a, to keep CRE, well balanced within the context of the total portfolio and risk-based capital and b, to keep the individual asset segmentation within the book, you know, at relatively reasonable and equal proportions. So you'll see their office or retail or industrial or multifamily, including construction, are all kind of in the low twenties. So, you know, we think we'll grow CRE mid-single digits in 2026, and it will be balanced, you know, across all asset classes to make sure we kind of stay any individual asset class is not above 25%. We do expect a more competitive market. Some of our folks from the CRE teams recently attended the Big CRE conference that was in Miami Beach last week, and we saw some of the notes from that. It's clear more banks are back involved in CRE. Some that may have been sitting on the sidelines due to asset concentrations and whatnot, you know, are back, and there will be probably more competition on the private credit side as well. So look. Every, you know, I was Raj and I talk about this all the time. We're always in search of a great market that's not competitive, and we can never find one. So there will be competition in every market, but I think we, you know, we have the balance sheet to be able to continue to work in the CRE space. I think we have the expertise and the teams to execute, and we're in a well-balanced position that allows us to be a consistent lender in the marketplace. Jared Shaw: Okay. And if I could just ask one more, just the final one on credit. You called out a fraud. Can you just give any, you know, what category of C&I, I guess, that was in? And as we look at the provision guidance, does that assume reduction in the ALL ratio as we move through the year? Or is that more a reflection of the growth in the portfolio? Rajinder P. Singh: No. I would expect ACL to stay, you know, fairly consistent. To give you any more color on that one loan, it was in New York. It was a contractor. And, you know, literally, the place shuttered, fired all those employees, and is out of business in a matter of days. You know? And there is no collateral to go after. So it was a complete write-off. Jim Mackie: As with most of the trends in non-performing and whatnot, I mean, we're just not seeing any, you know, broad systemic risk that, you know, everything is uncorrelated, unrelated industries, unrelated geographies. Rajinder P. Singh: Yeah. The only correlation is office, and which is getting better. Jared Shaw: Thank you. Again, if you have a question, please press 1. And the next question will come from Michael Rose with Raymond James. Please go ahead. Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Good morning. Maybe we could just start on the deposit growth. I think you guys had previously talked about getting the DDA mix up to 34%. You're expecting pretty good average growth this year. It seems like a lot of the story is coming together here. Is that something that you think you can hit this year? Or is it kind of a multiyear trajectory? And then kind of what needs to, in your mind, happen to kind of get to that 34% level? Rajinder P. Singh: I think there's a good chance we'll get there this year. I mean, we're expecting, again, double-digit NIDDA growth. So if you just do the math, we're not expecting deposits, total deposits to grow that much. So the ratio should get there. Jim Mackie: 33-ish percent. Yeah. Maybe 33% is sort of our looking at our budget here in detail. So we're getting close to it. I mean, what's more important is that we keep driving NIDDA growth. Which we feel fairly good about. Michael Rose: Okay. Perfect. And then maybe just one follow-up. Clearly good core loan growth expected as we move through the year. How much of that is coming from some of the newer markets that you've more recently expanded into, and then it looks like you did have a bump up in NDFI exposure of about $200 million this quarter. How should we think about that growth as we contemplate the core growth guidance? Thomas M. Cornish: Yes. I would say if you look at growth across the franchise, a good portion of it came from the new markets we're in. I mean, we're continuing to invest more in the Atlanta market. We're investing more in the Texas market. We're investing in the North Carolina market. So we saw good growth across all of those markets. It was an important part of the growth of the portfolio, you know, for the year. So I think that's an integral portion of how we're gonna continue to grow. Florida will continue to grow as well. We've also just completed a major investment in the Tampa market. We're actually opening up our new office in Tampa next Monday in the downtown area and hiring more producers in that market. So it played, you know, a key role overall. Rajinder P. Singh: Just mathematically speaking, new markets always tend to show more growth because there's not much runoff. Right? Mature markets where you've been in for a long time, there's always runoff that is happening. So just mathematically, they'll contribute a little bit more. But we're very happy with the investments we've made and how they're paying off. So we want to invest more. We want to hire more people in Texas. We're expanding our office space there. In Atlanta, we actually already have doubled our capacity there in terms of our physical footprint. So we're happy with how these new expansions have worked out. We don't have any new market on the horizon because we think we can really double, triple the bets that we've already made. That's probably the best thing to do over the next couple of years. Thomas M. Cornish: Yeah. Michael, in response to your question about the finance and insurance category, probably the largest segment of that would be what we would call investment-grade subscription-type credit facilities. We, you know, we are opportunistic in that. You know, it's a good space to be in. But the quality and rate kind of has to be right. And when it is, we'll move a little bit more into it. When it's not, we tend to move away from it. There's also a fair amount of, there's a kind of a convergence between what is insurance and what is healthcare. We have a lot of, you know, reasonably large credit relationships that are healthcare insurance-related. That fills up a little bit of that bucket as well. Those would probably be, you know, kind of the two larger segments within it. I think there was a $200 million increase quarter over quarter, hundred-ish was the subscription lines that Tom referred to. And to be honest, the other 100 is just refining the methodology. You know, that last quarter was the first time we pulled this information together for you, and so it's just cleaning up data and getting it organized. But the 100 being an increase in the subscription amount is a big change. Jim Mackie: Yeah. We're not very active. It's kind of the often talk about lending to debt funds. World. That's really a small piece of the overall finance and insurance bucket for us. I do want to reiterate a comment Raj just made related to our investments. You know, we're leaning into the markets that we previously announced, not, you know, in our projections for next year. It's not new markets. It's not new things. It's our existing footprint. Rajinder P. Singh: Yep. Michael Rose: Yep. Totally got it. If I could squeeze in just one last one, is there any reason to think that you wouldn't use most of, if not all, of the remaining buyback authorization this year just given where the stock is and earned back on the buyback? Rajinder P. Singh: Not really. I'm a PC. Okay. Some massive opportunity for growth that we're not thinking about today, you know, we always want to use capital for growth first if we can deliver it safely. But based on the numbers we put in front of you, you know, that's what we end up doing. There is room for buyback and to fund that growth. But you know, I wish we'd be lucky enough to come back to you and say, oh, the growth is twice as much as we thought, and we needed capital. That would be a very happy problem to have. We have a philosophy. We want to be sort of middle of the pack in capital ratio CET1 ratios with the peer group. And we're, you know, generally targeting 11.5% CET1. And so we'll hit that through buybacks, dividends, and growth opportunities. Operator: Perfect. Appreciate you guys taking my questions. The next question will come from David Bishop with Hovde Group. Please go ahead. David Bishop: Hey. Good morning. Tom, quick question circling back to the loan waterfall. Just curious in terms of payoffs this quarter versus last. Were these sort of in line with last quarter? And just curious if you have a lot of sight, maybe what could be looming maybe into the first or second quarter of this year? Thomas M. Cornish: You know, it's that's always tough to say early, David. Because right now, a lot of the payoff activity that we are expecting would be unexpected. I'll say it that way. In terms of, you know, companies selling, is predominantly what I would expect to see if I look at 2026. I think I would say, you know, companies selling would be probably the number one exposure that we have to payoffs. I think number two would likely be relationships that may be exiting the standard commercial banking world and opting into the private credit world because terms and conditions are different. And then lastly would be what I would call strategic exit. So in 2025, kind of the order of that would have been reversed. We had more strategic exits and things from a pricing, deposit perspective, or, you know, type of lending that we exited those were easier to plan because you kind of knew what they were. You knew when the facilities matured, or you knew when they were gonna redial, you know, based upon the timing of the line of credit. So they were a bit easier to predict. This year, that number will be substantially reduced as you saw in the fourth quarter. It was a lot less than it was the previous three quarters. I would say strategic exits were probably triple what it was in the last quarter each of the three previous quarters. So I would expect that that number will probably be around what it was in the fourth quarter, the $80 million type number, maybe a little bit less. A bit harder to predict what's gonna happen in the M&A and refinance market. But when I put all of those together, our kind of base forecast is we'll still see continued quality production across all of the lines of business that we have. Rajinder P. Singh: And we will see less payoffs within the upper part of the C&I market. David Bishop: Got it. Appreciate that color. And then I don't know if it's Tom or Raj who said the preamble sounds like spreads are tightening. Just curious maybe what you saw in terms of average origination yields. This quarter? Thanks. Jim Mackie: Do we have that, Tim? Rajinder P. Singh: Yeah. Give us a sec. David Bishop: That's fine. I can... Thomas M. Cornish: Yeah. We look. Yeah. In the interest of time, we'll follow-up with you after. It'll be somewhere in our disclosure, but it's not popping up too early. Rajinder P. Singh: It was right now. I could certainly tell you from looking at volume that spreads did tighten. In Q4. If we looked at it, it didn't necessarily impact the total book greatly. If we looked at spreads in the total book for the entire year, it remained fairly stable. We did see more pressure kind of late third quarter early fourth quarter across the lines of business, I would will give you the exact number, but yeah. Or Jim will give me the exact number. Was this C&I was 617? And CRE was 570. Thomas M. Cornish: So that's new. That's new on production coming online. I would ballpark to probably say we saw 15 to 20 basis point compression in new production in Q4. It's different for different types of deals, but a bit more in Q4, and we'll probably see that going into the year. Jim Mackie: As we built our plans next year, we certainly assumed it would continue to tighten throughout the year. David Bishop: Got it. Thank you. Operator: The next question will come from Jon Glenn Arfstrom with RBC Capital Markets. Please go ahead. Jon Glenn Arfstrom: Thanks. Good morning. Jim Mackie: Good morning. Jon Glenn Arfstrom: Jim, maybe a question for you. Most of my questions have been asked, but just puts and takes on the expense outlook. You guys are flagging some investments in '26, but also talking about limiting growth. Just, you know, where are you spending? Where are you trimming? Jim Mackie: Yeah. I mean, honestly, the way we set our plan is I kind of think about it as sort of run the bank, grow the bank. You know, with our existing cost base, we're always looking to, you know, keep within inflation and generate operating leverage. And then we want to use that expense discipline to invest in the things that we want to invest in. The types of things that we're investing in are continuing to hire revenue-producing staff and the various support staff to support that growth. We also are focusing on technology modernization, you know, especially, you know, our payment systems and, you know, AI workflows. You know, all the things that continue to help us improve and grow our business. And as Raj mentioned, you know, in our existing footprint, you know, we are looking to expand in, you know, in Dallas, Tampa here, and in Florida, etcetera. So that's really, you know, really bread and butter using operational discipline to pay for, you know, as much of the expand and growth areas that we can. Jon Glenn Arfstrom: Raj, a bigger picture question for you. Can you touch a little bit more on your New York comments? I think, you know, it sounds like it's doing fine and it's, you know, maybe similar size to Florida in terms of C&I, a little smaller in CRE, but, you know, I think the narrative is New York is difficult and Florida's on fire and sounds like maybe you wouldn't agree with that. Rajinder P. Singh: Our Florida business is bigger than New York. So let me start by just saying that. Having said that, I just look at production numbers by geography, by division, and at least this quarter, sort of our lower-end middle market business, they had the best quarter ever in New York. Almost to the tune of that, look at the numbers, and my first reaction was I think there's a typo here. And they came back and said to me, no. That's not a typo. That is actually what we did this quarter. So but that's a quarter. Every, you know, over time, but they had a great year also. But our business is still very much Florida is the center of gravity. And New York is a, you know, a nice hedge, a nice sort of risk mitigation geography for us. But this notion that, you know, New York is just in a downward spiral and as an economy, and that's not true. New York is doing fine. New York CRE is doing more than fine. New York C&I, you know, there's business to be done in New York. So we're optimistic, and more than optimistic about both geographies that we're in. And then Dallas and Atlanta, they're, you know, you know those markets doing really well. So we're not pulling back on any geography. But having said all that, you know, the center of gravity of the company is and will remain South Florida. Thomas M. Cornish: Yeah. I would add we've invested in a new team in New Jersey. We're, you know, we have invested in resources in the Long Island market both on the C&I and on the CRE side. And although people, you know, sometimes when they talk about New York Point or the Tri-State area, you know, point to differences in growth rates, that's true, but you're also starting from a $2 trillion base. You know? It is a very, very large economy, and we're, you know, we're not the market share leader there. So regardless of really whether it's up 2% or down 2%, there's still a lot of great opportunities in the Greater New York area. It separately would be one of the largest economies in the world if it were a separate country. So you can't walk away from that. There's still a tremendous amount of opportunities for us to grow in a market where our model of high-quality service personalized business stands out among the competition in that market. So we have growth plans for that market as well. Rajinder P. Singh: Yep. Jon Glenn Arfstrom: Okay. Thank you very much. Appreciate it. Operator: This concludes our question and answer session. I would like to turn the conference back over to Mr. Rajinder P. Singh for any closing remarks. Rajinder P. Singh: I almost thought Leslie would ask a question. But now listen, guys. Thank you so much for dialing in and listening to our story. And, you know, we'll talk to you again in ninety days. And before that, we'll probably see some of you on the road. Thank you so much. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to the Fourth Quarter Results Teleconference for The Travelers Companies, Inc. We ask that you hold all questions until the completion of formal remarks, at which time you will be given instructions. As a reminder, this conference is being recorded on January 21, 2026. At this time, I would like to turn the conference over to Ms. Abbe Goldstein, Senior Vice President of Investor Relations. Ms. Goldstein, you may begin. Abbe Goldstein: Thank you. Good morning, and welcome to 2025 results. We released our press release, financial supplement, and webcast presentation earlier this morning. All of these materials can be found on our website at travelers.com under the investors section. Speaking today will be Alan Schnitzer, Chairman and CEO; Dan Frey, CFO; and our three segment presidents, Greg Toczydlowski of Business Insurance, Jeffrey Klenk of Bond and Specialty Insurance, and Michael Klein of Personal Insurance. They will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through prepared remarks, and then we will take your questions. Before I turn the call over to Alan, I'd like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our earnings press release and in our most recent 10-Q and 10-Ks filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also, in our remarks or responses, we may mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release, financial supplement, and other materials available in the Investors section on our website. And now I'd like to turn the call over to Alan Schnitzer. Alan Schnitzer: Thank you, Abbe. Good morning, everyone, and thank you for joining us today. We're pleased to report excellent fourth quarter and full-year results. A strong and broad-based performance across both underwriting and investments. For both periods, the bottom line results were driven by very strong underlying underwriting income. Particularly given their written margins remain attractive, this is a durable dynamic. For the quarter, we earned core income of $2.5 billion or $11.13 per diluted share, generating core return on equity of 29.6%. Underwriting income of $2.2 billion pretax increased 21% compared to the prior year quarter, benefiting from higher underlying underwriting income, higher favorable prior year reserve development, and a lower level of catastrophe losses. The underlying result was driven by strong net earned premiums and excellent margins. The underlying combined ratio improved nearly two points to 82.2%. Underwriting results were strong in all three segments. Our high-quality investment portfolio also continued to perform well, generating after-tax net investment income of $867 million for the quarter, up 10%, driven by strong and reliable returns from our growing fixed income portfolio. Our terrific underwriting and investment results, together with our strong balance sheet, enabled us to return $1.9 billion of capital to shareholders during the quarter, including $1.7 billion of share repurchases. Importantly, at the same time, we continue to make significant strategic investments in our business. Even after this deployment of capital, adjusted book value per share was up 14% compared to a year ago. Turning to the top line, through disciplined marketplace execution across all three segments, we grew net written premiums to $10.9 billion in the quarter. In business insurance, we grew net written premiums to $5.5 billion. Excluding the property line, we grew domestic net written premiums in the segment by 4%. As I shared last quarter, the declining property premium is a large account dynamic. We'll continue to be disciplined in terms of risk selection, pricing, and terms and conditions. Renewal premium change in business insurance was 6.1%. Renewal premium change in auto, CMP, and umbrella remained in the double digits. Excluding the property line, renewal premium change came in strong at just over 8%, including workers' comp, which continues to be low single digits positive. Given the attractive returns, we were pleased that retention in the segment remained strong at 85%. In bond and specialty insurance, we grew net written premiums to $1.1 billion with excellent retention of 87% and positive renewal premium change in our high-quality management liability. In our industry-leading surety business, we grew net written premiums from a very strong level in the prior year quarter. In personal insurance, net written premiums of $4.2 billion reflected continued strong renewal premium change in homeowners and higher new business in auto. You'll hear more shortly from Greg, Jeff, and Michael about our segment results. Before I turn the call over to Dan, I'd like to take a step back and talk about what's driving this performance and what's ahead. About ten years ago, we embarked on an innovation strategy designed to position our business to grow with industry-leading returns with low volatility. As you can see on Slide 18 of our webcast presentation, over the past decade, we've grown our top line at a compound annual rate of 7% while improving our underlying profitability by almost eight points. Notwithstanding a significant increase in our technology spending, that improvement in underlying profitability includes a three-point or 10% improvement in our expense ratio. As a consequence of all that, compared to ten years ago, underlying underwriting income was more than four times what it had been. Our cash flow from operations has more than doubled, and our investment portfolio has grown by 50% to more than $100 billion. As you can see on Slide 19, over that same period, core return on equity has averaged more than 1,000 basis points over the ten-year treasury at industry-low volatility, and we've grown earnings per share on average by 12%. In short, the execution of our strategy has been exceptional. We think about all we think about that chapter as innovation one point o. Our success with innovation one point o is the result of having done three difficult things very well. Identifying the initiatives that really matter, and passing on the merely good ideas that don't executing effectively, and capturing the value of what we built. Over the decade, we developed a competitive advantage of an innovation skill set. Now we're bringing all that hard-won know-how to innovation two point o at Travelers. Powered by AI, and not too far off quantum computing, the P&C industry is well-positioned to benefit from AI across the entire value chain. This generation of AI can understand and on the complex stakeholder interactions, well-defined processes, data-intensive workflows, and massive amounts of unstructured data that characterize our industry. It gains compound over many, many interactions. In that context, Travelers is particularly well-positioned. As an industry leader, we bring differentiating domain expertise. Because AI amplifies existing strength, leaders in the domain are best positioned to use it to drive improvement. In addition, we have decades of high-quality data from millions of transactions and interactions and the scale to invest at significant levels as AI and technology continue to segment the market. We have thousands of engineers, data scientists, and analysts building AI and other sophisticated technology solutions. Dozens of scale generative AI tools are already in production. Millions of transactions are now automated. Within 20,000 of our colleagues use AI tools on a regular basis. And AgenTik AI isn't a future aspiration. It's embedded in our business operations today. Last week, we at Anthropic announced a partnership to empower 10,000 of our engineers, data scientists, analysts, product owners with personalized context-aware and integrated AI assistance. This initiative will enhance and accelerate the development of software, analytics, and predictive models. In extensive testing, we achieved significantly improved engineering output, and meaningful productivity gains. We expect that this will result in faster and more cost-effective delivery of new capabilities across Travelers. Everything from product development, the new business prospecting, to underwriting speed and quality, agent and customer service, benefiting our business, our customers, and more, and our distribution partners. In our claim organization, more than half of all claims are now eligible for straight-through processing. With customers adopting straight-through processing about two-thirds of the time. Another 15% of all claims are processed with advanced digital tools. All of those percentages are growing. To accommodate customers who still prefer to call in to report a claim, just last week, we launched a natural language generative AI voice agent takes first notice of loss by phone. Early customer adoption is exceeding our expectation. The results are tangible. In our claim organization, investments we've made including in automation, straight-through processing, and analytics, refine indemnity payouts and drive operational efficiencies. It's worth pointing out that the efficiency gains in our claim organization come through loss adjustment expense benefiting the loss ratio. As just one example, our claim call center population is down by a third. And this year, we'll be consolidating four claim call centers down to two. And, of course, we're deploying AI broadly across the business. Other use cases enhance underwriting decision quality and efficiency, and improve the experience for customers, agents, brokers, and employees. You'll hear some examples from Greg, Jeff, and Michael. We're so early in this transformation, which means the benefits more effective underwriting, improved operating leverage, and profitable growth will continue to build. To sum it up, our results this year and over time reflect the power of our earnings engine. Fueled by the disciplined execution of our strategy. For the full year, core income was up 26% to $6.3 billion or $27.59 per diluted share. Generating core return on equity of 19.4%. And during the year, we grew adjusted book value per share by 414% after returning $4.2 billion of excess capital to shareholders and investing more than a billion and a half dollars in cutting-edge AI and other technology initiatives. Our operational and financial success in the face of another year of elevated catastrophe losses for the industry supports our ability to be there for our customers. In 2025, we handled a million and a half claims, that's about one every twenty seconds. And paid out more than $23 billion in claim payments. We also met our objective of closing 90% of claims arising out of catastrophes within thirty days. 2026 and in future years, we'll be there to help our customers and communities recover, and to enable individuals and businesses to thrive. Looking ahead, we're also very well positioned to continue generating substantial shareholder value. The durability of our strong underlying business performance provides a powerful foundation for continued strong bottom line results, leading returns, and strong cash flows. Operating from this position of strength, we remain highly confident in the outlook for Travelers in 2026 and beyond. And with that, I'm pleased to turn the call over to Dan. Dan Frey: Thank you, Alan. Core income for the fourth quarter was $2.5 billion and core return on equity was 29.6%. As we once again delivered excellent financial results on a consolidated basis and in all three segments. The full-year underwriting results were also excellent, on both an underlying and as-reported basis. And net investment income was once again higher than a year ago. The strong fourth-quarter finish brings full-year core income to $6.3 billion and full-year core ROE to 19.4%. In Q4, we generated higher levels of written and earned premiums compared to a year ago, while delivering excellent combined ratios on both the reported and underlying basis. At 82.2%, the underlying combined ratio marked its fifth consecutive quarter below eighty-five. The combination of higher premiums and the improved underlying combined ratio led to a 15% increase in after-tax underlying underwriting income. That brings the full-year after-tax underlying underwriting result to $5.5 billion, up 23% from the prior year. The growth in underlying underwriting income in recent years is worth an extra minute of commentary. In 2022, we reported a very strong $2.1 billion after tax. Through the successful and disciplined execution of our strategy, we grew that figure to $3.2 billion in 2023, and to $4.5 billion in 2024 and now to $5.5 billion for 2025. Those earnings are what drive strong cash flow from operations. Which, after averaging about $4 billion for the ten years from 2011 through 2020, surpassed $9 billion in 2024, and reached $10.6 billion in 2025. Expense ratio for the fourth quarter was 28.4%. Bringing the full-year expense ratio to 28.5% as expected. Continue to expect the expense ratio for 2026 to be right around 28.5%. Catastrophe losses in the quarter were $95 million pretax. Turning to prior year reserve development. We had total net favorable development of $321 million pre-tax in the quarter with all three segments contributing. In Business Insurance, net favorable PYD of $25 million was driven by favorability in workers' comp. In Bond and Specialty, net favorable PYD of $30 million was driven by better than expected results in Fidelity and Surety. Personal insurance had $86 million of net favorable PYD, with favorability in both auto and home. After-tax net investment income of $867 million increased by 10% from the prior year quarter. Fixed maturity NII was again the driver of the increase, reflecting both the benefit of higher invested assets and higher average yields. Driven by the strong cash flows I referenced earlier, during 2025, we grew our investment portfolio by approximately $7.5 billion to $106 billion. As of December 31, new money rates were about 70 basis points above the yield embedded in the portfolio. Terms of our outlook for fixed income NII for 2026, including earnings from short-term securities, we expect approximately $3.3 billion after tax. Beginning with about $800 million in the first quarter and growing to about $870 million in the fourth quarter. As with underwriting income, the growth in investment income over the past several years has been significant. Our 2026 outlook represents nearly twice as much fixed income NII as we delivered in 2021 just five years ago. Page 22 of the webcast presentation provides information about our January 1 catastrophe reinsurance renewal, and we're very pleased with the changes for 2026. Our long-standing CAT XOL treaty continues to provide coverage for both single cat events and the aggregation of losses from multiple cat events. The per occurrence loss deductible is unchanged at $100 million and for 2026 we dropped the attachment point to $3 billion compared to the $4 billion attachment point we had in 2025. We believe in all perils cat aggregate is the most efficient way to protect the balance sheet. And the combination of our industry outperformance refined reinsurance structures, and more favorable reinsurance pricing have allowed us to meaningfully improve our coverage with only a modest increase to our total ceded premium costs. We also renewed the enhanced casualty reinsurance program first introduced for 2025. We were once again able to purchase working layer coverage a roughly margin neutral basis. On page 23 of the webcast presentation, have again provided both a summary of the seasonality of our cat losses over the prior decade and a view of our cat plan by quarter for 2026. As you can see, the 2026 cat plan in terms of combined ratio points is higher than both the five and ten-year averages. As a reminder for your modeling in terms of seasonality, as you can see from the data, the second quarter has historically been our largest cat quarter. Also of interest for 2026, we continue to value our relationship with Fidelis. And are very pleased to have once again renewed our 20% quota share with them. The renewal includes the same loss ratio cap we've had in place since the quarter share began in 2023. Interest rates decreased during the quarter as a result, our net unrealized investment loss decreased. From $2 billion after tax at September 30 to $1.5 billion after tax at December 31. Adjusted book value per share, which excludes net unrealized investment gains and losses, was $158.1 at year-end, up 14% from a year ago. Turning to capital management. We returned $1.9 billion of capital to our shareholders this quarter. Comprising share repurchases of $1.65 billion and dividends of $244 million. In our prepared remarks last quarter, we indicated that we expected to execute roughly $1.6 billion of share repurchases in the 2026. Including the use of about $700 million from the sale of Canadian operations which did close as planned on January 2. Even with the increased level of share repurchases we just executed in Q4, given the strong finish to the 2025 year, we now expect repurchases of around $1.8 billion in Q1. Of course, the actual amount and timing of repurchases will depend on a number of factors, including cat events and other quarterly earnings impacts, as well as other factors we disclose in our SEC filings. I'd like to make one other comment on capital management to help with your models. Given the growth we've generated over the past several years, and the outlook for continued growth, we're now more likely to issue debt every year assuming we're comfortable with market conditions. Our recent history has been to issue debt every other year. Annual debt issuance allows us to maintain a more consistent debt capital ratio. Recapping our results for 2025, we're very pleased to have delivered net and core income of $6.3 billion and core return on equity of 19.4%. We ended the year with our all-time high in book value per share and with our largest investment portfolio ever. In short, we're extremely well-positioned for 2026 and beyond. And with that, I'll turn the call over to Greg for a discussion of business insurance. Greg Toczydlowski: Thanks, Dan. Business Insurance had another very strong quarter. Rounding out another terrific year in terms of financial results execution in the marketplace, and progress on our strategic initiatives. Segment income for the quarter was nearly $1.3 billion and up more than $100 million from the prior year quarter. Improvement from the prior year was driven by higher net investment income, higher favorable prior year reserve development, and lower catastrophes. The all-in combined ratio of 84.4% was a great result. About a point better than the prior year quarter. We're once again particularly pleased with our exceptional underlying combined ratio of 87%. The underlying loss ratio was the second-best quarterly result ever. Trailing only last year's fourth quarter record. Expense ratio remained excellent at 29.3%. Turning to the top line, net written premiums reached an all-time fourth-quarter high of more than $5.5 billion. We grew our leading select and middle market business by 43%, respectively. These two markets make up almost three-quarters of our net written premiums for business insurance in the quarter. We saw a decline in national property premiums reflecting our disciplined execution in terms of risk selection, pricing, and terms and conditions. Excluding the property line, domestic net written premiums were up 4%. As always, our focus is on writing business that meets our risk profile and underwriting standards. And where we can get an appropriate price with terms that reflect the exposures perils. As for production across the segment, pricing remained attractive with renewal premium change of just over 6%. Excluding the property line, RPC was strong at 8%. Renewal premium change was positive in all lines, including property. And double digits in CMP, umbrella, and auto. Retention remained excellent at 85% and new business of $675 million was up 6% from the prior year quarter. We're pleased with these production results and our field's execution of our proven segmentation strategy. Across the book, pricing and retention results this quarter reflect excellent execution, aligning price terms and conditions with environmental trends for each line. As for the individual businesses, in select, renewal premium change and renewal rate change both remain strong for the quarter and about flat with third-quarter levels. Retention was up two points from the fourth quarter of last year as we continue to wind down our CMP risk return optimization efforts. Lastly, new business was up 6% from the fourth quarter of last year to a healthy $139 million. In our core middle market business, renewal premium change remained attractive at 6.6%. Price increases remain broad-based as we achieved higher prices on about three-quarters of our middle market accounts. And at the same time, the granular execution was excellent. With meaningful spread from our best-performing accounts to our lower-performing accounts. To a large degree, the sequential decline in RPC was impacted by the property line. Where RPC remains positive healthy, and reflective of attractive returns. We're pleased that middle market retention remained exceptional at 87% and new business of $395 million was up 11% to an all-time fourth-quarter high. As we close out 2025, let me provide a little color on full-year results before turning the call over to Jeff. We're very pleased to report segment income of nearly $3.7 billion, an underlying combined ratio of 88%, and top line of $22.7 billion. This was the third year in a row where we delivered an underlying combined ratio of less than 90%. As for production, renewal premium change in retention both remained historically high. While new business premiums approaching $3 billion reached an all-time best. These sustained exceptional results are a direct reflection of our strong value proposition. As well as the successful execution of our thoughtful and deliberate strategies. Beyond our execution excellence, we're pleased with the contributions we're getting from our ongoing strategic initiatives. The decision support tools were put in the hands of our underwriters at the point of sale including models that derive risk characteristics, refined technical pricing, and summarize historical model loss experience results in better risk selection, pricing, and terms and conditions. In addition, we're encouraged by the impact we're seeing from our product and user experience initiatives. Including how well they've been received in the market. Our new BOP product is now fully rolled out and our new auto product is live in forty-six days. Both products contain industry-leading segmentation which contributes to profitable growth. We also continue to enhance the insights around our submissions based on quality and appetite that allow our underwriters to focus on those new business opportunities that we most want to add to the portfolio. We're pleased with our progress with GenAI. We're building and executing a robust portfolio of Gen AI initiatives that will enable enhanced risk assessment and selection ultimately improving loss experience as well as drive gains in productivity and efficiency and improve our industry-leading experience for our agents and brokers. As just one example, we've recently rolled out GenAI agents to efficiently mine both internal and external data sources to better understand and synthesize the risk characteristics and ensure appropriate business classification. This capability both accelerates the underwriting process and results in improved risk classification and segmented pricing. To sum up, we feel terrific about our performance and financial results in 2025. We're excited about what we're investing in for the future and we have the best people in the business. And they're not only executing with excellence in the market today, but they're also helping to shape the transformation of our industry. In short, we're well-positioned for continued profitable growth. With that, I'll turn the call over to Jeff. Jeffrey Klenk: Thank you, Greg, and good morning, everyone. Bond and Specialty ended the year with another strong quarter on both the top and bottom lines. In the fourth quarter, we generated segment income of $236 million and an excellent combined ratio of 83%. A strong underlying combined ratio of 85.7% was a little more than a point better than the prior year quarter. Turning to the top line, we grew net written premiums by 4% in the quarter to $1.1 billion. In our high-quality domestic management liability business, renewal premium change was 2.8%. While retention remained strong at 87%. We're very pleased with the progress we've achieved to improve pricing through our purposeful and segmented initiatives while continuing to deliver strong retention. As we expected, new business was lower than the '24. As a reminder, this is the final quarter of year-over-year new business impact from our Corvus acquisition. With most Corvus production now reported as renewal premium. Turning to our market-leading surety business, net written premiums increased from the very strong prior year quarter reflecting strong demand for our products and unparalleled value-added services. We're pleased to have once again delivered strong results in Bond and Specialty this quarter. Reflecting on the full year, we're also very pleased with the performance of our business in 2025. Our management liability business, we successfully navigated ongoing soft market conditions and were among the first carriers to drive higher pricing to improve product returns where needed. Despite market headwinds, we drove profitable account and premium growth by leveraging our investments in advanced analytics, including the automated delivery of next-generation sophisticated pricing models. Our AI investments to automate submission intake for new business, reduced our time to ingest submissions from hours to just minutes, and we recently extended automation capabilities to renewal workflows. We've also made important investments in sales effectiveness, and enhancements to our product offerings. In capitalizing on our Corvus acquisition, we've successfully extended cyber risk services to customers across our portfolio. This includes always-on threat monitoring with same-day alerts, continuous dark web surveillance, twenty-four seven to a tailored policyholder dashboard, and personalized security consultations from our in-house cyber experts. As we've expected, these capabilities are helping our customers to more effectively manage cyber risks and are mitigating our exposure to evolving cyber vulnerabilities. In our surety business, we drove solid growth by capitalizing on our industry-leading expertise, and premier value-added service offerings. We've entered into new and expanded distribution arrangements domestically and internationally, that position us for continued growth. We've more closely aligned and integrated our outstanding Canadian surety operation which contributes to our position as the leading surety in North America. And in our commercial surety flow business, we've leveraged AI to enhance distribution submission and fulfillment experiences, improving efficiency, and fueling growth. All of these investments and initiatives and the terrific execution by our outstanding team drove another strong year of profitable growth in Bond and Specialty and we're excited about the opportunities that lie ahead. And with that, I'll turn the call over to Mike. Michael Klein: Thanks, Jeff. I'm very pleased to share that personal insurance generated segment income of more than a billion dollars in the quarter, and a combined ratio of 74%. Both results reflect the strong underlying fundamentals of our business. For the full year, personal insurance generated over $2 billion of segment income and combined ratio of 89.5%. These results improved compared to the prior year, notwithstanding significant losses from the California wildfires. Reflecting the strength of our diversified book of business and our disciplined approach to selecting pricing and managing risk. Net written premiums in the fourth quarter were comparable to the prior year, reflecting strong renewal premium change in homeowners and other, and higher auto new business premiums. Full-year net written premium increased 2% to a record $17.4 billion. In auto, the fourth-quarter combined ratio was 89.4% reflecting a strong underlying combined ratio and favorable net prior year development. The underlying combined ratio of 92.2% improved just over four points compared to the prior year quarter. Driven by continued favorable frequency across coverages, with sustained moderation and severity partially offset by the impact of continued moderation in earned pricing. This quarter's underlying combined ratio included a three-point benefit related to the re-estimation of prior quarters in the current year. The full-year auto combined ratio of 85.7% represents improvement of over nine points compared to the prior year. As we experienced favorability in both frequency and severity. In homeowners and other, the fourth-quarter combined ratio of 60.3% improved by 7.5 points compared to the prior year quarter. Primarily as a result of improvement in the underlying combined ratio and lower catastrophe losses. The underlying combined ratio of 59.9% improved by 5.5 points compared to the prior year quarter, reflecting the impact of our actions to achieve target returns. The year-over-year favorability was primarily related to the benefit of property earned pricing as well as favorability in non-catastrophe weather, and non-weather losses. Stepping back, the 2025 full-year property combined ratio of 93% was a notable improvement compared to the prior year. This reflects our actions to manage exposures in high catastrophe risk geographies, along with favorable non-catastrophe weather losses. Turning to production. Our results reflect continued disciplined execution, to position our diversified portfolio to deliver long-term profitable growth. In domestic auto, retention of 82% increased slightly from recent quarters. Renewal premium change of 2.2% continued to moderate as expected. And will continue to do so in 2026. Reflecting our sustained profitability and our focus on generating growth. Auto new business premium was up year over year, as new business momentum continued in states less impacted by our property actions. In domestic homeowners and other, retention of 84% remained relatively consistent with recent quarters. Renewal premium change remained strong at 16.7%. As we concluded our efforts to align replacement cost with insured values. We continue to expect RPC to drop into the single digits beginning in early twenty twenty-six reflecting improved profitability, and values that have now largely aligned with replacement costs. Quarterly new business premium and policies enforced declined compared to the prior year. These production results reflected the deliberate choices we've made to improve profitability and manage volatility in property. Over the past few years, we've executed a granular strategy to reposition our portfolio to optimize our risk return profile. The results have been meaningful. We reduced property policies in force by 10% with most of that decrease coming from high cat geographies, reflecting disciplined risk selection, and concentrated actions to manage volatility and reduce local market aggregations of exposure. While these actions impacted auto policies in force, the impact was muted. As we grew auto in many of the markets less affected by our property actions, demonstrating our ability to sustain a competitive position where portfolio economics remain favorable. Overall, the net impact of our actions is shifting the portfolio back toward a better balance between auto and property. Looking ahead to 2026, as we wind down many of our actions in property, we're focused on maintaining this progress by deploying property capacity in support of writing package business. The strength of our 2025 results reflects years of disciplined execution and strategic investment. Since year-end 2020, net written premiums grew $6 billion to $17.4 billion while we generated an average combined ratio of 98%. Over that same period, our domestic auto grew both in terms of PIF and premium. And in our homeowners portfolio, our actions to address profitability, geographic distribution, and terms and conditions have meaningfully improved risk-adjusted returns. In addition, we continue to invest in and deploy strategic capabilities. As just one example, we're leveraging artificial intelligence to make our renewal underwriting process more effective and efficient. We start with a proprietary AI-enabled predictive model that scores every account in the property portfolio. Based on this score, accounts with the highest probability of loss are presented to underwriters for review. From there, our renewal underwriting platform leverages generative AI to consolidate data into summaries of relevant actionable information for our underwriters to evaluate. With early results showing more than a 30% reduction in average handle time. Net result is that our underwriters focus their efforts on decisions most likely to improve profitability, and do so more efficiently. To sum up, to the continued diligent efforts of our team and with support from our distribution partners, personal insurance continues to deliver on a long track record profitably growing our business over time. Now I'll turn the call back over to Abbe. Abbe Goldstein: Thanks, Michael, we are ready to open up for Q&A. Thank you. We will now begin the question and answer session. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. And your first question comes from Gregory Peters with Raymond James. Please go ahead. Gregory Peters: Good morning, everyone, and as you said in your comments, you did have a great year, so congratulations. Alan Schnitzer: Thanks, Chris. Gregory Peters: I wanted to thank you for the commentary around the technology. You know, I've been asking you about this off and on. Like others have for a couple of years now. In Dan's guidance for the expense ratio, I think he said it's gonna be flat in twenty twenty-eight point five versus what it was in '25 versus the same in '24. So I guess what I'm trying to reconcile is you know, the emphasis on growing the strategic investments. You're harvesting efficiencies, with these technology investments. Just wondering when the structural shift in the expense ratio might materialize. And maybe know, I was looking at you know, the responsible artificial intelligence framework section of your website, maybe you could talk about some of the regulatory and other considerations that might delay some of the expected benefits from your technology spend? Alan Schnitzer: Greg, thanks for the question. I appreciate it. In terms of the expense, I mean, we give you a sort of a year outlook of where we'd like it to be, and that's not something that happens to us. That's something we manage. And we talk a lot about trying to optimize operating leverage. So, you know, in other words, we want the gains from the efficiencies that we're generating and that just gives us a lot of flexibility in the way we run the business. We can let it fall to the bottom line if we want through lower expense ratio, we can continue to invest it in other capabilities. Just gives us the flexibility to manage the business. And as I shared in my remarks, the extent that some of these productivity and efficiency benefits are in the claim organization, you know, those come through loss adjustment expense in the loss ratio. Again, we've got the flexibility there to think about that as an operating leverage component. But just in terms of where those benefits are or where they might arise in the future. In terms of the regulatory environment, from our perspective, it's constructive. We know, we try to make sure that we're using the technology in ways that are thoughtful and careful. And, you know, frankly, we as a company and we through our trade association are on a regular basis working with policymakers to make sure that we're achieving, you know, smart public policy and regulations as it comes to the development and implementation of technology. Gregory Peters: I guess and thanks for the answer. I guess related on the regulatory front, you know, there are an increased example of more examples of regulators becoming more focused on the profitability of the insurance business and particularly the personal lines business. And I'm just curious if you have a view on any regulatory pushback you might be getting on the profit levels in your business and if you think there's anything, you know, bigger issues at play that's gonna spread throughout the country as it relates to that. Alan Schnitzer: Yeah. You know, Greg, we certainly understand the affordability issue and think it's an important one for all of us to be focused on and we are on it. Let me just put the profitability of our personal insurance business into some perspective. We had a good year in '25. We had a good year in 2024, but the two years prior to that our combined ratio was over a 100. And if you look at the last five years, you know, it was 98, I think. So, you know, that would be below our target returns. And so this really is a business that you need to look at and manage over a period of time. And I think when you think about personal insurance results over a period of time, I mean, certainly, in our case, you wouldn't say that we're over-earning. So we, you know, we are trying to get the right price on the risk and earn a fair return for helping customers manage their risk. Abbe Goldstein: Your next question comes from the line of Ryan Tunis with Cantor Fitzgerald. Please go ahead. Ryan Tunis: Hey. Thanks. Good morning. Alan, in your prepared remarks, I think you mentioned that in business insurance, renewal premium change ex property was a little over 8%. I think that number was 9% last quarter. Just curious how much of that one-point deceleration is attributable to rate versus exposure? Alan Schnitzer: Yeah. So we're looking for the exact breakout, Ryan. It's a little bit of both. Dan Frey: Yeah. I mean, Ryan, if you look at the middle market webcast, you can see exposure was down. You can do the math between rate and RPC. It's not perfect math. So to Alan's point, a little bit of an exposure and a little bit of rate. Got it. Ryan Tunis: And then, I guess, just on the property side, clearly, it was a bit of a challenging year in the large account space. Just from a trading standpoint. Just curious how you guys are thinking about overall rate adequacy in national property headed into 2026. Alan Schnitzer: Yeah. Ryan, it's a challenging year. I mean, you know, the pricing dynamic is what the pricing dynamic is, but to a very large degree, that's where reflective of the profitability of that business. I mean, that business has been achieving, you know, rate gains over a very long period of time and it's gotten to a point where the profitability was strong. So we don't really look at a macro level and look at it and say it was challenging and appropriate. It's you know, it's not you can certainly find examples of accounts and we'll scratch our head and say, gee, we're surprised that got priced that way or and, honestly, more than price, we're surprised sometimes with the terms and conditions that we see given away in the marketplace that we're not willing to do. But, you know, so writ large, we look at it and we say, like, it's not so crazy when you think about where the returns are. Abbe Goldstein: Your next question comes from the line of David Motemaden with Evercore. Please go ahead. David Motemaden: Hey. Thanks. Good morning. Dan, just had a follow-up just on the capital return. So hear you loud and clear on the $1.8 billion that's expected in the first quarter. But just given what sounds like a change in terms of just how you guys are managing the debt load, and what looks like, you know, a billion dollars of excess at the holding company now before the Canada proceeds and pretty healthy statutory capital levels. Any sort of thought in terms of how we can think about the buybacks throughout the rest of this year outside of 1Q into 'twenty-seven just given the current growth environment? Dan Frey: David, so I'd say not really. I mean, we can't really sit here at the very beginning of the year and give much guidance on what we think buybacks are going to look like in the second, third, and fourth quarters of this year? There's no change in our capital management strategy, and we made these comments, you know, last quarter when we alerted you to the fact that we did expect higher levels of buybacks in at least Q4 and Q1 because we had, as you recognize, reached a point where we're probably carrying a little more capital on the balance sheet than we needed to. But no change in the overall capital management strategy and the rest of the year is gonna be impacted by all the usual things that would impact buybacks. What do cat losses look like? What does overall profitability look like? How do we feel about the growth environment? And we're gonna responsibly manage the capital. Right? We're not looking to hoard capital. We're looking to hold the right amount. And when we have excess, it's not ours, and we're gonna give it back to the shareholders. Alan Schnitzer: The only thing I would add to that, David, is our first objective for every dollar of capital that we generate is to invest it back into the business. David Motemaden: Got it. No. Thanks. That makes sense. And then just as my follow-up, just looking at Slide 23 and the 7.8% expectation for catastrophe losses in 2026. If I just sort of do rough math on the 2025 premium levels, that implies, you know, a little bit above, I think, $3.435 billion, which is above, you know, where you guys have the retention at your XOL, your aggregate. So could you help me understand a little better the moving pieces there then just relatedly, just the cost of that, how much of a drag that might be on BI premium growth in 2026? Dan Frey: Sure, David. Thanks for the question. So I guess I'll start with the second part of it and say, we don't expect it to be much of a drag. In my prepared remarks, we talked about improvements in pricing in the reinsurance environment. And a couple of other things we're doing around the edges that, you know, we don't think the year-over-year impact of ceded premium is gonna be that big a deal in '26. It really importantly, though, what you were getting to in terms of cat load on a percentage point basis and what that might translate into dollars. The thing you gotta remember when you think about the attachment point of the treaty is the first $100 million of every event is ours. So you can't just say if we thought we were gonna have three-point x million dollar billion dollars of cat losses next quarter. Anything over three goes to the treaty. The first $100 million of every event is ours. We said with this treaty, historically, this is really where buy-in tail protection for the balance sheet. That's still true. Clearly, with the $3 billion retention compared to a $4 billion retention, we're a lot closer in on the tail of possibly being able to hit that book. But if we looked at if you look, for example, at if we had that treaty in 2025, we would not have attached that treaty. Abbe Goldstein: Your next question comes from the line of Michael Zaremski with BMO. Please go ahead. Michael Zaremski: Hi. Good morning. My question is around all the great color you gave on technology initiatives. Would you be able to share what you maybe roughly expect your organic headcount growth or shrinkage to be on a percentage basis this year versus, I mean, last year or so? Alan Schnitzer: Yeah, Mike. Yeah. We gave you an example of a narrow view of that in our claim organization in our call centers. We're not gonna get into projecting headcount beyond that. But what I would say is premium per employee is up, thanks to some productivity and efficiency initiatives. And we expect premium per employee to continue to go up. Michael Zaremski: Okay. Got it. That's helpful. Switching gears for my follow-up to you commercial lines. I think we can tease it out based on the comments in the prepared remarks, so maybe you can just tell us in casualty commercial, maybe non-workers' comp, was the change in pricing kind of sequentially? Or what's the trend line looking there? Thanks. Greg Toczydlowski: Yes, Mike. Good morning. That would predominantly be the GL line in the umbrella. And in my prepared comments, shared with you umbrella at double-digit in terms of renewal premium change. What I didn't include was GL. GL, I think, has been running in the mid-single digits in terms of renewal premium change. Those would be the two components outside of the comp. Abbe Goldstein: Your next question comes from the line of Katie with Autonomous Research. Please go ahead. Katie: Yeah. Thank you. Good morning. Alan, you mentioned in your prepared remarks that the strengths seen in underlying underwriting this quarter is a durable dynamic. Guess with pricing momentum seeming to continue to slow down here, can you map out for us what's driving your confidence that those underlying results hold in, in 2026? Alan Schnitzer: Yeah, good morning, Katie. So Dan shared and I shared the trajectory of underlying underwriting income in our prepared remarks, and you can see it in the slides in the webcast. We are a larger and more profitable company today than we have been historically. And thanks to investments that we've made in products, services, experience, capabilities, and so on, we are very confident in our ability to continue writing premium at substantial levels, and we're very happy with the business that we're putting on the book. So when you combine those premium levels with reasonably strong profitability, you get high levels of underlying underwriting income. And if you look at the trajectory, you get a sense of what it's done over the last several years and we're confident it'll continue to be a strong foundation for strong results in the years to come. Katie: And then as a follow-up, I think last year in the fourth quarter, the business insurance underlying loss results included some additional IBNR for casualty lines. Guess, with the net favorable reserve development results this year, that probably seems to be holding in fairly well. But could you give us any additional color there? And let us know if there were any similar additions to IBNR this quarter? Dan Frey: Hey, Katie. It's Dan. So we did say, as you recall from last year, that we were including in the accident year loss pick for 2024, you know, what we called sort of the load for uncertainty related to the casualty lines. I'm pretty sure we said we were doing that again in 2025, and we did do that again in 2025. And just to get the question out of the way, as we head into 2026, our planned loss ratio for 2026 once again includes an uncertainty provision in the casualty space. I would say the casualty loss is generally performed about as we expected, not really better than we had expected. You know, the business insurance workers' comp favorability has really been driven by workers' comp. But long-tail line still in the casualty space, a little bit of uncertainty, so we're gonna stay prudent and stick with that load again in twenty-six. Abbe Goldstein: Your next question comes from the line of Meyer Shields with KBW. Please go ahead. Meyer Shields: Great. Thanks so much, and good morning. I think this is probably for Dan. I know you talked about not having much of an overall margin impact from lowering the catastrophe reinsurance attachment point. Should there be any impact on a seasonal basis? In other words, is there any pressure on first-quarter combined ratio components? Dan Frey: Yeah. I don't think so, Meyer, again, because when we look at our reinsurance program in the aggregate in terms of what we're going to pay out for ceded premium given the pricing dynamic in the reinsurance space and, again, some other changes we made around the margins in a reinsurance program. We think it's gonna have much of an impact. Meyer Shields: Okay. Perfect. Thanks. And just a question for Michael. When you look forward to 2026 and beyond, are you comfortable growing the more capstone state policy counts in line with the overall book, or are we still constraining growth? Michael Klein: Yes. Thanks, Meyer. I think my point in my prepared remarks about deploying property capacity to support package growth but maintaining the progress that we've made implies that certainly at most we would grow pet-prone states in line with the rest of the portfolio, but we do still have some spots where we'll be constrained. So I'd expect in aggregate, the property PIF growth will continue to trail auto as it has been, but both the growth trajectories of both lines should improve. Abbe Goldstein: Your next question comes from the line of Alex Scott with Barclays. Please go ahead. Alex Scott: Hi. Thanks for taking the question. First one is on just capital deployment, maybe a little bit of a follow-up off the question earlier. How are you viewing prospects for M&A relative to organic growth at this point? I mean, the profitability seems really attractive, but the growth obviously, a bit lower. So I'm just trying to gauge if your organic growth isn't quite as attractive to you. Could M&A be a way that you go? Alan Schnitzer: Alex, I'm gonna give you the same answer I've given like, for ten years. I'm sorry for I'm not gonna be the satisfying answer you're looking for. But the answer to that for us is we're always looking for M&A opportunities. And, you know, we've got the capital and we've got the expertise to diligence the deals and find the deals and execute the deals. And we are always looking for attractive inorganic opportunities. But I would have answered that question the same way at any point in the last decade. Alex Scott: Okay. Understood. I guess second one for you on tariffs and just all of a sudden, it seems like maybe a wider range of outcomes again. How does that affect the way that you go about pricing maybe across all your businesses? But be particularly interested in personal auto. Alan Schnitzer: You know, a couple of quarters ago when we first started talking about tariffs, we shared our view that we thought that the impact was gonna be relatively mild for us. And you go back and look at the and we shared a fair amount of commentary about how we got there. And at the time, you know, for lines that are potentially impacted, we did provide a little bit of a little bit of in the loss pick for that. What we've seen so far hasn't even been the relatively modest amount that we expected. Now as the world changes and as the tariff are out there longer, certainly that dynamic could change, but we feel like the provisions that we've made in the loss picks for potentially impacted lines are there to cover it. Abbe Goldstein: Your next question comes from the line of Brian Meredith with UBS. Please go ahead. Brian Meredith: Yeah. Thanks. First one for Michael. I'm just curious, Michael, the personal auto insurance space is getting increasingly more competitive. Some new entrants in the agency space. Maybe you could talk a little bit about those competitive dynamics. And what is gonna enable, you know, Travelers to actually maybe recoup some of the market share you've lost over the last couple of years in personal auto? Given the competitive dynamics in that market? Michael Klein: Yes. Thanks, Brian. I would start with, you know, the marketplace is always competitive. And certainly, you know, I think a lot of the news that you see is around competition in the IA space. The first thing I'd say about that is I think it's a great validation of our strategy to be largely an independent agent carrier for personal lines. And the value of choice and advice in this type of a marketplace. The second thing I would say is we've competed successfully in the independent agent channel for years. We remain confident in our ability to compete successfully in that channel. And I think it really comes down to, you know, a handful of competitive advantages in the space. Certainly, and durability of our relationships with independent agents, our investments in digitization and ease of doing business, and then lastly, and again, I've been talking about this for the last several quarters, the value of our package value proposition for both agents and our ability to deliver balance sheet protection for consumers. Is another key advantage that we have in that space. And again, we're confident in our ability to compete going forward. Dan Frey: Yeah, Brian. It's Dan. I'll just add one more comment in there on the auto space particular. So, you know, last couple of years, we've seen policy count down, you know, but if you looked at the business now compared to what it was, say, five years ago, we're up one of only a very small number of carriers. It's actually got a higher PIF count now than we did five years ago. And our view always again on growth is how you think about growth over time, right? We're not really looking to influence a growth number in the next quarter or even necessarily the next year. What's the right balance of returns? And are you sure that you're growing over time? Brian Meredith: Great. That's helpful. And then Alan, just curious. I'll always welcome your thoughts on the tort environment and casualty trend and what you see here going forward. Anything positive that's developing here that maybe curves that kind of loss trend on tort inflation? Alan Schnitzer: Yeah, Brian. I mean, it continues to be a very challenging environment, and I wish I could say that we saw improvement. It continues to be a pretty challenging environment. What may be a little bit of a bright light is we do see more states reacting to a difficult tort environment. And, you know, certainly, the impact of tort cost is impacting affordability for businesses and consumers. And I think we're seeing that in some states. And so that's, you know, potential positive. The other thing we are seeing more of is disclosure requirements when it comes to third-party with litigation financing, and that's also a very good thing. So we are, you know, continue to put our shoulder into it, and there's more work to do. Brian Meredith: Thank you. Abbe Goldstein: That's all the time that we have for questions. I would now like to turn the conference back over to Ms. Abbe Goldstein for closing comments. Abbe Goldstein: Thanks, everyone, for joining. I know we left several analysts in the queue, but as always, please feel free to follow up with Investor Relations. Thanks, everyone, and have a good day. Operator: This concludes today's conference call. Thank you for participation, and you may now disconnect.
Operator: Greetings. Welcome to the Northpointe Bancshares, Inc. Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I'll turn the conference over to Brad Howes, CFO. Brad, you may begin. Bradley Howes: All right. Thank you. Good morning. Welcome to Northpointe's Fourth Quarter 2025 Earnings Call. My name is Brad Howes, and I'm the Chief Financial Officer. With me today are Chuck Williams, our Chairman and CEO; and Kevin Comps, our President. Additional earnings materials, including the presentation slides that we will refer to on today's call, are available on Northpointe's Investor Relations website, ir.northpointe.com. As a reminder, during today's call, we may make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures and encourage you to review the non-GAAP reconciliations provided in both our earnings release and presentation slides. The agenda for today's call will include prepared remarks, followed by a question-and-answer session and then closing remarks. With that, I'll turn the call over to Chuck. Charles Williams: Thank you, Brad. Good morning, everyone, and thank you for joining. As we report today's results, I can't help but reflect on an incredible journey since we went public early in 2025. Prior to the IPO, we ended 2024 with total assets at $5.2 billion. Today, I'm proud to report that we've grown to over $7 billion in total assets, driven by tremendous growth in our Mortgage Purchase Program or MPP business. For 2024, we earned $1.83 per diluted share with a return on average assets of 1.08% and a return on average tangible common equity of 13.94%. For 2025, we increased our earnings per diluted share by 15% to $2.11. We also improved our profitability metrics significantly with the return on average assets of 1.33% and a return on average tangible common equity of 14.43%. The improvement in performance drove an increase in tangible book value per share over the prior year. When you add back the impact of the dividends paid, our tangible book value per share increased by 13.9% on an annual basis. During the IPO, we laid out our vision for Northpointe with an ambitious plan to grow the bank, generate positive operating leverage and strong shareholder returns. Fast forward 1 year, I'm pleased to report that we did exactly what we said we would do, and I'm proud of how well our team has executed on Northpointe's strategic direction. We've delivered robust balance sheet growth and consistent earnings throughout 2025. This was driven by sustained momentum and strengthened results across each of our key business lines while maintaining a strong credit and compliance culture, building out key roles in our leadership team and investing in new technologies to streamline efficiencies and lay a foundation for scalable future growth. Before I turn the call over to Kevin and Brad to dive into the details, I'd like to take a moment to share a few highlights. During 2025, our loan growth was very strong. MPP balances increased by over $1.7 billion from the prior year. We also increased participations in that business, which helps drive additional fee income. Our first-lien home equity lines, which are tied seamlessly to a demand deposit sweep account, which we call All In One loans, increased by $121 million from the prior year, which is a 20% annual growth rate. We also made good progress on the funding side of the balance sheet, adding new relationships to help bolster core deposits and lower our wholesale funding ratio. Noninterest income increased by $18 million from 2024, driven by solid performance in our residential lending channel. Residential mortgage originations increased by 20% to $2.5 billion for 2025, which is above industry results. This increase was largely attributable to the success of our mortgage originating professionals, including the new lenders that we've added over the past year in our retail channel. It's also attributable to higher refinancing activity, specifically within our consumer direct channel, which occurred later in the year as mortgage rates declined slightly. I'd like to turn the call over now to Kevin to provide more details on our business lines. Kevin Comps: Thanks, Chuck, and good morning, everyone. On Slide 5, we highlight our MPP business, which is our version of mortgage warehouse lending. We utilize our proprietary state-of-the-art technology stack to offer purchase program to mortgage bankers nationwide. As Chuck highlighted, we have experienced tremendous success over the course of 2025 in that channel. Average balances increased by over $410.2 million from the prior quarter. Period ending balances increased by $60.1 million over the prior quarter, which is in line with our guidance. Keep in mind that these balances are net of any MPP balances participated out. As we've reiterated on prior calls, participations remain an important component of our overall strategy, allowing us to manage the balance sheet and expand net interest margin while driving higher fee income. At December 31, 2025, we had participated $457.0 million in MPP balances to our partner banks. That is up from $37.5 million at September 30, 2025. Let me break down our growth a bit further. First, in the fourth quarter, we increased facility size for 3 existing clients, which totaled $50 million in additional capacity, bringing total increases for 2025 to 28 clients for $1.2 billion. Second, we brought in 4 new clients during the fourth quarter, which totaled $45 million in additional capacity, bringing total new deals for 2025 to 29 clients for $1.8 billion. And third, our overall utilization of our existing clients remained strong in the fourth quarter, averaging slightly over 60%. We continue to generate strong returns on the MPP business with average yields of 6.98% during the quarter. If you include fees, these yields increase to 7.22%. Average yields were down 12 basis points from the prior quarter as about 40% of the MPP portfolio reprices immediately and the remainder reprices on the 15th of each month. Turning now to Retail Banking on Slide 6. I'd like to highlight the results of the 3 main businesses within that segment. Starting with residential lending, which includes both our traditional retail and our consumer direct channels, we continue to perform well and take our share of industry volume. We closed $762.0 million in mortgages during the fourth quarter, which is up from $636.6 million in the prior quarter. Mortgage rate lock commitments and applications both decreased slightly from the prior quarter, driven by normal seasonality in the purchase business, offset by an increase in refinance activity. During the fourth quarter, we sold $665.6 million, which represents approximately 87% of total loans closed in the quarter, in line with prior quarters. Of that saleable production, 65% was in our traditional retail channel and 35% was in consumer direct. The volume increase within the consumer direct channel was attributable to the increase in refinance activity, which started in late third quarter and continued into fourth quarter. We sold approximately 79% of the saleable mortgages servicing released in the fourth quarter, which is consistent with the prior quarter level. Additionally, 48% of our overall production was purchase business in the fourth quarter, which is down from 72% in the third quarter and reflects the increase in refinance activity, which began in September. We continue to look for opportunities to create additional efficiencies using technology and hire new talented lenders within the channel. Over the course of 2025, we hired 34 new mortgage professionals to help us continue to grow the channel. In the middle of Slide 6, we highlight our digital deposit banking channel, where we feature our direct-to-customer platform and competitive product suite. We ended the fourth quarter with $4.9 billion in total deposits, up from $4.8 billion in the third quarter. The breakout of these deposits is detailed in the appendix on Slide 12. As Chuck mentioned, during 2025, we added 2 new relationships to help bolster core deposits and fund our planned growth. The deposits from these relationships can ebb and flow a bit during the year, but in aggregate, total over $500 million in new core deposits. The majority of our deposit growth compared to the prior quarter was from a new digital deposit relationship completed during the quarter. This drove $234.2 million increase in savings and money market deposits over the prior quarter. As we've highlighted on past calls, we will continue to explore similar additional sources of non-brokered deposits going forward. On right side of Slide 6, we highlight our specialty mortgage servicing channel, where we focus on servicing first-lien home equity lines tied seamlessly to demand deposit sweep accounts, including what we commonly refer to as AIO loans. Excluding the negative adjustment on the change in fair value of the MSR, we earned $2.2 million in loan servicing fees for Q4, which is up from $2.0 million in the prior quarter. Including loans we outsource to a subservicer, we serviced 15,200 loans for others with a total UPB of $4.9 billion as of the fourth quarter 2025. During 2025, we began specialized servicing for 5 new relationships and 2 additional securitizations. Lastly, turning to asset quality on Slide 7, which remains one of the largest risks for any bank. We monitor this risk very closely and spend a great deal of time analyzing our held for investment loan portfolio. Consistent with prior quarters, we are not seeing any systemic credit quality or borrower issues in any of our portfolios. What we are seeing is the normal migration of credit trends on the seasoned loan portfolio. Residential mortgage, construction, other consumer and home equity loans make up $1.8 billion or about 30% of our loans held for investment portfolio. This will continue to decline as we are not materially adding any new loans to these categories. Of these, approximately 88% were originated in 2022 or earlier. We had net charge-offs of $1.2 million in the fourth quarter, which is up from $977,000 in the prior quarter. Fourth quarter charge-offs represent an annualized net charge-off ratio to average loans of 8 basis points, which remains well below long-term historical averages. The charge-offs we took in the fourth quarter, similar to prior quarters, came from isolated occurrences. There were a handful of larger mortgage land and construction loan charge-offs this quarter, which totaled about $1.0 million. In the vast majority of these instances where we're dealing with a nonperforming loan, there is sufficient collateral to cover the unpaid principal balance, which usually leads to little or no loss. We saw that trend continue on the majority of the loans added to nonperforming status this quarter. Let me provide some additional details on our asset quality metrics this quarter. First, total nonperforming assets increased by $7.4 million from the prior quarter. Again, this represents normal seasoning and migration of our loans held for investment portfolio. Second, early-stage delinquent loans improved this quarter with loans past due 31 to 89 days, decreasing by $1.9 million from the third quarter level. Third, at December 31, 2025, MPP represented 54% of all loans, and we've continued to experience pristine credit quality in that portfolio. Fourth, virtually all our loan portfolio is backed by residential real estate, which typically carries much lower average loss rates than other asset classes. Fifth, our residential mortgage portfolio is also high-quality, seasoned and geographically diverse. At December 31, 2025, our average FICO was 747 and our average LTV when you factor in mortgage insurance was 71%. Additionally, our average debt-to-income ratio was 35%. I'd like to now turn the call over to Brad to cover the financials. Bradley Howes: Great. Thanks, Kevin. Last quarter, I provided preliminary 2026 guidance for many of our key drivers. As I go through today's slide presentation, I will be incorporating full year 2026 guidance into my commentary. Let's start on Slide 8. As a reminder, our non-GAAP reconciliation on Slide 14 provides details of the calculations and a reconciliation to the comparable GAAP measure for all non-GAAP metrics. For the fourth quarter of 2025, we had net income to common stockholders of $18.4 million or $0.52 per diluted share. During the last quarterly call, I provided an update on our strategy to replace a significant portion of our preferred stock with subordinated debt. That was completed during the fourth quarter, which helps optimize our capital stack and realize material annual cost savings in 2026. With that, we had $3.2 million or $0.09 per share in additional expense from the unamortized deal issuance costs, which was included in the preferred stock dividend line, and there is no tax impact on the expense. Excluding this expense, earnings per diluted share would have been $0.61 for the fourth quarter of 2025 and $2.20 for the full year 2025, which is in line with our expectations during the IPO process. Net interest income increased by $3.2 million over the prior quarter. This reflected growth in average interest-earning assets of $393.2 million, along with a 4 basis point improvement in net interest margin from the prior quarter. Our yield on average interest-earning assets decreased by 11 basis points from the prior quarter, but was outpaced by a 16 basis point decrease in our cost of funds. We benefited from a steeper yield curve with MPP yields only coming down about half the level of the 2 25 basis point Fed cuts in the fourth quarter. The decrease in our cost of funds was primarily driven by a 20 basis point reduction in the cost of interest-bearing deposits from the prior quarter. Our net interest margin was 2.51% for the fourth quarter and 2.45% for the full year 2025. For full year 2026, I'm expecting a similar range of 2.45% to 2.55%. My guidance assumes continued improvement in the mix of loans within the held for investment portfolio as well as 2 additional 25 basis point Fed funds rate cuts in 2026. MPP balances increased by $60.1 million over the third quarter level, but were net of $457 million in participations. As Kevin mentioned, we utilized participations to manage the balance sheet within our existing capital framework. For 2026, I'd expect our MPP loan balances to increase between $4.1 billion and $4.3 billion by year-end. I'm also expecting an additional $300 million to $500 million on average will be participated out throughout 2026. AIO loan balances increased by $31 million over the third quarter level. For 2026, I'd expect period ending AIO balances to increase between $900 million and $1.0 billion by year-end. Excluding MPP and AIO loans, I'd expect the rest of the loan portfolio to continue to decrease to between $1.9 billion and $2.1 billion by year-end 2026. This includes loans held for sale, which tends to vary based on the timing of loan sales. Kevin provided additional details on the higher level of net charge-offs this quarter. We had a total benefit for credit losses of $608,000 in the fourth quarter of 2025. This was driven primarily by an improvement in the economic forecast used in our credit model, most notably higher forecasted home prices over the next 5 years. We continue to experience a relatively low level of charge-offs compared to long-term historical averages. Our annualized charge-off ratio was 8 basis points in the fourth quarter of 2025 and 5 basis points for the full year 2025. I'd expect total provision expense of between $3 million and $4 million for 2026 related to the replenishment of net charge-offs and growth in our MPP and AIO loans. Any additional provision expense or benefit related to credit migration trends, changes in the economic forecast or other changes to the credit models would not be part of my guidance. Noninterest income decreased by $2.4 million from the prior quarter, reflecting a decrease in gain on sale revenue, partially offset by higher MPP and loan servicing fees. On the top of Slide 13, we break out our 3 fair value assets and their associated quarterly increases or decreases. These assets tend to move up or down with interest rates and are not part of my revenue guidance each quarter. On the bottom of Slide 13 and in our earnings release tables, we provide further details on the components of net gain on sale of loans. As you can see, the fourth quarter net gain on sale of loans included a $1.7 million increase in fair value for loans held for investment and the lender risk account with the Federal Home Loan Bank. Excluding these items, net gain on the sale of loans would have been $16.6 million, which is down slightly from the third quarter level on a comparable basis. For 2026, I am forecasting total saleable mortgage originations of $2.2 billion to $2.4 billion with all-in margins of 2.75% to 3.25% on those originations. My margin guidance is a blend of margins from our retail and consumer direct channels. The consumer direct channel has lower margins with an offsetting lower variable mortgage expense. For the year, consumer direct made up 24% of total saleable volume, driven mostly by refinance volume. My guidance assumes a similar volume mix for 2026. Keep in mind that these estimates do not assume any significant decrease in mortgage rates nor do they assume any changes to the current level of mortgage originators within the bank. I expect MPP fees to continue to increase from their current run rate to between $9 million and $11 million for full year 2026 based on the expected participation balances and continued growth in loans funded. Excluding fair value decreases, loan servicing fees were $2.2 million for the quarter, up from $2.0 million in the prior quarter based on the new servicing relationships and increase in loan service Kevin highlighted. I expect that quarterly run rate to continue to increase in 2026 with full year revenue between $9 million and $11 million. Noninterest expense was down $581,000 from the prior quarter, driven primarily by lower salaries and benefits, specifically bonus and incentive compensation. For 2025, total noninterest expense was $129.2 million. For the full year 2026, I'd expect total noninterest expense to be in the range of $138 million to $142 million. This increase in noninterest expense is more than offset by the growth in total revenue based on the positive operating leverage we have been able to generate. By 2026, expense guidance assumes approximately $1.0 million in additional salaries and benefits expense from new roles in addition to the usual cost of living adjustment to base salaries. We also saw increased medical benefits expense in 2025, which we believe will somewhat abate in 2026. Turning to the balance sheet on Slide 9. Total assets increased to $7.0 billion at December 31, 2025. Kevin provided details on our funding and deposits this quarter. Our wholesale funding ratio was 64.6% at December 31, 2025, down from the prior quarter level due to the new core deposit relationship, which drove an increase in savings and money market balances. Looking forward, we'd expect to continue to fund MPP loan growth through a combination of brokered CDs, retail deposits and other sources of non-brokered deposits where possible. Our effective tax rate increased to 26.04% for the fourth quarter of 2025. This was driven by $500,000 in additional income tax expense related to the nondeductible tax rules for publicly traded companies. The effective tax rate for 2025 was 24.44%, and I would expect a similar level for 2026. Lastly, on Slide 10, we outline our regulatory capital ratios, which are estimates pending completion of regulatory reports. Looking forward, I'd expect we will continue to leverage additional capital generated through retained earnings to grow MPP and AIO balances. With that, we're now happy to take questions. Rob, please open the line for Q&A. Operator: [Operator Instructions] And our first question will be from the line of Crispin Love with Piper Sandler. Crispin Love: So just first, it's very fluid mortgage environment right now. But can you just discuss how the last several weeks impacted your guidance for 2026, if at all, mortgage rates down to their lowest level in 7 years -- several years. It seems like the administration is supportive. So curious on just how the recent landscape has impacted your 2026 view or at least near term for saleable mortgage originations and MPP loan balances? And yes, that's it for the first question. Bradley Howes: Sure. Crispin, this is Brad. I'll start and then Kevin and Chuck can certainly add to my comments. But I would say, pretty minimal impact from the last couple of weeks. When we do our forecasting, we're always looking at kind of a blend of all of the economic forecasts out there. If you look at Fannie [indiscernible] or Moody's, they do have rates coming down towards the tail end of next year to sub-6, I think. We were very encouraged, I think, to see the decline in rates, although it could be short-lived. We don't know what's going to happen in the next few weeks. Kevin highlighted kind of volume trends, we saw a nice pickup starting in September in refinance activity that helped drive some higher volume for us, and we were encouraged by that. But I'd say where we sit right now today, we need to see kind of a more sustained decline to really see a significant benefit to our P&L. Kevin Comps: Yes. I'd say just we always have the normal seasonality within our mortgage origination platform. Also, when you think about year-over-year, Q1 of '26 volume-wise, all else being equal, should be higher than Q1 2025 based on the current rate environment. Crispin Love: Got it. That makes a ton of sense. And then just for full year '26, what are you assuming for mortgage rates? Bradley Howes: Yes. So kind of coming down to -- again, this is predicated on sort of the consensus economic forecast for any of the kind of the 3 major sources we have for mortgage, but rates dipping to below 6% towards the end of the year, but sort of a slow drip over the course of the year with what would be kind of built into our base economic forecast. So really, I'd say not a ton of significant benefit from our guidance embedded in what we may see as optimism from rates. So that would be upside if we do see additional declines and it works further than we think or than our estimates are assuming, there'll be benefit or upside to our origination forecast. Crispin Love: Okay. Perfect. I appreciate that. And then just on your guide for the net interest margin, heard for '26, I believe, 2.45% to 2.55%. But can you discuss what's implied in your guide for the trajectory throughout 2026 just as you move through the year big picture, just based on the current rate outlook and your expectations? Bradley Howes: Yes. So we had a 2.51% margin in this quarter, in the fourth quarter of 2025. The guidance, I wouldn't think would be -- as you look at the trajectory, you'll see a little bit of continued improvement in margin based on the shift of mix in the loans, right, as we amortize off residential mortgages and other loans that have lower yields and we replaced those with MPP and AIO loans which carry higher average yields. So you'll see a little bit of benefit as we go out throughout the year in that. But then we have 2 rate cuts that get embedded in the middle part of the year, where we see a little bit of a decline that kind of offset some of that improvement. So net-net, I don't think there's going to be a ton of change from a trajectory standpoint as we look out to 2026. It will obviously depend on deposit betas and the rate environment and where the yield curve kind of plays out with some of the middle part of the curve. But just I think from a trajectory standpoint, it should be pretty consistent across the year. Operator: Our next questions are from the line of Damon DelMonte with KBW. Damon Del Monte: Just wanted to start off with the outlook on the provision. I think, Brad, you had said that it would be kind of in the $3 million to $4 million range for the year. And when you kind of factor in growth, it doesn't really move the reserve much. So just was wondering if you could provide a little color around your comfort with the reserve level kind of slowly declining during the course of 2025 and kind of where you feel like a good, targeted level is for you guys? Bradley Howes: Yes. Happy to start there, and Chuck and Kevin could join too. When I think about the provision guidance, that's going to be just nominal growth in MPP and AIO. So as you indicated, not a ton of extra provisions was there. But if you look at the last couple of quarters of charge-offs, we've seen a little bit of elevation, although still well below long-term historical averages. So my guidance was just based on some higher charge-offs that may or may not come through next year, but that's just for conservatism, that's kind of what we're seeing right now. What I'd say about the decline in reserve, if you look throughout the course of the year, there's a lot of different things that go into that reserve. We have a very granular allowance methodology where we're running all of our loans at a loan level, forecasting out a lot of different economic scenarios and a lot of different model assumptions that go into it. What I'd say is if you look at our reserve, if you exclude MPP, which is pristine credit quality and you take out our fair value loans, we're probably about 37 basis points of coverage to the HFI book. When you think about our book, keep in mind, as Kevin indicated, it's a very seasoned book. Most of it was originated in 2022 or earlier. We're continuing to improve the mix with growth in MPP and AIO loans, which are much stronger asset quality than the remainder of the portfolio, carry much lower loss rates. So that improves the overall mix, and it reduces the allowance as we go forward. The biggest decrease this quarter, I'd say, would be from our economic forecast. As we look out -- and this tends to change quarter-to-quarter, right, as the economic forecasts are updated in Moody's. But when you see an improvement in economic forecast, really [ HPI ] will be the big one. Our allowance can change up or down based on that. Last quarter, we had the opposite impact where home prices were expected to come down relative to the prior forecast. So that tends to ebb and flow throughout the year. I'd also say when you look at our nonperforming loans, as Kevin indicated, the majority of the loans that we see go into the nonperforming bucket, we have little or no loss because there's sufficient collateral coverage. We have a 71% average LTV on our portfolio, a decent chunk of it has MI if it's above 80% and 99% of it is backed by residential real estate collateral. So I think our actual losses even at this quarter and the last quarter have been below what the model would indicate for charge-offs. So we're not seeing any detrimental updates to loss rates or anything in our allowance model. And I think it gives us a lot of comfort with where we stand today from an allowance to loans held for investment perspective. Damon Del Monte: Great color. I appreciate that. And then with respect to the expense guide, I think you said $138 million to $142 million for the full year. Kind of drilling in here a little bit. The taxes and insurance line has kind of gone up in the back half of the year and hit like $2.6 million, I think it was here in the fourth quarter. Do you expect that to continue to rise as like that just kind of part of being a public company? Or were there some unique items here in the fourth quarter, which will kind of come out and it will go back to maybe where it was for the first half of the year? Bradley Howes: No, I'd expect the former. That would continue to go up. We expect it to increase as part of the expense guidance, right? We'll see an increase in the other taxes and insurance that's really driven by our FDIC insurance charges. And 2 items really impact that. I think the capital levels are one. As we lever capital throughout the course of '25 and we've grown our balance sheet, that capital charge goes up. And then the wholesale brokered as a percentage of your funding is another big driver of that FDIC assessment charges. And we've continued to use -- a sizable portion of our funding is wholesale brokered related. That's why it's important that we continue to hit our deposit initiatives and look for sources of non-brokered deposits to help drive that down. Damon Del Monte: Got it. Okay. And then just lastly on, can you provide any update on your strategy for adding retail hires? I think you said there was about 34 or something this year that you added. Kind of just what the prospect is to add more producers as the year progresses? Kevin Comps: Yes. So we're always continuing on the recruiting front. And we actually have a formalized recruiting strategy that we implemented in late Q4 around retail loan officers throughout the country. And so there is a pipeline we're working of new originators is the simple answer, I guess. Operator: [Operator Instructions]. The next question is from the line of Christopher Marinac with Janney Montgomery Scott. Christopher Marinac: Could you elaborate a little bit more on the digital deposit relationship that you mentioned in the press release and how many more opportunities like that are out there for this new year? Kevin Comps: Yes, this is Kevin. So we did partner with an online platform where we gather these digital deposits direct to the customer through that platform. As I said, it's a little over $230 million that we brought in, in the past quarter. We're continuing to look for opportunities like that, as we've mentioned on a couple of these calls, we've had some decent sized relationships we were able to acquire during 2025. Nothing specific additionally to add for 2026 at this point, but we continue to explore all those different sources. Christopher Marinac: Are these more attractive today just given the fact that broad interest rates have edged down? And is there any sort of risk of these leaving once you have them onboarded? Kevin Comps: So there is -- they are rate-sensitive customers like a lot of our funding are. However, we continue to stay competitive on a national scale. These are savings, money markets deposits, which we do pay competitive rates and monitor that very closely with competitors in this online space. So we can control that through rates and pricing. Christopher Marinac: Got it. And then just looking at kind of where you were 6 months ago on the custodial deposits within the specialized mortgage servicing, I mean how significant to you is it that you've built that a lot in these last 6 months? Kevin Comps: Yes. So that's an important part of our funding strategy also. A couple of different things there. So the deposits that we have, custodial funds related to the mortgage servicing rights that we own, all those custodial accounts are housed here. Also, as we've outsourced the agency subservicing to a counterparty, we retain all those deposits here as part of that relationship also. In addition to the larger custodial fund relationship outside of the MSRs that we own, we brought on during 2025 also. So we continue to explore additional custodial type relationships to bring to the bank in addition to the one we have today. They definitely will continue to add as we retain more MRSs. In the future, all those custodial funds will remain here also. Christopher Marinac: Okay. So is it fair to say that there's a scenario where you get to the upper end of the margin range primarily -- or not primarily, but just part of it is because you could get these new deposits in, impact the mix, therefore, drive a higher margin. Is that still part of this year plus the ability to do higher over time? Bradley Howes: I would say we don't have a lot of those kinds of deposits embedded in the margin guidance. So that would be upside to that. What I would say would drive the needle though is deposit betas coming in better than we thought, which if you look at the last 2 quarters, we've had almost 100% deposit betas on the ones that we can control. We do have some deposits, obviously, CDs, right, are year out and some other ones that are smaller. But for the ones that we have control over, we've been very happy with the beta. If that continues, that could be incremental benefit to keep us at the top end of that range above where our model would say our beta should be. Christopher Marinac: Okay. Great. And then just one quick question on the gain on sale. I know there's a wide range on the 2.75% to 3.25%. But could you just remind us on what could be -- or what could happen to be at the upper end of that gain on the sale range this year? Bradley Howes: Yes. I'll start, Chris. I'd say it's really going to be driven on competition, right, and just spreads. From 2025, we were able to price, I think, a little better based on the less competition than we expect for these kinds of loans, and that would be both in our conforming business and across our non-QM. So we do expect that competition to heat up a little bit there, which is why you see a little bit lower guide on the overall margins. So that's one. And then I'd say, obviously, the mix of loans impacts that, too. I mentioned in my commentary, consumer direct has a lower margin and a lower expense structure. So net-net, profitability is the same. But when you look at the all-in margin, if consumer direct comes in at a lower percentage, that will drive up the margin guidance a little bit. If it comes in at a higher percentage, that will take it down. I'd say those 2 items and... Operator: This now concludes our question-and-answer session. I'd like to turn the floor back over to Chuck Williams for closing remarks. Charles Williams: Thank you. I want to again thank everyone for joining today's call. Our success over the last year is directly attributable to a talented team who work hard every day to make Northpointe the best bank in America. I'm proud of all we've achieved in 2025, and I look forward to remaining nimble and opportunistic and further driving long-term shareholder value in 2026. We appreciate all the trust and support for Northpointe. And with that, have a great day, everyone. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.
Operator: Good morning, everyone. And welcome to the FNB Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Lisa Hajdu, Manager of Investor Relations. Ma'am, please go ahead. Lisa Hajdu: Good morning, and welcome to our earnings call. This conference call of FNB Corporation and the reports as filed with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Wednesday, January 28, and the webcast link will be posted to the About Us, Investor Relations section of our corporate website. I will now turn the call over to Vince Delie, Chairman, President and CEO. Vincent J. Delie: Thank you, and welcome to our fourth quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. FNB reported fourth quarter operating net income available to common shareholders of $182 million or $0.50 per diluted common share. Full year 2025's operating performance reflected several records, including revenue of $1.8 billion, operating net income available to common shareholders of $577 million and operating earnings per diluted common share of $1.59. Full year operating EPS grew 14% year-over-year, driven by the 9% growth in net interest income, significant margin expansion and record noninterest income. We delivered strong profitability and capital metrics with return on average tangible common equity equaling 16% and tangible book value per share of $11.87, an increase of 13% from the year ago quarter. Throughout 2025, we focused on resetting the balance sheet to best position FNB for continued future success, including managing loan concentrations as well as improving the loan-to-deposit ratio to 89.7%. In December, we transferred approximately $200 million of performing residual mortgage loans to held for sale in anticipation of a loan sale to close in the first quarter of 2026. Additionally, as I mentioned on the earnings call a year ago, we have strategically decreased our CRE concentration organically to 197% over the past few years. We are generating enough capital to support growth across our loan portfolio, including CRE and have ample capacity to achieve historical growth rates. Since launching our Clicks-to-Bricks strategy 10 years ago, FNB has introduced innovative solutions, including the eStore and common application that provide an enhanced client experience to deepen relationships and achieve customer primacy. Our comprehensive digital strategy, including our early adoption of AI, remains a driving force behind client acquisition, engagement and convenience. This quarter, we introduced payment switch, which enables customers to easily switch preauthorized payments to their primary checking to FNB through our mobile app. With direct deposit switch and payment switch, we've eliminated 2 of the most common barriers for customers to move their primary banking relationship to FNB. This is another great example of how FNB is leading the industry with our eStore Clicks-to-Bricks strategy and comprehensive digital capabilities. We are planning on introducing additional unique features over the coming quarters that will benefit our customers and further differentiate us in the marketplace. Concurrently, FNB continues to expand to AI and data analytics usage to drive efficiency and accelerate revenue growth. Through our disciplined expense management culture, FNB has achieved annual cost savings of $10 million to $20 million per year since 2019. Leveraging our investments in technology, AI and data analytics, we expect even higher levels of cost savings in 2026 through increased automation and process improvements. This provides FNB the ability to continue to invest in our revenue-generating businesses and differentiated omnichannel customer experience while continuing to produce meaningful positive operating leverage. With that, I would like to turn the call over to Gary to discuss the strong credit results for the quarter. Gary? Gary L. Guerrieri: Thank you, Vince. Good morning, everyone. We ended the quarter and year-end with our asset quality metrics remaining at very strong levels. Total delinquency ended the quarter at 71 basis points, up 6 bps from the prior quarter with NPLs and OREO down 6 bps, ending at a multiyear low of 31 basis points. Net charge-offs totaled 19 basis points and 20 basis points for the year, showing continued strong performance throughout an uncertain economic environment. We experienced a further decline of $147 million or 10.2% in criticized loans on a linked quarter basis, driven by payoff activity with decreases again observed throughout all of the commercial segments. Once again, we were pleased with the improvements we saw during the quarter and throughout 2025. Total funded provision expense for the quarter stood at $18.7 million, supporting the C&I loan growth and charge-offs. Our ending fund reserve stands at $440 million, an increase of $2.3 million, ending at 1.26%, up 1 basis point from the prior quarter. When including acquired unamortized loan discounts, our reserve stands at 1.32%, and our NPL coverage position remained strong at 438%, inclusive of the discounts. Regarding tariffs, we continue to monitor line utilization and industry concentrations, especially customers with a higher potential impact over the longer-term. Since Q1, we have not seen any material impacts on the loan portfolio and have continued to experience positive credit migration since then. Furthermore, this quarter marked our strongest C&I loan production activity for the year, enabling us to achieve positive net C&I loan growth in the quarter and year-over-year which offset another decrease in line utilization. Regarding the nonowner CRE portfolio, all credit metrics improved quarter-over-quarter and year-over-year with delinquency and NPLs at 34 and 31 basis points, respectively. We have successfully managed the CRE risk and exposure to end the year within our desired range as a percentage of our capital base. We started to see some high-quality opportunities during the quarter However, exits through ongoing secondary market activity resulted in a reduction in exposure. We continue to enhance our concentration risk and allowance for credit loss frameworks and our proprietary credit management tool that provides a comprehensive view of our customer base. Not standing periodic uncertainty in the economic environment our core credit philosophy and strong credit risk management practices position us to successfully navigate any potential volatility across the various economic cycles. In summary, we continue to be very pleased with the performance of our loan portfolio and our team's attention to managing risk, which has positioned us well for growth in the year ahead. Building on the strong momentum we saw in the quarter, we continue to focus on core C&I and equipment finance growth with our building pipelines. Additionally, with potential for increases in line utilization, our growth expectations for high-quality CRE and our well-positioned retail franchise, we look forward to achieving our desired levels of balance sheet growth in the year ahead. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks. Vincent J. Calabrese: Thanks, Gary, and good morning. Today, I will focus on the fourth quarter's financial results and walk through our guidance for the first quarter and full year of 2026. Fourth quarter operating net income totaled a record $181.8 million or $0.50 per share when excluding a discretionary $20 million charitable contribution to the FNB Foundation partially offset by a reduction in the estimated FDIC special assessment. Record total revenues of nearly $458 million, grew a very strong 12.4% on an operating basis and operating pre-provision net revenue grew 21.5% from the year ago quarter. The fourth quarter's performance also includes investment tax credits of $37.2 million from a renewable energy financing transaction, partially offset by related noncredit valuation impairment of $4.4 million pretax on the financing receivable, which is included in other noninterest expense. FNB's Equipment Finance business originates renewable energy financing transactions is a core element of their business strategy. While we continue to have an active pipeline in the renewable energy sector, certain types of projects are limited by changes in the tax laws. Total assets at year-end 2025 exceeded $50 billion for the first time in company history. Fourth quarter average loans and leases of $35 billion, increased $169 million from last quarter or 1.9% annualized. Average consumer loans grew $223 million, primarily due to higher residential mortgage and consumer line of credit balances. Average commercial loans and leases slightly decreased $54 million linked quarter driven by higher attrition from secondary market activity, lower line utilization and further scheduled reductions in CRE balances. Average commercial and industrial loans increased $81 million and commercial leases increased $26 million, while average commercial real estate loans declined $158 million. CRE exposure has reached our desired concentration range and combined with record capital levels and a sub-90% loan-to-deposit ratio provides FNB a meaningful opportunity to participate in an economic environment with more favorable loan growth prospects. As part of our ongoing balance sheet management strategies, approximately $200 million of performing residential mortgage loans were transferred to held for sale late in the fourth quarter with the actual loan sale expected to close in the first quarter. Residential mortgage loans are expected to roughly approximate the growth in the overall loan portfolio in 2026. Fourth quarter average deposits totaled $38.6 billion, an increase of $740 million or 7.7% linked quarter annualized driven by organic growth in new and existing customer relationships. Average interest-bearing demand balances grew strongly, particularly interest-bearing checking and money market balances. Average noninterest-bearing deposits exceeded $10 billion and were up 4.5% linked quarter annualized. The mix of noninterest-bearing deposits to total deposits on a spot basis remained at 26%. Success of our ongoing balance sheet management strategies and deposit gathering initiatives brought our loan-to-deposit ratio below 90%, a more than 170 basis point improvement from year-end 2024. Fourth quarter net interest income totaled a record $365.4 million, up 1.7% linked quarter and 13.4% above the fourth quarter of 2024. Average earning assets were up $310 million sequentially on higher loan and investment securities balances. The yield on earning assets declined 11 basis points sequentially as variable rate loans were impacted by the 75 basis points of Federal Reserve interest rate cuts since September of 2025, while the yield on the investment securities portfolio only declined slightly. Interest-bearing deposit costs decreased 13 basis points linked quarter to 2.53% and borrowing costs declined 30 basis points to 4.35%. The resulting fourth quarter net interest margin was 3.28%, up 3 basis points linked quarter and up 24 basis points year-over-year. Our total cumulative spot deposit beta. Since the Fed interest rate cuts began in September of 2024, ended the year at 25%. We continue to strategically lower deposit pricing in step with the downward trend in the Fed funds rate and we expect a relatively stable net interest margin in the first quarter of 2026. Operating noninterest income was $92.3 million, up 8.8% from the year ago period. Wealth Management revenues grew 15% from 2024 levels, driven by securities commissions and fees and growth across the geographic footprint. Service charges increased 4.1% from last year reflecting increased contributions from treasury management activities. Increases in SBA sold loan premiums and other miscellaneous gains drove the strong increase in other income and BOLI income was boosted by higher life insurance claims. Capital markets income included higher swap fees and increased international banking revenue. Despite higher gain on sale and net positive fair value adjustments from hedging activity, mortgage banking income declined on higher MSR amortization and a net MSR fair value recovery in the fourth quarter of 2024. Operating noninterest expense totaled $256.5 million and $8.3 million or 3.4% increase from the year ago quarter. Salaries and employee benefits expenses were up 4.5% from the year ago quarter, primarily reflecting strategic hiring and higher performance and production-related compensation. Output Services increased 15.3% from last year due to higher volume-related technology and third-party costs and occupancy and equipment increased 7.3% primarily due to technology-related investments and higher occupancy costs. Other operating noninterest expense decreased $3.3 million and included a financing receivable noncredit impairment of $4.4 million from the tax credit transaction mentioned earlier, which was approximately $6 million lower than the impairment recognized for the fourth quarter 2024 tax credit transaction. The efficiency ratio remained solid at 53.8% for the fourth quarter, 307 basis points better than the fourth quarter of 2024. We continue to manage our expense base in a disciplined manner which is expected to generate significant positive operating leverage in 2026. FNB's capital levels remained at record levels with a CET1 ratio at 11.4% and tangible common equity ratio at 8.9%, providing flexibility to optimally deploy capital to increase shareholder value. On a year-over-year basis, tangible book value per common share increased $1.38 or 13.2% to $11.87, demonstrating our strong profitability levels and commitment to peer-leading internal capital generation. Share repurchases totaled nearly $50 million for the full year of 2025, the highest level since the program originated in 2020. Let's now look at the guidance for the first quarter and full year 2026 starting with the balance sheet. For full year 2026, period-end loans and deposits are expected to grow mid-single digits versus year-end 2025 as we continue to increase our market share across our diverse geographic footprint. Full year 2026 net interest income is expected to be between $1.495 billion and $1.535 billion with first quarter net interest income expected between $355 million and $365 million. Our guidance assumes 225 basis point rate cuts in April and October. Noninterest income for the year is expected to be between $370 million and $390 million, with the first quarter expected between $90 million and $95 million. Full year guidance for noninterest expense is expected to be between $1 billion and $1.02 billion, representing a 1.5% increase at the midpoint compared with 2025 operating expenses. First quarter noninterest expenses are expected in a range of $255 million to $260 million as compensation expense is seasonally higher in the first quarter due to the timing of normal long-term stock compensation and higher payroll taxes. The 2026 provision expense is expected to be between $85 million and $105 million, dependent on net loan growth and charge-off activity. Lastly, the full year effective tax rate should be between 21% and 22%, which does not include any investment tax credit activity that may occur. With that, I will turn the call back to Vince. Vincent J. Delie: As you've heard in our prepared remarks, we are very pleased with our financial results and achieved a number of records for 2025 including revenue, noninterest income and EPS. Our balance sheet surpassed $50 billion in assets, and we are well positioned to benefit from technology investment and expected growth opportunities. Our performance reflects steadfast execution of our multipronged strategy, diversifying revenue streams, optimizing our balance sheet, deploying capital thoughtfully and serving as the primary bank for our clients, enabled by our tech investments in eStore and omnichannel capabilities. Successful execution of FNB's strategy has led to enhance profitability and capital accretion, all while achieving some of the highest returns in the industry. Looking ahead to 2026, we are confident in our ability to deliver meaningful loan and deposit growth, margin expansion and further diversification of fee income. Our improved capital levels and double-digit tangible book value growth year-over-year provide strong capital flexibility and position FNB to continue to deliver sustainable long-term value benefiting our customers, employees, communities and shareholders. Operator: [Operator Instructions] Our first question today comes from Daniel Tamayo from Raymond James. Daniel Tamayo: Maybe we start on the fee income side. Obviously, at the Investor Day last quarter, you talked a lot about growth that has been expected -- sorry, investments that have been made into the fee income businesses and kind of long-term growth pathways. Just curious, as you look at the guidance range for '26, what do you think might get you towards the upper end of the guide and how likely that could be in your mind? Vincent J. Delie: Yes. I mean, I don't -- do you want to answer, Vince. Vincent J. Calabrese: Sure. I can jump in and you can add. I think just a couple of things on fee income, right? It again highlights the importance of diversification. So we had all-time highs for 7 of our fee-based businesses for the full year and 4 of them in the fourth quarter alone. When you look at the kind of moving parts that were there, the growth in service charges, insurance and securities commissions and BOLI offset mortgage banking and capital markets being lower than the prior quarter. So the benefit of the diversification comes through. When you look ahead to '26, we're projecting continued solid growth there. The newer businesses that we've talked about starting to contribute at higher levels is definitely baked into the guidance. I think there might be some upside to that. And then strong performance from our kind of core fee-based businesses, wealth, treasury management, capital markets and mortgage. I think there's an opportunity for them to have another strong year as we did in 2025. Vincent J. Delie: The only thing I was going to add, Vince, is that the macroeconomic environment, as we mentioned, when we were all together, Danny, plays in our favor. So the interest rate environment is positive for the mortgage banking business. We sell servicing release gain on sale from the sale of mortgage loans. So that's reflected in the fee income number. More activity in treasury management moving into next year because of what Vince said, with market share gains, expect... Vincent J. Calabrese: New initiatives there. Vincent J. Delie: And new initiatives there and the build-out of our TM platform. We expect that to continue to grow with contributions from merchant and other areas that relate to treasury management. Derivatives, we would expect, given the interest rate environment from a derivatives perspective to play out in our favor. And then we built out the public finance division in the process of building it out. We're very optimistic about contributions from that business and the debt capital markets arena. So that should play out for us. And then the M&A advisory business is they're seeing a lot of opportunities that we're expecting to translate that into fee income in '26. So there are quite a few drivers that's why we're fairly confident that we're going to be able to achieve what we've laid out in the guide. Vincent J. Calabrese: And we did move the first quarter guidance up a bit, Danny, too. The implied guide for the fourth quarter was [ 88% to 93% ] we moved it up to [ 90% to 95% ] In a seasonally slower quarter. So I think that's an indication too. Daniel Tamayo: Great, Vince. Maybe a bigger picture question on operating leverage. Just your thoughts around operating leverage in 2026 and what might be potential issues in not getting there or levers to achieve it? Vincent J. Calabrese: Yes, I would just -- a couple of things. So if you look at the PPNR was lower in the fourth quarter versus the third quarter, all very explainable. We had about $12 million of not -- what I would call discrete nonrun rate expenses that came through in the fourth quarter. We had the solar tax impairment that we mentioned in the remarks. We had some higher medical claims that occur in the fourth quarter every year, our mortgage down payment program was a little over $3 million. And then year-end performance-based accruals and 401(k) contributions based on the strong overall financial performance. So -- and then in the third quarter, we had that $5.4 million recovery. So there was a lot of noise kind of moving from third to fourth quarter. I mean as we go forward next year, our guidance includes a meaningful increase in PPNR and in the operating leverage. And I think as we talked about at Investor Day, expenses growing in the low single digits, while we're continuing to invest in the new initiatives, some of the ones that Vince mentioned. So I think we feel pretty good about our ability to meaningfully increase the operating leverage in 2026. Vincent J. Delie: We also don't have the expense related to heightened standards, building as rapidly because we've completed many of the initiatives that we needed to complete from a personnel perspective and from a consulting and systems perspective. So -- we don't expect that to be a headwind anymore. We've also completed -- we fulfilled our obligation to fund grants for low income mortgage loans. So that was a pretty significant expense in '25. So that will be behind us as well. So we're fairly confident that we're going to be able to achieve the results that we reflected in our guide. In addition, we've had a number of expense initiatives that Vince has mentioned in the past. And this year, we believe we can achieve even better cost takeouts on a run rate basis than we have historically. We've been focused on it. So efficiency is a focus moving into next year. And we're also leveraging some of the digital investment changes that we're making from a process perspective by utilizing AI and data analytics to make our operations more efficient. And the deployment of the common app in the retail delivery channel also provides a great deal of efficiency from a back office perspective because a lot of that processing is digitized. So that should all play well for us as we move into next year with elevated volumes in the consumer set. Vincent J. Calabrese: Yes, some of the initiatives baked into from a CapEx standpoint is investing in our data science platform, AI and machine learning data platform with the new leaders that we have on board, investing more to get even more benefit out of those functions there. And that's part of why we were confident with the higher cost savings goal that we have for '26. And if you baked into our guidance has the efficiency ratio kind of getting down into the low 50s by the end of the year or second half of the year, I would say. Operator: Our next question comes from Russell Gunther from Stephens. Russell Elliott Gunther: I wanted to ask on the -- the loan growth outlook for '26 of mid-single digits. First, Vince, I want to make sure I caught you that your expectations for the resi portfolio would be around that sort of mid-single-digit level. And then second, as you discussed at the Investor Day, C&I and CRE are expected to be the loan growth leaders going forward. So if we are thinking about resi in that mid-single digits, is it safe to assume C&I and CRE would outpunch that and maybe just some comments around the drivers of the magnitude within commercial. Vincent J. Delie: Sure. I mean if you strip out the large payoffs that we had, particularly in the CRE space, we had a very strong production quarter. I know it's not reflected in the spot balance because of those payouts, acceleration in payoffs, particularly in multifamily with some larger C&I credits that went the way of capital markets versus bank debt. So I think the production -- the underlying production was very strong. The C&I production was extraordinarily good, I would say, for the fourth quarter of the year. So we're moving into next year with some good momentum. We do have a lot of capacity. We talked a little bit in the prepared remarks about resetting the balance sheet. So we used '25 to kind of position our company to grow CRE loans and to grow C&I loans more rapidly. If you look at our loan-to-deposit ratio, we've had great success generating deposits. As I said earlier in the year, my hope was we would be closer to 88%. We're at 89.7%. So we're close. That gives us a lot of capacity to fund loan growth moving into '26 and to manage our margin from a deposit cost perspective. So those are positives. If you look at the capital generation that this company has been able to produce historically, we generate sufficient capital levels to sustain mid- to high single-digit loan growth with relative ease. If you look at capacity from a CRE perspective, we're one of the few banks in our peer group that has a concentration as low as we do. And we've specifically managed that down. We mentioned we wanted to be under 200%. We finished just under 200%... Gary L. Guerrieri: 197%. Vincent J. Delie: 197% capital. So this is a reset and that should give you great confidence because now we can move into '26 and be much more aggressive in the CRE space and in the C&I lending space. And we have a much stronger platform from a fee income perspective to support leading those credits. So I think all of that is why we're very optimistic about achieving the guide that we put out there. The other thing I will note, if you look at the H8 data and you exclude some of the payoffs that we've had, we've actually performed significantly better than the banks in total in the last quarter. So again, not looking at the full year because we were being very measured and we were reducing exposures in a bunch of areas that we wanted to reduce exposures in to prepare for '26. But if you strip out some of the payoffs, we were many times greater than the other banks in the industry. So we're optimistic about it. We haven't pulled back in terms of our pursuit of good C&I opportunities. We're not an NBFI. We're not a commercial finance driven C&I shop. So this is core C&I across our markets. where we're taking market share. Vincent J. Calabrese: The line utilization is very low. Vincent J. Delie: The line utilization remains low. So there's upside there as well. So all in, I think we're in a fairly strong position moving into '26 to continue to drive growth in our loan categories. In mortgage, I would -- we're -- there's a sale of performing mortgage loans. We decided there were some single household mortgage loans that we felt we should move off the balance sheet to give capacity for other things to provide higher returns, and that's the decision driving that. So I would expect growth in the mortgage business to be more tempered moving into '26 and with the change in rates probably an opportunity to get better gain on sale margin as we move into '26 to help fee income. So more moving off the balance sheet in '26. I hope that helps. Russell Elliott Gunther: Okay. Great. And then my second question would be capital related. CET1 11.4% not too long ago, that target was 10% than 10.5%. It would be helpful to get a sense for where you would plan to manage that in 2026. And as you grow that CRE where are you willing to flex that concentration level to? Vincent J. Calabrese: Yes, I would say a few things on that topic, right? Like you mentioned, the 11.4%. It wasn't that long ago that we had a goal of 10% and then 10% was the floor and now we're at 11.4%. Dividend payout for the full year, then you combine that with our expectation for strong internal capital generation based on the guidance that we have. So we're in the best position we've ever been to deploy capital to optimize shareholder value. The organic growth is the first use of that, of course. But like Vince said, we're generating enough capital to really support high single-digit loan growth. So I think that Vince... Vincent J. Delie: To stop you right there because you asked a question about our ability to maintain the concentration levels. We did look at that -- we do generate a lot of capital, as you mentioned, our strong internal capital generation. We could -- basically, based on that in our guide, we could originate nearly $1 billion in CRE loans and not change the concentration level at this point in time. I think that's an important point, and I'm sorry to interrupt you. I thought given your speech on our capital. Vincent J. Calabrese: Yes. Gary L. Guerrieri: So there's -- I mean there's significant capacity to do business as usual there. And we're going to pick the transactions that we want to bank. But we've got plenty of capacity with the capital generation that the company is achieving. Vincent J. Delie: But if we move slightly above 200%, that's not going to kill us. We're still well below others that we compete against in the marketplace. But our goal is to stay there if we can. Go ahead. Vincent J. Calabrese: So beyond supporting that balance sheet growth, we still think buybacks are attractive. I mean we did $50 million for the full year. We did $18 million in the fourth quarter. Even at these valuation levels, we still think it's attractive. And for 2026, I would expect we'd be at the same level or higher as far as buyback activity. And then the dividend, we've been having conversations. I mean it's something we discussed regularly, and we'll be discussing with our Board. In the past, we had that elevated payout ratio for such a long period of time. And we like the flexibility of the buybacks. So that will be a component of capital management. But our payout ratio in the 25% level at least creates the ability to increase the dividend at some point if we decide to do that. So it's definitely something that's on the table for us to discuss. There hasn't been a decision or anything, that's a Board decision, but it's something we'll take a hard look at this year. This is a strategic planning cycle for us. So it would be kind of part of our capital management planning as we look ahead. Vincent J. Delie: And the Board is going to look at it through the lens of our shareholders. They want to do what's absolutely best from a capital deployment perspective. That has always been their stated mission. They want to drive returns at the company, drive higher stock price performance. So they're going to look at all of that and look at our relative valuation with buybacks in mind when they make those decisions. So deployment of capital is a focus of the Board will continue to be. . Vincent J. Calabrese: Yes. The last point I would make, too, is just when you look at our financial performance, Alfred always says and it's a good point. We have a 16.3% return on tangible common equity on a TCE ratio that's 8.9%. So that TCE ratio has built significantly from the 4.5%. It was when the 3 of us started in our roles, it's 8.9%. So I think that's important, too. So even with the higher levels of capital, we're generating a top quartile for sure, return on tangible common equity and managing that capital will be key to our performance as we move forward. Operator: Our next question comes from Casey Haire. Casey Haire: I want to touch on the margin. So the -- just wondering the interest-bearing deposit beta, where does that trend throughout '26 versus that 25% cycle to date? Vincent J. Calabrese: Yes. I would say we've still talked and still feel that kind of mid-30s on a terminal beta makes sense to us. By the end of the year, our guidance probably get to about 30% or so, up from the '25. I think our team has done an excellent job managing the deposit rates through this cycle, being very thoughtful and strategic in how we're adjusting rates and which tranches we're adjusting rates at. So there's still opportunity for us from end of the year reference point forward to continue to bring down deposit rates and big slugs of the deposit base. So I would say 30% or so by the end of the year, Casey, and still kind of a mid-30s once this cycle finishes. Casey Haire: Okay. Excellent. And then just a credit question. Vincent J. Calabrese: Total, too. sorry, I should comment. Casey Haire: So that's not IBD. That's total deposit. Vincent J. Calabrese: That's total. Yes, I'm sorry. You're asking interest. That's total. Casey Haire: Okay. Got you. Okay. All right. And then on the credit side, so the provision guide, does that assume -- like that assumes that the ACL ratio. The reserve ratio kind of holds this level supports mid-single-digit growth, and then the charge-off outlook, I'm assuming that presumes that we kind of hang out at this 20 bps level. Gary L. Guerrieri: Yes. I think you're spot on, Casey, with your assessment of that, all sounds pretty close to what we're expecting there with the guide. . Casey Haire: Okay. Great. And just last one for me and one more on the capital front. So you guys clearly have a very nice capital generation. It's not inconceivable that you're above 12% CET1 in a year from now. So I guess, kind of the other way, is there -- I know you're well above your floor, are you looking at -- is there a level of capital that's too much? Or are you happy to just let capital stockpile for I mean you have more room to be more aggressive and take the payout ratio higher. I'm just wondering what's preventing you. Vincent J. Calabrese: Nothing is really preventing us. I mean, as I commented on, the dividend will be a discussion with our Board this year as far as potentially increasing the dividend, having buybacks at or higher than the level that we did last year is kind of part of what's baked into our plan. The capital ratio, if you do the math and run it forward, you get around 12% by the end of the year. So some of that at some point, the loan growth activity picks up to get to the high single digits, right? And you want to have the ability to do that. But we're looking at all the pieces of it between funding loan growth as well as the dividend and the buyback. Vincent J. Delie: Yes. We don't want to sit here and keep accumulating capital, Casey. We're focusing on a bunch of avenues to deploy capital to move some returns too. I mean we -- if we can invest capital in high-returning opportunities, then we're going to have a much higher return on tangible common equity on a slightly lower capital base. But it has to be sustainable. It can't just be a onetime deal, where we bought back shares, and then everything rolls back. And we're looking forward and making sure that we're deploying that capital in the most productive ways on a go-forward basis, so we can drive returns. Vincent J. Calabrese: Yes. And the industry has been moving higher, too. The peers generally have been shifting upwards. So kind of keep one eye on that and then the rest of our eyes on kind of what we're doing. Vincent J. Delie: Yes. I mean the -- it's kind of tough when you look at the AOCI impairment that occurred a few years ago, and there's accretion going on, Casey. So some of the TBV build is just a reversal of impairments that occurred and we didn't have that. So when you look at these big outsized numbers and TBV growth, you have to take that into consideration. Ours is core earnings and retained earnings. That's a big difference. So when you're evaluating all these banks, you should be taking that into consideration, I hope. I think you are... Vincent J. Calabrese: And we've returned with $2.2 billion capital since 2009. So I mean it's been an active part of our overall shareholder positioning. Operator: [Operator Instructions] Our next question comes from Kelly Motta from KBW. Kelly Motta: So not to beat a dead horse with capital, but just kind of building off of the last couple of questions there. It sounds like you believe your stock is still attractive here. Can you, one, remind us any price sensitivity that you have regarding the buyback, if there's any sort of guiding principles there. And then two, I'd be remiss if not to ask about any updated thoughts on M&A here. Vincent J. Calabrese: Yes. I would just say valuation, we think our stock is worth a lot more than where it's trading. If you look at where it was trading sake in the last year or 2, I mean, it had been trading at a discount on a P basis to our peers, which didn't make sense to us. And now it's kind of equal to the peers, and we think it should be higher than it appears. So we still think it's a good investment for us to make even at these higher valuation levels. And there's not a bright line, Kelly, I guess I would say, where we would stop. I mean, we look at our relative positioning and what's happening with the market and what's happening with the economy. So -- but definitely room for us to continue to be active. Vincent J. Delie: Yes, we're -- from an M&A perspective, we're 9 years past our last M&A -- large M&A transaction. We did 2 small bank deals, very small. We've said repeatedly, we're focused on internal capital generation. We're focused -- we've said this back going back 5, 6 years ago. We're going to continue to look at the mechanisms that we have to drive returns through organic growth. So that's our priority. We've been able to do that very successfully. We've been able to invest in tech and outperform some of the largest banks in the country in certain aspects of our tech offering. So we're going to keep doing that. And if something comes up opportunistically, it really has to be a good fit. And I think it would have to provide us with -- it can't dilute what we built. So 26% noninterest-bearing deposits and the deposit mix is pretty strong still even after it declined post the effect of stimulus. And I think our goal is to continue to drive that mix in a favorable manner. We don't want to dilute that. We don't want to dilute capital tangible book value materially because we've spent a lot of talking focusing on it and driving TPV growth. So we have good momentum there. If something provides us with an opportunity to drive organic growth at a faster clip, sure we would look at it. But we've got tremendous markets. We're spread across a pretty broad geography. We -- as I've said before, we've grown market share in 75% of the MSAs that we compete in. So we are proving that we can compete effectively at our scale and size and our efficiency ratio is very strong. So I don't place that as a high priority anymore. I know that seems surprising to people, but because we've been here for so long. I mean, I've been in this seat for almost 15 years. So we did a lot of M&A transactions to get to where we are, but we needed to get to this level. Vincent J. Calabrese: And then leveraging the investments we made that are really early stages of contributing. Vincent J. Delie: Yes. So I guess the answer is we're going to do whatever we think makes the most sense for the shareholders, and we're going to be very cautious as we move forward, just like we have been over the last in 5, 6, 7 years. And if something presents itself that checks all the boxes, sure, we'll look at it. But we're going to continue to stay focused on organic growth, driving organic growth, building out our platform leveraging our retail bank, which is, I think, the 19th, if you look at locations, it's the 19th largest retail bank in the country, right, Alfred, and one of the most efficient if we looked at metrics relative to the largest banks in the country, and we run a very efficient retail bank. So the consumer business for us is a good business. Anyway, that's our take on it. And I appreciate the question. Kelly Motta: Got it. I appreciate all the color makes total sense. Maybe 1 follow-up for me just asking the operating leverage kind of in a different way. Clearly, you've set the stage very well for 2026 to drive positive operating leverage ahead. And you noted you anticipate the efficiency ratio getting into the low 50s kind of by the second half of the year. Looking back, you were more a mid- to high 50s efficiency ratio type bank. You've obviously made a lot of investments in tech that you're able to really leverage now. Just wondering, as you kind of think about the longer-term efficiency ratio of the bank, given these significant investments you have made in technology, do you think that low 50s is that lower run rate is sustainable? Any kind of thoughts in either direction here, particularly as de novo expansion remains a focus here? Vincent J. Delie: Yes. I think there's 2 things. One, there's the efficiency that's being produced through automation and digitization of the banking industry. We've talked about this where we built out the data hub. We're using that data to drive efficiency in the delivery of products and services. I think we've only scratched the surface on taking cost out, right, over time. With looking at how we process transactions across the entire bank and thinking about the impact of AI and automation on driving efficiency and what that means over time, I think, is pretty positive for the industry. That should be viewed as positive. I also think from a revenue generation perspective, which is the other side of this, our ability to analyze data, present information to prospects, clients for our own internal people extremely fast, so that they're able to react to it and produce better revenue results per engagement with a customer is going to drive that efficiency ratio as well. So revenue growth through automation and efficiency are still -- we're still looking down the road for that. We've started to experience some of it, but there's quite a bit to come. So I'm very optimistic about that. I don't know, Vince, if you want to add anything to the question? Vincent J. Calabrese: No, I would just say sustaining around that low 50s to 50% level feels very achievable as we move forward, given all the things Vince just described. That's all I would say. Vincent J. Delie: And I also think when you look at us relative to the other banks our size, we have a disproportionately large retail bank. So the efficiency ratio in the retail business is not what it is in the commercial business. So if we were a pure commercial bank, yes, we would be below 50%, well below. But Alfred gives us all these branches. We've got a good note, you're laughing. But the truth is, we've got this big machine that we have to run, and it's a good business for us. And as I've said, we were able to do it very efficiently, which is remarkable given our size and scale. I mean, in fairness to the retail business, we do run an incredibly efficient retail delivery channel. It compares very favorably to the largest banks in the country. And if you look at the efficiency ratio broadly speaking, there are probably going to be some puts and takes to it. We're going to continue to drive efficiency in the areas that we can through automation. But as Vince mentioned earlier, we have plan to grow fee income, which tends to be a higher efficiency ratio business in and of itself. And the idea is that all these investments that will continue to drive the efficiency ratio plus the investments in growing additional fee income. I think net-net results in a top quartile ROE that compares pretty favorably to our peers. Vincent J. Calabrese: And you saw Kelly, you were here, you saw what we've already done with the digitization of the retail delivery channel. We've already embedded the eStore into the ITM. So that somebody remotely can engage a customer fully digitally in a branch and provide them with the ability to transact, cash checks down to the penny, make loan payments. And also, it buys them on what they have in the shopping cart, help them proceed to check out right there. So that in and of itself reduces the need for personnel in the branches over time. So that helps us gain efficiency as well, and we've already built it. It hasn't been deployed fully, but it's built. So that's coming as well. Anyway, that -- that's all. I don't know what else to add. Yes. I think we're in a pretty good spot, and we're very optimistic about efficiency. Unknown Executive: So it seems like there is a break with our operator. But Manuel, I think that you're on the line, if you have a question, please go ahead and ask it. Unknown Analyst: Okay. Great. I hear you guys on the lending capacity from your end and kind of strong production. Can you discuss lending sentiment in your markets? And how -- does that drive kind of expectations for growth to be more back half of the year loaded? And are you already seeing headwinds from payoffs and secondary market improvement slowing already? Vincent J. Delie: Yes. I'd say we -- I think you're right. We tend -- typically in this business, we tend to see the loan growth come in the C&I side anyway. Real estate is kind of all over the board depending on when the project was launched, but from a C&I perspective, you tend to see it build towards the second half of the year because companies are completing their financial statements, they're turning them over to the bank. They're planning from a CapEx perspective now. So then they're coming back right about now and they're starting to reach out to the bankers and start to make plans for capital expenditures and working capital needs. So that's happening, like discussions are happening. I would expect growth to be more back-ended this year. I also think bonus depreciation in some of the comments I read, we get comments back from every region before we do this call. So we all read them. They do a pretty nice job. I thought this was the best they've ever done, giving me commentary. I spent last night reading 38 pages of commentary. But I think when you look at the Southeast, you look at Charlotte and Raleigh and Greensboro, there's a lot of competition. You've got branches being built out across that footprint. But our people continue to see opportunities. We're entrenched in those markets. We have been building out our delivery channel as well and introducing digital strategy and building out our treasury management capabilities. So those markets have performed extraordinarily well, and I would expect them to continue to perform well. If you pivot to Pittsburgh, Cleveland, Baltimore, the more mature markets that we're in, they've had some pretty significant payoffs in those markets, not because we lost customers to other banks, but because we tend to play upmarket. So we have a lot of clients drives that debt capital markets business where we get fee income on bonds as well. Unfortunately, the flip side of that is the company has access to capital markets and they paid down the facility. So we had a lot of that going on last year. I think that's pretty much over unless you see a significant decline in interest rates from here, short-term rates from here, which would be positive for us from a margin perspective, but negative from a capital markets access standpoint, but it also reduces the cost of capital from a bank loan perspective for clients. So I would suspect that next year should be a pretty good year for everyone, assuming that those markets remain calm. We don't have some big turbulent event. But the sentiment around the table is people are starting to have serious talks about capital investment. So that bodes well for loan growth. That's what we're seeing. That's what I've read across the board. I will also pivot to the depository side. We have a lot of large deposit prospects that are coming in. So I see that being positive, too, for next year. Unknown Analyst: Yes, in the past, you've talked about the treasury management pipelines being solid. It's showing on the fee side. Do they remain -- they're remaining robust as well on the commercial treasury management deposits? Vincent J. Delie: Yes. We're seeing lots of opportunities across the footprint from a depository perspective, from a treasury management perspective. So... Vincent J. Calabrese: We still have a large pipeline close to $1 billion of deposit prospects we're going after. Vincent J. Delie: Yes. Gary L. Guerrieri: The other thing I would add, Manuel, is we are starting to see increased levels of opportunities around some high-quality CRE. Discussions were pretty active over the last 60 to 90 days here, and we're seeing some really nice opportunities there. . Unknown Analyst: All right. That's good to hear. Anything -- any more details on the mortgage sale? And I hear you that you're just opening up capacity. Were they specific to any region? Just any more color on kind of this sale that's coming up in the first quarter? Vincent J. Delie: Yes, they were predominantly -- they were out of market predominantly, not out of market -- not out of our operating area, but out of our immediate area, so around branches. So we looked at them from a practical perspective and said our probability of cross-selling additional services to this pool is limited. So there's nothing wrong from a credit perspective, they're good credits, but we just don't see an opportunity to be able to deploy cross-sell engagement. So we decided to return the capital and reuse it for something we can become the primary client, right? And that's what drove that. That plus it helps us manage the -- my expectation is as we move into next year, we're going to see prepayment speeds elevate anyway. So we're going to see attrition in that book anyway. And I think we're going to be able to move more off the balance sheet because there's more activity in the conforming space moving into next year, particularly in a lower rate environment. So I would expect us to drive fee income, manage the exposure and be able to still grow the other categories because we have the capital to do that, the other higher returning categories. But those loans, in particular, we just viewed as a drag on capital. Vincent J. Calabrese: Yes. We were -- the other thing I would add too is just from a concentration management standpoint, mortgages as a percent of total loans, around 25%. You can see that in the slide deck. So kind of managing that level of concentration, we decided to take $200 million off. I mean we're very strategic in how we take actions. Remember, during the year, we had pricing strategies to generate more saleable production, just to again manage the total mortgages on the balance sheet. And I think as we go forward in '26, that creates capacity for the commercial growth that you heard us talk about. And as far as the sales too, we expect sales to be basically at par when it settles this quarter. Vincent J. Delie: Right. Operator: And our next question comes from Brian Martin from Janney Montgomery. Brian Martin: Just your last comment, maybe Gary made a comment about the loan growth, but -- and I joined late. So from a commentary standpoint, it sounds like the loan growth outlook is mid-single digits, back-end loaded. Did you talk about kind of the current pipeline? And then also just maybe your comment about Vince, the mortgage being coming down around 25%. When you think about big picture about the loan concentration levels, where they are today, where do you see opportunity to maybe make some additional changes throughout the year as we get to the end of '26, is there a target in terms of where that mortgage number might be, where other buckets may be that you can kind of talk a little bit about in terms of how the positioning looks? Vincent J. Delie: I'll do a high level, and then I'll turn it back over to these guys. Our goal would be to shrink the mortgage book and redeploy over time, right? If you see prepayment speeds accelerated in a different interest rate environment, you're going to see that portfolio basically stay the same in size, right, or grow very small as a percentage of the total. But our goal would be to redeploy that capital into C&I and CRE lending. And I said earlier, I don't know if you missed it, but earlier I talked about our internal capital generation, Brian, and the ability for us now that our CRE concentration is at 197%. It's below 200%. There's capacity there to lend. So keeping that concentration at the same level, given the internal capital generation, we could still originate and fund... Gary L. Guerrieri: About $1 billion. Vincent J. Delie: $1 billion in CRE loans. So we don't have to keep it at 197%. There's some way to move up and down. That was just our internal goal, right, from a concentration perspective. It puts us in a much better position than many of the peers. So there's a lot of capacity to lend there. We can be very selective. On the C&I side, I think we have a great opportunity to deploy capital there and grow over the next 12 months because we think that, that business will start to accelerate for us and we can move in. Again, we're not doing the consumer finance stuff, NDFI, all the other stuff that is baked into the H8 data for C&I growth that really is mass consumer growth. But we're doing true middle market transactions across our footprint and growing that business. And I think we've done a pretty good job and the pipelines have actually built over time? And go ahead, Gary, you're going to... Gary L. Guerrieri: Just going to add, Brian, the equipment finance business for us has been extremely strong. And you would expect that with the bonus depreciation that group had an exceptional year, and that just continues to build. They had a very strong fourth quarter, and we expect to have a really, really solid 2026 across that group through the quarters and even building more, as Vince mentioned, towards the latter part of the year with where we sit economically at the moment. So really, really excited about that piece of the business and the C&I opportunities ahead of us. Vincent J. Calabrese: Yes. Brian, I would just mortgage point, just to close it out. I mean we're looking for production levels to still be very strong. So it's not that we're trying to lessen the activity in that business, the amount of originations. It's just what ends up on the balance sheet. And just for reference, I was looking back, Last year, it was 23% of total loans at the end of '23, it was 20%, just as kind of reference points. Today, it's 25%. So just managing that concentration -- the commercial activity that Gary and Vince have talked about. Brian Martin: Got you. And Gary, that equipment finance, how big a piece of the loan book is that today? Gary L. Guerrieri: That portfolio today sits at right about $1.5 billion. Brian Martin: $1.5 billion. Okay. Perfect. And then maybe just 1 or 2 last ones. Just on the loan pricing, maybe -- I don't know if you talked about this earlier, but we've heard that some of the pricing has been a bit rational of late. So just wondering how that -- how you're viewing on the loan pricing and just how that plays into the trajectory on your outlook for the margin for the year and kind of what's embedded in your guidance on that as you kind of look into 2026. Vincent J. Delie: I don't think loan pricing in the C&I book or across the board? What are you referencing specifically? Brian Martin: I guess the commentary we've heard is that people are really looking to be aggressive on pricing just because they haven't had the ability to grow. So I guess I haven't heard that it's whether it's on CRE or C&I specifically. So just kind of wondering... Vincent J. Delie: I wouldn't say -- yes, the CRE pricing has been a little -- it's been more firm. The C&I pricing is more aggressive, but it has been. I mean I -- you sound like some of the people that run the regions that we have, they talk about how competitive it is. It's always been competitive. For the 40 years I've been in banking, I've never sat there and said, well, it's not -- it's so uncompetitive. I just -- I can do anything I want. It's always competitive. But there's always a threshold for returns, right? Everybody is running the same models. So we try to achieve a certain return risk-adjusted return on capital. And I would say that kind of governs it. So it tends to fluctuate. Let's say, C&I is good, solid C&I credit, not risky stuff because that could be all over the board. But your traditional middle market transaction that's on solid footing, good fixed charge coverage, lots of capital. You're looking at 25 basis point variance between extraordinarily competitive and not as competitive. So it's never that wide of a margin right? It gets skinny from time to time. But I think you've got to be able to overcome that with products and services that produce returns. And you look at the broader relationship and bring in deposits, compensating balances to support treasury management fees, provide capital markets fees with derivatives and debt capital markets opportunities that's what gives the return. We kind of look at those returns holistically, and we look for returns that are north of sticking 15%, 16%, 17% all in some cases higher. So that kind of drives the whole marketplace essentially. Gary L. Guerrieri: Yes. And I think we've done a good job driving that cross-sell activity across all of those fee income products that we have. We talked about the diversification of those income streams earlier. The group is very focused on it. And I can tell you, the leadership there is really driving that through the banking teams. Vincent J. Calabrese: And Brian, I would just add 1 point. So top of the house, the new loans that we made during the fourth quarter came on at 5.92%, which up 24 basis points above the portfolio rate. So it's still additive to the overall return. Vincent J. Delie: Vince is always bringing you facts. I'm giving anecdote. He layers into the stuff you really want to hear. Vincent J. Calabrese: It all works together. Brian Martin: Exactly. Cool. And then how about just -- did you guys -- any commentary on kind of what's embedded in the NII outlook in terms of margin, just kind of trajectory of margin kind of as you kind of go through the year, given your outlook for rate cuts here and just kind of the better environment? Vincent J. Calabrese: Yes. I would just say what's baked into our guidance is 2 rate cuts, 1 in April, 1 in September. I mean, April and October. If we don't get to next one, I think last I saw the market was saying in July. I mean it's -- if you don't get it, it's like a couple of million dollars' worth of benefit to a quarter. So just kind of as a reference point, baked into our guidance, has the margin moving up modestly, a few basis points a quarter, say, between the 3.28% and the end of the year is kind of what's baked into our guidance if you do the math. Brian Martin: Okay. I think I'm good. And Vince, just the question on M&A, I guess, just in terms of big picture, if we do see something, if there's a great opportunity out there, does it feel like it's a smaller opportunity given you don't want to kind of take momentum away from what you have, all you've talked about today? Or is that the wrong way to think about it because the right opportunity could be something bigger. It just feels like it might be something smaller and less disruptive if there was an opportunity out there. But I guess maybe I'm reading into that. Vincent J. Delie: No, I think we're pretty focused internally on organic growth. And what we're doing is, we're looking at capital deployment constantly. We've talked about this before somebody else asked a similar question. I don't know if not. But we're going to do whatever we think makes the most sense for the shareholders from a return and capital deployment perspective. We're not out trying to find things. I think given where we are right now and the success we're having and how valuations line up, it's more unlikely that we do a large M&A transaction, right? And if you look back over the last I said 9 years going back to the large -- last large deal we did. We've only done 2 deals. Since then, they were relatively small, and they were -- they basically were additive to the overall strategy. So both deals have really high demand deposit mix it as set. And they provided lots of customers, it was like granularity in the customer base, and it could be plugged into the consumer bank and we could drive on the cross-sell strategies and drive fee income. And that's that made sense to us, but those are more opportunistic than plotted. Brian Martin: Yes. Okay. Yes, that answers it. Congrats on the quarter and the momentum you guys have going into '26. Vincent J. Delie: Yes. Thank you very much. I appreciate it. Thanks, Brian. Thank you, everybody. I think that concludes the questions. And I want to thank our employees for a tremendous year. I know there was a lot of hard work that went into this year, and I want you to know the executive leadership team. I appreciate it. And thank you to our shareholders for continuing to believe in us and support us. Thank you. Operator: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Operator: Certain statements made during today's event may be considered forward-looking statements within the meaning of the safe harbor provision of The US Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to inherent uncertainties, and actual results may differ materially. Any forward-looking information relayed during this event speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances. Additional information concerning these statements is contained in the risk factors and forward-looking statements section of the company's annual report on Form 20-F filed with the SEC on 06/16/2025. Copies of these filings are available from the SEC or from the company's investor relations department. I would like to now turn over the call to Rajesh. Over to you, Rajesh. Rajesh Magow: Thank you, Vipul. Welcome, everyone, to our third quarter call for fiscal 2026. At the outset, I am pleased to share that Q3, which traditionally represents the high season for leisure travel in India, witnessed strong demand recovery, barring temporary disruption in December caused by new and stricter flight duty time limitation rules (FDTL) for pilots. The festive season and a series of long weekends fueled this demand momentum, reinforcing our belief in the emerging trend of Indian travelers' desire to spend more on travel. Our diversified product portfolio and market leadership continue to act as mitigating factors in case there is any macro disruption that happens in one of the segments. For instance, while domestic air was impacted in December, we were able to capture some of this demand on other means of transport like bus and cabs. We continue to believe the Indian travel market is poised to expand, driven by a confluence of economic, social, and technological factors. Our focus remains on delivering superior value and a seamless booking experience and support to our customers with constant product innovations leveraging AI. We see AI as a very welcome and positive tech evolution, opening up many new opportunities in our business. Leveraging AI, we are aiming to improve all aspects of the customer journey, right from inspiration, discovery, search, booking, and post-sales. One of the most significant impacts of AI is the ability to offer a highly personalized experience. We have developed AI models using LLMs and vast amounts of in-house proprietary data to power Myra, helping customers interact with it from planning to eventually booking their trips. We believe over time, our product will be more relevant and effective because of our own proprietary data for travelers. Myra has now scaled to over 50,000 conversations daily, with over 72% of conversations being termed as good conversations. Around 15% of the conversations happen during the early stage of trip planning, enabling us to influence destination and product choice earlier in the customer life cycle. Myra is also helping us drive penetration into smaller cities, whether it's vernacular voice capabilities, with over 45% of Myra users coming from tier two cities and beyond. Voice-led interactions are 50% higher in non-metro cities. AI is also helping us improve post-sales customer experience through a virtual assistant providing instant 24/7 support to travelers. Our AI voice and chatbots are now autonomously resolving about half of the customer queries across flights and hotels, significantly improving service scalability and efficiency in the system. We are also using AI to augment our data intelligence support to our supply partners. For example, to empower our hotel and host partners, we have introduced a Geni-powered digital performance analytics summary in audio playbook format in Hindi and English, significantly improving partners' engagement. Besides following our one-stop-shop strategy with a view to meet all travel and travel-related needs on our platform, we have now expanded our product offerings with the recent launch of tours and activities, giving Indian travelers access to over 200,000 bookable activities across 1,100 cities in 130 countries worldwide. Indian outbound tourists often struggle with dispersed information, foreign currency pricing, and disjointed planning tools when booking activities and experiences. By stitching all of it together, we aim to remove friction and make it convenient for travelers to book in-destination experiences also in advance before they start their travel. Let me now turn to business segments, starting with the air ticketing business. The air market supply and growth bounced back on the back of robust seasonal demand in October and November, with domestic daily departures growth of 25% year-on-year, respectively, from a degrowth of minus 4% in Q2. However, new flight duty rules caused disruption in December, leading to daily departures degrowing in December at minus 5% year-on-year as against the expected 5% growth year-on-year. Despite this disruption in the domestic market, we were able to deliver good performance aided by robust growth in international travel and our diverse portfolio of all modes of transport as some of the seasonal demand moved to other modes of transport. International outbound travel from India presents a significant growth opportunity. We remain focused on growing this segment. We have launched a new feature in the international flights funnel that provides users with end-to-end visa guidance for their destination. It covers visa types, processing timelines, permitted length of stay, required documents, and applicable fees. Users can also initiate their visa application directly on MakeMyTrip through this feature as well. Early results show strong engagement on the listing page, along with a positive impact on both conversions and visa attach rates. Our accommodation business, which includes hotels, homestays, and holiday packages, delivered a strong 20.3% volume growth year-on-year. Growth was driven by strong demand for leisure travel with the highest-ever check-ins recorded on December 25th, with wedding season demand and MICE events. The reduction of GST on hotel rooms under the rupees 7,500 category has also been a catalyst for the growth. We have seen a surge in booking volumes in this segment as customers responded to attractive pricing. It is important to note that this has led to a divergence between volume growth and gross booking value growth. The gross booking growth is more moderate as it reflects the lower tax component in the final price paid by the customer. Lower GBV growth is an arithmetic consequence of the tax change and not a sign of any weakness in the segment. We continue to drive deeper penetration into India. We now have 97,000 plus accommodation options available on the platform covering 2,050 plus cities in the country. We are also driving online penetration in this segment with strong demand coming from tier two cities and beyond. During the quarter, we sold properties in over 1,950 plus cities across the country, with almost 100 plus new cities selling for the first time in the last twelve months. On the product side, we have made GenAI-led interventions across the top 25 international cities, including prominent international beach destinations, to power beachfront discovery for beach holiday-seeking travelers. We are also using this knowledge graph information to determine and introduce clear beach proximity tags, like on the beach, beachfront, short walk to the beach, on listing pages, thus improving discovery and conversion. In addition, for women travelers, we now feature women-specific ratings, AI-generated review summaries, and safety scores derived from female travelers to support deep information-seeking behavior. By adding specific safety indicators and top-rated by women filters, we are building a confidence-driven ecosystem for a segment that travels 25% more in groups. These features are already live across 100 plus cities and 33,000 plus properties. This comprehensive approach ensures that the growing number of women travelers can explore with predictability and trust. Our holiday packages business witnessed strong seasonal performance as well. During the quarter, we successfully operated MakeMyTrip chartered flight packages to Phu Quoc in Vietnam, thereby unlocking the potential in an unexplored destination for our outbound travelers. This reinforces our belief that direct connection along with a simplified visa process helps open new destinations very well. The Philippines, for instance, is another such recent example. Our homestay business continues to scale well. During the quarter, we sold 27,600 plus unique properties covering over 1,050 plus cities. This business now contributes early double digits to the overall hotel volume. Our bus ticketing business witnessed strong growth in Q3, aided by festive and holiday travel with all regions growing in double digits. Inventory addition remained buoyant throughout Q3 fiscal year 2026, with private inventory crossing 45,000 daily schedules by the end of the quarter compared to 40,000 daily schedules during the same quarter last year. During the quarter, we strengthened our cross-sell strategy by introducing unified inventory on the rail search page, enabling rail users to discover available buses on their search routes. On our Southeast Asia Red Bus platform, we partnered with Grab to integrate intercity bus and ferry bookings into its platform, providing more options and making travel more convenient for users. Our corporate travel business, where both our platforms, MyBiz and Quest2Travel, are witnessing strong growth on the back of new customer acquisition. Our active corporate customer count on MyBiz is now over 77,500 plus, compared to 64,000 customers during the same quarter last year. And for Quest2Travel, the active customer count has reached 539 large corporates compared to 493 customers in the same quarter last year. You would recall that we had acquired the travel expense management platform, Happay, at the start of the year. I am happy to report that our integration with Happay is now complete, with flights and hotels resulting in Happay becoming a complete travel and expense management solution now. With this, let me now hand over the call to Mohit for the financial highlights of the quarter. Mohit Kabra: Thanks, Rajesh, and hello, everyone. The highlight of the quarter was our strong performance in October and November, wherein we capitalized on the improved sentiment by launching a first-of-a-kind festival travel sale called Travel Kamhurat Seed. It saw the widest travel participation from our suppliers across travel services as well as our non-trade partners. It helped us engage with our 75 million users during this same period of about thirty-three days. It also helped us build significant advanced purchase behavior, particularly for the upcoming peak holiday travel in December. It also helped us mitigate the impact from the low light of the quarter, which was the disruption of flight operations, particularly during the first fortnight of the December month. This significantly impacted travel plans and bookings during that period. While the situation has now stabilized, complete supply recovery is likely to get pushed out into the next fiscal year. We are pleased to report that despite the disruption in the month of peak seasonality, we were able to drive strong performance overall for the quarter. Moving on to our segment results, our air ticketing adjusted margin is $207.9 million, registering a year-on-year growth of 20.4% in constant currency. Robust performance was driven by strong growth in the international air ticketing business, which now accounts for about 43% of the existing margin within the ticketing segment. In the domestic air market, while the industry grew by just 0.9% year-on-year, we were able to deliver 2.2% year-on-year growth. On a flown basis, we saw slight market share gains, with our share now increasing to just over 31% during the quarter. On the hotels and packages segment, we recorded strong volume growth of 20.3% year-on-year, with standard hotels growing even faster at 20.6%. This was largely on the back of strong demand aided by the recent rationalization of GST rates for hotels priced under 7,500, where the GST rate has been reduced from 12% to 5%. This has resulted in strong room night growth of over 23% in the non-premium price segment. As a result of this mix shift, as explained by Rajesh, we saw slightly neutral gross booking growth year-on-year at about 15.9%. The adjusted margin in the standalone business was in line with the GMV growth. It is encouraging, this tax rationalization initiative of the government of India has had a positive impact on driving up volumes in the hotel segment. The mix of international hotels and packages revenue has also increased to about 24.2% in the quarter compared to about 23% during the same quarter last year. In our bus ticketing business, the consistent margin stood at $42.4 million, registering a strong year-on-year growth of over 26.1% in constant currency. Our ancillaries business, which is part of the other segment, is scaling up well. This is helping us get a larger share of the wallet of our customers by building the attach of a variety of ancillary services. As a result, the adjusted margin from the other segment came in at $27.5 million, witnessing a strong growth of 45.5% year-on-year in constant currency. Moving on to the expenses side, most expenses have come in line. Marketing and sales promotion expense for the quarter was at 5.6% of gross bookings, again, in line with high seasonality and improving mix coming in on the back of strong growth in higher-margin segments like hotels and packages, bus ticketing, and ancillaries. This improvement of the mix is also translating into marginally better profitability overall. The adjusted operating margin has improved from 1.76% of gross bookings during the same quarter last year to 1.82% of gross bookings during the current reported quarter. We are glad to report our first $50 million plus adjusted operating profit updates in the quarter, with the actual number standing at $50.7 million. The non-cash interest cost on our zero-coupon convertible bonds for the quarter was recorded at $28.3 million, and the translation-related foreign currency losses in view of the rupee depreciation stood at about $5.3 million. Our reported net profit for the quarter was $7.3 million. The adjusted net profit came in at about $51.4 million, with adjusted diluted EPS growing by about 33% year-on-year. You would recall that as part of our capital allocation strategy last quarter, we had increased the size of our buyback plan to $200 million and also included the recently issued 2030 convertible notes in the repurchase plan. We have repurchased 550,000 shares for an aggregate amount of approximately $41.5 million during the quarter. We also repurchased 2030 notes with a principal amount of $5 million for an aggregate amount of approximately $4.6 million. Accordingly, the total utilization for the buyback program was about $46.1 million, which has been our highest in-market buyback to date. We ended the quarter with cash equivalents of over $100 million. We continue to dial up investments in core growth capabilities like AI and other organic initiatives while scouting for potential strategic investment opportunities. With that, I'd like to turn the call over to Vipul for the Q&A. Vipul Garg: Thanks, Mohit. All the participants will now have the opportunity to ask a question from the management. Anyone who's looking to ask a question can click on the raise hand button on their screen, and we will take the questions one by one. The first question is from the line of Aditi Suresh of Macquarie. Aditi, you may please ask your question now. Aditi Suresh: Well, thank you for the opportunity. So two questions. The first is on the standalone hotels segment. There's clearly been a very strong acceleration in your number of hotel room nights booked. Could you further break down that by maybe a premium segment, the budget segment, and also in terms of the growth you're seeing there? And then in relation to that, are there any changes to the online take rate you're seeing as this mix is changing? Mohit Kabra: Thank you. Maybe I can take that. Like I just called out, the whole GST rationalization, which came in September, was expected to be a tailwind for growth in the hotel segment. And we have actually seen this coming through. While our overall standalone hotel room nights have grown at about 20.6%, the room night growth in the non-premium segment, which is the budget to mid-pricing, has been much stronger at about 23% year-on-year. So we clearly saw that benefit coming through. In terms of overall margins, I think our margins have largely stayed in line at about 17.7%. So there's no real significant change in the margin structure per se. Like we've been calling out, we want to keep the margins in the high teens category, and we're pretty comfortable in having a stable regime on the margin side. Aditi Suresh: Thanks, Mohit. And then the second piece is on ancillary services. Here you're seeing really strong revenue growth. Is it now possible for you to quantify the underlying margin you're seeing here? Because I assume that a lot of this is just a lockdown to EBITDA. Please, talk through and give us any color on the underlying margin for the growth you're seeing in ancillary services. Thanks. Mohit Kabra: Sure. The growth in the other segment or ancillaries has been a continuing trend if you look at it over the last few years. It is also coming in from the fact that we have been adding a lot of new services on the platform over the last few years. Over a period of time, each one of them is scaling up well. Just to give you an example, a couple of years back, we were running the capacity cap segment, dialing up the input transfers. We have started dialing up rail ticketing, particularly for the high-speed air-conditioned trains. There, our market share has gone up closer to about 4-5%. Apart from this, we've also been adding a lot of non-transport ancillaries, whether it is buy-side insurance, forex, sponsorships, and ad tech on the platform. Visa service is something that I just called out. All of these put together, we believe, and this year, we also added a new segment of tours and activities. This is interesting because a lot of these travel customers book their core travel bookings with us, but there is a requirement for in-destination services as well, largely on tours and activities. Building that on the platform helps us retain them even for these services. With this increasing spread of other travel or travel-related services, which we are going on adding, we do believe that the other segment will keep delivering good growth for us. At some point in time, maybe five to seven years down the line, some of these segments could become meaningful to be reported on their own basis. There are some segments that are more transport-related, and there the margins are in line with the industry. For some of the others, there's a significant fall down to profitability. When we look at profitability, we largely look at it at a platform level and therefore report margins at a segment level but report expenses and profitability at a platform level. Vipul Garg: Thanks, Mohit. Thanks, Aditi. The next question is from the line of Sachin Salgaonkar of Bank of America. Sachin, you may please ask your question now. Sachin Salgaonkar: Thanks, Hi, management. I have three questions. First question, a follow-up to Aditi's question. Mohit, when we look at the year-on-year growth in the hotel business, it was 17% last quarter. It's now 9%, which has gone below 10% this quarter. I understand the impact of GST. Also understand the impact of rupee depreciation. But how to think about it? Is there some kind of a one-off out here? How should one think about a normalized growth from this business? This business was growing at 20 odd percent plus in previous quarters. So, do we see the growth resuming back to that number? Should I say all three questions, or should I take one by one? Mohit Kabra: Yeah. Sorry. Let me just explain this a little better. Because there's something which is more like a one-off starting in this particular quarter onwards. Right? Because the GST rationalization almost happened at the end of the previous quarter. It's important to explain this. At a very high level, if you really look at it, we have reported more than 20% growth on the volume side. Now if you look at the price segment, which is below 7,500 rupees, there's been a GST reduction of almost 7%. And almost two-thirds or 70% plus of our volumes come from this particular price segment. So roughly about a blended impact of about 5% plus goes through purely on account of the GST-related impact on the gross booking value. Therefore, like I said, gross booking growth year-on-year in constant currency has actually come in at about 15.8%. If you factor in this additional 5% impact, which came in on the GST side, then our growth actually remains in line with the volume growth. So I thought I'd just share the overall impact with the GST rationalization. Otherwise, there's no real one-off impact. It's just going to be a different GST rate in the previous year. On a year-on-year basis, this looks slightly different. Sachin Salgaonkar: Sorry. Mohit, if I may just ask you to clarify. I heard you saying 9% number somewhere. Which number are you referring to? Sachin Salgaonkar: So, Rajesh, I was referring to the reported hotels and packages revenue, which is $133.2 million. In Q3 2025, it was $121.9 million. So it sort of implies a 9% year-on-year growth. Mohit Kabra: No. That's true. Therefore, I was just trying to bake in the currency impact as well. In calling out the constant currency growth. Sachin Salgaonkar: So no. I get it. Mohit, now that we end up seeing numbers on a reported currency basis, going ahead, we should sort of look at a similar kind of growth, sliding from these levels. Right? Mohit Kabra: Absolutely. Absolutely. At least for the four quarters, now, beginning this quarter that we reported, this GST impact would be there. Constant currency impact would largely be dependent on how the currency plays out in the coming quarters. The GST impact would largely remain on these lines. Sachin Salgaonkar: Got it. Second question on Indigo. We all know they've been asked to cut 10% of capacity. General checks in the market indicate that, till date, other airlines have not been able to fully offset that capacity impact. So as we head into calendar '26, how should we look at the domestic air traffic growth for the industry? Do we see that normalizing, or do we still have a bit of an out there for the full year '26? Rajesh Magow: So maybe I can take that, Sachin. Yeah. This particular disruption was not even factored in. It came from nowhere, to be honest. Because these rules were always there. But I don't think anyone anticipated that this would cause this kind of a disruption. Therefore, the reduction of supply will happen and largely happen with Indigo because that's the largest airline in the market. Now our sense is that at least the estimates that we see basis our conversations, while things might have just from a disruption standpoint stabilized, in this running quarter, JFM quarter, it should come back to, again, the positive territory. I'm talking about daily departures getting back to, because December, it was negative growth of minus 5% on daily departures on an overall basis. The estimates are now suggesting that it should be back to the positive zone, albeit at a flat or a one or 2% year-on-year positive growth. As things progress and more we get out of this particular issue where the rules settle down, the pilots come on board, etcetera, slowly and gradually, this will continue to keep improving. Outside of this, nothing else changes. Because the new plane schedules, whichever were coming, the supply that will continue to keep coming. We also learned that even with Air India, the refurbishment of the planes is also happening at an accelerated pace. Along with the fact that they also keep getting new planes on a regular basis as well. That is likely to continue. So I think the overall picture, in all fairness, will be more clear, I would say maybe the next seasonal quarter. Which is April, May, June quarter, when the summer schedules are filed. I think we will be in a better position to see overall what kind of supply schedules are being filed factoring in this temporary issue because of the new rules on flight duty travel for pilots. The new infusion or the refurbished planes that are coming in. So I think we'll have to wait net net one more quarter, and I've already given you this quarter's sort of estimates that the industry is talking about. Sachin Salgaonkar: Thanks, Rajesh. And my third question is on generative AI, maybe two parts to the question. One would love to understand the feedback on Myra since you guys launched. Yeah. And second, in a market like the US, we're actually seeing Google and ChatGPT launch their generative AI on travel. Now, hopefully, and subsequently, perhaps at some point, it might come into India. So as and when that comes, how should we think that from a MakeMyTrip perspective? Is it a new competition for MakeMyTrip where consumers now have an option to go towards these LLMs and book their ticket? Despite the fact that at the back end, fulfillment perhaps could be done by, let's say, MakeMyTrip only. Rajesh Magow: Yeah. So let's talk about that. Firstly, progress on Myra. Very encouraging, I must say. In fact, some of that I was sort of mentioned in the script as well, but I'll give you more color. There are a few metrics that we've been tracking. One is how the interactions, the number of interactions are growing. So from, let's say, a couple of months ago, about 20,000, 25,000 a day, we have now touched about 50,000 interactions a day, not transactions a day, but interactions a day on Myra. Which is two times growth in two months. We are seeing pretty much day-on-day, week-on-week growth on that. So clearly good traction coming up. On the quality metrics side, we also measure what we call good conversation and also the quality score of the interaction. That is also progressively improving. We now have a quality score of about 3.9 on a scale of one to five, and about 72% of the conversations are good quality conversations. Just to give you a sense of what the good quality conversation is, the interaction is happening with more and more back-and-forth question-answer rather than just asking a 30,000 feet level query and then just going off the interface. That number is about 72%. The other two very important and encouraging metrics that we are tracking, one is, and that was one of our hypotheses as well, one is about the new users. We are seeing out of these 50,000 interactions about 20% interactions are happening from the new users never transacted before. That is largely coming from tier three, tier four cities, which is exactly what we were aiming to get. Where the voice bot is being largely used in vernacular language or the spoken language that consumers prefer. Coming in from whichever city, whichever state that they're coming from. Last but not least, I would say, which will be a perfect segue to your second part of the question, the trip planning part, because that was another thing that the OTAs had not really been globally focusing on the top end of the funnel, which is the trip planning piece. On Myra, we have seen at least about 23 or 24% of the interactions are related to more trip planning and not necessarily immediate travel. All these metrics are pointing towards quite promising, encouraging trends, and we will continue to keep monitoring. In parallel, obviously, we are working very hard to further improve the product as well. That journey is also in progress. Now coming to your point on what Google might have launched in North America, and when it comes to India, etcetera. Our take is as follows. What is happening is, like I just mentioned earlier, that as far as transactions and fulfillment and the kind of traveler who's willing to, who's made up his mind or her mind and coming to just to book the transaction and get done with it. I don't think that is going to get anyway potentially disrupted. Trip planning was the piece which was not being done by OTAs in any case. Then it remains to be seen. If they launch, let's say, their own GenAI tool for trip planning, whether they will attract more traction. In all probability, there is a possibility that they will attract traction and that the customers from conventional search will move to using AI tools for doing trip planning. To my mind, a large part of that is going to be share shift happening from a conventional search to AI tools. Our counter to that to an extent will also be our own GenAI tool for trip planning as well. The thing to watch out for will be how do we continue to keep protecting our direct traffic, which is the majority of that is on our app, as you know. That they continue to keep coming to us directly. Or we end up sort of keep growing that direct traffic as a percentage of the overall traffic. The share of the paid traffic from any of these new avatars of the search engines, we don't end up sort of increasing the share of the paid traffic from there. I don't really see, at least at this point in time, this is our conversation and this is the kind of development that has happened, including the development that is in progress. That there is anyone who is trying to talk about getting really deep in the funnel and also looking at even the fulfillment, post-sales activities, etcetera. Because those are the modes that will continue to stay with the OTAs. I think trip planning is the only piece where there is definitely a possibility given the richness of the data that they will have based on the LLMs. They might get more traction. But the counter to that for that will be our live-to-date customer base and the direct traffic contribution that we already have. How powerful and popular is the brand that MakeMyTrip and RedBus are. I'll be able to protect that progressively or not. Our energies, investments, resources are channelized towards that as we continue to watch this space and then accordingly sort of tweak our strategies as we go along. We are seeing this as more of an opportunity than a threat. I don't think, even in the conventional search space, this debate was always that whether Google is our competition or Google is the competition for OTAs and all, OTAs or not. I don't think, and that debate might still come back. But the reality is that, like in the past, I think there are clear distinct modes and their advantages that the OTAs bring to the table. I think they have a very clear and distinct objective and the business model that the horizontals or the generic search engines have. I'm not sure that even with this evolution of new technology, there's going to be a significant overlap going forward either. Sachin Salgaonkar: Okay, Travis. Thanks for the detailed answer. Very clarification, Mohit. We saw the NCLT approval for MakeMyTrip and the RedBus merger, which in a way sort of removes any legal or overhang from a potential India IPO point of view. So any revised timelines should look from an IPO point of view? That's it from me. Thanks. Mohit Kabra: Not really. I think, should we think of that? We'll come back separately. As you know, we have been in this restructuring process. A couple of years back, we had done a legal entity restructuring wherein we got the OTA businesses to come together. Now all the key operating businesses have been brought under a single legal entity. But, yeah, it does facilitate an eventual IPO at some point in time. To that extent. But no real change in thought process over there. Vipul Garg: Thanks, Sachin. The next question is from the line of Manish Adukia of Goldman. Manish, you may please ask your question. Manish Adukia: Thank you, Vipul. Hi. Good evening, team. So wanted to just go back to the growth discussion we were having in the early part of the call. I understand, Mohit, what you explained and then the volume being strong, 20% plus, and GBV, 15% because of GST. Why should revenue growth get impacted? Do you get paid from the hotels based on the GBV or the actual revenue that they recognize? I would have imagined that if growth is faster in mid to premium, sorry, mid to budget hotels, technically, your take rate should expand because you typically would have higher take rates in mid to budget compared to premium hotels. So I'm unable to reconcile the revenue slowdown. I understand GBV slowdown there, but I'm unable to understand the revenue bit. So if you can just explain that, that'll be helpful. That's my first question. Mohit Kabra: Yeah. No. Just to repeat it, Manish. The idea, if you really look at our margins largely coming on the booking value. Right? Therefore, the impact in a manner of sort flows both into the booking value as well as into the overall margin absolute margin that we get. So the percentage doesn't change, but the absolute margin that we get gets impacted as well. But like we have been calling this out even last quarter, when this change had come in, we were calling it out as a significant positive because this just helps unlock volumes or demand particularly at the price point, which is very sensitive. Right? Customers are pretty price sensitive in the mid to budget segment. Therefore, this is an important unlock. Therefore, if you really look at it, the growth has actually accelerated very nicely through this quarter. In fact, not just only in hotels, but across segments. Despite domestic air being at a very marginal growth for us. And for the industry. Our overall segment growth across all segments that we report also stood at about 22%. I think I'm more taking encouragement from the fact that this segment growth or the volume line growth continues to be strong. The rest is largely a play out of the changes in the landscape. They will get normalized over a four-quarter period. Manish Adukia: Very helpful. And your air growth, of course, in the quarter was impacted by what happened with Indigo. Hotels were extremely strong, partly driven by the GST cut on volume. But would the hotel volume growth, in your opinion, have been even faster without the Indigo disruption? Like, I mean, I'm just trying to think that here on, even on volume, is there room to accelerate in the foreseeable future? Mohit Kabra: Needless to mention, Manish, actually, flights are a lead indicator. Right? It kind of, if you look at the entire travel plans, for most Indians, they start with a flight booking. And then everything else follows. Right? So I think what we are trying to do is that whatever is the significant adverse impact coming in from the disruption on the flight side, to a large extent, we are trying to mitigate it through modes of transport. Therefore, if you see, we have been dialing up or seeing good growth on the bus ticketing side, also on intercity cabs, etcetera. Clearly, we could have benefited with the only description on the flight side. If I really look at it, very briefly, in terms of how the growth has panned out between the months during the quarter, clearly, December was a month of much slower growth for us. Therefore, again, it indicates the same. It would have helped, but I think given the circumstances, the hotel growth was very, very encouraging. Manish Adukia: No. Absolutely. And just a couple of other follow-up questions from earlier. On the overall spend on marketing and promotion at 5.6%, one of the highest we've seen in recent periods. Is there some bit of a one-off there? I mean, should it go back to the sub-five number you in the past indicated? And, again, is that a function of the fact that, again, when budget or mid hotels grow faster and they probably have a higher component of promotion that impacted us. So I just want to understand the outlook also on that number, and then just have one last follow-up question after that. Mohit Kabra: Yeah. Yeah. Absolutely. No one-offs. In fact, two parts to it. One, I would say, is the very fact that low-margin businesses like air ticketing have seen an adverse impact on growth. Therefore, the growth has come in predominantly from higher-margin businesses. Now what that means is clearly, you're getting a much better improvement in the blended margin for the business as a whole. If you were to look at adjusted margins across segments, and then look at it probably as a percentage of gross bookings, then it would look much healthier. The customer acquisition cost also. So it's completely linked to the mix shift. Then within that mix shift, there's also the fact that there's slightly more accentuation towards the mid to mid segment of hotels, where, again, the customer acquisition cost tends to be slightly higher. I think purely reflective of the mix, and therefore, if you really see despite the 5.6%, there's no impact. In terms of the adjusted operating number. That continues to be 1.8% plus as a percentage of gross booking. So wanted to call that out. It's very difficult. Like I said, the mix and the blended margins were very different, say, until about a year back. Which were very different in this one-year period. Due to these one-offs that have got paid out. Manish Adukia: Thank you. And maybe just my last question, taking a step back and looking at the overall business, 20% constant currency revenue growth in the quarter, which was a fairly noisy quarter, which in my opinion, is a very good outcome. When we think about, let's say, over a one to three-year outlook, is it fair to say that to deliver 20% growth you have to continue to reinvest in business and margins don't expand, which means over a period of time, your EBITDA growth broadly tracks revenue growth. Because I would have thought that in a country like India, if revenues are growing at 20%, operating costs probably grow at a lower pace. Is that something that may not play out? I mean, is it not an operating leverage story anymore? And margins will largely be in line with where they are? Or how should we think about the growth outlook versus the EBITDA growth outlook, revenue growth versus EBITDA growth? That's my last question. Mohit Kabra: Sure. If you look at it over the last five, ten years, we've clearly called out a substantial portion of the margin improvement that was supposed to come in leveraging volumes and leveraging penetration, building in a market leadership in each of the segments of the business, that's largely played out by 2024. Thereafter, we have been calling out that in our customer acquisition costs are actually pretty efficient right now. We don't really look at dialing them down. We'd rather keep focusing on dialing up growth. Looking at growing in the twenties. That opportunity is getting delivered despite the market growth coming down very significantly. At least in this year, across quarters. I think the last part of our objectives in setting the mix where we are. For instance, where the accommodation mix is still in the forties. Till the time we remain in the forties and closer or the sub-50% mark, we do believe our adjusted operating margins are pretty healthy. I've always given the example of the global players and how their best-in-class margins play out. If you just superimpose our mix over there, this margin percentage looks very healthy. I think we will really need now the mix going beyond the 50% mark. For any significant improvement on the adjusted operating margins to play out. Until then, I think the operating leverage will likely come in more from the more fixed than variable cost. Which again is very small. In our case, the fixed costs are just about 20, 25% of the overall expenses. Therefore, the improvements are going to be much smaller in nature. In line with what we have seen in the last two years or so compared to what we have seen in the five years before that. Manish Adukia: Very helpful. Thank you, Mohit, for answering my questions. All the best. Mohit Kabra: Thank you. Vipul Garg: Thanks, Manish. The next question is from the line of Vijit Jain. Vijit, you may please ask your question now. Vijit Jain: Yeah. Hi. Thank you. So my question, in the hotel segment, with the GST cut, did demand somewhat shift also from higher ticket size to sub 7,500 category? Within that, given that you even called out that growth did accelerate here. Is that because, in general, you have better selection in that and therefore some market share shift might have happened from others or from offline or other channels to you? Is that something that happened here? Mohit Kabra: We, as you know, on the premium side, we pretty much have all the hotels that are available in the country on the platform. Most of our expansion actually keeps happening more in the mid to premium or more in the mid to budget or more in the budget segment. Right, from a price point of view. Where we keep adding more and more hotels on the platform. Because there's a much larger number of hotels in that particular price point, which still need to be contacted and put on the platform. For maybe new hotels which come across all price points. So that improvement in the booking of offerings in the budget segment will keep increasing. No doubt about that. But this is more, I think, what we saw during the quarter was more on account of the significant price differential, which is now emerged. The sub 7,500 versus, say, the 7,500 to 9,000 or 10,000 price range because there's suddenly a significant impact coming in from the steep change in the GST rates. So that's seeing a lot more of the volume coming through in the sub 7,500 price range. In fact, a lot of the hotels who were on the marginal side, just about the $7,500 price, would have also wanted to bring the prices in line for the overall customer benefit to play out. So that's what's playing out, and that's what we've seen. Largely on expected lines. Like I said, there has been a little bit of a share shift from a volume point of view we've seen roughly about 2 to 3% shift happening from premium, super premium to maybe more like the mid to budget segment. Again, on the overall mix also, roughly about four to 5%, whether in terms of gross booking value or in terms of adjusted margins. So yes. But this is very much on expected lines. Like I was saying, the real underlying benefit of it is it's really helped unlock demand in the overall hotel schedule. Vijit Jain: Got it. Thanks, Mohit. My second question, just reflecting on your comment earlier, Rajesh, on generative AI and LLMs and those things. I'm just wondering if trip planning is what moves to LLM. Trip planning is arguably on search versus LLM. LLM offers much better. Does that mean that it could accelerate further your online shift in categories like international or other packages and stuff where traditionally, people have used agents because it's complex and make it easier? Could that conversely actually help online shift in India? Rajesh Magow: No. I think it's an interesting take, Vijit, I must say. Quite possible. See, listen. In any case, overall, across the categories, not necessarily on travel and within travel also, all segments directionally going in that direction only, from offline to online. Can we say that the digital agents tomorrow or even on the trip planning when it is becoming more popular, I don't know whether the trip planning per se because, I could also argue that even historically, people were going to Google and searching and doing some bit of trip planning there, right, or going to TripAdvisor to do some trip planning. Specifically or coming to OTAs to do some part of trip planning, etcetera. I'm not sure whether that per se will trigger this shift. But I think what is potentially what can potentially trigger is actually what we have built. Which is Myra is a digital agent because you can ask the question in your own language that you are comfortable. You can look for complex itineraries, ask as many questions as you want, and you will get accurate answers. Then along with that, the booking will also be stitched. In a very smooth manner. That might actually help. Because the hypothesis is that you're going to a travel agent or human travel agent to ask for help specifically for customization. Right? Now you can achieve that customization on the digital agent as well. Almost as effectively, if not better, as you would do it with the other alternative, right, so that you were doing it or you were it earlier. I think that might actually help do the shift or accelerate the shift better. I'm not sure. Only trip planning. The only trip planning where trip planning could help is that where overall inspiration for travel goers, because if that, in any case, is the consumer behavior is changing and spending more and more on travel in any case. So you go on your preferred either the social media channel for inspiration and then come to, let's say, horizontal search or and or an OTA like MakeMyTrip to do trip planning and you find it easier and smoother, domestic or an easy travel use case or a complex travel use case. That potentially can definitely help. But specific to international travel, I think unlock might be the digital agent mode, which is answering all the and also stitching the booking experience together. Put and also post-sales and in-trip in a single interface, that might actually help trigger that shift. Vijit Jain: Alright. Thanks, Rajesh. And my last question, on the total marketing spend, which I think to Manish's question earlier, you mentioned how mix shift has contributed to it rising to 5.6. So as air recovers maybe from the summer season onwards or maybe even marginal recovery in the March, does it trend? Does your total spend trend back towards what you've previously said, five to 5.5%? Mohit Kabra: Most likely, Vijit. It should start reflecting the mix. Because, like I said, there's nothing in terms of a one-off over here. Therefore, it should start to play in the mix depending upon what kind of changes we see over there. Vijit Jain: Got it. Thanks, Mohit. Those are my questions. Vipul Garg: Thanks, Vijit. The last question we will take from the line of Gaurav Rateria of WFM. Gaurav, you may please ask your question now. Gaurav Rateria: Hi. Thanks for taking my question. So just a couple of questions. One is the net take rate on air is about 7% this quarter, 7.2% last quarter. Is that a normal number, or is it running higher than a normal range of, like, six and a half or so? Mohit Kabra: Yeah. I think we generally tend to range around this mark. It can be about half a percentage point lower or higher depending upon what kind of phase of prevailing, depending upon the kind of lag between booking versus flown, etcetera. So nothing exceptional over here, Gaurav. Gaurav Rateria: Okay. Got it. And then the second question is going back to the hotels and packages business. So when we think of the constant currency bookings growth of fifteen, I think you explained it as volume growth of 20 and then five points of impact from GST. But then apart from volume and GST impact, there's also pricing. With all these hotel companies reporting pretty decent ADR growth. So for you, the price net pricing growth is like zero almost. Right? So I guess there is some price growth and then negative mix impact. Which is canceling each other. But if I just think about going forward, let's say, next one year where you mentioned for the next four quarters, this GST impact will hit you. Are we thinking of broadly an algorithm where your constant currency GBV growth will be like five percentage points below your volume growth like it was this quarter, or does that gap sequentially keep reducing? Maybe if I can share a one-year view as well as a two, three-year view. That'll be helpful. Mohit Kabra: Directionally, it is only just a one-year impact because the comparable number for the previous year is at a different GST rate. Therefore, it's just more of an optical thing than anything actually impacting the business. So this is more optical and don't see any real impact as such over here. Sorry. I missed the first part of the call. Question, what was that? Gaurav Rateria: Yeah. I got that, Mohit. Maybe I'll just quickly address that. Then just Gaurav, to your point on hotel companies reporting higher price rise and all, you should just be mindful of one thing. See, what you are looking at, it is only a few data points. Like, let's say listed companies reporting some, and, again, their ADRs have also not significantly gone high. On our platform across the segments we are selling hotels. Right? On a blended basis where there is a possibility in one particular segment in certain cities, some because of the demand-supply gap, etcetera, some price movement would have happened. But as a general trend, on a blended basis, the segments, if we do and even if we sort of look at different segment hotels, whether it's a budget hotel segment or a mid-segment or a premium and then super premium kind of segment, we haven't really seen any price increase which is extraordinary or out of the ordinary now happening. So it's actually that era is over. It is actually pretty stable now, and you would only see either because of seasonality, there will be some movement or there will be an inflationary increase year on year. Right? So I don't think we should jump to the conclusion that the average selling price for a room night across the board, the rates have only gone up in pretty much every segment. I thought I'd just clarify that because, on our platform, we also have, out of our hotel and packages business, about 10% homestays. Now homestays pricing and year on year, and across segments, and therefore, on a blended basis, on a pan-India basis, if you would see, there is no significant price increase except for the seasonality impact that we've seen. Gaurav Rateria: Got it. Maybe just one last follow-up on the domestic hotels business. So at least among the listed OTA players, we don't see anyone else having any meaningful hotel business right now. So at least in the domestic segment, is that a fair conclusion that there is not really much competition? When we look at the broader industry data, hotel, domestic plus international, there we see I guess you have competition from these global players. But let's say, at least on the domestic segment, would it be fair to conclude that? You would be the one dominating and not one competition? Mohit Kabra: Reasonably fair to say, but just keep in mind that the overall online penetration in the segment is still in the early stages. So there's a long headroom over there. But fairly in the right direction. Gaurav Rateria: Thank you. Thank you. Vipul Garg: Thank you, Gaurav. In the interest of time, this was our last question. We'll now hand over to Rajesh for his closing comments. Rajesh Magow: Thank you, Vipul, and thank you, everyone, for your patience. We look forward to seeing you next quarter. Vipul Garg: Take care, everyone. You may now disconnect the call.
Operator: Thank you for your continued patience. Our meeting will begin shortly. Please standby. Your meeting is about to begin. Welcome to Metropolitan Commercial Bank Fourth Quarter 2025 Earnings Call. Hosting the call today from Metropolitan Commercial Bank, are Mark DeFazio, President and Chief Executive Officer and Daniel Dougherty, Executive Vice President and Chief Financial Officer. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the prepared remarks. Lastly, if you require operator assistance, during today's presentation, reference will be made to the company's earnings release and investor presentation, copies of which are available at mcbankny.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to the company's notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release and investor presentation. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin. Mark DeFazio: Thank you, and good morning, and thank you for joining our quarterly earnings report. We are pleased with our fourth quarter and full year 2025 performance. Sustained growth in net interest margin, net interest income, deposits, and loans, combined with continued improvement in our efficiency ratio, positioned us to close the year on a strong note. The momentum we generated in the fourth quarter sets a solid foundation for meaningful progress in 2026 and beyond. Our disciplined underwriting and our franchise-wide risk management culture continue to anchor our safety and soundness approach. For the year, we expanded our loan portfolio by $775 million, representing a growth of nearly 13%. Total loan originations reached approximately $1.9 billion. Loan growth was funded by deposits, which increased by roughly $1.4 billion or about 23%, supported by our strategic funding initiatives. These initiatives included deepening existing deposit verticals and identifying new opportunities to diversify and strengthen our funding base. In the fourth quarter, we opened a full-service branch in Lakewood, New Jersey, as a conversion of an existing administrative office. Additionally, we expect to open two new branches in Florida in 2026, one in Miami and one in West Palm Beach, all of which will enhance our presence in these key growth markets. Asset quality remained solid with no broad-based negative trends across loan segments, geographies, or sectors. We continue to engage closely with our clients to assess evolving market conditions, and feedback to date has not indicated any areas of concern. This is a reflection of our disciplined underwriting and proactive portfolio management. Looking ahead, we remain focused on managing asset quality, optimizing profitability, and expanding our presence in New York and other complementary markets. Our strategy for 2026 and beyond centers on capturing additional market share through traditional channels while positioning the franchise to capitalize on opportunities that enhance long-term shareholder value. Several new initiatives will enter the market in 2026, and we expect to see early returns in the form of low-cost deposits and growth in increased fee income. These efforts reflect our commitment to build a more diversified, efficient, and resilient institution. I want to express my sincere appreciation to our employees and directors for their dedication and contribution throughout the year. Their commitment to excellence has been instrumental in Metropolitan Bank Holding Corp.'s sustained performance and will continue to drive our success in years ahead. I will now turn the call over to Dan Dougherty, our CFO. Daniel Dougherty: Thank you, Mark. Good morning, everyone. And again, thanks for joining our call. This morning, we will cover the strong results of the fourth quarter and conclude with 2026 guidance, focused on the continuation and importantly, the leveraging of the foundational financial strength evidenced in our fourth quarter results. Let's begin with a few comments on the balance sheet. The loan book was essentially flat in the fourth quarter; however, we did achieve our annual target growth. In 2025, the loan book increased by $776 million or about 13%. The reason for the limited loan growth in the fourth quarter was related to prepayments of approximately $317 million, which is about $150 million above the trailing three-quarter run rate. Fourth quarter total originations and draws were approximately $599 million, printed at a weighted average coupon or WACC net of fees of 7.28%. The new volume origination mix was in line with historical performance at about 70% fixed and 30% float. Over the next six months, we have about $1.1 billion inventories with a WACC of 6.94%. We assume that we will retain about 75% to 80% of those cash flows. In our forecast model, we assume that renewals will reprice at about 25 to 50 basis points below our new volume origination rate. As the treasury curve three years and out has not moved very much since the Fed began its most recent easing campaign, our loan spread guidance price guidance continues to drive coupons well above 7%. Our loan pipelines remain strong. I will provide 2026 guidance for the loan growth and other related metrics at the end of this narrative. In the fourth quarter, we grew deposits by $34 million or approximately 4.3%. As noted in the press release, for the year deposits grew by $1.4 billion or about 23%. On a spot basis, quarter over quarter, the cost of interest-bearing deposits declined by 43 basis points. As our balance sheet remains modestly liability sensitive, and more than $2 billion of our indexed deposits repriced on the first business day of the month following a rate change, the benefit of the mid-December reduction in the Fed funds target rate will only become apparent in the first quarter. We have $1 billion of hedged indexed deposits, which just display positive carry downs with Fed funds effective rate of approximately 3.5%. In our forecast model, we are using a generic cost of funds of the Fed funds target rate minus 50 basis points. Comments on the net interest margin? The margin was 4.1% in the fourth quarter, up 22 basis points from the prior quarter. As you know, the Fed began the recent easing campaign mid-September last year. Over the course of the 75 basis point easing cycle to date, our deposit beta for unhedged interest-bearing deposits has been about 75%. Expect that we will be able to replicate this performance for the next 50 basis points of rate cuts at the minimum. Supported by our deposit growth, we were able to pay off all wholesale funding totaling $450 million during the course of 2025. Now let's move on to some high-level comments on our income statement. Our methodical balance sheet growth and NIM expansion continue to drive impressive top-line results. For the fourth quarter, net interest income was $85.3 million, up more than 10% on a linked quarter basis and up almost 20% for the year. Now let's talk briefly about the diluted EPS print of $2.77. As mentioned previously, we experienced elevated loan prepayments in the fourth quarter. As such, our prepay penalty and deferred fee income was about $1.7 million above our normal run rate. In addition, in the first quarter, we've sold bonds and realized a gain of about $675,000. As well, in the quarter, we had an insurance claim recovery related to a discontinued business line and a compensation accrual adjustment that totaled to about $2 million. All told, I estimate that non-core credits put it to about $4.6 million or about $0.30 per share. Our fourth quarter NIM adjusted for above-normal prepayment penalty and fee income was approximately 4.02%. Our fourth quarter ROTCE adjusted for all of the income items that I just listed was just north of 14%. Our noninterest income for the fourth quarter was $3.1 million. I touched on the securities gain earlier. We do not expect to recognize further gains going forward. We do, however, continue to seek new business initiatives, as Mark mentioned, to drive growth in noninterest income. Noninterest expense for the quarter was $44.4 million, down $1.4 million versus the prior quarter. The major movements in operating expenses quarter over quarter were as follows: a decrease of $1.3 million in comp and benefits primarily related to a reduction in the bonus accrual and restricted stock expense. A decline in professional fees of $649,000 primarily related to a reduction in legal and other fees. As mentioned, a portion of the decline in legal fees was related to the receipt of an insurance claim. And finally, a $668,000 increase in technology costs. The primary driver of this increase was related to the digital transformation project. In the aggregate, for the fourth quarter, digital project costs were about $3.1 million. The effective tax rate for the quarter was about 30%. Now, let's take a look at what we are laser-focused on today. The outlook for 2026. To start, some thoughts on our interest rate assumptions and the balance sheet. We have penciled in two 25 basis point rate cuts, one in June and one in September. Clearly, the timing of our rate cut assumptions reduces their financial impact on our forecast. Similar to 2025, we expect to grow loans by about $800 million or approximately 12%. We expect the new volume loan mix to be consistent with recent experience. We expect to fund all planned loan growth with deposits. The securities portfolio will be maintained at about 10% to 12% of balance sheet footings. Now some thoughts on earnings and other financial metrics. We expect the NIM to expand modestly over the course of 2026. The number and timing of additional rate cuts are a primary driver of new performance. As well, the slope of the yield curve is an important variable. In our forecast model, we do assume some modest loan spread tightening throughout the year as a reflection of our loan growth demand. Based on our current forecast, we expect to print an annual NIM of about 4.1% for the year. Importantly, we expect that our business model is well equipped to defend or even expand the NIM with or without additional rate cuts. As for the provision, I note that the current consensus is generally aligned with our thinking. I do note that we are progressing through the workout process on many of the credits for which we booked specific reserves in 2025. The final disposition of these credits could result in allowance adjustments that are outside of our business-as-usual planning. For non-interest income, I suggest a 5% to 10% growth assumption is reasonable. We do aspire, as I mentioned, to rebuild the fee income line through time, generally in line with our 2024 results as a benchmark. Now some thoughts on the outlook for operating expenses. We expect the annual operating expense line total to about $189 million to $191 million. The OpEx forecast includes a number of unique items. The first item relates to the Modern Banking in Motion project. Our annual expense guidance includes $3 million of first-quarter spend primarily related to the extension of the timeline for conversion. The second item relates to the premises expense line item. In 2026, we will be expanding our real estate footprint both at our New York City headquarters and in West Palm Beach, Florida. The associated new expense run rate is about $2.2 million annually. Due to timing, the increase for 2026 will total to about $1 million. Finally, our plan includes growth in deposit verticals that are expensed below the line. The annual run rate of these fees is expected to increase by about $6 million in 2026. Putting this all together, our forecasted ROTCE approaches 16% by 2026. Finally, before we open the floor for questions, I want to mention that Metropolitan Bank Holding Corp. is hosting an Investor Day at our headquarters in New York on Tuesday, March 3. In addition to Mark and myself, a number of our other senior leaders will be presenting. More information is posted on the Events page of our Investor Relations website. A limited number of seats are still available for in-person attendance. If you have questions or would like to attend in person, please contact our Investor Relations team at ir@mcbankny.com. I will now turn the call back to our operator for questions. Operator: Thank you. The floor is now open for questions. Our first question is coming from Feddie Strickland with Hovde Group. Please go ahead. Your line is open. Feddie Strickland: Hey, good morning. Just wanted to start on the loan mix. Appreciate the comments. Opening comments and good to see momentum on owner-occupied CRE last couple of quarters. But I'm just curious if we could start to see C&I start to grow again after a couple of quarters of decline here. Mark DeFazio: I don't think so, Feddie. Core C&I you're going to see grow substantially. You'll see C&I that has a medical implication to it. So we continue to expand our healthcare practices and how we lean into healthcare. But Core C&I, I think we continue to manage that risk at our existing pace or slightly higher or even potentially slightly lower. Feddie Strickland: Understood. That's helpful. And just sort of along that same line, obviously, CRE concentrations come up a little bit just as you've done some repurchases and whatnot over the last couple of quarters, even as owner-occupied has gone up. Do you expect that it will be kind of stable from here just as you continue to grow owner-occupied CRE going forward? Mark DeFazio: Yes, I think so. I think our concentration increase to risk-based capital will be fairly stable going forward for sure. Feddie Strickland: And one last one for me before I step back in the queue. I know you've opened some new branches in New Jersey and South Florida. It sounds like you got more in the pipeline there. And I was just curious how much of a contributor those were to the municipal deposit growth we've seen over the last couple of quarters? Mark DeFazio: With New Jersey, yes. Because they had a little bit of a head start with the branch, the administrative office being converted. Florida has really not yet contributed. We just converted the Miami office and we're under construction in West Palm Beach. So I would expect significant contributions in the future from Florida and even more so from New Jersey as we go forward. Feddie Strickland: Right, great. Thanks, Mark. I'll step back in the queue. Operator: Our next question comes from David Conrad of KBW. Please go ahead. Your line is open. David Conrad: Yes, good morning. Want to talk a little bit about asset quality. I know NPAs went up around $5 million, not pretty stable this quarter, but maybe talk about the two credits there and maybe just update us from last quarter on the bigger relationship, what any movement there, what's happening with that relationship on NPAs? Mark DeFazio: Yeah. The two loans were in-market multifamily loans that properties were up for sale. And we expect to have little or no loss associated upon the sale of those assets. As far as last quarter's specific reserves, we're still working through the workouts. I'm still cautiously optimistic. As I said last quarter, I think we'll have a resolution to those loans by the end of this quarter, and we are engaging with the owners and workouts take time. You need to have patience and maturity. And I think we're going to come out on the right end of this, hoping to report that in the first quarter. David Conrad: Great. Thank you. And then just a follow-up question on capital. I think your CET1 ratio is about 10.7% right now. Maybe walk us through maybe your targets there in the range where you'd want that to be as you grow the balance sheet kind of double digits? Daniel Dougherty: Yes, David. As I when I think about that, I kind of focus on TCE. And we expect to see that kind of trend from the current high eight, 8.8 or so to about low nine. And that's kind of where we feel comfortable running the institution. David Conrad: Okay. So you get back Thank you. You get back in back into CET1 from there. Daniel Dougherty: Yeah. Yep. Yep. Perfect. Thank you. Yep. Operator: Thank you. We will move next with Mark Fitzgibbon with Piper Sandler. Please go ahead. Your line is open. Mark Fitzgibbon: Hey guys, nice quarter. Daniel Dougherty: Nice first question I had, Dan, wondering if you could share with us when you expect the digital transformation cost to be fully done and that transformation to be completed. Is that in the first quarter? Daniel Dougherty: The conversion is anticipated still in the first quarter. In fact, Presidents' Day weekend. That's the big day. Okay. So when that's complete, most of the you know, that's when the explicit expense terminates, but know, then the run rate going forward and takes shape. And there's always trailing stuff, but that's when the end of that $3 million spend will be finalized. Mark Fitzgibbon: Okay. Great. And then I was curious, was there any interest recovery? I know you mentioned some prepayment penalty income in the fourth quarter, but any interest recovery in NII this quarter? Daniel Dougherty: No. Mark Fitzgibbon: Okay. And then I wondered if you could share with us which verticals really drove the demand deposit growth this quarter. I couldn't quite tell from the tables. Daniel Dougherty: Total growth for the quarter largest contributors were munis. And it really was across the board, really, really nice distribution. But munis and property managers. And then customers. Both borrowing customers and new deposits. We're the biggies. And of course, EB5 pitched in a bit as well. So, it really crossed the board. Communities would be outstanding. Bit of the stuff. Mark Fitzgibbon: Okay. And then lastly, maybe for Mark, Mark, your currency's improved somewhat. I know you still think it's it's inexpensive. But do you feel like M&A is more possible now likely given what's going on in the environment out there? Mark DeFazio: At this point, we don't see a lot of value there in the franchises that are in our markets. So we're going to stay very close to the best here. We have some very exciting rollout of new opportunities that you'll read about. Hopefully by the end of the first quarter. So we're going to just keep doing our blocking and tackling and materially outperform our peers here and let these other M&A transactions just sit out there and let them work themselves out. But for now, we're just our head is down and we're focused on organic growth. Mark Fitzgibbon: Great. Thank you. Operator: Thank you. Do have a follow-up from Feddie Strickland with Hovde Group. Please go ahead. Your line is open. Feddie Strickland: Hey, just one quick follow-up kind of along that same vein. I wanted to ask on overall growth strategy. I mean, is something like a team lift out in the new geographic area a possibility? Absent any sort of M&A, if you have the opportunity to bring on a good team in a new geography or in an adjacent geography? Would that be something that's more likely? Mark DeFazio: Likely not. It's really not part of our culture or DNA here. We've been acquiring a really good talent in the markets that we operate in without taking the risk, the financial risk and the burden of teams and the cultural challenges of integrating. So we're not a big fan of the team lift outs. Doesn't say that if one presented itself that was unique and could fit in. We would consider it. But there's a lot of independent talent out there, in the markets that we're in. So far, it has worked for us for twenty-seven years. I think we're going to stick to the growth strategy that we have. Feddie Strickland: Great. Thanks. Operator: Thank you. And this concludes the allotted time for questions. I would like to turn the call over to Mark DeFazio, for additional or closing remarks. Mark DeFazio: Thank you. Just want to end on suggesting that our results continue to show the foundational strength and stability of our business model. Metropolitan Bank Holding Corp.'s business strategy, which is based on strong underwriting, conservative risk management, and the leveraging of our market standing positions us well to continue to deliver prudent growth outstanding financial performance. We remain steadfast in our support of our clients and communities while achieving appropriate returns for our shareholders. Thank you again for attending the call, and we look forward to seeing and speaking to you at our Investor Day. Thank you very much. Operator: This does conclude today's conference call and webcast. A webcast archive of this call can be found at www.mcbankny.com. Please disconnect your line at this time. Have a wonderful day.
Operator: Good day, and welcome to the Dime Community Bancshares, Inc. Q4 Earnings Call. At this time, all participants are in listen-only mode. After the speakers' prepared remarks, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. Before we begin, the company would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in today's press release and the company's filings with the U.S. Securities and Exchange Commission, to which we refer you. During this call, references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and for reconciliations to GAAP, please refer to today's earnings release. At this time, I would like to turn the call over to Stuart Lubow, President and CEO. You may begin. Good morning. Stuart Lubow: Thank you, Michelle, and thank you all for joining us this morning for our quarterly earnings call. With me this morning, as usual, are Avinash Reddy, our Chief Operating Officer and CFO, and also Thomas Reid, our Chief Commercial Officer. Today, I will touch upon the progress we made in 2025 as we executed on all aspects of our strategic plan. I will then touch upon some bank-wide goals for 2026. Thomas will talk about the progress we made in building out our commercial banking platform and industry verticals. Avinash will then provide some details on the fourth quarter and guidance for 2026. Our core earnings power continues its upward trajectory. Core EPS was $0.79 for the fourth quarter, representing an 88% increase versus the prior year. The growth in EPS was driven by record total revenues of $124 million for the fourth quarter. The NIM was up 10 basis points, and average earning assets were up over $650 million on a linked quarter basis. All our growth has been organic, built by our existing bankers and new hires. As you know, we do not have any purchase accounting in our numbers, which tends to inflate results at banks that have engaged in M&A. Core deposits were up $1.2 billion on a year-over-year basis. Deposit growth has been strong across all our channels. In addition, we have been successful in continuing to drive down our cost of funds and growing our non-interest-bearing DDA to 31% of deposits. As such, we have a core-funded balance sheet with a significant liquidity position, which will allow us to take advantage of lending opportunities as they arise. Speaking of loans, we continue to execute on our stated plan of growing business loans and managing our CRE concentration ratio, which is now below 400%. Business loans grew over $1.075 billion on a linked quarter and over $500 million on a year-over-year basis. We were very happy to be able to bring Thomas Reid in the first quarter of 2025 and have already made great progress in terms of building out various industry verticals that Thomas will talk about more in his remarks. Our loan pipeline continues to be strong and is more than $1.3 billion with a weighted average rate between 6.25% and 6.5%. As we mentioned on last quarter's call, NPAs moved down nicely in the fourth quarter and now represent only 34 basis points of total assets. Multifamily credit continues to be very strong with zero NPAs. Our capital levels are best in class with a total capital ratio of more than 16%. Disruption in our marketplace remains very high. As you saw, there was another merger transaction where an out-of-state bank bought a local thrift at year-end. We were not involved in this transaction in any way. We remain focused on our organic growth strategy and hiring teams. The environment for organic growth continues to be very strong with an extremely target-rich environment, and the execution of our strategy is now showing up in our quarterly results. Our Manhattan branch is up and running, and we expect the same for our Lakewood and Locust Valley locations toward the end of the first year. As we look forward to 2026, the momentum in our business continues to be strong. We are focused on the following. As we have discussed previously and as Avinash will mention in his remarks, we have a significant amount of repricing assets in the next two years, which provides a tailwind for revenue growth. As the loan repricing story plays out, Dime's inherent earnings power will be displayed. In 2025, we put in place the building blocks to create a more diversified balance sheet and loan portfolio. I expect to see significant growth in both in 2026. As we grow revenues faster than expenses, we expect to operate at a sub-50% efficiency ratio. Being efficient has always been a hallmark of Dime, and we expect to return to the sub-50% level in 2026. Lastly, we continue to attract talented bankers who can help us grow core deposits and grow business loans. In conclusion, Dime has clearly differentiated our franchise from our local competitors as it relates to our organic growth. We have an outstanding deposit franchise, strong liquidity, and robust capital, which bodes well for the future, driven by significant loan repricing opportunities over the next two years. I want to end by thanking all our dedicated employees for their efforts in 2025 and in positioning Dime as the best commercial bank in the New York Metro Area. With that, I will turn it over to Thomas Reid. Thomas Reid: Thank you, Stuart, and good morning. In my prepared remarks, I'll provide some background and color on our commercial banking initiatives. As many of you know, I was part of the leadership team at Sterling that helped transform that balance sheet from $5 billion to a $25 billion diversified commercial bank balance sheet. When I began speaking with Dime in 2024, it was apparent that Dime had a number of strengths that were attractive in recruiting talented bankers. First, an entrepreneurial and growth mindset, which is valued by commercial bankers. Second, the best deposit franchise in Metro New York, both from a cost perspective as well as a growth profile, which can be utilized for funding. Third, the back office was staffed with strong managers who had experience managing larger and more diversified commercial portfolios. And finally, Dime had developed a reputation in the marketplace as a company where talent wanted to work. It was perceived and is perceived as a winner. Even before I started, we outlined a strategy as to which industries and geographies we wanted to strengthen, build out, and focus on. Our goal was to create a platform that had all the industry expertise of a $50 to $100 billion bank, but that operated nimbly like a $15 billion bank with access to senior management and quick decision-making. Of note, right around the time I joined, we added a new chief credit officer, Rob Rowe, who was previously the chief credit officer at Sterling. Since I came on board in February, we have added the following capabilities: Fund finance, which is exclusively focused on capital call lines; Lender Finance, our focus is on lending to institutions that are focused on business credit. We do not intend to be active on the consumer credit side. Mid corporate, our focus is on companies that are larger than a typical middle market company. Sponsor finance. Our focus is on noncyclical industries with good risk-adjusted returns supporting sponsors and family offices. Operator: Syndications. We added a team to focus on syndicating Thomas Reid: self-originated loans, allowing us to service larger clients while staying within our established risk tolerances. And lastly, geographic expansion. Dime has always had a dominant presence on Long Island, and we are focused on expanding that to Manhattan and New Jersey. For example, in the fourth quarter, we hired a well-known banker to cover middle market relationships in New Jersey. All of our commercial bankers and industry specialists are focused on direct relationship lending with the occasional club deal to manage our exposure. We're not building a business based on SNCs or participations as many small to medium-sized banks often do. The bankers that we have hired have added significant industry knowledge and a high level of expertise to Dime's offerings. As we look to 2026, each of these new commercial banking teams will contribute to loan growth and operating leverage. We also have our eyes on one or two industries where we already have a presence, but where we could add some additional depth. With that overview, I'll turn it over to Avinash for his prepared remarks. Operator: Thank you, Thomas. Core EPS for the fourth quarter was $0.79 per share. This represents an 88% year-over-year increase. Core EPS excludes the impact of severance, which was approximately $2.4 million on a pretax basis, and a couple of discrete tax items, which were $2.7 million. These items have been described in the GAAP to non-GAAP reconciliation tables in our earnings release. Core pretax pre-provision net revenue of $61.5 million for 2025 represents approximately 163 basis points of average assets. The reported fourth quarter NIM increased to 3.11. We had approximately two basis points of benefit from prepayment fees. Excluding prepayment fees, the fourth quarter NIM would have been 3.09. As a reminder, the third quarter NIM excluding prepayment fees was 2.98. Avinash Reddy: Total deposits were up approximately $800 million versus the prior quarter. We saw strong inflows across all of our major channels. Deposit growth for the fourth quarter included approximately $100 million seasonal tax receivable deposits that typically arrive in the month of December and leave in mid-January, and approximately $225 million of deposits from a municipality tied to a bond offering that we expect to leave the bank in February. Excluding these items and typical seasonality in our branch network on the East End of Long Island, core deposit growth for the fourth quarter would have been closer to $400 million. Similarly, the overall balance sheet size and cash position was elevated at quarter-end by approximately $400 million due to the previously mentioned municipal deposits and seasonality. Our cost of total deposits was 1.85% in the fourth quarter, down 24 basis points versus the prior quarter. By maintaining a strong focus on cost of funds management, our NIM has now increased for a seventh consecutive quarter and has surpassed the 3% mark. We continue to have catalysts for growing our NIM over the medium to long term, including a significant back book loan repricing opportunity that I will talk about later. Core cash operating expenses, excluding intangible amortization of $62.3 million for the fourth quarter, was below our guidance of approximately $63 million. Noninterest income of $11.5 million was above our fourth quarter guidance of approximately $10 million to $10.5 million. The loan loss provision declined to $10.9 million, and the allowance to loans increased to 91 basis points, which is within our stated range of operating between 90 basis points and 1%. Capital levels continue to grow, and our common equity tier one ratio grew to 11.66%. Having best-in-class capital ratios versus our local peer group is a competitive advantage and will allow us to take advantage of opportunities as they arise and speaks to our strength and ability to service our growing customer base. Next, I'll provide some guidance for 2026. As I mentioned previously, excluding prepayment fees, the NIM for the fourth quarter would have been 3.09. We would use this as a starting point for modeling purposes going forward. We expect modest NIM expansion in the first half of the year and more substantial NIM expansion in the back half of the year as the pace of the back book loan repricing picks up. We believe our large cash position is a competitive advantage that will allow us to take advantage of lending opportunities as they arise and will help us create a sustainable NIM that is not subject to cyclical moves based on the trajectory of short-term rates. Given our current cash position, every future 25 basis point reduction or increase in short-term interest rates will not have more than a two to three basis point impact on our NIM. Our NIM expansion in future quarters will be driven more by the back book loan repricing as well as core deposit growth and business loan growth. To give you a sense of the significant back book repricing opportunity in our adjustable and fixed-rate loan portfolios, for the full year 2026, we have approximately $1.4 billion adjustable and fixed-rate loans across the loan portfolio at a weighted average rate of 4% that either reprice or mature in that time frame. Assuming a 250 basis point spread on those loans over the forward five-year treasury, we could see a 20 basis point increase in the quarterly NIM by 2026 from the repricing of these loans. As we look into the back book for 2027, we have another $1.7 billion of loans at a weighted average rate of 4.25%, that will lead to continued NIM expansion in 2027. Assuming a 250 basis point spread on those loans over the forward five-year treasury, we could see another 20 to 25 basis point increase in the quarterly NIM by 2027. In summary, assuming the market consensus forward curve plays out, we have a path to a structurally higher NIM and enhanced earnings power over time. Now that our NIM is at the 3.10 level, the next marker in front of us is 3.25, and after that, 3.50. With respect to the balance sheet, we expect a relatively flat balance sheet for 2026. The first quarter of the year is typically seasonally slow, and there's always a rush to get loans closed by year-end. In addition, we expect to continue to reduce our CRE concentration ratio lower to the mid-350% area driven by a reduction in transactional multifamily and transactional CRE. This will offset the strong growth we are seeing on the business loan side. We expect to reach an inflection point on CRE balances probably in the third quarter of the year. And once we reach this inflection point, the overall balance sheet should start growing again at a mid-single-digit growth rate. If we put that all together, our point-to-point total loan growth estimate for 2026 is in the low single digits with flattish balances in the first half of the year and growth in the second half of the year. For 2027, we are internally modeling mid to high single-digit end-of-period loan growth as business loans continue to grow and our industry verticals hit their stride. Next, I'll turn to expenses. We expect core cash operating expenses excluding intangible amortization for 2026 to be between $255 million and $257 million. This includes the full-year impact of our de novo locations in Manhattan, Lakewood, and Locust Valley, and all the private and commercial banking teams that we hired throughout 2025. With respect to the provision for loan losses, we expect the next couple of quarters to be in the $10 million to $11 million area as we move towards the midpoint of our allowance range of between 90 basis points and 1% and as we continue to aggressively work down NPAs and classified assets. For the second half of the year, we expect provisioning levels to trend down into the single digits and just cover charge-offs. Turning to noninterest income, we expect full-year 2026 to be between $45 million and $46 million. Factors that will determine the individual quarters will be the timing of swap fee income, which can be hard to predict, as well as SBA fees and title revenue. Finally, we expect the tax rate for the full year of 2026 to be approximately 28%. With that, I'll turn the call back to Michelle, and we'll be happy to take your questions. Operator: Thank you. If you'd like to ask a question, please press 11. If your question has been answered and you'd like to remove yourself from the queue, please press 11 again. Thomas Reid: And our first question comes from Mark Fitzgibbon with Piper Sandler. Your line is Stuart Lubow: Hi, Mark. Thanks. Maybe the first question is for Thomas. Thomas, Mark Fitzgibbon: could you share with us, you know, what industries accounted for the nice sequential quarter growth in the business loan balances this quarter? Just to give us a sense of where that growth is coming from. Thomas Reid: Yeah. All of those verticals are pretty much new, so we started out at a base of zero. Right? So I think Stuart mentioned we grew business loans about $500 million year over year, about $400 million of that came from these specialty groups that include healthcare, lender finance, fund finance, sponsor, and not-for-profit. The business that has probably most of the momentum in 2025 was healthcare. I think you know that Dime entered into healthcare probably about two years ago. And that portfolio has built over time. So I would say, probably out of the $500 million, about $400 million was the new specialized industries, and probably 50% of that was healthcare. Okay. Mark Fitzgibbon: And then secondly, I was curious, how much business do you have today roughly? And I won't hold you to the exact numbers, but roughly in New Jersey, you know, and deposit of sort of the, you know, the $10 billion of loans and call it $12 billion of deposits, how much of that is Stuart Lubow: is sort of Mark Fitzgibbon: Jersey domicile? Avinash Reddy: Yeah, Mark. So it's probably around, you know, somewhere between 8-10% of our portfolio is Northern New Jersey. A lot of clients that we followed over there. I'd say on the deposit side, it's less substantial than that. I mean, we're probably running at a, you know, 15 to 20% deposit to loan ratio for New Jersey. But in terms of overall loans, I'd say somewhere between 8-10%. But that's something that's been consistent at the bank, you know, for the last four or five years since Stuart got to the bank. Because, you know, Stuart ran a couple of banks in New Jersey, and a lot of relationships have followed since he got to Dime back in 2017. Mark Fitzgibbon: Okay. The last question I had, you know, loan sale gains were strong this quarter. I would have expected maybe they'd be a bit less given the government shutdown in 4Q. I guess I'm curious, are you sort of fully caught back up on the pipeline for these loans? Or maybe any thoughts you have on what 1Q activity levels might look like? Avinash Reddy: Yeah. I'd say the latter, Mark. We probably caught up at this point. We were very close to recognizing these gains in Q3. And then once the government opened up, we kind of did that. So it's kind of hard to predict that line. I think that one and the swap fee line, you know, it's just up and down based. So I wouldn't expect the first quarter to be as large as Q4. Q4 was probably two quarters into one, basically, is how I'd characterize it. Mark Fitzgibbon: Great. Thank you. Operator: Thank you. Our next question comes from Stephen Moss with Raymond James. Your line is open. Stephen Moss: Maybe just on the deposit growth here. Nice quarter for deposit growth. And I hear you, Avinash, in terms of some of the municipal deposits. Just curious, what the deposit pipeline kind of looks like? And kind of where are you pricing those deposits these days? Avinash Reddy: Yeah. So I'd say, you know, in terms of pricing, nothing's really changed there, Stephen, where you know, got a lot of influx of new deposits coming into the bank. So, you know, I'd say to get a new customer in the door, you probably gotta offer high twos to low threes on a money market. It's probably coming with 20-30% DDA. So the all-in cost is probably in the low twos of stuff coming into the bank. The actual cost of deposits or the spot rate on deposits at the end of the year was 1.68%. So that's, you know, lower than our overall cost of deposits, and that should help, you know, with the NIM going forward. I'd say just if you look back at our history, we just wanted to point out the seasonality just because we have a municipal business. We have an East End business. And then this quarter, we had the one, you know, transactional municipal deposit that did come. And so the point of that guidance was more along the lines of don't use our average earning assets for Q4 as a proxy for Q1 and grow it off of that base. You probably have to take out $300 to $400 million. But, you know, over the course of the year, if you look at year-over-year growth, we had a billion dollars of core deposit growth last year, and I think Stuart would attest to this as well that, you know, our teams haven't really matured yet, and we continue to see the pace of account opening pick up, basically. Stuart Lubow: Yeah. I mean, just to give you a little color, I mean, those teams that we brought on have crossed the, at year-end, the $3 billion mark, and opened up over, you know, in total, over 15,000 accounts. And we're still seeing monthly and quarterly growth in all our teams. So, you know, we're still very bullish on deposit growth. You know, we just had a, you know, a very outsized fourth quarter. Very happy with it. You know, all the channels from both the, you know, the commercial group, the private banking group, our retail bank, and our municipal group were all up. So, you know, we're excited about that and, as I said, very bullish. But, you know, the teams have really proven to be quite an asset, and we're still seeing quite a bit of new account openings. So, you know, we're expecting, you know, through this year continued growth in that market. Okay. Great. Really appreciate all that color there. Stephen Moss: On, you know, my other question here, just on the 100% rent-regulated piece. I know that was about $500 million at the end of the third quarter. Just and it came down pretty helpfully. At a pretty good pace in the third quarter. Wondering where that is now and if you have any color around like the scheduled maturities over the next year or two for that book? Avinash Reddy: Yeah. So, Stephen, we didn't have a lot of activity in that book in Q4, so it was, you know, relatively stable, you know, on a linked quarter basis. It's kind of hard to go, you know, quarter over quarter for some of these items. The way we really look at it is the pre-2019 book and the post-2019 book just because the stuff that was originated pre-2019 was prior to the rent-regulated rule changes. And, you know, as you know, and so we look at that book. That book's around $350 million at year-end 2025. That book used to be $450 million a year ago. That book was $500 million two years ago. Right? So that's the part that we had our eyes the most on. That book is fully reset at this point. You know, I think in terms of maturities and repricings in the entire multifamily book that's rent-regulated, both the 100% rent-regulated and the majority rent-regulated book, maturities and repricings are around $250 million for 2026. That's probably split $150 million and $100 million between the 100% and the 50 to 99% bucket. So look, we're not seeing any issues there. You know, as loans come up for maturity, they're, you know, paying off. As loans come up for repricing, I'd say, you know, a bigger proportion of them are staying with us and paying market rates, basically. But I think you'll continue to see, you know, attrition in that book. The one thing we've always pointed out is it's a very granular book. We don't have any big loans in that portfolio. You know, as opposed to the free market portfolio where you could see a few, you know, tens and fifteens in terms of size, in terms of credit. In terms of the rent-regulated book, it's very granular. So it's just gonna take time for that to continue to wind down. But, you know, we're pretty comfortable with what we have right now. Stuart Lubow: Okay. Great. Stephen Moss: Appreciate all the color there, and I'll step back in the queue. Thank you very much. Stuart Lubow: Yep. Operator: Thank you. Our next question comes from David Konrad with KBW. Your line is open. David Konrad: Yes. Thanks. Good morning. Just a follow-up question on the deposits. I know you have a lot of the municipality and seasonality this quarter, but noninterest-bearing deposits were, you know, almost 31% mix. Like, where do you think 2026, you know, will look like in terms of the mix of deposits, in terms of noninterest-bearing deposits? Thomas Reid: Yeah. Look. They have, you know, Avinash Reddy: if you go back in time, you know, this company had a noninterest-bearing deposit base somewhere between 35-40%. When we completed our merger. Obviously, you know, a lot of that was tied to PPP, and then we came all the way back down to 25%. Right? I'd say the starting point really should be, you know, in 2023, once you saw deposits leave the system, we were at 25%. We've built that up to 30 to 31% right now. I think we'd like to continue growing that over time. What we've really tried to do with the deposit base is focus on the low-cost deposits. And so I think what we really try to manage is getting the overall cost of deposits down. And right now, like I said, it's, you know, $1.68 plus or minus is the spot cost over there. But we're not really bringing on new relationships to the bank unless they bring us their full operating accounts and have 20 to 30% DDA. Right? So I think at a minimum, you know, seeing a floor of around 30% is probably, you know, reasonable, and we'd like to have that, you know, ratio creep up slowly over time. Stuart Lubow: Yeah. And, you know, you should note that, you know, again, getting back to the teams, you know, that $3 billion balance that they have, 38% of that balance is DDA. So, I mean, they really, you know, they really focus on the DDA side. And, obviously, while, you know, quarter-end was slightly higher due to some of the municipal deposits, those were not DDA deposits. Those were, you know, money market and whatnot. So, you know, I think there's a, you know, a good chance that we're gonna see 31% move up nicely during the year, and, really, that's what we've been focused on with our new team hires as well. Great. Thank you. Operator: Thank you. And our next question comes from Matthew Breese with Stephens Inc. Your line is open. Matthew Breese: Hey, good morning. Wanted to focus first maybe on just the, you know, the cash and then securities. Avinash, I heard you in your opening comments, but could you give us just some better idea of what the timeline and strategy is for deploying? Operator: Deploying that cash? And then what level do you think is kind of, you know, the normalized level, quote, unquote, Avinash Reddy: Yeah. So there's no specific timeline, Matt, in terms of us rushing out to buy securities. We probably bought around $150 million in the fourth quarter. You know, we're looking at rates consistently. I think we like having the flexibility on the balance sheet, like I said. At the start. What it really does is it creates a neutral balance sheet that's not tied to short-term rates. Right? Over time, as we, you know, make more business loans, have more floating rate assets, you know, that automatically will take care of the ALM profile of the bank. But in the near term, it just helps us having cash in that we don't have to go out and hedge the balance sheet in different ways. So I don't see that cash balance coming down significantly in the near term absent, you know, some of the seasonality that I talked about in Q4. I think if you read between the lines on the loan growth, we said, you know, loan growth's probably flat for the first half of the year and then growing in the second half of the year. So in terms of use of cash, in terms of loans, starting the second half of the year, there will be a use of cash for loans. First half of the year, it's gonna be, you know, in cash, and, you know, we're gonna look at the market for securities and where there's an opportunity to add some, we will. But we're not, you know, running out to put $500 million to work or, you know, $750 million to work overnight and something. This is we're building the balance sheet more for the longer term, and we're pretty happy with the, you know, liquidity position and our loan to deposit ratio. I mean, it's in the mid-eighties at this point, which is very consistent with what a national bank operates at. Obviously, the banks are not in our local peer group are, you know, much more over-leveraged and somewhere between 90 and 100%. But, you know, I think we're comparing ourselves really to a national bank, and we like the fact that we have this excess liquidity at this moment. Thomas Reid: Okay. Matthew Breese: I appreciate that. And then you'd mentioned in there adding floating rate loans. Could you just give me an update on where floating rate loans stand today as a percentage of total loans? These are, you know, loans priced off of SOFR or Prime. And the expectation for, you know, a year from now. Avinash Reddy: Sure. So, look, I think in terms of the new business and, you know, Thomas's verticals, you know, a majority of that is floating rate. So we think about, you know, the fund finance business, you know, that's a floating rate portfolio. When we're doing healthcare loans, those are priced off of SOFR. So anything coming on the books is likely more floating rate than fixed rate. Right now, floating rate's probably somewhere between 35-40% of the balance sheet. Fixed is probably around 25%, and adjustable is probably the difference over there. Matthew Breese: Got it. Okay. And then could you just comment on prepayment activity in 2025 was a big headwind for commercial real estate and multifamily growth. What did you see in the fourth quarter? And do you feel like there's some light at the end of that tunnel? Should we see or expect prepayment activity to start to decline? Avinash Reddy: Look. I think it really depends on its loan by loan, and it's whether we want to be, you know, in the market or not in the market for that type of asset. Right? And I think our guidance was we're focused on getting the CRE ratio to the mid-350s by, you know, maybe exiting some transactional multifamily and transactional CRE that doesn't have deposits. Right? Third quarter, we probably saw payoff rates in the 20-25% area. In the fourth quarter, it was probably 15%. Right? If you look over the cycle, it's somewhere between 15 to 20%. So, you know, I think rates, you know, short-term rates probably have to drop a little bit more for there to be a big payoff wave over there. Right now, it's kind of working in our favor because, you know, our goal is to get, you know, our CRE ratio down to the mid-350s. That being said, for relationship CRE that has deposits, we're very competitive with our rate. And we're able to retain them and their core customers at the bank. So I would delineate it between transactional and relationship CRE. And on the relationship CRE side, I think we are seeing pretty strong retention. Matthew Breese: Great. Appreciate it. Just last one for me. Muni deposit outflows you talked about, what categories of deposits will that impact? That's all I had. Thanks. Avinash Reddy: Yep. So the $225 million that I talked about and that Stuart mentioned, that's an interest-bearing deposit. It's probably in the 3% area, plus or minus, so that's interest-bearing. Some of the tax receivable money that comes in, that's in the DDA piece. So that's probably, call it, $60 to $70 million over there. So it's a split of categories. More of it in the interest-bearing side than on the noninterest-bearing side. Operator: Thank you. Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Stuart Lubow for closing remarks. Stuart Lubow: Thank you, Michelle, and thank you to all our dedicated employees and our shareholders for their continued support. We look forward to speaking with you at the end of the first quarter. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day. Thanks, Michelle.
Operator: Greetings, ladies and gentlemen. And welcome to the Truist Financial Corporation Fourth Quarter 2025 earnings conference call. Currently, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr. Brad Milsaps. Brad Milsaps: Thank you, Betsy, and good morning, everyone. Welcome to Truist Fourth Quarter 2025 Earnings Call. With us today are our Chairman and CEO, William Rogers Jr., our CFO, Mike Maguire, our Chief Risk Officer, Brad Bender, as well as other members of Truist's senior management team. During this morning's call, they will discuss Truist fourth quarter and 2025 results, share their perspectives on current business conditions, and provide an updated outlook for 2026. The accompanying presentation as well as our earnings release and supplemental financial information are available on the Truist Investor Relations website, ir.truist.com. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slides two and three of the presentation regarding these statements and measures as well as the appendix for appropriate reconciliations to GAAP. With that, I'll turn it over to Bill. Good morning, and thank you for joining our call today. Before we discuss our fourth quarter and 2025 results, let's begin like we always do at Truist with purpose on Slide four. At Truist, our purpose to inspire and build better lives and communities remains at the heart of everything we do. William Rogers Jr.: It drives our strategy and fuels our commitment to our clients and the communities we serve. Despite market volatility early in 2025, we stayed focused on supporting our clients and executing our growth and profitability agenda. This discipline drove higher earnings, stronger client relationships, and attracted new business. A key to delivering on our purpose and performance is the investment in our business, markets, and teammates. Some of these significant investments include enhancing our tech and digital capabilities in areas like AI, improving the client experience, recruiting and developing talented teammates to advise and serve clients with more complex and industry-specific financial needs, announcing plans to open 100 new insight-driven branches in high-growth markets, as well as enhancements to more than 300 branch locations in all markets. These investments underscore our commitment to the communities we serve and position us to deliver more personalized advice and create opportunities for outsized growth. As we enter 2026, our purpose continues to guide our focus on growth, profitability, and deeper client relationships. We're expanding our presence and delivering more differentiated advice-driven experiences. I look forward to sharing more of these priorities during today's call. Let's turn to slide five. We closed 2025 with strong results and clear momentum heading into 2026. We delivered net income available to common shareholders of $1.3 billion or $1 per diluted share for the fourth quarter and $5 billion or $3.82 per diluted share for the full year 2025. These results include certain charges such as severance and an accrual related to a specific legal matter that was settled in 2026, which totaled $0.12 a share for the quarter and $0.18 per share for the year. At the start of last year, we outlined five strategic priorities aimed at accelerating our performance and improving our profitability in 2025 and beyond. While there's more to accomplish, I'm proud of the progress we made as a company in 2025 and excited about the momentum we have entering this year. First, we continue to generate strong broad-based loan growth in both wholesale banking and consumer and small business banking driven by new loan production and increased client acquisition. Second, strong loan growth, better second-half results in investment banking, trading, and wealth, along with continued expense discipline, drove 100 basis points of positive adjusted operating leverage in 2025. Third, we made significant investments across our business in talent and technology, laying the foundation for future growth, which we expect to accelerate in 2026. Fourth, we maintain strong asset quality metrics as net charge-offs declined versus 2024, and nonperforming loans remain relatively stable. Finally, we returned $5.2 billion of capital to shareholders through our common stock dividend and the repurchase of $2.5 billion of our common stock. Our total capital return in 2025 reflects a 37% increase over 2024. Looking ahead, our strategic priorities remain unchanged, and our focus is clear: accelerate revenue growth, drive greater positive operating leverage, continue to invest while maintaining our expense and risk discipline, and return capital to shareholders at an accelerated rate. Executing on these strategic priorities is central to improving profitability and achieving our long-term goals, including our commitment to deliver a 15% return on tangible common equity in 2027. So in summary, we closed 2025 on a strong note and entered 2026 with significant momentum and confidence in our ability to deliver revenue growth at least twice the pace of 2025, greater positive operating leverage, higher levels of capital return, and improved profitability. Before I hand the call over to Mike to discuss our quarterly results, I want to spend some time discussing the positive momentum we're seeing within our business segments with our digital strategy on slides six and seven. First, let me start with consumer and small business banking. CSBB delivered consistent strong performance throughout 2025. As shown on the slide, we generated 5% growth in average consumer and small business loans and 1% growth in average deposits. This momentum was fueled by our market-leading consumer lending businesses, another year of net new checking account growth, and deeper relationships with our premier banking clients. Loan growth was broad-based across the portfolio with especially strong contributions from indirect auto and our specialty niche lending platforms Sheffield, Service Finance, and LightStream. These businesses continue to produce market-leading growth with attractive risk-adjusted returns. As part of advancing our consumer lending strategy, we've fully integrated our digital end-to-end lending platform, LightStream, into our Truist mobile app experience and our branch banking account opening experience. This expanded scale is improving efficiency, broadening distribution, accelerating growth, and meaningfully enhancing the client lending experience. Beyond our national consumer lending platforms, Premier Banking also delivered strong results. With 2025 production up 22% in deposits, 32% in lending, and 12% in financial plans. This performance was driven by higher adviser productivity and strong branded mortgage and branch-led lending. We continue to see strong outcomes from our strategic investments in digital, delivering year-over-year growth across all core metrics. In 2025, we added 77,000 digital new-to-bank clients, up 10% from the prior year quarter, capping a solid full-year performance with digital production up 9%. We also took meaningful steps to deepen self-service adoption, expanding capabilities within our AI-powered Truist Assist mobile experience. The launch of Ask Truist Assist universal search capability now delivers client quick intuitive access from any screen. This drove a 97% increase in digital chat engagement in 2025 and is helping us improve efficiency and strengthen client connectivity as more activity naturally shifts to digital. Let's turn to wholesale on page seven. In wholesale, we delivered a strong finish to 2025 driven by meaningful improvement in the second half of the year in both loan and deposit growth, investment banking and trading revenue, and continued progress in strategic focus areas, such as payment and wealth. We onboarded twice as many new corporate and commercial clients versus last year, spanning a diverse range of industries and markets. Building on these new client relationships and our focus on deepening existing ones, we saw our loan and deposit momentum strengthen as the year progressed. Average wholesale loans increased 3% in '25 with momentum accelerating in the second half. Fourth quarter average loans were up 8% compared to the fourth quarter of 2024, fueled by new client acquisition and supported by focused talent investments as our strategy continues to gain traction. End-of-period wholesale deposit balances rose 6% linked quarter. While seasonal public funds contributed to this growth, we saw growth from all of our industry banking teams and geographies. Full-year investment banking and trading income declined 6% versus 2024, due to first-half market volatility. However, activity rebounded strongly in the second half with fourth quarter revenues up 28% versus '24 driven by increased M&A, trading, equity, and debt capital markets activity. In wealth, net asset flows remained positive supported by an 8.5% increase in new clients last year, with almost 30% being generated by CSPB. Wholesale payment fees, which include merchant services, commercial card, and treasury management fees rose 8% in 2025. Treasury management fees, a key strategic focus, grew 13% on the strength of new client acquisition and deeper relationships within our existing base. Importantly, our payments pipeline is up significantly year over year, positioning us for continued growth in 2026. So now let me turn over to Mike to discuss the financial results in a little more detail. Mike Maguire: Thank you, Bill, and good morning, everyone. Before I start with our performance highlights on slide eight, I do want to briefly mention certain changes to the presentation of our earnings materials today and on a go-forward basis. On January 12, we filed an 8-K detailing changes to the presentation of certain noninterest income and noninterest expense items. Effective December 31, 2025, we changed the reporting line labeled card and payment fees to a new reporting line called card and treasury management fees. This line includes debit card, retail card, and commercial card fees, merchant discount fees, and treasury management fees. Previously, treasury management fees were included in the service charges on deposits line, which we renamed other deposit revenue. Other deposit revenue includes NSF and overdraft fees and other service charges. We believe these changes more accurately reflect how we're managing our business and will give investors more insights into how we're progressing with important fee income-generating initiatives. In terms of expenses, we will no longer disclose adjusted expense in our earnings materials. Instead, we will provide context on material items impacting results. For today's discussion, I'll provide you with adjusted expense for comparison purposes. But going forward, our expense commentary and guidance will be based on GAAP expense. As a result of this change, we moved restructuring charges, which typically included expenses related to severance and facility charges, back to their respective reporting lines such as personnel and occupancy expense. Okay. With that said, I'll now turn to the full year 2025 and fourth quarter results, which start on slide eight. We reported 2025 GAAP net income available to common shareholders of $5 billion or $3.82 per diluted share and fourth quarter 2025 net income available to common shareholders of $1.3 billion or $1 per diluted share. Our fourth quarter 2025 results included a charge of $130 million or $0.08 per share after tax due to an incremental accrual related to Truist executing a settlement agreement on 01/20/2026 in the matter of Bickerstaff versus SunTrust Bank. In addition, our fourth quarter results included $0.04 per share of charges primarily related to severance. Revenue increased 1.1% linked quarter, due to 1.9% growth in net interest income partially offset by a modest decrease in noninterest income. GAAP noninterest expense increased 5.2% linked quarter primarily due to the legal accrual and higher personnel expense. Excluding the legal accrual and severance, noninterest expense declined approximately 0.3% on a linked quarter basis. Net charge-offs increased nine basis points on a linked quarter basis, reflecting normal seasonality in our consumer portfolio. Nonperforming loans remained relatively stable on a linked quarter basis. Our CET1 capital ratio declined 20 basis points to 10.8% and our CET1 ratio, including AOCI, increased 10 basis points linked quarter to 9.5%. During the quarter, we repurchased $750 million of common stock and announced a new share repurchase authorization of up to $10 billion with no expiration date. Next, I'll cover loans and leases on slide nine. Average loans held for investment increased $4.3 billion or 1.3% on a linked quarter basis to $325 billion due to growth in both commercial and consumer loans. For the full year, average loans held for investment increased 3.6% to $316 billion due to 5.4% growth in average consumer and card loans, and 2.4% growth in average commercial loans. Based on our current pipeline and economic outlook, we expect 3% to 4% average loan growth in 2026. However, average loan growth in 2026 will primarily be driven by growth in commercial loans and other consumer loans with relatively slower growth in residential mortgage and indirect auto compared with 2025. Other consumer loans, which include our specialty lending businesses, Sheffield, Service Finance, and LightStream, are expected to grow at a similar pace as these businesses continue to offer attractive risk-adjusted returns. Moving to deposit trends on slide 10. Driving client deposit growth is a key priority for Truist, and we are seeing improved momentum with clients in both consumer and wholesale. Average deposits were relatively stable on a linked quarter basis, as a decline in higher-cost broker deposits was offset by growth in lower-cost client deposits. This improving mix, along with recent reductions in the federal funds rate, resulted in a 27 basis point decline in average interest-bearing deposit costs to 2.23% and a 20 basis point reduction in our total cost of deposits to 1.64%. As shown in the chart on the bottom right-hand of the slide, our cumulative interest-bearing deposit beta improved from 38% to 45% and our total deposit beta improved from 24% to 30% on a linked quarter basis. These improvements reflect stronger client deposit growth and disciplined efforts to reduce rate pay. Moving now to net interest income and net interest margin on slide 11. Taxable equivalent net interest income increased 1.9% linked quarter or $69 million primarily due to loan and client deposit growth and fixed-rate asset repricing. Our net interest margin increased six basis points linked quarter to 3.07%. For full year 2026, we expect net interest income to increase by 3% to 4%. This outlook is based on 3% to 4% average loan growth, which implies low single-digit end-of-period loan growth. We also expect low single-digit end-of-period deposit growth. Average earning assets will grow at a slower rate in '26 than average loans as average investment securities and other earning assets are expected to decline by 4% to 5% on an annual basis. Lastly, we expect two twenty-five basis point reductions in the fed funds rate, one in April and one in July, and we will continue to benefit from fixed-rate asset repricing. Although we expect modest net interest margin compression in the first quarter, we anticipate full year 2026 average net interest margin will exceed the 2025 average of 3.03% due to the benefits of fixed-rate asset repricing and improved earning asset mix and lower deposit costs. As you can see on the right-hand side of the slide, we've also updated our fixed-rate asset repricing outlook and our swap disclosure. Turning now to noninterest income on slide 12. Noninterest income decreased $12 million or 0.8% versus 2025 reflecting modest declines across several fee income categories, partially offset by higher investment banking and trading income. Investment banking and trading increased $12 million or 3.7% linked quarter to $335 million reflecting stronger M&A-related fees, partially offset by lower trading activity. Our new reporting line for card and treasury management fees was down slightly linked quarter due to seasonality, but grew 3.7% year over year as double-digit growth in treasury management fees was partially offset by lower merchant and corporate credit card fees. Next, I'll cover noninterest expense on slide 13. On a linked quarter basis, noninterest expense increased 5.2% driven by higher other expense related to the legal accrual previously mentioned, and higher personnel expenses due to increased incentives and severance. These increases were partially offset by lower regulatory costs due to an FDIC special assessment credit. Excluding the impact of the legal accrual and severance costs, noninterest expense declined by 0.3% linked quarter. Adjusted noninterest expense increased 1% in 2025, reflecting our commitment to expense discipline and to driving positive operating leverage during the year. Moving to asset quality on slide 14. Our asset quality metrics remain strong on both a linked and like quarter basis, reflecting our strong credit risk culture and proactive approach to quickly resolving problem loans. Nonperforming loans held for investment remained stable at 48 basis points of total loans, while the ALLL declined one point to 1.53% of total loans. Net charge-offs increased nine basis points linked quarter to 57 basis points and were down two basis points versus 2024. The linked quarter increase in net charge-offs reflects higher C&I seasonally higher consumer losses, partially offset by lower CRE losses. For the full year 2025, net charge-offs declined five basis points to 54 basis points. And now I'll turn to guidance for 2026 on Slide 15. For full year 2026, we expect revenue to increase 4% to 5% relative to 2025 revenue of $20.5 billion driven by 3% to 4% growth in net interest income and mid to high single-digit growth in noninterest income. We expect full year 2026 GAAP noninterest expense to increase by 1.25% to 2.25% in '26 versus GAAP '25 noninterest expense of $12.1 billion. Our '26 GAAP revenue and expense outlook implies positive operating leverage of 275 basis points in 2026. As I mentioned earlier, our noninterest expense guide will be based on GAAP noninterest expense. As we will no longer provide guidance on adjusted noninterest expense going forward. For comparison purposes, 2026 noninterest expense growth would be approximately 2.35% to 3.35% and operating leverage would be approximately 165 basis points if you were to exclude the impact of the fourth quarter 2025 legal accrual that I discussed earlier in the call. In terms of asset quality, we expect net charge-offs of about 55 basis points in 2026, which is relatively stable compared with net charge-offs of 54 basis points in 2025. Finally, we expect our effective tax rate to approximate 16.5% or 18.5% on a taxable equivalent basis in '26, versus 16.4% to 18.9% in 2025. As it relates to buybacks, we're targeting approximately $4 billion in share repurchases during the year. Looking into 2026, we expect revenue to decrease approximately 2% to 3% relative to fourth quarter revenue of $5.3 billion. We expect net interest income to decrease approximately 2% to 3% in the first quarter primarily driven by two fewer days in the first quarter relative to the fourth quarter and a seasonal decline in public funds deposit. We expect noninterest income to decline 2% to 3% linked quarter, due to lower other income. GAAP noninterest expense of $3.2 billion in the fourth quarter is expected to decrease by 4% to 5% linked quarter due to lower other expense and personnel costs, partially offset by higher regulatory costs. If you were to exclude the impact of the fourth quarter 2025 legal accrual, noninterest expense would be flat to down 1% linked quarter. Finally, we're targeting $1 billion of share repurchases in 2026. So with that, I'll hand it back to Bill for some final remarks. Great. Thanks, Mike. William Rogers Jr.: As we close, I want to emphasize the confidence I have in Truist's direction. We're seeing tangible results across key businesses with strong momentum, client engagement, and revenue growth. As shown on slide 16, our goal of achieving a 15% ROTCE in 2027 is locked in and reflects our confidence in Truist's long-term earnings power and strategic direction. We see and have invested in multiple paths to stronger revenue and profitability, and with disciplined execution, we expect meaningful improvement over the next two years. Much of this progress will come from deepening client relationships in consumer and wholesale, especially in wealth, payments, premier banking, investment banking and trading, small business, and corporate and commercial banking where momentum is already strong. This is highly accretive to our ROTCE commitment. Our expectation is that our revenue growth will double in 2026 and when combined with our expense discipline, should lead to even greater operating leverage and profitability improvement this year. Like 2025, we enter 2026 in a strong capital position enabling us to support client growth and accelerate capital return through increased share repurchases. As Mike mentioned, we're targeting $4 billion of share repurchase this year, which represents a 60% increase versus last year. In summary, I am confident in our future. I'm encouraged by the results and momentum we're seeing across our company and remain focused on executing with discipline, delivering for our clients, and creating value for our shareholders. Thank you to our teammates for their incredible focus, productivity, and purpose-driven commitment to moving Truist forward. As always, we appreciate your continued interest and support. And we look forward to updating you on our progress in the quarters ahead. With that, Brad, let me turn it back over to you. Brad Milsaps: Thank you, Bill. Betsy, at this time, will you please explain how our listeners can participate in the Q&A session? As you do that, I'd like to ask the participants to please limit yourself to one primary question and one follow-up in order to accommodate as many of you as possible today. Operator: We will now begin the questions and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. We ask that you limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question today comes from Ryan Nash with Goldman Sachs. Please go ahead. Ryan Nash: Good morning, Bill. Good morning, Mike. Morning. William Rogers Jr.: Morning. Ryan Nash: Bill, can you maybe talk a little bit more about loan growth where you ended the year at up eight year over year and you're guiding to three to four. It seems like if you think about the exit run rate, you're already running at about 3% average growth. So it implies, you know, as you said, low single-digit growth. So maybe just unpack the loan growth a little bit further between commercial and consumer, you know, and how are you thinking about growth across each of those areas? Thank you. William Rogers Jr.: Yeah. Thanks, Ryan. Great to hear from you. You know, as you noted, we're entering with some good momentum. And if you think about the mix, so we sort of talk about how I think this year will pan out. C&I had its strongest quarter. I mean, production was up really, really significantly. And just high-quality business. I mean, high-quality, advice-driven business, tied with treasury management, 62% plus had some type of treasury management products. So really, really good momentum on the C&I side. I think overall, we're really sort of focused on places where we have great client demand, clients still healthy, we're going to rebalance a bit, focus on higher client value and optimizing our return and our mix. And so I think the result of that's going to be a little more wholesale. The consumer businesses like Sheffield and LightStream and service finance continue to see great opportunities there. Probably in areas like indirect auto and some of those, probably a little less. In terms of exposure, margins being a little bit tighter. You know, a little bit lower client value. So I think think about it in two ways. One, continuing the momentum and things that have high client value, long-term return characteristics. And optimizing that return and mix over time. All of that, though, contributing to three to 4% I would consider sort of, like, really, really high-quality consistent growth. And, again, building on momentum that we already have. Ryan Nash: Got it. And, if I can ask a follow-up, Mike, on the net interest margin, I think you noted it would exceed last year's 3.03%. Now given that you're currently at 3.07, can you maybe unpack what is included within the margin for deposit pricing? And do you expect the NIM to expand from current levels, and what is the cadence behind that? Thank you. Mike Maguire: Yeah. Sure. Good morning, Ryan. Yeah. So it was nice to see the uptick obviously in the fourth quarter, which was largely driven by some of the seasonal deposit mix and the benefit of the cuts. You know, that'll go the other way on seasonality in the first quarter. So while we sort of enter the year at 3.07, we would expect to back up just a touch throughout the course of the rest of the year, we would expect to see margin expansion, especially in the second half where we see the benefit of the cuts. You asked around deposit pricing. Our expectation coming into the year is we'll grind a touch higher on the betas in the first quarter. We would expect to be in the kind of low fifties neighborhood by year-end. So, you know, you've got the lower cost of deposits. You've also got the fixed asset. The fixed-rate asset repricing engine happening in the background as well. And I think those are factors that are going to really help us make really, I think, significant progress on the margin relative. I know previously, we've talked about sort of a three-teens level in '27. We're going to make significant progress towards that level in '26. And, frankly, see ourselves exiting '26 in kind of that three-teens area, which I think is a really nice setup for 2027. Ryan Nash: Thank you. Appreciate all the color. Operator: The next question comes from John Pancari with Evercore. Please go ahead. John Pancari: Morning. Morning. Good morning. On your 2027 ROTCE target of 15%, I appreciate you reiterated your confidence and the attainability there. And could you possibly help kind of unpack the components that give you that confidence? You mentioned the three-teens in NIM, and you might be able to hit that by the end of '26. Just curious on maybe your efficiency expectations underneath that. Balance sheet growth, how we could think about the pace there as you approach that in 2027 and then also I think common equity tier one, you've alluded to the 10%. But how are you thinking about capital underneath that 15% ROTCE? Thanks. William Rogers Jr.: Yeah. Sure, John. So think about it maybe in its simplest term is the concept of holding the denominator of capital and dollars steady. And then improving momentum and return from the numerator. So think about that as sort of the basic mantra that we're operating from. I'll also say that this is going to be, we see this as more of a straight line. So in addition to 15, we're locked in on 14 for this year. So we don't this isn't going to be an all-at-the-end parabolic curve. This is going to be a straight line continued improvement. So again, think about that denominator in dollars holding steady. And then the part on the numerator that really is accretive and not necessarily in order, but I'll go down a few of these. Payments is really significant. So think about the growth in payments. We're seeing a 13% kind of growth. We expect that growth to continue in the double-digit kind of basis. So that's really accretive to not only deposits but also to NIM and that's sort of the overall ROA. Our middle market expansion, we two x the number of clients we're seeing in that business. So we see that as really, really positive to that growth. Premier, and our wealth production, net asset flows of wealth really positive. Premier, I talked about the deposit production and loan production, those 20 plus percent kind of activity. And then think about all the things that are deepening client relationships, and all of those categories. Those are things that are really most accretive because if you think about we've already committed talent. We've already committed capital to those businesses, and what we're doing is increasing the return against that. Mike mentioned fixed asset repricing is a component of it. There's all sorts of RWA maximization efforts to ensure that we're running our RWA engine really, really effectively. We talked about the improving operating leverage, so that's also a component of that as we'll run this revenue increase off a more efficient platform. And then your point on CT1, we're building this model on a 10% CT1. I think that's probably sort of the right ZIP code. And then looking, you know, this year to $4 billion in buybacks to accelerate all that. So again, my high degree of confidence is everything I mentioned in there has got momentum against it. Initiatives against it. We're starting nothing flat-footed, everything on our toes. Which is why I sort of say locked in for 15%. John Pancari: Got it. All that's helpful, Bill. And then staying along the same lines, I mean, no good deed goes unpunished. So you set out that 14. You gave us the fifteen. Last quarter on 2027, getting, you know, a lot of interest now on where you could ultimately go longer term. Your peers are flagging the mid to upper teens in terms of ROTC over time. Can you possibly talk about that, help us frame is Truist positioned to operate in that range? And is that a reasonable range, and how do you think about that time? William Rogers Jr.: Yeah. You know, John, our business model, we sort of look at our business model, look at our level of capital, and, you know, past 2027, I just don't want to speculate as to what all those things might be. We might be in a different capital position. The business model resulting from the momentum that we're generating, quite frankly, the economic environment that we might or might not be operating at, at that particular time. And if you think about, like, for now, the ascension to 15% so think about we start at 13, going to 15% plus our dividend. I think that's a really attractive path to that level. And as we get to the 15 and as we evaluate all the things I've talked about, then we'll look and see where we are at that particular juncture. Right? I think it's sort of premature to sort of lay something out there that isn't as, quote, quote, locked in as we think we are on the fifteenth. We want to have confidence when we say a number. We don't want to sort of throw caution to the wind. We want to really be focused just like we are today. John Pancari: Okay. Great. Thanks, Bill. Operator: The next question comes from Scott Siefers with Piper Sandler. Please go ahead. Scott Siefers: Let's see. I think you've touched or at least alluded to briefly a couple of times. But just on the capital markets, I think there's plenty of optimism about the industry's potential this year. That's, of course, an area where you all have invested really, really heavily. Maybe you could just sort of expand on your thoughts about momentum and potential there for the coming year. William Rogers Jr.: Yeah. Scott, I think as you pointed out, I mean, this is a business we've been investing in for decades. And I think we're in a really good position. We have really good momentum coming out of the second half of the year. And quite frankly, on a lot of cylinders. So debt capital markets, leverage finance, M&A, all of our derivatives, FX, all of those things are hitting on really good cylinders. And we come into it with a good pipeline. So we come into it with a good pipeline and not only the pipeline from the investment banking, but really the pipeline that's generated from our middle market and commercial client base. I mean, probably what I'm most excited about is this organic activity that we're building. We put talent on the field that really knows how to leverage all of our industry specialties, understands how to leverage our product and capabilities, and position those and great advice for our clients, with the appropriate teamwork that goes on and the technology that we built to support all that. So the part of the double revenue story for us is we think we continue with a low double-figure kind of compound growth in this business. I mean, I have every reason to be confident. It's organically built. We've hired some really good talent. You'll continue to see that, some really good talent. We've developed talent over a long time. We've got some senior leaders who've been in our business for quite a while. So this is a business I feel really confident in. I think we have a full capability and long-term continued high growth potential. Scott Siefers: Terrific. Thank you. Thank you, Bill. And then, Mike, so, you know, on capital management, you have really robust repurchase plans and capacity. I guess, I think about sort of calls on capital or uses of capital, you know, the loan growth outlook seems very prudent. You got some things accelerating while you sort of dial back others. So I would guess the overall repurchase plan is a very sturdy one. But just as you think about the coming year, any factors that would cause you to toggle down or up that pace of repurchase to get to the sort of net $4 billion? Mike Maguire: Yeah. No. Good morning, Scott. You know, the way we're thinking about this is we believe that that 10% operating target or level is appropriate. We've sort of laid out a trajectory that gets us there by the '27. And so there are going to be moving parts as we go. You know, if loans or the balance sheet grows a little faster, one quarter versus another, make a little more or a little less money. One quarter versus another. And, of course, just the overall, I guess, economic backdrop, you wouldn't want to dismiss. But, you know, in a stable operating environment, we're going to trend to that 10% over the next eight quarters. So if you look at the math, you know, that gets you to about a billion a quarter this year, you know, frankly, perhaps maybe a touch higher. And so that's really how we're thinking about is kind of retrending to 10 during that period. Scott Siefers: Gotcha. Okay. Perfect. Thank you guys very much. Operator: The next question comes from Ebrahim Poonawala with Bank of America. Please go ahead. Ebrahim Poonawala: Hey. Good morning. Good morning. Morning. Two questions. One, I think just on deposits. Talk about like, do you expect both as you move towards this wholesale mix on the lending side, what does that mean for deposits? And deposit growth as we look forward, both in terms of the mix? So when we think about DDA noninterest bearing balances and just the pace of overall deposit growth, do you think that kind of shifts for growth, and how strong could it be? Thanks. William Rogers Jr.: Yeah. You know, Ebrahim, you and I talked about this. You know, if you think about where we were a year ago with loans, could we build the momentum and sort of the asset-generating part of our franchise? And you see us deliver on that. And then we pull that into this year. We pull that in the momentum, and we optimize that. I agree with the exact same place on deposits. I mean, we're sort of same place. We're building that momentum. We're building that consistency. You know, it's part of, you know, core to what we do. And then I look at the leading indicators on deposits sort of think about, okay. What should give us confidence that we have deposit growth? First, I think there's the, you know, for the industry, it's a little bit of a natural tailwind with QE and lower rates. So just sort of put that on one side. But then, you know, idiosyncratic and specific to us, you know, think about the momentum. We saw wholesale deposits grow 400 basis points faster in the latter part of 2025 versus 24. I mentioned earlier, you know, 62% of our new clients came with deposits, and we've had two times the number of clients. So we have a lot more clients, a lot more clients with treasury management products and some of those are still funding. So they're in the, you know, they're in the funding base. So, you know, deeper penetration and the middle market base. We still have some loan-only clients that we're penetrating in that base. So in addition to the new, we look at the back book. End-of-period client deposits, you know, we're up almost $7.5 billion. The other leading indicator is that treasury management fees up 13%. Then you go to the consumer side, and we look at sort of the leading indicators there. And the first is net new. You know? So we're adding net new clients, and the quality of those clients increased year over year. So the amount of deposits that they're bringing to us increases year over year. The focus on Premier I talked about the deposit production being up significantly in Premier. The amount of off-us deposits from our Premier client base is actually quite significant. So their capacity to use great tools to approach those clients has been really significant. Technology, digital, account opening our branches, branch expansion, more marketing, related to deposit generation, deposit generation in expansion markets for us like Texas and Pennsylvania. So just my net summary is have really good momentum, in the deposit side. It might sort of outline the deposit and loan correlation for this year. So we feel good about deposit growth. We feel good about that opportunity. Headed into this year. Ebrahim Poonawala: That's good color, Bill. Thank you. And I guess maybe just a separate question. Around the whole wholesale strategy. On paper, half a trillion-dollar balance sheet, you've been in the investment banking for a long time. Truist should be winning in terms of and we think about fee revenue growth, financing. Just give us a sense. One, do some of the changes by the OCC around leveraged lending does that create a slightly better opportunity to compete in terms of risk-adjusted returns? And, remind us where you think the sweet spot for Truist is on the wholesale slash capital market side? Is it against the Wall Street banks? Is it against middle market investment banks? Would love some color there. Thank you. William Rogers Jr.: Yeah. Let me try to unpack that question. So on the leveraged lending specifically, remember that's been a core competency for us for a long time. So I don't see the guidance significantly changing our approach. Maybe there's something around the edge or that not, but we've been good in that business for a long time. And as you know, it's a really strong driver of our investment banking business as well. So I think sort of steady-ish she goes continue on that front. And in terms of our competitive position, the answer is to both. It really relies on a couple of things. I mean, I think what we want to be is sort of a couple of things. One is the premier middle market investment bank. So think about that as sort of like the high bar in terms of standard. And then really focused on places where we have specialization and a really strong right to win. So think about those combinations. So core middle market, leveraging our franchise. I mentioned earlier, I've been really excited about the teamwork that the team that we have on the field, the training we put in place, the partnerships we have, the new talent we have that really know how to leverage the tools and capabilities for our core commercial and middle market clients. And then anywhere on a specialty business, we have the right to win against anybody along that spectrum. Hope that clarifies it. Ebrahim Poonawala: That's good color. Thanks, Bill. Operator: The next question comes from Ken Usdin with Autonomous Research. Please go ahead. Ken Usdin: Hey. Thanks. Good morning. Mike, just coming back to a prior comment you made, Bill had mentioned getting to the three-teens NIM by year-end '26. And you had mentioned kind of remixing average earning assets with loans growing in some of the other categories. Coming down as an offset. So just wondering how you expect average earning assets to traject off of the mid-480s exit. And also, like, where is your landing spot in terms of securities and cash as a percentage of total assets as you do that remixing? Thanks. Mike Maguire: Yeah. Sure, Ken. If you think back to '25, you'll remember throughout the course of the year, we brought the securities portfolio down really in the second half of the year from, I think, maybe the $125 billion ballpark down to the $117 billion, $118 billion. And so we would actually, I think, expect that to be relatively consistent in '26 at that $117 billion, $118 billion level. And so if you just do that sort of math on the year-over-year average, you've got essentially the securities and a few of the other earning assets categories down at five to 6%. So you couple that with the loan growth in the three to 4% area, get to maybe, I don't know, ballpark, half that growth rate for earning assets. Now the good news is at half the earning asset growth rate of loans, coupled with net interest margin expansion, that's what sort of gets you to the three to 4% outlook on NII for the year. In terms of mix, I think relatively stable again is kind of how we exit '25. So, you know, we think about the securities and cash combined and the $140 to $150 billion area. And so I think you'll see us there. That helps us sort of more than satisfy our sort of lab and ILST requirements. And we think it's sort of the right sort of place on the efficient frontier from an earnings perspective as well. Ken Usdin: Okay. Got it. And then just on that updated slide you gave us on the fixed-rate repricing and the swaps book, you still obviously have a lot of forward-starting swaps relative to the size of the portfolio. Can you just help us understand like how that layers in and how much of a benefit will just the former drag be in terms of a year-over-year helper this year? On the swaps? Mike Maguire: Sure. Yeah. In terms of the active receivers, Q3, Q4 was actually flat. Around $50 billion and you see that sort of gradually phase in throughout the course of '26. So I think we go to, like, $57, $58 billion in the first quarter then to $80 and $100. I think we end the fourth quarter a little over $100 billion. So you do have a much more significant proportion of the swaps effective. Now at the same time, you know, at least based on forwards, you've got the policy rate lower at almost sort of a similar rate. So what you start the year with less notional active out of the money you end the year with more notional active and even slightly in the money. So answer your question on, like, what's the impact year over year is it's a helper. You know, of my head, maybe it's a $100 million. But, obviously, that's just one component of the balance sheet. And so you're thinking about with the policy rate lower, you know, 50 basis points at least as we see it. You know, you've also got, you know, the floaters, the cash loans, etcetera, going the other way. So all that gets taken into consideration in our outlook and how we're positioned. Ken Usdin: Yeah. Okay. Thanks, Mike. Operator: The next question comes from Mike Mayo with Wells Fargo. Please go ahead. Mike Mayo: Hi. Lot of talk about NIMs and returns. And I was more focused on growth. And I know you're not satisfied with the growth and that you expect growth to be 2x in 2026 and 2025. So directionally, I think you're moving where you want to be. So when you give your revenue guide of four to 5%, that seems kind of in line. Maybe below a couple peers. 2026, yet the population growth in your footprint is, what, two x? So I'm just wondering, and you're talking about the momentum you have in a lot of businesses for that growth. But do you need to increase your investments even more than you've you're already doing just to keep up with the bigger banks that are increasing their investments? And in the 100 new De Novo branches, why now? Where are they going to be? It's just a contrast versus in the prior five years of the merger when you're closing a lot of branches. William Rogers Jr.: Yeah. Mike, I think your basic question is, are we investing enough? Are we investing in the right places for growth? Let's sort of start with the concept of, as you pointed out, we're doubling revenue. So we are building momentum, building capacity to move forward. So the investments that we've made are reflected in that doubling of revenue. So let's sort of start as that premise is we are making investments that matter. The things that are significant, accretive market share, accretive growth. If you think about investment banking, treasury management, sort of in these low double-digit kind of categories, I mean, I think those are reflective of the fact that we're growing disproportionately and taking advantage of the opportunity that we have with our client base and with our markets. And then, when we unpack the expenses and unpack sort of where we're investing, it's a netting process. So remember, we're also continuing to create efficiencies in the company. So when we look at our overall expense level, that's a net number. We're creating efficiencies not only came out of the merger, really came out of the work that we did in the end of 2023 when we, as you duly noted, by the way, when we needed to really bend the expense curve, we've bent that significantly, but we're still harvesting some of those savings. And then we look at the risk infrastructure that we've built at our company, that's been a really significant part of the expense growth base over the last several years. While that can will continue to be high and appropriately so, the rate of increase will lower. So again, creating to redeploy in things that matter. And then you've seen the things that we're investing in. I mean, go down the list, investment banking talent, corporate banking, all the investment we're making in wholesale payments. I mean, we're rolling out literally new products and capabilities every month. You've seen the investments we're making in digital, the growth we've seen in digital marketing, premier banking, deposit growth, tech investments to create efficiency and effectiveness. And then on the branch side, this is a long-term game. So this isn't a quarter-by-quarter game. So, for the past six years, we've effectively not invested or added net new branches into our branch network. So as the population shifts in our markets, as our focus really clear on things like Premier, we're going to open these branches in places that have the highest return for our franchise long term. So think about expansion markets. Think about Texas in terms of examples. Think about market demographics that have changed in markets like South Florida and markets like Atlanta where we're continuing to invest. And then overall, in all of our markets, refurbishing. So I'm very confident that we're investing in the things that are delivering results. And I think you see that in the momentum we're building. Then we're putting a stake in the ground for continued momentum, doubling that revenue and creating this 15% return, which obviously has those characteristics attached to it. So I'm satisfied and excited about the opportunities. And then put on top of that AI, other efficiencies, and other opportunities, we're going to open up the aperture to continue to invest even more and with lots of clarity. We know the next place to invest, the next dollar to save, the next dollar to invest with a lot of clarity. Thanks, Mike. Mike Mayo: Yeah, sure. And just, you keep mentioning the 15%. It seems like you're really hyper-focused on the 15% return. Is that for the year 2027, or is that reaching 15% at some time in '27? Thanks. William Rogers Jr.: Thank you. Mike Maguire: For the year 2027. Mike Mayo: Yep. Okay. I guess that's not a final destination. When you announced the merger seven years ago, you were talking over 20%. So I imagine you'd want to go higher after that. William Rogers Jr.: Yeah. I mean, different business model in fairness. Right? When we announced the merger, we had different businesses at different return characteristics. So I think that, as I answered previously, I mean, that 15% is not the final destination. But the path from here to 15% is actually quite attractive from a shareholder perspective. I think as we get closer to that 15%, as we understand as I mentioned for economic environment, business model, where we see momentum, where we see a chance to put our foot on the accelerator, what we're seeing the return on the branch investment, just talking about that as an example. Then we'll start to hone in a little bit better about where that next stage of the destination is. I think I'm careful in saying final destination. I mean, I don't think there's a finish line. I mean, I think sort of constantly want to be improving and moving forward. The 15% was just to declare from here to there, and the slope is, I think, actually quite positive from a shareholder perspective. Mike Mayo: Alright. Thank you. Operator: The next question comes from Betsy Graseck with Morgan Stanley. Please go ahead. Betsy Graseck: Hi. Good morning. William Rogers Jr.: Morning. Betsy Graseck: Just continuing along those lines, the question I have is trying to understand how the efficiency ratio trajects as you manage through this process. Of driving up Rozzi and specifically also looking to understand the impact of the severance that we had this quarter, when that flows through into the P and L from a headcount perspective. And how do you see headcount trajecting and the efficiency ratio trajecting as you move towards the 15%? Thank you. Mike Maguire: Hey, Betsy, it's Mike. I'll get us started. So on the efficiency ratio, look, we do expect to see incremental improvement over the course of the next couple of years. I think that kind of mid-50s area is probably a reasonable expectation. That's lined up to improving. Bill sort of talked about the numerator and sort of more throughput, more sort of, I'll call it, capital-efficient revenue that's going to drive our ROA higher with sort of a similar level of capital over time. So it gets you to that kind of off that 1% ROA higher. And more in line with what's what it's going to take to get to that 15 level. In terms of severance, the charges we took in the fourth quarter would have been related to actions in the fourth quarter. You know, FTEs a little bit of noise in that, Betsy, because we've got contractor conversions happening. You know, we've got headcount coming in, coming out. So in fact, you might actually see headcount higher throughout the course of a year as we move from contractor to full-time employees. Now cost per FTE would go down. Assuming we do a good job executing that strategy. And we can, maybe throughout the course of this year, maybe give you a little bit more detail around how that's playing out. Betsy Graseck: Okay. Thank you. Operator: Ladies and gentlemen, in the interest of time, we ask that you limit yourself to one question. The next question comes from Matt O'Connor with Deutsche Bank. Please go ahead. Matt O'Connor: Good morning. A little bit of a follow-up on the last question here. Just as you think about the restructuring and severance costs, for '26, do you think there'll be anything meaningful? I think there's about $150 million this year. And I appreciate the guidance on a reported basis. Just trying to adjust for some of these items and see what the underlying operating leverage is. Thanks. Mike Maguire: Yeah. Got it, Matt. Look. I mean, first of all, appreciate the comment on sort of going to GAAP. You know, this is something that we've gotten some good feedback on from investors. And think it's going to be a more simple way to present our results. At the end of the day, the restructuring charges and sort of thinking about the originally, you recall sort of the MRCs, they've just become sort of less significant relative to our overall story. That doesn't mean they'll go away, we'll continue to have severance expense. We'll continue to have facilities-related charges and the like. But I do think that there is an expectation that they'll be lower over time. Difficult to necessarily forecast just given their nature. You know, we do have an expectation that they'll be lower in '26, modestly. And, again, it'll be sort of up to us to do a great job, you know, trying to create more opportunity there and beyond. So hopefully, that helps. Matt O'Connor: That's alright. Thank you. Operator: The next question comes from Gerard Cassidy with RBC. Please go ahead. Gerard Cassidy: Good morning, Bill. Good morning, Mike. William Rogers Jr.: Morning. Gerard Cassidy: Can you share with us, Bill and Mike as well, I guess, obviously, the outlook for yourselves and your peers this year looks really strong based upon the outlook for the economy, the yield curve, loan demands picking up across the board. And you have to look around corners, aside from the big geopolitical risk we all see. What are you guys keeping your eye on that could kind of surprise us later in the year? Because, again, the outlooks across the board look pretty darn good. William Rogers Jr.: Yeah. Mike, we can each talk about what keeps us up at night. In terms of looking around corners, I mean, Gerard, this is what we get paid for. We look around a lot of corners. We stress for a lot of things within the business environment. I think to your point of your question, you know, if you sort of said, you know, number one would be a more macro concerns and issues, you know, does the economy hold up? Are we able to deploy all our strategies and our initiatives against the backdrop of an expanding and growing economy. So I sort of start with that because on the micro side, you know, I feel really confident about the things that we're doing. You know? So in terms of looking around our own corners, you know, again, we'll stress for everything. We'll stress for credit. We'll stress for idiosyncratic things. We'll stress for geography, specialties, all that kind of stuff. So we're always going to be looking at it. But given the diversity of our franchise, you know, those aren't my number one concerns. They really are on the macro. Do we have the overall capacity to grow our business? And right now, the client sentiment's pretty good. And I would say in the macro, if you even break it down, my probably number one focus is employment. If I look at a number every day as, you know, is employment, the index of risk to financial services, I think we all learned in the financial crisis was related to employment. So that's what I stay really focused on. Will businesses still be confident to continue to hire if consumers are confident that they have a job or can get a job or have a job and a gig job, then that confidence will stay in and elevate it. So most of mine are macro. Mike, you might have Mike Maguire: Yeah. I mean, this might, you know, air a touch too tactical but, I mean, one thing that's on our mind here is, credit spreads are still at tights and so that's I think, sort of the longer that stays that way that you know, in some respects, is a risk that we're absorbing. You know? You know, we talked a little bit about just the competitive nature of things. Right? A fierce marketplace. And so we should all be up at night, you know, worrying about that. But I think you covered it well. Gerard Cassidy: Thank you. Operator: The next question comes from Saul Martinez with HSBC. Please go ahead. Saul Martinez: Hey. Good morning. Thanks for taking my question. I just have a real quick one follow-up. To Matt's question. Just to clarify Mike. The guidance implies $12, call it, $12.02 to $12.3 billion of expenses. That does have some level of restructuring expenses embedded in it. That are maybe slightly lower than this year. Is that right? Because, obviously, if it doesn't, it would imply something like three and a half to four and a half percent growth. Versus the adjusted number based on how you have been doing it. So I just wanted to clarify that. Mike Maguire: Yeah. No. That's right. The outlook so the one and a quarter to two and a quarter off the GAAP base includes, you know, what previously would have been outlined as restructuring charges or severance. Ex legal, that would be closer to, you know, two, three and three three. Year over year. Saul Martinez: Okay. Alright. So it does include a similar number. Than this year. Okay. Alright. I just wanted to make sure. Thank you. Mike Maguire: Yeah. Operator: Lower. Lower. Sorry. Mike Maguire: To clarify. Yeah. Understood. Understood. A little bit lower. Yeah. Operator: Understood. The last question today comes from Chris McGratty with KBW. Please go ahead. Chris McGratty: Oh, great. Good morning. Look at Slide six, looks like you grew net new checking accounts about 72,000 during the year. I guess two parts. Do you have that number for 2024? And then more broadly, you know, consumer and small business checking accounts were modestly negative year on year. I'm interested in kind of the impact of the branch openings in reversing this and when you might start to see a kind of a tangible progress in those trends? Thank you. William Rogers Jr.: Yeah. Chris, the net new 2024 was about 100 if I'm going to sort of go from memory, so, like, right in that zone. But as I mentioned earlier, the quality of the 70 plus this year is much higher. So higher average deposit in those. And what we're seeing also is our pull-through is really higher with that. So the quality is really, really strong. And the diversity of where it comes from, so it comes from the digital channels. I talked about the significant and the investment there and also the branch. And that leads to your next question as sort of the what are we going to see from the branch investment or employment? Keep in mind, we're just getting started. So like, that day will come. We'll talk more about that, but the capabilities that we have now in our branches, I think some of the models that we used to use, I think we can sort of bend some of those curves because our ability to open accounts digitally and branches do more in the branch than we could do before, I think, allows us to have a little more confidence and the return characteristics of those investments. But that's too early to tell right now. So we're building the models. We're getting started, great site selection, great markets, and we'll keep you updated on where we go there. But overall, net new is continues to be strong, and the quality is improving. Chris McGratty: Great. Thanks, Bill. Operator: This concludes our question and answer session. I would like to turn the conference back over for any closing remarks. Brad Milsaps: Okay. Thank you, Betsy. That completes our earnings call. If you have any additional questions, please feel free to reach out to the Investor Relations team. Thank you for your interest in Truist, and we hope you have a great day. Betsy, you're now free to disconnect the call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to Johnson & Johnson's Fourth Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode until the question and answer session of the conference. This call is being recorded. If anyone has any objections, you may disconnect at this time. If you experience technical difficulties during the conference, you may press 0 to reach the operator. I will now turn the conference call over to Johnson & Johnson. You may begin. Darren Snellgrove: Hello, everyone. This is Darren Snellgrove, Vice President of Investor Relations for Johnson & Johnson. Welcome to our company's review of business results for the fourth quarter and full year 2025 and our financial outlook for 2026. First, a few logistics. As a reminder, today's presentation and associated schedules are available on the Investor Relations section of the Johnson & Johnson website at investor.jnj.com. Please note that this presentation contains forward-looking statements among other things, the company's future operating and financial performance, market position, and business strategy. You are cautioned not to rely on these forward-looking statements which are based on the current expectations of future events using the information available as of the date of this recording and are subject to certain risks and uncertainties that may cause the company's actual results to differ materially from those projected. The description of these risks, uncertainties, and other factors can be found in our SEC filings, including our 2024 Form 10-Ks, which is available at investor.jnj.com and on the SEC's website. Additionally, several of the products and compounds discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide acknowledges those relationships. Moving to today's agenda. Joaquin Duato, our Chairman and CEO, will discuss our business performance and growth drivers. I will then review the fourth quarter sales and P&L results, as well as full year 2025 results for the enterprise. Joe Wolk, our CFO, will then close by sharing an overview of our cash position, capital allocation priorities, and guidance for 2026, as well as key milestones and qualitative considerations for 2026. Jennifer Taubert, Executive Vice President, Worldwide Chairman, Innovative Medicine, John Reed, Executive Vice President, Innovative Medicine Research and Development, and Tim Schmid, Executive Vice President, Worldwide Chairman, MedTech, will be joining us for Q&A. To ensure we provide enough time to address your questions, we anticipate the webcast will last up to seventy-five minutes. With that, I will now turn the call over to Joaquin. Joaquin Duato: Good morning, everyone, and thank you for joining us. I'm excited to discuss our very strong full-year results. We said 2025 would be a catapult year for Johnson & Johnson, and that is exactly what it was. It was a year that launched us into a new era of accelerated growth, fueled by the strongest portfolio and pipeline in our history. Johnson & Johnson today has a leading and expanding position in each of our six key businesses: oncology, immunology, neuroscience, cardiovascular, surgery, and vision. In each of these areas, we have multiple differentiated assets to drive growth and a strong competitive advantage, which you can see in the success of our recent launches. In recent years, we have increased our focus on areas of high growth and high unmet need, and we will continue this transformation with the planned separation of our orthopedics business. In 2025, we invested over $32 billion in R&D and M&A, including the acquisitions of Intracellular Therapies and Halda Therapeutics. We also initiated billions of dollars in new state-of-the-art manufacturing facilities in the US, which will accelerate the delivery of our next wave of innovation. These moves fuel our confidence that growth in 2026 will be faster than in 2025. And we have line of sight to double-digit growth by the end of the decade, which is notable as Johnson & Johnson is the only healthcare company that will soon deliver more than $100 billion in annual revenue. How is that possible? It's possible because we have tremendous strength and depth both in innovative medicine and in medtech. We are different from other companies. We are not focused on one or two growth drivers. In fact, we now have 28 platform-sold products that generate at least $1 billion of revenue annually, and that makes our growth more sustainable. This, together with our strong balance sheet and free cash flow, creates the resilience and durability that will power our future. Turning to our results, over the full year, we delivered 5.3% operational sales growth. The strength of our commercial execution and relentless focus on innovation drove strong momentum throughout the year, firmly placing the STELARA LOE in the rearview mirror. In innovative medicine, we reported operational sales growth for the year of 5.3%. Full-year sales for our Pharmaceutical business exceeded $60 billion for the first time, with 13 brands growing double digits. The foundation for these results and for the acceleration we see ahead is our unrivaled portfolio and pipeline. In 2025 alone, we secured 51 approvals and filed 32 submissions across major markets. We delivered positive readouts from 17 key studies and initiated 11 new Phase III programs. These milestones are not just numbers. They are the seeds of our best-in-class medicines that are improving and extending lives. Let me now talk about our key areas of focus. In oncology, we are working to cure cancer, and our depth of expertise is unmatched. In 2025, we delivered 21% operational sales growth, and we expect to exceed $50 billion in annual sales by 2030. We are the number one company in multiple myeloma, where eighty percent of patients are treated with at least one of our four medicines over their treatment journey. DARZALEX is the largest medicine by sales in our pharmaceutical portfolio and is considered the foundational gold standard treatment in multiple myeloma. With annual sales over $14 billion, DARZALEX grew an impressive 22% across the full year. Carvicti is the leading CAR T cell therapy in multiple myeloma, with more than 10,000 patients now treated across 14 markets. And we are not stopping there. Last month, we published and presented results for TegVyle plus Darzalex that show reduced risk of progression or death by eighty-three percent in relapsed refractory multiple myeloma as early as the second line. We also recently announced top-line findings from a second Phase III study, MAJESTIQ-nine, which showed monotherapy to reduce the risk of disease progression or death as early as first relapse in patients with multiple myeloma who are predominantly refractory to anti-CD38 and lenalidomide therapies. We're also seeing significant momentum in our solid tumor portfolio. In Q4, we received FDA approval for Ribram and Faspro as the first subcutaneous therapy for EGFR-mutated non-small cell lung cancer, reducing administration time from hours to minutes and improving patient experience. We are making strong progress in bladder cancer with the introduction of Inlexo, our novel drug revision system, which received its initial FDA approval in September. This is a revolutionary treatment that offers a life-changing alternative for patients who otherwise would have lost their bladders to radical surgery. Future approvals addressing larger patient populations are anticipated. And our Q4 acquisition of Halda Therapeutics added a promising clinical-stage treatment for prostate cancer with potential across multiple tumor types. In immunology, we are focused on transforming the standard of care by increasing remission rates in immune-mediated disease. In 2025, Tremfya became the first and only IL-23 inhibitor with a fully subcutaneous treatment regimen for both ulcerative colitis and Crohn's disease. It is now the fastest-growing IL-23 therapy in the US, delivering Q4 operational sales growth of 7565% worldwide. And with global full-year sales of Tremfya accelerating to more than $5 billion for the first time, we're increasingly confident that Tremfya will exceed $10 billion in peak year sales. But in healthcare, leadership means continually raising the bar. Which is why we are focused on what's next in immunology. In the coming months, we look forward to the anticipated US approval of icotrokinra. To be marketed as icotide, which will expand our immunology innovation beyond injectable medicines. We believe Icotide positions Johnson & Johnson to lead the next wave of treatment for psoriasis and inflammatory bowel disease. Turning to neuroscience, where 2025 operational sales grew 10%. Spravato continues its strong trajectory with 57% growth in the year, with more than two hundred thousand patients now treated worldwide. In November, we solidified our leadership with the US launch of CAPLYTA for adjunctive major depressive disorder, further strengthening our confidence in its $5 billion peak year sales potential. Now turning to MedTech, where operational sales for the year grew 5.4%. In 2025, we delivered nearly $4 billion in sales, with strong performance in cardiovascular and accelerating momentum across surgery and vision. Our success over the last year was supported by 15 major launches and more than 40 regulatory approvals in major markets. And with more than 60 active clinical trials, we have significant momentum going into 2026. Johnson & Johnson today is a leader in three cardiovascular segments, with the portfolio delivering 15% operational sales growth in the year. Abiomed and Shockwave performed particularly well, delivering operational growth of approximately 1823% in the quarter. We remain the market leader in electrophysiology, and we plan to expand our position in pulse field ablation. BariPulse has now been used to treat nearly forty thousand atrial fibrillation patients globally, and we look forward to submitting our dual energy thermo cool SMARTouch SF catheter for use in the US market in 2026. We are also seeing positive data for our Omnipulse catheter, which has the potential to further redefine post-field ablation. In fact, we anticipate launching a new catheter every year through the end of the decade as we build an industry-leading portfolio in PFA complemented by at least two Carto updates each year. In surgery, we are reinventing procedures through robotics and digital. This year, we will launch a first-of-its-kind robotics platform for urology with Monarch. Technology was first to market in bronchoscopy, helping diagnose and treat lung cancer. And this year, we'll create another first with Monarch, becoming the only robotic endoluminal and percutaneous platform for the treatment of kidney stones and other renal conditions. We also recently announced the FDA de novo submission of our Optava robotic surgery system. And with continued innovation in surgical instrumentation, including our recent launch of the Ethicon 4,000 stapler, we anticipate continued growth as we reduce complications and elevate the surgical experience across specialties. And finally, vision, which delivered robust annual operational sales growth of 5.3% with particularly strong momentum in surgical vision. In 2025, we launched IQVIA OASIS MAX disposable lenses for astigmatism and presbyopia and completed the full market release of Technis ODC IOL, which is the fastest-growing intraocular lens in the US. Looking ahead, we are planning to launch Tecnix Pure C in the US later this year. As you can tell, we are starting the year from a position of strength. You have heard me talk about the unmatched depth and strength of our business. In 2026, that will translate into accelerated growth and impact with game-changing innovation, reaching more patients more quickly than ever before. Darren Snellgrove: I will now turn the call back over to Darren. Thank you, Joaquin. Moving to our financial results. Unless otherwise stated, the percentages quoted represent operational results and therefore exclude the impact of currency translation. Starting with Q4 2025 sales results. Worldwide sales were $24.6 billion for the quarter. Sales increased 7.1% despite an approximate 650 basis point headwind from STELARA. Growth in the US was 7.5%, and 6.6% outside of the US. Acquisitions and divestitures had a net positive impact on worldwide growth of 100 basis points, primarily driven by the Intracellular acquisition. Turning now to earnings. For the quarter, net earnings were $5.1 billion, and diluted earnings per share was $2.1 versus $1.41 a year ago. Adjusted net earnings for the quarter were $6 billion, and adjusted diluted earnings per share of $2.46, representing an increase of 21.5% compared to 2024. Items of note include a $0.22 IPR&D charge associated with the VWave acquisition in 2024, and $0.10 of dilution due to the acquisition of Halda Therapeutics in 2025. For the full year 2025, worldwide sales were $94.2 billion. Sales increased 5.3% despite an approximate 620 basis point headwind from STELARA. And if you do the math, Johnson & Johnson grew double digits for the full year, excluding STELARA. Growth in the US was 6.9% and 3.4% outside the US. Acquisitions and divestitures had a net positive impact on worldwide growth of 110 basis points, primarily driven by the Intracellular and Shockwave acquisitions. Turning now to earnings. Net earnings for full year 2025 were $26.8 billion, and diluted earnings per share was $11.3, including the $7 billion talc reserve reversal from Q1. This compares to diluted earnings per share of $5.79 a year ago, which included $0.67 of dilution due to acquired IPR&D charges on various transactions. Full-year 2025 adjusted net earnings were $26.2 billion, and adjusted diluted earnings per share was $10.79, both representing an increase of 8.1% compared to full year 2024. I will now comment on business sales performance in the quarter, focusing on the six key areas where meaningful innovation is driving our performance and fueling our long-term growth. Beginning with innovative medicine, worldwide sales of $15.8 billion increased 7.9% despite an approximate 1110 basis point headwind from STELARA, illustrating the continued strength of our key brands and new launches. Growth both in the US and outside of the US was 7.9%. Acquisition and divestitures had a net positive impact of 170 basis points on worldwide growth, primarily due to the Intracellular acquisition. In oncology, starting with multiple myeloma, DARZALEX growth was 24.1%, primarily driven by strong share gains of 6.5 points across all lines of therapy and nearly 12 points in the frontline setting, as well as inventory dynamics and market growth. Carvictee achieved sales of $555 million with growth of 63.2%, driven by share gains and site expansion. Tegveli and Talve growth was 18.9% and 73.1%, respectively, driven by continued expansion in the community setting. In prostate cancer, ELEDA delivered strong growth of 18%, due to market growth and continued share gains, partially offset by the impact of Part D redesign. In lung cancer, Ribrovant plus Lascluse delivered sales of $216 million and growth of 76.5%, driven by continued launch uptake in all regions. We continue to see share gains in both first and second lines of therapy. Within immunology, Tremfya delivered remarkable growth of 65.4%. We continue to see share gains across all indications, with particularly strong momentum from our IBD launch as well as market growth. STELARA declined 48.6%, driven by share loss due to biosimilar competition and Part D redesign. In neuroscience, Spravato grew an impressive 67.8%, driven by continued strong demand from physicians and patients. CAPLYTA, which was acquired in Q2 as part of the Intracellular acquisition, delivered sales of $249 million for the quarter. Since AMDD approval in the US, CAPLYTA has had its highest-ever new patient start volumes across all indications. Now moving to medtech. Worldwide sales of $8.8 billion increased 5.8%, with growth of 6.6% in the US and 4.9% outside of the US, driven by strong performance in our three focus areas: cardiovascular, surgery, and vision. Acquisitions and divestitures had a net negative impact of 10 basis points on worldwide growth. In cardiovascular, electrophysiology delivered growth of 6.5%, driven by procedure growth within our comprehensive portfolio, commercial execution, as well as VariPulse and other new products, partially offset by competitive pressures in PFA. Abiomed delivered growth of 18.3%, with continued strong adoption of Impella technology. Shockwave grew 22.9%, driven by continued adoption of coronary and peripheral products, becoming our thirteenth billion-dollar medtech platform. Surgery grew 3.7% despite divestitures negatively impacting results by approximately 60 basis points. Growth was driven by accelerated launches of new products in biosurgery, technology penetration in wound closure, and strong commercial execution, partially offset by competitive pressures in energy and endocutters as well as VBP in China across the portfolio. In vision, contact lenses and other products grew 5.3%, driven by category growth, strong performance in the AccuView ONEday family of products, and continued strategic price actions, further solidifying our leadership position. Surgical Vision grew 10.8%, driven by new product innovations, robust demand for premium IOLs, and strong commercial execution. Orthopaedics growth this quarter continued to gain momentum and increased to 3.5%, primarily driven by new product launches and strong commercial execution, partially offset by the orthopedics transformation and VBP in China. Now turning to our consolidated statement of earnings for 2025. I'd like to highlight a few noteworthy items that have changed compared to the same quarter of last year. Cost of goods sold deleveraged by 80 basis points, driven by unfavorable product mix in Innovative and the impact of tariffs in medtech. This was partially offset by the one-time prior year fair value inventory step-up associated with the Shockwave acquisition. Selling, marketing, and administrative expense leveraged by 110 basis points, driven by lower administrative expense across the enterprise. Research and development leveraged by 620 basis points, primarily driven by prior year acquired IPR&D expense from the VWave acquisition in MedTech, as well as pipeline investment timing in Innovative Medicine. Interest income and expense was a net income of $23 million as compared to $144 million of income in 2024. The decrease in income was primarily driven by a higher average debt balance. Other income and expense was a net expense of $483 million as compared to $161 million of income in 2024. This increase in net expense was driven by higher litigation costs of $900 million, primarily related to the Aura shareholder resolution and a $200 million nonrecurring charge related to Holder Employee Equity Awards. This was partially offset by a $300 million contingent value right reduction associated with the Abiomed acquisition. Tax rate on a GAAP basis in 2025 was a benefit of 3% compared to an 11.7% cost in 2024. The decrease in the effective tax rate is primarily driven by a nonrecurring tax benefit related to a loss on certain international subsidiaries. More information can be found in the company's forthcoming Form 10-K. Lastly, I'll direct your attention to the box section of the slide, where we have also provided our income before tax, net earnings, and earnings per share adjusted to exclude the impact of intangible amortization expense and special items. Now let's look at adjusted income before tax by segment for the quarter. Innovative medicine margin improved from 32.5% to 36.3%, primarily driven by administrative expense leveraging and phasing of R&D expense, partially offset by unfavorable mix in the cost of products sold. MedTech margin improved from 10.8% to 17.4%, primarily driven by prior year acquired IPR&D expense from the VWave acquisition, partially offset by the impact of tariffs and cost of products sold. As a result, adjusted income before tax for the enterprise as a percentage of sales increased from 24.1% to 28.7%. This concludes the sales and earnings portion of the call. And I will now turn the call over to Joe. Joe Wolk: Thanks, Darren. Hello, everyone. We appreciate you joining us today. As you've heard from Joaquin and Darren, the employees of Johnson & Johnson delivered impressive results in 2025, driven by strong execution, important new launches, and significant pipeline progress that launched a new era of accelerated growth. Our performance demonstrates the depth and strength of Johnson & Johnson's business centered on six core areas: oncology, immunology, and neuroscience in innovative medicine, and cardiovascular, surgery, and vision in medtech. This has enabled us to exceed financial expectations at the beginning of 2025 on both the top and bottom line. We enter 2026 with powerful momentum and anticipate another solid year ahead. Let me briefly address yesterday's Albert rulings in the Talc MDL. The special master correctly decided to exclude the opinions of certain plaintiff's experts who propounded junk science. In other parts of the ruling, the court did not uphold its proper gatekeeping duty with respect to the reliability of plaintiff's experts' opinions, and we will appeal. The decision only serves to bolster our overall litigation strategy. We will continue to defend against these meritless claims at trial and through the appeals courts where we have largely prevailed. Before we move into 2026 guidance, let's address cash and capital allocation. We ended 2025 with approximately $20 billion in cash and marketable securities, $48 billion of debt for a net debt position of approximately $28 billion. The company generated $19.7 billion of free cash flow during 2025, on par with 2024 despite increased capital investment in the US and the impact of tariffs. Our financial strength is a competitive advantage that allows us to both invest in our future and return value to our shareholders. As we move forward in 2026, we expect to elevate free cash flow generation to approximately $21 billion. As it relates to the separation of our orthopedics business, we are making good progress towards a mid-2027 separation and look forward to providing updates later this year. Turning now to guidance for the full year 2026. We anticipate operational sales growth in the range of 5.7% to 6.7% with a midpoint of $100 billion or 6.2%. Acquisitions and divestitures are expected to favorably impact operational growth by approximately 30 basis points, resulting in an adjusted operational sales growth midpoint of 5.9%. We do benefit in 2026 as our financial calendar includes a fifty-third week, which is worth approximately 100 basis points. As you know, we do not speculate on future currency movements. And last quarter, we utilized the euro spot rate relative to the US dollar of 1.17. As of last week, the US dollar has stayed relatively flat to the euro spot rate, and as a result, we expect reported sales growth between 6.2% to 7.2% with a midpoint of $100.5 billion or 6.7%. 2026 sales growth across our Innovative Medicine business will be driven by Tremfya, DARZALEX, CARVICTI, ERLEADA, and SPRAVATO, as well as new launches of Ribrovant plus Lascluse in lung cancer and CAPLYTA as adjunctive therapy for major depressive disorder. In medtech, we expect growth to be driven by continued uptake and market expansion of new product launches across our cardiovascular, surgery, and vision portfolios, including VariPulse in electrophysiology, Ethicon 4,000 in surgery, and the Oasis Max family in vision. Turning next to other items on the P&L. In 2026, we expect to drive continued operating efficiencies, the majority of which we plan to invest in our business to power our new product launches and pipeline with heavier investment at the outset of the year. Despite that increased investment, we are planning for our 2026 adjusted pretax operating margin to improve by at least 50 basis points. Our pretax operating margin guidance takes into account the costs from the fifty-third week of operations and full-year medtech tariffs of approximately $500 million, which is significantly above the 2025 amount. It also includes the impact of the recently announced voluntary agreement with the US government to improve access to medicines and lower costs to US patients. We expect net interest expense between $300 million and $400 million. We anticipate net other income to be $1 to $1.2 billion for 2026, relatively flat to last year. Finally, we are projecting an effective tax rate in the range of 17.5% to 18.5%, with the increase largely due to a mix change with income in higher tax jurisdictions. Turning to adjusted operational earnings per share, we expect growth of 5.5% at the midpoint for a range of $11.28 to $11.48. By utilizing the exchange rate we mentioned earlier, for our reported adjusted earnings per share for the year, we estimate a positive impact of $0.15. As such, we expect reported adjusted earnings per share of $11.53 at the midpoint. Regarding our share count, due to the rapid share price appreciation in 2025, into early 2026, our diluted share count is increasing to approximately 2.44 billion shares based on US GAAP accounting rules for the diluted share count calculation, in line with how 2025 landed. The incremental dilutive shares for next year are worth slightly more than a $0.05 headwind versus 2025. Relative to current analyst expectations, our EPS and margin outlooks absorb the previously referenced incremental tariffs, the impact of the voluntary US government agreement, and a higher share count. We will now shift to some 2026 phasing considerations to help inform your modeling. We are well-positioned to build upon our accomplishments in 2025, continuing to make advancements across our innovative medicine and medtech portfolio and pipeline. We anticipate fairly consistent operational sales growth throughout the year, with a higher fourth quarter due to the benefit from the fifty-third week referenced earlier. Regarding Innovative Medicine, we expect a more pronounced impact from newly launched products throughout the year. We anticipate STELARA to continue to follow the HUMIRA erosion curve, which accelerated as we moved to 2025 compared to the start. While not nearly as impactful as STELARA, we do anticipate generic impact for both Symphony and OPSUMIT to begin in 2026, both of which are contemplated in our full-year guidance. In medtech, we will continue to accelerate our newly launched products and expect normalized seasonality. The surgery transformation progress will accelerate throughout the year, and we anticipate some additional rounds of volume-based procurement in China, all of which has been incorporated into our 2026 guidance. Regarding the P&L, it is important to consider one-time items that impacted our EPS results in 2025. Specifically, in Q1 2025, the impact from STELARA biosimilars was less pronounced given that the erosion accelerated starting in Q2. The Intercellular acquisition anniversaries in Q2. And tariffs will be relatively linear in 2026, unlike last year where the P&L cost was largely recorded in Q4 2025. Given these factors, we expect higher earnings per share growth in the second half of the year versus the first half. We are excited about how our pipeline is anticipated to advance in 2026. For example, in Innovative Medicine, we expect regulatory approvals for icotide in psoriasis, Tekveli in combination with Darzalex in relapsed refractory multiple myeloma as early as second line, and TREMFYA for the innovation of structural joint damage for patients with psoriatic arthritis. As this chart indicates, we also have many important regulatory submissions and data presentations across oncology, immunology, and neuroscience. In medtech, we anticipate the following approvals and regulatory submissions: Otava robotic surgical system, Aesthesia in biosurgery, and the dual energy thermal cool smart touch SF catheter in the US. Here too, we are also excited for new launches and continued expansion of new products as seen in the chart. To close the prepared remarks, I hope it's evident that Johnson & Johnson is entering 2026 with significant momentum. We are positioned to lead where healthcare is going to tackle areas of critical unmet need. Our strong financial position enables us to invest in our business and the next generation of scientific breakthroughs that will help improve patient outcomes while simultaneously delivering value for our shareholders. None of this would be possible without the hard work and dedication of our incredible colleagues worldwide who always keep patients at the center of everything we do. With that, we are happy to take your questions. So I will now turn it to Kevin to provide instructions for those seeking to participate in the Q&A. Operator: Thank you. Ladies and gentlemen, if you'd like to withdraw your question, please press star then 2. Please limit yourselves to one question only. First question is coming from Asad Haider from Goldman Sachs. Your line is now live. Asad Haider: Great. Congrats on the quarter and thanks for taking the question. Joaquin, maybe just a big picture question for you. You're entering this year in a clear position of strength following what's been one of the best performance years for the stock in about twenty years. You've had momentum in both business segments. You're generating tremendous free cash flow, and you're saying that's gonna continue to elevate. And you've now started to talk more about double-digit revenue growth by the latter part of the decade, although street consensus is currently modeling something in the 6% range. So if you could just maybe double click a little bit more on what the key levers are to bridge to that double-digit growth profile from where we sit today, particularly in the context of the current revenue base that's now approaching $100 billion and remains sizable through the end of the decade even with the ortho spin. And I guess what we're really trying to understand is how much of that acceleration comes from the organic pipeline versus acquisitions versus portfolio pruning. And I guess related, what innings are we in of the strategic repositioning away from lower growth segments like you're doing with Ortho towards higher growth segments? Thank you. Joaquin Duato: Thank you. Great question. And I'll share, I mean, we come out of a really successful 2025, leaving the STELARA biosimilars in the rearview mirror and initiating a cycle of accelerated growth for Johnson & Johnson. And you have seen that we have provided guidance for 2026, which is strong and ahead of expectations. And as I said before, we have line of sight to double-digit growth in the later part of the decade, which is especially remarkable for a company that, according to our guidance, would be $100 billion in sales in 2026. So what are the reasons to believe? The reasons to believe are focused on the strength of our portfolio and pipeline. Let me now take you through the six areas of focus that we are investing into the future. Let me start with oncology. Our ambition with oncology is to become the number one oncology company, reaching $50 billion by the end of the decade, sustained by our success in multiple myeloma and also in solid tumors with lung cancer, prostate cancer, and bladder cancer. We are very confident in our progress there in the pipeline, and I'm sure we'll have some time to discuss that later in the call. In our second area in innovative medicine, which is immunology, we are focusing on three major blockbusters. One is Tremfya, which has been very successful in IBD. You have seen the growth in the fourth quarter, really spectacular, 65%. TREMFYA and IBD launch is doing really well. And as a reminder, in the case of STELARA, IBD was 75% of the sales. So there is significant growth for Tremfya ahead of us. We see Tremfya as more than a $10 billion asset. The second one is icotide. Icotide is a trademark of icotrochimbra, our oral IL-23 blocker. We see the oral IL-23 blocker expanding the market, becoming a new blockbuster for us. We expect to have the launch of icotide in 2026, initially in psoriasis. This is going to be a transformational change for the treatment of these diseases, and we plan to continue to develop ICOTY-two in IBD, in inflammatory bowel disease. And finally, the third blockbuster in which we will see data this year is our co-antibody therapeutic for patients that are refractory to biologics. I think that's a great solution for these patients. Many of them relapse. So three major blockbusters in immunology, which are largely derisked. Some of them are a profile you're going to see data very, very soon. To end in innovative medicine, we are very encouraged by the progress of SPRAVATO, more than 60% growth, and also the very successful launch of CAPLYTA in adjunctive treatment of major depressive disorder. We're seeing the first data coming in very, very encouraging. We see CAPLYTA, as we discussed, as additive to our growth and more than a $5 billion business. So all positives in our Innovative Medicine group clearly driving this line of sight to double-digit growth by the end of the decade. If I move to our MedTech business, our cardiovascular sector, very strong growth in 2025, double-digit growth is reaching $9 billion, is one of the cardiovascular franchises in the industry. We are in three major markets, which are specialty markets with high growth, cardiac ablation where we are the leaders and we plan to expand our leadership in PFA with our launch of a new catheter every year and new carto versions. Tim will explain later. Our strong position both in with BioMed and Shockwave in heart recovery and in calcified arterial disease. So that's going to be a growth driver for us into the rest of the decade. In surgery, we have had strong results both in wound closure and in biosurgery, which are high single-digit in both areas. We just filed for OTAVA, which is going to make us a relevant player in the surgery robotics, which is an area in which we have all the right to compete. Let me remind all of you that we are in all hospitals in the world, and we already participate in all surgeries, and we plan to be a relevant player in robotic surgery with Ottava and also with the launch of Monarch in urology, in which we are going to have a unique position. Then finally, in vision, you see our results in vision. It's a market with growth. We're gaining share, and it's an area of innovation in which we continue to invest. So, you know, we have about a dozen new product launches for the company. Some of them are already approved, most of them submitted. So I would say that in that sense, it's essentially what I would call derisked, and some of you have called our story of growth in the second half of the decade as one of the cleanest stories of growth for the healthcare sector, for the healthcare entire sector overall. So we feel very confident about our outlook, as reflected in our guidance for 2026. And I can assure you that everybody here at Johnson & Johnson is focused on doing exactly what we do best, which is looking for innovation in medicines and medical technologies to improve the standard of care of the millions of patients that we serve. We are convinced that will translate into strong business results. Operator: Thank you. Our next question is coming from Larry Biegelsen from Wells Fargo. Your line is now live. Larry Biegelsen: Good morning. Thanks for taking the question, and I'll echo my congratulations on a nice end to the year here. So, Tim, there's some dynamics in the medtech market that you called out in the slides as well as the loss of coverage in the US from the enhanced subsidies expiring. How are you thinking about the medtech market in 2026 relative to 2025? How are you thinking about J&J's adjusted operational growth in 'twenty-six versus 'twenty-five? Do you expect an acceleration? It'd be helpful if you could touch upon the outlook for your EP business, which is growing below market. Thank you. Tim Schmid: Larry, thank you for the question. Let me touch quickly on the first question around ACA subsidies and put that one to bed. Firstly, based on what we know today, we do not expect the loss of ACA subsidies or any potential policy changes under the big one big beautiful bill to have a material impact on our medtech performance. And, you know, while we'll continue to monitor how coverage dynamics evolve, at this stage, we see no indication of an impact on our growth trajectory. The primary constraint, as you know, Larry, in our business is really more about clinical capacity, not coverage levels. And procedure demands remained very robust across our portfolio, which I think really speaks to the resilience of the businesses that we've decided to participate in. Turning to your question about the year, we do expect to see acceleration. We expect the year to be better in 2026 than it was in 2025. And I think it's important to maybe hedge this question on really our strategy. And I think, you know, for the last couple of years, we've been very clear in articulating our strategy focused on shifting our portfolio into higher innovation, higher growth, and higher margin markets. And as you just heard from Joaquin, we have deliberately chosen to focus on our three focus areas of CV, surgery, and vision. And I think our results, Larry, speak for themselves. Our strategy is working. We said we would accelerate our performance in 2025, and we did exactly that, beating consensus for the third consecutive quarter. And what we're most proud of, Larry, is that we saw acceleration across the board. As you heard from Joaquin, cardiovascular, now one of our largest businesses at $9 billion, grew 15.2% operationally in 2025, driven by the success of Abiomed and Shockwave, both double-digit growers, and increasing performance in EP, which I'll touch on a little later. Vision, strong mid- to high single-digit performer, double-digit growth in Surgical and Vision, and, of course, we couldn't be more excited by the growth opportunity that will come with Otava as we look to commercialize that first in the US, hopefully this year. We've also seen continued improvement of ortho. You would have maybe some distraction as a result of the announcement we made. We've seen exactly the opposite with sequential growth during the quarter and 3.5% in Q4. And so I'll finally reinforce, Larry, that our portfolio transformation is working. If you look at the $34 billion business today, we have roughly half of our assets participating in higher growth markets growing north of 5%. That's compared to about 20% in 2018. And this will catapult to north of 70% following the ortho separation. So as a result, we believe, frankly, that our best days are ahead, and we remain very confident in our ability to drive accelerated operational growth as we further push into higher areas of innovation, growth, and margins. Let me touch quickly on EP because I think that was another part of your question. The results speak for themselves, and they're speaking loud and clear. We're seeing continued acceleration in the markets that matter most, especially here in the US and in Europe. You will have seen that in the fourth quarter, our growth accelerated to 9.5%. We're on the cusp of once again double-digit growth here in the United States, which is by far and away the most important market. We're seeing this driven by the success of Verapulse, more than 40,000 cases today, Larry, with a benchmark safety profile that you heard from Joaquin. We've made a commitment to an additional catheter each year for the foreseeable future, starting with dual energy STSF, followed by Omnipulse, which is a large diffocal catheter, and we're also doubling down on our leadership position in mapping. And we now see really customers shifting back to Cardo based on the integration we have across our portfolio. And just to put a point on this, Larry, for example, our COTO3 system is widely recognized as the industry benchmark in mapping. In fact, in a recent study, it found that patients treated with PFA devices, whether that be ours or the competition's, using CARTO were sixty-one percent less likely to experience AFib-related readmissions, which I think further reinforces the competitive advantage we have in this portfolio. And so I've said this before, Larry, and I'll end by saying that we are not rolling over. J&J's strength lies in our comprehensive portfolio of integrated EP solutions, mapping, ablation, and cardiac imaging technologies combined with our best-in-class mappers, and we remain resolute and confident that our deep EP expertise earned over thirty years and our robust pipeline position us well to continue to drive global leadership in this important space. Thanks, Larry. Operator: Thank you. Next question today is coming from Chris Schott from JPMorgan and Company. Your line is now live. Chris Schott: Great. Thanks so much, and congrats on the results. Joe, can you just elaborate a little bit more on how to think about margin progression over time at J&J? You've obviously highlighted potential for accelerating top-line growth over the next several years. Should we think about that higher level of top-line growth being associated with greater margin expansion? Or is this kind of 50 basis point year type improvement you're seeing this year a reasonable proxy to think about margin expansion for J&J over time? Thank you. Joe Wolk: Yeah. Good morning, Chris. Thanks for the question. Yes, it's a great question. As we look at the margin expansion, the idea would be to continue to improve our infrastructure. What gives me confidence with respect to the 2026 outlook of at least 50 basis points is, as you know, with the orthopedic separation, much like we did with the consumer health separation, we're gonna take this opportunity to look and see where there's areas of opportunity efficiency to eliminate stranded cost. While that will probably need to be in place for 2027, we're gonna get a jump start on that in 2026. There's also, as you know from recent calls, efforts underway to improve our operating margins, our gross margin specifically in our manufacturing footprint, largely in the medtech space. And then lastly, while we will have continued STELARA erosion, it'll be off a smaller base, so that will have less of an impact going forward. And so, I wouldn't wanna give you a longer-term outlook. What I can say is I'll harken back to our last Investor Day where we said that earnings would be commensurate with sales growth. So you can expect that the margin profile will improve in conjunction with the sales growth profile as we move out to the next couple of years and to the back half of this decade. Operator: Thank you. Next question today is coming from Joanne Wuensch from Citibank. Your line is now live. Joanne Wuensch: Good morning. Thank you for taking the question. And I'll add my congrats on a good quarter. I just want to spend a minute or two talking about Vision Care. You highlighted that as one of the three growth areas in medical technology. It looks like in your Surgical business, it was a little bit slower during the quarter versus what we saw in the United States versus what we saw outside the United States. If you could tease that apart a little bit and your views on the health of the contact lens market would be really welcome. Thanks again. Tim Schmid: Joanne, thank you for the note. Once again, we have doubled down and really focused on Vision as one of our three priority areas within medtech. And as you highlighted, a strong fourth quarter at growth of just under 7%. So strong underlying performance within our contact lens category, while we did see a little softness, Joanne, in Asia Pacific, underlying demand is strong, and we saw tremendous growth at roughly 5.3% with share gains driven by the continued rollout of our AccuVue Oasis one-day family, which I think you probably know that we've added to with the addition of a product focused on multifocal astigmatism, an only product or only daily disposable available for patients suffering with both presbyopia and astigmatism. And so we believe that's going to be a growth driver for the future. Turning to surgical vision, growth of close to 11% in the quarter, and that's all driven by our doubling down of our focus on premium intraocular lenses, both with the Tech Odyssey launch here in the US last year and PURE C more broadly globally. As you look to 2026, we're going to be further enhancing that performance by building out the portfolio specifically with the launch of Piercy here in the United States. You touched on our fourth-quarter performance, underlying performance of our premium IOLs here in the US was outstanding. We did see that offset somewhat by some ongoing market declines in some of the legacy categories, which we're working to address, but we're confident that our Surgical Vision business can continue to be a strong double-digit growth for the foreseeable future. A couple of other areas I'll focus on here is that we are expanding global market share both in contact lenses and surgical vision, not just winning here in the States, but more importantly globally. We're focusing very much on portfolio optimization. I do think the ortho separation enables greater capital allocation to vision, supporting both R&D, commercial execution, and digital transformation. And so we're thrilled with the continued improvement in Surgical Vision and have great confidence in that continuing. Operator: Thank you. Next question is coming from Terence Flynn from Morgan Stanley. Your line is now live. Terence Flynn: Great. Thanks for taking the question. Appreciate it. Congrats on the quarter. Obviously, multiple myeloma is another one of your key growth drivers here. I was wondering, post a lot of the earlier stage data, earlier line data we've seen for TechValley, if you could speak to how you're thinking about positioning here of that franchise relative to CarVictee? And then the related question is, I know FDA published some final guidance regarding MRD negativity and CR's endpoint. So just thinking about how you might implement that across your development portfolio and what that could mean for timelines. John Reed: Thanks for the question, Terrence, and good morning, everyone. Yeah, for multiple myeloma, we were absolutely thrilled with the data that we saw for TekVeili plus Jarzalex in the second line plus setting as well as most recently the TekVeili data in patients who are refractory to anti-CD38 lenalidomide therapy. And maybe if I take a step back over the past twenty years, J&J therapies have dramatically improved survival for people with multiple myeloma. You know, from three to five-year survival rates to ten to fifteen years now or more. Despite these advances, multiple myeloma is still a complex disease, a heterogeneous disease, and about forty percent of patients are currently in the second line and third line settings. So how do all of these agents fit and why do we see that this is such an extraordinary opportunity? Well, first, if we start off with the Tech DERA information, plus Tech nine and CarVictee, together, they really provide highly effective agents that allow treatment that's tailored to the treatment goals, the patient setting, access, the patient status, and the prior therapy. So there's a number of things that get taken into account. So we start off with tech plus DARE Up. This is really community-ready therapy that's proven in unprecedented efficacy rate in the second line plus setting that the hazard ratio was zero point one seven. And so this is for patients who are CD38 naive or are CD38 experienced. And this is about seventy percent of the population in that second line and in a third line setting. If you take a look at Tekdara, the data, again, extraordinarily impressive, seventy-one percent reduction in the risk of disease progression, forty percent reduction in overall survival, and this is for patients who are refractory to anti-CD38 therapy and therapies. And so you can see the seventy percent Tekdara and then the thirty percent for the TECH nine data. And then when you bring CARVICTI in, Carvictee is really the most successful CAR T therapy. We just announced we're over ten thousand patients who've been infused with this, and this is a single-dose therapy with really a tremendous shot at what we would count as a cure. And we're the only CAR T therapy that's got that superior overall survival versus the standard of care. And so, when you take a look at what the goals are for that patient, what their prior lines of therapy would be, and what the practice setting is, J&J now has an option for really every one of those patients in that second line, third line setting. So we see a lot of growth potential ahead for these agents as well as DARZALEX in the frontline setting. Maybe to get into your MRD, but first, just to supplement a little bit, I've also noted that the tech Bailey regimens, whether it's monotherapy in CDA refractory patients or the combo with DARZALEX in patients who are 30 naive or have been exposed but still remain sensitive, these are dexamethasone-free regimens, which means the patients are on high-dose steroids, which really is an improvement on quality of life. The other thing I wanted to note is that the FDA, in fact, was so impressed with our REJESTIQ-three data that unsolicited, they contacted us and offered a priority review voucher to accelerate bringing this new regimen to patients. So really excited with that recent interaction with the FDA. Indeed, on MRD, that is exciting for us. Last year, there was an ODAC that endorsed that concept of using this biomarker, if you will, approach to finding those rare residual malignant cells. Much of the evidence behind that, frankly, was pioneered by J&J over the years. So we're excited that that is an option. We are mindful, however, that it's only an option in the United States. So we, at this point, will still have to deliver progression-free and overall survival data for other territories. So I suspect that will continue to be an element of our protocols. But indeed, we will be speaking with the agents to be on opportunities to accelerate some of our development. And in that regard, I think a place where this could be particularly apropos is with our new tri-antibody for myeloma, romantamig, which brings the features of both tec and tau into a single molecule with unprecedented efficacy, improved tolerability as well, fewer, for example, of the taste effects that you might see with Talvi, less weight loss, etcetera, really improved tolerability and then great convenience that makes it apropos for the community setting with only one step-up dose and Q4 week dosing per monthly dosing. Really excited about the pilot data we're seeing in newly diagnosed myeloma in combination with DARA, with that tri-specific, and that could be a really apropos place to discuss with the FDA using MRD negativity. Operator: Next question today is coming from Danielle Antalffy from UBS. Your line is now live. Danielle Antalffy: Hey, good morning, guys. Thanks so much for taking the question. I'll echo everyone's strong end to the year, and Happy New Year. Just a question on this move to higher growth end markets. Appreciate that you've done a lot of and are doing a lot of pruning now. You mentioned the 70% in a few years here. I mean, ultimately, I guess it's too. Do you see that seventy percent moving higher, or do you think that's, like, sort of the aspirational peak? That's the first part. And the second part is what are some other growth markets, whether it's in innovative medicines or medtech, where you guys aren't participating today that you see an opportunity to participate over that time frame, whether it's via organic or inorganic moves. Thanks so much for taking the question. Tim Schmid: Daniel, thank you. I mean, our aspiration is not to put a limit on the high-growth markets in which we participate. And I think we can conservatively say that once we separate ortho, we'll be at least at 70%. And there is tremendous opportunity even just focused within the three business units we've decided to focus on within MedTech, both in cardiovascular, in surgery, and in vision. I think we've built your confidence around cardiovascular continuing to be a strong double-digit grower, surgery, one of our profitable businesses where we maintain leadership positions both in contact lens and surgical vision. We believe it's gonna be a strong middle to high single-digit grower. And then surgery is the major opportunity to really catapult our growth, and that comes down to our belief in Ottava. As you heard from Joaquin, we are absolutely resolute in our commitment to play a bigger role beyond open and laparoscopic surgery in robotics with Ottava. And what we are most confident about is that we have something that is unique and different and something that surgeons and health system CEOs tell us every day that they need. So while we're excited by the recent milestone and the submission for approval, we're just getting started. And what really highlights the fact that this is different is you'll recall that this is a very different regulatory pathway we chose. This is a de novo pathway. And the reason we chose this pathway is that there is no predicate device, nothing that could be compared against. And so this is a novel platform where there's no reference or predicate device. And so that, coupled with the fact that we're going after the US, should further reinforce our confidence in the fact that we believe we have something that is really different. Now we're not stopping just in the US. We're building our submissions in a parallel path fashion outside of the US, with a focus on Japan and some select US markets. You will have recalled from the announcement we made two weeks ago, we're also already expanding into our next IDE clinical study in the lower abdomen. And so make no mistake that we believe that we can be a formidable player in surgical robotics. We don't take the current incumbent for granted by any means, but we do think the presence we have in open laparoscopic and soon-to-be robotic surgery gives us a right to play and a tremendous opportunity to drive to those high levels of growth that we've committed in the back half of the decade. John Reed: And then in Innovative Medicine, we are looking to expand in a number of really exciting areas. Right now, we've got clinical work already underway. And so to give maybe a few examples, Ribrovant in head and neck cancer and colorectal cancer, which is clinical trials underway. AMAVE, which we haven't spoken about yet today, but areas such as Sjogren's disease and SLE, lupus, areas of really high unmet medical need. Atopic dermatitis, of which we made a number of key acquisitions and licensing at the 2024 that give us a stable of assets there that we're working towards. B cell malignancies with our Bi CAR that's in development and even Milvexian that we're developing in partnership with Bristol Myers Squibb that we're very, very excited about for atrial fibrillation and secondary stroke prevention. A number of additional really key diseases that could be growth drivers for us in the future. Operator: Thank you. Next question today is coming from Vamil Divan from Guggenheim Securities. Your line is now live. Vamil Divan: Great. Thank you so much for taking the questions. I just want to ask on Inlexo. It's a couple of questions here. Just want any initial feedback you can share with us in terms of the initial launch and what doctors and patients are saying? Is there any update on when you expect to get a permanent J code? And then finally, just I see you listed Sunrise five data and potential submission on your events list for 2026, so that's good to see. I'm curious if you can just talk about how that data and that population might impact the addressable population for the product, and then to that Sunrise three, I thought might come this year. You didn't include that one on the list. So I'm just curious. Any update on timing when we might see data from Sunrise three. Thanks. Jennifer Taubert: Great. Thanks so much for the question on Inlexo. We are really pleased with the launch and what we're seeing in terms of interest and receptivity by both urologists as well as the patients who've had application of the device. As you recall, we've really launched into the BCG unresponsive population, and as you noted, we're actually looking to further expand that through Sunrise five, the BCG experience, and then SUNRISE III population on the BCG naive population. So far, the interest and enthusiasm on this has been really, really robust. We are anticipating the permanent J code at the beginning of the second quarter, sort of in that April timeframe, which we think is going to be a really nice catalyst for utilization. And so we do continue to believe strongly that this is one of our $5 billion plus assets and really look forward to getting that permanent J code in the second quarter. John Reed: Yeah. Just to supplement a little bit, I've also noted that the tech Bailey regimens, whether it's monotherapy in CDA refractory patients or the combo with DARZALEX in patients who are 30 naive or have been exposed but still remain sensitive, these are dexamethasone-free regimens, which means the patients are on high-dose steroids, which really is an improvement on quality of life. The other thing I wanted to note is that the FDA, in fact, was so impressed with our REJESTIQ-three data that unsolicited, they contacted us and offered a priority review voucher to accelerate bringing this new regimen to patients. So really excited with that recent interaction with the FDA. Indeed, on MRD, that is exciting for us. Last year, there was an ODAC that endorsed that concept of using this biomarker, if you will, approach to finding those rare residual malignant cells. Much of the evidence behind that, frankly, was pioneered by J&J over the years. So we're excited that that is an option. We are mindful, however, that it's only an option in the United States. So we, at this point, will still have to deliver progression-free and overall survival data for other territories. So I suspect that will continue to be an element of our protocols. But indeed, we will be speaking with the agents to be on opportunities to accelerate some of our development. And in that regard, I think a place where this could be particularly apropos is with our new tri-antibody for myeloma, romantamig, which brings the features of both tec and tau into a single molecule with unprecedented efficacy, improved tolerability as well, fewer, for example, of the taste effects that you might see with Talvi, less weight loss, etcetera, really improved tolerability and then great convenience that makes it apropos for the community setting with only one step-up dose and Q4 week dosing per monthly dosing. Really excited about the pilot data we're seeing in newly diagnosed myeloma in combination with DARA, with that tri-specific, and that could be a really apropos place to discuss with the FDA using MRD negativity. Operator: Thank you. Next question is coming from Shagun Singh from RBC Capital Markets. Your line is now live. Shagun Singh: Great. Joaquin and Joe, could you spend some time and elaborate on your next step with respect to the tax litigation, you know, implications of the initial Robert decision? You know, I know you indicated it'll be appealed. You know, if the reserves need to be stepped up. And then most importantly, what are your plans for an eventual resolution and risk mitigation here? You know, I think this may be contributing to the modest top-down today even though you know, you reported strong results and you have a very strong outlook to the end of the decade. Thank you for taking the question. Joe Wolk: Yes. I'll start, Shagun, and then Joaquin, I'll turn it over to you. So thank you very much for the question. And, I want to thank you for acknowledging just the strong results and outlook of the business, which is really what is at the heart of Johnson & Johnson. So last night, the special master reviewing the Daubert motions in the talc MDL issued what is known as a report and recommendation. So that really has no legal import until the judge actually accepts this recommendation. The recommendation itself excluded certain aspects of the plaintiff's expert witnesses and their opinions. And simultaneously, the recommendation also endorsed virtually all of our opinions of our experts. However, there were other parts of the recommendation where the special master clearly failed to apply the new federal rules of evidence known as Rule 702, which really reinforced starting in December 2023, the gatekeeping responsibilities that the special master should have had. We will certainly appeal those erroneous parts of the recommendation to the district court. Again, this recommendation from the special master has no legal consequence until the appeal is resolved. The bottom line is this is not going to change our strategy. We will continue to aggressively fight in the court system each and every one of these meritless claims. We will do so whether it's at original trial or through appeal. And we will continue to really bring to light the actions of the plaintiff's bar, the tactics that they use, the third-party litigation financing, all of which is really undermining US business and US competitiveness overall. Joaquin Duato: Thank you, Joe. So, I would tell you and I would tell investors we have been navigating this talc issue already for a decade. And we have been able to continue to deliver excellent results, invest in our business, and continue to return value to shareholders. So let's focus on the real story here. The real story is our successful 2025, the strong guidance for 2026, and what you said before, our line of sight for double-digit growth in the later part of the decade. This is a clean story for us, one of the cleanest stories in the entire healthcare sector. And we are in a position of strength today. And as Joe said, we are going to continue to fight these meritless claims, and we are going to continue with our strategy of litigating every single one. What I can assure you and all investors is that every single employee of Johnson & Johnson does not get distracted. They wake up every day with the intent to bring new medicines and medical technologies that improve the standard of care of the millions of patients that we serve every day, and that's really our goal. Let's focus on what really matters. Let's not get distracted. Operator: Shagun. And I think we probably have time for one more question. So our final question today is coming from Alexandria Hammond from Wolfe Research. Your line is now live. Alexandria Hammond: Thanks for taking the question. On Milvexian, can you talk a little bit about confidence in this asset? What do you think you'll need to show to be competitive in what's already a pretty crowded space with another potential next-generation factor 11 from Bayer? And I guess as a quick follow-up, how can you leverage your past experiences commercializing to make another multibillion-dollar opportunity for J&J? John Reed: Yeah. So on Milvexian, we're expecting data readouts later this year for both secondary stroke as well as atrial fibrillation. We often get asked about atrial fibrillation because the competitor molecule had failed in that indication, and we cite a couple of things. One is that MILVEXIAN, at least in vitro, is about 10 times more potent than the other molecule that is being developed by another company. And we know from monitoring the APP APTD biomarker, the thromboplastin time, that we have very effective reductions in clotting at the dose that we have selected for atrial fibrillation, which is one hundred milligrams twice a day. So we feel that we've got the right dose and the right study design. So we'll be looking forward to those data later this year. Jennifer Taubert: We're really excited about the opportunity with Milvexian. And what we're really looking to show there is clear superiority in terms of safety and bleeding risk. We know from all of our experience in the market with Xarelto that there are a lot of patients that are not treated or are undertreated because of fear of safety risk. And so we think there's extraordinary need for a highly efficacious and highly safe with low bleeding risk product in the market, both for atrial fibrillation and then we're very excited about the possibilities in secondary stroke as well. So we're looking forward to this product that we're developing in collaboration with Bristol Myers Squibb. It is absolutely one of our $5 billion plus assets on our list. Operator: Thanks, Alex. And thanks to everyone for your questions and your continued interest in our company. I will now turn the call over to Joaquin for some brief closing remarks. Joaquin Duato: Thank you to all of you for joining the call today. As we have commented in the call, we are starting the year from a position of strength. We have the strongest portfolio and pipeline in our history, and we have a leading and expanding position in our six key business areas of focus. 2026 will be a year of accelerated growth and expanded impact, and I look forward to sharing our progress with you in the remaining of the year. Thank you very much. And this finalizes the call. Operator: Thank you. This concludes today's Johnson & Johnson's fourth quarter 2025 earnings conference call. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Evolution Mining Limited December 2025 Quarter Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Lawrie Conway, Managing Director and Chief Executive Officer. Please go ahead. Lawrie Conway: Thank you, Harmony, and good morning, everyone. I trust you've had a good break and wish you a very healthy and successful 2026. I'm joined on the call today by Matt O'Neill, our Chief Operating Officer; Fran Summerhayes, our Chief Financial Officer; and Peter O'Connor, our GM, Investor Relations. Today, we released our December quarterly report, which will be a reference point for the call. Fran and I will be back in a few weeks when we release our FY '26 half year financial results. Before going into our quarterly results, I want to take a moment to reflect on the tragic event that happened here at Bondi on 14 December. 15 people were murdered due to racism. No violence is accepted even more so violence linked to racism. This heartless and cowardly act of terrorism, whilst many people and families were enjoying the Bondi environment, specifically the Jewish community celebrating Hanukkah. I know this has impacted our country, including our team members at Evolution. The attack is something that should have been avoided. The lack of action by the federal government over the past 2.5 years on racism is inexcusable. The refusal to call a Royal Commission until the overwhelming majority of Australian spoke of the need for it, and then to try and condense the time frame for political reasons is disappointing. It lacks leadership. On the contrary, the leadership of the New South Wales state government with quick and strong action and support was very welcome. My biggest concern is that we learned nothing from this and do not make Australia a safer and more inclusive country. Our condolences go out to the family and friends of those who were murdered. Our thoughts and prayers go out to everyone who was impacted by the attack, and we also thank all the first responders volunteered support during this incident. Turning back to Evolution. This was another quarter and the eighth consecutive quarter where we've safely delivered to plan. We produced 191,000 ounces of gold and 18,000 tonnes of copper at a very low all-in sustaining cost of $1,275 per ounce for continuing operations. We did it safely with our TRIF remaining low at 5.8. Gold production improved by 10%, while our all-in sustaining cost improved by 26%. Importantly, the cash generation has really gained momentum as we realize the benefits of the current metal price environment. Our underlying group cash flow improved 176% to $541 million or around $2,800 per ounce when normalizing for the FY '25 annual tax payment made during the quarter. Reported cash flow was up 110% to $412 million. The cash flow was achieved at a gold price around $800 below current spot. The group cash flow was on the back of record mine cash flows with operating cash flow up 57%, just over $1 billion, while net mine cash flow doubled to $727 million, with the operations increasing their cash flows in the range of 55% to 140%. The cash flow charts on Page 1 of the report very clearly shows our cash-generating capacity. We are on track to deliver almost $4 billion of operating cash flow. This is 40% higher than when we issued our guidance in August and is anticipated to be 25% higher than what we have delivered in the first half. Our cash balance improved to $967 million after we repaid $110 million and $116 million in net dividends. We have no debt due until FY '29. Our gearing is now at 6% compared to 11% at September and 30% just 2 years ago. We are well on track to being net cash this year, providing further balance sheet flexibility, including returns to shareholders. We remain on track to deliver original group production guidance of 710,000 to 780,000 ounces of gold, and 70,000 to 80,000 tonnes of copper. Group copper production is expected to be at the low end of guidance due to the weather event at Ernest Henry. At the end of the quarter, Ernest Henry received 300 millimeters of rain in a 24-hour period, resulting in water ingress to the underground mine and temporary suspension of the operation. All personnel were safely accounted for and no injuries reported. Recovery activities are progressing well with only short-term operational impacts expected. It is anticipated that the impact at Ernest Henry is about 7,000 to 8,000 ounces of gold, and 4,000 to 5,000 tonnes of copper for FY '26. Group all-in sustaining cost guidance is updated to $1,640 to $1,760 per ounce and is a 6% improvement on our original guidance, reflecting continued cost control, the impacts of higher by-product credits, partially offset by the Ernest Henry weather event. The updated group guidance further entrenches [Audio Gap]... Matt will go through the operational performance soon. However, I do want to call out a couple of key highlights. About 2.5 years ago, some analysts were calling Cowal's best days behind it. One even saying that the cash Cowal was over. Well, this quarter, it delivered $361 million of operating cash flow at $4,500 per ounce and $284 million of net cash, which equates to more than $3 million per day even after investing in the OPC project. This level of cash flow alone is better than a number of Australian multi-asset, mid-tier companies, and the operation has at least 16 more years ahead of it. Mungari delivered record net mine cash flow of $104 million, which is a 142% improvement for the quarter and represents nearly 50% of the plant expansion project capital. At Red Lake, the operation is settling into the desired rhythm of 30,000 to 40,000 ounces per quarter and positive net cash flow. That produced 33,000 ounces and doubled their net mine cash flow to $80 million. They have now delivered over $200 million of net cash flow in the past 18 months. On the projects front, Mungari successfully moved to commercial production and the establishment of the Castle Hill mining hub is now complete, following the full sealing of the haul road during the quarter. The Cowal OPC project made solid progress this quarter and remains on plan and budget. Studies for the next key growth projects being E22 at Northparkes and Ernest Henry are complete, and we'll go to our board for assessment during the March quarter. With that, I'll now hand over to Matt to take through the operational performance. Matthew O'Neill: Thanks, Lawrie. As noted, we have successfully completed another strong quarter of safely delivering to plan, and we remain on track to meet full year guidance, allowing us to continue to benefit from the rising metal price environment. I'm pleased our safety performance remains in a healthy position with the teams at each of the operations continuing to focus heavily on this area. We did see a small increase in our total recordable injury frequency rate this quarter, which was driven by an elevated number of injuries at our Cowal and Mungari operations during the month of October. Our safety focus remains on leading indicators, and we continue to perform strongly here. On the production front, as noted, we're on track to meet full year guidance. For me, the production highlight of the December quarter was the successful ramp-up of the Mungari operation where we achieved an annualized run rate through the mill for the quarter of 4.1 million tonnes. Throughout the quarter, the team ran the new mill through a range of operational parameters, and I'm happy to say that they're very pleased with how it has performed. Similarly to the September quarter, we had minor interruptions to mining activities in the open pit at Cowal due to wet weather. Again, it was pleasing to see that the work the team have done on resilience and reliability pay off as we experienced only minor variations in the plant due to these events. As noted, works continue to progress well on the OPC project with the project ahead of schedule and in line with budget. The Red Lake and Mt Rawdon operations continued to deliver in line with their plans with minimal variations throughout the December quarter. As noted earlier in the call by Lawrie, Ernest Henry experienced a significant rain event at the back end of the quarter on the 29th of December. The Cloncurry region had its average annual rainfall of 420 millimeters fall in just a 72-hour period, 300 millimeters of which fell in just 24 hours. During this event, all personnel were evacuated safely from the mine via the shaft and the multiple dewatering systems, both in the pit and underground operated as designed to reduce the impact of the rain. We diverted water away from key infrastructure areas and into the bottom of the mine, minimizing the impact on mine infrastructure. Whilst we are dewatering and remediating the mine, we've moved forward the scheduled February plant shutdown to align with these works. The processing plant shutdown is underway now and scheduled to be completed by the end of January. Current estimates are for full year production from Ernest Henry to be lower by between 7,000 and 8,000 ounces of gold and 4,000 to 5,000 tonnes of copper. At Northparkes, we achieved a significant milestone during the December quarter, with the completion of the E26 sublevel cave after 10 years of operation and the successful ramp-up of E48 sublevel cave taking its place. In summary, we remain on track to meet the group's full year guidance and take advantage of the strong market conditions we are currently enjoying. This brings the formal part of our update to an end, and I'll now hand back to Harmony for questions. Operator: [Operator Instructions]. Your first question comes from Levi Spry from UBS. Levi Spry: Happy New Year. I mean, I guess, just firstly, on the -- moving to a net cash position sometime this half. Can you just talk a little bit around how the Board might address that in February, what the competing sort of interests are in terms of CapEx and exploration, maybe what you can bring forward potentially? And specifically, I'm thinking about your projects, but also the OPC and how you're going to optimize that going forward, Northparkes? Lawrie Conway: Thanks, Levi. Happy New Year, and I'll get Fran to add a couple of comments. Our cash flow only just has increased since the day she joined. Look, we will move to a net cash position over the remainder of this year. And it is -- highlights that if you deliver a plan essentially in an unhedged environment and do that safely, you actually get the benefits. What the Board will consider our policy is percentage of cash flow, targeting 50%. We look at it on a full year outlook basis. And at the end of each financial year, we look at the policy. So we look at the policy at the end of the year. I don't expect it to change too much, but we've got certainly flexibility around the percentage that we pay. In terms of then internally, I think our discipline around capital allocation and projects will remain key. We have seen that OPC is advancing well, and I was out there last week and it's actually a lot higher than what it was 6 months ago and 3 months ago, which is good for the project and does open up some flexibility around that project and what we do. Exploration, I think Glen is going at full tilt, but he's looking at some opportunities there. And then obviously, the Board will consider E22 and during the quarter as well. So yes, well -- as I said, we'll look to make sure we continue to reward shareholders in this environment, discipline around our capital [ allocation ], be that in projects and exploration, but a good problem for Fran to have as to what to do. Fran, anything to add? Frances Summerhayes: No, you summarized it well. Levi Spry: Yes. Okay. And then just at Ernest Henry, maybe for Matt, look, a pretty significant event, maybe lost a little bit, otherwise very good quarter. What's the current status? So you expect the plant to turn back on at the end of the month, but interesting in terms of the mine and dewatering... Lawrie Conway: Yes. I'll get Matt to do that. I mean, yes, Levi, I think it didn't impact on the December quarter, as Matt said, it was right at the end, but it is what we're going through into this quarter. And Matt outlined a little bit on the call, but maybe just, Matt, color around the mine and the plant and the surface. Matthew O'Neill: Yes. So I'll start with the surface. Things went quite well for us on the surface with that volume of water. The plant is completely fine. And so what we chose to do is instead of having that shutdown in February is that we will do it ourselves and that we would bring it forward into January, so giving us a bit of time back in that month. In terms of the mine, the infrastructure, there's some minor flooding remediation works that we need to do in areas that were sort of pockets rather than anything else as the water sort of moved through the mine, some of the pockets filled up and so that's tail end of 2 conveyors that doesn't take much to get back and then some works around a hydraulic pack that was sort of sitting in a pit in the crusher. So there's nothing material from the infrastructure side. Currently, we're dewatering into the existing dewatering system quite significantly. So we're sort of up around sort of 35 megaliters a day. The current status is that that's progressing ahead of plan. And like I said, we'll turn the plant back on at the end of January and then work our way back through that, bringing the mine back on through that month as well. Lawrie Conway: And just a thing to point out, Levi, versus what we experienced in March '23 that the pumping stations and the main power substations were not impacted like they weren't really impacted at all this time. Matthew O'Neill: No, that's right. We kept those operational throughout. We had a period where we didn't put people into the mine because we didn't want to put anyone at risk. And so we had tripped out until we got someone back in there to fix it. But outside of that, all of the infrastructure worked exactly as planned. The size of the event was probably the issue. It's almost triple the size of anything we've seen before. The [ 100 million ] a day was about the maximum from the last couple of events. And we did see that in the lead up to this event, and then we saw the 300 millimeter, so that the systems all worked as planned. The scale of that event isn't something that we've seen in that region for quite some time. And you could see around some of the neighbors in the area as well. The past has had some pretty significant impacts that they've not seen. So that was the issue for us. But managed well, infrastructure good, and we'll get back up and running in the short term. Operator: Your next question comes from Hugo Nicolaci from Goldman Sachs. Hugo Nicolaci: Lawrie, Matt, Fran, congrats on a fairly strong quarter. I just wanted to -- first question in and around sort of more strategic one. Obviously, this gold cycle has been pretty strong, if not unprecedented, with prices where they are, obviously, producer discipline has been pretty key in terms of capturing that operational leverage and not chasing low-grade ounces for the sake of volumes has been pretty -- has delivered a pretty good cash result. But looking at it from here, so the gold prices arguably more than double where a lot of these mine plans were set. I mean, is there room to start recutting how you look at these things to optimize value from here if this is the gold price going forward? Lawrie Conway: Yes. Look, I'll let Matt have a bit of talk about the plans and the mines, the open pits and the underground. But essentially, we look at the current price environment and as we're mining in certain areas, if more material becomes economic, we're taking those, we're right into our life of mine and mineral resource, ore reserve review now. But we don't just let the short-term metal price drive the wrong behaviors. Matt? Matthew O'Neill: Yes. We are taking advantage of that in the short term. But the discipline that I'll keep pushing with all of the operations is that any of the lower grade is not to displace any of the original plan or high-grade materials. So where that starts to help us is that when we can increase the capacity either through the plant or the materials handling systems, we can do that because most of the operations do have that capacity if we were to drop cutoff grades, we see some reasonable increases in some of those operations. And probably 1 of the key ones that sort of stands out in this environment, both copper and gold, is Northparkes, and you'll see that that's where a lot of the work is occurring and a lot of the focus for trying to take advantage of that is sitting. So yes, we are doing it, but I don't want us to drop back to erode the margin significantly by chasing stuff that's economically viable in this market. Hugo Nicolaci: Got it. That's helpful. And then second one, just following on from Levi's question at Cowal on the OPC. I mean, obviously, ahead of schedule there. If you've got the team on site, how do you think about bringing forward the next stage [Technical Difficulty] or just maybe the recent rainfall we've seen maybe limit your ability to do that immediately? Lawrie Conway: Yes. Look, Hugo, I think what we're doing, the northern bond as we completed in the last quarter enables us to then start works around E46 and a lot of other surface infrastructure in the northern end, which is why it was scheduled first. The water in the lake is receding and receding at a good rate. And unfortunately, when I was at Cowal, they said they would have liked some of the weather that -- or the rain that Ernest Henry got because it is fairly dry out there and at Northparkes. So when we look at it, it's anticipated that the lake would be dry by the middle of this year. And you might recall when we approved the project, the south -- the south part of the lake move was scheduled for FY '28 and scheduled to be dry. So it does provide an opportunity for us to consider bringing that 1 forward because you wouldn't want to be waiting a couple of years and find out that you got a wet lake or a full lake again. So that's something that we're working through right now. And then I think in terms of the other surface infrastructure and works that Joe and the team are looking at, I think, they will build that into the plan. It will allow us to look at the IWL, whether we build that up in preparation for having 2 and 3 open pits in the next couple of years do that earlier. Certainly, 1 thing that we'll look at is just anything else that can be done now in the environment that they're experiencing. Hugo Nicolaci: And then maybe last one, if I could, maybe 1 for Fran. Just can you remind us how the copper quotational pricing periods were just looking at the realized pricing on some of the byproducts. It looks pretty favorable versus average prices in the quarter. If you could just remind us if there's any timing or any impact there we should be considering? Lawrie Conway: Yes. Hugo, it's not simple for you on your side to be able to, I guess, model them because at Ernest Henry, you've got a quotational period that gets nominated every month. At Northparkes, you've got a quotational period that gets nominated quarterly, and you've got 2 offtake partners in terms of Sumitomo, our joint venture partner and IXM as our offtake main partner. And so they have to nominate them. And if we look at it in the -- at the end of September, we had about 8 shipments outstanding that were still open to pricing about 21,000 tonnes of copper, split sort of 3 at Ernest Henry and 5 at Northparkes. They, at the end of September were priced around $15,000 a tonne. They then move to the December pricing, and that was around $18,500 a tonne. So that's what lifted our achieved copper price for the quarter by about $3,000 a tonne. At the end of December, we've got about 4 shipments outstanding around 10,000 tonnes that will get finalized in this quarter. And then it depends on what each of the offtake partners nominate in the next 3 months for their pricing. So that's why it's a little bit difficult. Where we stand today, it's averaged about 19,200 month to date. That's what some of those shipments are going to get repriced at -- if they finalize this month. As I said, it's not easy for you. But it's really dependent on what the offtake partners or what they nominate. Operator: Your next question comes from David Radclyffe from Global Mining Research. David Radclyffe: So just a bit of a follow-up to Hugo's question. Because obviously, when you look at the quarter, it was really only Mungari that was setting a new record, and that obviously reflects the expanded capacity. But there is some late mill capacity across the group. So just trying to understand if there are any near-term opportunities you're considering to push throughput and take advantage of this environment. And if not, what is the constraint there? Is it the fact that you're not prepared to budge on the current capital budget. Just trying to understand there how you could actually push the mills a bit harder. Lawrie Conway: Thanks, Dave. I'll let Matt just give a run-through on each of them. I mean -- but I will start off by saying it is not about the capital constraint. It is about making sure that if we commit the capital, we're going to get the returns. I think when we look at it and if you see the announcement today, the land around Ernest Henry, that we've now picked up that plus the previous project that we announced a while ago, that gives us a continuous footprint all the way around the plant. That's all within trucking distance. And so we've got 1 program has already started. This 1 will be the next one. So that's giving us an opportunity because it's constrained by the mine and you obviously got berth. But we will look at all of those opportunities where we can. Matt, 9 months? Matthew O'Neill: Yes. I think Ernest Henry is the main 1 for us. We do additional milling capacity available today compared to what we bring through the mining system. So we are open to that, whether it's our own material through exploration or whether it's a toll agreement with people in the region. That's something that we're actively pursuing. Then outside of that, if I look at Northparkes and Cowal as the next 2, they are mill constrained. So we spent some money at Cowal on the mill setting it up for the next 20 years in the last financial year. And -- we also spent a bit of money there on improving the recovery. So we are working on opportunities account to increase throughput through the mill, but it's something I'm certainly not wanting to rush through there. So those do essentially mill constrained with improvements and incremental improvements possible, and we can feed them from our own sources. Mungari is a similar story. So Mungari, obviously, now ramped up. What we were wanting to do there, our strategy there is to run the Castle Hill complex, which is running very well at our baseload feed and then supplement that with our underground feed, which is where the grade from -- grade comes from and gives us the ounces. The opportunity there is to be able to postpone or defer any of the lower-grade material from Castle Hill by putting in higher-grade product through the mill. And obviously, we run the finances on that depending on what we do. So the exploration team, that's 1 of our key spend areas and where we do see an upside if we can get additional underground feed. We want it to come from our own material. That's where we make our best margin. That said, we do have opportunities where we will and can and have toll treated other people's product at a higher grade if the finances make sense for us from deferring that material. So those are your areas. Outside of that Red Lake does have mill capacity. There's not a huge opportunity there for either increasing our own material, which is still the bottleneck from the mining operations. But third parties, there's not a huge amount around there, but those are things that John and the team are looking at when they come up. I think that's the run through of most of the operations. David Radclyffe: Right. Maybe if I could just come back on Mungari there because I think on the site visit you were still ramping it up and hadn't really tested it and it looks from the commentary that you may have sort of pushed it a little bit here with third parties. So are you confident -- you're obviously confident you can get to capacity. Did the engineers sort of leave anything there in terms of conservatism? Do you think you could run Mungari a bit higher than nameplate? Matthew O'Neill: No, that's something we're investigating. At the moment, it did ramp up exactly as we wanted to. We had periods where we were above nameplate, but that was more related to the material [Technical Difficulty] or a little bit softer. So like most mills, depending on what we're putting through, it will give us a rate. But that's what I'd like us to do. At the moment, we're certainly not promising that, but that's what we're working on. Lawrie Conway: And I think if you look at it for the quarter, it annualized at a whole point [Technical Difficulty] special production. Operator: Your next question comes from Daniel Morgan from Barrenjoey. Daniel Morgan: Lawrie, just going back to the Cowal southern bund decision. Can you just maybe expand what drives the decision to execute a bit faster on the Southern bund? Is it it's easier, costly, more productive and sort of costs? Or is it revenue items are you're going to have potentially access to more or more material, better grades and can grade sequence like what goes to the decision to execute earlier if you do so? Lawrie Conway: Yes. Dan, look, I think the primary 1 becomes where the lake is sitting at with the level of -- that it's receded as you'd recall, we've always planned to do it dry, it's more cost effective. So that's -- that is the primary decision point because it's not about what can we afford the capital as long as we're staying within the $430 million, we'll be fine. Then in terms of -- the second part of it is, what does it give the site in terms of flexibility. So having put all of that infrastructure around the southern area, it gets the ability to look at E41 and when we time that. But that's coming into FY '27 and beyond. And I think that's why the secondary piece is that flexibility it provides to Matt and the Cowal team is that for a period, we'll be on low-grade stockpile material. You're going through the cutback of Stage I, so if you can open up E46 and E41, it just derisks that operation a lot more. Daniel Morgan: Right. Another question. Just there is a footnote on Page 2 regarding Northparkes, where there's been some sort of a positive adjustment relating to stream deliveries, the number there is $18 million, that was an outflow. It just seems a bit lower than what I thought. Is there any -- can you just clear up what's going on there? Lawrie Conway: Yes. So during the period, there was a reconciliation of the finalized pricing and payments for the stream with Triple Flag and as the final pricing and everything that came through on that back for a number of periods resulted in a credit back to us. So that's why the $18 million, I think last quarter was about $32 million. So there was a benefit relating to the final pricing. That is one... Daniel Morgan: That's a one-off? Or is it something that there's an annual true-up or something that we might see again in a year's time or that could be adverse or better or... Lawrie Conway: More of a one-off, Dan, is going through with Triple Flag about the whole mechanics of it, and we're obviously learning it in the first year. We've then done all the reconciliations with them, and that it's more of a one-off. Daniel Morgan: Okay. Very clear. Just shifting over to Red Lake. It looks in -- you've made a breakthrough at Cochenour, where if I read that correctly, does that mean that you are no longer going to be using ore passes and that you're going to truck down, ore down to the high-speed tram. And is there benefits in terms of grade and reconciliation that could come? Matthew O'Neill: Yes, Dan, it's Matt. Look, we will still be using ore passes, but what it does do is derisk those. We've got some duplication and contingency in that system given the issues we had earlier on. So we will still use all passes through that. The biggest benefit for us there will be ventilation as well. And also the mobility of some of our equipment. So it's more of an operational flexibility and reliability thing that it will give us. It doesn't necessarily impact grade and other bits and pieces at this stage. It does open up some other areas. And allow us to do things a little quicker, but that's really around operational flexibility that the benefit comes. Daniel Morgan: And just last question is mainly cost, I mean, obviously, there was a provisional pricing stuff that came through, but signs of cost control are evident as well. Just on Mungari specifically. There's obviously a bit going on with various third-party ore purchases. You had commercial declared partly through October. And so the AISC number is not necessarily completely clean as a go-forward guide. Just wondering if -- what's the latest view on what Mungari costs roughly are going to be on a clean basis? Lawrie Conway: Yes. Dan, I think when Matt talked about testing of the plant and everything the team took the opportunity around that ore purchase to get that type of material through the plant earlier. So those costs and ounces are excluded. So when you look at what we've reported for Mungari for the quarter, that AISC and the costs are really about just our ore. So it gives you a good reflection of -- so about $2,000 an ounce, you take it that most of October, there were commissioning costs. So you're going to be in the early low 2,000s -- going forward, when it hits the 50,000-ounce quarterly run rate is what you should expect to see. So we're at $1,980, I think, was a quarterly cost for Mungari. As I said, some commissioning in there, but it is only on our ounces and our costs. Operator: Your next question comes from Matthew Frydman from MST Financial. Matthew Frydman: Lawrie and team. Happy New Year. I guess my question is a continuation of some of the earlier discussion. I'm very interested in the outcome of the 2 studies that are currently undergoing board review, and I'm sure you'll present that [ in time ]. And I guess I hate to sound a bit like all of a twist, but wondering what's next to be considered in terms of any sort of formalized growth studies out of those options that Matt discussed conceptually the key growth projects that you're moving into that pipeline over time? And I guess the secondary question to that is just looking at your reserve on Marsden, obviously, a big low-grade reserve there in your numbers. I think it was last cut at $1,350 an ounce gold price. So we're only about $5,000 an ounce higher than that at the moment. So I guess at what point does that become a viable growth project? Or does that reserve need to be, I guess, reconsidered at all? Lawrie Conway: Matt, Happy New Year. I definitely hope that our now nonexec chair is listening because he would love to hear about [ Marsden ]. I'll start on that, well, look, I mean, for us, on Marsden, anything that we do there would have to be better than what we've got at Northparkes and Cowal. And so that's really what it's got to compete against at the moment. So it sort of sits there in the background. It certainly doesn't get the priority from Nancy and the team, but it does get looked at. It's good to see that you talked about Bert and E22 and you've moved straight on and gone, okay, what's next. I think for us, Bert is really important to Ernest Henry because of the capacity we've got in the plant. So that will be something that the Board will consider the studies are finished, and we'll take that to them this quarter. E22 really is what can unlock what we have at Northparkes in terms of increasing both mining and processing capacity. We've got such a large resource there. We've got to look at how can we expand that over time because it's not going to reduce the NPV of the asset. So that's something, I think, when we take that through to the Board this quarter, it's like, okay, what does E22 give us as a -- we looked at a block cave, the sublevel hybrids the -- sort of the best outcome is the block cave, and we've talked about that previously. Now we've got to work out where does that fit into unlocking the rest of the operation around expanded capacity. I think when you look at -- the other thing is what's next. At Cowal, we've got the OPC going. We've got E46, E41, E42 operating. We get the undergrounded capacity. And what Matt's talked about is, okay, with all of those ore sources and the work we've done on the plant, are there ways to increase the processing and production rates at Cowal. And then I think when you look at Mungari, Matt also talked about it earlier. We've got the base feed at Castle Hill, the underground is really which is getting most of the exploration dollars is what gives us an opportunity of can we get more than 20% of our material going through that plant. And can we get the plant running at greater than nameplate. Matthew Frydman: Okay. And then maybe, I guess, the follow-up to that then is then how we think about capital allocation for the business going forward. As you just described, you're pretty advanced in terms of your capital spend across the majority of the portfolio. You've got a couple of formalized, I guess, growth projects still on the pipeline in terms of Bert and E22. But overall, clearly, the business is generating a lot of cash. How should we think about any kind of revision or revisiting of the capital allocation policy, I guess, in the absence of any other sort of big scale growth investments like Marsden like we just spoke about. And how does that look in the current gold and copper price environment in terms of how attractive that capital is to spend externally to the business? Lawrie Conway: Yes. Look, Matt, it's a good situation to be in. I mean, 2 years ago, we were getting asked that how can we afford these projects and now we're getting asked how can we [Technical Difficulty] -- that discipline. I think we've outlined our capital sort of spend for the projects that are already in the pipeline. As being that $750 million to $950 million, what now with what we're seeing, the progress at Cowal and the outcomes of the studies and where the metal prices is what can we incrementally invest in, either bring projects forward, accelerate them or new projects to bring forward production growth. As long as if you look at the portfolio at the moment, the asset's average annual rate of return is sitting around that 16%. If we can generate those sorts of returns, then we would increase our capital allocation. If we were to increase that allocation by $100 million, $200 million a year, and we can generate those returns given the cash that we're generating today and where the balance sheet sits, I think that would be the best use of a part of the extra cash flow we're getting. We obviously are still remaining committed to increasing returns to shareholders through dividends, and they'll share in the increased cash flows automatically by our current policy. But if there's ways to [Technical Difficulty] -- through the second half of the year as well. Matthew Frydman: Got it. That's a sensible way to think about it, obviously. And obviously, the balance sheet has changed very quickly. So a nice position to be in. Thanks. Lawrie Conway: Thanks, Matt. Operator: Your next question comes from Adam Baker from Macquarie. Adam Baker: Just back to Mungari. I noticed the 127,000 tonnes to 9,000 ounces gold is third-party ore process in the region. Just curious if you could touch further on that. Is this a normalized rate we could expect moving forward? I know you're looking at further opportunities. And just to give us a bit of flavor, are there any companies out there knocking at your door to process the material in the region? I know, it's about 10% to 15% of your planned throughput capacity at the moment. Lawrie Conway: Yes. Look, Adam, I'd say, firstly, yes, there's people out there that would like for a brand new mill that's got capacity for them to put some ore through. I think as Matt outlined on the call, we used the opportunity to purchase that ore to really test the plant through the commissioning rather than waiting until we get our ore, both the main ore out of Castle Hill and the underground through given we've got a large campaign this second half on the underground. So that was -- I would sort of almost say that's one-off. But if we've got capacity, we will take it because we believe with our mine plan we've got 4.2 million tonnes of our ore that will go through the plant. If there is spare capacity, we would look at it. But right now that is only really around the commissioning part of the plant that we did that purchase. If we do, it's going to displace. I mean, this 1 did -- yes, it made a profit, didn't make a lot of money for us, but it allowed us to learn a lot about the plant. Adam Baker: Yes. And the reduction in cost guidance, I mean, that makes a lot of sense due to the stronger byproducts. Just trying to understand the 6% improvement at the midpoint, how much of that would roughly be driven by the stronger byproducts versus it's a better-than-expected cost control from Mungari, et cetera? Lawrie Conway: Look, Adam, it's a combination of both what the split -- it depends on how we go through the second half. But like we're achieving $2,000, $3,000 a tonne halfway through the year above what we had sort of guided at. Current price at [ $19 ] is sitting about $4,500 a tonne above. So the byproduct credits are pretty important in that regard. But if you look at our gross operating and our net operating cost spend against our budget, it's pretty well in line, a little bit lower in some areas. And then when you look at our sustaining capital, we're actually tracking well against our guidance a little bit. I'd say, a little bit of an opportunity for some of the sites to ask Matt for a little bit more money given the cash they're generating, but I do think the discipline around all of the capital has been very good across the business. Operator: Your next question comes from Mitch Ryan from Jefferies. Mitch Ryan: I just wanted to sort of pick at 1 of your answers to Matt Frydman's question with regards to accelerating Northparkes. You sort of said you're obviously looking at E22 and accelerating that, but then also that expanding capacity. I just wanted to understand, is your thinking materially impacted by the Triple Flag agreement? And is there anything you're able to do around that with expanding Northparkes? Lawrie Conway: Yes. Look, Mitch, I mean, yes, when you look at Northparkes, you've got a stream over it that we only get 40% of the gold and pay 100% of the cost. So it has an impact on what we can do in unlocking Northparkes. What I'd like is that we've engaged actively with them since we -- since we've owned the asset, they know they have a role to play, and we continue to work through what role they have in the site going forward in unlocking the value. I think because when we look at it, we've got -- it's permitted to 8.6. It's running. It can get to 7.5. We've got 600 million tonnes in resource. If you keep running at those rates, this mine is running for 75 years. So increasing processing capacity and mining capacity is the right thing to do at some point. But we've got to make sure that it's going to give us a good return, both on a pre- and post-stream basis. Mitch Ryan: Okay. And then my second question relates to Ernest Henry. Just noting that you've obviously been able to pull forward some of those works. But were there any works that will be unable to be rescheduled into the shut that was bought forward? And if so, will they be deferred or completed later in the half. Lawrie Conway: The short answer probably is no. So nothing material. There were some minor tasks in the underground that we couldn't complete just based on access. So they will be completed, but they won't drive a processing plant shutdown or a material underground shutdown in the quarter. So I'd say 95% of the tasks we've been able to pull forward or defer depending on which one it is. Operator: Your next question comes from David Coates from Bell Potter Securities. David Coates: Thanks for your time this morning and congratulations on a great quarter. Matt, it's a bit of a high-level question. There's been a lot of discussion and questions this morning about where you guys can value add. Is it dropping cutoff grades? Is it expanding plants? Is it maybe regional acquisitions. Just wondering -- and we're in this -- what's fairly unprecedented gold price environment, not just the price but still the rate that it's risen. Are there any -- out of all the sort of growth of value-adding options that you guys presumably are considering and have been discussed, what are the ones that are sort of floating to the top as the best bang for your [ buck in ] in this sort of environment as well at the moment across the portfolio? Lawrie Conway: Yes. Look, I'll get Matt to talk about what he sees as the opportunities at each of the assets. I mean, for us, if we can get more ounces or tonnes, copper tonnes out of any of our operations that basically improves our margin, that's really where we're going to focus. I mean I think we've always got to be conscious of is that in this current pricing environment, if you do approve a project and Cowal OPC as an example, and Mungari was an example, your time to bring those to production is 2, 3 years' time. So you've got to have the real confidence in terms where the metal price will be in that time versus those short-term ones around improved marginal increases in processing capacity or recoveries or those things. They're the ones that you can certainly bring on straight away. But the others, you're going to be looking 2 to 3 years at confidence that when you do bring them on, they're going to be in a good environment. And Mungari is an example, in '23, gold price was about 40% of what it was is today. And they're coming on at the right time. I've been involved in projects that gone the other way. Matt, you want to talk about some of the things that we're looking at. Matthew O'Neill: Yes. And aside from the ones that have already been spoken about of sort of [ E22 ], if I just run through the operations quickly. The area that excites me most, if I pick Cowal is -- and I'm stealing Glen's thunder, but is the exploration and the resource potential that's there. So investing the money in the drilling, investing the money in the mining, [Technical Difficulty] those 2 things, there's an opportunity to extend, which is not as exciting as growing, but there's also a pretty good opportunity there depending on where we see the long-term metal prices level out at, that you would grow Cowal again, that's pretty -- that's very exciting in terms of the results we're getting back through that, and Glen will give an update next time we talk through that. And then the other 1 there is also Mungari. In a similar vein, the margin and the value comes from the underground. So that the mill capacity is good, but if we can invest in our drilling and increase that percentage of underground through, that's where we get our growth in ounces without a material one. So they're our best bang for buck. And then the, like I said, Ernest Henry exploration, you do have that capacity there. But the cave and whatever else is reasonably sort of restricted there. So additional ore sources around the region that we would see growth from with that one as well. Operator: [Operator Instructions] Your next question comes from Zane Guo from JPMorgan. Zane Guo: Just the 1 for me today on capital management. How do you think about the dividend versus a buyback into the half? Lawrie Conway: Yes, Zane. We've talked about this previously. I mean, we -- buybacks are a part of a capital management plan that we look at -- I mean, for us, they need to be sizable. If you're looking at 10% of the value of the organization as a benchmark, that's a large commitment over. And I go back to the point of like if we've got projects that we can invest in that get a greater return for our shareholders, that will be the first priority. The second part is that the flexibility around our dividend policy, where in this rising price environment, our shareholders will receive a greater portion of cash flow than what they have in the past. And I think that really gives the best value for our shareholders. So I don't expect that buybacks would be on the table for consideration by the Board this half year. Operator: Thank you. There are no further questions at this time. I'll now hand back to Mr. Conway for closing remarks. Lawrie Conway: Thanks, Harmony, and thanks, everyone, for taking the time on the call today. We've got another safe and successful quarter. The cash flow is building the projects that we're running to are on plan and on budget, and we really look forward to updating you in a few weeks' time where Fran can tell you what we are doing with the cash as we release our half year results. Thank you. Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Hello, and welcome to the Australia (sic) [ Australian ] Foundation Investment Company Half Year Financial Results Briefing. [Operator Instructions] I'd now like to hand the presentation over to Mr. Mark Freeman, Managing Director of AFIC. Thank you. Please go ahead. Robert Freeman: Okay. So good afternoon, everyone, and I'm Mark Freeman, the CEO and Managing Director of the Australian Foundation Investment Company. So welcome to this half year result briefing. I'd like to begin by acknowledging the traditional owners and custodians from all the lands we are gathered on today and pay my respects to their elders past, present and emerging. I have joining me today on the webinar, Brett McNeill, who is the Portfolio Manager for AFIC. Just as a bit of background, Brett has recently taken over the responsibility for the AFIC portfolio. So Brett's actually been with us for over 6 years now, having successfully managed the Djerriwarrh portfolio, which is one of the LICs we manage within the group. We believe Brett's appointment will strengthen the application of our investment processes against AFIC's long-standing investment frameworks. We also have with us in the room Winston Chong, who is the Assistant Portfolio Manager; Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; Geoff Driver, our General Manager for Business Development; and Suzanne Harding, who is also involved with business development. This briefing is based on the material available on the company's website. The presentation slides will change automatically via the webcast. Finally, please note, following the presentation, there will be time for questions and answers. You can ask a question via the webcast using the tab at the bottom of the screen. So just moving to the presentations now, just starting with Chart 2, which is the disclaimer, which just says we're here to talk about what the company is doing. We're not giving any advice as such. So I'll just quickly hand over to Brett and Winston to run through that shortly. But just as an introduction, I'd just like to say that we are -- the Board, myself and the team, we are clearly disappointed with the results for last year. There's obviously been a lot going on in markets, some very strong sector moves and some very weak ones, and Brett will go into all the reasons for that. There's always -- we're always looking to improve and develop on our execution against our processes. I can say though that when I look through the portfolio, we are still holding good companies. Clearly, there are some elements in the market that we have missed. But I don't see that we're holding poor businesses in poor sectors. We do feel like we are holding good companies. There's been price reactions over the last year. But ultimately, I always look through and say, are we holding good companies with strong balance sheets that have the ability to grow their profits over the long term, and I still believe that, that is the case with the portfolio. But with that introduction, I'll pass over to Brett. Brett McNeill: Thanks, Mark. Good afternoon, everyone. It's great to be here presenting AFIC's first half financial results today. So the agenda for today's presentation was listed on Slide 3. I'll begin with an overview of the key features of AFIC, along with restating our investment objectives. Our CFO, Andrew Porter, will then go through the financial result highlights. Winston and myself will give an update on the broader share market as well as our portfolio, and then I'll give some outlook comments before we open up for questions. So if we turn to Slide 5, this was some of the key features of the Australian Foundation Investment Company. So AFIC predominantly invests in Australian and New Zealand companies. It's the largest listed investment company on the ASX. It's got 150,000 shareholders and a structure that has an independent Board of Directors. Importantly, shareholders own the management rights to the company. This provides for low-cost operations, which you'll see in the low management expense ratio, and there's no additional fees such as performance fees or the like. We're a long-term investor. We tend to run low portfolio turnover, which we think helps provide tax effective returns and we have a long history of having delivered stable to growing fully franked dividends to shareholders. And AFIC is managed by a team that also manages three other listed investment companies being Djerriwarrh, Mirrabooka and AMCIL, and we think this gives us good benefits of scale. One, it helps keep costs low, but two, it also allows for the generation and sharing of investment ideas across the group. So given that background and approach, AFIC has two key investment objectives and these we state on Slide 6. So firstly, we aim to pay stable to growing dividends over time. And secondly, we aim to provide attractive total returns over the medium to long term. So on the next few slides, I'll go over how we've done against these objectives in recent times. So if we look firstly at how we've performed against the first of our objectives, which is to pay stable to growing dividends over time, and this chart here on Slide 7 shows AFIC's ordinary dividends, these are the blue bars, along with special dividends being the purple bars, each on a full year basis back to 2019, and we also show AFIC's earnings per share on the yellow line. So the key points to make we think from this track record is that we can clearly see the delivery of stable to growing dividends with the ordinary dividend having increased from $0.24 in 2019 to $0.265 in 2025. Importantly, we're able to maintain the dividend at $0.24 across the years 2020 and 2021. And this was despite dividend cuts across the broader share market resulting from the COVID pandemic, and you can see the result of that having flowed through to our earnings per share results in both of those years. So pleasingly, the stable to growing dividend has also been accompanied by special dividends from time to time, these having been paid in full year 2019 and full year 2025. And for the current financial year, 2026, we have declared a $0.025 special dividend on top of the $0.12 ordinary dividend for this first half '26 result and we've also announced another $0.025 special dividend, which is expected to be paid with the final year dividend later this year. On Slide 8, we address our second objective, which is to deliver attractive total returns over the medium to long term. So the chart here shows a 30-year track record, and I think it illustrates the power of really an investment style that takes a long-term approach, focuses on owning high-quality companies, benefiting from compounding returns and keeping costs low. So $10,000 invested in AFIC's portfolio 30 years ago in 1995 had grown to $155,000 by 2025, and this compares to a value of $136,000 from an equivalent investment in the broader share market. So the long-term returns have been very strong, but the short-term performance is not what we wanted to be with AFIC's total return and NTA performance being very disappointing over the last 6 and 12 months. So I'll go through the reasons for this in the market and portfolio update section of today's presentation. But at this point, I'll pass to our CFO, Andrew Porter, and he's going to give a rundown of our financial results as well as an update on our share price versus the NTA. Andrew J. Porter: Thank you, Brett, and good afternoon, ladies and gentlemen. So for many of you, these four boxes will be a familiar format. The profit for the half year at $147 million was down 4.6% from last year. That's equivalent to $0.117 per share. But it's important to note, as Brett stated, that we've maintained the interim dividend at $0.12, so above the earnings per share, and also paid a special dividend of $0.025. That is, of course, one of the benefits of an LIC is that ability to pay a consistent dividend over time. As Brett said, we maintained the dividend during COVID, we maintained the dividend during the GFC, as I'm sure many of you are aware. So of that fall in the profit, the income was down $4 million on last year, and that was mainly to the -- down to some of the larger companies reducing their dividends from the prior year over 6 months. For instance, BHP, we received $23 million worth of dividend in the previous 6-month period and $19 million in this 6-month period. Woodside and Woolies were some of the other ones where we've had a reduction in dividend. There was also a change in the tax charge. For those of you who are studying the financial statement in some detail, you'll notice the tax charge looks a bit high. This has been caused by two things. There's a mix. We had lower proportion of franked dividends to unfranked income and the larger the franked dividend component of your income is, the less tax you pay. So that's had an impact. There's also some timing difference on deferred tax which will sort itself out by the end of the year. We mentioned the interim dividend of $0.12 and $0.025 in special, so $0.145 in total. As I said, the Board has had a policy and will have a policy of where possible if the ordinary dividend is going to be increased, we'll look to have a bias towards doing that at the interim so that we can increase or rather, I should say, decrease the disparity between the interim and the final dividend. But at the moment, that's flat at $0.12, but with that addition of $0.025 special as per the announcement on the 25th of November, when as Brett has said, there'll also be $0.025 at the final. Management expense ratio, that is a measure of the cost of running the company, 0.11%, that's $0.11 for every $100 invested. So the actual costs were down due to the nonvesting of incentives and some one-off costs we received in the prior period or had to pay in the prior period, I should say. That 0.11% is artificially low because of the timing of that nonvesting of incentives, but it's not out of the ballpark for what we've seen in the past. We had -- it was 0.10% in 2020, for instance, 0.13% in 2022. But the big driver of that tends to be the size of the portfolio. The portfolio itself, as I said, $9.9 billion. So that's down from $10.4 billion at the 31st December 2024, and Brett and Winston will go through some of the components of that later. Moving on to the next slide, which is something that shareholders who look at the NTA announcements each month will be familiar with. It's the share price relative to the NTA, it's at a premium, so above the 0% line, you're effectively paying more -- you're paying more than the fair price of the shares that we own that is set by the market. So you're buying $100 worth of share at $110 for instance, if it's a 10% premium. And conversely, if it's a discount we're able to buy the shares, let's say, $100 worth of shares for $90 at a 10% discount. The discount was about 9% at the end of December 2025. And it does appear, as you'll see from here, that there has been a long period of discount and what the company has been doing, we have been doing buybacks, we introduced recently a share buyback program. And as per the announcement, we will look to continue that in the next 6 months if the market conditions allow. And there's also you may see that there's been an increase in the marketing that we have Suzanne, as Mark has said, has joined us and is spending a lot of time talking to planners, et cetera, about the benefits of investing in LICs. But if we go on to the next slide, it was once attributed to Mark Twain that history doesn't repeat itself, but it often rhymes. And you can see here that actually we have been in periods of discount before. You can see here on this particular slide going back through the Black Monday, just before the GFC, the tech bubble, et cetera. So what we are going through now may will have different causes and different effects, but it is in itself not unusual, I mean, we have seen this in the past. And you can see here a much longer period back to '89 where the premium discount can bounce around the place. So with that, I will hand over to Brett, but obviously, we'll be around for any questions following the presentation. Brett McNeill: Great. Thanks, Andrew. So turning now to our update on markets and the portfolio. So the left-hand side of Slide 14 shows AFIC's NTA performance, which is after cost and realized tax. This is our total returns shown in the blue bars, and we compare this to the performance of the broader share market being the ASX 200 Accumulation Index in the purple bars. So starting with the shorter-term performance. As we can see, AFIC's performance for the 6 months to December 2025 of minus 2% and over 1 year of 1.2% are both well below the returns of the market over both of these time periods. And the short-term underperformance has now dragged down our 3-, 5- and 10-year returns as well. So before I go into the reasons for this, just cover off on the right-hand side of Slide 14 to give some more detail on what have been the drivers of the market's 6-month returns on a basis before franking credits broken up by sectors. So if we work down the chart, we can see clearly, it's been the material sector that has contributed most of the market's gains over the last 6 months. So we've had the large-cap miners such as BHP and Rio Tinto having produced very strong share price performance. But most of the materials sector returns have actually come from the small and mid-cap resource companies, especially the gold stocks. And at the other end of the scale, it's interesting that traditional growth sectors, such as information technology and health care, have both had a very poor 6 months of share price performance. So I want to give some more detail, though, now on why AFIC's total return, so our NTA performance has been well behind the benchmark over the last year, and we list the key reasons for this on Slide 15. And we've really grouped it into three key buckets. So the first group of stocks behind this underperformance are some large cap companies that performed poorly over 2025. Starting with CSL, which delivered a total return of minus 37% for the calendar year. So it's the former market darling that suffered a huge derate in recent years. It's been a very frustrating investment for us over this time. And whilst there's still short-term pressures on the business, we think the long-term growth potential remains and hence, we intend to maintain our large investment in this company. James Hardie was down 38% for the year, and this was really following an acquisition that was not well received by the market. We still own the stock today, but we have reduced our position given our view on the company's balance sheet, in particular, as well as a lot of management and Board turnover that's happened in recent times. CAR Group was down 13%, but this was despite what we saw as continued good results as well as a very smooth leadership transition, and it's our belief that the stock looks good long-term value at this point. The second group of companies contributing to the underperformance over the last year we've grouped as some small companies that also performed very poorly during the year. In the case of both Reece and ARB, they have been strong compounders over the long term, but they have suffered from some issues in 2025 that we think are mostly short-term related. Our view is that both remain very high-quality companies, and they both have good long-term growth potential. In the case of IDP, it's been a very disappointing investment for us. We bought the stock too early, but we do intend to hold for now as long as we retain confidence in management and the balance sheet. The third group of companies covers one of the biggest stories in markets in recent times, which has been the rise in the gold price. The major gold stocks have had an unbelievable run with Evolution up 170%, Northern Star up 78% and Newmont up 156%. It's been the case that AFIC historically hasn't been a large investor in gold stocks but this has clearly been a mistake in recent times, and it's cost us over the last 12 months in terms of performance versus the benchmark. At this point, we find it hard to see value in such a hot sector but we will keep more of an open mind towards this sector in the future. So for now, I'll pass to Winston, who's going to talk about recent portfolio changes and provide a summary of the key aspects of the portfolio at year's end. Winston Chong: Thank you, Brett. The 6 months to 31st of December has seen transaction activity levels in line with our long-run averages. Our buying during the period has been concentrated in both Woolworths and Telstra, which presented opportunities to increase our existing weightings in high-quality blue-chip businesses at attractive valuations. You'll see there that we also increased our position in Sigma Healthcare, which is the owner of the Chemist Warehouse business. Chemist Warehouse is the market leader in health and beauty retail in Australia, a category that is experiencing strong secular growth. The company continues to take market share and roll out stores in both Australia and New Zealand with an emerging footprint further abroad as well. The shares have underperformed in the last year despite meaningful progress on growth plans, and we've taken the opportunity to build a more meaningful position given the long growth runway ahead. We also continue to add to CSL, which, as Brett mentioned, has been a disappointing investment for some time, and is currently experiencing some short-term competitive pressures. Despite this, we continue to see a good long-term investment case at current valuations. Weakening sentiments towards artificial intelligence-related stocks presented an opportunity to add some Macquarie Technology at what we believe were levels that represent a compelling value particularly when we consider the build-out of its data center project and the longer-term outlook for the business. You'll see on the bottom left of this slide that we've added three small cap stocks to the portfolio during the period. This reflects a more refined approach to the management of AFIC's small cap positions to take a more diversified portfolio approach, leveraging the expertise and experience of the Mirrabooka portfolio management team. The result of this is that we've added positions in Life360, Objective Corp and Temple & Webster. Collectively, these three additions currently represent about 0.3% of the portfolio. To fund the buying, on the right-hand side, you'll see that we've trimmed stocks in -- we've trimmed positions in stocks where the valuations were getting stretched, namely Wesfarmers, Netwealth and the banks. We've also moved to reduce our position in James Hardie to reflect the increased balance sheet risk and governance risk following the AZEK acquisition. We also exited our position in WiseTech during the period after buying some earlier in the year. We've taken a more circumspect approach to the governance risk associated with the investment. Over the next few slides, we'll provide some context to some of the transactions just mentioned to highlight our approach to buying when we see value and selling when we see valuations reaching extremes. Firstly, on Woolworths, many of you will recall that last year, Woolworths went through some operational and reputational issues. We saw its share price and market cap decline as the green line on this chart illustrates. Despite these issues and a required turnaround, we believe that Woolworths has a strong brand and significant latency in its store network. At around $27 to $28, Woolworths' market cap was about the same as that of Coles despite Woolworths having nearly 30% more stores. And so we took the opportunity to meaningfully increase our positions at around those levels. Secondly, on Telstra. Our buying in Telstra has been premised on the track record of dividend growth that the company has been establishing over the past few years following a rebasing as shown in the blue bars here. Telstra's cash flows and dividends are backed by a strong mobile business built on Australia's leading network, steady earnings from its infrastructure business and solid cost control by a capable management team. We expect this to continue, and the significant amount of cash being generated means the grossed-up dividend yield plus growth on offer looks attractive relative to other large cap industrial companies. As a result, we've been buying around the current share price. Our trimming in Wesfarmers has really been informed by valuation. We continue to view it as a high-quality business being the owner of Bunnings, Kmart and Officeworks, and we rate the management team highly. While we continue to hold a position, we materially reduced it over the last 6 months at an average price of around $92. At that price, the dividend yield was below 3%, which, as this chart illustrates, is well below its long-run average yield of 3.6% as well as the yield of the broader market. Similarly, our trimming in Netwealth was based on where valuation got to. At around $34 where we were selling, the price-to-earnings ratio was above 60x. Our view on the business hasn't changed in that it's a quality founder-led business with a long runway of growth as investment flows shift on to its platform. However, we view the valuation at those levels as extreme. And as you can see on the chart here, the PE has since returned to a more appropriate level for the growth on offer. To provide a sort of portfolio summary, you as shareholders hold a portfolio of nearly $10 billion in 59 stocks with a net tangible asset value of $7.90 per share. You'll see on this slide that our top -- in our top 25 holdings, we have exposure to some resources companies such as BHP, Rio and Woodside. These are all companies with solid management teams and world-class low-cost producing assets. We still have a meaningful position in the banks for income as well as stocks like Transurban and Telstra, which we've spoken about supporting our dividend yield. And also in the top 25, we have some high-quality industrials with the likes of Goodman, ResMed, CAR Group and Fisher & Paykel Healthcare that we expect to underpin good capital growth over the long term. In summary, we believe the portfolio is a diversified mix of high-quality companies structured to deliver on our income and capital growth objectives. And with that, I'll pass back to Brett for an update on our international portfolio and some outlook comments. Brett McNeill: Thanks, Winston. So on Slide 22, we give an update on our international equities portfolio and strategy. So the first point to make is that the portfolio has continued to generate value for AFIC shareholders. But at this point, we aren't considering a listing of a separate fund. So we believe the better strategy for now is to continue to invest in international equities within AFIC, but to do it in a more concentrated and complementary style. To give some more detail on the portfolio, we show some of the key statistics here. So the portfolio as of the end of December was worth $170 million. This represented 1.7% as a percentage amount of AFIC's total portfolio value. And the amount of international stocks owned within this international portfolio was 27 and you can see some of the biggest holdings on the chart, including NVIDIA, Microsoft, Netflix and Visa. Obviously, we're happy to take questions on this and any other aspects of the presentation in the question session shortly. But for now, I'll make some quick comments on the outlook, which we list on Slide 24. So the market backdrop at the moment. I think one of the key features is one of extreme geopolitical uncertainty, but it's interesting when you plot that against the share market that remains close to all-time high levels. So to us, we think it leaves the market looking moderately expensive in our view, especially when we look at long-term valuation metrics, such as price-to-earnings ratios and dividend yields. Notwithstanding this, we have found some select buying opportunities recently in some high-quality companies. As Winston mentioned, these have included companies like Telstra and Woolworths, which were bought primarily to income as well as other companies like Sigma and some small caps like Macquarie Technology Objective Corp, Life360 and Temple & Webster, which we want to own more for long-term growth. Overall, we continue to believe that our investment style of focusing on owning high-quality companies for the long term is the right one for us to meet our dividend and total return objectives whilst recognizing that our short-term performance has not been where it should be, hence the focus on improved investment returns under this style and approach. And finally, AFIC's strong level of franking and profit reserves means we have declared $0.025 special dividend for this first half result, with the additional $0.025 special dividend also expected with the full year result in July this year. So with that, thank you very much for listening, and I'll pass over to Geoff to run the question-and-answer session. Geoffrey Driver: Thanks, Brett and Winston. So quite a few questions here. I'll start with this one. This is quite a long one, so I'll try and, I guess, encapsulate as best as I can. We run four different listed investment companies with different objectives. Would it be better from a shareholder perspective to actually combine all of these funds and run them as one and have a sleeve of active management within the portfolio along each of these teams that we manage? Robert Freeman: Okay. So look, we do observe, there has been some consolidation within the LIC industry. We saw that through the Soul Patts Group. And as we stand at the moment, each of our four LICs is an independent company with an independent Board of Directors. Those Boards have the responsibility to oversee the strategy and determine where the portfolios and where the company should head looking forward. In each case, I guess we've -- the sense has been that each of the LIC has been fulfilling a different need within the market. AFIC is more of a broad-based fund. Djerriwarrh gives much higher dividend yield than what you get from the market, particularly when you include franking credits. So we've certainly felt that, that fund suits a particular part of the market, particularly those in the superannuation phase where they can get full value for franking credits. And Mirrabooka, with its focus on small to mid-cap, has over long term produced some very good returns, but often, that can come with higher volatility. So I guess, while I take on board those comments and it's probably fair to say that the Boards are constantly reviewing the strategies and where they should operate in, if they are fulfilling those needs, then the sense has been to continue on that part. But as the case with all companies should be, strategy needs to be constantly reassessed as we go forward. Geoffrey Driver: A question here. Good to see the MER stay ultra low at 0.11% annualized. Any comments on sustaining that edge? And also, could we share any specific internal process improvements you're implementing to reinforce current disciplined decision-making in buying, holding and selling, especially as difficult markets may persist for some time? Robert Freeman: Okay. So I'll just make a comment on the MER, then I'll pass to Brett to talk about how we transact on the portfolio. Having an extremely low MER is a critical part of our strategy. We want to be viewed as having a similar, I guess, cost to an ETF, and it's very important philosophically that most of the gains that come from the portfolio go to the owners of the company, which are the shareholders. And so being -- or having a very low MER is certainly something we want to sustain going forward. And that's quite an important part of the way we think about the business. So that will always remain in focus, and we always continue to look for ways to improve our cost out where we can. Just the second piece, just on the portfolio management. Brett McNeill: Yes, sure. I mean I think when you look back over the long term, AFIC's approach is tried and tested, and I think it's proven and that's what we try to show with long-term performance numbers. But when you have 6 and 12 months like we have had, there's always a need to test and retest things and question things. And the main conclusion of this that everyone was involved in is we think the overall approach is the right one. So investing in high-quality companies for the long term, and focusing on fundamental value, assessing factors and behaviors such as it was mentioned, keeping calm in volatile markets is absolutely essential, and we think the right one, but it doesn't mean that we can't do things better. And some of the ones that have stood out to us, we think, are executing on the transactions better and I think some of the selling over the last 6 and 12 months has been terrific, particularly when you look at Commonwealth Bank and Wesfarmers, the trimming of those positions at the valuations. On the other side, though, unfortunately, we've missed some buying opportunities. We've talked a lot about resources, but there's been some other high-quality blue chips as well that it would have been good to add to. So the whole team is involved, I think, in uplifting the process based on the frameworks that we've got that we think have been proven, but everyone is highly focused on doing a better job of executing against those frameworks. Geoffrey Driver: Thanks, Brett. There's a few questions on international in terms of our approach going forward. So the question is, it's been 5 years we've been sort of looking at the international potentially separate LIC. I guess the question is why we sort of reached the position now where we're sort of managing more of in-house in terms of that short position. And then also the other question around this is are we looking to hold less stocks with a more concentrated portfolio. And finally, on the international questions I got here is will it -- how will it impact AFIC's approach to income within -- generating income within the portfolio given international stocks don't generate a large dividend. Robert Freeman: So I guess we were very clear on day 1 when we started this process, and we kept shareholders up to date, we felt that the Australian market over the long term, there's some risks that our market could narrow and every time we see a takeover, it reduces another stock. We talked about the fact that many of our companies, even though they're listed in Australia are truly international businesses and our understanding what's going on globally is becoming more and more important to understanding our own stocks and that we felt that our long-term investment approach can be utilized in the global markets, as I said, because markets have really become easy to transact in just because you're seeing here in Australia doesn't mean you need to just buy Australian stock. So what we said from day 1 is that we think it can add value to the AFIC portfolio at the very least and that we will embark on a path and we'll be looking to learn from that along the way, and there are a number of outcomes that we set at the start, which could be to not do it anymore, to keep doing it or to keep it a part of just AFIC, maybe even doing a separate LIC. And we've spoken in the last couple of years how we're doing some work behind the scenes but we weren't making any final decisions. We were keeping all options open to us as we've continued down that journey. So the initial investment into international, I think, was just over $100 million. That's worth $170 million. So the investments added $70 million to the portfolio. So it's been value adding to the shareholders. And as we have continued on that journey now, we felt like we're ready to make a decision. So we were prepared for an LIC, we were prepared to continue the way we are, we were prepared for all the options but I think where we got to now is that we felt the best way for us forward at this point was to have a more concentrated view, just be a stock picker to the AFIC portfolio trying to add to businesses that can add value to the overall portfolio. And so in that context, we see this as just additional stock to the portfolio rather than a separate portfolio and be willing to buy stocks when we see opportunities and sell when we think we need to sell. And it's where we've landed on, and we think that's the best strategy to go forward from here. And hopefully, we can continue to make the same sort of returns to the portfolio. Now the amount we have in it could go up if we see weakness in overseas markets and we're starting to see good value, we could add to that. We are aware that they are lower-yielding companies. But at the moment, as a group, it's worth 1.7%. So it's almost like a single stock in one of the companies we own, for example, whether you take Brambles or [ Hardie ] or Goodman Group or CSL, they're all international businesses that probably have a similar yield, but we've got 27 stocks at the moment in we call it on holding. So it's very similar to a single holding in a more international-focused business. But we are aware of that, but as Brett touched on, that's why we look for other opportunities in our market to add stocks where we can get dividend yield from. So we're very comfortable with where now we were landed on. It means we can be much more focused, much more picky about what we go into when we get out of it. And as I said, I hope we can continue to make the same returns that we have over the last 5 years. Andrew J. Porter: And it wouldn't change our income objectives. Geoffrey Driver: Again, a number of questions about where the share price is trading relative to NTA. What do we see has been driving that large persistent discount? Secondly, what are we trying to do about it in terms of in the market. And the other question I've got here is the split between retail and institutional investors on the register. Well, actually, most of our -- we have very few institutional investors. But -- so most of our investors will be retail investors either through individuals or through financial advisers or stock brokers. Mark, can you talk about the discount. Robert Freeman: So just on that discount, I mean, I'll probably just draw you back to Slide 12, if you get a chance to have a look at it again where we show you clearly that this is not something new. We've seen it before. And this is probably a little bit of a scary bit in a way, but in fact, all the previous periods where we've traded at a discount, it's been when the market's been hot in some way, shape or form. Markets had that sort of elements in it, and we've -- not just us, we see this across the sector, particularly the other, what I'd call traditional LICs. So this is not unusual to us. This is a sector theme. And when the markets get a bit hot, we kind of get left behind. And that chart clearly showed you that when you had the tech bubble, we got left behind, then tech crashed and we suddenly went to a premium. You had the late stages of the GFC, market was running hot, we got left behind. But then post GFC, we went back to a premium because in many cases, we had more, what we call, quality businesses, we were able to sustain the dividend through tough times and we didn't really have the speculative parts of the market. Then we got down Black Monday, get the same theme. I would say this time around, we were at a large premium only a couple of years ago, which was during COVID, we had quite a long period of trading at a premium, and we're kind of unwinding that. But again, there are elements in the market that are very speculative. And so this has sort of been a consistent theme, but it's tended to proceed in a significant market pullback. And I'm not giving any forecast at all, but that's -- there's been a pattern there that we haven't seen before, and this is not new. It is frustrating, though, for us, and I understand it's very frustrating for shareholders. With the special dividends we're paying at the moment, it is presenting an attractive dividend yield along the way. We are increasing our marketing efforts, and we're doing a lot more activity around that. And we understand that the marketing is important. Myself, I've been doing a few podcasts and there's a lot of activity going into this year because I think there's so many competing products out there, we certainly realize we've had to do more out in the market to educate them what is different about a traditional LIC in the way they work, and we will be doing a lot more activity on that front. Geoffrey Driver: And I think the other part of the question came up about the distribution of shareholders is about how we're targeting sort of a younger audience, and I think we are doing that through other means these days in terms of podcasts and other means to try and attract a younger audience to the share registry. Question here about the results on paper are disappointing as we well understand. How is management looking at repositioning strategy to be more inclusive of mid-cap opportunities, particularly given large-cap stocks such as CSL and Telix have been damaging to the results? Robert Freeman: Yes, sure. It's part of the overall portfolio strategy. So by no means do we give up on large caps. And sometimes when all you do is look at what has worked in recent times and then try and flip the portfolio to do that, you can just lock in the underperformance both ways. So we'd never want to react just for the sake of it. I think where we do want to take action is where we see genuine fundamental improvement potential. And one is, I think, better accessing opportunities in the small and mid-cap space. And Winston mentioned part of this. And we think a big element of it is investing in these companies, small and mid-cap, small in particular, in a more diversified approach. So taking probably smaller stakes, but in a greater group -- a greater number of small cap companies. And you can see the start of that action on the portfolio adjustment slide, where we've added Objective Corporation, Life360 and Temple & Webster. We think it makes sense when investing in this part of the market to have that more diversified approach because it's very hard to pick individual winners. As we all know, diversification is one of the most important elements of successful investing. And we think it gives a better through-the-cycle approach to rather than trying to time entry into small and mid-caps. So that's one of the things that we not only have identified, but we think are already putting into action. Geoffrey Driver: Just a question on resources. Are we saying look at these more closely, given we haven't -- we missed out on the sort of gold and silver rallies, more recently? Robert Freeman: Yes, we're definitely looking at the performance more closely because it's been stunning about what it's done to markets, and hence, it was a big thing on that slide where we ran through about the key reasons for our portfolio underperformance versus the benchmark. We want to keep an open mind on these sectors, but we don't just want to fall into the top of just chasing what's run really recently, and gold and silver would be at the top of that list. So there might be opportunities in the future, and there's definitely reasons why the gold and the silver prices run. But we'd only want to make an investment if it's for the right fundamental reasons long term as opposed to chasing short-term performance or to close a gap versus the benchmark, which can clearly work against you, remembering that these are cyclical sectors. Geoffrey Driver: While on resources, a question here about the proposed Rio and Glencore merger. Do you have any comments on that, either you or Mark? Brett McNeill: Yes, sure. I can start. I mean I think our initial approach in these situations is to be generally skeptical of mining sector M&A, and that's just based on experience of this group and what we've seen happen in that part of the market over time. And maybe it's a sign of where we are in the resources cycle. We're always looking for those indicators and observing what's happening in markets by actions rather than words. And there isn't actually a takeover or merger proposal there yet. Clearly, it's been flagged. There's been discussion. So we'll wait and see what comes out after the 5th of February and with Rio's results. But I would also say, we did like -- we really like the idea that Rio presented at their recent Capital Markets Day of having a simpler company focused on better operational performance and cost control and being invested in what they think are the best commodities long term. But overall, we'll see what comes of it. Robert Freeman: Yes. I mean I'll just add to that. I mean we've seen some of these transactions before over time, and not with a great deal of success. And we think Rio's assets are great. And so we're keen to understand from the company why they think this time it's different. And I guess sometimes these can be presented in terms of what it can do to their exposures long term. But what we understand is how it adds valuation, how does it add net present value or NPV to us as shareholders, and that's been the issue. They can always explain this in terms of it's going to give growth in copper long term but if the financial metrics on the deal don't add up, it can destroy shareholder value to us, Rio shareholders. So these are the sort of things we want to understand from the company. Geoffrey Driver: Particularly a question for Brett. Can you comment on the impact of index changes for AP Eagers and Soul Pattinson within the index going in and the recent Amcor going out and also the effect of on-market turnover due to passive ETFs? Brett McNeill: Yes, it's been a huge factor in markets. It's probably been one of the bigger changes that's taken place, particularly over the last probably 3, 5 years is just the influence of index weightings on money flows. It's never going to be a key consideration for us. We want to invest more in quality companies that we can buy at good fundamental values. We think that, again, stands the test of time as opposed to following money flows, but it definitely has an impact on short-term performance. And you see it when stocks go in and out of the index. I mean what we -- just the big impact for us is because we are more long-term focused, we should have an advantage in being able to take advantage of short-term mispricing opportunities. So when stocks go drop out of the index and if the share price falls a lot, if we believe in the long-term fundamentals, that can present a buying opportunity. We need to take advantage of that if that's the right approach. And similarly, the other way, there might be stocks that we still like that go into an index, attract a lot of money and become overvalued temporarily, and there can be opportunities to trim that and rotate the capital into better opportunities at the time, but there's no doubt it's a big influence in the pricing of shares in our market. Geoffrey Driver: I've got a few questions here on dividend policy. So what is our dividend policy in terms of yield? And also, what is our long-term capital growth target? The question then becomes, are we looking to balance the interim and final dividend over time. And then finally, would we ever think about moving to quarterly dividends? Robert Freeman: Okay. So we are aware that there is a difference between the interim and the final dividend. And we have sort of -- we keep giving that some thought. At the moment, there is an imbalance, but obviously, it's the full year results that really determine the dividend outcome. So I suspect there will probably still be a split for some time. But we do every time we think about when we can lift the dividend, is there a way we can put more into the interim, but it doesn't always work out that simply. Sorry, Geoff... Geoffrey Driver: So would we think about our quarterly, and also what's our target in terms of dividend and long-term growth. Robert Freeman: Yes. So there is -- one of the LICs within the stable, but it is a different company, Djerriwarrh has announced they are going to quarterly dividends, but that is more of an income-focused product. And that's really a Board decision, but I guess the most recent view is that probably half yearly is okay at this point. But there has been a bit of a trend to try and move to quarterly generally in the market. So this is an issue that will probably get more discussion going forward. But yes, I'm not sure there's a strong appetite for change at this point, but it certainly needs to be looked and discussed on an ongoing basis. And this is the general approach we take, we like to pay out all the earnings as dividends. So we like to sort of pass dividends and the franking credits through to shareholders. Then obviously, we have capital gains we generate on the way. There's a little bit we hold back for a rainy day to make sure that we've got stability. But beyond that, there's a sense from the Board that we want to get excess fracking credits back out to shareholders. So obviously, we announced the $0.025 special for this and another $0.025 special with the final. And we also did say that we will reconsider at that point our franking credit position, but we're sort of establishing that if there are excess, the general sense is to try and get that back to shareholders. We want to have a mix of yield, we also want to get growth. And there certainly is there an intent to -- or want to outperform the index. If we can do that with stable dividends, very low cost, we believe it's a good product for the long term. Geoffrey Driver: A question here about IDP. I think we've covered in the presentation, but I guess you said we went early. So why did we not wait in terms of actually... Winston Chong: Yes, sure, I can cover that one. So with IDP Education, if we kind of reflect on why we went into early, when you look at kind of the share price declining over the last couple of years, the first point of entry was at a time where one of the markets was under a bit of pressure due to policy changes. What we didn't preempt was the synchronization of policy globally during an election cycle where -- and neither did the company, and that's why we've seen the precipitous decline in the share price and the financial results consequently. When we kind of look at the moment where all the markets are sitting, Australia, which is the largest market, is back into growth. The U.K. overnight, just announced some strategic measures for international students, and even Canada, which has been one of the most difficult markets, is starting to show some early signs of green shoots. So when we experience these declines, the first question we ask is, is the balance sheet okay and the second question we ask is can we back management to manage through that situation. And with IDP, the reason we've maintained the position is because the answer to those questions is yes, and we're starting to see some early signs of improvement. Geoffrey Driver: A question here about CSL and why do we continue to have confidence in it given that it's been poor results and also the canceled demerger? Brett McNeill: Yes, sure. We do have confidence in it, but it's definitely been tested over the last 12 months. So I think there's a whole lot of negative things affecting the company at the moment. So -- and some of them are a result of market type factors like the attitude towards vaccinations and the like in the U.S., but a lot of them are self-inflicted, particularly the confusing strategy around the planned demerger of the Seqirus business. Overall, though, we think there's enough in the company to, I think, say that the competitive advantage is still very strong in CSL, particularly in the immunoglobulin products that they have got, basically life-saving treatments to patients in almost 100 countries around the world. And the returns that CSL can make of this and have made in the long term, I think, are still valid. The concerns that are there are very much impacting the share price, and you can see it in the multiple that the market gives the stock. I mean, CSL once has traded at 35, 40x earnings, it now trades on 16x earnings. So unless we believe that the business is truly broken, it seems like a very low point to give up on the stock. We have been buying in the last year, but that's been too early. But for now, we see a strong case to at least hold the position, given that long-term potential remains, particularly when you've got a balance sheet that's in good shape, so we don't think there's any problems there, and we think management and the Board are very focused on getting things right, particularly addressing things like maybe a bloated cost base and an overly complicated structure and returning CSL to being more of a growth company that it has been in the past. So clearly, it will be one of the most anticipated results in the upcoming February reporting season. But for now, that's our position. We think the company's long-term growth potential and the value that's there today warrants us holding our position at least. Geoffrey Driver: Thanks, Brett. A question probably for you here, Mark. How active are your Board members with making decisions around purchase and sales of specific investments, i.e., are they making it easier or hard for your portfolio managers to make changes that they see are necessary? Robert Freeman: Yes, that's a good question, understanding the role of the Board, it's the investment team that manage the investments. The Board members have to approve the transaction at the end of the day, but the investment team have the ability to run that. The Board are there to give us great insights to utilize their experience in terms of the sectors and markets and companies they've been involved with, and that's invaluable. But in terms of how they do it, Brett, who's Portfolio Manager now for AFIC, has talked about, we do have sort of subaccounts within AFIC and we call them, there's the A account, which is our long term. We've got a B account, and we've also got a trading amount. We've talked a lot about internally the B account, which we can do more activity, how that can be used. And I think Brett's got the license and Brett and Winston to take advantage of opportunities as they see fit in the market. And I think there could have been more use of that over the last few years, but I'm encouraging them to utilize that and to make sure we are hunting for value and capturing value within the AFIC portfolio. Geoffrey Driver: Thanks, Mark. There's a question here about Telstra, a couple of points really. Why are we investing in Telstra given the share price has sort of gone out over the last few years? And also a question about market turnover in Telstra seems to be consistently high in terms of its shares. Winston Chong: Yes. So I guess I'd refer us back to the slide that I presented on earlier before during the transactions. And it really comes down to the role Telstra plays in our portfolio, which is really income. And the points made there around the share price are correct. It has been through a really rough period for shareholders over a long period of time. But really, from where we are today, having -- the company having gone through the NBN transition is now in a really good position where it's paying a sustainable dividend and the growth outlook for that dividend is good as well. And so at current -- in one respect, the share price performance has actually provided the opportunity for us to increase the position at an attractive price and kind of giving us dividend plus growth over the long term. So that's probably why we see at this point, a good investment. Geoffrey Driver: And the same question around Woolworths in some ways, too. Why are we sort of positive around that given where the share price has been trading more recently? Brett McNeill: Yes. Again, a similar story. So it is -- it's been a disappointing year for Woolworths. They've been through a number of challenges. But again, that's where the opportunity presents itself. The yield where we're buying looks attractive versus history. And Woolworths does have a bit of a turnaround ahead of it. We're kind of watching management. We back them at the moment. It's -- again, it's got a strong balance sheet and a lot of these characteristics like market leadership and attractive returning business, but we think there's a lot of latency in that business that's not being realized. Over the long term, we expect it to deliver. Robert Freeman: I'd just add to that. It's about hunting for value. And with that sort of bit of negativity, you had the stock price sell off, Winston, to sort of $26, $27, and that's what we look for is those, we call them price dislocations where we think there's -- a company is going through a bit of a tough time or we were talking earlier, that every company has a tough period. And that's where you can often get the best buying. And if you're convinced it's temporary, so the team did some really good buying around those levels, and now it started to recover, it's back over $30 again. And so you get then good capital growth and a good yield, and it can turn out to be a good return for us. Geoffrey Driver: So a question here about Mineral Resources. We sold it, did the exit. Was the exit a mistake in hindsight? Brett McNeill: Yes. So far, it was because it was below the current share price, but these things take time. I think the lesson from that was our expertise and track record in picking single commodity stocks, particularly those that are up on the risk curve. And whilst the company had a lot of very strong attributes at the time being founder-led and a very attractive sector, it could change quickly, and then it's changed again. So definitely a mistake in the short term. Long term, we'll see, but we could buy the stock today, and we're not -- we've chosen not to buy it. So that's the best indicator of our view of the company at this point in time, whereas our commodity exposure has been concentrated in BHP and Rio. That's where we've seen better value and quality. Geoffrey Driver: A question here. Given all the opportunities available in the U.S. and the outlook for deregulation in interest rates versus Australia, would you consider materially increasing your position in international equities? Many of your top Australian holdings are fully valued by their own admission. Granted capital gains tax on sales, some of these would be taking profits will allow further fully franked dividends, increased international exposure and will be a point of difference versus your competitors? Robert Freeman: Okay. There's lots of questions within that question, but I'll try and pick up on most of it. Certainly, we had a view 6, 12 months ago that a lot of our stocks were very fully valued, and we are a long-term investor. We want to be tax effective. So we try and limit our activity and sometimes you wear that downside. But I would say a whole bunch of our good quality stocks are now looking much better value at the moment. And so that gives us an opportunity to hunt for good quality there. And with our renewed approach on the international, where we're being a bit more focused, we are hunting for value there. So we're taking a bit more of a view is where we see value, that's where we're going to allocate money. We are open to putting more in international if we're seeing good value that can add to the AFIC portfolio. So we can hunt for value in both locations and both of them are available to us. Geoffrey Driver: You've got any view on the oil and gas sector in terms of the stocks we currently own, particularly around the Santos failed merger, failed acquisition, I should say? Brett McNeill: Yes. So we own two stocks in the sector being Woodside and Santos we think are the higher-quality businesses within this space, and it's a sector that's offering and has for quite a while, offered some very good value, and we want to be in what we think are the better quality operators. Both have got a good case for better returns over the next few years. So they've invested in growth projects that will start to complete over the next few years, and that should generate a very attractive level of cash flow, which, if the Boards and management teams of these companies manage that widely, a large part of that should flow through to shareholders in the form of dividends, mostly fully franked dividends. So I think there's a good investment case for both Woodside and Santos, which is why we've retained a holding in both. But a lot of the short-term share price performance is going to come down to simply the oil price, which has been trading -- trending lower over the most recent year and actually on a multiyear view as well. But you see at certain points in time, it's been a pretty calm share market overall the last few years, but you see certain points in time when there is an episode offshore like what has happened in the last couple of weeks, for instance, and you get a spike in the oil price and it can make a big difference to the share price of Woodside and Santos. So again, wanting to keep, I think, a level head and a more through the cycle longer-term view of value rather than being swayed so much by the short-term stuff. Geoffrey Driver: I've got quite a few questions which I'll amalgamate in terms of given the recent performance, how are we viewing both in terms of the investment team, the structure of the investment team and also remuneration around the investment team? Robert Freeman: Well, with the structure, I'm really, really pleased with what we've had in place with Brett and Winston. I think Brett has been with us 6 years, and to my mind, is a proven quality value investor. So -- and I think myself and the Board is just wrapped that he's taken on this responsibility. So really pleased with that. In terms of remuneration, the biggest part of our incentive is performance. And so if the performance is not there, the incentives are not there. So we are all very aligned with the outcomes of the LIC, not only from incentive, but we are all shareholders, some of the significant shareholders across them all. And so performance means everything to us across all those assets. Andrew J. Porter: Just to note, as Mark said, it is across all LICs. So the figures that you see in the annual report, the remuneration report include incentives that are based on performance for the four LICs, not just any. Geoffrey Driver: I noticed the number of participants have gone down quite dramatically here, but I'll ask a few more of the outstanding questions that we've got, and then we'll attempt to get back to those that we couldn't answer online. Interesting question here, Andrew. Dividend declared is $181 million, cash available is $131 million, a difference of $50 million. How AFIC fund the $50 million in difference? Andrew J. Porter: Well, first of all, of course, there is a strong participation from shareholders in the DRP and the DSSP. So that reduces the amount available, and that's cash we've got at the moment. So there's always cash coming in for dividends with companies that we hold and any potential cash that we're getting from the sale of facilities and from the sale of securities. We do have liquidity facilities in case there is a short-term funding gap, but that really is just to tide us over until the dividends come in from the companies that we invest in. So it's not unusual, it's not an issue. Geoffrey Driver: So Winston, the rationale for the new additions, such as Objective, Life360 and Temple & Webster. What are your sort of objectives there in terms of the yield and also growth targets on these? Winston Chong: Yes, I'd say for the first one I make is something that might have been missed in my comments that they are relatively small positions at this stage, they're 0.3% of the portfolio. What we're really looking for in these small-cap stocks, and I think all three that were mentioned fit this bill is really the duration of growth, that they're small, they're at the early stage of their growth runways and that we have growing confidence in the their long-term opportunities, and so they're really there for capital growth as opposed to dividend yield, I'd say. Geoffrey Driver: A question, is Transurban an appropriate holding for the long term? Robert Freeman: Yes, we're very confident that it is. We think it's very hard to find companies to invest in, especially on our share market that effectively have a new monopoly position in a highly defensive and quality sector that has locked-in growth. So when you own collection of the best toll roads in a country that has population growth and a pretty solid economy, the returns and the growth that you can get from that over the long term when you factor in compounding can be very strong. And you see it when you analyze the historic results of Transurban. And then -- so within that, though, you need to have a balance sheet and a capital management policy that reflects the nature of the business. And we think, again, that's been well proven over time in the case of Transurban paying out operating cash flow as a dividend and running a very tight ship on the financials, particularly on the gearing levels, running it all in a sustainable manner can deliver great outcomes for shareholders. And I think we've seen that over the long term in Transurban, and the dividend growth in recent times has been very good, too. Geoffrey Driver: I might make these last couple of questions. Got a question here. AFIC's larger holding in Mirrabooka is giving a greater exposure to small and mid-caps while in recent times, this has been valued as probably trade as a discount. Also, has the writing of call options increased as a means of improving income? Brett McNeill: Sure. So on Mirrabooka, so yes, of course, the share price will fluctuate around NTA. It's got the same company structure as AFIC does, so you're always going to have that premium discount to NTA. I mean, interestingly, the Mirrabooka share price is still above the issue price in the equity raise that we participated in last year. The overall investment we have in Mirrabooka is quite small as a separate investment of about 0.5%. Hence, we think there's a good case to also invest in small and mid-cap equities directly. And the second question, Geoff, was what, sorry? Geoffrey Driver: In terms of would we think of -- sorry, in terms of the way we manage the small mid caps in the portfolio, does it also satisfy that requirement because we're using Mirrabooka? Robert Freeman: Yes. Geoffrey Driver: Another question here on Amcor. It's being sold off. Does it present one of those opportunities you alluded to previously in regard to index changes? Brett McNeill: Yes. So Amcor certainly has been one of the stocks that have suffered from the index changes. So that explains part of the reason. But as long-term investors, that's something that over the long term, we think is a bit of a wash. One thing that has meaningfully changed for Amcor is post the merger or the Berry acquisition, the shareholder base is -- it's a dual listed company. So the shareholder base has shifted its weight more towards the U.S., where packaging stocks are not as scarce, and so the valuations of those stocks attract -- are not as attractive. From here, we continue to hold the stock. We think that the benefits of the merger have not yet been fully appreciated by the market, and will hopefully be proven up over the next couple of years. And so yes, certainly, the index changes have been a big factor in that stock in particular. Geoffrey Driver: A question on Reece here in terms of confidence in the Board and also, it seems that Reece has sort of been running their own race with regard to shareholders. Could you sort of bit of comment around that? Winston Chong: Yes, I'd say as a signing point, it's similar to my comments on IDP before and that Reece have been subject to the external environment. So U.S. housing is in a downturn, and Reece obviously have aspirations to grow our business there. But given where that business is in terms of its maturity has suffered quite a bit. And so in that regard, we kind of take a step back and look at the Board, the management team, are they aligned and find very much so they are and they've been buying back stock recently in support of that and also been managing the balance sheet in a very conservative way that we do think is in the interest of shareholders. When we look at the Reece management team, they have always managed the business for the long term, and that includes managing through the fluctuation. So again, we -- the things we look for when companies are experiencing headwinds like Reece is, are they aligned, do we still back management? And then secondly, do they have a strong balance sheet? And again, the answer to those two questions is yes. Geoffrey Driver: I've a question here about the option strategy, Brett, just to clarify, we're sort of writing call options, and we're not buying options per se. Brett McNeill: Correct. Yes. So when we use options and you may see it indicated on our reports, when indicated options are written against certain holdings, what we're doing there is writing call options predominantly against stocks that are held in the portfolio, and we only do it to generate more income. So we do not use options at all for hedging for speculative purposes. It's purely for income generation. It's not a significant part of our strategy. But we do have the ability to do it against certain stocks. And if it's done well, and hopefully, we've got the expertise within the group, again, proven over time to do -- to run such a strategy, it can generate a good level of extra income, which we obviously can use to pay out as dividends. Geoffrey Driver: Thanks, Brett. Look, we've been going for well over an hour now. So I think the questions we've got, we've basically covered most of them within the presentation, but anything we don't have covered, we'll get back to you directly. But at that point, I think we'll close the presentation, and thanks for your -- to shareholders listening to us and also be aware that we'll have shareholder meetings around the capital cities in March, and also we'll be doing one of these presentations with the final results in July. So again, thank you very much, everyone. Operator: That does conclude today's webinar. Thank you for your participation. You may now disconnect your lines.
Operator: Thank you for standing by, and welcome to the Evolution Mining Limited December 2025 Quarter Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Lawrie Conway, Managing Director and Chief Executive Officer. Please go ahead. Lawrie Conway: Thank you, Harmony, and good morning, everyone. I trust you've had a good break and wish you a very healthy and successful 2026. I'm joined on the call today by Matt O'Neill, our Chief Operating Officer; Fran Summerhayes, our Chief Financial Officer; and Peter O'Connor, our GM, Investor Relations. Today, we released our December quarterly report, which will be a reference point for the call. Fran and I will be back in a few weeks when we release our FY '26 half year financial results. Before going into our quarterly results, I want to take a moment to reflect on the tragic event that happened here at Bondi on 14 December. 15 people were murdered due to racism. No violence is accepted even more so violence linked to racism. This heartless and cowardly act of terrorism, whilst many people and families were enjoying the Bondi environment, specifically the Jewish community celebrating Hanukkah. I know this has impacted our country, including our team members at Evolution. The attack is something that should have been avoided. The lack of action by the federal government over the past 2.5 years on racism is inexcusable. The refusal to call a Royal Commission until the overwhelming majority of Australian spoke of the need for it, and then to try and condense the time frame for political reasons is disappointing. It lacks leadership. On the contrary, the leadership of the New South Wales state government with quick and strong action and support was very welcome. My biggest concern is that we learned nothing from this and do not make Australia a safer and more inclusive country. Our condolences go out to the family and friends of those who were murdered. Our thoughts and prayers go out to everyone who was impacted by the attack, and we also thank all the first responders volunteered support during this incident. Turning back to Evolution. This was another quarter and the eighth consecutive quarter where we've safely delivered to plan. We produced 191,000 ounces of gold and 18,000 tonnes of copper at a very low all-in sustaining cost of $1,275 per ounce for continuing operations. We did it safely with our TRIF remaining low at 5.8. Gold production improved by 10%, while our all-in sustaining cost improved by 26%. Importantly, the cash generation has really gained momentum as we realize the benefits of the current metal price environment. Our underlying group cash flow improved 176% to $541 million or around $2,800 per ounce when normalizing for the FY '25 annual tax payment made during the quarter. Reported cash flow was up 110% to $412 million. The cash flow was achieved at a gold price around $800 below current spot. The group cash flow was on the back of record mine cash flows with operating cash flow up 57%, just over $1 billion, while net mine cash flow doubled to $727 million, with the operations increasing their cash flows in the range of 55% to 140%. The cash flow charts on Page 1 of the report very clearly shows our cash-generating capacity. We are on track to deliver almost $4 billion of operating cash flow. This is 40% higher than when we issued our guidance in August and is anticipated to be 25% higher than what we have delivered in the first half. Our cash balance improved to $967 million after we repaid $110 million and $116 million in net dividends. We have no debt due until FY '29. Our gearing is now at 6% compared to 11% at September and 30% just 2 years ago. We are well on track to being net cash this year, providing further balance sheet flexibility, including returns to shareholders. We remain on track to deliver original group production guidance of 710,000 to 780,000 ounces of gold, and 70,000 to 80,000 tonnes of copper. Group copper production is expected to be at the low end of guidance due to the weather event at Ernest Henry. At the end of the quarter, Ernest Henry received 300 millimeters of rain in a 24-hour period, resulting in water ingress to the underground mine and temporary suspension of the operation. All personnel were safely accounted for and no injuries reported. Recovery activities are progressing well with only short-term operational impacts expected. It is anticipated that the impact at Ernest Henry is about 7,000 to 8,000 ounces of gold, and 4,000 to 5,000 tonnes of copper for FY '26. Group all-in sustaining cost guidance is updated to $1,640 to $1,760 per ounce and is a 6% improvement on our original guidance, reflecting continued cost control, the impacts of higher by-product credits, partially offset by the Ernest Henry weather event. The updated group guidance further entrenches [Audio Gap]... Matt will go through the operational performance soon. However, I do want to call out a couple of key highlights. About 2.5 years ago, some analysts were calling Cowal's best days behind it. One even saying that the cash Cowal was over. Well, this quarter, it delivered $361 million of operating cash flow at $4,500 per ounce and $284 million of net cash, which equates to more than $3 million per day even after investing in the OPC project. This level of cash flow alone is better than a number of Australian multi-asset, mid-tier companies, and the operation has at least 16 more years ahead of it. Mungari delivered record net mine cash flow of $104 million, which is a 142% improvement for the quarter and represents nearly 50% of the plant expansion project capital. At Red Lake, the operation is settling into the desired rhythm of 30,000 to 40,000 ounces per quarter and positive net cash flow. That produced 33,000 ounces and doubled their net mine cash flow to $80 million. They have now delivered over $200 million of net cash flow in the past 18 months. On the projects front, Mungari successfully moved to commercial production and the establishment of the Castle Hill mining hub is now complete, following the full sealing of the haul road during the quarter. The Cowal OPC project made solid progress this quarter and remains on plan and budget. Studies for the next key growth projects being E22 at Northparkes and Ernest Henry are complete, and we'll go to our board for assessment during the March quarter. With that, I'll now hand over to Matt to take through the operational performance. Matthew O'Neill: Thanks, Lawrie. As noted, we have successfully completed another strong quarter of safely delivering to plan, and we remain on track to meet full year guidance, allowing us to continue to benefit from the rising metal price environment. I'm pleased our safety performance remains in a healthy position with the teams at each of the operations continuing to focus heavily on this area. We did see a small increase in our total recordable injury frequency rate this quarter, which was driven by an elevated number of injuries at our Cowal and Mungari operations during the month of October. Our safety focus remains on leading indicators, and we continue to perform strongly here. On the production front, as noted, we're on track to meet full year guidance. For me, the production highlight of the December quarter was the successful ramp-up of the Mungari operation where we achieved an annualized run rate through the mill for the quarter of 4.1 million tonnes. Throughout the quarter, the team ran the new mill through a range of operational parameters, and I'm happy to say that they're very pleased with how it has performed. Similarly to the September quarter, we had minor interruptions to mining activities in the open pit at Cowal due to wet weather. Again, it was pleasing to see that the work the team have done on resilience and reliability pay off as we experienced only minor variations in the plant due to these events. As noted, works continue to progress well on the OPC project with the project ahead of schedule and in line with budget. The Red Lake and Mt Rawdon operations continued to deliver in line with their plans with minimal variations throughout the December quarter. As noted earlier in the call by Lawrie, Ernest Henry experienced a significant rain event at the back end of the quarter on the 29th of December. The Cloncurry region had its average annual rainfall of 420 millimeters fall in just a 72-hour period, 300 millimeters of which fell in just 24 hours. During this event, all personnel were evacuated safely from the mine via the shaft and the multiple dewatering systems, both in the pit and underground operated as designed to reduce the impact of the rain. We diverted water away from key infrastructure areas and into the bottom of the mine, minimizing the impact on mine infrastructure. Whilst we are dewatering and remediating the mine, we've moved forward the scheduled February plant shutdown to align with these works. The processing plant shutdown is underway now and scheduled to be completed by the end of January. Current estimates are for full year production from Ernest Henry to be lower by between 7,000 and 8,000 ounces of gold and 4,000 to 5,000 tonnes of copper. At Northparkes, we achieved a significant milestone during the December quarter, with the completion of the E26 sublevel cave after 10 years of operation and the successful ramp-up of E48 sublevel cave taking its place. In summary, we remain on track to meet the group's full year guidance and take advantage of the strong market conditions we are currently enjoying. This brings the formal part of our update to an end, and I'll now hand back to Harmony for questions. Operator: [Operator Instructions]. Your first question comes from Levi Spry from UBS. Levi Spry: Happy New Year. I mean, I guess, just firstly, on the -- moving to a net cash position sometime this half. Can you just talk a little bit around how the Board might address that in February, what the competing sort of interests are in terms of CapEx and exploration, maybe what you can bring forward potentially? And specifically, I'm thinking about your projects, but also the OPC and how you're going to optimize that going forward, Northparkes? Lawrie Conway: Thanks, Levi. Happy New Year, and I'll get Fran to add a couple of comments. Our cash flow only just has increased since the day she joined. Look, we will move to a net cash position over the remainder of this year. And it is -- highlights that if you deliver a plan essentially in an unhedged environment and do that safely, you actually get the benefits. What the Board will consider our policy is percentage of cash flow, targeting 50%. We look at it on a full year outlook basis. And at the end of each financial year, we look at the policy. So we look at the policy at the end of the year. I don't expect it to change too much, but we've got certainly flexibility around the percentage that we pay. In terms of then internally, I think our discipline around capital allocation and projects will remain key. We have seen that OPC is advancing well, and I was out there last week and it's actually a lot higher than what it was 6 months ago and 3 months ago, which is good for the project and does open up some flexibility around that project and what we do. Exploration, I think Glen is going at full tilt, but he's looking at some opportunities there. And then obviously, the Board will consider E22 and during the quarter as well. So yes, well -- as I said, we'll look to make sure we continue to reward shareholders in this environment, discipline around our capital [ allocation ], be that in projects and exploration, but a good problem for Fran to have as to what to do. Fran, anything to add? Frances Summerhayes: No, you summarized it well. Levi Spry: Yes. Okay. And then just at Ernest Henry, maybe for Matt, look, a pretty significant event, maybe lost a little bit, otherwise very good quarter. What's the current status? So you expect the plant to turn back on at the end of the month, but interesting in terms of the mine and dewatering... Lawrie Conway: Yes. I'll get Matt to do that. I mean, yes, Levi, I think it didn't impact on the December quarter, as Matt said, it was right at the end, but it is what we're going through into this quarter. And Matt outlined a little bit on the call, but maybe just, Matt, color around the mine and the plant and the surface. Matthew O'Neill: Yes. So I'll start with the surface. Things went quite well for us on the surface with that volume of water. The plant is completely fine. And so what we chose to do is instead of having that shutdown in February is that we will do it ourselves and that we would bring it forward into January, so giving us a bit of time back in that month. In terms of the mine, the infrastructure, there's some minor flooding remediation works that we need to do in areas that were sort of pockets rather than anything else as the water sort of moved through the mine, some of the pockets filled up and so that's tail end of 2 conveyors that doesn't take much to get back and then some works around a hydraulic pack that was sort of sitting in a pit in the crusher. So there's nothing material from the infrastructure side. Currently, we're dewatering into the existing dewatering system quite significantly. So we're sort of up around sort of 35 megaliters a day. The current status is that that's progressing ahead of plan. And like I said, we'll turn the plant back on at the end of January and then work our way back through that, bringing the mine back on through that month as well. Lawrie Conway: And just a thing to point out, Levi, versus what we experienced in March '23 that the pumping stations and the main power substations were not impacted like they weren't really impacted at all this time. Matthew O'Neill: No, that's right. We kept those operational throughout. We had a period where we didn't put people into the mine because we didn't want to put anyone at risk. And so we had tripped out until we got someone back in there to fix it. But outside of that, all of the infrastructure worked exactly as planned. The size of the event was probably the issue. It's almost triple the size of anything we've seen before. The [ 100 million ] a day was about the maximum from the last couple of events. And we did see that in the lead up to this event, and then we saw the 300 millimeter, so that the systems all worked as planned. The scale of that event isn't something that we've seen in that region for quite some time. And you could see around some of the neighbors in the area as well. The past has had some pretty significant impacts that they've not seen. So that was the issue for us. But managed well, infrastructure good, and we'll get back up and running in the short term. Operator: Your next question comes from Hugo Nicolaci from Goldman Sachs. Hugo Nicolaci: Lawrie, Matt, Fran, congrats on a fairly strong quarter. I just wanted to -- first question in and around sort of more strategic one. Obviously, this gold cycle has been pretty strong, if not unprecedented, with prices where they are, obviously, producer discipline has been pretty key in terms of capturing that operational leverage and not chasing low-grade ounces for the sake of volumes has been pretty -- has delivered a pretty good cash result. But looking at it from here, so the gold prices arguably more than double where a lot of these mine plans were set. I mean, is there room to start recutting how you look at these things to optimize value from here if this is the gold price going forward? Lawrie Conway: Yes. Look, I'll let Matt have a bit of talk about the plans and the mines, the open pits and the underground. But essentially, we look at the current price environment and as we're mining in certain areas, if more material becomes economic, we're taking those, we're right into our life of mine and mineral resource, ore reserve review now. But we don't just let the short-term metal price drive the wrong behaviors. Matt? Matthew O'Neill: Yes. We are taking advantage of that in the short term. But the discipline that I'll keep pushing with all of the operations is that any of the lower grade is not to displace any of the original plan or high-grade materials. So where that starts to help us is that when we can increase the capacity either through the plant or the materials handling systems, we can do that because most of the operations do have that capacity if we were to drop cutoff grades, we see some reasonable increases in some of those operations. And probably 1 of the key ones that sort of stands out in this environment, both copper and gold, is Northparkes, and you'll see that that's where a lot of the work is occurring and a lot of the focus for trying to take advantage of that is sitting. So yes, we are doing it, but I don't want us to drop back to erode the margin significantly by chasing stuff that's economically viable in this market. Hugo Nicolaci: Got it. That's helpful. And then second one, just following on from Levi's question at Cowal on the OPC. I mean, obviously, ahead of schedule there. If you've got the team on site, how do you think about bringing forward the next stage [Technical Difficulty] or just maybe the recent rainfall we've seen maybe limit your ability to do that immediately? Lawrie Conway: Yes. Look, Hugo, I think what we're doing, the northern bond as we completed in the last quarter enables us to then start works around E46 and a lot of other surface infrastructure in the northern end, which is why it was scheduled first. The water in the lake is receding and receding at a good rate. And unfortunately, when I was at Cowal, they said they would have liked some of the weather that -- or the rain that Ernest Henry got because it is fairly dry out there and at Northparkes. So when we look at it, it's anticipated that the lake would be dry by the middle of this year. And you might recall when we approved the project, the south -- the south part of the lake move was scheduled for FY '28 and scheduled to be dry. So it does provide an opportunity for us to consider bringing that 1 forward because you wouldn't want to be waiting a couple of years and find out that you got a wet lake or a full lake again. So that's something that we're working through right now. And then I think in terms of the other surface infrastructure and works that Joe and the team are looking at, I think, they will build that into the plan. It will allow us to look at the IWL, whether we build that up in preparation for having 2 and 3 open pits in the next couple of years do that earlier. Certainly, 1 thing that we'll look at is just anything else that can be done now in the environment that they're experiencing. Hugo Nicolaci: And then maybe last one, if I could, maybe 1 for Fran. Just can you remind us how the copper quotational pricing periods were just looking at the realized pricing on some of the byproducts. It looks pretty favorable versus average prices in the quarter. If you could just remind us if there's any timing or any impact there we should be considering? Lawrie Conway: Yes. Hugo, it's not simple for you on your side to be able to, I guess, model them because at Ernest Henry, you've got a quotational period that gets nominated every month. At Northparkes, you've got a quotational period that gets nominated quarterly, and you've got 2 offtake partners in terms of Sumitomo, our joint venture partner and IXM as our offtake main partner. And so they have to nominate them. And if we look at it in the -- at the end of September, we had about 8 shipments outstanding that were still open to pricing about 21,000 tonnes of copper, split sort of 3 at Ernest Henry and 5 at Northparkes. They, at the end of September were priced around $15,000 a tonne. They then move to the December pricing, and that was around $18,500 a tonne. So that's what lifted our achieved copper price for the quarter by about $3,000 a tonne. At the end of December, we've got about 4 shipments outstanding around 10,000 tonnes that will get finalized in this quarter. And then it depends on what each of the offtake partners nominate in the next 3 months for their pricing. So that's why it's a little bit difficult. Where we stand today, it's averaged about 19,200 month to date. That's what some of those shipments are going to get repriced at -- if they finalize this month. As I said, it's not easy for you. But it's really dependent on what the offtake partners or what they nominate. Operator: Your next question comes from David Radclyffe from Global Mining Research. David Radclyffe: So just a bit of a follow-up to Hugo's question. Because obviously, when you look at the quarter, it was really only Mungari that was setting a new record, and that obviously reflects the expanded capacity. But there is some late mill capacity across the group. So just trying to understand if there are any near-term opportunities you're considering to push throughput and take advantage of this environment. And if not, what is the constraint there? Is it the fact that you're not prepared to budge on the current capital budget. Just trying to understand there how you could actually push the mills a bit harder. Lawrie Conway: Thanks, Dave. I'll let Matt just give a run-through on each of them. I mean -- but I will start off by saying it is not about the capital constraint. It is about making sure that if we commit the capital, we're going to get the returns. I think when we look at it and if you see the announcement today, the land around Ernest Henry, that we've now picked up that plus the previous project that we announced a while ago, that gives us a continuous footprint all the way around the plant. That's all within trucking distance. And so we've got 1 program has already started. This 1 will be the next one. So that's giving us an opportunity because it's constrained by the mine and you obviously got berth. But we will look at all of those opportunities where we can. Matt, 9 months? Matthew O'Neill: Yes. I think Ernest Henry is the main 1 for us. We do additional milling capacity available today compared to what we bring through the mining system. So we are open to that, whether it's our own material through exploration or whether it's a toll agreement with people in the region. That's something that we're actively pursuing. Then outside of that, if I look at Northparkes and Cowal as the next 2, they are mill constrained. So we spent some money at Cowal on the mill setting it up for the next 20 years in the last financial year. And -- we also spent a bit of money there on improving the recovery. So we are working on opportunities account to increase throughput through the mill, but it's something I'm certainly not wanting to rush through there. So those do essentially mill constrained with improvements and incremental improvements possible, and we can feed them from our own sources. Mungari is a similar story. So Mungari, obviously, now ramped up. What we were wanting to do there, our strategy there is to run the Castle Hill complex, which is running very well at our baseload feed and then supplement that with our underground feed, which is where the grade from -- grade comes from and gives us the ounces. The opportunity there is to be able to postpone or defer any of the lower-grade material from Castle Hill by putting in higher-grade product through the mill. And obviously, we run the finances on that depending on what we do. So the exploration team, that's 1 of our key spend areas and where we do see an upside if we can get additional underground feed. We want it to come from our own material. That's where we make our best margin. That said, we do have opportunities where we will and can and have toll treated other people's product at a higher grade if the finances make sense for us from deferring that material. So those are your areas. Outside of that Red Lake does have mill capacity. There's not a huge opportunity there for either increasing our own material, which is still the bottleneck from the mining operations. But third parties, there's not a huge amount around there, but those are things that John and the team are looking at when they come up. I think that's the run through of most of the operations. David Radclyffe: Right. Maybe if I could just come back on Mungari there because I think on the site visit you were still ramping it up and hadn't really tested it and it looks from the commentary that you may have sort of pushed it a little bit here with third parties. So are you confident -- you're obviously confident you can get to capacity. Did the engineers sort of leave anything there in terms of conservatism? Do you think you could run Mungari a bit higher than nameplate? Matthew O'Neill: No, that's something we're investigating. At the moment, it did ramp up exactly as we wanted to. We had periods where we were above nameplate, but that was more related to the material [Technical Difficulty] or a little bit softer. So like most mills, depending on what we're putting through, it will give us a rate. But that's what I'd like us to do. At the moment, we're certainly not promising that, but that's what we're working on. Lawrie Conway: And I think if you look at it for the quarter, it annualized at a whole point [Technical Difficulty] special production. Operator: Your next question comes from Daniel Morgan from Barrenjoey. Daniel Morgan: Lawrie, just going back to the Cowal southern bund decision. Can you just maybe expand what drives the decision to execute a bit faster on the Southern bund? Is it it's easier, costly, more productive and sort of costs? Or is it revenue items are you're going to have potentially access to more or more material, better grades and can grade sequence like what goes to the decision to execute earlier if you do so? Lawrie Conway: Yes. Dan, look, I think the primary 1 becomes where the lake is sitting at with the level of -- that it's receded as you'd recall, we've always planned to do it dry, it's more cost effective. So that's -- that is the primary decision point because it's not about what can we afford the capital as long as we're staying within the $430 million, we'll be fine. Then in terms of -- the second part of it is, what does it give the site in terms of flexibility. So having put all of that infrastructure around the southern area, it gets the ability to look at E41 and when we time that. But that's coming into FY '27 and beyond. And I think that's why the secondary piece is that flexibility it provides to Matt and the Cowal team is that for a period, we'll be on low-grade stockpile material. You're going through the cutback of Stage I, so if you can open up E46 and E41, it just derisks that operation a lot more. Daniel Morgan: Right. Another question. Just there is a footnote on Page 2 regarding Northparkes, where there's been some sort of a positive adjustment relating to stream deliveries, the number there is $18 million, that was an outflow. It just seems a bit lower than what I thought. Is there any -- can you just clear up what's going on there? Lawrie Conway: Yes. So during the period, there was a reconciliation of the finalized pricing and payments for the stream with Triple Flag and as the final pricing and everything that came through on that back for a number of periods resulted in a credit back to us. So that's why the $18 million, I think last quarter was about $32 million. So there was a benefit relating to the final pricing. That is one... Daniel Morgan: That's a one-off? Or is it something that there's an annual true-up or something that we might see again in a year's time or that could be adverse or better or... Lawrie Conway: More of a one-off, Dan, is going through with Triple Flag about the whole mechanics of it, and we're obviously learning it in the first year. We've then done all the reconciliations with them, and that it's more of a one-off. Daniel Morgan: Okay. Very clear. Just shifting over to Red Lake. It looks in -- you've made a breakthrough at Cochenour, where if I read that correctly, does that mean that you are no longer going to be using ore passes and that you're going to truck down, ore down to the high-speed tram. And is there benefits in terms of grade and reconciliation that could come? Matthew O'Neill: Yes, Dan, it's Matt. Look, we will still be using ore passes, but what it does do is derisk those. We've got some duplication and contingency in that system given the issues we had earlier on. So we will still use all passes through that. The biggest benefit for us there will be ventilation as well. And also the mobility of some of our equipment. So it's more of an operational flexibility and reliability thing that it will give us. It doesn't necessarily impact grade and other bits and pieces at this stage. It does open up some other areas. And allow us to do things a little quicker, but that's really around operational flexibility that the benefit comes. Daniel Morgan: And just last question is mainly cost, I mean, obviously, there was a provisional pricing stuff that came through, but signs of cost control are evident as well. Just on Mungari specifically. There's obviously a bit going on with various third-party ore purchases. You had commercial declared partly through October. And so the AISC number is not necessarily completely clean as a go-forward guide. Just wondering if -- what's the latest view on what Mungari costs roughly are going to be on a clean basis? Lawrie Conway: Yes. Dan, I think when Matt talked about testing of the plant and everything the team took the opportunity around that ore purchase to get that type of material through the plant earlier. So those costs and ounces are excluded. So when you look at what we've reported for Mungari for the quarter, that AISC and the costs are really about just our ore. So it gives you a good reflection of -- so about $2,000 an ounce, you take it that most of October, there were commissioning costs. So you're going to be in the early low 2,000s -- going forward, when it hits the 50,000-ounce quarterly run rate is what you should expect to see. So we're at $1,980, I think, was a quarterly cost for Mungari. As I said, some commissioning in there, but it is only on our ounces and our costs. Operator: Your next question comes from Matthew Frydman from MST Financial. Matthew Frydman: Lawrie and team. Happy New Year. I guess my question is a continuation of some of the earlier discussion. I'm very interested in the outcome of the 2 studies that are currently undergoing board review, and I'm sure you'll present that [ in time ]. And I guess I hate to sound a bit like all of a twist, but wondering what's next to be considered in terms of any sort of formalized growth studies out of those options that Matt discussed conceptually the key growth projects that you're moving into that pipeline over time? And I guess the secondary question to that is just looking at your reserve on Marsden, obviously, a big low-grade reserve there in your numbers. I think it was last cut at $1,350 an ounce gold price. So we're only about $5,000 an ounce higher than that at the moment. So I guess at what point does that become a viable growth project? Or does that reserve need to be, I guess, reconsidered at all? Lawrie Conway: Matt, Happy New Year. I definitely hope that our now nonexec chair is listening because he would love to hear about [ Marsden ]. I'll start on that, well, look, I mean, for us, on Marsden, anything that we do there would have to be better than what we've got at Northparkes and Cowal. And so that's really what it's got to compete against at the moment. So it sort of sits there in the background. It certainly doesn't get the priority from Nancy and the team, but it does get looked at. It's good to see that you talked about Bert and E22 and you've moved straight on and gone, okay, what's next. I think for us, Bert is really important to Ernest Henry because of the capacity we've got in the plant. So that will be something that the Board will consider the studies are finished, and we'll take that to them this quarter. E22 really is what can unlock what we have at Northparkes in terms of increasing both mining and processing capacity. We've got such a large resource there. We've got to look at how can we expand that over time because it's not going to reduce the NPV of the asset. So that's something, I think, when we take that through to the Board this quarter, it's like, okay, what does E22 give us as a -- we looked at a block cave, the sublevel hybrids the -- sort of the best outcome is the block cave, and we've talked about that previously. Now we've got to work out where does that fit into unlocking the rest of the operation around expanded capacity. I think when you look at -- the other thing is what's next. At Cowal, we've got the OPC going. We've got E46, E41, E42 operating. We get the undergrounded capacity. And what Matt's talked about is, okay, with all of those ore sources and the work we've done on the plant, are there ways to increase the processing and production rates at Cowal. And then I think when you look at Mungari, Matt also talked about it earlier. We've got the base feed at Castle Hill, the underground is really which is getting most of the exploration dollars is what gives us an opportunity of can we get more than 20% of our material going through that plant. And can we get the plant running at greater than nameplate. Matthew Frydman: Okay. And then maybe, I guess, the follow-up to that then is then how we think about capital allocation for the business going forward. As you just described, you're pretty advanced in terms of your capital spend across the majority of the portfolio. You've got a couple of formalized, I guess, growth projects still on the pipeline in terms of Bert and E22. But overall, clearly, the business is generating a lot of cash. How should we think about any kind of revision or revisiting of the capital allocation policy, I guess, in the absence of any other sort of big scale growth investments like Marsden like we just spoke about. And how does that look in the current gold and copper price environment in terms of how attractive that capital is to spend externally to the business? Lawrie Conway: Yes. Look, Matt, it's a good situation to be in. I mean, 2 years ago, we were getting asked that how can we afford these projects and now we're getting asked how can we [Technical Difficulty] -- that discipline. I think we've outlined our capital sort of spend for the projects that are already in the pipeline. As being that $750 million to $950 million, what now with what we're seeing, the progress at Cowal and the outcomes of the studies and where the metal prices is what can we incrementally invest in, either bring projects forward, accelerate them or new projects to bring forward production growth. As long as if you look at the portfolio at the moment, the asset's average annual rate of return is sitting around that 16%. If we can generate those sorts of returns, then we would increase our capital allocation. If we were to increase that allocation by $100 million, $200 million a year, and we can generate those returns given the cash that we're generating today and where the balance sheet sits, I think that would be the best use of a part of the extra cash flow we're getting. We obviously are still remaining committed to increasing returns to shareholders through dividends, and they'll share in the increased cash flows automatically by our current policy. But if there's ways to [Technical Difficulty] -- through the second half of the year as well. Matthew Frydman: Got it. That's a sensible way to think about it, obviously. And obviously, the balance sheet has changed very quickly. So a nice position to be in. Thanks. Lawrie Conway: Thanks, Matt. Operator: Your next question comes from Adam Baker from Macquarie. Adam Baker: Just back to Mungari. I noticed the 127,000 tonnes to 9,000 ounces gold is third-party ore process in the region. Just curious if you could touch further on that. Is this a normalized rate we could expect moving forward? I know you're looking at further opportunities. And just to give us a bit of flavor, are there any companies out there knocking at your door to process the material in the region? I know, it's about 10% to 15% of your planned throughput capacity at the moment. Lawrie Conway: Yes. Look, Adam, I'd say, firstly, yes, there's people out there that would like for a brand new mill that's got capacity for them to put some ore through. I think as Matt outlined on the call, we used the opportunity to purchase that ore to really test the plant through the commissioning rather than waiting until we get our ore, both the main ore out of Castle Hill and the underground through given we've got a large campaign this second half on the underground. So that was -- I would sort of almost say that's one-off. But if we've got capacity, we will take it because we believe with our mine plan we've got 4.2 million tonnes of our ore that will go through the plant. If there is spare capacity, we would look at it. But right now that is only really around the commissioning part of the plant that we did that purchase. If we do, it's going to displace. I mean, this 1 did -- yes, it made a profit, didn't make a lot of money for us, but it allowed us to learn a lot about the plant. Adam Baker: Yes. And the reduction in cost guidance, I mean, that makes a lot of sense due to the stronger byproducts. Just trying to understand the 6% improvement at the midpoint, how much of that would roughly be driven by the stronger byproducts versus it's a better-than-expected cost control from Mungari, et cetera? Lawrie Conway: Look, Adam, it's a combination of both what the split -- it depends on how we go through the second half. But like we're achieving $2,000, $3,000 a tonne halfway through the year above what we had sort of guided at. Current price at [ $19 ] is sitting about $4,500 a tonne above. So the byproduct credits are pretty important in that regard. But if you look at our gross operating and our net operating cost spend against our budget, it's pretty well in line, a little bit lower in some areas. And then when you look at our sustaining capital, we're actually tracking well against our guidance a little bit. I'd say, a little bit of an opportunity for some of the sites to ask Matt for a little bit more money given the cash they're generating, but I do think the discipline around all of the capital has been very good across the business. Operator: Your next question comes from Mitch Ryan from Jefferies. Mitch Ryan: I just wanted to sort of pick at 1 of your answers to Matt Frydman's question with regards to accelerating Northparkes. You sort of said you're obviously looking at E22 and accelerating that, but then also that expanding capacity. I just wanted to understand, is your thinking materially impacted by the Triple Flag agreement? And is there anything you're able to do around that with expanding Northparkes? Lawrie Conway: Yes. Look, Mitch, I mean, yes, when you look at Northparkes, you've got a stream over it that we only get 40% of the gold and pay 100% of the cost. So it has an impact on what we can do in unlocking Northparkes. What I'd like is that we've engaged actively with them since we -- since we've owned the asset, they know they have a role to play, and we continue to work through what role they have in the site going forward in unlocking the value. I think because when we look at it, we've got -- it's permitted to 8.6. It's running. It can get to 7.5. We've got 600 million tonnes in resource. If you keep running at those rates, this mine is running for 75 years. So increasing processing capacity and mining capacity is the right thing to do at some point. But we've got to make sure that it's going to give us a good return, both on a pre- and post-stream basis. Mitch Ryan: Okay. And then my second question relates to Ernest Henry. Just noting that you've obviously been able to pull forward some of those works. But were there any works that will be unable to be rescheduled into the shut that was bought forward? And if so, will they be deferred or completed later in the half. Lawrie Conway: The short answer probably is no. So nothing material. There were some minor tasks in the underground that we couldn't complete just based on access. So they will be completed, but they won't drive a processing plant shutdown or a material underground shutdown in the quarter. So I'd say 95% of the tasks we've been able to pull forward or defer depending on which one it is. Operator: Your next question comes from David Coates from Bell Potter Securities. David Coates: Thanks for your time this morning and congratulations on a great quarter. Matt, it's a bit of a high-level question. There's been a lot of discussion and questions this morning about where you guys can value add. Is it dropping cutoff grades? Is it expanding plants? Is it maybe regional acquisitions. Just wondering -- and we're in this -- what's fairly unprecedented gold price environment, not just the price but still the rate that it's risen. Are there any -- out of all the sort of growth of value-adding options that you guys presumably are considering and have been discussed, what are the ones that are sort of floating to the top as the best bang for your [ buck in ] in this sort of environment as well at the moment across the portfolio? Lawrie Conway: Yes. Look, I'll get Matt to talk about what he sees as the opportunities at each of the assets. I mean, for us, if we can get more ounces or tonnes, copper tonnes out of any of our operations that basically improves our margin, that's really where we're going to focus. I mean I think we've always got to be conscious of is that in this current pricing environment, if you do approve a project and Cowal OPC as an example, and Mungari was an example, your time to bring those to production is 2, 3 years' time. So you've got to have the real confidence in terms where the metal price will be in that time versus those short-term ones around improved marginal increases in processing capacity or recoveries or those things. They're the ones that you can certainly bring on straight away. But the others, you're going to be looking 2 to 3 years at confidence that when you do bring them on, they're going to be in a good environment. And Mungari is an example, in '23, gold price was about 40% of what it was is today. And they're coming on at the right time. I've been involved in projects that gone the other way. Matt, you want to talk about some of the things that we're looking at. Matthew O'Neill: Yes. And aside from the ones that have already been spoken about of sort of [ E22 ], if I just run through the operations quickly. The area that excites me most, if I pick Cowal is -- and I'm stealing Glen's thunder, but is the exploration and the resource potential that's there. So investing the money in the drilling, investing the money in the mining, [Technical Difficulty] those 2 things, there's an opportunity to extend, which is not as exciting as growing, but there's also a pretty good opportunity there depending on where we see the long-term metal prices level out at, that you would grow Cowal again, that's pretty -- that's very exciting in terms of the results we're getting back through that, and Glen will give an update next time we talk through that. And then the other 1 there is also Mungari. In a similar vein, the margin and the value comes from the underground. So that the mill capacity is good, but if we can invest in our drilling and increase that percentage of underground through, that's where we get our growth in ounces without a material one. So they're our best bang for buck. And then the, like I said, Ernest Henry exploration, you do have that capacity there. But the cave and whatever else is reasonably sort of restricted there. So additional ore sources around the region that we would see growth from with that one as well. Operator: [Operator Instructions] Your next question comes from Zane Guo from JPMorgan. Zane Guo: Just the 1 for me today on capital management. How do you think about the dividend versus a buyback into the half? Lawrie Conway: Yes, Zane. We've talked about this previously. I mean, we -- buybacks are a part of a capital management plan that we look at -- I mean, for us, they need to be sizable. If you're looking at 10% of the value of the organization as a benchmark, that's a large commitment over. And I go back to the point of like if we've got projects that we can invest in that get a greater return for our shareholders, that will be the first priority. The second part is that the flexibility around our dividend policy, where in this rising price environment, our shareholders will receive a greater portion of cash flow than what they have in the past. And I think that really gives the best value for our shareholders. So I don't expect that buybacks would be on the table for consideration by the Board this half year. Operator: Thank you. There are no further questions at this time. I'll now hand back to Mr. Conway for closing remarks. Lawrie Conway: Thanks, Harmony, and thanks, everyone, for taking the time on the call today. We've got another safe and successful quarter. The cash flow is building the projects that we're running to are on plan and on budget, and we really look forward to updating you in a few weeks' time where Fran can tell you what we are doing with the cash as we release our half year results. Thank you. Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Regis Resources quarterly briefing. [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 Jim Beyer, Managing Director and CEO, to begin the conference. Jim, over to you. Jim Beyer: Thanks, Paul. Good morning, everyone, and thank you all for joining us for the Regis Resources December quarter FY '26 results. Joining me on the call today is our CFO, Anthony Rechichi, also our COO, Michael Holmes and Head of Investor Relations, Jeff Sansom. We'll refer at times to figures -- some figures and tables in the quarterly report that we released earlier today. So you may find it useful to have that document at hand when we refer to them. All right. So look, I'll start with safety. During the quarter, our operations continued to perform strongly from a safety perspective. The 12-month average lost time injury frequency rate finished the quarter at about -- at 0.34, which remains well below the Western Australian gold industry average. Our objective remains unchanged in this area to provide a workplace free from serious injury. We continue to focus on leadership, discipline and continuous improvement to support safe and reliable operations across the business. Turning now to our production performance. Over the quarter and in fact, across the last several quarters, the team has continued to deliver the plan. The message we have consistently communicated to the market has not changed. Regis operates quality assets with strong leverage to the gold price. And when combined with the rolling life extension potential of our underground mines that we continue to see, this positions the business extremely well to deliver consistent ounces and cash flows well into the future. Operationally, the quarter group gold production for the period was 96,600 ounces at an all-in sustaining cost of $2,839 an ounce. And that, by the way, includes $179 an ounce of noncash stockpile inventory movement unit cost. This consistent delivery across both Duketon and Tropicana again demonstrates the reliability of our operating base and the strength of our margins. The performance translated directly into strong financial outcomes and further balance sheet strength. During the quarter, we generated $419 million of operating cash flow and increased our cash and bullion by $255 million, leaving us with an end of December balance of $930 million in gold -- in cash and gold. Also during the quarter, after taking into account our strong balance sheet and great outlook, we resumed dividend payments, declaring and paying a fully franked dividend of $0.05 a share, returning $38 million to our shareholders. Now this was underpinned by strong financial performance delivered in FY '25. This brings the total amount of dividends paid by Regis to $580 million since 2013. It reflects -- the restart of dividends, reflects our confidence in the sustainability of our cash flows and the strong position the business is now in and also in our fundamental understanding the value growth and returns to our shareholders are a fundamental objective of our business. To that end, Regis is unhedged and continues to be. We continue to invest in underground growth and exploration. And thanks to the strong operational performance, now has the capacity to balance this disciplined reinvestment with returns to shareholders. And with that, I'll now hand over to Michael and then Anthony, who will provide more detail on operations and financial performance. Thanks, Michael. Michael Harvy Holmes: Thanks, Jim, and good morning, everyone. Operationally, the December quarter was in line with expectations, both across Duketon and Tropicana, and the teams to continue to deliver its plan and the consistency of execution across the business remains a key strength for Regis. At Duketon, open pit on underground operations produced 57,600 ounces. Open pit mining continued at King of Creation, Gloster and Ben Hur, delivering 13,600 ounces at an average grade of 0.82 gram per tonne. Mining conditions were stable and performance was in line with plan. Our underground operations at Garden Well and Rosemont continue to perform reliably producing 32,000 ounces at 1.8 grams per tonne. Development rates across both undergrounds were pleasing and supported steady ore delivery through the quarter. Total underground development at Duketon was 3,896 meters with approximately 40% classified as capital development, reflecting the ongoing investment in Garden Well Main and Rosemont Stage 3. Both projects continue to schedule and are progressing as planned towards commercial production. The Duketon Mills performed to expectations and throughput was supported by planned stockpile feed. During the quarter, we also progressed activities associated with the BuckWell open pit at Duketon North. Following the reserve upgrade announced during the quarter -- during the period, early establishment and pre-strip works commenced to position the operation for first ore later in FY '26. BuckWell is a capital-efficient near-term opportunity that leverages existing infrastructure, approvals and available mill capacity at Moolart Well. From an operational perspective, it provides a flexible source of ore to support the Moolart Well once low-grade stockpile processing concludes while fitting well within the broader Duketon mining sequence. Turning now to Tropicana. At Tropicana, Regis' attributable production for the quarter was 39,000 ounces, representing another solid quarter of delivery. Open pit operations delivered 18,800 ounces at an average grade of 1.96 grams per tonne, with performance in line with expectations. Underground operations delivered 17,400 ounces at 3.14 gram per tonne, again, consistent with plan. Overall, both Duketon and Tropicana continued to perform reliably during the quarter, delivering consistent production while progressing key underground and near-term growth projects. With that, I'll now hand over to Anthony to take you through the financials. Anthony Rechichi: Thanks, Michael. Good morning, everybody. As Jim outlined earlier, the December quarter again demonstrated the strength of Regis' financial position with consistent operational delivery translating directly into strong margins and cash generation. Gold sales for the quarter were for just under 100,000 ounces for an average realized price of $6,436 an ounce, generating $641 million in revenue. Operating cash flow for the quarter was $419 million, with $231 million generated at Duketon and $188 million coming from Tropicana. Also in cash and bullion and referring to Figure 2 in this morning's ASX release, the coppers increased by $255 million during the quarter, taking the total balance to $930 million as at 31 December. Importantly, this increase was achieved after the payment of a fully franked dividend of $0.05 per share which totaled $38 million, while continuing to invest across the business and at McPhillamys. On the capital expenditure front, we spent $115 million in the quarter. At Duketon, this included underground development, preproduction mining activities and waste removal as well as investment in plant and equipment. A significant portion of this spend related to the continued advancement of Garden Well Main, Rosemont Stage 3 and early works at BuckWell. At Tropicana, expenditure related to underground development at Boston Shaker and Tropicana underground, preproduction costs at the Havana Underground and sustaining capital across the operation. Exploration expenditure during the quarter was $19 million, reflecting the strong level of activity across both Duketon and Tropicana and $5 million were spent during the quarter on McPhillamys. As previously outlined, following the Section 10 declaration, all McPhillamys expenditure is expensed through the profit and loss account. To close out and to also remind everybody, because of what has been strong profitability for a while now, Regis will return to a cash tax payment position, starting with the FY '25 tax payable of approximately $100 million, which will be paid in March next month. Well, month after, I guess. Going forward, we expect to make monthly corporate tax installment payments since the long period of tax loss benefits that we've enjoyed has come to a close. Overall, the December quarter highlights the magnificent cash generating capacity of the business with strong operating margins and disciplined capital allocation supporting balance sheet strength and shareholder returns. With that, I'll hand back to Jim. Jim Beyer: Thanks, Anthony. Look, now I want to talk through some of the broader corporate areas, and I'll start or return back to capital allocation. I'll repeat myself earlier that during the quarter, we resumed the dividend payments and a $0.05 fully franked share, returning $38 million to shareholders. The resumption of dividends is not expected to be a one-off decision. It reflects a clear shift in how we now view our business and the outlook of gold price, which then leads to the question of capital management. We are generating strong reliable cash flows. We have a robust balance sheet, and we're able to invest in the business while maintaining financial flexibility, a great position. Now in relation to looking ahead, we're in the process of finalizing a formal capital allocation policy as our Chairman mentioned at the last year's Annual General Meeting 2025, which we expect to release in February with the half year results. So that's discussing the ultimate outcome of our business, i.e., returns to shareholders. I'd now like to go right back up to the front of the business and talk about exploration. During the quarter, we released our biannual exploration update, which highlighted several very exciting opportunities that are popping up across both our underground and our open pits. Now as a result of these pleasing results and the resulting confidence to continue, we've actually increased our forecast spend on exploration this year. So we're continuing with our budgeted drilling program plans that we already have laid out for the rest of the year. But we're also adding to the program by basically maintaining the range at one of the -- at the projects that we drilled earlier in the year that have proved successful and warrant continuing. This increased our FY '26 exploration forecast and hence our guidance by about $20 million to result in the new guidance range for exploration of $70 million to $80 million. At Tropicana, the good news keeps on coming as drilling consistently delivers extensions to our known mineralization, increased confidence in underground growth opportunities and identify new targets to continue to build the underground pipeline. So our increase in exploration spend this year is deliberate, disciplined and pleasingly driven by results. It reflects the quality of the opportunities we're seeing and our confidence in converting exploration success into future production and ultimately, cash flow, particularly where it leverages off our existing infrastructure. On McPhillamys, as previously flagged, the judicial review for the Section 10 was heard in the federal court in Sydney last month in December, and the judge has reserved this decision and we sit and wait for the outcome. Now as we've mentioned before, in parallel, we continue to progress work on alternative pathways to return McPhillamys to an approvable position, and that includes ongoing assessment of an integrated waste landform solution for the tails. This work is progressing methodically and over a longer-term time frame, it takes time for us to work on these alternatives. Now finally, I'd like to touch on the Buckingham Wellington pits was -- and Michael has talked on these before and as we call them now, BuckWell. BuckWell is a capital-efficient near-term opportunity that, as Michael said, leverages existing infrastructure approvals and our available milling capacity. It is a cracker of incremental value. We're going to get 221,000 ounces out of it at an average all-in sustaining cost of $3,524 an ounce. And this is all in the release we put out last quarter. Now at consensus average price of 5,387 an ounce, it has a pretax NPV of $270 million and an internal rate of return of 127%. Now that's a 5,387 spot today. I don't know what it is right this very minute, but earlier this morning, it was 7,125. If we run that through it, the math is pretty simple. Pretax NPV would be more than double. This is a great project, and it's a great example of the work that our team is doing. With a bit of a fresh look at our old assets, sometimes a little bit of extra drilling. And in this case, we've been able to add significant annual production to Duketon by now being able to keep the Duketon North operation in production until early FY '32. That's 5 or so more years delivering a total of 221,000 ounces recovered. What a great project. And the great part about it is that it's a -- the stage nature of the development provides flexibility in sequencing and timing. It enables us to adjust the pace and the extent of the mining to reflect the prevailing gold price. This is not a commitment to start mining now and get ounces in 2 or 3 years' time, hoping that the gold price is where it is, not that it's going to draw, but it gives us flexibility in the unlikely circumstances that the gold price did go down. This allows the company to advance profitable ounces in a higher gold price environment while retaining discretion to defer later stages, if required. The plan is consistent with our disciplined capital management approach and demonstrates the ability to respond decisively to favorable market movements. So wrapping up, to summarize, the team delivered another quarter of consistent operational performance. This performance translated into strong cash generation and further balance sheet strength. We resumed the dividend payment and are progressing a formal capital allocation framework to guide future shareholder returns. We're increasing exploration investment supported by a strong track record of success and reflected by our increase -- as is reflected in this increased expenditure and really driven by successful early-stage outcomes. At McPhillamys, we continue to pursue all available pathways while awaiting the outcome of the court process. The addition of BuckWell pit to our production outlook means Duketon North will now be in operation to produce gold through to the end at least FY '31. The Regis team has delivered a strong result over the quarter, and we believe the business is well positioned to continue delivering long-term value for shareholders. Thank you. And I'll now hand back the call to you, Paul. Operator: [Operator Instructions] Your first question comes from the line of Levi Spry of UBS. Levi Spry: Happy New Year. Very good one for you. I guess, two questions, please. Firstly, on the exploration front, so nice to see that increase in the budget there. Can you just give us a bit of context around the activities that are involved there. So how many rigs you got running, sort of roughly where they are, what sort of meters that converts to and I guess, how that sits with your internal capacity in terms of your going full tilt at that? Or could you spend some more? Jim Beyer: Look, I can't -- I haven't got the exact details of the additional meters close at hand. What I can say is in addition to what we had already planned. So there will be additional activity that will need to be -- well, it's actually already underway to where we were either decommissioning rigs to move on to somewhere else. We've now kept them and brought in other rigs to go to the previously planned locations elsewhere. So there's quite a bit of activity on that. I mean we've got Beamish. Beamish South is an area that we've seen some particularly interesting results that are keeping us there. But also there's some very early indications in -- across our greenfields exploration areas that we want to put some more money in. But certainly, a key 1 is Beamish, which we're getting quite excited about. And -- but the basic answer to your question is, are we sort of shifting gear around? Or are we mobilizing more equipment we'll be mobilizing more equipment. We'll certainly be running more equipment, more people than we were planning to do in the second half. NCX for $20 million. Levi Spry: Yes. I guess sort of partly where I'm going. Are they easy to get? What -- how is the capacity in the WA drilling industry? And are they charging more? Like everyone's drilling lot meters. Just trying to understand. Yes. Talk a little bit about the [indiscernible]. Jim Beyer: Yes, I don't think there's any issues for us in sourcing that extra gear in equipment. So haven't seen that, I mean our commitments. The team believes that they can get the work done, the additional work done that we have planned. So we're not seeing that. And in terms of access, access is always the usual issue nothing expanded. Nothing has got worse, I should say. Levi Spry: Got it. Okay. And then going back to shareholders' returns sort of pace with the result, can you just flesh out the competing interest there a little bit and that balance sheet, $930 million, what is potentially a comfortable sort of number? What other competing interest do you have? So you've got that tax piece? Do we expect CapEx to be similar to this year plus the BuckWell, sort of CapEx and exploration sort of running at those sort of levels? Is that -- are they some of the goalposts that you're working to? Can you just sort of flesh out some of those parameters? Jim Beyer: Yes. Look, the capital that we've got laid out in front of us is definitely -- it's -- we're not expecting any major jumps or leaks of where -- from where we are at the moment. Quite frankly, we've got a pretty good problem that we're sitting at and sitting on, which is we've got a good, clear and reasonable capital expenditure program sitting in front of us. Nothing unexpected. And therefore, we're in a good position to be able to be comfortable with what our dividend policy should be. I'm sort of -- it's a pretty general question that you're asking, Levi. I mean, we have big leaks of capital, probably the biggest leak of capital that we've got sitting in front of us clearly is McPhillamys, but that's at least a couple of years away, and we've got nothing else of material scale at the moment sitting in our internal or organic options. So I think it's pretty -- it's -- our ability to pay a dividend was pretty clear and our ability to potentially continue to pay that is quite clear as well. Sorry, Levi. I mean if you if your question is where else are we -- what else could impact on our ability to continue to pay a dividend? We've got -- we're making excellent margin. We don't have anything significant coming up on our capital demand. So the ability is there, of course, notwithstanding gold price, but we're confident -- I think everybody is pretty confident. We understand how the gold price is going to perform certainly in the near to medium future. So I don't see any other significant demands on our capital for now. Levi Spry: Yes, quite the contrary. I'm trying to work out how big it might be. Jim Beyer: Yes, that's what we're working our way through, and it really ties in with the policy. And as I mentioned in the release, and I think I said earlier on that we will -- our plan is to provide a policy on capital return with the first half profit results, which will be around about this time in a month's time. Operator: Your next question is from the line of Adam Baker of Macquarie. Adam Baker: Jim, just firstly on the Duketon open pit. I did notice the grades have fallen a little bit quarter-on-quarter and compared to the second half of last year, your mining grades are around 0.82 grams per tonne. What should be expecting the grades moving forward, expecting normalized levels around this? Or are you going to continue to bring forward the low-grade tonnes in regards to Buckingham and Wellington? Is that going to see a bit of an uplift in grade from those levels? Or just trying to get a feel for how you're thinking there with open pit volumes. Michael Harvy Holmes: Yes, Adam, it's Michael here. The grades have fallen a bit. I mean it's a function of the mine sequence of where we are in the different pits. And so as we're working down there into the better grade generally at the depth of the pits and also it's a function of the stockpile fee. We have been feeding the better grade stockpiles. And as we sort of move forward, we're sort of moving into the lower grade stockpiles to supplement the feed through the mill. So expecting that sort of similar grade, but it will fluctuate depending on where we are with the fresh material. But no great fluctuations. Just the usual variation really. Adam Baker: What was the kind of reserve grades for BuckWell, you may have already pre-disclosed this, but is that kind of in the low 1s or where are you sitting at for that project? Michael Harvy Holmes: I don't have the number off the top of my head. Jim Beyer: What was the question? BuckWell? Michael Harvy Holmes: The grade of BuckWell. Yes, it's around about -- yes, just under 1, around about 0.9. Adam Baker: Yes, makes sense. And just in addition to the capital management framework policy, you touched on dividends, but it seems that you're also considering share buybacks as you say in the announcement and/or how do you weigh that up just versus the dividend payout versus considering some buybacks like some of the peers have done over the last 12 months as well. Jim Beyer: Yes. Look, I mean, it's a -- that is how do we weigh it up? Well, we wait and we try and work out what's going to give the best value to our shareholders. There's a number of share buyback initiatives that are in play with some of our peers. Just how much is being done is sort of one thing that we look at, what's announced and what's executed. Obviously, you got to have a view on what your share price is. But there are a number of different ways that we can return -- give returns to shareholders. There can be regular dividends that are tied to our profit and our announcement, there can be special dividends or there can be buybacks. And they are the things that we're looking at, right? We sort of got to trade them off. We've got to figure out which ones provide real benefit? Where is our share price trading? Are we -- is our value right? Are we under or over? And there's multiple things there, Adam, that we're looking at. And ultimately, we will work out and let the market know what our final view on that is. But it's pretty clear that the idea and the capacity for returns are there. So that is quite clear the form of it is probably takes a little bit of finalization, but fully franked dividends are a great way of returning our profits to shareholders. Operator: Your next question is from the line of Hugo Nicolaci of Goldman Sachs. Hugo Nicolaci: Jim and Anthony, congrats on another strong quarter of cash build. Just first one on McPhillamys. I appreciate the timing there is a little bit out of your control, but sort of any indications to the timing there or sort of getting outcome this quarter, that time line might have changed? Jim Beyer: Yes. Good question, Hugo. No, not really. I mean there's no statutory time line for any judicial person to come back. We think that -- yes, I would like to think that we're going to hear something by the end of this quarter, but there's no certainty on that. I mean, in fact, by the time we take into account holiday and Christmas, it's probably not unreasonable to expect we won't hear anything until what is it the June quarter sometime. And even then, there's no -- as I said, there's no fixed time line on when -- how long a judge takes to come back with their decision. Hugo Nicolaci: Fair enough. Just to double check there. And then just one more on capital returns and only because it's a nice enviable position to be in that you do have so much capital accrued. But in terms of that you'll come out with in February. I mean, is there anything that we should consider that might guide why the policy would be sort of materially different to some of your peers in that sort of 20% to 30% of operational free cash flow being paid out? Jim Beyer: Hugo, what I can tell you is that we're working on our dividend and return policy, and we will be informing the market of what that is when we release our half year results later on in February. Hugo Nicolaci: Fair enough. I thought I'd try that question one more way. But now, we look forward to that update in February. On the operations, then maybe just Duketon North, can you maybe just confirm what that produced this quarter? And then just give us a bit of color there on the time line through this half to ramping up the extension? Jim Beyer: Sorry, what were -- what was the question? Hugo Nicolaci: Sorry, Duketon North. Michael Harvy Holmes: The question related to -- Hugo was the direction -- sorry. Keep going. Jim Beyer: Keep going, Hugo. Hugo Nicolaci: So I was going to say, yes, the question was just for Duketon North, so how the production from the stockpiles is tracking at the moment? And then just a bit more color on the time line through 2026 in terms of wrapping up for the extension. Jim Beyer: Yes. So it's sort of minor. We get sort of minor improvements through the Duketon North of the stockpile. So it's sort of nothing sort of material there about ran to that 1,500 to 2,500 tonnes, depending on the ounces, depending on the grade. BuckWell sort of is not really producing grade this year and financial year and that will be ramping up next financial year. Hugo Nicolaci: Yes. Got it. And then just lastly, on Tropicana, just looking at some of the cost components there. It looks like milling costs sort of tracking up about sort of $26, $27 a ton last couple of quarters. Is that sort of the right rate to think about going forward from here? Or are there pieces like labor cost inflation or sort of power and contracts there on the gas piece that might push those costs a little bit further or be a benefit going into next year? Jim Beyer: I don't think there's any reason to think that those numbers should be viewed any differently going forward. Operator: [Operator Instructions] Your next question is from the line of David Coates of Bell Potter Securities. David Coates: Jim and team, congratulations on a strong quarter. And look, just a bit following on from the question on cost. More of just around like underlying unit costs across the board. I was sort of hearing different reports that cost inflation across the industry in general is easing or in some cases, maybe not. But just wondering what you guys are seeing in terms of your underlying unit costs and input costs. Jim Beyer: Well, I mean, at a high level, I would say that you can see where our costs are coming in on our AISC guidance and there's nothing that we're seeing or experiencing that's going to drive that higher. But on an individual basis in specific areas, I'd sort of pass over to Anthony or Michael to make a comment on that. Anthony Rechichi: Yes. Look, David, it's Anthony here. Look, my comment on that is except for -- so on the AISC front, as we've sort of already talked about there or in the public, we've been talking about we're purposely pursuing some of the higher cost ounces. Now that's -- they're grade related. So that's what you're seeing in AISC. In actual input costs, though, like what is things costing down at the ground for getting per gold produced unit. Look, besides general CPI increases, and they are still there, nothing standing out. What we're not seeing is in your earlier comment, yes, maybe some people are seeing it go down. We don't see that. But we're seeing, yes, just typical CPI, not necessarily more than that and not less. David Coates: Not cool. I was seeing people saying stable, but I haven't seen going down yet. But yes, so it is unwinding. Anthony Rechichi: Yes. I guess stable is the right way to say it. If we say stable in line with CPI, I guess, it's kind of stable, yes, if you say it that way. Operator: And there are no further questions at this time. I would like to turn the call back over to Jim for closing remarks. Jim Beyer: All right. Thanks, everybody. Appreciate you joining on what is another busy day and also appreciate the questions. As usual, if there's anything to -- anything you want to follow up, give us a call. Also I'd just take the opportunity now to thank for those who aren't aware, Jeff's leaving at the end of this month and heading off to Alicanto. So good luck with the new role, Jeff. Thanks for everything. And we'll let you know who Jeff's replacement is in due course. All right. Thanks, everybody. Have a good day. Operator: This concludes today's conference call. Thank you all for joining us. You may now disconnect.
Operator: Good afternoon. My name is Constance Constantine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight Swift Transportation Fourth Quarter twenty twenty five Earnings Call. All lines have been placed on mute to prevent any background noise. If at any time during this call you require immediate assistance, please press 0 for the operator. Speakers from today's call will be Adam Miller, Chief Executive Officer Andrew Haas, Chief Financial Officer and Brad Stewart, Treasurer and Senior VP of Investor Relations. Mr. Stewart, the meeting is now yours. Brad Stewart: Thank you, Constantin. Good afternoon, everyone, and thank you for joining our fourth quarter 2025 earnings call. Today, we plan to discuss topics related to the results of the quarter, current market conditions and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last 1 hour. Following our commentary, we will answer questions related to these topics. In order to get to as many participants as possible, we limit the questions to 1 per participant. If you have a second question, please feel free to get back in the queue. We will answer as many questions as time allows. If we're not able to get to your questions due to time restrictions, you may call (602) 606-6349. To begin, I will first refer you to the disclosures on Slide 2 of the presentation and note the following. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A, Risk Factors, or Part 1 of the company's annual report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Now please turn to Slide 3, and I will hand the call over to Adam for some opening remarks. Adam Miller: Thank you, Brad, and good afternoon, everyone. During the fourth quarter, the truckload market saw demand that was generally stable, but lacking the typical broad-based seasonal lift in demand until late in the quarter. Seasonal project activity occurred in October, but wound down quickly in early November. As a result, truckload volumes were lower than we expected. While we did see some improvement in overall demand and a tightening spot market in December, it was a reduction in available capacity that seemed to be the primary driver of the tightening market. The pressure on capacity also may be affecting the secondary equipment market as we experienced slowing equipment sales trends and falling average prices during the quarter. Developments such as these are often a precursor to a more healthy market. Thus far in January, network balance is running better than typical seasonality as capacity continues to be under pressure. We are pleased that our people were able to deliver meaningful sequential operating margin improvement in our Truckload segment, even while demand was short of our expectation for much of the quarter. For the full year, our progress on structurally cutting costs out of the business helped us overcome a $125 million decline in truckload revenue, excluding fuel surcharge, but grew adjusted operating income $28 million in this segment. At the same time, the Truckload business overcame inflation pressures to hold its 2025 cost per mile flat with 2024 despite miles declining 3.6%. Our LTL team was able to produce year-over-year shipment growth for the fourth quarter in a lower demand environment even after lapping the DHE acquisition in the prior quarter as our expanding network continues to help us create new opportunities. This team also responded quickly to the changing environment, stepping up the intensity of our cost initiatives to deliver operating margin within 60 basis points of the prior year levels, even while shipment count growth fell well below that of the growth in facilities and door count year-over-year. As we move into a new year and with anticipation building for a turn in market conditions, we felt it would be helpful to review our company's profile and to highlight some of the things we are focused on to better position ourselves for earnings growth moving forward. I won't touch on every part of our business here, but I wanted to share a few thoughts. First, we operate the largest fleet in the truckload industry and roughly 70% of our fleet is deployed in one-way or over-the-road service. It is true the one-way market has been the most difficult place to be over the past 3-plus years as this market has felt the brunt of the influx of capacity since the pandemic, but one-way service is what typically improves first and most in a tightening market. Our unique ability to deliver responsiveness at scale and with industry-leading trailer pool flexibility are competitive differentiators that attract opportunities, especially in a tightening market. Second, the significant progress we have made cutting costs out of our truckload business has driven year-over-year earnings growth despite lower revenue. Further, while the deleveraging effect of lower miles has masked some of our progress in reducing cost per mile, we believe most of the fixed cost reductions are permanent and position us for better incremental margins as volumes and pricing recover. The incremental margin opportunity is further enhanced by the room to improve utilization on the existing fleet. While we have made meaningful progress on cost to date, there are still a number of opportunities to further improve and to scale our business efficiently. We have been investing in internal development and external products to facilitate tech-enabled efficiency gains as well as better revenue capture, including through AI and other methods. We expect the benefits to begin to be realized in 2026 as we more fully roll out these technologies and as an improving marketplace provides us opportunity to scale more efficiently. Finally, our entry into the LTL industry and subsequent expansion over the past few years is just the beginning of what we believe will be a multiyear journey with an attractive runway for reinvesting free cash flow towards improving revenues, margin and earnings stability. As we have grown our facility count faster than our shipment count over the past 2 years, this has weighed down margins, but we expect a more deliberate pace of network expansion in the near term will allow us to restore margins as we continue to grow into these investments. We believe the existing infrastructure has capacity to support annualized revenue of $2 billion. As we continue growing into these investments, the operating leverage will be further enhanced by building density and optimizing our cost structure to help us reach our goals of steady margin improvement. Then, when we look externally, there are a number of factors that increasingly indicate the truckload market could begin to grow stronger in 2026. Capacity reduction is clearly underway. Regulatory enforcement of qualifications and safety standards was arguably the most welcome development in 2025 for our industry. The influx of capacity from 2021 to 2024, much of which was played by a different set of rules and operating with different cost structures has distorted pricing behaviors and cyclical patterns. The ongoing efforts of the FMCSA and DOT to prevent and revoke invalidly issued CDLs, shut down noncompliant CDL schools and address hour of service abuses should, in our view, have an outsized impact on the lowest priced capacity in the one-way truckload market. Aside from the regulatory cleanup, capacity continues to erode, especially in the one-way truckload market where struggling carriers are running out of liquidity and large players continue to shift towards dedicated services. Second, market data trends have improved of late. Despite muted demand, rejection rates climbed in recent months and are hanging in above year ago levels in early January. Similarly, market spot rates and the spot versus contract spread improved exiting 2025 to the best level seen since early 2022. These market trends align with those seen within our own businesses. And finally, the inventory pull forward appears largely worked off as a result of solid holiday sales, and there is a potential for stimulative support for demand from the tax bill and Fed rate cuts. It appears the market has progressed to a point where even small increases in demand can cause disruption and our industry-leading over-the-road capacity is uniquely positioned to create value for our customers and capture opportunities for our business. The market and regulatory developments in the back half of 2025 give us increased confidence in the path to return our Truckload segment back to mid-cycle margins. We are not here to call the turn by any means, but we are closely monitoring market trends, bid developments and signals from our multiple nationwide truckload networks and are prepared to execute our playbook for deploying capacity towards the most valuable opportunities as the landscape shifts. We remain committed to thoughtfully deploying capital, intentionally leveraging our strengths and creatively unlocking synergy opportunities across our business. And with that, I will turn the call over to Andrew and Brad to review the results of the quarter and our guidance. Andrew Hess: Thanks, Adam. The charts on Slide 4 compare our consolidated fourth quarter revenue and earnings results on a year-over-year basis. Before getting into the comparisons, it's important to note that our GAAP results for the current quarter include $52.9 million of noncash impairment charges, primarily related to our decision during the quarter to combine our Abilene Truckload brand into our Swift business. Impairments have been adjusted out of our non-GAAP results as shown in the reconciliation schedules following this presentation. Revenue, excluding fuel surcharge, decreased slightly by 40 basis points and operating income declined by $51.5 million year-over-year, largely due to the $52.9 million of impairment noted above. Adjusted operating income declined 5.3% year-over-year as a result of lighter truckload and LTL demand environments compared to the fourth quarter of 2024. GAAP earnings per diluted share for the fourth quarter of 2025 were a loss of $0.04, primarily related to the impairments noted above. GAAP earnings per diluted share in the prior year quarter were $0.43, which included a $36.6 million benefit for a mark-to-market adjustment of certain purchase price obligations associated with the U.S. Xpress acquisition. Adjusted EPS was $0.31 for the fourth quarter of 2025 compared to $0.36 for the fourth quarter of 2024. Our consolidated adjusted operating ratio was 94%, up 30 basis points year-over-year and 20 basis points sequentially. The effective tax rate of 21.6% on our GAAP results was 820 basis points higher year-over-year. The effective tax rate of 23.1% on our non-GAAP results was 460 basis points higher year-over-year. Slide 5 illustrates the revenue and adjusted operating income for each of our segments for the quarter. Overall, truckload grew as a share of our consolidated revenue quarter-over-quarter as the fourth quarter is typically the strongest season for this business, while it is the softest [indiscernible]. We would anticipate LTL returning closer to its recent 20% share next quarter as LTL seasonality begins to improve. We have been enhancing our ability to generate revenue synergies across brands and lines of service. The key levers are intentional leadership to drive powerful collaboration and deploying technology to foster seamless connectivity. Leveraging excess capacity in one brand against excess demand in another effectively increases our ability to search and capture a greater share of market opportunities while solving internal network imbalances. To be certain, we have leaned on each other before, but for these advances -- but these advances make such practices systemic, more responsive and scalable. These are calculated investments designed and prioritized based on their ability to propel our business. Now we will discuss each of our segments, starting with our Truckload segment on Slide 6. As Adam mentioned, volumes in the Truckload segment were lower than expected with generally lower demand than the prior year period until late in the quarter. Additionally, seasonal project activities in October had shorter duration than in the prior year, likely due to some freight having been moved earlier than normal given trade and tariff disruptions throughout 2025. Additionally, blockades of the Mexico border during the quarter were a headwind to productivity, especially for our TransMex division. While demand did show some improvement late in the quarter, which helped support spot rates, this could only partially overcome the muted November results. The secondary equipment market weakened during the quarter, which appears to be at least partially related to the impact of regulatory enforcement on smaller carriers, which caused gains on sale to come in roughly $4 million below the prior quarter level and our expectations. On a year-over-year basis, revenue excluding fuel surcharge declined 2.4% and adjusted operating income declined $9.2 million or 10.7% year-over-year, largely as a result of the 3.3% decline in loaded miles. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions increased 0.7% year-over-year and sequentially improved 1.4% over the quarter. The fourth quarter combined adjusted operating ratio was 70 basis points higher year-over-year. Excluding U.S. Xpress, the Legacy Truckload brands operated at a 91.6% adjusted operating ratio, while U.S. Xpress improved its adjusted operating ratio 430 basis points year-over-year to the mid-90s as the seasonal project participation was at its highest since the 2023 acquisition. Finally, during the fourth quarter, we decided to combine the Abilene trucking operations into our Swift business to improve efficiency and enhance the productivity by incorporating these assets and freight flows into a more robust network with more freight opportunities. We continue to make tangible progress improving our cost structure to position our business to generate meaningful returns as market conditions recover. Moving on to Slide 7. Our LTL business grew revenue excluding fuel surcharge 7% year-over-year with shipments per day up 2.1%, a lower growth rate than the previous quarter as we lapped the acquisition of DHE on July 30 and as market demand moderated at the beginning of October. Revenue per hundredweight, excluding fuel surcharge, increased 5% year-over-year. Adjusted operating income decreased 4.8% and adjusted operating ratio increased slightly by 60 basis points year-over-year. As Adam noted, in response to the moderating demand environment during the quarter, we stepped up the cost initiatives we had announced last summer to mitigate pressure on margin. We are taking action where prudent in the short term, but without sacrificing our ability to respond to growth opportunities through ongoing bids as discussions around bids currently in process are encouraging. During the fourth quarter, we opened one new service center and replaced another with a larger site, bringing our growth in door count to 10% year-over-year. We have opportunities to optimize our operations and cost structure as our network and business mix mature, and we have confidence in our plans to achieve this. Our solid service levels, growing customer base and ground to make up on pricing provides a compelling runway for the value to be generated by this business. Now, I will turn it over to Brad for a discussion of our Logistics segment on Slide 8. Brad Stewart: Thanks, Andrew. Logistics revenue for the fourth quarter declined 4.8% year-over-year as volumes were down 1%, while revenue per load was 4.1% lower due to mix change. Third-party carrier capacity grew noticeably more difficult to source during the quarter, which pressured gross margins. Gross margin of 15.5% for the fourth quarter declined 230 basis points from third quarter levels and 180 basis points year-over-year. Adjusted operating ratio was 95.8% for the quarter. Another recent trend is the increase in cargo theft in the industry. While fraud and theft in the industry has been on the rise over the past couple of years, channel checks indicate a rash of theft in the quarter, some of which appear to be related to operators being forced out of the business through either financial struggles or regulatory enforcement. If these trends continue, it could further encourage shippers to allocate more business to direct asset-based carrier relationships. For our part, we have been further tightening our already rigorous carrier qualification standards and narrowing the existing carrier base that we tender loads to. Also, if upward pressure on third-party capacity cost continues, this could cause further pressure on gross margin in the near term as capacity continues to erode. However, given the relationship between our Logistics segment and our Asset-Based Truckload segment, we believe these dynamics would ultimately benefit both our asset and logistics businesses over time. Our Logistics business has demonstrated its agility in navigating a volatile market the past few years by maintaining its operating margin close to target levels through disciplined pricing and cost management. This team is now further leveraging technology to take cost efficiencies to a new level as well as to improve our responsiveness and ability to capture opportunities in the market, which we expect will contribute to earnings in 2026. These enhancements, combined with its complementary relationship with our asset business, position our Logistics business to accelerate revenue growth and the return on our trailer assets in an improving market. Now on to Slide 9 for a discussion of our Intermodal business. The Intermodal segment improved its adjusted operating ratio 140 basis points year-over-year to 100.1%, driven by a 2.8% increase in revenue per load as well as structural cost reduction and improvement in network balance, which led to significant year-over-year reductions in empty repositioning, trade and chassis costs. Revenue declined 3.4% year-over-year on a 6% decrease in load count, partially offset by the increase in revenue per load. On a sequential basis, revenue grew 1.7% up 2.6% increase in load count, with both measures reaching their highest marks for the year. We look forward to leveraging the new chapter in our rail partnerships in an improving market. And in the meantime, we remain focused on delivering excellent service and driving appropriate returns through growing our load count with disciplined pricing, cost control, network balance and equipment utilization. Slide 10 illustrates our all other segments. This category includes support services provided to our customers, independent contractors and third-party carriers such as equipment sales and rentals, equipment leasing, warehousing activities, insurance and maintenance. For the quarter, revenue increased 17.7% and the operating loss in the seasonally slow period for this category improved $5.9 million or 37.3% year-over-year, primarily driven by growth in our warehousing and leasing businesses. Now on Slide 11, we have outlined our guidance and the key assumptions, which are also stated in the earnings release. Actual results may differ from our expectations. Based on our assumptions, we project our adjusted EPS for the first quarter of 2026 will be in the range of $0.28 to $0.32. In general, this guidance for the first quarter assumes current conditions remain stable and that we experienced some seasonal slowing in the truckload market and seasonal recovery in the LTL market. The key assumptions underpinning this guidance are listed on this slide. I won't take time to read through all of our assumptions here, but I do want to touch on a couple of the more significant moves other than the typical seasonality in truckload. We expect a strong bounce back in our all other segments category after its seasonal slow period in the fourth quarter, and we have significantly reduced the range for expected gain on sale based on the secondary equipment market trends that we noted in our earlier comments. Now this concludes our prepared remarks. And before I turn it over for questions, I want to remind everyone to please keep it to one question per participant. Thank you. Constantin, we will now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Richa Harnain from Deutsche Bank. Richa Talwar: I guess maybe we can start with the outlook. Adam, you walked through some various items to be -- look forward to in 2026, some tailwinds. Maybe you can just elaborate on like in light of those tailwinds, why we're not seeing maybe a more robust outlook for Q1? And I understand that there's some seasonality, but maybe you can just talk about that. And then just generally speaking, like any sort of guidance on how we should think about Q1 relative to the entirety of the year? Has seasonality shifted at all? And given the incremental margin should maybe be better, given all the good work you did on costs, like how should we think about how margins could progress as the year goes on? Adam Miller: Yes. Okay. Thank you, Richa. We'll count that as one question. So just to go through the outlook here. Maybe I'll start with just maybe walking through Q4 and then how that kind of sets up in Q1 and then maybe how we're looking out beyond that. I won't give any guidance in terms of EPS beyond Q1, but I can give you my view of how I think the market may progress. When we came into the fourth quarter, I think on our last earnings call, we talked about having some projects in the queue, some of them we haven't seen in several years. And those did materialize in October. And typically, when you see projects like that materialize, you have other types of projects that just kick off during the fourth quarter where you have customers that have acute needs and those typically drive a stronger November and build up through Thanksgiving and then you have a little bit of a lull coming out of that and then you could finish the quarter strong. Once we got through our projects in October or maybe early November, we did not see the strength continue. And it was a bit disappointing the volumes in November, and it was just tough to overcome that even with some of the strength we saw in the back half of December. And we don't get too wrapped up in the spot market jumping up for a couple of weeks because we're still largely contractual, but we did see some of the lift, but it wasn't enough to overcome the slower November and then just the disruption you get in productivity during the holidays. But as we saw that market kind of continue in or bleed into the first part of -- the first couple of weeks of January, I think we became a bit more constructive on maybe the balance between supply and demand. And so as we sit in early January, we're feeling a bit better about our ability to push rates in the bid season and maybe find some ways to even get some spot -- some premium spot opportunities early in the first quarter, which has been some time since we've been able to do that. But when I look out to what that means for the first quarter, a lot of the work that we do in the bids, we don't really feel the benefit of that or see the benefit of that until you get into the second quarter, earlier or mid-second quarter and then throughout the back half of the year. So I think the first quarter, we may be in a period where we feel better than we look in terms of the results, but the confidence in our ability to start to push rates higher and to restore or begin to restore our margins. And I think we've started off the bid season with far more constructive conversations with customers where the discussions are starting around securing incumbent lanes with positive rates. Now I think what we'd be pushing for would be low to mid-single digits and improvements in contract rates and maybe closer to mid than low. And maybe that may not align with what our customers want to see in a prebid. And so some of this stuff is going to go into a bid to see where the market is from a balance standpoint. And we've already heard from several customers about wanting to shift a bit more volume from brokers to assets because of the spot market trends that we've been seeing and then some of the capacity that's been coming out of the market from a regulatory perspective. So I think that gives us more confidence in where this market is headed. But I don't know that we really feel the full benefit or see the full benefit of that in the first quarter. But again, we're not trying to call the inflection yet. It's -- we've seen head fakes before, but I think we're feeling better about where this market is headed. And we do feel better about what the DOT and the FMCSA are doing to clean up capacity in our industry. And I could tell you our Knight, our Swift and especially now our U.S. Xpress business is well positioned and prepared with the tools, even the culture around what we're going to do to find opportunities to really leverage the scale and the flexibility that we have in our network. And so we're encouraged about what that could mean here in the back half of this year. Andrew Hess: Richa, I mean, Q1s are always a hard quarter to really flex, right, just based on that seasonality. I -- you rarely and I don't expect rate will be much of a lift for us year-over-year in Q1. And we're operating on a smaller fleet than we were last year. So I think all those go together, we do expect continued progress on cost. And I think that's our expectation here in the first quarter, improvement in cost per mile year-over-year. And I guess the other side, we talked a lot about truckload but LTL, I mean, I think there's -- we're still watching how the volumes build back. And that's, to some degree, going to determine how this quarter plays out. We're encouraged as kind of we're watching the early build back of volumes here in January, but there's still a lot of kind of runway ahead of us to see really where volumes build to in the quarter. So our guidance range that we've provided does not -- we think reflects a reasonable kind of middle lane view of how the quarter plays out. But certainly, if market conditions improve or worsen, there is a degree of variation around the guidance we're providing here. Operator: Your next question comes from the line of Jonathan Chappell from Evercore ISI. Jonathan Chappell: Adam, as it relates to the priorities and the strategic goals, almost every single segment you highlight cost to serve, technology, automation, optimization, et cetera. So when we think about your margin progression from 1Q, do you kind of view this as all the things you're doing on the cost side and the efficiency side could make margins improve even without a true inflection of the market? Or is it more you need price, price kind of drives an exacerbated move in margins and kind of higher highs and higher lows. Adam Miller: Yes. I mean, really, John, we really want to see both. But if the market doesn't play out on the revenue side, like we're maybe expecting in the back half of the year. We're not going to be a victim of that. We're going to go after as much as we can on the cost side to improve margins on a year-over-year basis. But certainly, when you have a lift in rates in the spot market, that mean that's going to help you get to kind of normalized margins. I don't think you get to normalized margins just on cost alone. You'll need some lift in the market. But we look at it as, hey, we fight both battles on a regular basis. And really, the wins we've had have been more on the cost side in the last couple of years. And I think we're due on the revenue side, but our goal is to get -- to make progress on both. Andrew Hess: It's really a 3-pronged approach, right, to full repair margins. It's capturing price. It's bringing volume back into the business, and reducing our cost per mile. We expect each one of those independently to contribute in 2026 to margin improvement. And the price, obviously, is going to be very much market dependent and to some degree, the miles, but we expect cost alone should drive margin expansion in 2026. Operator: Your next question comes from the line of Brian Ossenbeck from JPMorgan. Brian Ossenbeck: Maybe if you can expand a little bit more what you're seeing in the LTL market. It sounded -- I mean, you guys called out things were softer than I think most others saw last quarter. So that seemed to play on October, but it hasn't really built back the way you might have thought. So I wanted to see if you can elaborate on that, if it's more of a market perspective or maybe something with the network as you expand it? And then just some quick color on, you mentioned expanding the length of haul for the network like how does that -- how long does that take? And what does that really mean from a margin perspective as you go throughout this year? Adam Miller: Yes. So I think we talked about how we saw a shift downward of demand starting early in October, and that really progressed throughout the quarter. And so we've had to make some adjustments on the cost side of the business to adjust for that. But also factoring in that with our expanded network now, we're now going to have an opportunity to bid with larger shippers that we just hadn't had an opportunity with before because we didn't have the breadth of the network that would support what they're looking for in a carrier. And so a lot of those loads may be heavier loads, may have a longer length of haul. And this is where we tap into the relationships that we have on the truckload side of the business to provide opportunities for our LTL business to bid on that volume. So it's kind of still a little too early to tell how is volume really -- is it really picking up? Are we seeing a shift from Q4 into Q1? I think the margins were okay to start, but we're looking for a greater lift. But we have a lot in the pipeline right now in terms of bids that we think could be impactful to the shipment volume of our LTL business because we just have new customers that we have opportunities to grow with. So we're kind of working through those, still early progress on that, and I think more to come. But we're just kind of balancing what you do on the labor front to manage your expense in a market where you have volumes lower than I know what we can handle, knowing that we could have an opportunity to see those volumes shift up, and we want to be prepared to handle that with a high level of service. Andrew Hess: Yes, Brian, maybe one point I would add to that is one of the things we identified last year was even though we had integrated from a back-end perspective and systems between the 3 businesses that we have combined, it was creating confusion in our sales efforts and as we took our business to the market. And so we announced in the third quarter, we're moving to a unified brand. We've already seen that really help us in our sales efforts that we can present a single face to our customers and get them comfortable with our ability to deliver across our network in a way that meets their needs. So we think that is enhancing our sales efforts. We think that's going to help in addition to just the design of our network that we're going through. I mean it is a process to really put our network as we understand how our freight is flowing with these customers, there's been a process of doing that network design that we've been going through. And I think we're getting to the point where we've managed a lot of those bottlenecks. It's really put in a position on bid on business that we have not been able to participate on before. And so there's a lot of tailwind here in terms of we think the strength that's going to build in our ability to sell and build volume into the business that we built this structure on. Operator: Next question is from the line of Ravi Shanker from Morgan Stanley. Ravi Shanker: Maybe as a follow-up to that, kind of in the past, I think you've said you're keeping the brands that you've acquired, protecting them so that you don't have any customer losses, driver losses and kind of other negative implications in taking those brands away. So, a, how do you protect against that? B, what does this mean for the other separate brands in your portfolio? And if I can squeeze a really quick one in, kind of you spoke about LTL bid season going well. Any early comments on TL bid season would be great as well. Adam Miller: Sure. I touched on TL already, but I'll come back to that to Ravi. Yes. So if I look over the last 2 quarters, we've made a couple of adjustments to our strategy around some of our brands. On the LTL front, I think what we realized going into the strategy we had with buying multiple brands is the outsized benefit you get on the LTL front when you have one distinct network, 1 pro number, just 1 voice to the customer. I mean that is what they long for. They don't like the interline approach. And even though we had the systems integrated, we had -- the visibility was similar across the different brands regardless of the website, it still didn't feel like one company and one carrier to them. And so we felt like we needed to shift that strategy around LTL to provide one brand, one voice to the customer in order to really maximize the potential of the network that we've built. And so that wasn't an easy decision. We put a lot of thought into it, but we still think that was the right approach. Now you may have seen or we did comment on rolling Abilene Motor Express into our Swift Transportation business. Abilene Motor Express was a smaller company that we purchased in 2018, and it had gotten down to around 300-plus trucks and was really struggling. And what we found was given the size of that company and maybe the lack of brand recognition with some of our customers, it was really tough for them to break through with freight opportunities that was going to support their network. And we had some change in leadership that came from the Swift business to help right the ship at Abilene. And ultimately, we made the decision that it would be best for the Abilene employees, the drivers in particular, to run under a more robust network under Swift, we're trying to convert as many of the Abilene customers that went direct with them to the Swift network. And we had a lot of overlap of customers. So we're in that process right now of keeping that freight within Swift, but then supporting Abilene with backhauls and things that allow them to be far more efficient from a network perspective. I would not -- we don't have another brand out there that we own that we believe we would ever need to take this approach with. This was one that really saw margins degradate over the last several years and didn't have a clear path to profitability, and we felt like this was the fastest way to get that business back to generating a reasonable turn for the assets that we have and then allow us to reduce some overhead and put our drivers in a position to be successful. So again, it wasn't -- this isn't something that we would take lightly, but this was the right decision for the situation we were in. And on the TL bid, again, it's early, but we've had constructive conversations with our customers around rates being positive. And we're not having discussions about having to reduce rates to retain volume. And now it's just a matter of where can we get comfortable about where rates need to settle out in the bids. And some may be done in pre-bid negotiation,s, others, it will probably have to go to the bid, so the customers can really vet where the market is. But I feel more confident going into this bid season that rates are -- contract rates are going to be up. And I think that will build as capacity continues to exit. I mean we have some cliff events coming potentially with capacity, Ravi, where we've already seen with English proficiency, nearly 12,000 drivers who've been put out of service since June. We have -- with California, there's 17,000 non-domicile CDLs potentially expiring in March. New York has a similar number that isn't further that far out from there. Really all states other than, I think, one are not issuing non-domicile CDLs. So you kind of shut off that funnel of capacity coming in. And then there are several countries where the temporary protective status is ending as well in Somalia, Epiopia, in Haiti, where I would believe actually, you're going to have some of those individuals that are driving the truck. That may not be legal to be able to do that any longer. And then I mentioned just in my opening remarks about all the schools that are being shut down. I think there were 3,000 schools recently removed because of noncompliance and another 4,000 schools that have placed on notice for noncompliance. And there are audits out there being completed. I mean we -- 2 of our schools at Swift were audited and hey, we passed with flying colors as we'd expect. So it is real. It is happening. And so I think, again, constructive on early bid, but I think we'll start to see rate improve as the bid season progresses. Andrew Hess: And I think maybe just one note to add to that is we've had customers share with us that one of their objectives out of the bid season is to increase their asset coverage -- and we are -- I think we're seeing customers looking at the market, looking at the regulatory changes and realizing that this could be particularly more strategic procurement organizations are looking at this as a chance to increase their coverage of asset. And I think that's helpful in our conversations in the bids. Operator: Your next question is from the line of Dan Moore from Robert W. Baird. Daniel Moore: I think everyone realizes that you're positioned -- first of all, that you're under-earning along with everybody else in the space. And secondly, that you're well positioned here from the standpoint of starting to get some momentum in terms of rate. I guess 2 questions, I'll call it one, 2 things that I'd like to get some perspective on is one, cost-out story. You guys have been very focused on cost, lane balance, improving your landed cost. Where are you with that? And then, i.e., how much is left? Or are you at a pivot point there where you really need to be more focused on rate? And then to the extent that the rate environment improves over '26, is there an opportunity to go back to customers in the early innings that try and lock in at rates that are noncompensatory? That's it. And I appreciate the time again. Adam Miller: Yes. So Dan, maybe I'll hit on rate, and I'll let Andrew talk about cost. Rate is pretty fluid in terms of how it works in our markets because you got to realize we're not locking up with guaranteed volumes with a customer on the over-the-road space. Now dedicated is a little bit different, but the 70% that we do over-the-road is pretty fluid. And when the market begins to shift and it becomes tougher to find capacity, even if we've done contractual rates, we're managing commitments. We start to get overflow volumes, which sometimes can be at a premium. You get backup rates where in a market like this would typically be higher than your contractual rate. You'll have spot opportunities that are ad-hoc on our customer load boards that sometimes can be a premium. And so we can move pretty quickly to adjust to the market if we see it changing. And so even if you've kind of locked up rates early in the bid cycle, there's still opportunity with that customer, even if it's not going back and changing what you've already agreed to, it's just doing more for them because it's tough for them to find capacity in a more challenging market, and that's where you can at times charge a premium. And so you've got to know what your commitments are, be able to adjust those, manage it very closely. And that's what Knight historically has always done. We brought that logic to Swift, and they've employed that extremely well. And that logic is there with U.S. Xpress now. And so I think we're well equipped to be able to react to the market. And again, we're watching this every single day. We have the network maps that are unique to each brand that we see trends before probably many in our space would see those trends. And we have API, we have algorithms that we can adjust on the fly if we see the market changing. And so I feel like we are -- we will be well positioned to get the most value out of the market if it does indeed does change. Andrews, do you want to hand the cost? Andrew Hess: Yes, maybe I'll give you a little perspective on cost and kind of how I rate our performance as I look back on 2025 and give you a sense for how much more ahead of us is in 2026. So when you look at an environment like 2025 when we got less than 1% on rate, you're not even covering inflation, which probably wants to be 3% to 4%. So you're not getting a lot of help from the market. And so if you look at our Truckload segment, where our costs are down something like $150 million, probably 2/3 of that reduction is variable, maybe 1/3 of that is fixed. And so you put that all together and you get about, I think, an 80 basis points improvement on OR year-over-year. And so when you think about the variable costs, it probably drove half of that OR improvement. So you've covered inflation plus some margin expansion from these areas. So at the beginning of the year, we put initiatives in place to drive cost out of what we viewed as the biggest opportunity, 3 variable cost areas of maintenance, fuel and insurance. And those -- all of those areas improved, obviously, from a dollar perspective. But I think even more meaningful is that each one was lower in 2025 as a percentage of revenue in 2024 and on a cost per mile basis. So real improvement, not just volume-driven reduction. So those projects are continuing. And just to give you a sense for some of the work we're doing there is we're working with our drivers to create new routing and fuel optimization processes to really get more efficient in our routes and identify the lowest cost fueling solutions. So we have technology that we are deploying that is largely going to benefit us in 2026. I would -- but also another project that we're really encouraged by some additional tools to drive advanced auto planning technology to just help us optimize our freight routing and load assignments. We think this has a chance to really help us drive driver and asset utilization and reduce deadhead and just improve our overall network efficiency. So we're going to continue to deploy these tools to drive variable cost per mile down. On fixed costs, gosh, we made so much progress there. Obviously, you lose 3% or 4% miles are really, it's hard to show up in your P&L because of the fixed cost leverage. But as a percentage of revenue, it also declined in 2025 versus 2024 even with that loss in volume. So we view these as structural in nature that won't come back. It will lever really well. And I think it's going to come in 3 areas: equipment and cost and productivity. There, you saw that in our utilization improving 2 or 3 percentage points last year over the year before. Our real estate costs, look, we've done some really smart, in my view, facility rationalization, we exited and sold, I think, 13 locations that we don't think -- we're looking at this very long term. These aren't things that are going to impair our ability to capture opportunities, but drove -- are going to drive cost out of our business just in how we manage our facility costs. Our facility maintenance costs are down about 4% last year. We want to do that again in 2026. Our overhead costs are the other big area we're focusing, I think our -- in the truckload space, we're about 5% down on nondriver headcount after doing 5% or so the year before. So a lot of the AI initiatives that we've made reference to or we're rolling out in 2026 are really going to help us identify opportunities in G&A. And we talked about Abilene. That's going to be an area that's also going to create some opportunity for more efficiency in the cost of our business. So the costs are a huge area of focus for us. We're attacking it from a lot of different angles, and we're optimistic about the momentum we're building on our strategy and costs. Operator: Your next question is from the line of Chris Wetherbee from Wells Fargo. Christian Wetherbee: I guess maybe kind of curious if you could elaborate a little bit on what you're hearing from shippers as you're going through the beginning of bid season here. I guess maybe specifically around capacity reductions, I guess, is there any sense of urgency from the shipper community to kind of think about covering some capacity needs as we -- and maybe doing that on the earlier side? Just kind of thoughts about how they're thinking about it. And then maybe related to that, I know you're doing a lot of work on the cost side. But as you think about the potential for driver wage increases through the cycle, obviously, the enforcement focus is on the driver side, and we're seeing that pool shrink. Do you think there's risk to the upside in terms of the traditional relationships that we think about a point of price getting a portion of that to the driver? Does that change at all as we go through the cycle given what this enforcement action looks like? Adam Miller: Well, so Chris, on the shipper commentary, I mean, look, we're in early bid season. So everyone is always negotiating at this point. So I think there are certainly some that acknowledge that there's potential risk. Some would push that risk out a little bit further into the year and may not feel some of that pain today. There's others that recognize that they most likely want to get ahead of it, especially if they have a higher percentage of their freight running through brokers where their real exposure is. But again, it's still kind of early on where it's more of a discussion point rather than then taking real action on it right now. So I think we'll -- again, we're going to watch that. We continue to have dialogue. And again, they may not always be so upfront with us because we're in the process of negotiating rates. On the driver front, this is always the question we get, hey, when rates go up, do you have to share that with driver wages? And I think historically, we would typically share -- it's probably around 25% to 30% of our revenue per mile would go to drivers. Now in this cycle, it may feel a little different. There's a lot of margin to restore given how low that margin has gotten over the last few years. And so I think we've got to take some of that margin to the bottom line before doing a blanket driver wage increase unless we feel like there's enough momentum where we're going to have plenty of revenue per mile to share. But we just watch, are we able to hire? Are we able to retain? I think our drivers get just a noticeable increase in pay just from running more miles on the truck. And so typically, when in an environment that's improving, you're going to get better utilization, which we're already seeing that out of our trucks, which is naturally raises the wages for our drivers. But hey, if we find the driver market gets really tough kind of given the -- where the -- with the tightness of capacity and we are compelled that rates are going to be improving, then yes, we may share with the drivers so we can ensure that we have enough capacity to meet the needs that our customers have in terms of operating loads. So it's pretty dynamic. And hey, we wouldn't -- we would look at it in pockets, and we would look at it specific markets rather than historically, we've done across-the-board approaches. We would be very dynamic based on the region and where we have challenges retaining and hiring, and that's where we put our resources. Operator: Your next question is from the line of Ken Hoexter from Bank of America. Ken Hoexter: Adam and team, just want to revisit a couple of your comments, right? So you said recent trends in truckload have continued into the early part of January, modestly better than typical seasonality. So I just want to understand, is that -- are you making a comment on anything demand led? Is that just the capacity side? Is that weather? So maybe dig into -- if there's anything in there on demand side as we go into the first quarter and your thoughts as we go forward. And I guess the same for LTL, it seems like you said same thing, modest volume improvement. Is that just share gains? Or are you making a demand commentary there, too? Adam Miller: Yes. I think on the truckload side, what I'm referring to is every day, we'll come in to the office, and we get a look at the market in terms of the relationship of number of loads versus number of trucks that we have available. And in the first quarter, a lot of times, you're having to dig out every morning needing additional loads to feed the trucks that are available to operate a load. And so every morning, we get these maps, we have -- it gives us an idea of the kind of the balance in the network. And so early part of January, those maps are far more balanced than we would typically see in the first quarter, meaning you have -- you're very close to relationship of having enough loads for every truck that you have available and you're not having to book as much same-day freight. It's hard to know if that's demand or capacity. I would lean towards capacity, Ken, simply from the third-party data that we have that's available out there where load tenders are still relatively low, even if you look at the last 3 years, yet rejections are higher. And that would align with what we're seeing in our rejections as well. Now our load tenders are still better. So I do feel like there's maybe a flight to quality in terms of customers shifting loads to the Asset-Based carriers. But from an industry perspective, I think it's more driven by capacity tightness versus demand, which I think is encouraging because that tells me any uplift in demand is just going to be that much stronger for the market. It will be that much more disruptive potentially. And then on the LTL side, I would say, I think it's just the -- we always see some real softness at the tail end of the fourth quarter, particularly with our customer base. We're a bit more retail than maybe some of the larger peers out there. And so we're just seeing that shipment count restore to kind of more normalized levels. But I don't know that we've really seen a big shift in demand that I would call out. And so for us, we're looking at through the bid season, can we pick up share through the customers that are newer to us, but again, that the larger shippers that now we have an opportunity to participate with. Operator: Your next question comes from the line of Scott Group from Wolfe Research. Scott Group: So Adam, just a bigger picture. If you look back at prior cycles, you've gotten a lot of price, but utilization usually goes down, maybe seated tractor counts go down or something like that, driver pay goes up a lot. It sounds like from one of the last questions, you don't think we have to give up maybe as much driver pay this time. And then maybe the other piece, like do you think you can get a -- can we get a pricing cycle where we also get utilization at the same time? And so if we have good price and utilization, maybe we don't have as much driver pay, it sounds like you're doing some stuff on technology productivity. Like could that relationship between price and margin be much better? Meaning like if historically, 10 points of price is 5 points of margin, do you think it's a lot better this time around? Adam Miller: So Scott, I mean, our goal, what we intend to accomplish is to get some utilization along with price. So then, yes, that price goes a lot further because you've got that utilization that also helps cover your fixed costs. And so I don't think we -- like if I look at the last cycle with COVID, I mean, the labor market was totally disrupted. And so I think that made it very challenging to source drivers. And so then obviously, rates were incredibly high. And even that shifted our network to where we were doing shorter length of haul at higher rates because that's where the needs were with the customer. So I think it really distorted the metrics if you're trying to look at it historically. I look at this as maybe a more typical cycle and the adjustment up. And I would think that we would be able to achieve better utilization with our equipment, the key is going to be what happens in the labor force. But we believe that with the academies that we have, the ability to train drivers at a very high level and reducing competition from other academies that I think are not compliant, that we'll be in a good position to source drivers, get volume while rates are improving. Andrew Hess: Scott, I would just make one point that one thing we've not had in prior cycles is we spent most of 2025 developing the capability to match up our demand between our different brands, between our large truckload brands and even LTL and truckload to find efficiencies where there's excess capacity in one place and demand, we can match them up. That is not a toolkit we've had at scale with the level of sophistication that we're going to go into this next cycle with. So I think that's going to help in filling some of those gaps to drive utilization up. Adam Miller: Scott, we appreciate you sticking to one question. So that will conclude our call. We appreciate all the interest and all the questions. If we didn't -- if we weren't able to get to your question, you can dial (602) 606-6349, and we'll try to get back to you as soon as possible. Thank you, everyone. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Daniel Baker: Good afternoon, and welcome to the NVE Corporation Conference Call for the quarter ended December 31, 2025. I'm Dan Baker, NVE's President and CEO. I'm joined by Daniel Nelson, our Principal Financial Officer; and Pete Eames, Vice President of Advanced Technology. This call is being webcast live via YouTube and Amazon Chime and being recorded. A replay will be available through our website, nve.com, and our YouTube channel, youtube.com/nvecorporation. [Operator Instructions] After my opening comments, Daniel Nelson will present our financial results. Pete will cover new products and R&D. I'll cover sales and marketing and then we'll open the call to questions. We issued our press release with financial results and filed our quarterly report on Form 10-Q in the past hour following the close of market. Links to the press release and 10-Q are available through our website, the SEC's website and X, formerly known as Twitter. Please refer to the safe harbor statement on your screen. Comments we may make that relate to future plans, events, financial results or performance are forward-looking statements that are subject to certain risks and uncertainties, including, among others, such factors as uncertainties related to the economic environments in the industries we serve, risks and uncertainties related to future sales and revenue and risks and uncertainties related to tariffs, customs duties and other trade barriers as well as the risk factors listed from time to time in our filings with the SEC, including our annual report on Form 10-K for the year ended March 31, 2025, as updated in our just filed 10-Q. Actual results could differ materially from the information provided, and we undertake no obligation to update forward-looking statements we may make. We're pleased to report a 23% increase in revenue and an 11% increase in earnings for the third quarter of fiscal 2026 compared to the prior year quarter, driven by broad-based growth across our revenue lines, including defense and nondefense sales as well as distributor and direct channels. Daniel Nelson will cover details of the financials. Daniel? Daniel Nelson: Thanks, Dan. As Dan said, revenue for the third quarter of fiscal 2026 increased 23% year-over-year. The increase was due to a 16% increase in product sales and a 335% increase in contract R&D revenue. The increases were across most of our product lines and channels. Gross margin for the third quarter of fiscal 2026 was 79% of revenue compared with 84% in the prior year quarter. The decrease in gross margin percentage was due to a less profitable product mix and increased distributor sales for the quarter. The increase in distributor sales is positive, although distributor sales typically have lower gross margin than direct sales. Total operating expenses decreased 12% for the third quarter of fiscal 2026 compared to the third quarter of fiscal 2025 due to a 9% decrease in R&D expense and a 19% decrease in SG&A. The decrease in R&D was due to completion of some of our wafer level chip scale packaging activities and reassignment of some R&D resources to manufacturing. The decrease in SG&A was primarily due to the timing of selling and marketing activities and reassignment of some SG&A resources to manufacturing and new product development. Interest income decreased 3% due to a decrease in our marketable securities portfolio as proceeds from bond maturity, partially funded dividends and fixed asset purchases. Other income decreased by $135,000, which is primarily from reclaiming precious metals used in our manufacturing process in the prior year quarter. Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes increased to 20% for the third quarter of fiscal 2026 compared to 15% for the third quarter of fiscal 2025. The increase in our effective tax rate was primarily due to the noncash impact of tax law changes on certain tax deductions this fiscal year. We currently expect a full year tax rate of 16% to 17% in fiscal 2026 because we expect advanced manufacturing investment tax credits of between $700,000 and $1 million to offset the impact of other tax law changes. And net income increased 11% to $3.38 million or $0.70 per diluted share from $3.05 million or $0.63 per share. The increase was primarily due to increased revenue and decreased operating expenses, partially offset by decreased gross margin, a decrease in other income and an increase in our effective tax rate. Our profitability metrics remained strong. Operating margin was 60%. Pretax margin was 68% and net margin was 54%. For the first 9 months of fiscal 2026, total revenue increased 0.4% to $18.7 million from $18.6 million for the 9 months of the prior year as growth in the most recent quarter more than offset year-over-year decreases in the first 2 quarters of the fiscal year. The revenue increase for the first 9 months was due to a 0.8% increase in product sales, partially offset by an 8% decrease in contract R&D. Net income for the 9 months decreased 8% to $10.3 million or $2.12 per diluted share. Turning to cash flow items. Cash flow from operations was $12.2 million in the first 9 months of the fiscal year. Accounts receivable decreased $1.1 million during the first 9 months of fiscal 2026 primarily due to the timing of customer payments. Inventories decreased by $177,000 due to increased product sales. Prepaid expenses and other assets increased $323,000 primarily due to increased accrued bond interest and a decrease in federal and state taxes due. The decrease in taxes due was because we deducted previously unamortized research and development expenses in the quarter ended December 31, 2025, and as permitted under the federal budget reconciliation bill enacted July 4, 2025. We expect accelerated deductions of previously unamortized research and development expenses to reduce our cash taxes for the full fiscal year ending March 31, 2026 by approximately $1.1 million. Accrued payroll and other current liabilities decreased $366,000 primarily due to the payments of federal and state taxes balance due as of March 31, 2025, and decreased accrual for performance-based compensation. Fixed asset purchases were $2.18 million for the first 9 months of the fiscal year, including $1.05 million in the December quarter. We substantially completed spending on our 2-year multimillion dollar expansion. We expect to put the equipment into service in the current quarter. Pete Eames will discuss the new equipment. Now I'll turn the call over to Pete Eames, our Vice President of Advanced Technology to talk about our plans for the new equipment and to cover new products and R&D. Pete? Peter Eames: Thanks, Daniel. I'll cover new equipment and R&D. New equipment in the past year has increased our capacity, increased our capabilities and allowed us to do smaller and more precise wafer-level chip scale package parts in-house. We completed installation and calibration of a new equipment cluster in the past quarter in an expanded production area on the east end of our building. The new equipment allows extremely precise control of spintronic materials deposition to well within 1 atomic layer. This capability translates into more precise spintronic devices and expands our capacity with existing products. We've made good progress developing new advanced spintronic processes on the equipment. And as Daniel said, we expect to place new equipment into service by March 31. Our R&D strategy is to make the world's best electronics for high-value markets such as medical devices, electric and autonomous vehicles, advanced factory and humanoid robotics in highly automated Fourth Wave Factories using the artificial intelligence of things. We've had a continuous flow of new products as part of that strategy. Just yesterday, we announced a new wafer-level chip scale sensor a part that's just 0.65 millimeter square, about the size of the period at the end of our quarterly report and about as thick as the paper that it's printed on. The sensor is about 1/3 the size of the conventionally packaged version, and this tiny size allows for unmatched miniaturization and special sensitivity. There are demonstrations of our new products on our website and our YouTube channel. Now I'll turn it back over to Dan Baker. Daniel Baker: Thanks, Pete. I'll cover customers sales and marketing. Starting with customers. We're proud to supply products to some of the world's most demanding customers, including Abbott Laboratories. Abbott is a leading supplier of implantable medical devices. In the past quarter, we executed an extension to our supplier partnering agreement with Abbott. In recent years, the extensions have been for 1 year, but this extension is for 2 years through December 31, 2027. It provides for price increases for 2026 and 2027. The agreement was filed with the Form 8-K and their links in our just filed 10-Q on our website and the SEC's website. Turning to sales and marketing. We exhibited at the Medical Design & Manufacturing Trade Show in the past quarter. Medical devices are an important market for us. We have a convincing benefit proposition for medical devices with small size, low power and superb reliability. At the show, we highlighted new wafer-level chip scale parts for miniaturization of implantable medical devices and surgical robots, high-field sensors to enable MRI-tolerant medical devices, high-sensitivity sensors for medical device navigation and our best-in-class electrical isolators to ensure the safety of medical instruments. The show generated good leads, and we believe our investments and shows payoff and future sales. With the success of that show, we'll also exhibit at Medical Device & Manufacturing West for the first time. The exhibition starts February 3 in Anaheim, California and host attendees from all over the world. Now we'd like to open the call for questions. Daniel Baker: [Operator Instructions] Jeffrey Bernstein: Dan, it's Jeff Bernstein from Silverberg Bernstein Capital. So we talked during the quarter about this idea of magnetic navigation in GPS compromised areas and whether you're magnetometer sensors were appropriate for that kind of application. Can you just talk a little bit about that and if you made any contact with anybody in the BOW about this? Peter Eames: Jeff, this is Pete Eames. I'm happy to answer that question. We have looked at MagNav. And for those who aren't familiar with it, this is a new technology that replaces GPS in the defense applications that are susceptible to GPS jamming. So typically, NVE sensors are lower power and much smaller than the sensors that are used to detect the magnetic field anomalies and magnet systems. But it is an interesting application for us. It's evolving and it's one of the things that we keep an eye on in the defense community to see how it evolves. And hopefully, we have an opportunity there in the future. Jeffrey Bernstein: So do you have a part that you would deem appropriate for that application today or now? Peter Eames: Not exactly. MagNav is pretty new. It's still a relatively nascent technology. One of the problems with MagNav is that the maps that are being generated and used by sensors for this technology are still too imprecise. So it's still -- it's not a mature enough technology that we would chase it for example. But it's something that is interesting and fits within our defense systems and something that we think has a bright future. Unknown Analyst: Dan, this is [ Pete Prevett ] in Florida, how you guys. A couple of quick questions. Your new equipment up and running in March, I recall being at the shareholders meeting in '24, it'll be almost 2 years. Is that pretty much on the expected schedule that you thought? Daniel Baker: It is. Thanks for the question, Pete. As you saw, we just had a blank space when you were here and at the annual meeting in 2025, we had a much more finished blank space. And now we've got a piece of equipment that's up and running, and as Daniel and Pete both mentioned, we plan to deploy it in an accounting sense this quarter. So things are going well, and we were -- it's a complicated piece of -- set of equipment and a complicated process, but our guys have done a great job of getting it done on schedule. So we're pleased with how it's going. Unknown Analyst: That's great to hear. With that, is there an expectation that, that new equipment will help with new product sales like adding to new revenue and/or I guess, better profitability because it's packaging, right? Some of it's for packaging, so you don't have to outsource the packaging? Peter Eames: Yes. This is Pete Eames again. Yes, Pete, I think there is a lot of optimism surrounding the technology that we're developing with the new equipment. I talked about one of the sensors in our earlier remarks. We're definitely selling samples of those parts. And we're -- again, we're looking forward to continued sales there. So I think the optimism continues. Unknown Analyst: And do you guys see the distributors building up inventory? Again, I know that, that was an issue that they had lots of inventory and had sell that down. Is that starting to pick up again? Daniel Baker: Yes, it is. It's very positive. And Daniel mentioned that in the prepared remarks that our distributor sales are picking up and have been through the fiscal year. And that's an indication that some of those inventories that had built up during the semiconductor slowdown the last fiscal year and prior to that, have been depleted, burned off and end user demand is increasing. So we feel like we have the wind at our backs and we've got excellent products. and the inventory situation in the semiconductor industry as a whole is much better than it was. Unknown Analyst: That's fantastic. And let me ask you about the other company or one of the other companies in your space, Everspin. There seems to be a lot of interest in them lately and some talk about their intellectual property being valuable for quantum computing, possibly. How does NVE's intellectual property compare to what they have? And have you had any discussions with other companies about licensing your IP? Daniel Baker: We have had discussions about licensing from time to time over the years, including we had a license agreement with predecessors of Everspin technology, including Motorola going way back. So we believe we have excellent intellectual property. We deploy it mostly for anti-tamper and HUF. So we are in a different market than ever spin, but we do have technology that applies to MRAM. We continue to develop MRAM. And we've talked about it from time to time. Pete didn't talk about it on this call in the prepared remarks, but we continue to work on developing advanced MRAM mostly for defense applications, defense and anti-tamper applications. And we believe that the intellectual property has significant value, and we'll look for opportunities to monetize that through licensing or other means. Unknown Analyst: And I don't know too much about it, but with Flash memory, is MRAM a replacement of Flash? I on someone who mentioned something about memory and MRAM being a lot better with spintronics. Is there anything you could talk about there? Peter Eames: Yes. In general, MRAM is a nonvolatile memory, meaning it retains its information when the power is removed. And for some applications, that's a very powerful technology, and it's something that's already used in some embedded computing systems today. So it is very useful, and that's one of the things that, as Dan said, makes us believe that our IP is very valuable here. Unknown Analyst: Okay. Great. And last question. Dan, we love your post on Twitter. Do you employ or have a meeting company? Is there any plans to expand marketing? Not that we don't love your videos and stuff, but just curious about how you guys look at marketing to promote the company. Daniel Baker: Well, we've been spending more on marketing, doing more marketing. So we try to do more of what works and what's been working, as I mentioned in the prepared remarks, our trade shows work very well for us. So we're going to more trade shows than we ever have. And we are working more and more on demonstrations. So the videos are one manifestation of demonstrations, but we also provide demonstrations at trade shows and for a specific customer targeted applications. The newsletters are also very effective. We have a very high click rate, a very high response rate. So we measure our marketing activities, and we continue to boost the ones that work. So those are the kinds of things that we've been doing and we do get some response from Twitter. However, it's not a huge sales driver. Some of that is more fun and content that we have from other sources or for other targets such as trade shows. Unknown Analyst: Keep up the good work. I appreciate it. Jeffrey Bernstein: Dan, it's Jeff Bernstein again. Just wanted to check in on the application for rare earth magnets for position sensing? And what kind of traction you've gotten there? And have we seen any revenue actually come through from any design wins? Or what's the design win situation looking like? Daniel Baker: Yes, that's a good point. There's still a lot of concern in the supply chains about rare earth elements. And our sensors are uniquely positioned to use rare earth free ferrite magnets because of their high sensitivity. And we continue to offer ferrite magnets they do not use rare earth elements. They use iron and oxygen, which are 2 of the most abundant elements in the earth's crust. So we're well positioned in that, and we have gotten some sales, and we've gotten some interest in both the magnets and in the sensors that go with them. So we do see it as a promising application. And the concern about rare earth magnets has done nothing but increase. So it's hard to quantify exactly how many are targeted at rare earth replacement and how many we're getting or we wouldn't have gotten, if it were for the concerns about rare earth, but it certainly helps us. [Operator Instructions] Unknown Shareholder: Can you hear me? Daniel Baker: Yes. Unknown Shareholder: This is [ Christopher Chevski ], a private investor. I was just wondering if there's any comments you can make on the current quarter, especially I'm wondering about your defense business, which happens to be a little bit more volatile? Peter Eames: Yes. I can try to add a little bit there, Christopher. I think we've talked fairly about some of the past quarters and explained that things have been relatively weak there. And in general, I think we're optimistic going forward. I think it's safe to say that we'll be returning to somewhat of a more normal flow there if that's of any help. Unknown Shareholder: Yes. That's very helpful. And the rise in NRE revenues, does that pretend for additional future nondefense business? Daniel Baker: That's certainly the goal. When we invest in R&D. We invest heavily in R&D. Pete talked about some of the programs. We talked about some of the things that we're doing in the medical space for new products and for advancements especially in miniaturization. So that's been a significant portion of our R&D, and we've been pleased with the response of customers and prospects to those products. And we believe they're going to pay off in future sales, and that's why we make the R&D investments. Unknown Shareholder: Okay. And your 2-year agreement with Abbott, are there any market gains in that? Are you in any new devices? Daniel Baker: Unfortunately, we can't talk about what devices they use our parts in, they use our sensors and we're bound by confidentiality. However, they make some remarkable devices, medical devices, and we're pleased to be a partner with them. We've been a partner with them for many years. And we're proud of the role that we play in making devices that can change people's lives. We also have other medical customers that sometimes we can't talk about. And we're promoting and meeting more of them, promoting our products and meeting more of those prospects and customers at the trade shows such as MDM here in Minneapolis recently and in early February, MDM West. Unknown Analyst: Dan, this is Pete again. Just one last question. The company, obviously, has been very, very solid over many years of delivering good performance. Can you talk a little bit about what the potential of customers being recurring, right? So rather than kind of sawtooth revenues quarter after quarter, year after year, where you're going to eventually have recurring orders from the same customers and then revenues might hit $6 million, $8 million, $10 million, $12 million per quarter because you've got repeat orders from the same customers, can you just give some clarity as to what the product mix looks like and if there's potential of that type of expectation from these customers that would order consistently so all investments are just adding on to revenues quarter after quarter? Daniel Baker: Yes, that's a good point and a good question, Pete. So we look to increase our sales to our current customers with existing products and then we look to add new products to existing customers because we feel like our existing customers are our best prospects. They know us. They've seen the quality of the product we produce and the quality of the support that we provide. So we work on both. Our goal is to grow faster than our customers. We have to add customers we have to continue to add products and expand the products that we sell to existing customers. And so I just mentioned Abbott, which is a great example of a customer that we've had for 20 years at least and they continue to buy our products, and they've expanded over years, the number of products that they use. So that we see is driving growth. And then we've added additional new customers, and then we add products for existing customers, new products for existing customers. Jeffrey Bernstein: Jeff Bernstein. Just a follow-up question. As far as you guys have talked about in the past that at Abbott, you have exposure in the cardiac rhythm management area. You have exposure in the, I guess, neuromodulator area. In terms of the other medical customers that you're talking to, are these very similar kinds of applications? Or are there other applications I think you discussed medical robots and I'm kind of curious about why a big piece of equipment like that would need tiny parts like yours unless it's a sensitivity issue. But can you just flesh through that a little bit? Daniel Baker: Yes. So we cover a variety of medical products. We cover life support medical devices, which are the types of pacemakers and ICDs that Abbott makes. We cover non-life support medical devices, and we cover medical instruments. We sell products for medical instruments, which would be monitors, pumps and things of that nature. They require different types of products. They have different design cycles, but they share a common goal of miniaturization of low power high sensitivity, high accuracy. As far as the medical robots, which we talked about before, Pete touched on that with our wafer-level chip scale parts that the smaller parts Well, you're right, they might not need them because it's a relatively -- the robots are relatively large, but they offer more special sensitivity, which means that the robot can detect smaller displacement more precisely. And for medical robots, being able to do delicate operations is a key benefit, and our sensors enable that. Unknown Analyst: This is [ Ittai Abraham] from [ Principal Global ]. I just wanted to come back to the MRAM point. I'm curious if you can talk a little bit more if that's really just kind of an IP opportunity or if the added capacity can actually help you sell into some of MRAM and customers as well? And then I have one more. Daniel Baker: Okay. Thanks for the question, Ittai. Our strategy has been to not make large-scale memories. That often requires multibillion-dollar fabs. So what we've been doing is specializing in high value-added memories that are used in specialized applications such as crypto keys for anti-tamper devices but we believe that the intellectual property is applicable to larger MRAMs that would have broader applications. So that's how we would participate in that market by licensing intellectual property that we've developed over the years. Unknown Analyst: Got it. That's super helpful. And then my second question is on the new capacity, I'm curious if you could give us a high-level view on the current mix shift may shift in terms of end market and how the new capacity might change the end market mix? Daniel Baker: Right. So the new capacity is targeted at applications such as the Internet of Things and the artificial intelligence of things, which are emerging markets for industrial automation, merging the Internet of Things with artificial intelligence. So we see those as tremendous opportunities. They require inputs, which is what we do. We make sensors. And the future appears to have ubiquitous sensors, many very small sensors distributed in many robots and other locations in order to provide the information for smart factories that are that are self optimizing. So we see a historic opportunity there, and that's part of the reason why we were confident making such a large investment. Unknown Analyst: Got it. And congrats on the results. Daniel Baker: Well, if there are no other questions, we were pleased to report strong increases in revenue and earnings driven by broad-based growth. We look forward to speaking with you again in early May for our fiscal year-end call. A replay of this call will be available on the Investor Events page of our website, that's nve.com and our YouTube channel, that's youtube.com/nvecorporation. Thank you for participating in this call.
Operator: Good day, and welcome to the Simmons First National Corporation's Fourth Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Ed Bilek, Director of Investor Relations. Edward Bilek: Good morning, and welcome to Simmons First National Corporation's Fourth Quarter 2025 Earnings Call. Joining me today are several members of our executive management team, including President and CEO, Jay Brogdon; CFO, Daniel Hobbs; and Chief Operating Officer, Chris Van Steenberg. Today's call will be in a Q&A format. Before we begin, I would like to remind you that our fourth quarter earnings materials, including the earnings release and presentation deck are available on our website at simmonsbank.com under the Investor Relations tab. During today's call, we will make forward-looking statements about our future plans, goals, expectations, estimates, projections and outlook including, among others, our outlook regarding future economic conditions, interest rates, lending and deposit activity, credit quality, liquidity and net interest margin. These statements involve risks and uncertainties, and you should therefore not place undue reliance on any forward-looking statements as actual results could differ materially from those expressed in or implied by the forward-looking statements due to a variety of factors. Additional information concerning some of these factors is contained in our earnings release and investor presentation furnished with our Form 8-K yesterday as well as our Form 10-K for the year ended December 31, 2024 and Form 10-Q for the quarter ended September 30, 2025, including the risk factors contained in those filings. These forward-looking statements speak only as of the date they are made, and Simmons assumes no obligation to update or revise any forward-looking statements or other information. Finally, in this presentation, we will discuss certain non-GAAP financial metrics we believe provide useful information to investors. Additional disclosures regarding non-GAAP metrics, including the reconciliation of those non-GAAP metrics to GAAP, are contained in our earnings release and investor presentation, which are furnished as exhibits to the Form 8-K we filed yesterday with the SEC and are also available on the Investor Relations page of our website, simmonsbank.com. Operator, we're ready to begin the Q&A. Operator: [Operator Instructions] Our first question today comes from Matt Olney at Stephens. Matt Olney: I want to start on the loan growth front, loan growth took a nice step forward in the fourth quarter. Any more color on the drivers? And then the second part, I just want to understand the pipeline discussion disclosures. It looks like the approved and ready-to-close pipeline moved up nicely, but the overall pipeline was still flattish. So just trying to appreciate maybe the various components of that pipeline and then what that means for growth in 2026? Jay Brogdon: Yes. Thanks, Matt. So I'd say a few things to comment first on the quarter, and then we can talk about pipelines in 2026. So we were certainly pleased with the pace of growth for loans in the fourth quarter. The quarter really had the highest level of production, I think, that we've seen in at least a couple of years. At the same time, we still had elevated paydowns in the quarter, but the level of production was more than enough obviously to offset that level of paydowns and drive some meaningful growth. I would also call out for the fourth quarter, in case it's not obvious to you, there are some -- arguably some seasonable adjustments to the fourth quarter. Fourth quarter growth for us tends to be slower on the agri side and agri loans were down. Mortgage warehouse loans were down. We obviously divested some loans and had some charge-offs in the quarter. And so really, when you think about fourth quarter underlying growth rate, it was well in excess of the 7% annualized that we disclosed on a total loan basis. So again, I think it demonstrates the ability for us to really move the needle from a loan growth perspective. At the same time, your question on pipeline and kind of 2026 outlook, our guide is not to have sort of sustained that level of growth. We just had some good timing of some things and pipelines coming out of Q3 and early Q4 that pulled through and led to some really nice funded commitments throughout the quarter. Rate ready-to-close, as you commented on, that's a very, very firm high likelihood area of our pipeline, is also at a multi-quarter high. So I think that points to probably some good production and funded growth as well in the early part of the year. And then as I think about the rest of the pipeline, our pipeline ranging in that mid kind of between $1 billion and $2 billion, $1.5 billion to $2 billion is a pretty normal pipeline for us. We're certainly active in seeing a tremendous amount of opportunities all across our footprint. And so we feel very, very confident when we put all those things together in our outlook for something that's probably a little more optimistic in loan growth than what we've had over the last couple of years. But we're still going to be very, very cautious around the credit and underwriting environment, and then also just from a pricing and profitability perspective, the competitive environment in there. And all that kind of balances out to what we -- what you saw us guide for '26 is kind of low to mid-single-digit growth. Matt Olney: Okay. Perfect. Appreciate the details there, Jay. And then pivoting over curious about your thoughts on the margin from here in the fourth quarter, I think it was at 3.81% margin. Just trying to appreciate how clean that number is? Anything you would call out as unusual in the fourth quarter. And then I think the deck mentions the back book should provide some nice tailwinds for the margin in 2026. Would you expect that to support margin expansion from here? Just trying to appreciate maybe the puts and takes on the margin from here. Charles Hobbs: Yes. Matt, this is Daniel. I'll comment on that. So the linked quarter margin growth of 31 basis points. I'll break that down for you, give you an appreciation for that. So of that 31 basis points, about 19, call it, 19 to 20 of that is from the partial quarter impact of the balance sheet restructure that we did last quarter. But then the rest of that is really from core NIM expansion from this business practices, so 11 basis points from that. And of that 11 basis points, about 3 basis points is related to loan growth and 8 basis points is related to rate and mix. So a couple of things to understand from that is we had the 3 rate cuts in the back half of the year, September, October and December. Post balance sheet restructure, we did move from liability sensitive to asset sensitive. But a nuance to that is as you think about our sensitivity along the curve, we're still a little bit liability sensitive on the short end of that curve. So call it, day 1 to 3 months, we're a little bit liability sensitive. So we got some benefit from those rate cuts in the fourth quarter. We will shift to asset sensitive once you get past 3 months and towards the long end of the curve. So as you think about kind of the guide and specifically Q1, we would expect Q1 to be relatively stable to the 3.81%. There might be a basis point or two of benefit there. And then as you think about the full year, we're probably pretty stable, maybe a couple of basis points to get to the mid-3.80s by fourth quarter. Your comment on the back book repricing. So yes, that's still a benefit for us, and we expect that to be a benefit for us as we move on. That benefit lessens a little bit as we get rate cuts. We've talked historically about a 200 basis point pickup before the 3 rate cuts that we got in the back half of the year. So that will come down a little bit. But we still have, Matt, over $2.5 billion of loans that will reprice over the next 2 years that have a rate less than 4%. So that tailwind will continue to exist. Maybe a couple of points about the guide. Our rate forecast that's embedded in our guide is a rate cut in May and one in August. And so as you think about loan yields repricing. When you look at the fourth quarter, loan yields were down 8 basis points. Even if you go back to second quarter, we're only down about 3 basis points. So we're -- that back book repricing is offsetting some of the impact from the rate cuts that we've had. And if you flip to the deposit side, you think about the beta there. Our beta cumulatively is 64%. We do expect that beta to moderate some into 2025 primarily because a couple of things. Number one is our deposit book is different than it was pre-balance sheet restructure. We've got about $1.4 billion less brokered deposits, which have a 100% beta. So that's embedded in that 64% cumulative beta today. What we think is the incremental beta for future rate cuts is probably around 50%. And so by the end of '26, we think the cumulative beta kind of settles in that kind of that high 50 range. So still some opportunity there, but we do expect the beta to moderate a little bit. And then just maybe connecting the NIM discussion with your question on loan growth, we still believe and feel like that we can grow NII without significant growth in the loan portfolio just because of the things that I just talked about. So our 9% to 11% guide on NII, we feel pretty good about it. Jay Brogdon: Matt, I will just chime in. I mean, I'd echo everything Daniel said there. Bottom line for me is I think my outlook for NIM for '26 is relatively stable, as Daniel said. I think the back book reprice on loans as well as the deposit beta and our ability to continue to do things we've been doing from administered rates, et cetera. Those are all tailwinds that will offset any additional rate cuts to the extent they come through and allow for that more stable NIM. I think the opportunity in excess of what we've guided, right? Our outlook is what our outlook is. The opportunity though, and what we're focused on strategically is really on the remix on the deposit side. Our biggest opportunity to even further exceed the guide is really built around our ability to organically grow some low-cost deposits, and we're very, very focused on that and think that, to the extent we're successful there, we've already got, I think, very strong growth embedded in the guide, but that would be the area that would provide upside to the guide. Matt Olney: Okay. That's great commentary. I appreciate all the details there. And maybe just one more follow-up with this discussion. Any commentary about what you're seeing in markets around deposit competition, loan pricing competition. I think last quarter, you flagged the loan side was getting more competitive. Just in general, updated thoughts on both sides there. Jay Brogdon: Yes, Matt, really a continuation of that same theme. On the deposit side, honestly, I would say I think we feel pretty -- see there's pretty good behavior around the rate cuts in the industry. Betas are relatively high in my mind and lags are short around the more recent rate cuts. So that feels good. Where we see irrational competition for the most part today on the deposit side is from smaller banks. And the good news is in a lot of those markets where we're competing with the smaller banks, we have a very, very dominant market share and we can kind of flex around that. And so that area is still very competitive. But to me, it's nowhere near as competitive of a pressure as what we're seeing on the loan pricing side. You've heard us talk about that. We -- a lot of our loan growth in the fourth quarter was in a CRE bend. We're very focused, as you and others know, on C&I. We have good C&I opportunities in our pipeline. We've had great opportunities. We've had some good production on C&I. But returns on a risk-adjusted basis have been so much stronger in recent months from a CRE perspective because of what we believe is very, very irrational pricing and really pricing away the profitability from, even in relationship-based situations where deposits and treasury management are coming with it. The yields on the loans really make no sense and particularly make no sense on a risk-adjusted basis. So we'd like to see some improvement in that competitive dynamic. It doesn't discourage us it relates to our overall growth outlook. But that is the biggest competitive factor that we're seeing today. Operator: And our next question comes from David Feaster at Raymond James. . David Feaster: I wanted to maybe shift gears to asset quality. Nice to see the resolution of those 2 problem credits and with less impact than initially expected, also saw the sale of the equipment finance business, and you guys did the deep dive into the NPAs. I'm just curious maybe whether there's anything else that you're considering divesting? And as you did that deep dive, whether you found anything else of note that maybe has shifted underwriting at all? Or just kind of curious kind of what you're thinking on asset quality and anything that's come out of this whole process? Jay Brogdon: Yes, David, I'll jump in on this one. So you did a great job summarizing the actions that we took in the quarter. And we feel very, very good that our reserve levels and what we had done kind of on a specific reserve basis was more than adequate for the actions that we're taking, particularly on the larger credits and the equipment finance portfolio. Really, as I think kind of read through credit and the results of the deep dive, again, I feel credit is very stable right now. Those situations were very unique, each of them. They've been around for a while, particularly with the equipment finance portfolio, been in runoff for a long period of time. We hadn't originated a loan there in several years that came from historical acquisition. And so the credit read for us as we did the deep dive was really cleaning up some of those legacy type nonperformers that have been in there. We were able to identify the loss content, got the full resolution on several of those credits and moved on and took the charge-off in other instances, still working toward very rigorous resolution processes in a couple of those instances. However, we had done enough work to know what the loss content was and went ahead and moved on those. So really underlying, I think it's just a continued stable outlook in all of our kind of early indicators or predictive indicators around credit, I would fall into that characterization of just in the stable category. David Feaster: Okay. And obviously, there's been a lot of disruption across your footprint in the market broadly. Just wanted to get your thoughts on where you see the most opportunity and how you're positioning to capitalize on that. And then just specifically on the hiring side, it looks like you did add some talent this quarter. Just curious your appetite for hires, where you're hiring and maybe what segments or markets you're focused on? Jay Brogdon: Yes. I don't want to be overly generic in the answer, but it is a somewhat generic answer in that. We are seeing great opportunities all across the footprint. Southwest part of our footprint, the Midwest, the Southeast parts, really just footprint wide, we are very active. Pipelines from a talent perspective are very strong. And I would suspect that you'll see us being successful in continuing to upgrade talent, add talent, and it's across all areas of our business, again, not trying to be overly generic. It is somewhat heavily focused in our revenue areas where we are adding talent, but it's not just there. A lot of our support areas where we can bring in strong talent to help us innovate, automate and drive some of our efficiency and scale initiatives forward, we're seeing some really good talent come out of some of the disruption in those areas as well. So we're very, very excited. That's probably one of the most exciting things going on in our business right now is the prospects that we're talking to from a talent perspective and the success that I think we're going to have in that regard. David Feaster: That's great. Maybe just last one, Jay. One of the things that we've discussed pretty in depth previously has been as a part of the Better Bank Initiative, the focus on improving processes and procedures, and there's still kind of in the middle innings of that maybe a quarter or two ago. I'm just kind of curious if you could kind of give an update on where we are there on improving again the processes and procedures in some of the business lines. And kind of maybe what's you're most focused on near term? Jay Brogdon: Yes. I think from a noninterest expense and just overall kind of efficiency and scale point of view, I really think it's still fair to characterize us as in the middle innings of that journey. I also think that the latter innings are much harder to get than those early innings were because we attack the lower-hanging fruit first. There's a slide on this in the presentation. I want to remind everyone, our expenses in 2025 were below our run rate for expenses in the fourth quarter of 2022. So 3 years of inflation, merit increases, investing in the business, et cetera, and we've been very, very disciplined in our ability to keep expenses down throughout all of that. And that is a function of, I think, us demonstrating success in executing these efficiency initiatives. We have brought a tremendous amount of automation to processes and continue to do that. We've centralized and standardized around best practices in a lot of areas of the bank. And so you might think of a decade of acquisitions and really taking the time over the last few years to fully, fully integrate and digest all across the footprint. And so I think there's still, David, some very meaningful opportunities for us there. As I think about the expense outlook, maybe a little more tactically, not exactly embedded in your question. But if I think about an expense outlook, I'll tie it back to your question around talent opportunities. We continue just to try to fund our investments. So I think a lot of the work that we're doing in these middle and later innings on the efficiency side are geared around kind of freeing up the investment, to bring in talent, to invest and improve in the technology stack and better innovate around the bank. And so I think you saw our expense guide is up 2% to 3% year-over-year. That's really reflective, I think, of kind of a balanced view of success in these initiatives paired against the opportunities we see, maybe even on an accelerated basis to invest in our business. Charles Hobbs: Yes. David, I'd add a couple of things to what Jay said. I think when you look across our business from the back office, the middle office and the front office, we've adopted a continuous improvement mindset in that we're inspecting everything that we do. And in many of those processes, we need to tweak some things and then some of them, we need to completely blow it up and rebuild it. And we recently visited a customer that made a comment to us that says, if it isn't broke, break it. And we've adopted that in some places. And so there's still a lot of opportunity for us there. Just a couple points for you. We've talked about our vendor spend and our procurement group that we stood up about 2 years ago, and we've got some significant success out of that. We still see opportunity in that over the next 12 to 24 months to gain some ground. And then when you just look at our -- across our footprint, our facilities, the square footage that we have, we reduced our square footage this year by 6%. Some of that is direct savings to the bottom line and some of that is savings on future spend of maintenance that we might have to do that we are now no longer going to have to do. And that's split about 60% between retail and about 40% from corporate locations. So it's not all coming from branches, which is a good thing. So those are examples of just things that we're looking at across our entire business to Jay's comment earlier about how can we self-fund the investments that we're trying to make to grow our businesses. Operator: And our next question today comes from Woody Lay at KBW. Wood Lay: I wanted to start on your comment on the loan production, and you noted it was the highest level over the past couple of years. I just wanted to get your opinion, is that more a reflection of you all being more aggressive on growth now that the balance sheet restructure is behind you and you have more flexibility? Or is that a reflection of customers being more optimistic? Or is that a combo of both? Jay Brogdon: I think it's fair to describe it as a combo, Woody. I think it's probably more of the latter than the former. We haven't just sort of like lowered rates aggressively or started to sacrifice our standards around profitability. That said, with the significant reduction in wholesale funding as a result of the balance sheet repositioning and just improving, I'll call it the nimbleness, the flexibility around the balance sheet overall, it has certainly -- there's in an indirect way that has helped us to accelerate the loan growth. But the more fundamental answer is we've just seen more robust opportunities. The pipelines were improving all throughout the year last year. The quality of the pipeline is not just an aggregate number. You have to really look into the pipeline and think about quality of opportunity. Quality of pipeline was improving all throughout the year. And we just kind of saw a pinnacle in that activity late Q3, early Q4 and we're successful in some pull-throughs there and continue to see success. Again, I mentioned the rate ready-to-close area of the pipeline that even as we turn into January, we're seeing some -- exactly what you would expect with that kind of year-end quality of pipeline. So I think it's probably more the latter of your 2 things, but there's certainly an element of both. Wood Lay: Got it. That's helpful. And then maybe circling back on the NIM. I believe last earnings call, you all gave a sort of a longer-term NIM range of 3.50% to 3.75%, and you're now above that. And it feels like, as you mentioned, the loan repricing over the next 2 years is very real. So has that a longer-term target? Do you think it's shifted upwards a little bit? Charles Hobbs: Yes. Woody, the context of that 3.50% to 3.75% was that we would like to manage it within that range, no matter the interest rate environment. And rates are still relatively high. We've moved to asset sensitive. I would say probably that top end of the range of the 3.75% has moved up a little bit. And -- but if rates were to go down to significantly go down, we're trying to stay at that 3.50% above in that scenario. So I think it's a fair comment to say that the top end of that range has probably shifted up a bit. Jay Brogdon: Yes. And I think the forward curve has shifted as well. So that range was really embedded on an outlook that had a lot more rate cuts in it than what we're expecting today. So all of that is very fair, Woody. And good news is rates are higher for longer, I think, better for us and better for the industry right now and gives us upward bias on how we think about the NIM range. Wood Lay: All right. And then just last for me. In terms of capital, I mean, you just printed a quarter of a ROTCE over almost core 16%. You're going to be building capital over the next year. How do you think about sort of where excess capital stands and opportunities to deploy it? Jay Brogdon: Yes. I think our priorities continue to really be around organic growth, investing in the business to grow sustainably and profitably is clear priority 1. Priority 2 would be our very long-standing dividend. And then from there, Woody, I mean, we'll have to think about share buyback, I think, increasingly throughout the year this year. We're not -- we don't have any share buyback activity embedded in our budgets or forecast right now. I think we'll be -- we'll keep that tool in the toolkit. We'll be opportunistic in how we see the growth environment evolving and candidly in how we see the valuation of the stock evolving. And where it makes very good sense economically for us to get active, we would do so. But as of now, it's really centers on priorities 1 and 2 that I outlined there. Operator: And our next question today comes from Brian Wilczynski with Morgan Stanley. Brian Wilczynski: Maybe going back to the ROTCE for a moment. Clearly, a very strong quarter, 16% ROTCE. If we zoom out a bit, how do you think about the trajectory of ROTCE as we move forward? And how much of it will depend on the environment versus some of the other strategic levers that you talked about earlier? Jay Brogdon: Yes. I'll start on that, Brian. Daniel, I'm sure, is going to want to layer in some comments as well. But I think if you think about -- whether you're thinking ROA or ROTCE, I think there's probably a couple of things about the fourth quarter to kind of first quarter and outlook that are important to denote. One is there's just always, as we go into the first quarter of any year, there's some seasonality in expenses that we have to chew through from payroll taxes to merit increases, et cetera. And so the early part of the year has got a seasonal element in it that you don't see in the fourth quarter. In the fee income area from a noninterest revenue point of view, we had -- we very much exceeded the top end of our range of what we normally see. And some of that was just very strong results in some of those fee businesses. A little over $3 million of that was BOLI gains. And so we're not going to repeat that every quarter, obviously. So I think you've kind of got to run rate that just a little bit. And then another big item I want to -- I would call out is just the effective tax rate. Our balance sheet changed a lot given the repositioning back in Q3. The fourth quarter tax rate is below what our tax rate would be in 2026, which -- that tax rate is probably, as we called out in the guide, much closer to around 20%. And so I think of that as -- I'll do it in ROA, not ROTCE because it's just that number is more readily available in my mind. We had a 1.29% ROA for the quarter. I think ROA kind of on a more run rate basis is at least kind of mid-1 teens, if you will. And that's more of what I think is the sustainable run rate as we turn the quarter into '26 with all of the tailwinds that we've been describing on this call and opportunities to continue to grow and expand that from there. Charles Hobbs: Yes. And Brian, the only thing I'd add to all that Jay said in terms of the seasonality, when you think about Q1, the additional one there, is that there are 2 fewer less days. So the NII raw dollar amount is impacted by that by about $3.5 million. So when you think about the fourth quarter returns relative to the first quarter, there will be a downward shift. But then over the long term, we think about ROTCE somewhere needs to be kind of mid-teens is where we'd like to be. And we've talked about an ROA of 1.25% and above. And we feel like we got a really good path to get there. And to Jay's point, kind of our maybe normalized rate is in the high 1-teens right now, but we feel like we've got a really good path to get there throughout the year and towards the end of '26. Jay Brogdon: Yes. Last comment I'd make on this, Brian, is just when we did the balance sheet repositioning, we thought some of those targets from ROA and ROTCE were probably more achievable in 2027 on a run rate basis. And our jumping off point at the beginning of '26 is several basis points higher than where we thought it would be and all of that indicates kind of similar to Woody's question earlier on NIM, maybe a bit of a parallel shift up in either in what those run rates should be or in kind of accelerating the achievability of those targets. Brian Wilczynski: That's really helpful. And maybe one follow-up on the funding base. That's clearly been a big area of improvement over the past 12 months. As we look forward, can you just elaborate a bit more on the strategy to grow customer deposits over the course of 2026 and beyond? Jay Brogdon: Yes. I'll jump in there and others may want to comment, too, Brian. But I think I'll speak to it maybe in kind of like line of business thought process. We've got a lot of activities and efforts going on. Some of them in kind of the category of first ever in the bank, not first ever in an industry, but just maybe adopting industry best practices for the first time, particularly on the consumer side of our bank, and that spans across kind of all demographics, all categories of customer profile, and we're seeing some success, some early success there, experienced that success throughout 2025 and are creating better kind of discipline and muscle memory around those activities in the consumer bank. And so -- and that's been an area of focus from a talent perspective. And so I think that all of that is -- would fall into something that we're focused on strategically on the deposit side and the consumer category. The other thing I'd mention from a consumer perspective is private banking is a product we really rolled out probably sometime in '24, if memory serves, but really, really expanded our efforts around private banking in 2025. That's another area that we are seeing very good early signs on, and we've got a lot of built-in opportunities that we can synergize across our business through more competitive products there. And so having developed in those products, bringing in private bankers, incentivizing around that, that's another area that we're very, very optimistic in. And then the last piece that comes to mind for me in another line of business is just on the commercial side of our business. And so we've been very focused on building out business and middle market C&I capabilities that is tools, processes, people, everything. And that's been a multiyear investment. We're pretty deep in that journey. We started in the back side of our business, really [ retooled ] and reprocessed, continue to have some very important initiatives in those areas and then have brought some very good talent into the bank over the last year or two on the sales side as well, and that continues to be an area where I think we'll see -- you'll see heavy investment from us in terms of building out and expanding on the commercial [ TM ] side of the business. And I put all that together and say, one simple way I look at this is our noninterest-bearing deposits as a percentage of total deposits is below peer and below where it ought to be. And that kind of circles all the way back to an early comment to a question. I believe that is perhaps the biggest opportunity to accelerate even beyond our guide this year and into the future is our ability to demonstrate some success in growth in those strategies. Christopher J. Steenberg: Brian, it's Chris. I'll add to that. I think Jay referenced some of the things that are not necessarily new to the industry, but new to us. I think as we demonstrate to ourselves that we are effective at those, our focus pivots from the experimentation and piloting to accelerating and scaling. And so we're -- as we find those successes or even things we didn't like, we're learning from those quickly, and we're shortening our cycle every time so that we can get from concept to execution and into results on a much shorter cycle, and we're taking those learnings. And I think one spot that Jay didn't mention is another one of small business where we've got a significant opportunity in our footprint, both embedded in our existing relationships, but also prospect opportunities where we can attract really deposit-rich customers that have got limited credit needs, but they have absolutely -- have got significant needs around deposits and transaction needs. And so our ability to meet that, we already have demonstrated, and we continue to focus on that area, and that's going to continue to be an area of emphasis for us. Operator: And our next question today comes from Gary Tenner at D.A. Davidson. Gary Tenner: I just had one follow-up question. Just as I'm looking at the interplay between growth on both sides of the balance sheet based on the guide. I guess, two questions come to mind. One, is there any kind of anchor on the loan-deposit ratio to think about now that you're up in the mid-80s there the last couple of quarters? And then the second, just to the degree that loan growth outstrips deposit growth over the course of the year, is that funded with runoff from the securities portfolio? Or what are the broad thoughts around that? Jay Brogdon: Yes. I think -- I mean, you nailed it, Gary. I think that our constraining factor in our business from a growth perspective today is certainly not loans. It is on the deposit side, the core customer deposit side. Hence, all of the commentary that we've had around that being such a key element of our strategic focus going forward. So I think to the extent you see it outstripping -- loan growth outstripping or outpacing deposit growth, we do have cash flows from the balance sheet. That would be investment priority one. Investment -- the other funding elements that could be in there is we could get more aggressive on the customer side in things like promotional CD rates, et cetera, to help fund some of that. And then kind of your last stop would be on the wholesale side of any category. Operator: And that concludes the question-and-answer session. I'd like to turn the conference back over to Jay Brogdon, President and CEO, for any closing remarks. Jay Brogdon: Thanks. I'd like to just maybe end today with a few closing remarks. First of all, it's just -- it's hard for me not to look back to one year ago. A year ago, we were announcing fourth quarter 2024 results and net interest margin had a 2 handle on it and was up linked quarter but was still a 2-handle. ROA was barely creeping above 70 basis points. Our efficiency ratio was in the mid-60s. I flash forward to today and I think about, of course, the results from the balance sheet repositioning, but also just the ongoing commitment to sort of sound and profitable growth and the decisions we're making and the discipline that we're demonstrating as we do that. And we just find ourselves in a much stronger position. Net interest margin was up 94 basis points compared to a year ago. Our expenses are down, as we talked about on the call, and they're down on a multiyear basis. And all of that has led to revenue fourth quarter of this past year compared to a year ago up almost 20%. And pre-provision net revenue is up 60%, 6-0 percent. And so I just think about all the things that are now in the rearview mirror for us as we turn the corner into 2026, and we just have a great deal of momentum behind us. And the thing I want everybody to hear me say is that we are nowhere near satisfied with where we are right now. In fact, as we've talked about on this call, we continue to design and execute a number of strategic initiatives. And we think all of these initiatives are going to bolster that already strong momentum. Our pipelines for adding talent, as we've discussed, are as strong as they've ever been. And so as we move through 2026 and beyond, we very much look forward to continuing to demonstrate our progress, and we remain steadfast in our commitment to delivering value for our customers, for our associates who make all of this happen and of course, for our shareholders. So with that, I'll just thank everyone for the support, and you guys have a great day. Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good afternoon, and thank you for standing by, and welcome to the Fourth Quarter 2025 Earnings Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to Mr. Rich Kinder, Executive Chairman of Kinder Morgan. Richard Kinder: Thank you, Michelle. Before we begin, as usual, I'd like to remind you that KMI's earnings release today and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities and Exchange Act of 1934 as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release as well as review our latest filings with the SEC for important material assumptions, expectations and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. I have only 2 comments before turning the call over to our CEO, Kim Dang and the team. First, we believe our bullish outlook on natural gas demand remains grounded in reality, and we expect to see very strong growth over the rest of this decade and beyond. Now while there are several important drivers of that growth, the largest and most certain driver remains the need for additional LNG feed gas to service both expansions of existing export facilities and new greenfield projects coming online. We now estimate feed gas demand will average 19.8 Bcf per day in 2026, which is an all-time record, an increase of 19% from the daily average of 16.6 Bcf per day in 2025. And we see that demand increasing to over 34 Bcf per day by 2030. This astounding growth is enormously beneficial to the midstream sector and especially to companies like Kinder Morgan that have extensive pipeline networks along the Texas, Louisiana Gulf Coast, which is the location of most of the export terminals present and future. Our throughput agreements for delivery of the feed gas are essentially take-or-pay in nature which gives us great confidence in the resulting cash flow. My second comment is specific to Kinder Morgan. You will hear from Kim and the team that we finished 2025 very strong compared to 2024 and to our budget for 2025. And as you know from our earlier release of the budget for 2026, we expect more good performance this year. Once again, the chief driver of our success in both years is the extraordinary strength of our natural gas assets. And with that, I'll turn it over to Kim. Kimberly Dang: Okay. Thanks, Rich. As Rich said, we had a fantastic fourth quarter, producing record results for the quarter and the year. Much stronger than we anticipated when we announced our Q3 results. For the quarter, adjusted EBITDA was up 10% compared to the fourth quarter of last year and adjusted EPS grew 22%. Those are big numbers for a stable midstream business like ours. The biggest driver of the outperformance was natural gas. It had an outstanding quarter and year. Our project backlog has increased by approximately $650 million to $10 billion. We added a little over $900 million in new projects which was offset by $265 million of projects placed in service. The most 2 significant additions are Florida Gas Transmission projects, both supported by long-term shipper contracts. Our backlog multiple remains below 6x, which will drive very nice growth over the next few years. In addition, we're working on greater than $10 billion in project opportunities beyond the backlog. While we won't be successful on all of those, it gives you a sense of the tremendous market opportunity. We believe we will continue to find attractive opportunities for years to come. Wood Mac currently projects the U.S. natural gas market will continue to grow over the longer term, with an incremental 20 Bcf a day of demand growth between 2030 and 2035. Now a quick update on our 3 largest projects, MSX, South System 4 and Trident. We started construction on Trident last week. And for MSX and South System 4, we received our FERC scheduling order. The FERC anticipates issuing our final certificate by July 31, which is a schedule we requested, but ahead of our original expectation. There's still a lot of work ahead, but all 3 projects are on budget and on or ahead of schedule. Another positive last week, S&P upgraded KMI to BBB+. That shows our balance sheet is in great shape. On the management front, I want to take a moment to recognize Tom Martin, who will retire at the end of this month, for his wise counsel and the value he has helped delivered to our shareholders over his 23 years with the company. As we have previously announced, Tom will continue to serve as an adviser to the OCC and the Board, so we'll continue to benefit from his perspective. We're excited to have Dax, who many of you know from his long tenure at the company, step into the President's role. I'm looking forward to working with him closely as we continue to execute on our strategy. To sum it up, we had a great quarter and year. We also strengthened our balance sheet and advanced key projects with a $10 billion backlog and tremendous potential beyond that we are set up for a very exciting future. And with that, I'll turn it over to David -- Tom? Thomas Martin: Thanks, Kim. I appreciate the kind words. Starting with the natural gas business unit, transport volumes were up 9% in the quarter versus the fourth quarter of 2024, primarily due to increased LNG feed gas deliveries on Tennessee Gas Pipeline. For the full year transport volumes were up 5% over 2024. Natural gas gathering volumes were up 19% in the quarter from the fourth quarter of 2024 across all of our G&P assets with the largest impact being from our Haynesville system. Sequentially, total gathering volumes were up 9% and the full year 2025 gathering volumes were up 4% versus 2024. We experienced a significant ramp-up from our producer customers during the quarter to meet the growing LNG demand. Our Haynesville gathering system, for example, set a daily throughput record of 1.97 Bcf a day on December 24. Looking forward, we continue to see significant incremental project opportunities across our natural gas pipeline network. For example, we are in various stages of development to potentially serve more than 10 Bcf a day of natural gas demand in the power generation sector. In our Products Pipeline segment, refined products volumes were down 2% in the quarter compared to the fourth quarter of 2024. For the full year 2025, refined products lines are about equal to '24. Crude and condensate volumes were down 8% in the quarter compared to the fourth quarter of 2024. More than all of that decline is driven by taking HH out of service for the NGL conversion project early in the third quarter of 2025. Excluding HH volumes in both periods, crude and condensate volumes were up 6% in the quarter compared to the fourth quarter of '24. On January 16, 2026, KMI and Phillips 66 announced the start of the second open season on their proposed Western Gateway Pipeline system. Western Gateway Pipeline will connect Midwest and other refinery supply to Phoenix and to California with connectivity to Las Vegas, Nevada via KMI's CALNEV Pipeline. The second open season, which concludes on March 31, 2026 is for the remaining pipeline capacity and adds new access to the Los Angeles market via a joint tariff supported by the planned reversal of one of KMI's existing SFPP lines between Watson and Colton, California. In addition to expanding the offered destinations, the second open season adds additional origin points to enable supply diversification and optionality for our customers. We believe this project provides an attractive supply alternative for markets in Arizona and in California. In our Terminals business segment, our liquids lease capacity remained high at 93%. Market conditions continue to remain supportive of strong rates and the utilization of tanks available for use is 99% at our key hubs on the Houston Ship Channel and at Carteret, New Jersey. Our Jones Act tanker fleet remains exceptionally well contracted, assuming likely options are exercised. Our fleet is 100% leased through 2026, 97% leased through 2027 and 80% leased through 2028. We have opportunistically chartered a significant percentage of our fleet at higher market rates and have an average length of firm contract commitments of more than 3 years. The CO2 segment experienced 1% lower oil production volumes, 2% lower NGL volumes and 2% lower CO2 volumes in the quarter versus the fourth quarter of 2024. For the full year 2025, oil volumes are about 2% below '24 but finished strong in the quarter to be slightly above our plan for the year. With that, I'll turn it over to David. David Michels: Thank you, Tom. This quarter, we're declaring a quarterly dividend of $0.2925 per share, which is $1.17 per share annualized, up 2% from 2024. For the fourth quarter, we generated net income attributable to KMI of $996 million and EPS of $0.45, 49% and 50% above the fourth quarter of 2024. This quarter's results included a gain on an asset sale which we treat as a certain item. Excluding certain items, our adjusted net income and adjusted EPS still grew very nicely, both 22% above the fourth quarter of 2024. Our growth was driven by newly placed in service natural gas expansion projects, contributions from our Outrigger acquisition and continued strong demand for natural gas transport, storage and related services. For the full year 2025, we beat our budget by more than the contributions from our Outrigger acquisition. Outperformance came from our natural gas business, driven by greater value on transport capacity and ancillary services. Our Terminals segment also generated better-than-budgeted contributions. We budgeted to grow adjusted EBITDA by 4% and adjusted EPS by 10% from 2024. We actually grew adjusted EBITDA by 6% and adjusted EPS by 13%. Our 2025 EBITDA and net income were at all-time record levels for Kinder Morgan. Moving on to the balance sheet. As we continue to grow our cash flows and take a disciplined approach to capital allocation, our balance sheet continues to strengthen. Our net debt to adjusted EBITDA ratio improved to 3.8x, down from 3.9x last quarter and down from 4.1x at the end of the first quarter, which was immediately following the acquisition of Outrigger. Since the end of 2024, our net debt has decreased $9 million despite nearly $3 billion of total investments in growth projects and the acquisition. So we'll go through a high-level reconciliation. We generated cash flow from operations of $5.92 billion. We've spent -- we've spent $2.6 billion in dividends. We invested $3.15 billion in total CapEx, including growth sustaining and our contributions to joint ventures. We spent approximately $650 million on the Outrigger acquisition. We've received $380 million on divestitures, primarily the EagleHawk sale. And then we had all other items as a source of cash of about $100 million. That gets you close to the $9 million decrease in net debt for the year. The rating agencies have recognized our strengthened financial profile. Last week, S&P upgraded us to BBB positive. Fitch upgraded us to BBB+ during the summer of 2025, and we're on positive outlook by Moody's. So as has already been mentioned, but I'll mention it again, 2025 was an exceptionally strong year, a record setting year, in fact. We beat our budget and delivered double-digit earnings growth. We grew our backlog from $8.1 billion to $10.0 billion despite placing $1.8 billion of projects into service, meaning we added $3.7 billion of projects to the backlog during the year. We improved our balance sheet. We achieved credit rating upgrades and expect meaningful cash flow benefits from tax reform which will generate additional investment capacity. We have very positive momentum heading into 2026. And with that, I'll turn it back to Kim. Kimberly Dang: Okay, Michelle, if you'll come back on, and we'll take questions. Operator: [Operator Instructions] Our first caller is Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Look, if I can kick it off more on the data center front. You guys talk about the 70% number with respect to where you have exposure and aligned with data center opportunities. Can you talk a little bit about what you're seeing actively on that front? Obviously, we saw the FTC announcement here, perhaps that speaks to that a little bit. But how do you think about that regionally in terms of further data points we should be seeing through the course of the year? And I've got a quick follow-up. Kimberly Dang: Okay. I'm not exactly sure about the 70%. But if you look at our $10 billion backlog, about 60% of our backlog is associated with power projects. That's not just data center, that's anything associated with power. And if you think about the opportunities on the power side, I think a great example is if you look in the state of Georgia, where Georgia Power, recently, I think the end of November filed a revised IRP. And they're projecting 53 gigawatts of power demand between now and the early 2030s. And so from a gas perspective, if that was 100% gas, that would be like 10 Bcf a day, roughly, depending on the conversion metrics you use. And we expect that a significant portion of that will be gas, and that's just one utility in one state. And so what we're seeing across our network, whether that's in Georgia or South Carolina or Louisiana or Arkansas or Texas or New Mexico, Colorado, mean we are seeing similar stories just across our network. And the other thing is you look at power demand, we've got a higher power demand growth between 2025 and 2030. Wood Mac has in their most recent estimates increased theirs. And if you look at Wood Mac between 2030 and 2035, they think the power growth, at least in their projections, is greater between 2030 and 2035, than it is in their projections between '25 and '30. So this is something that is driving significant amount of projects. It's also a significant driver of the potential opportunities that we have, and we think will last for a decade. Julien Dumoulin-Smith: Excellent. If I can just firm up a little bit more on the SSE5 setup and timing. What are you looking to move forward on that? How are you thinking about timing? And then even more specifically, if you could speak to -- are you thinking about this as being a compression first or looping kind of project initially? And what level of signed utility load would unlock a more formal filing? Sital Mody: Yes, Julien, this is Sital. So look, in terms of timing, we see strong interest in the Southeast, and we continue to work with the customer base. In terms of what the final scope looks like, that all depends on final subscription. I do see it more than just compression. I think there could be some more brownfield looping. But once again, it's early. We're working through the demand dynamics with our customer base. We do see opportunity there, and it is competitive. So we will continue to report as we go along. But ultimately, the signed deal is what drives the announcement. Operator: Our next caller is Jackie Koletas with Goldman Sachs. Jacqueline Koletas: First, I just wanted to start on the next steps on the Western Gateway following the second open season launch last week. How do you think about allocating capital towards this project versus natural gas opportunity set? And how do those returns compare? Kimberly Dang: Yes. I mean on every project, we look at based on risk and return. And so I think we have a middle-of-the-road return that we expect and then we vary off that based on the stability, the duration and the creditworthiness of the cash flows. And so it's -- you've got stronger creditworthy parties and longer cash flows and take-or-pay, then you come off that return -- down from that return a little bit. And if you have those things are less and you go above that return. All these returns are significantly above our cost of capital. And so I think if we proceed on Western Gateway, we will have long-term shipper contracts there. And I expect those shipper contracts will be largely from creditworthy counterparties. And if not, we would have some credit support. So we don't, at this point, have limited capital. I think we can easily fund this project and do all the natural gas projects that we're talking about. Another point I'd point out on Western Gateway, which is we are contributing assets to that. And so our cash contribution will be less than we're going to -- we're setting up a 50-50 joint venture with P66. It would be less than half of the cost of the overall project because we're contributing value for -- contributing assets for part of our contribution. Jacqueline Koletas: Got it. That's helpful. And then just as a follow-up, leverage ended around 3.8x in the quarter. How do you think about maintaining leverage levels towards the midpoint of your long-term guide of 3.5 to 4.5x range versus leveraging up towards that high end if there are multiple CapEx opportunities? Kimberly Dang: Well, I'd say right now, what we've said is we're going to spend about $3 billion per year in CapEx. Now that won't be a perfect ground, $3 billion because you just have timing of spend, but roughly $3 billion a year. And we have the ability to fund that 100% out of cash flow. The other thing I'd point out is that as our $10 billion backlog of projects come online that our debt-to-EBITDA actually declines over time. And so that creates more balance sheet capacity. So for every 0.1x of leverage, that's $850 million of capacity. So I think we've got a ton of capacity even without leveraging up closer to the 4.5x. And I don't think we have intention of getting close to that level. So I think we've got plenty of capacities to accommodate the opportunities that we see out there. Operator: Our next caller is Theresa Chen with Barclays. Theresa Chen: Kim, I hear you loud and clear on the less than 50% of capital contribution on Western Gateway because you're contributing SFPP. When we think about the net EBITDA impact to Kinder, and I'm assuming this project moves forward, how should we quantify the displacement of existing SFPP EBITDA? How much is that contributing currently? Kimberly Dang: Well, I think, 2 things. One, Theresa, I think we're really early. And so we've got to get through the open season, we've got negotiations to do with our partner on the specifics. So I think -- and so I think we've got to finalize costs, et cetera. So I think it's too early to go through that at this point. Theresa Chen: Understood. Maybe turning to a different portion of your liquids business. Could you provide an update on the progress of the HH conversion? And in light of recent upstream developments in the Bakken and the increasingly challenged near-term outlook for the basin, how are you thinking about the expected NGL throughput and EBITDA contribution from this project? Kimberly Dang: Sure. I mean the project is going to come on probably late first quarter, early second quarter and that's Phase 1. And then with respect to the future phases, that's something we continue to work on. Sital Mody: Yes. I mean, Theresa, Broadly, though, I mean, we still -- given the recent pullback, it's just a matter of time. I think our initial phase is well contracted. We see the volumes behind it. These are coming from our plants, and so we have visibility there. So I don't think, as far as Phase 1 is concerned, and that is probably on the earlier side of the time frame that Kim gave you in terms of where we come in. I think as we look to the next phase, we continue to have discussions, positive discussions with our customers. We'll monitor the overall macro situation, and we'll make the investment decision accordingly. That being said, we still have that in front of us. Kimberly Dang: Right, and I think the other thing is GORs are growing in the Bakken. Operator: Our next caller is Michael Blum with Wells Fargo. Michael Blum: Yes, maybe if I could just ask maybe a different way at the same question to some degree, with Continental Resources effectively saying they're going to stop drilling in the Bakken. I'm wondering if you can talk about, at least for now, can you talk about how meaningful a customer they are, either your current business? Or where they were contemplated to be for HH and if that has an impact on the further expansion? Kimberly Dang: So yes, if you look at the EBITDA that we get from Bakken or EBDA, it's about 3% of Kinder Morgan overall. Obviously, Continental makes up a piece of that. We don't think that there's going to be any material impact from the Continental news. We think that the impact is very manageable, that's one because it's 3% of our EBITDA. But it's also because volumes came into the year a little stronger than we were expecting. And it's also because they're going to continue to complete wells through August and because they are just one of a number of customers we have up there. Michael Blum: Okay. Great. That makes sense. And then I just wanted to ask, in light of the asset sale that you did here in late 2025. Are there more noncore assets that you're actively looking to sell? And strategically, are there segments or areas of the business that you're more inclined to reduce your exposure to? Kimberly Dang: Okay. Yes. Let me talk about the EagleHawk sale first. First of all, on that, that's not an asset that we were looking or planning to sell. Our partner approached us because they were selling at least a portion of their interest and based on the price that we could achieve it made sense to sell. It's an 8.5x multiple on a nonoperated minority interest in the GMP asset. And when we looked at the reinvestment opportunity, meaning if we were buying at the price that we propose to sell and we look at the cash flows, those were going to be below our cost of capital. So -- and that included taking in into account any tax impact from the sale. So we thought it made sense. It was a good economic decision to sell that asset and recycle that capital. And so that's generally the way that we have been approaching sales of assets, which has been more opportunistic. As we say, our assets are for sale every day at the right price. And so we want to make good economic decisions about that. We like the portfolio of assets that we have today, 60 -- it's 2/3 natural gas and 26% is products, pipelines and terminals, very similar pipeline and storage business. So similar -- and then 7% is CO2, which is a little bit different, but we get great returns on that business, and we have an expertise that a lot of people don't have. So I think we're very comfortable with the suite of assets that we have, and this was just an opportunistic sale that made sense. Operator: Our next caller is Jeremy Tonet with JPMorgan. Jeremy Tonet: I was just curious for your thoughts, I guess, industry at large and what opportunities it could present to you down the road just if we think about Waha egress. One, we have some pretty cold weather coming up in -- during Uri, that presented opportunities for Kinder last go around. So just wondering if you could share any thoughts there. Sital Mody: Well, look, we -- as always here, when we look at the footprint, given our footprint, we're able to leverage basis dislocations that occurred. First and foremost, we want to serve our customers. And then to the extent that these opportunities present themselves, we've been taking a little more of a proprietary view on certain things in certain areas, strategically, small amounts. And so to the extent that, that presents itself, we'll be able to leverage that. Kimberly Dang: Yes. But I don't think -- this storm is not a Uri. Sital Mody: It's not a Uri. Kimberly Dang: I mean it's much shorter in duration and it's not going to be as significant. So... Jeremy Tonet: Understood. It seems like there might be another one on its heels. So we'll see what happens this winter again. Kimberly Dang: Generally, what I would say is that the gas transportation market is very tight. And so whenever you see dislocations in supplier demand in and around our assets, that is going to present opportunities for us. And that's part of what you saw in the fourth quarter of this year. Sital Mody: Yes. I mean a key component of that is storage for us, and we have a significant storage portfolio that will allow us to leverage some of that to the extent that it presents itself. Jeremy Tonet: Got it. And then just wanted to dial in on NGPL a little bit here, hearing more data center-driven opportunities in the Midwest, coal to gas switching as well, some of the other nat gas pipeline operators are seeing a lot of activity there. I'm just wondering if you could talk about what that could mean for Kinder -- for NGPL. Sital Mody: Yes. So look, we've -- we're quite a bit of -- there's significant discussions. You've been seeing some of the EBB postings we've been making out there. We've got interest along the pipeline in terms of not only just from power customers but also from organic markets that are trying to grow. Still early on some of these projects. We've got some binding commitments that we're looking to convert into full-fledged FID projects, as these develop, we'll bring them. But I mean, when you think about the corridor itself, we see a concentration up in the market area. We have some in the producing regions where folks are looking to site themselves. And so I think the opportunity set is there. It's just, once again, we're in this mode where folks are looking -- there's -- it's a competitive landscape, and so we want to make sure we secure the returns that we need to progress the projects to FID. Operator: Our next caller is Jean Ann Salisbury with Bank of America. Jean Ann Salisbury: You said in the prepared comments that MSX could be in service a couple of quarters early, I think. Is there any read across to a faster permitting process across the board? Or was that project specific? Kimberly Dang: No. I mean I think a couple of things on these projects. One is 871 is gone, and that happened, I don't know, 6 or 9 months ago. And that basically required us to wait 5 months between when we got our FERC certificates and when we could start construction. So that's gone. And then the FERC has acted within -- is going to act within roughly 1 year on our filing. And so previously, we've been seeing that take a little bit longer than that on big projects. And so the fact that the FERC process only took 12 months and we don't have 871 is speeding up our in-service on MSX from, call, the fourth quarter of '28 to the second quarter of '28. Jean Ann Salisbury: Great. That's very clear. And then one of your peers took an equity stake in a U.S. LNG terminal a few months ago. Is that something that KMI is actively looking at or would have interest in, especially, I guess, if you could back to back it with another counterparty to make it take-or-pay equivalent? Kimberly Dang: To make it -- well, I'll say a couple of things on that. Generally, what we've seen on the LNG front is the returns haven't been where we needed them to be to make those investments. And it's not something that we are accustomed to building. We do a small one, obviously, at Elba, but that was a relatively small facility. And so I think in general, what you should expect from us is that we are kind of sticking to our knitting, we're staying in our lane. We are serving those LNG -- that LNG demand through our pipelines. And right now, we serve 40% of that demand. As Rich said, that demand is expected to grow significantly, and we expect to get our fair share of that future demand, and that's driving very nice project opportunities for us. So I'm not saying we would never step out. It's just there hasn't been the opportunity where we thought the risk return profile was appropriate. And we haven't wanted to build these on our own. Richard Kinder: I think another thing we like on a risk-return basis is the fact that both on the LNG terminal side for feed gas and on the service to -- for electric generation purposes, we have, in general, take-or-pay contracts with utility grade -- investment-grade utilities. And that, we think, is a very good way to look at the risk that we are taking. And we think that minimizes any risk that we have as opposed to contracting directly with AI developers, for example. Operator: Our next caller is Keith Stanley with Wolfe Research. Keith Stanley: You updated the messaging on CapEx to at least $3 billion a year of growth CapEx for the next few years, up from $2.5 billion. Wanted to clarify, is that solely based on the sanctioned project backlog today? So if you keep FID-ing new projects and the backlog grows, CapEx could be above $3 billion a year for the next few years? Or is that already reflecting your best estimate over the next few years? Kimberly Dang: I'd say it's largely based on the $10 billion approved project backlog, but there is some view, there is a small portion that is based on getting some of the $10 billion in the opportunity set. So -- and look, I think that we updated it from $2.5 billion to $3 billion, given the $10 billion, given we continue to add to the backlog even after putting projects in service. So this year, when we were putting all those projects in service at the beginning of the year, we thought it might come down. It's continued to increase natural gas demand, we continue to see it grow between '25 and '30, but also beyond that. And so there may be the opportunity to extend that further, but we're not ready to do that -- or make it higher, but we're not ready to do that at this point in time. Keith Stanley: Got it. Second question, just wanted to follow up on the earlier one on Mississippi Crossing. So if you're 6 months early on that project and on -- potentially on some of the other bigger ones given the regulatory environment. Would your contracts kick in and you'd have pretty close to a full financial contribution right away at that earlier date? Or is that not the case? Kimberly Dang: It's a project-by-project analysis. In this case, the answer is no, the customers don't have to take it at that point in time. They can. I mean, they can elect to take it, but they don't have to. And I would say that being early on the regulatory front does not directly translate into day for day on the in-service. It's going to depend on the projects because once you move back that regulatory, once you get sooner approval from a regulatory perspective, you have to think about when you're getting pipe and when you're getting compression. And so, for example, we haven't seen that translate into much of an earlier date on South System 4 at this point in time. So it's project by project. But if our customers don't want that capacity, it will be available for us to use during that time. Sital Mody: And given the macro environment, Keith, I mean, you just think about the demand profiles that are coming our way, it's just -- you look at that as an opportunity to sell in the secondary markets. Operator: Our next call is Manav Gupta with UBS. Manav Gupta: Firstly, congrats on all the upgrades from rating agencies, reflects the strong quality of the management and execution. I wanted to ask you about the Florida Gas Transmission projects, both the projects. How did these come about? Can you give us more details? And then the last one year, what you have seen is you announced the project and then end up upsizing it. So if you could talk about the possibility of some upsizing here for these projects. Sital Mody: So Manav, this is Sital. So just in terms of the project itself, as you know, we're not the operator. Energy Transfer is the operator. So we'll let them talk about how it came about on the call. We've been working with them closely. Thematically, it's the same themes we've been talking about in the Southeast. We see that as a growth area, just broadly. And this is just another example of us getting incremental infrastructure to an area where there is significant growth. There's also a resiliency component there with the 2 projects. We think it makes sense in terms of whether or not the project gets upsized. We're in the process of having an open season right now. That open season closes here, I think, Feb 5, if I'm not mistaken. And based on the interest there, is it possible to upsize? Yes, if there's a demand for it. Kimberly Dang: Yes. I'd say both those projects are backed by long-term contracts with creditworthy counterparties. And so I mean, they are right down [Technical Difficulty]. Manav Gupta: Perfect. And my quick follow-up here is, at the start of the call, you mentioned that the 4Q turned out to be stronger than what you thought when you announced your 3Q results. So help us understand some of those tailwinds which help you drive the beat in 4Q? And are those still persistent out there? So should 1Q also turn out pretty strong, if you could talk about that. Kimberly Dang: Sure. So I mean, it was across the gas network. So it was our intrastate business, it was our interstate pipes and it was our gathering assets. And so as we said before, when you [Technical Difficulty] and this goes more to the outperformance on the intrastate. Operator: This is the operator, please standby. And speakers, please go ahead. The next question comes from Jason Gabel. Jason Gabelman: It's Jason Gabelman from TD Cowen. Hopefully, the storm isn't hitting you too hard down there. Maybe to start and to help everyone out, maybe we could just replay Manav's question because I was interested in the answer to it. I didn't quite hear. So just wondering what drove the earnings upside on the natural gas segment in 4Q. It sounded like some of it was driven by pull from LNG plants. So did some of these plants start up earlier than you had expected in the plan? Or were there other factors at play? Kimberly Dang: I mean, it was -- look, it was across the entire gas business. So it was a lot in our Texas intrastate market. It was in the Eagle Ford and the Haynesville on our gathering assets. And then it was also on the interstate markets more so in the Northeast than other areas. And so it's a function of having a very tight pipeline and storage network and that's going to create opportunities when you have supply or demand dislocations that could be weather, that could be LNG coming on or off, it could be a variety of factors, but that leads to volatility and upside for us. And there is the potential for that to happen again in 2026. Jason Gabelman: Great. And my follow-up maybe staying on the topic of LNG. It seems like the market is facing this upcoming global supply glut and maybe you get a bit of a slowdown in the pace of new liquefaction project sanctions here in the U.S. Gulf Coast. So just wondering how much of that project backlog, if any, is tied to servicing incremental projects? And I guess it's not the project backlog. It is the shadow project backlog and projects -- LNG projects that are associated with that shadow backlog. Kimberly Dang: Yes. So a couple of things. I'd reiterate the point Rich made a minute ago, which is -- the -- we have long-term take-or-pay contracts with these LNG facilities. And so those typically are 20- to 25-year contracts, and they pay whether they use that capacity or not. In our current backlog, about 12% of the $10 billion actual approved project backlog -- 12% of the shadow backlog is associated with LNG. So it's not a huge percentage. I think a lot of the shadow backlog, again, is going to be more on the power front. But the other thing I'd say is that when you look at these LNG projects, it's not always about adding a new facility. A lot of times, it's about an existing facility has some capacity and they want to reach further back to get more competitive supply. So to have incremental project, you don't have to have a new facility come online. It could be a need from an existing facility to try to get more competitive supply. Operator: And at this time, we are showing no further questions. Kimberly Dang: Okay. Thank you, everybody. Richard Kinder: Thank you. Have a good day. Operator: Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.
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