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Martijn Massen: Good morning, everyone. Thank you for joining and welcome to our 2025 Full Year Results Analyst Call. Today, our CEO, Bernd Stahli, accompanied by our CFO, Elke Snijder, will comment on the results presentation published on our website this morning. At the end of the call, you will have the opportunity to ask questions. For now, I would like to hand over to our CEO, Bernd Stahli. Bernd Stahli: Thank you, Martijn, and good morning, everyone. Welcome to the results presentation. Let's dive straight in. Slide 4 shows you what we stand for. These will be known, but I'll repeat them anyway. We're predominantly invested in Amsterdam. We're open to other sectors than offices. We appreciate that happy customers are key to the long-term success of the business. Sustainability is a must. And if the opportunity is there, we would like to grow into a larger, even better, more resilient business. Looking at 2025, lots of things have moved. For us, the 4 highlights of this year. The redevelopment of HNK Rotterdam Alexander, will talk about that later. All the permits are ready and the contractor is at the point of signing for Vitrum. So that's going to be the story for '26. We've delivered on our asset rotation, and we've exited a few more markets. And we've successfully refinanced EUR 400 million in loans successfully at better terms. Slide 6, we highlight the key performance indicators, some good, some bad. Earnings slightly higher than last year, EUR 2.10. The dividend, therefore, up by EUR 0.01 as a result as well, given that we have got a minimum payout ratio of 75%. Our balance sheet is under control. Our cost of debt remains low. But in terms of vacancy, and we'll talk about that later as well, it has increased. We see it as something that we will be able to address over the coming period, but it's something that we know, we need to address because 9% is not something that we're very happy about. Portfolio performance. If we look at the portfolio that we have today, anyone who was in the call 8 years ago remembers the map of the Netherlands where we had dots in some 72 cities. It's a lot more clean now this map. We're down to 5 cities. We exited Eindhoven, we exited Hoofddorp, which actually is very clear on Slide 9. Three assets sold, Eindhoven, Hooghuisstraat, we actually delivered to the buyer yesterday at 3:00. The 2 assets that you see at the top that were sold at the end of the list -- at the top of the list were sold at an 80% premium to book. The assets in first half of '26, Eindhoven is actually also sold at a similar sort of premium. So the trajectory in terms of asset rotation is good. What you see also on this slide is that we -- it looks like we have not done any acquisitions in '25. That is correct, but that doesn't mean we didn't invest. We actually invested quite heavily in HNK Rotterdam Alexander. And again, in '26, there will be further investments, particularly as Vitrum will start. The vacancy rate on Slide 10 is up. And we've indicated there's a slightly further increase at the start of 2026 as we got another building back in Leiden. So today, the pro forma number is just under 12%, and this is for us the level from which we have to start working it down again. If you look at the vacancy, we basically, over the years, as a result of strong asset management, asset rotation, investments in our assets, we have managed to keep the vacancy low. But obviously, there will always be tenants vacating, moving on. And this year -- last year, 2025 was the year that we actually had some adjustment as a result of it. And with a small portfolio, a vacancy returning to us will have a significant impact on the overall number. It's something that we know we need to address and we are addressing head on. Why, how do we do that? By just continuing to invest in our assets. And HNK Rotterdam Alexander is a very good example of this. This is going to be the best asset in the Alexander submarket of Rotterdam opening on February 9. Due to its quality and service offering, the building has attracted significant tenant interest during the development phase. And as a result, we are now leased 85% ahead of completion with conversations ongoing for most of the remainder of the space. Rents are above our original business case and with costs under control, we look forward to generating an attractive yield on cost of 8.4%. Alexander follows a trend of successful rebrands and upgrades at other HNK as we show on Slide 13. In 2026, we're doing a major rebrand of HNK Houthavens in Amsterdam and of HNK Utrecht Central Station, where we also expect to see good increases in ERV post the upgrades. We know the demand for offices is changing. And what is clear is that if and when you invest in your assets, as long as you're in the right location, it does get recognized in higher occupancy and higher rents. We also see this in how our tenants are using the space. We're getting more and more data on the actual usage of our buildings, and we are now on Slide 14. The actual physical occupational levels are stable at a good level, especially for the buildings that fit modern day tenant demand. We're optimistic that for the portfolio that we have, these occupancy levels will actually continue to improve. Slide 15 shows Vitrum. It's a project that you've seen coming back on our presentation for the last years. It's taken its time, but we're planning to make as much of a success of our development as we have done on some of the other redevelopments in our portfolio. In 2025, we've overcome all the legal hurdles, and we're close to the point now of finalizing and signing the contractor, confirming an actual start date, confirming a delivery date. Anyone that is driving by the location today can see the preparatory works already taking place at this time. It will be a great addition to the portfolio, adding just under 15,000 square meters of high-end space in a highly visible location, and we're optimistic about the leasing prospects as there is not that much comparable space available in the market now or in 2028. All the relevant details you can see on Slide 13. Slide 15 highlights Glass House. We announced in the press release because it's a big vacancy for us that is coming up, that it's going to become vacant in December 2026 after KPN has been there for just over a decade as a tenant. You can actually on the map, see where its location is. It's in terms of location, the best assets in the Sloterdijk area. And it's up to us now to make sure that -- it's also going to be again the best asset in terms of not only location, but in terms of product for this market as and when we deliver the project in probably 18 months' time post the delivery -- the return of that building in end of 2026. We'll make it future-proof. We know how the occupier market has changed. It will be a multi-tenant building, high quality, and we expect it will cost money. We don't yet know how much. But as and when we know the details with respect to the cost of the project, the timing of the project and the returns of this project, we will clarify this to you probably in one of the future presentations for the results. And with that, I would like to hand it over to Elke for the revaluation and the financials. Elke Snijder: Thanks for the introduction, Bernd. On this slide, you can see that the overall revaluation for the full year was negative. In the second half of the year, we recorded a downward adjustment of EUR 31 million. This was almost entirely driven by the revaluation of Glass House, the building that we just talked about that KPN will be vacating by the end of '26 and to a lesser extent, by Leiden assets following Johnson & Johnson's departure from the lab space on Newtonweg and overall, the change in sentiment in the bioscience industry that there has been lately. On this slide, the left shows the euro amount and the breakdowns between positive and negative full year revaluations. And on the right, we highlight that excluding Glass House and Leiden, our H2 valuations remained pretty much stable. Okay. We wanted to dive a little bit deeper into valuations and ERV. That's why we made the next slide. And here, we take a closer look. We've created this chart for you. And what it illustrates is that the development of both market rents, ERV and asset valuations for our like-for-like portfolio using 2020 as the base year and how that develops. Over a longer period, you would generally expect that if anticipated rental income increases, the corresponding asset values would rise as well. However, the chart shows a disconnect over this time frame, interestingly. While ERV was increased by 20% across our like-for-like portfolio, valuations have declined by 17% over the same period. Moving on to the next slide. You can see that while ERV growth has been slightly lower than inflation, we have seen that our gross rental income does grow ahead of inflation, which, in essence, is good news. Our new leases are signed significantly above ERV, almost 14% in 2024 and 11% in 2025. Okay. Let's now move on to sustainability. I think this is a familiar slide for you, but of course, with updated numbers. As one of our key strategic pillars, sustainability remains an area where we can truly show our commitment and really continue to lead the sector. We assess our progress against multiple indicators, giving us a well-rounded view of our performance. Our EPC continues to stand out. Nearly our entire portfolio is now labeled A or better. And within the A category, we can see further improvement as more assets climb to higher label tiers. On this slide, you can see that reflected on the top right, where the dark blue segment grows significantly in 2025 versus '24. A major focus area is reducing our actual energy use as we believe that, and I've explained this before, together with CO2 impact, this is the most meaningful driver of our sustainability trajectory. We track this through CRREM, targeting improvements in kilowatt hour per square meter per year. And this requires both investing in the technical performance of our buildings, but also supporting our tenants in adopting more energy-conscious behaviors. On the left-hand graph, you can see that we achieved another reduction in energy intensity. This is even more encouraging and now it gets quite interesting given that '25 was relatively cold with 5.7% additional heating days or in Dutch, we call them [Foreign Language]. Pro forma, had conditions been more typical, energy intensity would have likely landed around 105 or 106 for this scope versus the 109 that you see here in the chart. Our performance still remains well ahead of the Paris Proof pathway. And as mentioned, progress will not always be linear, some investments deliver larger steps than others and weather can create year-on-year fluctuations. But the overall trajectory remains strongly positive. Finally, on BREEAM, on the bottom right, you can see that 75% of our portfolio scores is very good or better. But more on that on the next slide. Okay. Here, you can see on the left, our ratings in '24 at the top. Then in the middle, you can see how our ratings would have looked if we wouldn't have done anything with the new certification that we did this year. And in the bottom, you can see how our ratings were finalized in '25. We recertified a large part of our portfolio in December, and this is the result. While we still have roughly 3/4 of the portfolio in very good or better, you can clearly see a shift from excellent in '24 at the top chart to more very good ratings in the bottom chart. At first glance, this might suggest our assets are performing worse, but I'm trying to explain that's not the case. In reality, our assets have continued to improve. However, the thresholds for each BREEAM rating level have become significantly stricter, which means the same level or even better performance may still result in a lower label. Now as for most of you, BREEAM is not day-to-day work, let me explain a little bit about how BREEAM ratings work. They are a moving target, not a static achievement. The assessment framework is regularly updated, and the assets are typically reassessed every 3 years against newly tightened criteria. As a result, the benchmark effectively resets each certification cycle, meaning that simply maintaining your rating usually requires additional investment and efforts. In years with widespread reassessments, for us, '25 was a biggy, it becomes inherently more difficult to maintain previous labels even if the environmental performance of the underlying assets has stayed the same or even improved. Part of what we're seeing was expected as we rolled out extensive planned sustainability upgrades, but some outcomes also stem from methodological updates introduced during the certification process. What does remain unchanged is our commitment. We continue to invest in and further enhance the quality and sustainability and long-term resilience of our assets. Okay. Now let's dive into the financials. EPRA earnings, a familiar chart here. It shows the bridge from GRI to NRI to EPRA earnings. Let me highlight a few points. Service costs not recharged increased as higher vacancy meant a larger share of these costs were not passed on to tenants. OpEx, noticeably higher than in '24 and driven really by 3 main factors. We saw a significant increase in municipal taxes. It was roughly EUR 0.5 million. In '24, but this was a little bit of a minor cost. We had a one-off insurance compensation that, of course, did not come back in '25. And we had higher sustainability-related consultancy expenses, including work tied to the BREEAM recertification. And again, we did a lot of those in '25, and we do not expect those to return in this magnitude in '26. Net financing result improved. I will elaborate on this later. And finally, corporate income tax lands at a direct rate of around 5.5%, comfortably within our guidance range of 5% to 7%. Moving on to EPRA earnings per slide. It's a bridge from '24 to '25. From left to right, the big ones. First, you can see the impact of the Sypesteyn acquisition that came in for December '24. So we have the full year impact in '25, hence, the EUR 0.06 of GRI that you see. Negative impact of disposals consists of full year impact of the '24 disposals. To remind you, that was Binnenhof Den Bosch and Fellenoord Eindhoven and the partial impact of the disposals of '25, and there we see Beukenhaghe Hooghuisstraat that was [ Beukenhaghe ] and Kennedyplein in Eindhoven for December. Like-for-like GRI shows the impact of mainly indexation, as you're familiar with. And as said, service costs not recharged increased due to higher vacancy. OpEx was higher, as explained, mainly due to higher municipality taxes and sustainability consultancy. Financing costs lower, and that was due to mainly on average, lower debt outstanding. Corporate income tax direct is about EUR 0.9 million higher than in '24. That's the EUR 0.04 impact, and that all ties up to an EPS of EUR 2.10, which is EUR 0.01 higher than '24. So I hope everybody is still with me because we're moving on to the EPRA NTA per share from again, end of '24 to end of '25. From left to right, more familiar stuff coming in, so I'll speed up a little bit. Total dividend of EUR 1.57. Over the year, the EPS we just talked about of EUR 2.10. Impact of revaluation comes down to EUR 3.06. And the sold assets in '25, good news, sold above book value, hence, the result on sales. Deferred tax relates to an increase of the deferred tax assets because of the negative revaluation over the year. The effect of stock dividend here is EUR 0.27. Simply put, the denominator of NTA per share has increased and results all in all, in a decrease of the NTA from '24 to '25 of EUR 2.24. Okay. Let's move on to financing. You have been able to read in a recent press release, but we are very pleased to have successfully closed a new EUR 50 million 7-year private placement with MetLife Investment Management. This strengthens our long-term funding profile, and we're happy to do it with an existing partner. Our EUR 40 million Pricoa placement, which matures at the end of this month, well, it's actually that's the end of this week, is being refinanced through this transaction, and we're adding an additional EUR 10 million to support continued investment in our portfolio, and we have investment plans enough planned for '26. Commercial terms are attractive. And as a result, average cost of debt remain well under control, increasing only to 3.2% after closing. Okay. Another sheet on our maturity and hedging profile. On the left side of this slide, you see the pro forma. So after we've paid back the Pricoa private placement loan maturity profile. And we're quite happy with that. It's a well-staggered schedule. No refinancing needs until '28 and also highlights that we still have substantial capacity on our RCF. With the completion of the new private placement, average debt maturity is extended to 4.6 years, which is illustrated on the top right of this slide. Overall, very satisfied with refinancing in '25. Over the past year, we secured the extension of both the term loan and RCF with our bank syndicate before the summer and closed the USPP just last week. Importantly, our entire debt structure remains fully unsecured, preserving maximum financing flexibility. Okay. Last slide for me. Looking at our balance sheet KPIs, a familiar slide again. On the left side, you can see that our cost of debt has remained stable. As mentioned, it will tick up slightly in '26 due to the new private placement. But do remember, this was priced in a very different base rate environment than the Pricoa private placement that expires at the end of this week. LTV, really healthy, well within external covenant thresholds, but also even a bit still below our own internal guidance. And we did share in the press release that pro forma for the Hooghuisstraat asset that's transferred yesterday, our LTV is 32.2%. So well, it provides some room to invest. All the other numbers, I think, are looking healthy. ICR is looking healthy and also net debt-to-EBITDA improved further, supported by the lower net debt position. Okay. So this is it for me now. Back to Bernd for the outlook '26. Bernd Stahli: Thank you, Elke. That's on Slide 31, the last slide of this presentation. You see the EPRA EPS guidance for 2026 of EUR 1.90 to EUR 2.05. That's middle of the range would be more or less a EUR 0.12 decline in earnings. That is entirely related due to the disposals that we did last year and the full year effect of Hooghuisstraat being sold earlier this month -- or actually yesterday. That underlying the business, actually, we are still getting like-for-like rental growth at the top line level. Obviously, an increase in vacancy diminishes the positive impact on that, but the indexation and like-for-like rental growth, they more or less offset themselves in 2026. If we look at the business more generally, we do see that the outlook for offices is improving. Liquidity is returning to the investment market and tenant demand is healthy for high-quality buildings in prime vibrant locations. People are willing to pay up for being in the best locations. We see more and more evidence of that. Over the years, we've moved to the right locations. And as we continue to invest and are able to provide the high-quality building that the market now wants, we should benefit. 2026 will see us further invest in the portfolio. Vitrum is a clear example. Glass House will be an upgrade and the rebrands of 2 further HNKs, they may be smaller investments, but we'll also make sure that these assets will continue to perform their best over the coming years. Offices are becoming more operational, hands-on assets. We know this. We're prepared for it, and we believe we're firmly on the right side of this transition, and that should ultimately drive future returns for our shareholders. We're optimistic about the outlook, but the vacancy is the key issue that we know we need to address this year, and it's something that the entire team is fully aware of and should be capable on delivering on. Finally, those of you who received the e-mail this morning will see that we've actually also put out a video of Elke, myself. I don't necessarily like to look at myself. But for those who haven't seen it yet, it's an interesting way to see how our communication is going to evolve as an extra add-on. There is an avatar video on the website. Have a look, give us feedback and let us know if you like this sort of thing. We're looking forward to doing more of this. AI is not going to go away. It will impact our business as well. It will impact our tenants. It's something that we're again fully aware of, and it means that we need to continue to deliver the product that the market wants. It will continue to evolve. With that, I would like to hand it back to Martijn for Q&A. Martijn Massen: Yes. So as this was the last slide of the presentation, we will now be continuing with the Q&A. Operator: [Operator Instructions] Martijn Massen: Vincent should be -- Vincent Koppmair from Degroof Petercam should be in the call right now, but I don't think we can hear him. Vincent Koppmair: Can you hear me? Martijn Massen: Okay. There we are. Vincent Koppmair: Apologies I didn't hear any sound effects. Congrats on the results. Apologies for the delay then. I just had maybe 2 quick questions. First of all, you've highlighted, of course, the EPS guidance and let's say, a bit wider range of the guidance. Could you give a little bit of color on what are the underlying assumptions that you're assuming for some of those guidance? And then my second question is, do you consider any further disposals in 2026, given your, let's say, maybe successful disposals at high valuations or above book value that you've done in the past month? Bernd Stahli: Have more guidance. The range is wider than we normally do. What I indicated is that the middle of the range is EUR 1.98. And there you get basically with the disposals that we did in the back end of '25 and the last one in Eindhoven yesterday. The increase in vacancy as a result of our efforts in Leiden that we had as per the start of this year will have a negative impact on income. That should be more or less offset by this increase in occupancy that will happen in Vivaldi II during this year. Beyond that, obviously, you get some indexation. We've guided for that as well. So we are -- this is the early -- the first EPRA EPS guidance that we give. Hopefully, we can narrow the range in subsequent quarters to give you clarity as to where the number actually will ultimately come out. With respect to further disposals, possibly, yes. We'd rather just do them first and then explain to you why we did what we did. But there are a small number of assets that we are currently preparing for disposal that should not necessarily be the biggest assets, but assets that where we see longer term a trajectory that doesn't fit where we think the office market is going. So assets that may ultimately move to change of use where we don't see a role for ourselves in that change of use. I hope that answers your question. Vincent Koppmair: It's, clear. I would have 1 follow-up question potentially if I may. The last question would be on the investment plan. So of course, you now have announced the figure and the yield on cost on Vitrum, that's EUR 80 million. But of course, you will also now have the renovation of Leiden and potentially Glass House. Where do you see basically your LTV landing over the next, let's say, 2 years, end of 2027, given the entire, let's say, CapEx plan? Bernd Stahli: Starting at the pro forma number of EUR 32 million today, assume that we basically get our earnings and that we pay out the dividend and take into account an element of CapEx, then that, by and large, is a wash. The increase in LTV will indeed come from the CapEx of Vitrum, the CapEx -- the remaining CapEx on Alexander and the start of CapEx of Glass House will end up above EUR 35 million but will stay well below EUR 40 million. Martijn Massen: Our next caller is [indiscernible] from ING. Unknown Analyst: So I have 2 questions. So first on -- you mentioned that Well House remains challenging in the current market. You also talked about building costs and pre-leasing. Could you maybe elaborate on that, please? Bernd Stahli: Well House is a wood hybrid structure that is going to be built upon an existing parking garage. That is complicated, expensive and actually takes a lot of time. The entire development period for this project is currently estimated somewhere between 34 and 40 months, where typically you would only probably need 2 years for a project that is basically ground up on a greenfield. Of that period, it's about 14 to 16 months that the excavation of the parking needs to take place. If you take into account that construction period, it means that all your costs capitalize over a period of time that your leasehold costs are quite extensive over that period of time when there is no income forthcoming. So it's actually the lead time before you actually have your building that is making it hard to make the economic stack up. What is a positive is that the rental assumptions are better today than they were 2 years ago, 2.5 years ago when we canceled project. But the rising construction costs that have happened since, partly offset this. The return that we need is slightly higher than average for the very simple reason that -- given the floor plates that this building will have, which is about 1,000 meters per floor, it's not the type of building that you would expect to pre-let where you get one anchor tenant taking 5,000 or 6,000 square meters for the very simple reason that people then want to like to have that space on maybe 1 or 2 floors, not on 6. This is a building that will be multi-tenanted and probably will only lease up towards completion. So we have full conviction of costs and timelines, but less clarity on revenues, and that's a trade-off that we need to square over the coming period to see whether or not we can justify the investment. Unknown Analyst: Okay. Great. That's very clear. And then a second question on the Bioscience Park. Could you maybe elaborate on the negative sentiment shift? And how would that impact the re-leasing options for the assets and also potentially any impact on other assets you have in that park? Bernd Stahli: Fair question. The life science cluster in Leiden that we have and the entire area is to a very large extent, driven by Johnson & Johnson as a major tenant in the entire area. Over the last couple of years, there have been some changes with respect to the available funding, venture capital, capital available for start-ups that has sort of become less prevalent as cost of capital generally across the board has gone up. And at the same time, what we also see is that the improvements in AI means that you need less lab space because more of the analysis can be done computer generated. And so the market is shifting. There is a little less confidence than there was 3 years ago about -- over the prospects of this industry. What we know is that it's a very cyclical industry, and we're now at the wrong part of that cycle. It will come back, but it's harder to judge when that will happen. Unknown Analyst: Okay. Great. And maybe 1 last question, if I may, on Vivaldi II, is there any update on the leasing? Do you see also interest from larger tenants to lease more space? Bernd Stahli: We got that building back in August. We've basically with our joint partner on this, established a new plan for the upgrade of the ground floor that basically should complete this month. We've had some leasing so far at rent levels above what we were sort of anticipating. But actually, the leasing should really sort of start to pick up from this month onwards. And we indicated at the time that we wanted to go back to a normal occupancy in 18 months. So basically, if we meet that target by the end of this year, we should be at close to 75%, 80%. That's -- if we get that, that we would be okay with. But we're not there yet. Operator: [Operator Instructions] Martijn Massen: Given that there are no further questions, I would like to thank everyone for listening and wish you a pleasant rest of your day. Thank you.
Operator: Good morning. My name is Michelle, and I will be your conference operator. At this time, I would like to welcome everyone to Automatic Data Processing, Inc.'s Second Quarter Fiscal 2026 Earnings Call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct a question and answer session. Instructions will be given at that time. I will now turn the conference over to Matthew Keating, Vice President, Investor Relations. Please go ahead. Matthew Keating: Thank you, Michelle, and welcome, everyone, to Automatic Data Processing, Inc.'s second quarter Fiscal 2026 Earnings Call. Participating today are Maria Black, our President and CEO, and Peter Hadley, our CFO. Earlier this morning, we released our results for the quarter. Our earnings materials are available on the SEC's website and our Investor Relations website at investors.adp.com, where you will also find the investor presentation that accompanies today's call. During our call, we will reference non-GAAP financial measures which we believe to be useful to investors and that exclude the impact of certain items. A description of these items, along with a reconciliation of non-GAAP measures to their most comparable GAAP measures, can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. I will now turn it over to Maria. Maria Black: Thank you, Matthew, and thank you, everyone, for joining us. This morning, we reported strong second quarter results that included 6% revenue growth, 80 basis points of adjusted EBIT margin expansion, and 11% adjusted EPS growth. We achieved these financial results while also making meaningful progress across our strategic priorities. Before discussing this strategic progress, I will briefly review some additional details from our results. We delivered solid employer services new business bookings growth in the second quarter. We enjoyed broad-based strength with the fastest growth in our international, US enterprise, and compliance businesses. Our small business portfolio and mid-market business also contributed to the growth in the quarter. With good momentum and healthy pipelines, we are focused on driving continued new business bookings growth in the second half of our fiscal year. Our employer services retention rate matched our expectations with a modest decline in the second quarter. We continue to benefit from a stable overall business environment and very high levels of client satisfaction. In fact, our overall client satisfaction results represented the single best quarter in Automatic Data Processing, Inc. history. Employer services pays per control growth rounded up to 1% for the second quarter, representing modestly higher year-on-year growth compared to the first quarter. Lastly, our PEO revenue increased 6% in the quarter, helped by growth in zero-margin pass-throughs and solid new business bookings growth. Our 2% growth in average worksite employees included a moderation in PEO pays per control growth. Peter will share our updated outlook in a few minutes, but we believe the demand environment for our PEO and other outsourcing services also remains healthy. We are proud of our strong second quarter financial results and excited by the progress we continue to make across our three strategic business priorities. I will start with what we are doing to lead with best-in-class HCM technology. We are very pleased with the strong traction our Workforce Now and ADP Lyric HCM platforms continue to experience. Workforce Now NextGen is being embraced by our mid-market clients for its always-on payroll processing capabilities, generative AI functionality, and expedited implementation timelines. We reached a milestone in the second quarter with our first sale to a client with more than a thousand employees. The client, a logistics company in the Midwest, selected Workforce Now NextGen based on the strength of its underlying technology and the breadth of its integrated solutions, which included payroll, HR, benefits administration, time and attendance, and learning. Workforce Now NextGen is a great example of how we build products to solve real-world challenges HR teams face each day, and we do so by combining our next-gen platform investments in AI and automation with robust compliance expertise to support our clients' wide-ranging needs. In the enterprise space, Lyric new business bookings once again exceeded our expectations in the second quarter, and its new business pipeline continued to expand at a rapid pace. Underscoring Lyric's strong reception in the market, more than 70% of its new business bookings and overall pipeline related to new logos as it continues to fare favorably against our competitors. Organizations are turning to Lyric for its flexibility, intelligence, and human-centric design that enhances the employee, manager, and practitioner experience. Among our many Lyric new business wins in the second quarter were two companies with more than 20,000 employees, which represents two of our largest clients sold on the platform to date. Earlier this month, Lyric was named a winner in the 2026 Big Innovation Awards presented by Business Intelligence Group, earning recognition for driving transformative impact in the HCM industry. In addition to building our own best-in-class solutions, we strive to enhance our HCM offerings through acquisitions that complement our business. Our October 2024 acquisition of Workforce Software is a great example. During the second quarter, we launched the ADP Workforce Suite, our integrated workforce management solution across our leading payroll and HCM platforms. Clients now have the opportunity to offer their employees around the world a unified time, pay, and HR experience with best-in-class workforce management tools at their fingertips. We are already seeing benefits from our integrated approach, winning several deals in the second quarter that included the ADP Workforce Suite. We also partner with others to accelerate innovation. In December, we successfully embedded Fiserv's Cash Flow Central, an integrated accounts payables and receivables management solution, into RUN in order to help our small business clients better manage their cash flow. The RUN powered by ADP platform brings payroll, contractor payments, bill pay, and invoicing together in one clear, connected experience. With payroll and payments in sync, our clients can do more in less time and steer their business forward confidently. AI remains central to our technology strategy, and we are moving full speed ahead to leverage it in attracting, serving, and retaining our clients. We continue to scale the usage and capabilities of our client-facing AI, including the launch of new ADP Assist payroll, HR, analytics, and tax agents that apply advanced intelligence to real workforce challenges. Built on ADP's comprehensive global data platform, these new persona-based agents help organizations manage people, streamline processes, and make informed decisions that support people at work. For example, ADP Assist tax registration agents can proactively identify when clients have missing or incomplete tax IDs and guide them through every step of the registration process. Additionally, our ADP Assist HR agents can create key talent actions instantly, such as initiating a promotion, simply by the user typing what they want to do. The system delivers real-time answers and guided next steps, reducing time spent navigating HR workflows. Our AI solutions are designed with a human-centric approach that enhances the value and meaningful connection we all derive from our work. Unlike generic AI solutions, ADP's approach combines proprietary workforce insights with advanced automation to solve real workforce challenges while maintaining the security, governance, and compliance standards companies trust. Our second strategic priority is to provide clients with unmatched expertise and outsourcing solutions. Success here requires us to carefully consider the breadth of our solutions and to continually evolve to best meet client needs. To this end, we were excited to introduce our first pooled employer plan, or PEP, within our retirement services business during the second quarter. A PEP is a single 401(k) plan that lets unrelated employers participate together with a pooled plan provider acting as plan sponsor, named fiduciary, and plan administrator. This arrangement shifts most of the compliance, filing, and oversight burdens from employers to the pooled plan provider. Our Save for Retirement pooled employer plan brings together scale, integration, and fiduciary support, allowing employers to offer robust retirement plan benefits without adding administrative burden. Clients gain scale-driven cost savings, reduced administrative work, and lower fiduciary risk. Finally, we are focused on executing on our third strategic priority, benefiting our clients with our global scale. We serve more than 70,000 clients outside of the United States, and we pay more than 16 million wage earners across more than 140 countries. Our mix of global solutions includes both in-country and multinational offerings. During the second quarter, we won the business of a large European bank with more than 75,000 employees. This win demonstrates the power of our brand, built by having associates on the ground for decades in most of our international markets. We also recently enhanced our global payroll platform through more intuitive dashboards with clearer messaging and easier navigation, all of which reduce manual tasks and enhance the overall user experience. The investments we are making in our international business are being noticed, as we were recognized recently in the HRM Asia Reader's Choice Awards, winning two golds in 2025 for best HR tech outsourcing and payroll solution. Overall, our second quarter represented strong outcomes on the financial front and with respect to our key strategic priorities. I would like to take a minute to thank our associates who continue to deliver exceptional product and outstanding service to our clients, particularly now as many of them are in the middle of our most hectic time of year completing year-end work. Their consistent effort over decades has established our company's trusted corporate reputation, and I am proud to announce that Automatic Data Processing, Inc. was recognized earlier this month by Fortune Magazine as one of the world's most admired companies in 2026. This marks Automatic Data Processing, Inc.'s twentieth year on this annual ranking. I would like to congratulate all ADP'ers on this well-earned accomplishment and thank them again for all that they do for Automatic Data Processing, Inc. and for our clients. And now I will turn the call over to Peter. Peter Hadley: Thank you, Maria, and good morning, everyone. I will start by providing some more color on our second quarter results and then update our fiscal 2026 outlook. Overall, we reported a strong second quarter, with our consolidated revenue growth, adjusted EBIT margin, and adjusted EPS growth all coming in slightly ahead of our expectations. Let me focus on our employer services segment first. I will cover both our results and our updated outlook. ES segment revenue in Q2 increased 6% on a reported basis and 5% on an organic constant currency basis, with FX contributing about a point of revenue growth in the quarter. As Maria shared, ES new business bookings were solid and broad-based in the second quarter. With continued healthy pipelines, we are maintaining our 4% to 7% new business bookings growth guidance for fiscal 2026. ES retention was in line with our forecast, declining modestly versus the prior year. We are keeping our outlook of a 10 to 30 basis point decline in full-year retention unchanged. ES pays per control growth improved slightly, rounding up to 1% for the second quarter, and we continue to forecast about flat pays per control growth for the full year. Client funds interest revenue increased slightly more than we anticipated in Q2, helped mainly by higher average client funds balance growth. We have increased our forecast for average client funds balance growth to 4% to 5% in fiscal 2026, and we continue to expect an average yield of approximately 3.4%. Accordingly, we are increasing our full-year client funds interest revenue forecast by $10 million to a range of $1.31 to $1.33 billion. We are also raising our expected net impact from our extended investment strategy by $10 million to a range of $1.27 to $1.29 billion. Overall, we are also increasing our ES revenue growth outlook to about 6% for the full year. ES margins increased by 50 basis points in Q2, driven by both operating leverage and the contribution from client funds interest revenue growth. Turning now to the PEO. Overall, PEO revenue growth in the second quarter was 6%, while PEO revenue growth, excluding zero-margin pass-throughs, was 3% in the quarter. PEO new business bookings growth was solid in Q2 but did come in slightly below our expectations. This impact, along with some further moderation in PEO pays per control growth, weighed on our average worksite employee growth in the quarter. Accordingly, we are now expecting average worksite employee growth of about 2% in fiscal 2026. We continue to expect fiscal 2026 PEO revenue growth of 5% to 7%, and PEO revenue, excluding zero-margin pass-throughs, to grow by 3% to 5%. PEO margins decreased 70 basis points in Q2, driven mainly by zero-margin pass-through growth and higher selling expenses. As we highlighted on our Q1 conference call, we do expect positive contribution to overall ADP margins this year from our other segment as a result of our client funds extended investment strategy. This margin contribution is being driven by growth in our corporate extended interest income, while at the same time, our short-term financing costs are decreasing. We saw this in the second quarter, and we expect this dynamic to continue across the balance of the fiscal year. Putting it all together, we are increasing our fiscal 2026 consolidated revenue outlook to about 6% growth, and we are maintaining our forecast for adjusted EBIT margin expansion of 50 to 70 basis points. We continue to expect our effective tax rate to be around 23% for the year, and we are also raising our fiscal 2026 adjusted EPS growth forecast to 9% to 10%, supported by share repurchases. Earlier this month, our board authorized the purchase of $6 billion of our common stock, which replaced in its entirety our 2022 authorization of $5 billion. This new authorization, along with our recent 10% dividend increase, signals our continued commitment to driving shareholder value and to returning excess cash to our shareholders, which remains a key pillar of our capital allocation strategy. Finally, a quick note on our anticipated adjusted EBIT margin cadence in the second half of the year. As we mentioned last quarter, we continue to expect a bit of a ramp in the back half of the year for margin expansion, and we currently expect to deliver more of this margin expansion in Q4 than in Q3. Thank you, and I will now turn it back to the operator for Q&A. Operator: Thank you. If your question has been answered and you would like to remove yourself from the queue, please press 11 again. We ask that you please limit yourselves to one question with a brief follow-up. Our first question comes from Mark Marcon with Baird. Your line is open. Mark Marcon: Good morning, lots of significant positives in the quarter. Maria, I am wondering if you could talk a little bit about the international opportunity, and congratulations on that win. Where do you see Automatic Data Processing, Inc. currently in terms of addressing that strategic pillar, and what do you think the runway is like? How do you compare the profitability of the international operations relative to the US? And then I have a follow-up on PEO. Maria Black: Sure. Good morning, Mark, and thank you for the question. As you know, international is an entire strategic priority for us. So we have three strategic priorities, one of which is candidly dedicated to exactly what you just suggested, which is the opportunity we have in our global space. So how are we doing? How are we faring? Perhaps I can comment on that, and Peter can touch on the impact of that business from a margin perspective to address the second part of your question. How we are faring is very well. I think the strength that we see in our offering is just getting started. I was excited to see the rebound in bookings, specifically this quarter, after a tiny bit of a softer first quarter on the heels of a very incredible fourth quarter. So we do know that the international space and those opportunities, they are big, they are complex, they are broad. They often involve lots of different stakeholders, countries, and decision-makers. So how do we show up? We show up well. I think the thing that was the highlight for me with respect to this quarter was this 75,000 employee European bank that we cited. But it was not just the fact that we had that win, which was tremendous execution by the team. It was also how that win came about, which was a direct reflection of the offering that we have in conjunction with our existing platform married to now the Workforce Suite that we launched. And so that was a key contributor to that win, and I think we continue to make progress in our offerings and our investments, whether that is through the products or through acquisitions. So we show up well from a product perspective. I mentioned during prepared remarks how we show up in terms of kind of this balance of Automatic Data Processing, Inc. associates on the ground in-country. That is unique. That is differentiated. So I think in general, and I apologize, I do not know what is happening to my voice. We are very proud of the offers that we have and how we show up in the international space. We continue to execute well from a bookings perspective. And as it relates to the future, I think it is bright for us, and I will let Peter comment on the margin piece. Peter Hadley: Yeah, Mark. On the profitability side, the international business is a little bit lower margin than some of the domestic businesses, which I think is to be understood. I think the retention rates, though, are very, very high. So if you take a look at it from a lifetime value sort of contribution, if you like, to value, it is very much comparable with any of the businesses we have in the US. So we are very happy to continue investing in that business. It does drive margin. It is an important contributor to our margin evolution, but it is a little bit lower on the margin as is the enterprise business in the US relative to, call it, the down market, mid-market. But over a lifetime value of a client, given the very high retention rates, we believe we achieve very similar levels of ultimate value from growing in international as we do in some of the maybe higher margin domestic market businesses. Mark Marcon: That is great. It seems like a great long-term opportunity. I was wondering on a separate note, can you just talk a little bit more about the PEO and the WSE growth? You know, it has been slowing for a while across the entire space. And, Maria, I know you know the PEO space better than anybody. What do you think is contributing to that slower growth? And how do you think about the long-term outlook on the PEO just in terms of WSEs? Because it seemed to me like we still have a long way to go in terms of penetration in multiple states that are not as well developed as some of the core states. Peter Hadley: Yeah, Mark, I will take that, and Maria might want to chime in. But I think we still agree with you. I think we still have tremendous opportunity in the PEO. You know, we have spoken about what we believe is the addressable opportunity, and we are, whilst we are clearly the largest PEO, we still think there is plenty of room to grow in that space. And as you know, around half of our PEO bookings come from our own client base. So, again, plenty of opportunity there. What is going on at the moment? I mentioned in my prepared remarks we had solid bookings. Maria also mentioned we had solid bookings in the PEO this quarter. They were a little less than we were expecting, but not a huge difference. But it does contribute when you are dealing with relatively small movements, basis point movements in things like WSEs. We also saw a little bit, again, very small margins here in terms of basis point moves, but we did see a little bit of softening in the PEO pays per control metric in the quarter. We saw a little bit of strengthening. Again, I do not want to overemphasize it, that it is just tens of basis points, but a little bit of softening in the PEO pays per control metric. By the way, it came in at exactly the same level as the ES metric. I think I mentioned last quarter, the PEO was, as it typically does, sitting a little ahead of ES. It is not always the case, but it is typically the case. This quarter, they happen to come in together. So just doing the math, looking at sort of where we were in Q1 and where we are now, we felt the lower end of the range was more appropriate. Hence, we have sort of adjusted our guide. But, you know, we are still very bullish on the opportunity. We continue to invest in distribution. We are investing in our product capabilities within Workforce Now specific to the PEO and certainly feel there is a tremendous opportunity in front of us with respect to the PEO. Mark Marcon: Great. Thank you. Operator: Thank you. Our next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Hey. Thanks so much. Thanks for the follow-up on Mark's question on PEO. I am just curious if you are doing anything differently to spur growth versus plan at the beginning of the year. Yeah. I know there is a lot of talk about health care costs being higher and perhaps SMBs are looking to trade down. Curious if you are seeing any of that and if you are responding to it. Maria Black: Sure. Happy to comment on that and the general value proposition of the PEO. As Mark mentioned, and you know as well, I am incredibly close to this business. Certainly been watching that value proposition over decades, and I can confidently say it is as strong as it has ever been. The complexity to be an employer in that space dealing with whether it is, as you mentioned, health care and the complexity of offering those types of things to your employees. It is very difficult. The PEO fits into that value proposition for those employers. I think the other piece is just the basic of co-employment and what employers are looking to do in that shared liability. So what are we doing to respond to what is arguably an increasingly complex landscape for small to medium-sized businesses? We are investing. So we are investing in our sellers. We are investing in their ecosystem. We talked a lot at Investor Day about the tools that we are developing to serve up the right leads to the right sellers at the right time. As Peter mentioned, a big piece of our value proposition inside of Automatic Data Processing, Inc. is that ability to mine our own base, and we are getting smarter about that. And so investments into tools, technology, to figure out who the exact right fit is for that PEO investment into things such as sales, incentives, headcount. So I can tell you from a go-to-market perspective, not a shortage of focus. The team is laser-focused. And building on the healthy pipeline, the momentum, we see that certainly in the solid results in PEO bookings in the second quarter, but we also see it when we look into the healthy activities, RFPs, things of that nature. There is a lot of motion in that space, and we are definitely positioned to take advantage of it. Tien-Tsin Huang: No. Great. All your confidence there, Maria, is important. Just on the margin cadence, Peter, I think you know, you talked about this last quarter about it being more back-half weighted. Looked like Q2 was a little bit better than what we had modeled, including the higher float from the higher balances. So Q3 to Q4, any callouts in terms of step function change, and have you changed your investment approach given the higher float? Sounds like maybe you are investing a little bit more, or maybe I am misreading it. Thank you. Peter Hadley: Yeah, Tien-Tsin, the second quarter, I think, came in a little higher than we were anticipating as well. We were pleased with that from a margin perspective. The margin cadence point is sort of really two things. As I said, we are expecting continued margin delivery in the second half, a little higher than the first half. The main driver of the second half versus the first half is we still had in Q1, as you remember, the fourth quarter of the before the anniversary of the Workforce Software acquisition. So we had some acquisition-related drag in the first quarter. The second quarter came in strongly. We are expecting good results in both Q3 and Q4. The main difference, I think, in Q3 versus Q4 is a little bit of timing of expenses, but that sort of happens from time to time. I would not overemphasize that. The other piece, though, is the float portfolio, which I think is where you are going. So the float portfolio in Q3 being calendar Q1 is our highest balance period where we have bonus season, we have tax rate, tax limits resetting. So we have more float basically in Q1, which results in more overnight balances. And this year versus last year, you know, as you know, we had a 75 basis point reduction in Fed funds between the same period last year and this year. So that creates a little bit of margin pressure in Q3 over Q3 last year relative. We do not really have that in Q4, so we are expecting a little bit more of this. The underlying margin expansion continues, I think, at really good momentum, but that float element as well as a little bit of timing of expenses, we are expecting Q3 not to be quite as strong as the fourth quarter. Tien-Tsin Huang: Perfect. Thank you for the answers. Operator: Thank you. Our next question comes from Scott Wurtzel with Wolfe Research. Your line is open. Scott Wurtzel: Thank you for taking my question. Maria, just wondering if you can talk a little bit more about the overall bookings environment. Just wondering how, you know, if you can characterize how growth in bookings was sort of trending in February relative to Q1 and even in the context if we go back to sort of the end of last year and some of the slowdown that we saw maybe on sales cycles, wondering how all of that is sort of trending now relative to six to nine months ago. Thanks. Maria Black: Yeah. Sure, Scott. So I think with respect to the overall environment, as mentioned during the prepared remarks, the environment is stable. I will tell you that from a new business perspective, we were really pleased with the solid performance in Q2. I think the thing that stands out to me the most with respect to Q2 is that it was broad-based. And so every single business contributed to that growth narrative. Some of the highlights we mentioned during the prepared remarks, certainly we saw in the enterprise space just how Lyric is resonating. It is really an incredible story for us. We are really excited about the momentum in the enterprise space. Excited to see that across the compliance solutions as well. I think within the small business portfolio, we continue to see strength in retirement services, in insurance, and mid-market also contributed to the growth. And as mentioned earlier, we had good PEO bookings, although that is not in the employer services numbers. So I think just broadly speaking, the quarter felt solid, and we were excited about the broad-based results that really were reflected in that. I think with respect to kind of intra-quarter type of stuff, I do not know that there is a lot to glean from kind of what happened in the three months. I think what, you know, what I would rest on is that we feel solid about the performance. It was broad-based. And that the pipelines are healthy as we set into the back half. But as always, we have a lot to get done in the back half. Scott Wurtzel: Got it. Makes sense. And then just as a follow-up. Hate to ask a question on AI impacts on hiring, but just in the context of even over the last, you know, 24, 48 hours, seeing some incremental announcements from enterprises around layoffs and citing AI. I am just wondering if you have any updated views on that topic. You know, impacts that AI could be having on the broader labor market? Thanks. Peter Hadley: Yeah. Thanks, Scott. I will take that one. We have seen the headlines too. I think more of the headlines I have seen actually have been more about sort of corporate realignment following, you know, a big hiring period post-pandemic. But in terms of the data we look at, we look at it obviously very closely. We look at it by industry, about 10 or 12 industry groups. We are not really seeing anything discernible there. I mean, you look at the labor market situation, certainly, the hiring levels are muted. Job openings are relatively muted. We have been talking about that now for some quarters on this call. Now what we have also been talking about though and what we still continue to see is continuing in the level of overall layoffs going on in the job market. And, certainly, lower layoffs and, you know, across the industry groups, we see a lot of consistency, if you like, in terms of where they are going and sort of areas that potentially you may think of as being more subject to being at risk with AI. We are not actually seeing in those industry verticals. So, you know, things like financial services, things like professional services, tech, and so on. You know, we are actually seeing reasonably healthy growth. So, you know, it is hard to say, but the empirical data does not really point to that happening at this point in time. Future, obviously, is yet to be determined. Scott Wurtzel: Great. Thanks, guys. Operator: Our next question comes from Bryan Bergin with TD Cowen. Bryan Bergin: Hi, guys. Good morning. Thank you. Wanted to follow-up on the international ES and compare that to the US. So Maria, I sense the incremental international focus here in your commentary, the investments you have been making there. Can you just give us a sense of how that is translating to potentially relative revenue and bookings growth of that international ES base relative to US ES? Peter Hadley: Yeah. I will take the revenue point, Bryan, and then Maria may want to comment more generally. But in terms of the revenue mix, it is not really changing. I mean, again, with the international space, the bookings that we are talking about and, for example, the 75,000 employee European bank, you know, those things take quite some time to come through to revenue generation. You know, they are large sort of enterprise implementation projects. So, you know, in terms of bookings performance, whether it is this quarter or in recent quarters, versus the, you know, having an influence, if you like, on the overall mix, not really. The mix has sort of been consistent for some time. I think the international business, as Maria said earlier, is certainly making good contributions, and we see a great growth opportunity there. But that is more over the medium and longer term than necessarily short-term influencing the revenue mix. Maria Black: Yeah. I think, Bryan, if I may just add from a bookings perspective, the focus across the entire enterprise space, inclusive of the large multinationals. So if you think of that global enterprise space kind of as large companies that are incredibly complex, that are driving large transformations, undoubtedly, the performance we saw specifically in the second quarter with respect to the enterprise space and international or Lyric in our global payroll offers were a larger contributor to the bookings narrative than perhaps in previous. But again, both of those spaces can be a bit lumpy. So to Peter's point, I think it is relatively consistent, but we have high hopes and lots of investment and focus as we continue to uniquely put together global payroll, global time, global HR, and global service into a unique offer in the market. Bryan Bergin: Okay. That is helpful. And my follow-up on ES PPC. So you just commented on the pickup here. I am curious if that was broad-based or if there were select contributors of that performance across certain client sizes? And as you just thought about the full year still roughly a flat outlook, last quarter you said you are rounding down to zero, here you are rounding up to one. Just curious how you thought about the second half, just given that pickup of trend. Peter Hadley: Yeah. It is a good question, Bryan. I think in terms of, like I was saying earlier, I think from an industry group contribution, very consistent also across the segments, our segments in the small market, small business market, the mid-market, and the enterprise space. What we do not really see is what the wider economy is seeing, which is a slowdown in the down market. Again, our base has tended to prove to be more resilient, if you like, I think, over the years. With respect to hiring than the wider small business segment. So it is really a pretty broad-based contribution, whether it is industry groups, whether it is from the segment sizes. In terms of the outlook, we had quite a lot of discussion about it. It is not an easy one to predict because we are really talking about we are very confident, I think, that we will continue to see growth. It is a question of is that growth just above or just below the half percent mark. So, you know, we decided not to adjust our guidance. I think we need to see a little bit more as I have sort of mentioned, we are talking about either tens of basis points above or one or two sort of, you know, below the half a point mark. So it is very consistent. You know, you can extrapolate, I think, sort of the ADP NER and the BLS, apply your usual, like, sort of ADP factor to that, and that is exactly what we are seeing. So, you know, I think the back half, we will see where it comes in and where it rounds to, but at the moment, it certainly looks very much like it is in and around what we have seen in the first and second quarters. Operator: Thank you. Our next question comes from Ramsey El-Assal with Cantor Fitzgerald. Ramsey El-Assal: Hi. Thank you very much for taking my question. I wanted to follow-up on Tien-Tsin's question before on margin cadence. I mean, there seems to be a few more moving parts in terms of the flow through in the second half. And given Q4 is typically a lower margin quarter for you guys. I just was wondering if you could speak to your confidence level about getting to where you need to get to deeper in the year. And just also whether there are any sort of underappreciated levers you might have access to to help things along. Peter Hadley: Hey, Ramsey. Yeah. Thanks for the question. I think, you know, I think it is really what I did say to Tien-Tsin. You know, we delivered 80 basis points this quarter. We are not guiding sort of to by quarters, obviously, but we are expecting sort of similar, you know, strong underlying margin contribution across the remaining two quarters. There is that dynamic on the short portfolio, which you can pretty easily, I think, extrapolate from our filings and our press release. We give the sort of the rates by quarter and the balances by between the portfolios, you know, in our press release. So there is clearly about a 75 basis point reduction on the yield of that short portfolio in Q3 versus last year. The other two portfolios continue as they are. So and, you know, more importantly, I think in terms of the true underlying margin expansion from, you know, from revenue growth and diligent cost management, that continues and they also obviously continue particularly cost management continues to be a lever for us. So, you know, I think we are we reiterated our range. We do that confidently in terms of our margin expansion range, and, you know, we do not necessarily anticipate any headwinds in the back half of the year absent, you know, the sort of the dynamics I have already spoken about with respect to margin expansion. Ramsey El-Assal: Okay. Got it. And a quick follow-up for me. Could you comment on the pricing environment right now? How does it feel in terms of your ability to deploy pricing? And maybe what contribution are you expecting from that in your numbers? Peter Hadley: Sure. No. I think the environment again, is very consistent with what it has been. We feel similarly confident with respect to our ability to price. Our pricing, you know, across our 1,100,000 clients. We do not just have a date in the year where we apply a price increase across the base. You know, it is feathered in, so we are halfway through the year already. I think our pricing has been very thoughtful as always, and generally well received as these things go. And, again, we are not expecting anything to deviate from what we have said before, which is around 100 basis points of contribution from price in fiscal 2026, which is a little lower, not a huge amount of difference, but a little lower than what we had in fiscal 2025 and a little higher than sort of what we were doing pre-pandemic, which was more in the half a point range. Ramsey El-Assal: Got it. Thank you very much. Operator: Thank you. Our next question comes from Ashish Sabadra with RBC Capital Markets. Your line is open. Ashish Sabadra: Thanks for taking my question. Your peer talked about a lower revenue per client. I was just wondering if you have seen anything on that front. In terms of the number of products that are obtained by your clients. Thanks. Maria Black: Ashish, I apologize that we missed the first word. Who spoke about a lower revenue per client? Ashish Sabadra: It was Paychex that talked about a lower revenue per client. So I was wondering if you have seen anything on that front or in terms of, like, just the number of products that are adopted by your clients. Thanks. Maria Black: Yeah. No. Fair enough. I am happy to comment on that with respect to I believe, the reference that they made was at point of sale, lower attach rates perhaps is the way that we would think about it, or a lower number of employees. I have not seen any of those trends. We, you know, monitor that closely, especially this time of year as we are looking at, you know, tremendous volumes, and we have not seen anything that would lead us to believe that there is a lower revenue per client or per client employee, if you will. Peter Hadley: No. No. And just to follow on to that, some of our strongest bookings performance have actually been our retirement and insurance services in that down market space. So if anything, I think we are perhaps seeing the reverse of what you were referring to. Ashish Sabadra: That is very helpful color. And maybe just another follow-up question on PEO. When we think about the bookings came in modestly below expectation, are there any particular regions or where you have seen any particular softness or in terms of, again, attach rate or employee penetration? Have you seen any color on those fronts? Thanks. Maria Black: I would say with respect to the strongest fit across the PEO markets, whether that is some of the states that have more concentration of PEOs, they continue to perform well in terms of those markets. But again, the performance is broad-based, if you will, across various industries. Certainly, the usual suspects of industries continue to fare well in terms of the strongest fits across PEO, whether that is the likes of property management, professional services. We kind of fit into that white-collar end of the PEO, maybe perhaps slightly blue-collar. So I think all of that feels normal. As it relates to the overall offer, I think the other piece that I heard a question in there, and perhaps you were not referring to it, but I will take the moment to comment on it because it is such a big contributor to the value proposition of the PEO, which is the health benefits piece and what are we seeing with respect to participation at the client employee level. What I would tell you is participation across health insurance and health offers across our PEO are healthy and remain strong, which to me is a direct reflection of the strength of the value proposition of that offer in the market. Ashish Sabadra: That is great color, and congrats on strong momentum in services. Thanks. Maria Black: Thank you. Operator: Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open. Kartik Mehta: Good morning. Maria, maybe just on PEO, in the last twelve months, have you seen a change in the type of client that is asking for PEO, in terms of are the clients larger or smaller or the type of industry any noticeable difference? Maria Black: Good morning, Kartik. No. No noticeable difference. I think the momentum across what is our strongest fit, if you will. So the PEOs that we look or the PEO opportunities that we look to bring into our PEO remains really consistent. I think that is a big piece of the strength of Automatic Data Processing, Inc. and ADP TotalSource and our offer is that we are incredibly guardrailed as well as strategic in terms of the clients that we target inside of the Automatic Data Processing, Inc. base, who we want to be in that PEO. And I would say that it is largely consistent across the last couple of decades, both with respect to size as well as respect to industry. Over time, we have pulled up a little bit in average size over the last couple of decades. Part of that is the PEO does have our best-in-class offer in the mid-market. So if you imagine the PEO sitting on Workforce Now, that stretches it into a little bit perhaps beyond just the small businesses. But again, that is relatively consistent over the decades we have been in the business. Kartik Mehta: And, Peter, just a question on AI. I know you talked a little bit about AI and maybe the impact of employment for your clients. I am wondering for Automatic Data Processing, Inc., I think you have implemented AI, I think you have had success on the sales side. Just a two-part question. Has that changed the number of people that maybe salespeople you need or made them more productive, so changes maybe the number of hires? And is it success? Of allowing you to increase investment or one leading you to increase investment in that? Peter Hadley: Yeah. Thanks for the question, Kartik. In terms of the headcount, no, we have not sort of taken a different approach to our headcount. We remain committed to growing sales headcount. We have seen over decades the contribution that that can make. What it has done to your point is it has enabled our sellers to be both more efficient and, I think, also more effective. I would still say we are in the relatively early innings in terms of taking dividends, if you like, from these investments and really seeing sort of the lift we expect to get from this over the coming years. But it is less about, okay, you know, a shift change in how we approach investing in the Salesforce or sort of where we expect sales to come from, really, it is a way that we are looking to make our salespeople more effective, more efficient, and ultimately deliver more wins. But I think you should expect us to continue to invest in both headcount and tools, be they AI and also other tools. We have spoken about, you know, the zone, which obviously is AI-infused, but it is also a platform our sellers use. All of those things, we will continue to invest in to maximize our opportunity to be successful on the sales front. Kartik Mehta: Thank you both very much. I appreciate it. Peter Hadley: Welcome. Operator: Thank you. Our next question comes from Daniel Jester with BMO Capital Markets. Your line is open. Daniel Jester: Great. Good morning, and thank you for taking my question. So maybe on Lyric, you know, it sounded like you sold a couple of quite large deals this quarter that you mentioned in the prepared remarks. Maybe can you share a little bit of color about how maybe you won those deals or how they came together? And as you think about the larger part of the enterprise for Lyric, do you have critical mass now in terms of reference customers or and are deals like this? Should we be seeing them more frequently, or maybe just any more color about the upmarket momentum on Lyric? Maria Black: No. Thank you, Daniel. I am so glad you asked. This is one of my favorite stories coming out of Q2 is the strength that we see in Lyric new business bookings. Really excited about those two deals as they do represent two of the largest. Do we anticipate and want to see more of them? Of course, we do. That is everything that we have been building toward. So that is, you know, part of our goal and our expectation. I think the part that again, also was a standout is that when you look across the pipeline, you look across the wins with Lyric, 70% of those are new logos. That is a direct correlation to how this product is resonating with CHROs, with the market at large. It is being cited not just the awards we are winning, but by the buyers. So how do these deals come together? They come together because CHROs today are looking for flexibility in their products. They are looking for dynamic tools. They are looking for products that have AI built in the fabric and in the core, not after and attached. So it is an AI-centric, human-centric platform that we build with really that worker at the center. That is unique. It is different. That is how these deals are coming together. That is how the pipeline is coming together. So you probably hear it in my voice, but, yes, we are very excited to see this, and we are building critical mass now. Again, I think Peter mentioned earlier on the international same thing on these deals. These are large deals. They will take some time to onboard to get to huge revenue contribution. But definitely material bookings contribution from Lyric at this time. Daniel Jester: Okay. That is great. Thank you. And then maybe just to go back to your prepared remarks on the customer feedback, it sounds like extremely strong, some of the highest you have seen. I guess I would love you to compare and contrast that with sort of the retention commentary that it just kind of came in line with your expectations. So if your customers really love the product and retention is coming in line, you know, any thoughts about sort of what is impacting the market in terms of exogenous factors from the macro or the competitive environment? Anything you would share on retention? Thank you so much. Maria Black: Yeah. Sure. So I will start with the client satisfaction because it is another highlight. It was a record quarter. It is a record first six months. I hope we always have records because that means that the efforts that we have to improve the experience that our clients have engaging with us, the investments we are making in those tools. Peter mentioned the zone. That is true for sales. We are also investing tremendously into AI tools for our internal associates as well as into our products to make our clients more productive and our practitioners, whether it is ours or our clients, in the HCM field, be able to navigate this space even better. So the investments into product, the investments into the tools, I would like to believe the NPS improvements that we continue to make, and by the way, they are broad-based. I think that is the other piece that stands out to me. From a structural perspective. So really excited about that, and as mentioned, it is a direct connection to retention. We do have strength in retention. That said, it was in line with our expectation, and that expectation is really how we set out the plan for the year, and Peter can comment on this as well, but we do anticipate a bit of a moderation. So it is hard to believe that six years later and I am still sitting here talking about pre-pandemic out-of-business rates there, but we are. You know, are we back to fiscal 2019 or not? And I would tell you, we are almost planning for, even in the back half of the year, a bit of moderation as it relates to things like out of business. We did see a tiny bit of that contribute to the slight decline, if you will, in the second quarter. It is right in line with how we are planning, but it is not a byproduct necessarily of the tremendous efforts that we continue to make on client satisfaction and more a byproduct of how we really structure the plan for the year. So I do not know if you have anything to add to that, Peter. Peter Hadley: Yeah. No. I think that is well said. I mean, again, our reported retention rate last year was in the US was 92.1%. So the math, obviously, on a $14 billion plus dollar business, but 10 to 30 basis points is actually a pretty small movement, if you like, that we are anticipating. As we said, our second quarter came in, you know, more or less where we were expecting. The first quarter was slightly better than where we were expecting. We will see where the back half goes. It is more a back-half story. Particularly Q3 is the most definitive period. So I think we are just anticipating, to your point, a little bit maybe more on the macro side but, again, very small margins, very small up in, as Maria said, a normalization of out-of-business levels in the small business segment, but all of this is very much on the margins given we are only talking about 10 to 30 basis points against the very high retention rate to start within a very large business. Daniel Jester: Okay. Very helpful. Thank you very much. Operator: Our next question comes from Bryan Keane with Citi. Your line is open. Bryan Keane: Hi, guys. Good morning. Just had a follow-up on PEO, Peter. Maybe you could help me understand the first quarter revenue ex pass-throughs grew at 6%, this quarter at 3%. That is a pretty big move or bigger move than usual we see between first and second quarter or just in the cadence of quarters. Is the 300 basis point delta there, maybe you could help us some of the drivers there? It sounds like maybe some of that is the softer bookings, but I did not know if there are other things at play. Peter Hadley: Yeah, Bryan. So if you take the rounding, it is actually a little less. We had some rounding up and down and what have you. But still, it is a bit of a differential. You know, there are a few factors there. One is the slightly softer worksite employees we were talking about earlier, which came from, again, from a solid but slightly below our expectations booking performance and some moderation in pays per control. The second factor is you may recall, Q2 last year, we had a bunch of pull forward of SUI revenues that we would not last year, we were anticipating in the third quarter were pulled forward just due to the way the processing calendar worked in the second quarter. We did not have that this year, so there is a bit of a grow-over challenge or challenging compare, if you like, from a revenue growth perspective as a result of that. Then the third factor we saw was which, again, all going in the same direction hence, the differential that you are referring to was wage growth. We saw a little bit less wage growth in the PEO in the second quarter. Again, this happens from time to time. I would not necessarily draw a trend that employers in that space are looking to put through lower wage increases. If anything, the third quarter is more a quarter where our third quarter being this current first calendar quarter is more when you see sort of wage rate changes if you like, for worksite employees. But yeah, just due to movements in the base clients moving out, other clients moving in, the timing of that, saw a little bit less in terms of the payroll base or the wage growth levels in the PEO. So bit of a step off from Q1. I would acknowledge that. I think though we are still positive with respect to the outlook for the year, and that is why reiterated, if you like, by the fact we did not change our guidance either with or without zero-margin pass-throughs. Bryan Keane: Yeah. I was going to ask about the guidance. I think you did reiterate the three to five ex the pass-throughs. Would we be on the lower end of the range more just given the trends or not necessarily? For the back half of the year. Peter Hadley: Yeah. I would say not necessarily, but, you know, we do not guide on the quarters, obviously, but there is a lot to be done. Again, we are in sort of prime selling season now, retention is a little bit more of a fourth-quarter play, so it is much more of a back-half story than front-half, so it is hard to sort of give, you know, clear guidance, I guess, as to where in the range we think we will finish. We are confident about being able to land in the range, but I would say at the moment, the range is there because all possibilities still exist and will depend on largely bookings and pays per control and, to some degree, retention. Bryan Keane: Okay. Helpful. Congrats on the solid results. Peter Hadley: Thank you. Operator: Thank you. Our next question comes from Dan Dolev with Mizuho. Your line is open. Dan Dolev: Hey guys. Really nice results. I think Maria, you mentioned in the beginning you are very proud of the Cash Flow Central partnership with Fiserv. Can you maybe discuss a little bit of sort of the contribution? When should that become really material? And then I have a follow-up quick question. Thank you. Maria Black: Yeah. And thanks, Dan. I appreciate the question and the nice comments about the quarter. I am really excited about our continued journey of the strategy of embedded offerings. So we have spent a lot of time talking about embedding RUN into other offerings. I think now I am incredibly excited to talk about Fiserv's Cash Flow Central being embedded into RUN. What this allows for is a small business owner to really leverage RUN powered by Automatic Data Processing, Inc. as a one-stop-shop platform where they have the ability to run payroll, they have the ability to do bill pay, APAR. They have the ability to pay contractors. They have the ability to pretty much pay everyone in one single platform. Other technology, we believe in this ecosystem approach. Anytime you can come together with to make it easier for a small business owner to navigate the work that they need to do is something that we are incredibly interested in, and it is, you know, part and parcel to the embedded strategy, whether it is putting RUN into other ecosystems or leveraging others' best-in-class offerings into our platforms. So really excited about it. That said though, we did just complete that integration in December, and so there is not a lot of contribution yet with respect to revenue and or bookings. So that opportunity is largely in front of us, which also makes me incredibly excited as we can continue down the journey of embedded. Dan Dolev: Great. Thank you. And I have, like, a little bit of a longer-term question. I think one of the key concerns obviously not ours, is sort of the long-term terminal value in sort of an AI-driven, you know, white-collar, you know, job-killing world, like software engineers, etcetera. Like, I am sure you guys are very I mean, you have been around for decades. Automatic Data Processing, Inc. has been around for decades. Like, are you guys working, I am sure, internally about sort of the more, like, the three to five-year outlook? How can Automatic Data Processing, Inc. add value or how, you know, changing kind of the framework if the AI thing does reduce long-term jobs. Just maybe some long-term comments would be great. Maria Black: Yeah. Absolutely. I am happy to start. And then, Peter, you know, if you want to chime in, kind of from a terminal value and things of that nature and things we may or may not be modeling. But I think maybe I will start with the things that I think every day about, which is the, you know, some level, like, the beauty of this business when I think about what it is that we do, which, as we have talked about, at investor day, we continue to see each and every day. What we do is not discretionary. What we do is an imperative, paying people on time and accurately is not just a brand promise. It is candidly how the whole world goes around. So I think deeply about what does that look like in the future. You said it well, which is Automatic Data Processing, Inc. has navigated many of these innovation cycles. We have been around for seventy years. So if you think about how payroll was processed seventy-six years ago to where it is processed today, a lot has changed. Work has changed. Workflow has changed. I spent the last week over at the World Economic Forum. And as I walked up and down the promenade, you know, this concept of AI changing workflow and augmenting the work as it automates tasks, that is real, and that is happening. And we see that. We see that in our business. We see that in our clients' business. But we also see that it has to be still anchored to, call it, human centricity. The world of work is a human place. What we do is probably the most emotional part of humanity, which is connecting people to their purpose, connecting people to their work. By the way, the way to test that is if you ever want to really upset somebody, you know, get their payroll wrong or, you know, get something with respect to benefits wrong. And so what we do will continue to evolve, and I think we are right there with it. That is why we are really excited about the work that we are doing across each of the domain disciplines of HCM with respect to AI. I talked about it in the prepared remarks. Having ADP Assist agents in payroll, in tax, in benefits, in, you know, all of these different areas will continue to change how work happens, whether that is for us or our practitioners. But at the end of it, you know, the other thing I think a lot about, whether it is, you know, this last week during the snowstorm or, you perhaps on December 23 when one of the largest global clients in the world had a challenge with payroll on their end. You know, do I see a world where a bunch of humanoids are going to be sleeping in offices to get payroll done and navigating things to ensure that people get paid accurately and on time without people involved. You know, candidly, I cannot see it. So I think workflow is changing. Yes. Are we prepared to continue to innovate in that space? That is exactly what we are doing, but I also believe what we are doing and what many companies do outside of Automatic Data Processing, Inc. is anchored in humans. And so, you know, only time will tell. Truly what the future holds, but we are navigating this innovation cycle at a rapid clip no different than all the other ones that Automatic Data Processing, Inc. has navigated. Dan Dolev: Great. Thank you for this. We believe in you. Maria Black: Thank you. Appreciate that. Operator: Thank you. This concludes our question and answer portion for today. I am pleased to hand the program over to Maria Black for closing remarks. Maria Black: Well, funny enough, I think those probably serve as pretty good closing remarks. I will only add one piece, which is exactly where I started, is thanking our associates because it is our associates that are innovating. It is our associates that are showing up for our clients, whether that is at the holidays to get things done, or it is weathering snowstorms to get things done. I am really proud of the work that we are doing. It is a direct reflection of how we get recognized by companies like Fortune for twenty years in a row as the most admired companies. I am in awe of the Automatic Data Processing, Inc. spirit and how human the work that we do and how it shows up, and I am really proud of that. And I just want to once again acknowledge our associates and thank everyone for their interest. Operator: Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good morning. My name is Warren, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth Quarter and Full Year 2025 PPG Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. To allow everyone an opportunity to ask a question, the company requests that each analyst ask only one question. Thank you. I would now like to turn the conference over to Alex Lopez, Director of Investor Relations. Please go ahead, sir. Alex Lopez: Thank you, Warren, and good morning, everyone. This is Alex Lopez. We appreciate your continued interest in PPG Industries, Inc. and welcome you to our fourth quarter 2025 earnings conference call. Joining me today from PPG Industries, Inc. are Timothy Knavish, Chairman and Chief Executive Officer, and Vincent Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. Equity markets closed on Tuesday, January 27, 2026. We have posted detailed commentary and the accompanying presentation slides on the investor center of our website, ppg.com. Following management's perspective on the company's results, we will move to a Q&A session. Both the prepared commentary and discussions during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on PPG Industries, Inc.'s operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. The presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG Industries, Inc.'s filings with the SEC. Now let me introduce PPG Industries, Inc. Chairman and CEO, Timothy Knavish. Timothy Knavish: Thanks, Alex. Good morning, everyone. Welcome to our fourth quarter and full year 2025 earnings call. I'll start off by providing some highlights on Q4 and full year 2025, and then I'll move on to our 2026 guidance. I'm pleased to report that 2025 was a year of solid commercial, operational, innovation, and financial performance for PPG Industries, Inc. The year also demonstrated the strength and resilience of our diversified portfolio as well as the dedication of our PPG Industries, Inc. global team. Despite a very mixed and dynamic macroeconomic environment throughout the year, we delivered consistent organic growth, both volume and price, capping the year off with our strongest organic growth of over 3% in the quarter. We also continued our legacy of driving structural cost improvements through our self-help actions and maintained our heritage of strong cash flow generation and disciplined cash deployment, including returning cash to our shareholders. For the full year, net sales totaled $15.9 billion with 2% organic growth, which was driven by a combination of higher selling prices and volume gains across our segments. Our adjusted earnings per share came in at $7.58, underscoring our ability to maintain solid profitability in a dynamic environment. Our cash from operations totaled $1.9 billion, up about half a billion dollars year over year, supporting a robust free cash flow yield of 5%. This strong cash performance enabled us to return $1.4 billion to shareholders through dividends and share repurchases. Our segment EBITDA margin for the year was a healthy 19%, reflecting ongoing operational efficiency and cost discipline. I'm pleased that we have delivered on our organic growth commitment, with sales volume and selling price growth resulting in a full year increase of 2% in organic sales, which outpaced the estimated market decline of negative 0.2%. This is the result of our productivity solutions for our customers, as well as the share gains in our core technologies. Now turning to the fourth quarter, we further accelerated our growth momentum. Net sales were $3.9 billion, up 5% year over year with 3% organic growth driven by positive sales volume growth across all regions. We achieved record aerospace coating sales and earnings led by strong demand for our technology-advanced products. Automotive OEM net sales increased 6%, well outpacing the industry driven by share gains and customer mix. Architectural coatings in Latin America delivered high single-digit organic sales growth aided by the sequential quarterly recovery project-related sales and continued strong retail performance. We delivered positive sales volume growth in all regions, with Asia Pacific leading the pack achieving mid-single-digit percentage followed by low single-digit percentage in the US, Latin America, and Europe. Our segment EBITDA margin for the quarter was 18%, reflecting solid execution despite some headwinds that impacted certain end markets. Adjusted EPS for the quarter was $1.51, as the improved organic growth and improved operational performance were more than offset by higher interest costs and increased corporate expenses. Now looking at each of our segments, in the global architectural coatings segment, fourth quarter net sales rose 8% to $951 million with 2% organic growth. This was driven by Mexico's strong retail performance and sequential improvement in project-related spending as well as favorable foreign currency translation. Project-related spending was weak in 2025 driven by uncertainties related to tariffs. However, in 2025, we experienced consistent recovery and expect this to extend into 2026 based on leading indicators and discussions with our customers. Architectural coatings demand in Europe was mixed, with a low single-digit percentage decline, which was partially offset by favorable pricing. We have now delivered positive pricing for thirty-nine consecutive quarters in this business. Segment income increased 6% driven by improved pricing and cost management, and EBITDA margins improved nearly 100 basis points. We expect positive organic sales and margin momentum to continue in 2026 in this business. The 5% net sales growth to $1.3 billion was led by double-digit organic growth in aerospace and consistent gains in our protective and marine coatings business, which now has delivered 11 consecutive quarters of volume growth. As expected, automotive refinish organic sales decreased by a high single-digit percentage as sales volumes were lower reflecting customer order patterns stemming from distributors more heavily weighting their purchases to 2025. However, one closely watched data point in the industry is US accident claims, and the December year-over-year claims were down only 2% compared to high single-digit or low double-digit declines throughout the year. We communicated in our third quarter earnings call that the industry claims normalization and our 2025 distributor order patterns will result in a difficult sales comparison for PPG Industries, Inc. in 2026, but incremental volume growth during 2026. Segment EBITDA margin decreased driven by the lower automotive refinish coating sales and higher growth-related investment spending in aerospace, and protective and marine coatings partly offset by higher selling prices. We expect margin contraction for the segment during 2026 with margin growth during the second half of the year. As you know, our aerospace business is an important growth engine for the company, and I want to take a moment to talk about the momentum in industry growth and the demand for our highly specialized qualified products. The business is equally weighted to OEM and aftermarket customers, with margins that are accretive to the overall reporting segment and has a strong presence in commercial, military, and general aviation. During our second quarter earnings call, we presented the significant expected aerospace OEM growth given the increased builds forecast for the next several years. In addition to the OEM growth, the forecast for higher aftermarket demand translates into sales growth CAGR of high single-digit percentage growth for the foreseeable future. For PPG Industries, Inc., this is a business that is more than just coatings, with the majority of the portfolio being represented by transparencies, sealants and adhesives, and service and materials. For each one of these verticals, we compete with peers that do not have a strong presence in overlapping technologies. This makes our business very unique with a much stronger segment presence than any traditional competitor in our space. Moving to the industrial coating segment, fourth quarter net sales grew 3% to $1.6 billion with organic growth fueled by share gains that led to 5% sales volume growth well outpacing industry demand. As we realized the full run rate benefit of share gains with strength in automotive OEM coatings and packaging coatings. From a business unit perspective, our automotive OEM business delivered a 6% increase in net sales with growth above market as a result of our share gains. We expect to outgrow the market in the first quarter and for the full year in 2026 in this business. Organic sales for our industrial coatings business were flat as sales volumes growth in Europe and Asia Pacific region offset lower index-based price. Packaging coatings organic sales increased by a double-digit percentage year over year, growing significantly above industry rates. These results reflect the positive momentum in share gains led by Europe and the US as a result of the technology shift favoring our sustainable product portfolio. Segment EBITDA was up 6% year over year and EBITDA margin improved by 30 basis points to 15.1%, reflecting the leverage from the organic sales growth along with our manufacturing productivity and strong cost control actions. Now looking ahead, we expect some softness in global industrial and automotive demand to impact organic sales and margin in the first quarter of 2026. Now let me talk about our balance sheet and cash. Strong cash flow generation remains a key pillar of our strategy. As I said, our operating cash flow increased by over half a billion dollars year over year to $1.9 billion in 2025. We returned $1.4 billion to shareholders through dividends of $630 million and share repurchases of $790 million, which represents about 3% of our outstanding shares. We ended the year with a strong cash balance of $2.2 billion and a net debt position of $5.1 billion with $700 million of debt maturing in 2026, which we intend to pay from our current cash position. Our balance sheet is strong, which continues to provide us with financial flexibility, and we remain committed to using this strength and flexibility to drive shareholder value. Capital expenditures for the year totaled approximately $780 million, reflecting our investment in growth initiatives including expansions in aerospace and Mexico, and our digital and AI capabilities. 2025 will represent the high watermark of these growth investments, and we expect to sequentially pace back to our historical levels of approximately 3% of sales by 2027. Looking ahead, I'm encouraged by our organic growth momentum and what we will achieve in 2026. We anticipate that demand in Europe and global industrial end-use markets will remain challenged. However, despite the macroeconomic environment, we expect sales volume growth will be driven by aerospace, architectural coatings in Mexico, and about $100 million of share gains in the industrial coatings segment that will be realized in 2026, including $50 million of carryover share gains announced last year. We expect overall price for the company to be positive with strength from our performance and architectural coating segments, which will be partially offset by modest contraction in the industrial coating segment. This will result in organic sales growth in the range of flat to positive low single-digit percentage. The raw material basket remains favorable to coatings producers, and we are consolidating our supplier base which will help us offset the impacts of already enacted tariffs resulting in expected overall flat raw material costs for the year. Finally, during 2026, we expect growing benefits from operational excellence programs, reducing our cost by another $50 million. This combined with the leverage from acceleration in volume growth is expected to drive earnings per share growth that at the midpoint of our guidance represents a mid-single-digit percentage increase. We expect earnings per share to be flat to growth of low single-digit percentage during the first half of the year and increasing to high single-digit percentage in the second half of the year. In closing, I'm excited about the increasing momentum we have demonstrated during the fourth quarter that allows us to start 2026 on strong footing. We are laser-focused on executing our enterprise growth strategy which emphasizes high-margin business growth, strong cash flow generation, disciplined capital allocation, and operational excellence. Our portfolio pruning completed in 2024 enables us to more effectively win with our customers and drive shareholder value. Additionally, we are investing in customer innovation, including digital and AI capabilities to maintain our technology leadership in coatings, sealants, specialty materials, and productivity solutions for our customers. As always, we remain disciplined with our cash deployment to drive shareholder value. We're confident in our strategy and the strength of our business model to deliver sustainable long-term growth. Thank you to our PPG Industries, Inc. team around the world who make it happen and deliver on our purpose every day. We appreciate your continued confidence in PPG Industries, Inc. I look forward to discussing our results and outlook in more detail during today's call. Warren, please open the line for questions. Operator: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Christopher Parkinson with Wolfe Research. Your line is open. Christopher Parkinson: Most of us would still call the macro, you know, muted or even meager. And yet your organic growth, you know, with maybe one exception, has been pretty solid across a lot of the substrates and the facets you've been focusing on last few years. Could you just add a little bit of insight on what you saw in the fourth quarter and how you're thinking about everything in 2026 in terms of breaking that growth down as was the macro actually slightly better than you anticipated? Is it all share gain? Is it new product introductions? If you could kinda just break that down and how, you know, that breakdown would actually lead you to think about your '26 guidance, that'd be particularly helpful. Thank you. Timothy Knavish: Yeah. Hey, Chris. I guess a high-level answer, and I'll get into some details for you here. The high-level answer is, you know, macro is not better than we expected. And to your questions about is our growth based on macro share gain or technology introductions? The answer is yes, yes, and yes. So the spaces where we're seeing macro help you know, aerospace, right, that continues to crush it for us. The sequential improvement in Mexico that helps us. And, you know, I'd say still a pretty strong robust PMC market. When you look across the rest of our businesses, well and those businesses, if you think about auto OEM, you know, S and P has Q1 down. The rest of the year, call it flattish. But we're committed to outperforming that, and we will grow. Packaging industry is a very mixed bag, and we're crushing it there with multiple quarters of double-digit. And that's largely share gain, and I will tell you largely Europe. Where we're doing quite well there. You know, if you look at the other businesses, Architectural Europe, still flattish. Industrial or general industrial, which, as you know, is the catch-all. It's you know, some segments are up. Some are down. Overall, I'd still call it pretty flat. So, really, there's a few markets where we're getting macro help. Most of our businesses were getting share gain help, and to the technology question, a lot of the share that we're gaining in packaging is technology-driven. A lot of the share that we're gaining in refinish even though the you know, the destocking is covering this right now. A lot of the share gain is driven by the productivity tools that we launched. So it's really a combination of all three. But high level, I don't think anything has changed significantly with our view of the macro. Operator: Your next question comes from the line of Aleksey Yefremov with KeyBanc Capital Markets. Your line is open. Aleksey Yefremov: Good morning. Thanks for providing all the color on end markets. I was hoping you could just give us some details on total volumes and price for organic growth in '26. Timothy Knavish: Sure. Let me do the easy one first, and that's pricing. You should expect to see positive price in virtually all of the protective businesses. I'm sorry. Performance businesses and the architectural businesses. You know, you heard my even our most challenged region for architectural in Europe, we've gotten price 39 straight quarters. I don't see us breaking that streak. And, of course, our position, our strength in Mexico we'll capture price there. So you'll see price there. Refinish, aerospace, to a lesser degree, PMC, those two segments will definitely have positive price. Now in industrial segments, I would call it flattish, but we do have two slight negatives. We still do have a little bit of index pricing carryover. And automotive frankly, automotive in China we see some low single-digit price declines frankly, that are offset by lower raw materials than we expected in China. But all in, you'll see performance and architectural offset a little bit of decline in industrial. You know, volume-wise, we're on a pretty good trend. You'll continue to see volume growth in aerospace, PMC, packaging, modest volume growth in architectural. You'll see volume growth in auto OEM, frankly. You know, we have we've had two quarters in a row of beating market there. And we're optimistic about doing that throughout 2026. And that's driven by share gains. And then, you know, as we move through the year, I think you'll start to see some more in general industrial where some of the share gain wins that we've had will actually come to launch. So thank you for the question, Aleksey. Operator: Your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Your line is open. Kevin McCarthy: Yes. Thank you, and good morning. Tim, it was nice to see you finish up the year at plus 3% on organic sales growth. If I look at the EBITDA line, though, it was relatively flat. And so I was wondering if you could walk us through your thoughts on operating leverage. It seems though raw materials are pretty benign, and you've been taking costs out of the company as per your restructuring. And so, maybe why did EBITDA not grow more in the quarter? And more importantly, how do you see that trending as 2026 progresses? Timothy Knavish: Yeah. Hey, Kevin. There's several contributors, but the one that by far drives that math is the refinish destocking. As you know, that refinish is one of our higher margin businesses, so when it's down, you've got destocking, that just I think we were down double digits in Q3, high single digits in Q4. It overwhelms the positivity of the other businesses' organic growth just given its margin profile. So what you should expect to see there, unfortunately, you'll see some of that in Q1 and Q2. Think you'll see it sequentially get better as the other businesses kick it in more. And more pricing kicks in, more of our cost out and productivity kick in, but really, where you'll see that flip is once we get back to the normal buyer buying patterns, which will be the second half of the year. Vincent Morales: Yeah, Kevin. Let me this is Vince. Just, let me remind everybody. Our segment earnings did grow in the fourth quarter. So they were up, about $20 million year over year. Operator: Your next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open. Vincent Andrews: Thank you and good morning. I wanted to dig in a little bit more on Refinish. If I think some of the metrics that have been discussed over the last couple of calls, I think third quarter claims were down mid-single digits, but 4Q claims are back down high singles. So you noted, Tim, that December was only down 2%. And I believe in the answer to Kevin's question, you're still anticipating the sort of second half recovery and normalization of customer shipments. So could you just help us tie all that together with sort of the latest update? What you're hearing from customers as well as and not just how you're interpreting all that claims data. Timothy Knavish: Yeah. Thanks, Vincent. And if you don't mind, I'm gonna take a rather holistic answer here, try to answer all the refinish questions here. Because I wanna make sure we leave time to get to everything in the portfolio here. I'm gonna answer maybe your question and more when it comes to refinish. So the headline I'd say is there's nothing that indicates a huge change for us versus what we told you at the end of Q3. Relative to the industry and to our trajectory. However, we are seeing what I would call some reinforcing green shoots as we move through the quarter. Okay? So, you know, we still we're still very confident in our best-in-class product solutions to Grocery, and that's happening. We have market share momentum. That's happening largely in the US, but also across Europe. You know, this is and will be a very good business for PPG Industries, Inc. as we work through this transitory kinda period just given the strength of our position versus others. I will also add that there is clearly industry anxiety out there partly driven by the pressure that body shops have been on for the last eighteen months. But also driven by consolidations, divestitures in this industry, and what all of those anxieties play to our strength, one, the strength of our productivity offering, but second, because of the certainty of continuity that we provide. Insurance rate spikes were really the key driver to this disproportionate drop in claims over the last year and a half. Or so. Okay? And that led to multi or leading to multi-quarter destocking in our channel. I mentioned last time how it ties to our rebate structure, etcetera. And we said at the last quarter, we expect normalization of buying patterns from our distributors in 2026. In normal, I'll remind everybody, would be kinda low single-digit claims. Down. And that's very good. Normal is very good for PPG Industries, Inc. because our track record for decades shows that at that kind of level, we can put up record after record because of the strength of our offering. If you look at our guide, I'll remind you too, everybody, that we had a very strong 2025. Combined with a pretty weak 2025. So when you combine that with what we're saying now, which is okay, destocking for two quarters, sales volume and EBIT growth in Q3 and '4, that really explains a lot of the EPS difference between the first half of the year and the second half year. So that's kind of the fundamentals. Now updates. Everything we're seeing and hearing from our customers since we last spoke is playing out as expected. Distributors are destocking as we expected. Body shops are starting to see beginning signs of normalization. As we expected. And thus we reinforced our guide today. The few points of reinforcement and green shoots because of the strength of our productivity offering and the anxieties in the marketplace that I mentioned. We're winning a lot of share. We saw you saw one public announcement yesterday but a lot of other ones happening that are not publicly announced, and there are more to come. Second, insurance premiums are normalizing. Okay? So kinda the catalyst for this whole cycle is beginning to normalize. We continue to reinforce the strength of our productivity offering. Two things we did just this quarter we launched the next chapter of digital tools for the body shops, you know, beyond Moonwalk, beyond Link, beyond Visualize. We launched a new digital tool called mix and shake. Which drives further body shop productivity savings. And that's being well received. And we also launched our first AI formulated product, in Refinish to, again, to help body shops be more productive. So the industry is playing out as we expected. We're winning share with our solutions. That reinforces our guide to see destocking in the first half normalized order patterns in the second half. Two other things that happened notably in December. You did see the minus 2% claims. One data point, I get I get that, but you gotta start somewhere. So let's watch that closely as we move through the '26. And we did start to see what we call fill-in orders from our distributors. Okay? So this multi-quarter destocking, you know, you can only destock so far before you've gotta supply the body shops. And that's when you start seeing fill-in orders. And we did start to see those in December. So another reinforcing sign. So all that added up we expect a muted first half for continued destocking. Second half returned to sales and EBIT growth were finished in a more normalized distributor buying pattern. So, you know, just one other thing, more for the segment and to speak to the strength of our portfolio. Despite a challenging back half of the year in one of our best margin businesses, you know, the performance coating segment still put up a record sales year. And record earnings year for the full year of '25. So the strength of our portfolio just, just really comes through there when things like PMC Aerospace and traffic can offset this transitory period of overfinish. So hope I answered your question and more on refinish. It's playing out as we expected. And, obviously, more data points to come as we move through Q1 and Q2. Operator: Your next question comes from the line of David Begleiter with Deutsche Bank. Your line is open. David Begleiter: Good morning. Tim, on aerospace, can you tell us what the growth the sales growth was in 2025? And are you at all capacity constrained in '26? Ahead of the new supply capacity coming on next year? Timothy Knavish: Yeah. We thanks, David. The growth rate for 2025 was double-digit. By the way, it was 20 double-digit and 24 as well. So we expect continued growth. You're starting to lap double-digit on top of double-digit. Denominators are getting bigger. By the way, this business is almost the same size as Refinish now. So the denominator's getting bigger and bigger as you start lapping multiple double digits. So we're guiding high single digits for 2026, I think, for aerospace. We are capacity constrained. No doubt about it. That's why our CapEx has been above our historical norm for the last couple of years. Round numbers I approved about $120 million of CapEx last year that I will call incremental aerospace debottlenecking CapEx expansion. We've also brought in a number of consultants to help us just with debottlenecking on the expense side, and that's why you see some of the margin challenges that I think Kevin asked about. And in addition to that $120 million or so, we announced $380 million new fact that will take about two years to bring online for the sealants and coatings side of the business. And we're working on some other capacity expansions. I can't get ahead of my board here. But, you know, we're not done. This business will be growing likely for the rest of my career, and hopefully, that's longer than Mr. Morales' career here. But so we see that coming for as far as our forecast go. Operator: Your next question comes from the line of John Roberts with Mizuho. Your line is open. John Roberts: Thanks, and congrats on a long career, Vince, and best wishes. Vincent Morales: Thank you, John. John Roberts: Could you talk a little bit more about the depths of the AI reformulation activity going on? You launched the first product and refinish, and how broad is this across the industry? PPG Industries, Inc. have a differentiated position or the consultants sort of bringing AI to all the coatings companies? Timothy Knavish: Yeah. Hey, John. We're super excited about this. There are things in AI that consultants are bringing to everybody. And I would say that's more kind of back office, customer service, you know, the finance transaction processing. Those are things that are kind of table stakes that everybody's doing. Formulation AI this is internally developed working with a few partners but it's organically, internally developed, and we believe it's a differentiator. Now I'm guessing our competitors are out there trying to work on it and catch up, but we believe we're definitely out front here. And we've launched commercialized a refinish clear coat that optimizes performance of the end coating as well as productivity in the body shop for our customers. We launched that. It was a first product fully developed using AI but it's not based on anything public. It's based on scraping all of our internal formulations that we've developed over a hundred years and optimizing. So that is commercialized. Beyond that, we've launched another 50 products already where they were existing products in the marketplace that we've used AI to optimize both from a product performance standpoint and a cost to PPG Industries, Inc. standpoint. 50 products already since we made that first announcement. Going forward, we'll continue to both optimize existing formulations but we've got development projects like we did in refinish across virtually all of our businesses, so more to come there. Hope you hear a little kick in my step on this one, John, because I'm pretty excited not only about where we are, but where we're going. Vincent Morales: Hey, John. This is Vince. Let me add a little here. The precursor to this was really the scraping of the data that Tim described. So we were fortunate a couple of years ago. We digitized a lot of our data. So that we think that puts us in maybe the pole position certainly in the front row in the industry because of that activity was very time-consuming. And we did it a couple of years ago that allowed us to now take advantage of that digitized data. Operator: Your next question comes from the line of John McNulty with BMO Capital Markets. Your line is open. John McNulty: Thanks for taking my question. So Tim, over the last couple of years, you've dialed back investment in inorganic growth. You've really focused internally, and it seems like it's delivered. You've gotten share gains. You know, like you were saying, from technology, from service. The whole nine yards. And it seems like you're able to outpace your markets right now. I guess as we look forward, just given the strength of the balance sheet, the strength of the cash flows, is that still pretty much the main focus where, look, inorganic growth really isn't necessary for PPG Industries, Inc. going forward? And you keep focusing on the internal opportunities, or have you played a lot of that out and now that you're in a stronger position, you start looking maybe a little bit more aggressively at acquisitions? I guess, should we be thinking about that? Timothy Knavish: So hey, John. Great question. So, both important to us. But the tip of the spear, as I always say, continues to be building this organic growth and margin engine because I believe in many, if not most of the cases, we can deliver better shareholder returns by making those investments in organic growth, organic productivity, organic cost out, etcetera. Now, we still will do acquisitions. Either bolt-ons or someday transformational. We still believe that the industry needs some consolidation. And we're supporters of that. We still believe there are acquisitions that will add value to PPG Industries, Inc.'s customers and shareholders that can be tuck-ins from a technology standpoint or reinforce our position somewhere. But I would say that it's organic first. We still look at every opportunity. We put it through a filter of is it the right asset that's consistent with our enterprise growth strategy? Where it gives us a strong number one or number two or reinforces a strong number one or number two. Is it the right ask? Is it the right time given everything else that we have going on so that we can ensure that we can not fall back in a trap where we had this we had built this excellent inorganic muscle but not an excellent organic muscle. So is it the right time we can still do both, if you will? And most importantly, is it the right price? You know, especially given where our depressed or undervalued stock price is, when you do the mathematics and say, well, okay. Organic first. Then on some of these inorganics, man, I'm better off buying shares. So I wanna make sure everybody recognizes that all of those are on the table. Organic investment, inorganic investment, share repos, but we run them through this filter to make sure that all of our decisions are maximizing shareholder value. Operator: Your next question comes from the line of Matthew Dyer with Bank of America. Your line is open. Matthew Dyer: Yes. Good morning, everyone, and you know, and also echo John's comments, Vince. You know? Congrats on the career and the retirement. I wanted to walk through some of the corporate cost inflation and bucket some of this stuff out. Across potential sources? I mean, you're not the only coatings company to talk about health care inflation, and I get that. But where is that coming in? And kind of related? Does it make sense to align compensation fully to organic growth if there isn't commensurate EBIT accretion? Because you know, it's helping the top line, but it also seems to exacerbate the headwinds from some of the other unabsorbed fixed costs. Timothy Knavish: Yeah. Matt, I'll take this first, and then I'll let my short-timer CFO here take it from there. The leading answer here is medical claims in Q4. Vince will explain it. We're a pay-as-you-go company. They exceeded our expectations. The second piece is incentive comp. Now remember, some of that's a year-over-year comp issue. Right? Because we were we were drawn down our incentive comp accruals in Q4 of last year because of overall performance. And in this year, we were we had done the same, but then we came in stronger in Q4 much stronger in Q4, on two of our three metrics. That guide our incentive payout our short-term incentive payout. There's an important point, the short-term versus long-term. I'll get to that in a second. So our short-term incentives are based on three metrics. Organic growth, EPS growth, and cash. Cash flow. So on two of those three, we finished better than expected. So that increases the payout. But a lot of that all came in Q4, so we had to catch up for the full year. Right? So when you compare that to last year's comp, it looks like a big number. I wanna reinforce, though, we are not overpaying ourselves or our team because the total payout is still less than target. Now another point to your point about, you know, kinda how do you balance all these different metrics. If you look at the grand total compensation for our executives, including myself, you know, the TSR payout, which is an important factor if you look through our proxy, you know, that is not paying out. We have not performed there. The other one is on our restricted shares, you know, we did not meet our EPS growth for that payout. So some of our longer-term payouts for the year will be significantly below target, but that kinda just explains how and why you see that delta in the Q4. Vincent Morales: Yeah, Matt, I'll just add a good summary by Tim. The prior year, again, we lowered our Q4 incentive comp as we ended the year lower than we expected. When we came into the Q4 this year, strong fourth-quarter organic growth exceeded a strong cash flow especially the latter part of December. In receivables, I welcomed and our cash from ops was $500 million higher than the prior year. As Tim mentioned, we did not hit our EPS target. So we are not getting the target payout for that. Flipping back to the medical, we are a company that's pay-as-you-go. We as I talk to my peers in the industry, we do see folks we think, pulling some medical expenses into 2025. Ahead of some potential inflation. In 2026. So our medical cost year over year were up significantly in Q4 and particularly in December. So, hopefully, that answers some of the questions you had on corporate expenses. Operator: Your next question comes from the line of Michael Sison with Wells Fargo. Your line is open. Michael Sison: Hey, guys. Couple quick questions. Architectural EME, you know, a business that has struggled to grow. I mean, end markets, I understand. But, you know, why is that a good business? For y'all to keep longer term, and maybe what's the growth algorithm there? And maybe similar on industrial coatings. Again, I understand end markets have been tough, but how do you see those two businesses grow longer term? And then and just curious if Vince is gonna take the Browns coaching job because I don't think anybody else wants it. Vincent Morales: Let me answer that question first, Michael. I think that's a hopeless job. So I'm trying to retire not going to a hopeless job. Timothy Knavish: I think he's already declined it officially too. So, Mike, the two answers to the two businesses you asked about are very different. One is an ongoing macro issue, and that's Architectural Europe. The other one is really kind of a tariff and, you know, time-stamped issue, and that's general industrial. But let me talk about architectural Europe. It's been a depressed volume market for years. As has much of the European economy. Two years ago, I guess three years ago now, 2023, which was depressed, we generated record earnings and record cash. It goes all the way back to 2008. So even in depressed markets, we can generate good earnings and good cash, and we don't spend that cash within the business. We use that cash to supplement what we're trying to do some of our higher growth businesses. What's happened these last couple of years is you know, the volume decline has been pretty pronounced. At this point last year, one of the things we missed, frankly, was we were projecting some upside in the market. We are not projecting upside in the market this year. We're saying flat. Flattish, for the whole year. But we're not waiting. We're not sitting around waiting for this macro to improve. It still makes good money for us, but with the actions we've started to take and will take throughout the year, we'll see margin expansion cash generation expansion out of this business as we move through 2026. So it's not you know, it's not our best growth business, certainly, but it can deliver has delivered good earnings, good cash in a challenging macro. Vincent Morales: Yeah. Before Tim goes on to industrial, Mike, I just wanna remind everybody that you know, this is a maintenance cycle business. We did have significant growth during COVID. So 2020, 2021, so the maintenance cycle clock reset. Typically, this is a five to six-year maintenance window. So we're now getting to that fifth year where repaint typically would occur. So some of the volume declines the past couple of years really have been because we pulled forward maintenance into those COVID years. Timothy Knavish: Yeah. In industrial, very different. It's a bit more cyclical than, you know, probably our most cyclical business is auto. Second most would probably be our general industrial because you're essentially painting big hunks of metal that get moved around the world. And so with the tariff uncertainty and what that's done, the confidence of some of our customers, that's been dialed back, and then what's that's done from consumer affordability? You know? So some of those folks are struggling. But we do see sequential improvement in this business. What's interesting is we see really good sequential improvement in places like Europe. And Latin America, largely driven by share gain. We see sequential improvement in things like heavy-duty equipment, not ag-related, but construction-related. We see some sequential improvements in transportation and powder. And in a broad category of general finishes. But we still see challenges in the US market. And we still see challenges in a small part of what we do in China is exported to the US, about 10% of what we do in China and think electronics and kitchen and bakeware those kind of things remain, you know, compressed a bit. So the industrial story is more of a timing one and we are starting to see green shoots. We are starting to win share, and start to launch those share wins in as we move through 2026. Operator: Your next question comes from the line of Jeffrey Zekauskas with JPMorgan. Your line is open. Jeffrey Zekauskas: Your Performance Coatings revenue expectation for 2026 is flat to up low single digits. And in that segment, you've got aerospace, and you've got auto refinish. If aerospace grows at a high single-digit rate, in order to meet that guidance, Refinish has to contract at a high single-digit rate or a mid to high single-digit rate. Is that the correct conclusion to draw? And for Vince, how many shares did you buy back this quarter and what did you spend? Timothy Knavish: Hey, Jeff. I'll take the first one. I don't think we're seeing that much of a decline, more like low to mid low to mid for a finish in the first half. If you think sequentially, what did we see in Q3, Q4? We saw double-digit then we saw high single-digit. So I'd say you ought to say that that slope continued towards normalization as we move through the quarter. You know, remember, traffic's quite small there, but we also have a nice PMC business in there that's not small that'll contribute to some of the grand total of what we guided to for the year. Vincent Morales: Yeah. Jeff, for us, from a share repurchase perspective, we bought just under 980,000 shares at an average price of about $102. We spent, as we said in the press release, around $100 million in the fourth quarter. Operator: Your next question comes from the line of Ghansham Panjabi with Robert W. Baird. Your line is open. Ghansham Panjabi: Thanks, operator. Good morning, everybody. Vince, congrats from our team as well. The best in retirement. Vincent Morales: I'm still here till July, but thank you. Ghansham Panjabi: Just an early congratulations. Yeah. Thanks. On the raw material side, you know, as it relates to guidance, can you just give us a bit more color to the constituents you think about some of the major ones, TiO2, petros, etcetera, it looks like you've gotten flat for the year and also flat for the first quarter, but some of the spot markets were weaker into fourth from 2025. So just curious as to which categories may be inflating as well. Thanks. Timothy Knavish: Yeah. You know, so first, Ghansham and a public service announcement for everybody. This is not Vince's last earnings call, and I don't want Vince to think it's his last earnings call. He's still got six more months of work to do here. So, but thank you for the kind and lots of kind words as we get closer to his actual date. But, Ghansham, high level it's still a very long favorable to us supply-demand balance. So across the board, that generally means good pricing for us. But what offsets that a couple of things. I put them in three categories. Epoxies are up a bit. Because of tariffs. Right? And that's included in our guide, and you know, that obviously affects more of the industrial businesses. So it doesn't affect deco companies because most deco products do not have epoxy. So when you compare to what others might say, the epoxy is one. Second one is pigments, but let's not put TiO2 in that. I'd say more the specialty pigments. We are seeing some inflation there. Driven by tariffs because those things come from all over the world. Okay? And the other category that's up is metal packaging. And everybody knows what's happening on the aluminum and steel tariffs. Those are really the only categories that I can think of that are up in our guide. TiO2 is still pretty soft. Just given the supply-demand, we've been doing some supplier consolidation. We've been working volume for volume commitment deals for pricing. So that one is still pretty soft. You know what oil's doing, so that drives solvents to be. And then across the board, everything else is still in a very long situation. Add it all together, and we come up with flat for Q1, flat for the year. Vincent Morales: Yeah. And I'll just remind everybody what we said at the outset. You know, we do have targeted pricing that we instituted in 2025 or we'll institute in 2026, including in Q1, so we do expect higher pricing for 2026. Operator: Your next question comes from the line of Joshua Spector with UBS. Your line is open. Joshua Spector: Yes. Hi, good morning. I just wanted to ask on Mexico. I don't know if there's a way you can maybe index your volumes for where you are today in the fourth quarter versus a year ago? Because obviously, there's some easy comps in the first half with all the liberation day disruptions. But it seems like the fourth quarter performance might say you're even above where you were coming into last year. So can you help us square that away a little bit? It'd be helpful. Thank you. Timothy Knavish: Yeah. Let me give a high level, and then I'll let Vince give the details. Because he's doing the math in his head here. So we definitely finished pretty strong in Mexico. And if you look kinda sequentially at how we move through the year, we're down mid-single digits in Q1, up low single digits Q2, up mid-single digits Q3, up high single digits Q4. Now where that puts us relative to year-end '24, I'll give that to Vince. Vincent Morales: Yeah, Josh. If you look at the fourth quarter as a standalone basis, again, there's two parts of our Mexican business. There's the retail or consumer segment, there's also the project segment. The retail segment has continued to grow. The project segment's the one that had contracted the most in the first half of the year. Fourth quarter over fourth quarter, just on the volume basis, we're right around mid-single digits higher. Again, some of that's recovery. And we expect again in the first quarter a good volume based on an easier comp. Operator: Your next question comes from the line of Laurent Favre with BNP. Your line is open. Laurent Favre: Yes. Morning, guys. I want to go back to the M&A discussion. I understand what you're saying on buybacks versus M&A. But there are some pretty obvious situations with assets coming out or potentially coming out of the recent announcements in Germany, Amsterdam, and Philly. Now I think it's unlikely that we'll have any clarity before 2027. So am I right to assume that this might be a very quiet year for buybacks as you wait to get clarity on what's happening on those situations? Timothy Knavish: No. You know, I wouldn't say that, Laurent. I would say, look. Our balance sheet is strong enough that we've got optionality if something gets spit out of either of those two deals and if it makes sense to us at the right price. We've got optionality to do something there in 2027 without it impacting our ability to do buybacks in 2026. You know, we're I think we're on nine straight quarters of buybacks now, and you know, we run a play, Vince, myself, our treasurer, and our corp development guys sit down every quarter and say, what's the pipeline look like? What's cash flow look like? And we make a decision on buybacks, and we'll continue to do that because even if we make a buyback and then all of a sudden I get a phone call saying, hey. There's on the table here from one of these deals that's being spun out. I'm not worried about my ability to do both. Operator: Your next question comes from the line of Frank Mitsch with Fermium Research LLC. Your line is open. Frank Mitsch: Thank you, and good morning, Tim. I hope you can understand some of the confusion we have regarding Vince's retirement date. Since many of us had already assumed that he was. So, appreciate your clarification there. I want to drill into a little bit about the first quarter here. You know, in the script, I don't wanna make too big a deal about it, but, you know, in the script, you just you described the first half as being low single-digit EPS growth. And in your comments this morning, you talked about it being flat to low single digits in the first half of the year. Obviously, you didn't provide any 1Q guidance. Can you just speak to your expectations in terms of, in terms of one Q? I mean, I guess flat down modestly up. All that's in the calculus as we sit here in late January. Timothy Knavish: Yeah. Yeah. Frank, by the way, I made that clarification not only for you, but I made that clarity. Fixed too. So I appreciate it. And I will publicly acknowledge that you were right a year ago that Aaron Rogers would be better with us than anything he could do with the Jets. So we'll leave that out there. So look, here's the easiest way to say it. We're gonna ramp up in our EPS growth. I said flat to low single digits for the first half. So I would interpret that as and then stronger in the second half of the year. Flattish for Q1, low single digits ish for Q2. Operator: Your next question comes from the line of Michael Harrison with Seaport Research Partners. Your line is open. Michael Harrison: Hi, good morning. Tim, in response to one of the first questions you were asked on the call about organic growth and kind of what we're running ahead of expectations. I was surprised to hear you not exactly managing it. She might have. I know. It sounded a little bit like a little bit specific, but it's ahead of expectation. You talk about what you're seeing in China and, like, China's particular thinking about what do you see what you're seeing you know, as we're cutting out in Thank you. Timothy Knavish: Yeah. Hey, Mike. I'm glad you asked that question. Because I wanna clarify. I was responding by business, by vertical. Not as much by geography. So I appreciate the opportunity to do that. Despite all the headlines, we're growing in China. We grew in Q4 in China, and we'll grow in 2026 in China. You know, it's because we have a strong position of local for local businesses. We're well-positioned in the kind of the right industries. But more broadly, Asia Pacific is very strong for us because India is doing great for us. Parts of Southeast Asia are doing great for us. So if you look at specifically China going forward, you know, we'll see low single digits kinda growth, maybe mid-single digits kinda growth in 2026. So it's not the growth of a decade ago, but it's also not the gloom and doom that you see at least for our portfolio because we're in the right places with the right kind of offering for the customers. You know, if you move to India, you know, India is delivered double-digit growth for us throughout most of 2025. We expect that to continue into 2026. So part of that overall Asia Pacific story is China still putting up growth numbers? India contributing with double-digit growth numbers. Operator: Your next question comes from the line of Aaron Boyce with Evercore. Your line is open. Aaron Boyce: Good morning. Thanks. My question is back to Arrow. Appreciate the intra-business mix breakdown as aero becomes a bigger percentage of the segment. From a profitability and margin standpoint, how would you rank order aero coatings, transparencies, and sealants? And then maybe also on customer mix, military versus G and A commercial, and then I think you mentioned the OEM tailwinds, but how do you see the product mix for transparencies and sealants evolving in 2026 and beyond? Thanks. Vincent Morales: Hey, Aaron. This is Vince. As we've never done, we don't give our intra-business profitability by product or by end market. As Tim said in his opening remarks, or in one of the Q&A questions, it's certainly one of our better-performing businesses due to the technology and specification requirements. So but we're not gonna give product-specific profitability. Timothy Knavish: Yeah. And as far as some of your other questions, mix of OEM, military, and aft or general aviation. I think we provided that pie chart. And the growth rates among those three are very similar. Which helps the portfolio. And to Vince's point, look, we get we're giving more detail on aerospace because we don't believe it's fully understood because we have a competitor that has a very, I'll give them props. They've got a very good aerospace coatings business. This is much more than that. And as I said in my opening comments, coatings is actually the minority of our total profile here. So I don't know if I've addressed all your questions. I know you're particularly interested here because I believe you're a pilot or air force pilot. So we're happy to show you how we make F-35 canopy someday or F-16 canopies. Not sure which bird you flew. Vincent Morales: Yeah. And if you look again by end market, we do sell to OEM. We sell to military. And general aviation. All those markets right now are sold out. All the products we have are sold out. Hence, the capital increase we've had the last couple of years. Also, the operating expense increases we have folks trying to debottleneck our existing operations. These operations are specified and qualified so they do require significant handholding as we change processes. Timothy Knavish: And one more point, and then we can move on. But it's also significant R&D in this business. That's why we're able to command a better margin, better than the rest of or better than many parts of our portfolio because of the significant long-cycle R&D investment that it takes to win in this space. Operator: Your next question comes from the line of James Hooper with Bernstein. Your line is open. James Hooper: Good morning, guys. Thanks very much for the question. My question is on auto OEM and the share gains there. Can you unpack a few more of the drivers for us, please? Is this to do with kind of your positioning in China? Or is it to do with your customers gaining share of the OEM market? And can you give us a little update about some of the technology offerings there? Is that a driver of share gains? Thanks. Timothy Knavish: Yeah. Thank you, James. It's a little bit of all of those I mentioned there is some element of customer mix there where one of our customers where we have a fairly large share wallet at a rough couple of years, they're recovering now, and that helps us to some degree. But most of what we're winning on we've been introducing, you know, lower cure products. We've got a new electro coat product out there that brings more productivity and some sustainability benefits to our customers. We've been doing very well with automotive parts in that business. We've been doing well with a particular large EV manufacturer based in China. Who, you know, despite some headlines of what's happening to the EV, EV is doing very well both domestically and export not to the US obviously, but to many other countries. So it's a combination of some customer mix, some new technology wins, and some as Alicia, who runs the business force, calls it targeting the win with the winners, partnering with those that are gonna win in the marketplace, and developing and bringing them their best value proposition, and then growing with them. Vincent Morales: Yeah. As we said all year, we did pick up some significant share in South America as one of our competitors exited the market. We've realized the full quarterly benefit of that in Q4. We had some benefit in Q3. Full quarterly benefit in Q4. That'll carry over into 2026. We've also got, as I said in my opening remarks, in addition to the carryover, there's another significant double-digit millions share wins that will launch throughout 2026 that we won in late 2025. Operator: Your next question comes from the line of Patrick Cunningham with Citigroup. Your line is open. Patrick Cunningham: Hi, good morning. Thanks for taking my question. Just a quick one on Protective and Marine. You seem to call out normalization to industry growth rates. It seems like you still have some nice marine products that are ramping up. So are there any share losses offsetting in 2026? And what would you expect the overall industry growth rate to be across the platform? Vincent Morales: Yeah. Patrick, this is Vince. Just really two factors there. You know, Tim mentioned 11 consecutive quarters of volume growth. Organic growth. That's compounding. So we're running up against some very difficult comparables. This is a project-oriented business. So as projects roll off, we have to win new projects. So those are two of the factors. We do feel good about our technology, as you mentioned. That's gonna continue to allow us to carry the day. Timothy Knavish: And you specifically mentioned marine. Marine is a particular area of strength for us right now. We've been disproportionately winning in aftermarket, also, you know, dry docks. Because of our Sigma Glide technology. This year, we've also been disproportionately winning in Asia new builds. So marine continues to be a real strength for us as well then on the protective side, some of our specialty fireproofing products. Operator: Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Your line is open. Arun Viswanathan: Thanks for taking my question. Congrats on the impending retirement events. Great working with you over the last several years. So I guess, first off, I just wanted to dig back into the operating leverage and corporate expense question. So it looks like you're guiding to about 4% EPS growth. If I back into it, it looks like about 3% EBITDA growth. And as you show on the slide, flat to low single-digit, up organic growth. So I think you mentioned price would be slightly positive, so that would kind of imply flattish to maybe even slightly down volumes. Is that correct? And then I guess as a follow-on, is it really that volume number that we need to see go higher that would drive the operating leverage? Or are the corporate expenses gonna be structurally higher and kinda mute that as you know, for in the foreseeable future? How do we kinda get to the point where you do see kind of a lot of the fruits of your labor paying off and you see that actual EPS growth come through? Timothy Knavish: Yeah. Thanks, Arun. I'll take it first, and Vince will fill in the details. You know, first, we're not seeing structural change in our corporate expense going on. Right? That's or going forward. Vince will explain that. The biggest issue with our lack of leverage with the volume growth that we're getting today is first, second, and third. The refinish destocking. Because it's just such a strong margin for us that a lot of the other gains, until that stabilizes and you'll see it in the second half of the year as normalization happens there. But that's, like, kinda number one, number two, and number three is the reasons why you're not seeing more leverage. We'll continue to gain incremental volume going forward, that'll bring incremental leverage. Pricing will bring incremental leverage. We've got the cost outs, which will continue. Bringing incremental leverage. In 2025, all those happened, but they got overshadowed by two things. One, the refinish destocking, and two, corporate and interest. So with that, let me throw it to Vince and fill in the details. Vincent Morales: Yeah, Arun. If you look at 2026 versus 2025, a couple of the segments are gonna grow mid-single digits or higher. In aggregate. In terms of segment earnings. We do have higher interest costs. Like most companies, we have some very low-cost debt rolling off with three maturities. Two maturities in 2025 roll off, we have another maturity in early 2026 roll off. We're replacing that. In kind in absolute dollars, but not at the same interest rate. So, unfortunately, our interest costs are higher. In '26 versus '25. In addition, and most companies are also seeing this, we're seeing a slight increase in our tax rate. And that's driven around a variety of different factors, especially in different jurisdictions. So those two items are a bit of a detractor, but the segment results are seeing growth in over year in 2026. Operator: Your next question comes from the line of Laurence Alexander with Jefferies LLC. Your line is open. Laurence Alexander: Morning. Just two quick ones. First, on the AI investments, given it's a you're leveraging internal projects, do you have enough data to see what your paybacks are like on incremental investments? And secondly, on the share gains in industrial, do you expect those to be pro or countercyclical? You know, if demand accelerates, you expect the rate of share gain to accelerate. Timothy Knavish: Yeah. Yeah, Laurence. Let me take both, and Vince can fill in anything. The AI first of it's still early days. Right? We are part of our increase in operating expense and capital expense is because of the AI. We've got a few runs on the board that have delivered millions to the bottom line. Not yet material to the company, but very favorable early indicators relative to the investments that we made that this will be a very good ROI for us as we go forward. And you consider the fact that we've only only, air quotes, optimized 50 formulas that are commercialized so far, and we've only launched one that was AI developed so far, if you look at the size of our pipeline, the materiality is yet to come but even today, we are booking savings to the bottom line with what's already been launched. So very confident in the ROI going forward. Vincent Morales: Yeah. On the industrial side, Laurence, we would expect our share gains to be additive if there's a cyclical recovery here. As Tim mentioned earlier, this is one of our early warning businesses, both up and down. Kind of the canary in the coal mine. We have seen in past and expect some point green shoots in this business. And then with our share gains and technology offerings on top of that, we'd expect it to be added. Operator: There are no further questions at this time. I will now turn the call back over to Alex Lopez. Alex Lopez: Thank you, Warren. We appreciate your interest and confidence in PPG Industries, Inc. This concludes our fourth quarter earnings call. Operator: This concludes today's conference call. You may now disconnect.
Operator: Morning. My name is Daryl, and I will be your conference operator today. I would like to welcome everyone to Starbucks First Quarter Fiscal Year 2026 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question and answer session. If you would like to withdraw your question, please press star, then the number two. I will now turn the call over to Catherine Park, Vice President of Investor Relations. Ms. Park, you may now begin your conference. Catherine Park: Good morning, and thank you for joining us today to discuss Starbucks first quarter fiscal year 2026 results. Today's discussion will be led by Brian R. Niccol, Chairman and Chief Executive Officer, and Catherine R. Smith, Executive Vice President and Chief Financial Officer. This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factors discussed in our filings with the SEC, including our latest annual report on Form 10-K and quarterly report on Form 10-Q. Starbucks Corporation assumes no obligation to update any of these forward-looking statements or information. GAAP results in the first quarter fiscal year 2026 include restructuring and impairments, and transaction costs that are excluded from our non-GAAP results. Revenue, operating income, operating margin, EPS, and EPS growth metrics on today's call represent non-GAAP measures and are measured in constant currency. G&A and effective tax rate metrics also represent non-GAAP measures. Please refer to the earnings release and our website at investor.starbucks.com to find reconciliations of these non-GAAP measures to the corresponding GAAP measures and supplemental financial information. This conference call is being webcast, and an archive of the webcast will be available through Friday, March 13, 2026. Also, for your calendar planning purposes, please note that our second quarter fiscal year 2026 earnings conference call has been tentatively scheduled for Tuesday, April 28, 2026. I'll now turn the call over to Brian. Brian R. Niccol: Good morning, and thank you for joining. I look forward to seeing many of you tomorrow for Investor Day, where we will lay out our future vision for the company, our path to sustained growth and profitability, and how we plan to deliver the best of Starbucks Corporation for our customers, partners, and shareholders. Today, though, I want to focus on the continued progress we've made on our Back to Starbucks plan and the momentum we've built across the business through Q1 fiscal 2026. I'm most excited that our turnaround plan is coming to life in the way we envision. First, turnaround the top line, and then earnings growth will follow. And I am delighted to say we are now achieving top line growth driven by transactions, and we have clear plans on how we expect to turn top line growth into margin and earnings growth. We started the fiscal year strong with a focus on disciplined execution at scale. As a result, in Q1, global revenue grew by 5% to $9.9 billion, and global comparable store sales accelerated to 4% growth. We delivered 128 net new coffee houses globally, and we delivered operating margins of 10.1% and EPS of $0.56. Our North America revenue grew 3% in the first quarter to $7.3 billion. Across North America as a whole, and our U.S. business, company-operated sales comps were both 4%, led by three percentage points of comp transaction growth. And across our international business, sales comps grew by a healthy 5%, led by strong performance across our company-operated markets in China, Japan, and the UK. In the U.S., where much of our turnaround work has been focused, company-operated transaction comps grew year over year for the first time in eight quarters, and we grew transactions across all dayparts in the quarter. Starbucks Rewards ninety-day active members reached a record 35.5 million customers during the quarter. Rewards transactions grew year over year for the first time in eight quarters, and non-rewards transactions grew even faster. In fact, this was the first quarter we grew both rewards and non-rewards transactions since 2022. That's nearly four years ago. It is clear from our top line results that our Back to Starbucks plan is working, and our turnaround is taking hold. As we return to growth, we can also see more clearly where we will improve further. Over the past several months, we have surfaced legacy models and processes in our business that we are now fixing. For example, transaction growth has shown us continued opportunities to strengthen our supply chain and reevaluate menu offerings to ensure product availability while reducing future waste. We will keep moving with speed to identify and implement practical changes like these that we know are good for our customers and for our business. Also, continuing to refine our labor model because we see some opportunities to fine-tune it based on store format and performance. There's also an opportunity to better enable efficiencies with technology solutions in our coffee houses and across our support centers around the world. We're pleased with our progress, and we believe we remain ahead of schedule. And we're confident on our path forward. But we also recognize that we're still in our turnaround. And as we expected, the strategic investments we're making to fix our operating foundations will take time to flow through to sustainable earnings growth. A key piece of our path forward is technology, and I'm excited to share that Anand Rerudharajan recently joined Starbucks Corporation as our new Chief Technology Officer. Anand joins us following a successful nineteen-year career at Amazon, where he most recently served as President of Worldwide Grocery Technology. I am confident his leadership and knowledge will result in step-change improvements across all our technology platforms. I want to use the remainder of my time today to share with you what we've done to drive line growth through Q1 and why I'm confident we're on the right track to deliver improved growth in fiscal 2026 and beyond. First, our Green Apron service standard continued to improve our coffeehouse experience, creating value for our customers and underscoring our growth potential in North America. Through the quarter, we leveraged bigger rosters, new customer service standards, continued low hourly partner turnover, and our SmartQ algorithm to deliver more consistent, timely, and personal service. As a result, across our U.S. company-operated coffee houses, positive customer comments grew in the quarter. All day and peak throughput steadily increased. We addressed throughput challenges during peak with average cafe and drive-through service times both below our four-minute targets, even with meaningful transaction growth. And we brought order to mobile orders, ensuring they remained accurate and on time. To instill more ownership of the coffeehouse experience and the results they deliver, we rolled out new expectations for coffeehouse leaders to stay enrolled for at least three years. That's because we know leadership continuity strongly correlates to a better culture and improved coffeehouse performance. We also launched the Grow program, a simplified reporting system to evaluate, rank, and improve coffeehouse performance, measuring five key metrics that closely tie to comp growth and are within coffeehouse leaders' control. While it's only been a few months, leaders across our North America operations are already using the new report to help them better run their coffee houses and take ownership of their action plans to improve performance. To better support our Green Apron partners, we fully scaled Green Dot Assist across our North American coffee houses this past November. This new AI-powered knowledge search tool provides a real-time resource to look up beverage builds, troubleshoot operational issues, and adjust deployment plans. It also provides a strong foundation to test and learn, then develop and scale thoughtful AI solutions that reduce friction for partners and help them focus on craft and connection with our customers. Second, our overhauled approach to marketing and menu innovation is putting Starbucks Corporation back in the cultural conversation and back into a leadership position. Including our barista mug, our holiday offering featured an exciting menu and new merchandise, which created real energy and buzz that drove more customers into our coffee houses. Our partners also showed up with enthusiasm and a desire to connect with our customers, delivering a record revenue holiday launch week for our U.S. company-operated business and driving sustained performance through the quarter. We also saw brand performance improve. Brand affinity in the U.S. remained strong during the quarter, with continued improvements in visit consideration and Starbucks Corporation ranking as a customer's first choice. Connection scores improved, with more customers saying our partners make an effort to get to know them. Convenience scores improved significantly as customers responded to our Green Apron service standard and improved in-stock levels. And more customers said Starbucks Corporation offers great-tasting food and healthy menu choices. Value perception scores also held strong in Q1, and when paired with average ticket growth, it clearly shows that we're delivering greater value through menu innovation and customer connection, not through discounts. These are all clear signs that we are creating a more valuable brand for more customers. Going forward, we will continue to build on Starbucks Corporation's proven seasonal strengths with engaging marketing, on-trend menu innovation, and seamless digital experiences that work together to create moments our partners can deliver with excellence and our customers want to be a part of and share. Third, we continue to scale our coffeehouse uplift program, bringing more warmth and great seats back into our coffeehouses. Today, we've completed approximately 200 uplifts, primarily in Southern California and New York City, and we're on track to complete more than a thousand by the end of 2026. We believe these investments in our cafes and the customer experience will continue to have a positive impact on our business as we reclaim the third place. Within our international segment, we grew revenue by 10% to $2.1 billion, and we grew comps in nine of our 10 largest international markets, underscoring the strength and resilience of the Starbucks Corporation brand globally. China was a standout. Comps accelerated to 7%, marking our third consecutive quarter of comp sales growth led by transactions. This performance reflects the progress we are making to strengthen our competitive position as the leading premium coffee brand in the market. Looking ahead, we are sharpening our focus for our long-term future in the region. During the quarter, we identified Boyou as our partner to maximize Starbucks Corporation's potential in China. This partnership will help us expand into more cities, deliver exceptional coffee experiences, create new career opportunities for partners, and strengthen Starbucks Corporation's position as a global brand for long-term growth. We continue to expand our footprint with discipline and pace. In the first quarter, we opened 79 net new international coffee houses, reflecting 130 net new licensed coffee houses and 51 net closures in our company-operated business. India crossed 500 coffee houses, and we announced expansion into six new cities in our Latin American and Caribbean markets, along with plans to surpass 1,000 coffee houses in Mexico this year. International remains a powerful growth engine for amplifying the Starbucks Corporation brand, and we are confident in our ability to deliver consistent, profitable growth in this business longer term. So to conclude, we've continued to build momentum across our business through Q1, and we are clear on our long-term vision. We will be the world's greatest customer service company, will offer the best job in retail, visible, relevant, and loved everywhere. We will be the community coffee house. Our brand will be We will accelerate growth around the world. And finally, we will deliver on our commitments to create shareholder value. As a result of our disciplined work over the past eighteen months, we are now delivering the top line results we set out to achieve. And we're creating the room we need to invest thoughtfully in our future. As I said last quarter, we have a plan, we have been working the plan, and the plan is working. Our work is not done, and we are clearly in the early stages of our turnaround. And we have clear plans to maintain our top line performance while improving the foundations of our business. I don't expect the path forward to be linear, but we will continue to test, learn, and refine our approach to deliver the best of Starbucks Corporation, drive durable, profitable, long-term growth. Before I turn it over to Kathy, I want to thank our partners across our coffee houses and support centers around the world for their continued focus and relentless effort to execute with excellence. Our Back to Starbucks plan is the strategic currency of our turnaround. And their work is the foundation of our progress and our performance. Together, we've grown comps and transactions. Brand affinity and customer connection is strong. Our innovation pipeline is stacked with breakthrough menu items and new digital experiences. And the shine is back on our brand, both in the U.S. and around the world. With that, I'll turn it over to Kathy to walk us through our Q1 financial results and to share our fiscal 2026 guidance. Catherine R. Smith: Thank you, Brian, and thank you all for joining us this morning. We made meaningful progress in the first quarter as we executed our growth priorities to build long-term strength in the business. I'm incredibly proud of how our partners showed up for our customers throughout the holiday season. And I want to thank them for their dedication and hard work. I'll now share our Q1 results and then provide additional insight into how we're setting up for the months ahead. Our Q1 consolidated revenue was $9.9 billion, up 5% from the prior year, reflecting one net new company-operated store growth and a 4% increase in global comparable store sales, driven by strong performance across both our North America and International segments. Our North America segment revenue grew 3% in the first quarter to $7.3 billion, with comparable store sales growing 4%. In the U.S., our comparable store sales growth also accelerated to 4%, with transactions up 3%, fueled by the first full quarter of Green Apron service embedded in the daily operations of our company-operated coffee houses. Average ticket grew 1%, driven by a growing mix of espresso and tea-based beverages alongside the continued rise in the popularity of our cold foam platform. Our U.S. comp performance is a compelling proof point for our Green Apron service standard, menu innovation, and marketing efforts. This combination drove broader reach and deeper engagement with customers, as evidenced by our ninety-day active Starbucks Rewards member base growing 3% year over year to an all-time high of 35.5 million members. And as Brian mentioned, our Starbucks Rewards member transactions grew year over year in Q1 for the first time in eight quarters, and non-Starbucks Rewards customer transactions grew even faster. Our U.S. licensed store portfolio revenue declined in Q1, primarily due to ongoing trends within the grocery and retail channels. Steady growth across other areas of our portfolio, including business and college and universities and healthcare, continued to serve as partial offsets. Overall, our North America portfolio increased by 49 net new coffee houses to reach 18,360 at the end of the quarter. Moving on to international. The segment reported $2.1 billion of net revenue in the first quarter, growing 10% year over year. International's comp growth of 5% was led by transactions, as customers celebrated the holiday season with Starbucks Corporation around the world. Most of our largest international markets, including our company-operated businesses in China, Japan, and the UK, contributed to our comp sales performance in the quarter. China continues to showcase strong momentum. Starbucks China's comparable store sales grew 7% in Q1, with a 5% improvement in comparable transactions powered by product innovation, effective marketing, and continued growth in delivery. In our Channel Development segment, our Q1 net revenues grew 19% year over year, due to higher revenue from the Global Coffee Alliance, as well as our ready-to-drink business. In the first quarter, we launched our new multi-serve refreshers concentrate in our North America market, which was met with incredible demand. We will continue to work with our partners to innovate, to maintain our leadership position in the North America at-home and ready-to-drink coffee categories. Shifting to margin, our Q1 consolidated operating margin was 10.1%, contracting 180 basis points from the prior year. This was led by North America's operating margins, which declined by approximately 420 basis points year over year, primarily as our investments in support of Back to Starbucks continue to annualize. Approximately a third of North America's margin contraction was also driven by our product and distribution cost inflation, led by tariffs and elevated coffee pricing. As our fiscal year progresses, we are expecting these pressures will begin to abate. Consolidated G&A in the quarter decreased 7% as our work to streamline the business last year begins to actualize this fiscal year. Our Q1 effective tax rate of 26.8% was higher year over year, primarily driven by lapping some discrete tax items from last year. All in, our Q1 EPS was $0.56, down 19% from the prior year. I look forward to providing our longer-term targets at our Investor Day tomorrow, but today I'll focus on fiscal 2026. But before I do, let's spend a few moments on China. In November, we announced an agreement to form a joint venture with Boyu Capital to more strategically capture the significant white space we continue to see in China. Under the agreement, Boyu will acquire up to a 60% interest in Starbucks Corporation's retail operations in China, and Starbucks Corporation will retain a 40% interest in the joint venture. We will also continue to own and license the Starbucks Corporation brand and intellectual property to the JV. We currently expect to close in the spring of this year, subject to regulatory approvals. For your modeling purposes, here are some considerations for how this impacts our financials in the near term. In Q1, we classified the assets and liabilities of Starbucks Corporation China's retail operations as held for sale. This required us to cease property, plant, and equipment depreciation and right-of-use asset amortization, resulting in reduced DNA and store operating expenses. This means starting in December, we are recording $39 million less in monthly expenses than we otherwise would have recognized prior to the announcement. We expect these dynamics will likely continue through the transaction close date. Upon closing, we expect Starbucks Corporation China's retail operations will fully deconsolidate from our consolidated financials, and we expect to convert our 8,011 company-operated coffee houses to licensed stores within our international segment. Under the equity method of accounting, Starbucks Corporation will record our 40% share of income from the joint venture recognized as income from equity investees. We will also collect revenues from the joint venture for sales of coffee and other products, as well as royalty revenues. Our proportionate share of gross profit resulting from these revenues will also be included in income from equity investees. Turning to our outlook for the year. As we assess our Q1 results, we're seeing exactly what we want to see in our top line at this point in our turnaround. And we are pleased with our continued comp strength in January as well. Our strategy is working and gaining traction. We have always said that we expect the top line to come first and then earnings will follow. As such, our guidance reflects strategic flexibility to leverage our growing top line as we uncover opportunities to further strengthen the business longer term. For fiscal 2026, we expect 3% or better global comp sales growth, led by 3% or better comp sales in the U.S. as well. In fiscal 2026, we expect approximately 600,000 to 650 net new coffee houses as we work to rebuild our development pipeline. This includes 150 to 175 net new U.S. company-operated coffee houses, a slight decrease in North America licensed coffee houses, and 450 to 500 net new international coffee houses, of which China comprises close to half. We plan on providing more details of our accelerating pace of growth beyond this year at our Investor Day. We expect our consolidated net revenues to grow at a similar rate to global comp growth for the full fiscal 2026, as our portfolio repositioning at the end of fiscal 2025 offsets our new store openings. We expect consolidated operating margins to grow slightly year over year, driven by improvements in the back half of the year. Remember that our quarterly margin rates follow natural seasonality in the business, and our second quarters are usually the lowest margin quarters of the year. Our expectations for margin improvement are driven by the following. First, we will anniversary our Green Apron service investments in Q4. Second, we expect sales leverage builds as we continue to refine and our Back to Starbucks initiatives and improve our supply chain. And third, while market dynamics can change, we continue to expect coffee prices and tariff pressures to peak in Q2 and find some relief in the back half of the fiscal year. Following our structural reorganization last fiscal year, partial offsets to our investments, we expect fiscal 2026 consolidated G&A dollars to run below fiscal 2023 levels, providing We also expect continued discipline on costs more broadly and to find more efficient ways of working across our broader organization around the world. Our EPS guidance of $2.15 to $2.40 reflects our measured approach investing strategically in the first half to establish momentum then building on our work for growth in the second half. Note that our guidance contemplates business as usual China operations in 2026. We have taken this approach as we believe it provides the cleanest view of our expectations for the underlying business. Furthermore, the timing of close and our use of proceeds from the transaction can influence certain P&L line items, increasing variability in our results. That said, if we assumed a joint venture structure for 2026, we expect slightly lower consolidated revenues and comps, partially offset by slightly better consolidated operating margins relative to our original guidance. And on an annualized basis, we believe that the new structure could be approximately 40 basis points accretive to our consolidated margins. While subject to change, we currently plan to use our transaction proceeds for debt reduction, strengthening our balance sheet, and allowing us to execute our long-term growth strategy with greater financial flexibility. Collectively, we expect the transaction to have a $0.02 to $0.03 dilutive effect relative to our current EPS guidance. In summary, our Q1 performance demonstrates the momentum that we're building in our business and gives us confidence we're on the right path. It's also clear that our work isn't done. We remain focused on driving top line performance and managing our costs to deliver sustainable, profitable long-term growth. And we look forward to speaking further about our future vision tomorrow at our Investor Day. And with that, we are ready to take your questions. Thank you. Operator? Operator: Thank you. And we will come back for follow-up questions as time allows. Our first question has come from the line of David E. Tarantino with Baird. Please proceed with your questions. David E. Tarantino: And congratulations on the progress you're seeing. I had a question about the North America traffic performance. And maybe first, if you could perhaps clarify how much benefit you might have seen from the transfer of the sales from the stores that you closed during, I guess, September. And then, to just kind of give us some sense of kind of what the underlying improvement was in the business? And then secondly, I guess, Brian, could you maybe frame up what you're seeing in some of the earliest stores that got the Green Apron service model and whether those are continuing to ramp in terms of the traffic benefit from that service model? Thanks. Brian R. Niccol: Yeah. Good morning. Thanks, David. And so to answer your first question, what we're really delighted about is the North American comp result is driven by transactions. And specifically, the fact that both non-rewards customers grew transactions and rewards customers grew transactions. So two things happen. People came back to the brand. And we also drove engagement or more frequency with our existing customers. So that's a really strong foundation. To answer your specific question, about a half a point was driven by, call it, the sales transfer. In the comp is what we are seeing. So you know, the strength really is broad-based. Other thing that I love is we said from the beginning we wanted to win the morning. And that is exactly what we're seeing. You know, our partners have done a terrific job of staffing and executing the Green Apron service experience in the morning and, frankly, the balance of the day because we're growing transactions throughout the entire day. But the place where we saw the biggest move was in the morning. And then in regard to your question about the pilot stores, this is actually something that we're really excited about. Our 650 pilot stores continue to outperform the fleet by about 200 basis points in comp. We're seeing most of that is well, it is all pretty much driven by transactions. So what we continue to see is a great customer service experience in a great place with our partners doing their craft continually resonates with customers. And then I think you heard me talk about this too. I think we're just getting the brand back on its front foot both in its marketing communication and also the innovation that we're bringing forward. So I'm really delighted by where we are in this phase of the turnaround. David E. Tarantino: Great. Thank you. Operator: Thank you. Our next question comes from the line of Brian James Harbour with Morgan Stanley. Please proceed with your question. Brian James Harbour: Yes, thanks. Good morning, guys. I think sort of inherent in what you talked about was some additional cost opportunities, and it sounded like that's this year, but also over the next couple. Could you elaborate on some of those will be and what you expect the timing to be? Brian R. Niccol: Yeah. So I'm sure you guys probably saw this in some of our materials that have been released of late. We've got a clear plan in place to basically track down about $2 billion of cost. You know, we really started that work in 2025. I think it's gonna unfold over the next two years in front of us. And so, you know, it really is across the entire P&L. You know? So, obviously, we've made some progress on G&A. We're gonna continue to make progress in procurement efforts. We think there's tremendous opportunity with using technology to drive efficiency in the work that we're doing. And the thing that I love is this is really to Kathy's credit and the team, is it's not just one project that we're counting on. Okay? We've got a list of projects with people's names next to it, clear deliverables, and the thing I love about the power of our organization is when one idea doesn't work, we get another idea that's up. And so that's what gives us confidence to be able to deliver on the cost side of things while we continue to drive the top line. So it's gonna be an ongoing program. We've identified the $2 billion over the next couple of years here. But I will tell you, it's something that we're gonna be unrelenting, and it's gonna be a consistent piece of our program going forward. Operator: Our next question comes from the line of David Sterling Palmer with Evercore ISI. Please proceed with your question. David Sterling Palmer: Thanks. Good morning. I wanted to ask a little bit about the earnings guidance for fiscal 2026. Perhaps if you think there's some elements that you would like us to appreciate that might not be so obvious, love to hear about that. And relatedly, the earnings guidance seems just a little wide, a little wider than I would have thought. What scenarios do you think would get you to the high end and the low end? Are those two scenarios look like? And thanks. Brian R. Niccol: Yeah, sure. Thanks, David. So the thing that gets us to the higher end is maintaining the performance on comp. First and foremost. And, you know, that's why we're really excited about the underlying strength that we're seeing that's driving the comp. And then, obviously, we're gonna continue to do the work on the cost side of things. But, really, here in the near term, it is going to be driven by comp, is gonna be supported by terrific execution on the Green Apron service model, the marketing menu innovation. And I think you'll hear it at our Investor Day, all the comp drivers that, frankly, we have, across digital, rewards, menu, I'm really optimistic about our future. But that's gonna be the key piece is we gotta continue to drive the top line. And we need to do it in a healthy way so that we maintain the integrity of the experience and we give our customers access to the food and beverage that they want to experience in a Starbucks Corporation. Operator: Our next question comes from the line of Lauren Danielle Silberman with Deutsche Bank. Please proceed with your question. Lauren Danielle Silberman: Congrats on the quarter. I wanted to unpack some of the same-store sales momentum. The non-rewards member growth outpacing rewards member growth, I think over the last several quarters. Great to see the rewards member back to positive. What's driving the differential between the two? And what do you see as the biggest opportunities to narrow the gap? That's how you think about it? Brian R. Niccol: Yeah. Yeah. So thanks for the question. This is something that when I first came into Starbucks Corporation, I wanted to address because I had seen non-rewards customers declining for a consistent trend, and that's never healthy in a business. You have to win both with your rewards customers and call it the light or infrequent customer. And so when Tresi and I set out to discuss how we get back on our front foot, we knew we had to make sure that we had the marketing that was broad, we had to have the message about Starbucks Corporation that was broadly appealing. And I think that's what we're seeing happen with customers. And then, look, the innovation, I think, has been on trend. We're getting back into culture, leading culture. You know, most recently, the barista mug was a I would call it, a lucky strike extra. You know, Tresi would say that was intentional. But, you know, it is one of those things where you have to be relevant leading culture so that you get the infrequent customer to hopefully grow with your brand. And the thing that is exciting to see is our rewards customer user base is getting bigger. So, you know, we surpassed 35 million, and what is great about what's happening in a rewards customer is it's through better engagement that we're getting people to be active, not through discounting and couponing, but rather giving people the Starbucks Corporation experience, the thing that really makes Starbucks Corporation unique, which is our personalization. So when we do that personalization through the rewards program, we get rewarded with more visits from those customers. Then I think you're gonna hear really exciting things about the rewards program at our Investor Day on how Tresi and the team are going to make that program feel like it is made for you. And I think you'll see us have a step up in performance with our rewards program as a result without letting up on driving our non-rewards customer as well. I almost hate calling it non-rewards customer because they're just as valuable. Every customer matters and every transaction matters. We're gonna give that type of experience to everybody so that they know they matter. Operator: Thank you. Our next question comes from the line of John William Ivankoe with JPMorgan Chase. Please proceed with your question. John William Ivankoe: The question and really this is observation-based. Certain coffee chains have kind of separated both in the U.S. and around the world, their morning execution from the afternoon execution. And I'm really wondering what kind of opportunity that might mean for Starbucks Corporation, morning that might be faster and more consistent, but afternoon, that might be more innovative, specifically around, you know, for example, you know, handcrafted blended energy is just, you know, one idea. So if you could kind of address that theme of AM versus PM daypart execution? And secondly, and I think this is related, there's a lot of competition in this space that's accelerating, in fact, some markets, almost all of it is drive-thru and takeout focused. I'm wondering if that's something that that's really on your competitive radar at this point and if there's anything specific that Starbucks Corporation should do or could do to perhaps blunt some of the sales momentum that some of these chains are seeing? Thank you so much. Brian R. Niccol: Thanks, John. So first to answer your question on the afternoon day versus the morning daypart, you know, I think the way we think about it and the customer thinks about it is the morning is very much a ritual. There are a lot of habits that people have versus the afternoon is really a reset. And depending on where you are in that reset, you sometimes want a blended drink. You sometimes want an energy drink. You sometimes want a sparkling drink. Okay? And you sometimes want protein. And what you're gonna see us do, and this is why I'm really excited, we're gonna finally be done rolling out digital menu boards. It'll be across our entire system. It will allow us to daypart the menu. And drive against these two key insights. Right? The afternoon is a reset. The morning is a ritual. And in the afternoon, you're gonna see us, and Tressie's gonna be talking about this, we will have customized energy. We will have sparkling energy. We will have those indulgent drinks that people want. Right? The frappuccinos that we've made famous. And we will also have food that complements it. That's very much on trend. So the good news is we've got a strong base already in the afternoon. I just think there is tremendous opportunity to unlock that afternoon daypart further. Having more relevant beverages, for how people wanna reset in their day and then also complement it with food then we're gonna use, I think, the traditional tactics you would do in order to market and merchandise that we are the right solution for that afternoon. And, frankly, some of these places we've been slow to develop. And so it presents a tremendous opportunity for innovation pipeline to address it. Your question on drive-thru, mobile order pickup, you know, one of the things that I've been really excited about is it really is an entire ecosystem, John. When we've got the cafe, the drive-thru, and mobile order pickup all working together, we are unmatched. Okay? And when I put that execution on any street corner, I am confident we will win. And there's an opportunity for us to put a lot more stores with that ecosystem all across the country and be very competitive. So you know, Mike and Meredith, they know our goal is to put our entire ecosystem through, I think, cost-effective buildings that ultimately our partners can run with excellence, and give our customer experience that they want. Because I know customers want those moments in the cafe, they want those moments in the drive-thru, and they want those moments for mobile order pickup. And we can do all of it. And we can do it with excellence. And so I really like where we're headed, and I'm excited about how our pipeline is being rebuilt. And as we get back to building at the clip that we're capable of, because we will have people capability as well to go with that building. So thank you for the question because it really is areas that I think drive a lot of opportunity in this business. Building, you know, the drive-thru cafe, mobile order pickup, experience with our cafes, and then really building out an afternoon daypart. On the strength of our morning daypart. I think, is just tremendous upside for us. John William Ivankoe: That's great. Thank you so much, Brian. See you tomorrow. Brian R. Niccol: Yeah. Operator: Thank you. Our next question comes from the line of Sara Harkavy Senatore with Bank of America. Please proceed with your question. Sara Harkavy Senatore: Thank you. A question on another question on same-store sales and then a clarification, I think, on Kathy. One of your comments. So just on same-store sales, you mentioned kind of service. I think that it sounds like service, you know, Green Apron maybe a couple of hundred basis points if you could disaggregate it. Maybe you could just talk a little bit about as you think about the comp, how much was maybe the service versus innovation, you know, versus marketing? I know that's a hard thing to do, but just as I think about sort of the sustainability of the comp going forward. And then Kathy, you mentioned guidance embeds flexibility to, I guess, to identify projects. I interpret that as perhaps investments as well as savings. So just wanted to make sure I understood. Is it, you know, plausible that you might find additional investments that you want to make this year in addition to the kind of annualizing the $500 million in the labor model? Thanks. Brian R. Niccol: So I'll take the first part of that, and then I can hand it over to Kathy. On the second part. So the first part is, you know, you kind of ended your question. It's hard to separate these out. But what I can tell you is a strong operating foundation makes all the other initiatives that much more effective. Right? So, you know, we would not have had the holiday experience that we had with the innovation that we had if we did not have our partners executing the Green Apron service model. And we heard it in the customer feedback. Right? The customer feedback was, hey. Something's different, and it's different in a good way. You know? I love how Mike says this. Like, you're gonna see our partners with eyes up. You're gonna see our partners moving towards customers. You're gonna see our partners wanting to make sure that their craft is, you know, being experienced the way it's intended to be experienced. And so, you know, we heard it over and over again. We had the lowest level of customer complaints we've seen over the last couple of years. We've also seen that customers felt the speed or the convenience. So I think these are all service things. And then we also heard things like, hey. Your menu is much more relevant. It seems more health relevant. It seems more flavor relevant. And so, you know, that's a sign that the marketing is working, connecting. And then also, you know, I don't want to walk past the fact we've put seats back into our cafes. We've not put uplifts everywhere, but we've tried everything we can to get at least seats back in our cafes. And you know what? Every cafe I walk into, guess what? People are sitting in those seats. Enjoying a cup of coffee, or a beverage, and dwelling. And that's what we want to have happen because when you walk into a cafe and grab a mobile order to go, and it's full of seats, you feel better about your purchase decision. Just do. And if you're driving through the drive-thru and you see through the window a thriving cafe, you know, I think we all have had these experiences where it's like, well, on Saturday when I'm walking the dog, I'll probably stop by the Starbucks Corporation and linger. So, you know, it really is working in harmony. It was why it was so important that we get the operating foundation strong, and that then we ultimately dial up the marketing and the menu innovation. So it's hard to distill it, What I can tell you, though, is the fact that they're both working together is why we're seeing the transaction performance that we're seeing. And then on your question about the cost side, I'll hand it over to Kathy. Catherine R. Smith: Yeah. Good morning, Sara, and look forward to seeing you tomorrow. When we talked about having flexibility, it's really about our first objective is to make sure we're supporting the business. And so we're gonna continue to do that in our Back to Starbucks strategy and our plan. And so we want to make sure we've got the right flexibility to do that. You'll hear this again tomorrow, but this is not about broad-based cost-cutting. We are making sure we invest in what matters most. And so we want to make sure that we've got that flexibility inside the P&L and our guidance. Obviously, we've talked about the Green Apron service investment we're doing. We'll continue to evolve our supply chain, which will have little bits of investment here and there, but we equally see the opportunities for reduction or savings there as well. And all of that's embedded inside of our guidance. Operator: Thank you. Our next question comes from the line of Jeffrey Andrew Bernstein with Barclays. Please proceed with your question. Jeffrey Andrew Bernstein: Great. Thank you very much. As I think about the U.S. portfolio, comp growth is often volatile, but the unit growth is more stable in terms of a revenue driver over time. Brian, I think you just mentioned putting more restaurants on corners across the U.S. and being able to still win versus the competition. Just wondering if you could talk conceptually about one, the rate of reacceleration in the U.S. and two, kind of how you think about the opportunity over time? I think last year, you mentioned talking about doubling the long-term store counts. I'm just wondering how you think about that whether there's some sort of penetration analysis that you've done to give you that level of confidence and kind of the cost versus return analysis? Any color at least conceptually in terms of the glide path to reacceleration and where you could ultimately get to would be great. Thank you. Brian R. Niccol: Yeah. Yeah. Yeah. Thanks for the question. And, you know, obviously, we'll get into a lot more of the details on the new unit growth opportunity both in the U.S. and around the world tomorrow. What I will say right now, though, is, like, there are thousands of sites that we've looked at, and I've identified right now. So there's no barrier on unit growth. Frankly, the issues we needed to address was making sure that we're building the right unit, and we had the people capability to open up those new units successfully. And so we put both things in place. Right? We're gonna have, what we're calling now coffee house coaches, which are assistant store managers. That's gonna be a pipeline to enable new store openings from a people standpoint. Right? Because it also creates, I think, a great career path for our partners on their path to becoming a coffee house leader. And then it also allows us to have more stability in the system while we add new units versus what I saw when I first got here is new units were very disruptive on our people. And we can't have that happen. The other thing that we're addressing is the build cost and the actual, I would say, flow that we're going to build. And so I love the new building. We've called it the Ristretto. Right? We've got the tall and grande executions on that Ristretto, and then we also have a PICO Version Of The Ristretto. And so I love the fact that we got flexibility in the size and we can execute all of our access modes. And then we've got the people capability system set up to also then support the people that you need to open these stores. But we'll get into a lot more of these details tomorrow. I just leave you with there's thousands of opportunities in the U.S., and there are thousands outside the U.S. And, you know, our growth opportunity on new units is exciting. Operator: Thank you. Our next question comes from the line of Gregory Francfort with Guggenheim Partners. Please proceed with your question. Gregory Francfort: Hey, thanks for the question. Brian, there were some comments, I guess, in the proxy about adding a couple of platforms as part of the turnaround efforts. And I guess I'm wondering where does the menu stand today versus when you got there in terms of either SKU or products? And how much have you cleaned up? And then as you look at holes in the menu, where are you looking to identify opportunities to kind of maybe add back some excitement and some marketing to the customer? Thanks. Brian R. Niccol: Yeah. Sure. Thanks for the question. Yeah. I believe we've reduced the menu by, like, 25%. And then if you even go back further, we've reduced it even further than that. But based on my time just here, it's probably been a reduction of, like, 25-30%. And then the platforms that we're after are, like, a health and wellness platform, which we started with protein. You'll continue to see us push against the health and wellness platform going forward. I think there's an afternoon platform both in beverage and in food. And not surprising in beverage, I think it is going to be this personalized energy that can be executed as still sparkling and blended. So there's a pipeline for that platform. And then also, just to give you an example, on food, I think there's a real opportunity, not surprising, to make sure we have food for how people want to eat. Snackable, protein, fiber. Right? These are the things for how people want to eat and reset in their afternoon. So, you know, most recently, you probably saw us talking about another platform area, which is making the bake case more artisanal. So you're gonna see us have pastries that I think you're gonna wanna eat with your eyes. Okay? And that's that is really the heritage of Starbucks Corporation. Like, it is about craft. It's about artisanal. And I think we can do this in bakery. We can do this in what I would call snackable food. Obviously, we're already doing it in breakfast. Right? Our egg bites, I think, are iconic, and I think we have the opportunity with these platforms to create more iconic food and beverage. And I think you guys are gonna be really excited when you see the customized personalized energy platform, that really leverages strength, which is our refreshers platform. So, that's what we mean by we wanna be building platforms into the business. It's things that we can then innovate against without having to introduce at the same time. Operator: Thank you. Our next question comes from the line of Peter Saleh with BTIG. Please proceed with your question. Peter Saleh: Great. Thanks for taking the question and congrats on the quarter. I did want to ask about the throughput initiatives. Brian, I think you mentioned you're now below the four-minute promise. Is that where you want to be for Starbucks Corporation at this point? Or do you feel like there's more opportunities to improve throughput? And if so, where do you think we can get to over the next year or so? Thanks. Brian R. Niccol: Yeah. Thanks for the question. Look. We've made great progress on throughput at peak. We still have opportunity on the tails, though. There are still too many occasions throughout the day where we aren't hitting our metric. So there still is opportunity, frankly, to get the entire business every transaction to be under four minutes. We've not achieved that. But what we have achieved is, I think, great performance during peaks, which is really, in my opinion, my experience in this industry. You have excellence at the peaks. You can then win with the shoulders and then ultimately balance a day. That really is kind of what I mean by fine-tuning the model. And, you know, I think one of the things that is crystal clear to us is there is demand when we can get the speed and convenience right, as evidenced by, you know, getting more standard opening hours. You know? All our stores now are pretty much opening at 5 AM. And you know what? I wouldn't be surprised if 5 AM becomes 4:30 AM because of the throughput and the experience that we provide. It's just a matter of time. And we'll earn our way into that. And then the other thing I will tell you too is our teams are just getting more reps. The more reps they get, the better they perform. And then, you see that in, I think, the 650 stores that are part of the lead pilot. And then you also see that, frankly, in our Grow program. And, you know, having our teams really focus in on just a couple of key metrics that are in their control really is a big unlock. It eliminates a lot of the complexity, eliminates a lot of the noise, and allows them to focus on great craft, great speed, and ultimately great experiences. So there's still lots of upside in our mobile order pickup business, our cafe business, our drive-thru business. And, you know, I didn't really talk about much, but we've also got a really nice emerging delivery business. So you know, we just gotta get our Green Apron service labor model dialed in. Get our teams the reps that they need with stability, and then keep with consistent metrics so they know when they perform. They're recognized for their performance accordingly. So I think Mike and the team and you'll hear more about this tomorrow at Investor Day. Have a great plan for how we unlock the demand that Starbucks Corporation has. Peter Saleh: Thank you. Operator: Thank you. Our next question comes from the line of Zach Fadem with Wells Fargo. Please proceed with your question. Zach Fadem: Hey, good morning. Brian and Kathy, is there any color you can offer on the magnitude of operating margin performance in the first half of the year versus the second half? And you mentioned about a third of the pressure today related to product and distribution inflation. Is there a glide path in your mind in terms of these pressures rolling off? Brian R. Niccol: Yeah. I'll start, and maybe I can let Kathy fill in. You know, I think you heard Kathy say some of the inflation, specifically coffee, and the tariff headwinds start to peak here in Q2, and we start rolling off of it into the back half. As well as we start to roll over the initial big investment in our Green Apron service model. And then compound that with a very conscious effort on cost, which is, you know, this $2 billion program over the next two or three years. So, you know, I obviously envision that earnings will continue to pick up as we maintain the top line momentum that we have. But Kathy, I don't know if you wanna add anything. Catherine R. Smith: Brian hit really the it's kind of the four big ones. We've got the anniversary of the investment in Green Apron service, which you talked about. That'll we get anniversarying it by the fourth quarter. The savings program that we got in place while we've been working hard and at speed, a lot of that starts to come to fruition beyond some of the restructuring we already did come to fruition toward the back half of the year. And then, the tariff in coffee, we do expect to abate in Q3 and Q4. And then the most important one is the sales leverage. Just make sure that we continue to drive the top line like we expect. So all of that will weight it a little bit more to the back half of the year. Zach Fadem: Appreciate the time. See you tomorrow. Brian R. Niccol: Yes. Thanks. Operator: Thank you. Our next question comes from the line of Danilo Gargiulo with Bernstein. Please proceed with your question. Danilo Gargiulo: Thank you. Excited to see that you're focusing even more on the health and wellness platform. And I was wondering if you can maybe, Brian, start to dimensionalize a little bit how much of the shift in menu and expansion of your menu could be contributing to your comps going forward? Specifically, if you can comment on how much the protein beverages lineup is mixing today and what's your expectations as it grows over time and potentially how other platforms will complement that? Thank you. Brian R. Niccol: Yeah. Thanks for the question. So we launched the protein platform, and what I'm happy to say is, you know, back in early Q1, here in Q2, as we've not surprising, revisited the platform in January, we saw a nice, you know, recommitment to the platform from customers. So, you know, it is one of those examples of being very much on trend with how people want to eat and drink. And, you know, this is a platform that I think is gonna continue to build for us. As a matter of fact, I might've started my day with a vanilla protein latte. But, you know, look. The thing that is most exciting is customers, when they experience it, they really like it. Awareness is still pretty surprisingly low. But the trial and the repeat rates are really, really great. So meaning when someone tries it, we see a high level of repeat, and it is proven to be highly incremental. So it is one we wouldn't keep doing. And as I said, the thing I always love is you don't wanna launch and leave things. You wanna launch and leverage things. And that's exactly what we saw with our protein platform in January. Catherine R. Smith: Maybe I'd add just two more things really quickly that we're excited about for protein. Is it's we have seen it's a traffic driver, meaning the intention of why the customer is coming in. So that's getting us to access new customers or at least new occasions. And then the other thing is that maybe has been a little surprising is the popularity of the cold foam and protein in the cold foam. It's a great way to get that extra 15 grams or so of protein for our customers, and you can put it pretty much on every single drink. And so I think those have been maybe two of the positives or highlights we found out of the protein launch. Danilo Gargiulo: Great. Thank you. Operator: Thank you. Our last question will come from the line of Christopher Thomas O'Cull with Stifel. Please proceed with your question. Christopher Thomas O'Cull: Good morning. Thanks, guys, for taking the question. Brian, I know you mentioned you aren't taking your foot off the gas in terms of broad-based marketing. Could you just elaborate on how instrumental that's been in turning the tide for non-reward customers? And then Kathy, as you look at the 420 basis points margin contraction in North America, how much of this marketing step-up should we kind of model as a permanent rebasing of G&A OpEx line versus maybe temporary marketing turnaround costs? Brian R. Niccol: Yes. So I'll start, and then I'll hand it over to Kathy. You know, the marketing, I think, has done a great job of getting the brand back in front of all of our customers. And, you know, the metrics that we track, right, are brand affinity, the trust, and we're seeing all those metrics move up. We're also seeing our brand value scores move up. And what I ultimately say is, like, it's one thing to see what are claiming. It's another thing to see it in their behavior. And what I'm seeing in their behavior is every age cohort has increased their visitation with Starbucks Corporation over the last couple of months. And so that just demonstrates to me that we're doing a great job of making the brand relevant. Making the brand a leader and making the brand one that innovates on the right things at the right time that people want to engage with Starbucks Corporation. And so I really have to give Tresi and the team a lot of credit both our digital efforts, our personalization efforts, our menu innovation efforts, I think just you know I don't know if you've seen the most recent ad, the Together ad that we have running. Personally, it's one of my favorites. You know? It makes you feel good about the brand. It makes you start to see the soul of the brand. And I think that's what we're bringing back, and that's what I mean by the shine of Starbucks Corporation's back. The soul, the feeling, the emotion that you get when you get to have a moment to connect with humanity. And, you know, I think people want it. And when we get it right, people love it. And we're seeing that happen that that's relevant with every age group. And every income group. Catherine R. Smith: How we think about our investment in marketing is we look at our total spend looking at discounts as well, and those were not quite as effective. So we've taken some money and repurposed it into marketing. What I can tell you is this, we believe that that's an ongoing We think it's important an important investment in the brand. So that is something you should continue, but it's all included in our guidance. But we really have just reallocated some of the less effective discounts into far more effective marketing dollars. Christopher Thomas O'Cull: Great. Thanks, guys. Operator: Thank you. That was our last question. So I'll now turn the call back over to Brian R. Niccol for closing remarks. Brian R. Niccol: Yeah, thank you. And thanks, everybody, for the questions. And I really do look forward to seeing hopefully everybody at our Investor Day tomorrow. You know, the long-term plan that we have in place is one that I am really excited about. And I think you'll see our executive team, our leadership team share the growth story that we have in front of us. I do want to just leave you with a few things. You know, obviously, we are very delighted with where we are on the top line. And we believe we're gonna continue to drive that momentum. Then the earnings will obviously come behind it. And I also want to emphasize, you know, in any turnaround, the path is never linear. But I do believe we've got the right plans, the right team, and the right focus going forward. And, you know, our Back to Starbucks plan really is the strategic currency of our turnaround. And I really do want to thank our partners both in the stores and in our support centers because they really are the foundation of the progress and the performance that we're achieving. So I couldn't be more excited for them and the Starbucks Corporation to be able to have the shine back, and I couldn't be more excited to share our story with everyone tomorrow at Investor Day on our long-term plans for continued growth and just how much opportunity there is for Starbucks Corporation not just in the U.S., but around the world. So thank you, and look forward to seeing everybody tomorrow. Operator: Thank you. This does conclude Starbucks Corporation's first quarter fiscal year 2026 conference call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Corning Incorporated Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you would need to press star 11 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. It is my pleasure to introduce to you Ann Nicholson, Vice President of Investor Relations. Please go ahead. Ann Nicholson: Thank you, and good morning, everybody. Welcome to Corning's Fourth Quarter 2025 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, and Edward Schlesinger, Executive Vice President and Chief Financial Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we'll be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the fourth quarter, differences between GAAP and core EPS included noncash mark-to-market adjustments associated with the company's translated earnings contracts and foreign-denominated debt, as well as constant currency adjustments. Wendell Weeks: As a reminder, the mark-to-market accounting has no impact on our cash flow. Reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the interactive analyst center. Supporting slides are being shown live on our webcast, and we encourage you to follow along. Also available on our website for downloading. And now I'll turn the call over to Wendell. Thank you, Ann, and good morning, everyone. Today, we announced fourth quarter and full year 2025 results. We delivered another excellent quarter. Year over year, sales grew 14% to $4.41 billion and EPS grew 26% to 72¢. We expanded operating margin 170 basis points to 20.2%, achieving our springboard target of full year early. And we expanded ROIC 150 basis points to 14.2%. For the full year 2025, versus the prior year, we delivered double-digit sales growth with EPS growing twice as fast as sales and free cash flow growing three times faster than sales. Today also marks the second anniversary of SpringBoard and the plan has certainly been a tremendous success to date. Since our quarter four, 2023 launch point, we have transformed the financial profile of our company. We expanded operating margin by 390 basis points to 20.2%. We grew EPS 85% to 72¢, and we expanded ROIC 540 basis points to 14%. We also nearly doubled free cash flow in 2025 to $1.72 billion from $818 million in 2023. In total, we now have a highly profitable launch point for future growth and excitingly, we have even stronger long-term growth ahead. Today, we are upgrading our original SpringBoard plan to now add $11 billion in incremental annualized sales by 2028, up from our original $8 billion. So we feel great about our position entering 2026. In quarter one, we expect year-over-year growth to accelerate with core sales up approximately 15% to a range of $4.2 to $4.3 billion. Looking at 2026, our internal SpringBoard plan now adds $6.5 billion in incremental annualized sales by the end of the year, up from our previous $6 billion plan. And our high confidence SpringBoard plan now adds $5.75 billion, up from our previous $4 billion plan. Quite simply, our strategies are working. We're seeing remarkable demand for our innovations in manufacturing capabilities and we see a larger long-term growth opportunity through 2026 and beyond. Recently secured customer contracts including the one we just announced with Meta, only increase our confidence. We've been getting a lot of questions about the Meta Agreement from our investors. So before I talk about SpringBoard in more detail, let me take a moment to outline the key elements. Just yesterday, we announced that Corning and Meta announced a multiyear up to $6 billion agreement to support Meta's apps, technologies, and AI ambitions using our newest innovations in optical fiber, cable, and connectivity solutions. This long-term partnership with Meta reflects our commitment to develop, innovate, and manufacture the critical technologies to power next-generation data centers here in the US. Together with Meta, we're strengthening domestic supply chains and helping ensure that advanced data centers are built using US innovation and US advanced manufacturing. Meta will serve as the anchor customer for the expansion and upgrading our manufacturing and technology capabilities across our operations in North Carolina. We are concluding similar long-term agreements with other major customers to dedicate capacity for them as well. Taken together, these agreements enable Corning to provide our customers with secure US origin production of our most advanced GenAI high-density innovations. Now we're also seeking to appropriately share the cost and risk of such expansions with our customers. And we structure our agreements accordingly. These structures include components like customer prepayments and stringent long-term customer commitments to provide revenue assurance. For longtime followers of Corning, you would recognize the model is quite similar to our extremely successful Gen 10.5 agreements with our display customers, and most recently, Apple's $2.5 billion commitment to produce 100% of iPhone and Apple Watch cover glass in our Kentucky facility. Basically, we're taking the proven approach in our glass businesses and applying it to optical communications. As a result, we will serve our customers, grow organically, and share risk appropriately so that we can deliver the strong returns for our investors that are outlined in our SpringBoard plan and underpin our upgraded plan. So now let's talk more about the SpringBoard upgrade. I'll start with the basics of the plan. When we introduced SpringBoard in quarter three 2023, we used this chart to explain our incremental sales opportunity using our quarter four projected sales of $3.25 billion as the starting point, which put us at a $13 billion annualized run rate. The y-axis represents incremental annualized sales above our quarter four 2023 run rate. And the x-axis represents time for the following five years. Now let's fill in some numbers. Here's our original internal non-risk adjusted plan, which reflected potential growth of $8 billion in annualized sales run rate by 2028, with $5 billion by 2026. We took this opportunity and translated it into a high confidence plan to help inform investors. To do that, first, we focused on a three-year time frame. Second, we probabilistically adjusted for different potential outcomes in each of our market access platforms including market dynamics, timing of secular trends, successful adoption of our innovations, as well as volume pricing and market share across all of our business. And, of course, the potential that some of our markets may go through down cycles. We purposely drew this as a wedge. We were trying to guide every quarter for the next twelve quarters. We said it obviously won't be a straight line. But we were also not dealing with a hockey stick when we built the plan we expected. To see strong growth early. And we did. In March, we upgraded our internal and high confidence plans by a billion dollars. That's $6 billion and $4 billion respectively. So as I previously noted, we've made excellent progress and achieved our upgraded high confidence sales target a full year ahead of plan. Adding $4.6 billion of incremental annualized sales since the launch of SpringBoard. As you can see, we are also performing well against our internal plan. We look ahead, we expect our strong momentum and progress to continue. Of course, at its core, our SpringBoard plan was about more than our ability to grow organically. It was about enhancing our profitability base. We provided you with one metric to track our progress, an operating margin target of 20% by 2026. And as we executed SpringBoard, you can see that we expanded our operating margin significantly. In the fourth quarter, we achieved the 20% target a full year ahead of plan. This is just one example of how significantly we have transformed the financial profile of the company over the past two years. To illustrate my point, let's compare a snapshot of key metrics at the launch of SpringBoard versus today. In just two years, we've grown sales 35% to $4.4 billion. We've improved operating margin by 390 basis points to 20.2%. Growing EPS 85% to 72¢, expanded ROIC 540 basis points, to 14.2%. And for free cash flow, let's look at full year numbers. In 2025, we delivered $1.72 billion, and that's almost double what we delivered in 2023. In total, the first two years of SpringBoard has simply been a tremendous success. We established a new base from which to launch another round of strong, more profitable growth. And that takes us to our upgrade. Let's look at the highlights of the sales growth we now anticipate. Having completed our recent planning cycle. First, as I showed you, our original SpringBoard plan added $8 billion incremental annualized sales through 2028. We are upgrading our internal plan to now add $11 billion in incremental annualized sales. This represents a double-digit growth rate from the quarter we just closed through 2028. This upgrade also impacts this year. Our internal plan now adds $6.5 billion in incremental annualized sales by 2026, up from the previous $6 billion plan. Our high confidence plan now adds $5.75 billion in sales by 2026 up from the previous $4 billion plan. You will note our increasing confidence in delivering our growth objectives. Two years into the three-year plan, we've hit key milestones in advanced strategic initiatives like our announcements with Meta and Apple that increase our probability of success. We feel really good about our performance going into year three of SpringBoard. To wrap things up this morning, as we mark the second anniversary of SpringBoard, the plan has clearly been a success. We've transformed the financial profile of our company, and we've established a powerful base for future growth. Excitingly, we are now pursuing an even larger growth opportunity on that enhanced profile with significantly higher returns. Feel great about our position as we enter 2026. And this morning, we wanted to make sure that we shared our new top-line growth numbers with you. Because it's such a significant upgrade. How we'll get back to you in the coming months to do a more detailed review of our upgraded SpringBoard plan. We would like your input and ideas on the most helpful way to portray the plan and the associated metrics. It's really so interesting, isn't it? Here we are celebrating our 170th birthday as a company this year. A feat so few companies ever attain. I think it's pretty cool that we're on this exciting journey from our original 2023 to essentially doubling the size of the company in the coming years. So thank you for joining us in this exciting hour of Corning's history. I'm really looking forward to continuing the dialogue and updating you on our progress. Now let me turn things over to Ed for more detail on our results and outlook. Ed? Edward Schlesinger: Thank you, Wendell. Good morning, everyone. In the fourth quarter, we delivered outstanding results that not only capped off a record year but also illustrated the tremendous success of our SpringBoard plan to date. So this morning, I will provide details on our performance, our upgraded SpringBoard plan, and our approach to capital allocation. Let's start with our results. Year over year in Q4, sales grew 14% to a record $4.4 billion. EPS grew 26% to $0.72. Operating margin expanded 100 basis points to 20.2%. ROIC grew 150 basis points to 14.2%, and we delivered strong free cash flow of $732 million. We delivered both our high confidence sales plan and our operating margin target of 20% a full year early. For the full year, we grew sales 13% to a record $16.4 billion. EPS grew more than twice as fast as sales at 29% to $2.52. Operating margin expanded 180 basis points to 19.3%, and we delivered strong free cash flow of $1.7 billion. Turning to our business segments. In Optical Communications, Q4 sales were $1.7 billion, up 24% year over year. Net income was $305 million, up 57% year over year, and net income margin was 18%. For the full year, sales were $6.3 billion, up 35% year over year. Net income was $1 billion, up 71% year over year. The majority of growth in optical was driven by the outstanding adoption of our new GenAI products. For the full year, our enterprise business, where we capture sales for inside the data center, grew 61% year over year. And the hyperscale data center portion of our business grew significantly faster. We also saw year-over-year sales growth in our Carrier Networks business, which was up 15% for the full year. This growth was primarily driven by sales to interconnect data centers. The growth we are seeing in optical communications is an important component of the SpringBoard upgrade we are providing today. We expect this segment to continue to drive significant growth. Our recent Meta announcement is a great proof point. Moving to display. Fourth quarter sales were $955 million, and net income was $257 million. For the full year, we provided a target for net income in the range of $900 million to $950 million and net income margin of 25%. We exceeded both goals this year, delivering $993 million of net income and a net income margin of 17%. Looking ahead, in the first quarter, we expect the glass market and our volume to be down mid-single digits sequentially in line with normal seasonality. As a reminder, we successfully implemented double-digit price increases in 2024 to ensure we can maintain stable US dollar net income in a weaker yen environment. We've hedged our exposure for 2026, and we have hedges in place beyond 2026 through 2030. We continue to expect to deliver annual net income of $900 million to $950 million with a net income margin of approximately 25%, consistent with the last five years. Turning to specialty materials. The business delivered a strong fourth quarter with sales up 6% year over year to $544 million and net income up 22% to $99 million. For the full year, we outperformed end markets with sales growing 10% to $2.2 billion and net income growing significantly faster at 41% to $367 million. Results were driven by increased demand for premium products and growth in our Gorilla Glass Solutions business, with industry-leading flagship devices featuring our latest cover materials. Looking ahead, we expect our more Corning content approach to increase demand for our innovations and manufacturing capabilities, and we anticipate significant growth in this segment as part of our upgraded SpringBoard plan. Our expanded partnership with Apple creates a larger, longer-term growth driver. And we continue to innovate and advance the durability of our products to offer consumers industry-leading glass solutions for mobile device applications. A great recent example is the new Samsung Galaxy Z Trifold, a multi-folding device designed with our ultra-thin bendable glass solution on the interior, Gorilla Glass Ceramic Tube on the exterior, and camera lens covers featuring Gorilla Glass with DX. Turning to automotive, segment sales of $440 million were down slightly year over year in Q4, and for the full year, were down 3%. The heavy-duty diesel market in North America and Europe remained weak. Net income of $63 million was up 3% for the full year. Net income was up 7% driven by strong manufacturing performance. For 2026, industry analysts forecast light-duty vehicle production to be flat to down slightly. And for the heavy-duty market, to remain flat. We remain focused on executing our more Corning growth strategy in automotive as additional content is required in upcoming vehicle emissions regulations, and as technical glass and optics gain further adoption in vehicles. Turning to life sciences, full-year sales of $972 million were consistent with the prior year, and full-year net income was $61 million. Finally, Hemlock and Emerging Growth businesses' Q4 sales were $526 million, up 62% versus the prior year, driven by growth in polysilicon and module sales for the solar industry. Q4 net income of $1 million was down year over year as we have shared with you we are ramping capacity to make additional polysilicon wafers and modules, to build a much larger solar business. The cost of that ramp is the primary drag on net income. As a reminder, we plan to build solar into a $2.5 billion revenue stream by 2028 with profitability levels at or above the Corning average. Now let's turn to our outlook. For the first quarter, we expect year-over-year growth to accelerate, with sales growing approximately 15% year over year to a range of $4.2 billion to $4.3 billion. We expect EPS to grow significantly faster at about 26% to a range of 66 to 70¢. As was the case in Q4, our Q1 guidance includes the continued temporary impact of our solar ramp of approximately $0.03 to $0.05 as we continue to bring up capacity to meet committed demand. We expect our sales to increase and our profitability to improve as we move through the year. For the full year, we expect capital expenditures to be about $1.7 billion, a few hundred million dollars above our depreciation level. Even with that, we expect to generate significantly more free cash flow year over year while continuing to invest strongly in our growth vectors, aided by customer financial support. Stepping back as we mark the second anniversary of SpringBoard, the plan has been a tremendous success. Over the last two years, we fundamentally transformed the financial profile of the company. From Q4 2023 to Q4 2025, we expanded operating margin by 390 basis points to 20.2%. Grew EPS 85% to 72¢, and expanded ROIC 540 basis points to 14.2%. We also doubled full-year free cash flow to $1.7 billion in 2025, versus the year of 2023. We are operating from a much stronger profitability base. You see the margin and cash improvements already reflected in our fourth quarter 2025 results. Additionally, you just heard from Wendell that we are upgrading our SpringBoard sales plan. Our internal plan now adds $11 billion in incremental annualized sales by 2028, up from our original $8 billion plan. To put this in perspective, when we started SpringBoard in Q4 2023, our annualized sales run rate was $13.1 billion. Delivering our internal SpringBoard plan puts our annualized sales run rate at $24 billion by 2028. We almost double our sales run rate over this time period. Importantly, the combination of stronger sales growth with a dramatically enhanced financial profile will result in much more cash generation. We are also upgrading our internal and high confidence plans for 2026. Our internal plan now adds $6.5 billion in incremental annualized sales by 2026, up from our previous $6 billion plan. And our high confidence plan now adds $5.75 billion in incremental annualized sales by 2026, up from our previous $4 billion plan. We've significantly closed the difference between the high confidence internal plans because of our increased visibility, the success of new products, and customer commitments to our innovations. One thing I'd like to note is that we are not changing our operating margin target at this time. We developed our original target to build an exciting, highly profitable platform to support higher growth returns on our innovations. At this level of profitability, we would be delighted with more growth. Our target is to continue to be at 20% or above on operating margin. And to help you with your modeling, we'll handle profitability expectations through our normal guidance process. We expect to share more with you about our upgraded SpringBoard plan in the coming months. And since our upgraded plan will generate higher cash flows, I want to take a moment to share our approach to capital allocation. We prioritize investing in organic growth opportunities that drive significant returns. Overall, we believe this approach creates the most value for our shareholders over the long term. And our investors have confirmed they see the value in this approach. So for the larger growth opportunity in our upgraded SpringBoard plan, we need to invest. As we invest, we will use a variety of tools to share the cost and risk with our customers. Including customer prepayments and stringent long-term customer commitments to ensure we generate strong returns on our investments and secure our planned cash flows. We also seek to maintain a strong and efficient balance sheet. We're in great shape. We have one of the longest debt tenors in the S&P 500. Our current average debt maturity is about twenty-one years, and we have no significant debt coming due in any given year. Finally, we expect to continue our strong track record of returning excess cash to shareholders. We already have a strong dividend. Therefore, as we go forward, our primary vehicle for returning excess cash to shareholders will be share buybacks. We have an excellent track record. Over the last decade, we repurchased 800 million shares. Close to a 50% reduction in our outstanding shares. Because of our growing confidence in SpringBoard, we started to buy back shares again in 2024, and we have continued to do so every quarter since then. And we expect to continue buying back shares going forward. Now before we move to Q&A, we just reported quite a lot of news. So let me reiterate the key takeaways. First, our current performance is outstanding. We delivered fantastic results for 2025. And we entered Q1 with exciting momentum and accelerating growth. Second, over the first two years of SpringBoard, we fundamentally transformed our financial profile. Establishing a higher profitability base from which to grow going forward. And third, we now see an even larger growth opportunity. Therefore, we just upgraded our SpringBoard plan in both the near term and longer term. Because of our improved financial profile, and higher growth expectations, we expect to generate significantly more cash as we go forward, creating a very compelling plan for shareholder value creation. I look forward to engaging with you to discuss our upgraded SpringBoard plan in more detail. To get your input on the most helpful way to portray our plan, and of course, to update you on our progress. Now, before we move to Q&A, I'm going to turn it back to Wendell for a moment. Wendell Weeks: Thanks, Ed. I just want to let everyone know that our beloved VP of Investor Relations, Ann Nicholson, will be retiring after forty years of exceptional service to Corning. Now I first met Ann when she was a young process engineer and I was a shift supervisor almost thirty-nine years ago. We have followed each other through many roles in subsequent decades. My personal favorite was when she was my supervisory effectiveness instructor a long time ago. Again, thank you for my success as a supervisor. More importantly, Ann, thank you for being such a good friend, an adviser, and trusted colleague, and most importantly, thank you for showing what it means to be Corning Blue. Ann Nicholson: Thank you, Wendell. Alright, operator. We'll now turn it over to questions. Operator: Please press 11 again. And the first question will come from Wamsi Mohan with Bank of America. Your line is open. Wamsi Mohan: Yes. Thank you so much. Wendell, we'll all have to get together and share Ann's stories on this news. I guess, on my question, you noted that there are similar long-term agreements with other major customers to dedicate capacity. Could you help us think about if any of that is already baked into your SpringBoard plan? And secondarily, the optical fiber market has been very tight globally. Would you say that you're experiencing supply constraints at the moment? And do you have a view on how pricing could evolve on the fiber side given these kinds of constraints? Wendell Weeks: Okay. Let's start with similar agreements to Meta that we are in the process of concluding. First, let's size them. They are of a similar size and scale, each of them, to the Meta agreement. So very significant, obviously. What is our approach to these in the SpringBoard plan? As you have noted, we tend to be very thoughtful and conservative as we give these upgrades. So we have not yet included everything that those could mean because we have yet to conclude all of those agreements. And also remember this, we are dedicating capacity for these customers we are in the process of building now. So we won't see the financial impact really until you get into '27, and then it will continue to build to 2028. So that is the way I would portray those. Before I get to the second question, Wamsi, did that address your question, and do you have any further follow-ups on that question? Wamsi Mohan: No. That's good, by now. Thank you. Wendell Weeks: Okay. As far as the optical fiber market, I would say on a generic basis, it is our opinion that there is enough fiber in the world to meet demand. Now what our capacity expansions are about is about our new high-density products in fiber, in cable, and in connectivity. And for those, we are experiencing very, very robust demand. And that is why we continue to expand our capacity and improve our productivity in these products. If we could make more of these new products, we could sell more. And it is for those types of products that we are dedicating these capacities through these agreements. Is that a good answer to your question, Wamsi? Wamsi Mohan: Yeah. Is there a pricing element, Wendell, though, that we're not yet maybe seeing that potentially as you're talking about these fairly massive amounts of demand coming in, would that change the economics around pricing for you? Wendell Weeks: Yes. So what you'll tend to experience here is over time, you'll see a mix of that impact of these more valuable innovations. These innovations enable our customers to have better and more reliable optical performance in about half the space with significantly reduced installation cost. Whenever we create this much value, usually, some of that value creation will end up accruing to our shareholders. We would assume that that will be so in this case as well. As we begin to master our manufacturing of these product sets. So over time, the more valuable our innovations are, we would expect our profitability to improve. Wamsi Mohan: Okay. Great. Thank you so much, Wendell. Operator: Next question. And our next question will come from Joshua Spector with UBS. Your line is open. Joshua Spector: Yeah. Hi. Good morning, and congrats, Ann. I wanted to ask first just on similar lines of the capacity that's being added. So if we think about Meta as a share of your enterprise sales today, versus what this agreement implies, are they going to disproportionately buy more from you after this agreement? And are you adding capacity to match that added sales or is it less than that? Meaning your capacity might tighten a bit as it relates to this agreement? Wendell Weeks: Okay. So to the first is sort of relatively scale. Last year, Ed, maybe help me with some of the numbers. Our enterprise business was about $3 billion for the year. Roughly two-thirds of that would be the hyperscalers of which Meta was one. Edward Schlesinger: Yeah. That's right. We were a little over $3 billion in enterprise, Wendell's right. And I think a good note was our enterprise business in total grew 60%, the hyperscale portion of that grew almost double that rate in 2025. Wendell Weeks: So with this sort of significant agreement, you're obviously seeing continued very high growth into the future. Now you ask the question of does this mean that relative to our other customers, Meta will be catching a lot more. I think, the thrust of your question. And what I just was sharing with you is we're concluding other similar size and scale agreements. Several of them. With other of our major customers. So what I think we tend to think about it as is not so much a shift in what portion of our product sets. Our various customers get. Is being the overall the pie is going to get much bigger. And then people will decide, so you know what slice of that they want. Does that address your question, Josh? Joshua Spector: It does. I mean, I guess what I'm trying to figure out here, does this so if we thought hyperscalers were going to grow at x percent in Meta within one of them, know, we're baking something like that into our estimates of what your growth would be. Does this it sounds like this kind of codifies that growth and maybe secures them some of that capacity as you grow into the future. Versus know, Corning capturing more share of that pie. Wendell Weeks: That's I want to make sure I understand if maybe you're capturing more share of that pie or not. Thank you so much, Josh. So you will have your point of view on sort of the rate of optical growth in Gen AI and our hyperscalers. It is true that our new products and the reaction to those new products is increasing the demand for our products relative to the demand of others' products mainly because of unique advantages these innovations are offering. Now how all that will shake out, I am not sure. But I like our hand a lot better than I would like anybody else's. Joshua Spector: Excellent. Thank you. Edward Schlesinger: Thanks, Josh. Next question. Operator: And the next question will come from Meta Marshall with Morgan Stanley. Your line is open. Meta Marshall: Thanks. Great. And congrats on the quarter. I just wanted to ask kind of one clarifying question about the Meta deal just since you mentioned kind of expansions of high-capacity cable. Would any of what is kind of included in that deal be included in the carrier line item, or is that all kind of being counted in enterprise today? And going forward? And then maybe on a second question, just if you could kind of give a sense of CapEx for the year as you start to kind of make out some of these capacity investments? Wendell Weeks: Well, first, I'd like to thank you for participating in that CNBC special that was done, Meta. I appreciate it. And then I'll turn it over to Ed for the answers to your question. Edward Schlesinger: Yes. So on the accounting of the Meta deal, you can think of our accounting protocol as when we're selling to a high scaler directly like Meta, account for that in our enterprise business. And when we're selling to a carrier, like Lumen or AT&T, for example, we account for that in our carrier business. The only thing that gets a little bit, you know, maybe confusing is that data center interconnect has typically, at least to date for us, long-haul data center interconnect has gone through carriers. So our customers, for example, Lumen, are, you know, building out networks for data centers. We think of that as sort of outside the data center. That sits in our carrier business. But the Meta deal would be all in enterprise. Does that make sense? Meta Marshall: That does. Yep. Edward Schlesinger: Okay. And I'm sorry. Can you repeat your second part of the question? Just the CapEx how we should think about CapEx in terms of 2026? Wendell Weeks: Yes. So we plan to spend about $1.7 billion in CapEx. For reference, we spent a little under $1 billion this year. Our depreciation level happens to be around that $1.3 billion level. So we're spending a little bit more in '26. We plan to spend a little bit more. That is good. You know, we have a lot of growth opportunities. We want to ensure that we invest for those opportunities. You know, optical is a place that you can think about where we'll direct a lot of that capital. And, of course, as we shared on the call, we look to ensure we get a really strong return on those investments. Sometimes that gets accounted for by customers providing an upfront payment. Sometimes that gets accounted for the nature of our agreement with the customer, so that may show up in the operating cash flow, the cash section, or against our capital. But you can think of us as spending around that $1.7 billion. Meta Marshall: Great. Thank you. Edward Schlesinger: Yeah. Next question, please. Operator: And our next question will come from George Notter with Wolfe Research. Your line is open. George Notter: Hi. Thanks a lot, guys. Just to continue on that line of questioning, the $1.7 billion, does that include specific CapEx associated with the Meta project? Or is that just you there's kind of a gross and a net number here, I think. And I guess I'm trying to figure out I think the basic idea here for you guys is you're trying to get your customers to pay for more of your capital expansions or capacity expansions, and I guess I'm just trying to figure out, you know, how much of this is ascribed to the customer and how much of this is on Corning. Thanks. Edward Schlesinger: Yes. So as we've shared, we use a number of tools to de-risk our investments. Sometimes, when we do an upfront payment from a customer, it goes against the capital. And sometimes it actually doesn't. It may be a refundable down payment that they get through a take-or-pay mechanism or some other mechanism in a contract. We don't disclose and we typically don't disclose the details of any specific agreements. I can say that for sure some of the capital we plan to spend in 2026 for the Meta deal. George Notter: Got it. Okay. And then just one other question. You know, certainly not every major customer certainly, you'll have customers in the optical business that won't sign contracts like this. I assume that with those other customers, those guys will be looking at price increases. Is that a part of the strategy here? Thanks. Wendell Weeks: So first of all, to add on it, our plan with that $1.7 billion, we're integrating and the cash flows that we're thinking about. We're integrating all of the various customer agreements we believe that we will complete and we're addressing that as thoughtfully as we can. So more to come in that space over time, but that is what we think we'll invest this year. As far as our other customers, well, for long-standing customers, like our carrier customers, they are not related to these particular product sets. And so we will continue to serve them and serve them in an excellent way. And what we're seeking here is just to make sure that we have assured revenue streams. Against any capacity that is dedicated specifically to those customers. They're scaling this rapidly. George Notter: Thank you. Edward Schlesinger: Next question? Operator: And the next question will come from Steven Fox with Fox Advisors. Your line is open. Steven Fox: Hi. Good morning. First of all, congrats to Ann. Pretty sure you could probably do another forty years if you wanted to. But congrats, and thanks for all your help. I guess just on everything that was announced around Optical, I was wondering if you could fill in the blanks on two things. One is you seem to be pushing more and more assets towards US, North America production, and I was curious how you feel about international markets for Corning in the coming years. And secondly, Ed, I understand not changing the operating margin target yet for the company as a whole, but it seems like everything you talked about around optical is pretty positive for optical's own operating margins. So, like, maybe you could sorta give us some clues as to how that could influence the overall corporate average. Thanks. Wendell Weeks: Let me start on the first one about the global mix of our sales. We today are about 60% outside the US. And about 40 in and we would expect something in that zone to continue. But what will really drive the location of our factories will tend to be where our customers are because we seek to locate close to them. So if a lot more gets built in the West on the AI side, then we would expect to have more of that be here. If on the other side, in the glass side, let's say, or in our automotive emissions business or any of our other new innovations more outward to build in Asia, that's where we would locate that manufacturing. And just remember throughout all of this, what happens to us every year is we're continuously improving our productivity. Which is where we tend to get the product to be able to support ever-increasing revenue, and then if we don't have a revenue opportunity for that, in the specific market, then what we seek to do is develop new markets for that capability like we did for Gorilla, from display and then automotive from Gorilla. So that tends to be our approach with deep dedication to the locations we build the factory. Edward Schlesinger: Yeah. Steve, on margins, you know, I'm gonna step back for a second and then I'll come to your question. I think when we first created SpringBoard and launched it, improving our operating margin, our profitability, and our cash generation was such a huge component of the plan. Because of where we were operating from, our financial profile. We needed to get our returns up. We needed to generate more cash and we've significantly done that. Feel great about it. Optical has actually been a huge component of that. We've been talking specifically about their net income margin over the last year or two, and that's now at 18% significantly above where it was when we started this plan. So I think that actually is a good background for how we think about going forward. So from here forward, I think you're right, it is highly likely that our operating margin goes above 20%. Could do that for, you know, periods of time. It could be, you know, nicely above 20%. But we really like the financial profile and we want to focus on improving our return on invested capital and we want to generate more cash. So we want to make sure we capture all the growth that we can in this next window of time. So that's primarily why we're not putting a new target out. We expect to be at 20% or above 20%, and we expect to grow significantly. And we think that return profile is very compelling. Steven Fox: Great. That's super helpful. Thank you. Edward Schlesinger: Next question. Operator: Next question will come from Asiya Merchant with Citi. Your line is open. Asiya Merchant: Great. Thanks for the question, and congrats again, Ann, on the retirement. You'll be missed. Wendell, if I may, a question for you on the optical side of things. You've talked a lot about, you know, CPO and the scale-up opportunity. So given the growth profile that you guys are talking about here with additional commitments from hyperscalers coming forth, can you just remind us is scale-up included in that outlook through, let's say, here through the '28? Or are we looking at that opportunity further beyond? Thank you. Wendell Weeks: So the straightforward answer before I give others more color is we do not have a significant revenue amount for scale-up included in this most recent SpringBoard upgrade. So that would be on top depending on your opinion on timing. For those of you who are less close to scale-up, what Asiya is asking about is because transmitting information with photons is greater than three times lower power usage than using electrons even in very short lengths inside switches, or servers and that that advantage increases dramatically the longer you want to go or the higher the bit rate, can be 20 times or more. There is a widespread deep technical effort going on to be able to bring more optics into the scale-up piece of the network. Closer and closer, to the GPUs and inside of the boxes closer and closer to the switch ASICs. Though I believe deeply, the innovator in me, believes deeply that it is inevitable that those links go to photons. And I also believe that our innovations will play a significant role in those new links. I believe that's inevitable. Calling timing is more difficult. There are scenarios where the timing would be within this time period between now and 2028. There are scenarios where it will be primarily starting immediately 2028, and beyond. What we seek to do with SpringBoard is to not over-speculate. And if we don't have really quite compelling evidence of the timing of something as significant and large as the scale-up opportunity it is, we will tend to view the timeline from a conservative point of view. Does that answer your question? Asiya Merchant: Yes. That's great. Thank you. If I may, one for Ed as well. Ed, you talked a little bit about operating margins for or net income margins for Optical. Can you just remind us like within the SpringBoard, how we should think about margins for the solar business that's ramping up here and expected to I think, drive margins which are at or accretive to corporate. If you can just remind us where we are on that ramp and what it looks like within the updated SpringBoard. Thank you. Edward Schlesinger: Yeah. Thanks. So as we've shared and Q1, we're expecting sort of a similar Q4, you know, situation is we're significantly ramping an extremely large factory and so there's a drag on our margins, our profit dollars as well. We sized that in the fourth quarter originally at about $0.03. It was a little more than that. In the first quarter, we expect to be in the 3 to 5¢ range. So if you were to take that drag, just the drag part, not even the higher sales, and eliminate that from our financials. Clearly, our margins would go up. Obviously, our profit dollars would go up. And, specifically, that would hit, you know, in that Hemlock and Emerging Innovations segment, which is where we have solar. So I think there's a nice opportunity for us there to improve margins as we continue to ramp. And we expect sales to go up, our profitability to improve through the year of 2026, and we expect to get this business to sort of size and scale we would expect it to be, including margins at or above the Corning average by 2028. Wendell Weeks: Next question. Operator: The next question will come from Tim Long with Barclays. Your line is open. Tim Long: Thank you. If I could as well. One on the optical side. If you could go back to the carrier piece, you know, just wanna, you know, understand how you're thinking about this business going forward. Think historically, we've seen pretty big cycles here, a few good years and then some catch up, you know, inventory, whatever. But now there's a lot more data center in that line. So when you think about the carrier business over the next few years, do you think that the cyclicality of the business has changed, and it's a little bit more secular? Love your thoughts on that. And then second, maybe if we could just touch on display. I think the yen has moved back the last few weeks, but it was getting up there. So Ed, if you could just talk I get you're managing to that 25% and $900 to $950 million of net income. Is there a scenario? And I know you have hedges where we might need to see more price increases, or where are we with the flow through of the last set of price increases? Thank you. Edward Schlesinger: Yes. So on carrier, I'll start there. In 2025, our business was up about 15%. Majority of that growth was data center interconnect. I certainly see that data center interconnect portion of or the carrier business being driven by data center interconnect spend? That said, I think you'll see fiber to the home growth as well. So I do think Carrier will grow over the next several years, and we factored in scenarios and how we think of that in our SpringBoard plan. But probably the largest driver data center interconnect. Does that answer your question? Tim Long: Yeah. Yeah. That's helpful. Thanks. And then on to display. Edward Schlesinger: Yep. And then on to display. So, you know, the way I think about display is our goal is to generate $900 to $950 million of net income, cash, out of that business. We did better than that this year. We're, you know, we're high a little higher on income, and our margin percent was a little above our target. And we expect to be able to maintain that, and we could certainly be above that at times. You know, we could certainly be above that at 2026. To the extent we need to adjust for weaker yen than what we have, and we have a 120 yen in there, we will do what we need to do on price or otherwise to ensure that we can deliver that level of profitability. Tim Long: Thanks, Ed. Edward Schlesinger: Alright. Thank you. We'll take one last question. Operator: Okay. And our last question comes from John Roberts with Mizuho. Your line is open. John Roberts: And congrats as well, Ann. Hope you're headed to someplace warm. What percent of bare fiber currently used internally for cabling? And are you importing any bare fiber into the US? Wendell Weeks: I don't actually know the answer to that question off the top of my head. And everybody's looking at me like I should. So, John, let us take a moment to gather that information. And we'll chat with you. John Roberts: Okay. Thank you. Ann Nicholson: Great. Okay. So, just quickly thank everybody for joining us today. I wanted to let you know before we go that we're going to attend the Susquehanna Tech Conference on February 27. And the Morgan Stanley Tech Conference on March 3. Additionally, we'll be scheduling management visits to investor offices in select cities. Finally, a web replay of today's call will be available on our site starting later this morning. Thanks again for joining us and for the well wishes for me. Operator, that concludes our call. Please disconnect all lines. Operator: Thank you for participating, and you may now disconnect.
Operator: Good day everyone and welcome to the Littelfuse, Inc. Fourth Quarter 2025 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to Head of Investor Relations, David Kelley. Please proceed. David Kelley: Good morning, and welcome to the Littelfuse, Inc. Fourth Quarter 2025 Earnings Conference Call. With me today are Greg Henderson, President and CEO, and Abhishek Khandelwal, Executive Vice President and CFO. This morning, we reported results for our fourth quarter and a copy of our earnings release and slide presentation is available in the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to Slide 2 for our disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review today's press release and our Forms 10-Ks and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available on the Investor Relations section of our website. I will now turn the call over to Greg. Greg Henderson: Thank you, David, and thank you to everyone for joining us today. This morning, I will provide highlights on our fourth quarter, then an update on the progress we are making on our strategic priorities. But I wanted to start by highlighting two recent exciting developments. First, we closed the acquisition of Basler Electric in December. Basler strengthens our high power capabilities and expands our positioning in key growth markets, including grid and utility infrastructure, and data center. I got the opportunity to meet their leadership and technical teams last month, and this left me even more excited about Basler's market and technology positioning, scalability, and long-term growth opportunities with Littelfuse, Inc. Second, we are excited to announce that we will host an investor day on May 14 in New York, where we will provide a detailed review of our strategy and long-term financial goals. I look forward to sharing more about Littelfuse, Inc. and our opportunities at this event. Now turning to our fourth quarter. We delivered strong performance with year-over-year revenue growth of 12%. Across our businesses, we continue to drive momentum in our high growth markets. We delivered double-digit revenue growth in data center, grid and utility infrastructure, and renewables markets. Automotive grew mid-single digits despite declining global vehicle production in the quarter. Finally, we are seeing emerging signs of broad-based industrial recovery into 2026. In the fourth quarter, our teams also delivered on our operational excellence priority, which culminated in our earnings results exceeding the high end of our guidance range. Throughout 2025, we remained focused on executing our strategic priorities, and we exited the year with a robust backlog and considerable momentum. Entering 2026, we are well-positioned to drive strong performance. We expect to deliver double-digit first-quarter revenue growth and significant earnings expansion supported by our fourth-quarter bookings, up more than 20% versus the prior year. Abhi will discuss specific results and our outlook in more detail shortly. But I want to thank our global teams for their persistent hard work and efforts. Now I want to share the progress we are making as we enhance our focus on future growth opportunities. Our end markets require increasingly higher power and higher energy density solutions from Littelfuse, Inc. We are seeing broad-based momentum reflected in our 2025 design wins, which were up double-digit relative to the prior year. Today, I wanted to specifically highlight our grid and utility infrastructure opportunity. If you turn to Slide 6, our position in this high growth market was significantly bolstered by the closing of our Basler Electric acquisition this past December. With approximately $3 trillion expected to be invested in grid modernization through 2030, the market is demanding more advanced and higher power protection excitation systems. With the strategic timing of the acquisition, we are well-positioned to help our expanding grid and utility customer base navigate the challenges of higher voltages and increasingly complex system requirements. Basler enhances our core high power protection capabilities and equips us to sell more complete solutions. We believe our complementary portfolio coupled with our deeply embedded relationships positions us for double-digit growth and strong profitability within this market. An example of our expanding reach this quarter, Basler was selected as a design partner for a next-generation control system solution for a leading player in the high power industrial data center backup generator market. Now turning to our second strategic priority, which is to work more closely with our customers to help better understand and solve their technology challenges. Our new go-to-market evolution is live, and we are seeing the early signs of success following our Salesforce realignment, which is now market-facing, customer-centric, and focused on solving our customers' most complex challenges with our complete technology portfolio. As an example, we continue to drive significant progress in the data center market, where we were early to adapt our new sales model. Our 2025 data center design wins more than doubled relative to the prior year. As you can see on Slide 7, we have a comprehensive data center technology portfolio, and we are capturing meaningful wins with leading hyperscaler, cloud, and infrastructure customers. The data center market is undergoing a significant architectural shift to high power systems. As shown on Slide 8, we believe our content opportunity on these next-generation architectures will be significantly more than double current levels. Importantly, we also have meaningful growth opportunities across the data center infrastructure ecosystem. The acquisition of Basler further expands our high power data center infrastructure capabilities. To illustrate our momentum, we secured a significant design win for a static transfer switch with a leading data center infrastructure provider. This solution leverages our high power semiconductor and packaging technology, which enables increased power density of approximately 20%, improved efficiency, and simplified integration into the customer's equipment. This win is for a two-megawatt UPS bypass and power distribution unit application that enables uninterrupted power to data center racks. Shipments are slated to begin in 2026, representing continued momentum and growth in high power data center solutions. Turning to our third strategic priority, enhancing operational excellence. Today, I want to highlight our semiconductor business opportunities. This business is core to our technology differentiation. Our market-leading protection and complementary power semiconductor products are critical to our mission of enabling a safe and efficient transfer of electrical energy. Last quarter, we shared that we made a change in semiconductor leadership. I would like to provide an update on the strategic progress we are making in optimizing our power semiconductor products, which accounts for roughly half our semiconductor business. First, we have made a decision to sharpen our focus on high value and high growth applications. We have differentiated technology and strong customer relationships in high power markets, such as data center, battery energy storage, grid and utility infrastructure. We have started the process of rationalizing our portfolio to reduce exposure to lower value product families and are aligning our manufacturing strategy accordingly. As part of this initiative, we are reviewing our power semiconductor manufacturing footprint to ensure it is optimized and resilient. We believe these actions will significantly improve the strategic focus and profitability of the business and position us to deliver next-generation technologies that will drive growth in our targeted markets. We look forward to providing further updates on these initiatives and sharing our firm strategic and financial roadmap at our May investor day. Taking a step back, we closed 2025 with considerable momentum, reflected in our fourth-quarter performance. We closed the Basler acquisition and drove robust backlog through customer and market traction throughout year-end. Into 2026, we are focused on executing our three strategic priorities, and believe we are positioning Littelfuse, Inc. today for meaningful long-term scale and leading shareholder performance. With that, I'll hand the call over to Abhi. Abhishek Khandelwal: Thank you, Greg. And to everyone joining us. Today, I will start with an update on the Basler acquisition. Then, I will walk you through our fourth-quarter results, followed by our first-quarter outlook. We will then be happy to take your questions. As Greg mentioned previously, we are excited to close the acquisition and look forward to executing on the meaningful revenue synergies and opportunities that the combination of Basler and Littelfuse, Inc. will deliver. We anticipate the acquisition will contribute between $130 million and $135 million in revenue and $0.10 to $0.15 of adjusted earnings in 2026. We also expect Basler to deliver a high teens adjusted EBITDA margin for the year. With that, please turn to Slide 10 for details on our fourth quarter. Going forward, comparisons I will discuss will be relative to the prior year, unless stated otherwise. We delivered strong results as revenue in the quarter was $594 million, up 12% and up 7% organically. The Dortmund and Basler acquisition contributed 3% to sales growth, while FX was a 2% tailwind. Adjusted EBITDA margin finished at 20.5%, up 180 basis points reflecting meaningful operational leverage, while fourth-quarter adjusted diluted earnings were $2.69. We also delivered meaningful cash generation in the fourth quarter. Operating cash flow was $139 million, and we generated $120 million in free cash flow. We ended the quarter with $563 million of cash on hand and net debt to EBITDA leverage of 1.2 times. In the quarter, we returned $19 million to shareholders via our dividend. Now before we go into further details on our results and outlook, I wanted to discuss the non-cash goodwill impairment charge that we recorded in the fourth quarter. The impairment charge of $301 million is for the IXYS and Dortmund acquisitions and is the result of our annual impairment testing of our reporting units. It reflects weaker sales and profitability than original expectations amid persistent soft market conditions. As Greg mentioned, we have an opportunity to enhance our power semiconductors focus on applications and markets where we have strong market share, brand power, and technology expertise. With the sharpened strategy, power semis will better complement our market-leading protection capabilities and ultimately drive improved performance over the long term. Please turn to Slide 12 for brief highlights on our full year 2025 performance. We delivered strong revenue growth of 9%, while adjusted EBITDA margin expanded 260 basis points to 20.9%, reflecting the focused execution of our strategic priorities. We also delivered robust cash flow for the year with free cash flow expanding 26%, showcasing the strength of our operating model. We continue to target free cash flow conversion of more than 100% in 2026. Please turn to Slide 13 for our segment highlights. Starting with the electronics product segment. Sales for the quarter were up 21%, led by strong passive products organic sales as well as growth contributions from protection semiconductor products. Adjusted EBITDA margin of 23.7% was up 170 basis points reflecting favorable year-over-year passive and protection volume leverage. For the full year, sales increased 13% while adjusted EBITDA margin expanded 190 basis points driven by solid volume leverage. Moving to our transportation product segment on Slide 14. Fourth-quarter sales increased 1% year-over-year but declined 1% organically. Passenger vehicle organic sales growth was more than offset by softer commercial vehicle volumes. Adjusted EBITDA was 16%, reflecting our team's focus in driving margin expansion in a continued soft transportation market environment. For the full year, our focus on operational execution led to solid margin expansion and we remain confident in our ability to drive long-term transportation profitability enhancements despite continued soft market conditions into 2026. Turning to Slide 15. Industrial product segment sales increased 4% but declined 1% organically for the quarter as improved energy storage, utility and grid infrastructure, renewables, and data center demand was more than offset by lower HVAC demand. Fourth-quarter adjusted EBITDA margin was 16.2%. For the full year, our industrial segment delivered revenue growth of 10% reflecting our secular growth positioning. Solid full-year 2025 adjusted EBITDA margin expansion reflects favorable volume leverage, while we continue to invest in long-term growth. Please move to Slide 16 for our first-quarter outlook. We entered 2026 with a strong backlog and significant momentum. With that in mind, our first-quarter 2026 guidance incorporates current market conditions, trade policies, commodity prices, and FX rates as of today. We expect first-quarter sales in the range of $625 million to $645 million, which assumes 7% organic growth at the midpoint and five points of growth from our Basler acquisition. We are projecting first-quarter EPS to be in the range of $2.70 to $2.90, which assumes 25% flow-through at the midpoint as well as a $0.03 contribution from the Basler acquisition. Turning to Slide 18. We want to provide you with a view on our key market exposures and underlying growth assumptions for 2026. We look forward to sharing our full strategy with you at our May 14 Investor Day in New York. With that, operator, please open the call for Q&A. Operator: It's time to ask a question. Simply press star followed by the number one on your telephone keypad. And our first question comes from the line of Luke Junk with Baird. Please go ahead. Luke Junk: Greg, maybe if we could start with data center. Obviously, it's emerged as a big part of the story over the past year. Just hoping you can help us think through some of the key incremental drivers as we move through, not only in the first quarter, but through '26 in terms of share gain opportunity flowing through that 2x backlog growth that you cited for the full year and maybe even initial tailwinds from those higher voltage systems starting to launch. You mentioned the award in the script that, you know, for half 2026 shipments are starting there. Just how should we kind of scale in the opportunities as we go through this year? Thank you. Greg Henderson: Yeah. Thank you, Luke, for the question. Good morning. We continue to see good progress in the data center market. I think I emphasized that data center is one of the early markets where we focused on our sales realignment, putting a dedicated team focused on our customers selling our complete technology portfolio. We're already seeing traction. As I mentioned, our design wins were up significantly, more than doubled in 2025, and we continue to see momentum. And I think the good news is that as is shown on the chart, as the customers are moving to higher voltage systems, their architecture is on higher voltage and DC, high voltage systems. There's a lot more for us, and we're part of those conversations with our customers now on architecting that. So we can't give a quantitative number exactly because the architectures are evolving. But it's at least twice the opportunity for us as we go to the higher voltage systems and in some cases, significantly more than that. So we have momentum. I mentioned the design win on the static transfer switch. We have momentum across the business. Also, Basler has a good position in data center for backup power generation solutions. And so as we mentioned, it's not just in the rack, the white space, but actually more and more solutions that we offer in the gray space as well. So we have good momentum. We continue to see growth in design wins. We will continue to see growth in revenue. And I just say that the thing I'm most excited about is we're having deeper conversations with our customers, talking about more of our technology portfolio, talking about next-generation architectures around the high voltage solutions. Abhishek Khandelwal: And, Luke, just to build up on what Greg said. So, again, to reemphasize the design wins are 2x, you know, 2024 and '25. Data center grew really, you know, grew strong double digits in the quarter and was a material contributor to our growth story in Q4. We expect it to be a leading, you know, market contributor growth in '26. And then more importantly, as I think about our data center exposure, you know, it's double digits as a percent of revenue inclusive of Basler as I think about our data center exposure. Luke Junk: Very helpful. And then, Greg, switching gears to industrial. You mentioned in the script that you're seeing signs of a more broad-based recovery in industrial into '26. Just hoping you could double click on that in terms of some of the maybe more specific things that you're seeing or obviously this touches a few parts of the business maybe flow through to some specific business impacts as well. Thank you. Greg Henderson: Thank you, Luke. Yeah. I would say that, you know, if you look at the bookings we had in 4Q and the momentum we feel, we're seeing a broader-based momentum, I would call it, in our broader industrial market, especially, like, our diversified industrial segments and industrial automation segments. The one market where I would say we still continue to see softness is in the residential HVAC where we have a reasonable exposure on our industrial business. So that one continues soft. But broadly, the market is improving. And I would say the good news is that we see that broad momentum across the business. It's strong in our industrial products and passive electronics and also our semiconductor protection. The book to bill in the quarter was above one, and we're seeing growth in not just book to bill, but also in POS at our end through to our end customers. Abhishek Khandelwal: Yeah. And just, Luke, last one I'll make is if we think about the bookings in Q4, we're up 20%. We saw similar, you know, numbers in Q3. So points to, again, strong momentum exiting '25 and coming into 2026 to Greg's point. Luke Junk: Yeah. And then maybe for my last question, obviously, there's a lot of metals inflation out there right now. You just remind us how you buy things like copper and silver in terms of buying at spot rates versus indexing mechanisms to pass through those higher costs to different customer types assume distribution, a little more straightforward versus some other customers and maybe put a finer point on what you're assuming in the first quarter guidance specifically? Thank you. Abhishek Khandelwal: Yes. Absolutely. Look, Luke. So we're seeing pressure on the metal side, right? Our exposure is primarily to copper and ruthenium. But given the volatility in the silver and gold prices, we're seeing an impact from that. Right? So they kind of think about what our teams are focused on. Firstly, they're focused on supply chain opportunities and really looking at ultimate ways to go procure that same material for cheaper pricing. Two, it's around, you know, how do we go price that and take that inflation and price it along to our customers either through pricing or surcharges. What I will tell you is while we're getting impacted, you know, just like 2025. Right? If you think about the price cost type to tariff, we did our teams did a great job managing that. That's what we're focused on. That's what we plan to go do this year. Now there might be some timing between quarters just given the timing of inflation versus when you, you know, get your price. But that said, our goal is to be price cost neutral. We have factored the impact of current commodity prices in our Q1 guide and feel reasonably comfortable about where we are, and the Q1 guide. Luke Junk: Yeah. Just maybe in terms of the first quarter guide, is the assumption that your price cost neutral and the first quarter guide? Or should we think of that as a full year comment? Abhishek Khandelwal: I think it's a full year comment. But like I said, there'll be timing, Luke, throughout the year as we go through it depending on how the, you know, commodity pricing moves versus when we recognize the pricing on it. So I that that's a full year comment, not a Q1 comment. Luke Junk: Understood. I'll leave it there. Thank you. Operator: Your next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead. Christopher Glynn: Yeah, congrats on the deal in the data center momentum there. You know, you answered a lot of questions upfront about, you know, migration to the higher voltage architectures. You know, obviously get some constructive comments there net of some product categories that will diminish. So that's great. Still a question remaining. Curious about, you know, what you're seeing in terms of opportunities like partnerships or consortiums into that space for standard application design? And I'm just wondering if there's anything to talk about in that respect. Greg Henderson: Well, I think yeah. Thank you, Chris. I think the thing to understand is that we have increased focus on the data center market. And we're wanting to play across the ecosystem. So we're partnering and talking to the hyperscalers. We're partnering and talking to the chip providers that the architectures. We're very active in the ODM and the design ecosystem in Asia and Taiwan that supports the design ecosystem. So what's important about our strategy now is that we have a dedicated focus, a dedicated sales focus on the data center customers and increased focus. And I think what's important is that we participate in all parts of that. From the chip designers that are building architectures to the hyperscalers that are designing and power to the ODM in Asia, and we're covering all of that, and we're participating in all of that. Our view is that, you know, we get our products architected and designed in, throughout the cycle, and we're touching all those phases. So we're very active. You know, we're also very active in platforms like Open Compute, for example, to make sure we know where the architectures are going, where the standards are going. One other thing I will emphasize is that when you go to high voltage architectures, many of these high voltage architectures, once you go to 400 or 800 volts, products that didn't used to need to be UL certified, for example, now need to be UL certified. We need new standards. We're active in the standard body and the UL certification process for some of the standard setting processes for these high power applications that ultimately are going to go into data center. So we're participating across the ecosystem. That's actually how we think we're going to win. And we're increasingly investing in that. Christopher Glynn: Great. And then, on the power semis, you kind of blew through some of the target markets focused there. So I'd like to just revisit that. And also, what kind of attrition might we anticipate in kind of related earnings power? How should we contemplate that element ahead of the kind of breakout in May? Greg Henderson: Yeah. Thank you, Chris. I'm going to try to give a little bit more color. So again, just to anchor on our semiconductor business, which is in our electronics segment, about half the business is our protection semiconductor business. This is actually a model franchise for us. We have very good market position, strong share, good customer value. That's about half the revenue. And then the other half is our complementary power semi business, which is core to our strategy. And I think where we're focused here though is that there's elements of power semi business where we have high value, we see high growth markets, we have meaningful share, we're important to our customers, and actually, those tend to be the higher energy density, high power segments, like data center, battery energy storage, grid and utility customers. And so those are the areas where we're going to continue to focus, where we have high value, where we have market position that's giving us differentiated solutions. There are, however, parts of our Power Semi portfolio where it's lower value and a little bit more commoditized, I would say, where we don't have as much value. And so we're undergoing an effort to rationalize the portfolio and double down on the areas where we believe we can win. And as part of that, we will also be optimizing our manufacturing footprint. So what I think we're telling you is that this is a work in progress. Telling you where we are. We look forward to getting you continued updates as we progress this between now and Investor Day in May. So we will continue to give updates as we make progress. But I think the strategic focus is to continue to just like we're doing broadly for the company, sharpen our focus on where we play and why we win. Abhishek Khandelwal: Yeah. Chris, just to build around, you know, Greg's commentary, the way to think about it from a financial standpoint is as we go through the year, as we make progress, we'll incorporate any changes to our guide. That's point number one. Point number two, again, to Greg's point, you know, our semiconductor business unit is made up of two things really. Right? It's protection and it's power. Protection is a model franchise. So what this also does give us an ability to go do is we rationalize our portfolio, optimize our footprint, get our power to semi business, at that model level profitability. Right? That's what we're focused on. Again, more to come on this, but to Greg's point, our efforts are underway. And as we make progress through the year, we'll keep you up to date. And then more importantly, a vision and a roadmap by Investor Day so that the team understands what is it that we're going after. Christopher Glynn: Perfect. And then if I could sneak one in on Basler. Just curious about how you're seeing the cultural fit. Anything kind of edgy on the integration? You know, probably some differences in go-to-market and specification process with a little bit more of a systems and solution orientation to their portfolio. Greg Henderson: Yeah. Thank you, Chris. Yeah. Look. We are very excited to have Basler as part of Littelfuse, Inc. As I mentioned, I got the, you know, we did the due diligence, but that was kind of a limited process. So I got the opportunity to meet with the team shortly after close in December. What we really like, and actually, I left even more excited about is that couple things. One, Basler is a highly technical organization. They have a great engineering capability. They're market leaders in protection solutions, like excitation systems, and probably punch above their weight based on the size of the company for the capabilities that they have. Two of those, you mentioned go-to-market. We really like about Basler is that they have market position and established go-to-market in the utility industry. If you look at Littelfuse, Inc.'s legacy portfolio, we have technology that really plays in good utility. And some subsegments of that, like battery storage and solar, we've done really well. But other subsegments that may be more core utility grid space we have under-participated mainly because of focus, but one of the key areas is that we didn't have the channel. So we're actually really excited about Basler and the capabilities they bring. They have complementary products. They're a system-level provider. They provide complete solutions. So many of the places we're going Basler is, and our goal is to leverage their go-to-market and customer understanding to help us bring more of the Littelfuse, Inc. portfolio into that space. So just like we're doing other places, we're leveraging that. We're very pleased to have the Basler engineering and go-to-market team as part of Littelfuse, Inc., and we see that as a growth synergy out of this acquisition. Christopher Glynn: Great. Thank you. Operator: The reminder to ask a question, press 1 on your telephone keypad. And our next question comes from David Williams with Benchmark. Please go ahead. David Williams: Hey, congratulations on the progress here. It's really great to see, and the tone has changed and I'm much more enthusiastic. So congratulations there. Maybe the first question is, Greg, as you kind of think about over the last ninety days, what has changed or shifted? What do you think has become maybe more positive? And is it simply because of the self-help, the strategy you've implemented, or do you feel like the markets are also helping in that regard? Greg Henderson: Yeah. So two things. First, I think, you know, we're on a multiyear journey. And I think that from the Littelfuse, Inc. perspective, we are continually making progress. We've been making progress throughout '25. We anticipate we're going to continue to make progress through '26. And so for us, I would say it's a multiyear journey, and we are seeing results of our, you know, results of our progress. We expect to continue that. In addition to that, I would say we continue to see market momentum. So if you go back to 2025, I think the market momentum was maybe more narrow. In data center and grid utility, solar, battery storage, energy around data center, the market momentum was a little more narrow. We actually are seeing a little bit broader market momentum. We talked about the broader industrial market momentum. So I would say it's both. Right? We are making progress on our strategy. It's a journey. It's a, you know, step by step, we're making progress. But also, we're seeing some market momentum that is adding to that. Abhishek Khandelwal: Yeah. And, David, just to build on what Greg said, I think a couple things will add to it. First of all, as you see our results for '25. Right? We talked a lot about operational execution. While we have more to go do there, you see that play itself out in our margin expansion across all three segments, whether it's transportation, industrial, or electronics. Two, I think the whole conversation we just had around, you know, power semi and that focus really gives us an opportunity to optimize our profitability and continue to move that, you know, move that profitability to optimal level. So I think to Greg's point, I think there's a little bit of focus that we're driving that helps us optimize our portfolio further and then Greg, I talked to '1 guide, right, I mean, at the midpoint, it's a 7% organic, 15% growth year over year. Where Basler's going to contribute about 5%, you know, in the quarter. And an EPS guide that the midpoint is a, you know, 28% growth and a 7% top line growth. So, again, points to the strong momentum exiting '25, coming into '26. As I think about the markets, as Greg mentioned, we're seeing broad-based industrial strength, right, with the exception of the HVAC market. It's not just data center anymore. It's a little more broad-based. So in general, we feel really good about where we are in 2026 and the momentum that we're seeing as we go along the year. Of course, we'll, you know, keep the team up to date on our progress. But sitting here today, we feel really good about our momentum in '26. David Williams: Thanks so much for the time. Certainly appreciate it. Best of luck. Abhishek Khandelwal: Thank you. Thank you, David. Operator: With no further questions in queue, I will now hand the call back over to CEO, Greg Henderson, for closing remarks. Greg Henderson: All right. Well, thank you all for joining us today. I just want to close by first thanking our global teams. As we mentioned, we had a strong Q4 and good progress to our goals in '25. And we're confident in our momentum into '26 as Abhi just said. So thank you for joining us. We look forward to seeing many of you in person as you join us at our Investor Day on May 14 in New York. So thank you very much.
Operator: Ladies and gentlemen, thank you for standing by and welcome to the Elevance Health Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session where participants are encouraged to present a single question. If you wish to ask a question, please press star then 1 on your telephone keypad. You will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then 2. These instructions will be repeated prior to the question and answer portion of this call. As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead. Nathan Rich: Good morning, and welcome to Elevance Health Fourth Quarter 2025 Earnings Conference Call. My name is Nathan Rich, Vice President of Investor Relations. With us on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Peter Haytaian, President of Carillon; Morgan Kendrick, President of our Commercial Health Benefits Business; and Felicia Norwood, President of our Government Health Benefits Business. Gail will begin the call with a discussion of our fourth quarter performance, our 2026 guidance, and the progress we continue to make on our strategic priorities. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website elevancehealth.com. We will also be making forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties may cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail. Gail Boudreaux: Good morning, and thank you for joining us today. Affordability remains the central challenge in health care. At Elevance Health, our focus is on improving outcomes, making care easier to access and navigate, and managing costs responsibly. Our commitment to whole person health shapes how we deliver on our strategy. Strengthening care coordination, reducing unnecessary complexity, and creating a simpler experience for those we serve. Before I go through the business, there are three points I want to underscore. First, 2026 is a year of execution and repositioning. And the outlook we provided today reflects prudent achievable assumptions grounded in pricing discipline, operational rigor, and targeted investments. Second, even in a dynamic environment, we are acting decisively in the areas within our control to strengthen margins, reduce volatility, and improve the consistency of our performance. And third, as those actions take hold, we expect to return to at least 12% adjusted EPS growth in 2027 off our ending 2026 earnings baseline supported by the earnings power of our diversified platform. Consistent with that approach, we are establishing 2026 adjusted diluted earnings per share guidance of at least $25.50. As you consider the year-over-year comparison, it's important to remember that our 2025 results included approximately $3.75 per share of favorable nonrecurring items. Let me walk through how we are positioning the portfolio. In Medicaid, we continue to see our rates lag elevated acuity and utilization, and we are working urgently with state partners on both rate actions and program design changes that support the long-term sustainability of the Medicaid program. We continue to view 2026 as a trough year. We expect our Medicaid operating margin to be approximately negative 1.75%, with improvement over time as rates incorporate more current experience and our actions take hold. We are also preparing for new eligibility and community engagement requirements under recently enacted federal legislation, the One Big Beautiful Bill Act. As these changes are phased in by states, we expect Medicaid membership may decline, and the acuity of the population may shift over time. And we have reflected that in our planning assumptions. We believe this is manageable within the context of our diversified enterprise and long-term growth strategy, and we're approaching these changes constructively with state partners with a focus on continuity of care and program stability. Turning to Medicare, our execution during the annual election period was aligned with our emphasis on delivering greater value for members and strengthening our performance while maintaining stable share in markets that are core to our long-term growth. We expect Medicare Advantage membership to decline in the high teens percentage range in 2026, reflecting deliberate portfolio actions and stability in our dual eligible membership. The actions we've taken and the composition of our membership should support meaningful margin improvement in 2026. In the individual ACA market, we've repositioned our plans with discipline to reflect higher costs observed this year and the expiration of enhanced subsidies while maintaining value and access for consumers. Our commercial business continues to have healthy momentum, particularly in national accounts, supported by a productive selling season, favorable client retention, and new opportunities to expand our reach through the second blue bid process. We remain disciplined in our pricing and focus on delivering sustainable margins while helping employers address affordability through Whole Health Solutions that integrate a member's medical, pharmacy, and behavioral health needs. Our integrated approach continues to resonate in the market, and we are pleased that 40 employers over the past five years have selected our Anthem affiliated plans as their sole carrier. And finally, Carillon is increasingly recognized as a differentiated platform in the market, growing demand for its solutions in managing high-cost complex areas of health care. Near-term growth will be moderated by lower health plan membership, most pronounced in CarillonRx, while Carillon services is less impacted by membership dynamics, reflecting its broad mix of external relationships and value-based arrangements. As our business mix evolves and we make targeted investments to strengthen the foundation, we are also refining certain long-term margin expectations to reflect a more prudent view of the forward environment. Our long-term enterprise margin target is 5% to 6%. For health benefits, Carillon and CarillonRx, we are targeting mid-single-digit margins, with our Carillon services target unchanged. These updates are intended to provide a clearer, more durable framework for evaluating performance, and they do not change our focus on disciplined execution, durable earnings growth, and strong cash generation. Stepping back, we view 2026 as a year of execution and repositioning. Across Medicaid, Medicare Advantage, and ACA, the dynamics we've described reflect a combination of policy-driven changes and deliberate portfolio and pricing actions designed to strengthen performance consistency. And we are aligning our cost structure and operating priorities accordingly. That's why we believe we have a clear line of sight to improve performance as we move through this year and into 2027. Now let me turn to the actions we have underway. We are strengthening our ability to emerging utilization trends and improve care coordination by leveraging actionable data and advanced analytics. These capabilities help us identify trends earlier and address inefficiencies in the system while supporting timely access to appropriate high-quality care. In Medicaid, we're strengthening our analytics to identify outlier utilization and billing patterns in high-cost substance use disorder treatment settings while maintaining access to clinically appropriate care. These insights are enabling targeted actions, including provider education, claims review enhancements, and payment accuracy and compliance initiatives where appropriate. Consistent with program requirements and clinical guidelines, we're able to execute with confidence because we built and are scaling capabilities that improve outcomes and reduce costs in complex areas of health care. In 2026, we will further strengthen specialty pharmacy management, advanced behavioral health support, and expand care management programs for members with elevated care needs. Established programs in oncology and serious mental illness are delivering savings for our health plans in the face of heightened utilization trend. Our patient advocacy programs now serve over 7 million members, up nearly 20% from last year. Through proactive tailored support, we help members navigate the system with greater confidence, remove points of friction, and close gaps in care, especially for individuals with greater care needs where early engagement can materially improve outcomes and reduce downstream costs. And we remain deeply committed to improving the experience of care providers. We remain on track to exceed our commitment that 80% of prior authorization decisions will be made in real time in 2027, particularly for routine approved services supporting faster access to care and reducing administrative burden for care providers. Through our HealthOS platform, we're enabling real-time data exchange that aligns information across the system, streamlines interactions with care providers, and makes it easier to deliver care. In summary, while the environment we operate in continues to evolve, our strategic direction remains clear. We are entering 2026 with prudent planning assumptions, focused execution, and targeted investments to unlock the embedded earnings power of our diversified platform. And based on the actions underway this year, we remain confident in our long-term algorithm and our expectation to return to at least 12% adjusted EPS growth in 2027. Before closing, I want to thank our associates for their unwavering commitment to our purpose throughout 2025. In the face of a challenging year for our industry, our teams operated with integrity, compassion, and a deep sense of responsibility to the people and communities we serve. Their dedication is the foundation of our performance today and the progress we are building for the future. And I am deeply grateful for the impact they continue to make across Elevance Health. With that, I'll turn the call over to Mark for a more detailed review of our financial results and outlook. Mark Kaye: Thank you, Gail, and good morning. Elevance Health reported adjusted diluted earnings per share of $3.33 for the fourth quarter and $30.29 for the full year. Relative to our guidance, fourth quarter results benefited from greater tax favorability than anticipated, increasing the full-year contribution from nonrecurring items to $3.75 per share. Solid underlying performance in the quarter enabled us to advance a portion of the investments we had planned for 2026 and to support our workforce as we enter the year. Throughout 2025, we remained focused on aligning pricing to elevated cost trends, refining our product portfolio, and investing selectively in capabilities that differentiate our model and support sustainable growth. We ended the year with 45.2 million members, a decrease of approximately 500,000 year over year, principally reflecting a decline in Medicaid membership due to continued eligibility reverification. Operating revenue for the quarter totaled $49.3 billion, an increase of 10% from the prior year, driven by premium rate adjustments and recognition of higher cost trends and acquisitions completed in the past year. Our consolidated benefit expense ratio was 93.5% for the quarter and 90% for the full year, in line with our guidance. Cost trend development was consistent with our expectations across major lines of business. Our adjusted operating expense ratio was 10.8% for the fourth quarter and 10.5% for the full year. We are managing the enterprise with discipline while making targeted investments to support our long-term performance. During the quarter, we pulled forward one quarter of the approximately $1 per share of incremental investments that we had anticipated in 2026. Our Medicaid operating margin ended the year favorable to the outlook provided last quarter. We are encouraged by the initial results of our targeted efforts to better coordinate care and support high-quality, low-cost treatment pathways. While the benefit of these actions will build over the course of the year, we continue to expect cost trend to be in the mid-single-digit percent range in 2026, with rates lagging this level of trend. As such, we anticipate our Medicaid operating margin for 2026 to be approximately minus 1.75%, in line with what we shared last quarter. Medicare cost trend in the quarter was consistent with our expectations. For 2026, we made deliberate changes to our plan offerings and intentionally exited select geographies, prioritizing plans that deliver value to members while producing sustainable financial performance. As you heard from Gail, we now expect Medicare Advantage membership to decline in the high teens percentage range in 2026 while achieving meaningful margin improvement. We've also repositioned our individual ACA business for higher expected morbidity following the expiration of enhanced subsidies. Similarly, our commercial group risk membership reflects our focus on margin stability and disciplined pricing. Carillon continues to experience strong customer demand for its solutions. However, near-term growth will be moderated by lower health plan membership. The guidance provided today reflects the impact of our anticipated membership headwinds as well as investments we plan to make as we scale our dispensing and home health assets. Operating cash flow was $4.3 billion for the year, or approximately 0.8 times GAAP net income. Cash flow in December was negatively impacted by the timing of certain Medicaid-related payments, which were subsequently received in early January. Incorporating these items, we expect our 2026 operating cash flow to be at least $5.5 billion. Days in claims payable was 41.3 days, a decrease of 0.1 days sequentially. For 2026, we expect days in claims payable to remain in the low forties range, consistent with our long-term target. In the fourth quarter, we repurchased 1.4 million shares for $470 million, bringing full-year repurchases to $2.6 billion. Combined with dividends paid during the year, we returned $4.1 billion of capital to shareholders. Turning to our outlook, we are establishing guidance for adjusted diluted earnings per share to be at least $25.50 in 2026. We anticipate operating revenue to decline in the low single-digit percent range in 2026, driven by a low double-digit percentage decline in risk-based membership, partly offset by higher premium yields and growth in Carillon. Our consolidated medical loss ratio is expected to be 90.2%, plus or minus 50 basis points, reflecting a prudent view of cost trend and shifting acuity in Medicaid. Our adjusted operating expense ratio is expected to be 10.6%, plus or minus 50 basis points, as we maintain operational discipline while investing to scale Carillon, embed AI-enabled and digital capabilities, and simplify the member experience. Our capital deployment plans remain aligned to our long-term framework, and we plan to allocate approximately $2.3 billion towards share repurchases in 2026. Regarding earnings seasonality, we expect to earn approximately two-thirds of our adjusted EPS in the first half of 2026, with 65% of that coming in the first quarter. Based on the actions underway this year, we are reaffirming our long-term algorithm of at least 12% adjusted earnings per share growth annually on average over time, and we expect to return to at least that level of growth in 2027 off our ending 2026 earnings baseline. Finally, our long-term earnings growth algorithm is supported by multiple levers: robust revenue growth, operating margin expansion driven by operational execution and technology integration, and our commitment to disciplined capital allocation. As our business evolves, we are recalibrating our long-term margin targets for the enterprise as well as for each segment to reflect our current portfolio and how we expect it to evolve in the future, both across and within segments. Importantly, the revision to our health benefits target margin is reflective of the revenue mix we have today while maintaining our targets by line of business. These adjustments are intended to provide a clear and durable framework for evaluating performance but do not change our conviction in the embedded earnings power of our diversified platform. And with that, operator, please open the line for questions. Operator: You will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then 2. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, we ask that each participant limit themselves to a single question to allow ample time to respond to each analyst that may wish to participate in this portion of the call. For our first question, we'll go to the line of A.J. Rice from UBS. Please go ahead. A.J. Rice: Hi, everybody. Thanks for the question. I wonder when you think about the cost trend across the major lines of businesses, I think the industry would say, and I think you guys would say that it was elevated in 2025 across commercial, Medicaid, Medicare, and exchanges. I know, Mark's saying that you have a mid-single-digit cost trend assumption at Medicaid, I believe, for the '26 guidance. But I wondered if I could just get you to comment on are you assuming sort of a similar cost trend in '26 in your embedded guidance to what you experienced in '25? Or is there any place you're assuming it gets worse or better? Mark Kaye: Hey, A.J. Good morning, and thank you very much for that question. Briefly, I would say the fourth quarter medical cost performance across the health benefits segment came in generally in line to slightly better than our expectations. We did see some modest variations by line of business, and so we've carried that forward into our planning for 2026. To your question, in commercial, within large group, we do expect cost patterns and margins to be largely consistent with what we saw in 2025, meaning an elevated but stable trend environment with some pockets of high utilization. In ACA, we again expect accelerating cost trend, especially as the expiration of the enhanced premium subsidies affects the risk pool. We expect to see some healthier members exit, and we do expect the remaining population to become more acute. In Medicaid, we expect cost pressure to remain pressured again in 2026 at roughly twice the historical average. And that's going to reflect elevated utilization. It's going to reflect continued misalignment between rates and member acuity. That said, I would say after two years of fairly unprecedented trend, we do expect some moderation versus 2025. So you could think about cost trend here moving into that mid-single-digit range per your question. Then finally, in Medicare, we anticipate higher reported cost trend in 2026 that's going to be largely driven by our membership mix, including a greater emphasis on the D-SNP. So overall, I'd say we're continuing to monitor trends very closely. We're comfortable with how we ended 2025, and we're very confident that our outlook for 2026 is prudent and appropriate. Gail Boudreaux: Thank you, Mark. Next question, please. Operator: Next, we'll go to the line of Andrew Mok from Barclays. Please go ahead. Andrew Mok: Hi. Good morning. Your 2026 membership declines generally came in larger than expected, especially on the Medicare side. Can you walk us through what played out during AEP that prompted the negative revisions and help us understand the components of membership declines within commercial risk between ACA and employer group? Thanks. Felicia Norwood: Thank you for the question, Andrew. I'm going to have Felicia Norwood start, and then maybe Mark talk a little bit about the second part. Good morning, Andrew, and thank you for the question. You know, our enrollment during AEP and the member composition is really aligned with our focus on margin. As you know, we took very deliberate steps to reposition our business to deliver sustainable value for our members and move the business towards our margin objectives. So while our outlook for our membership is going to be in the high teens percentages, as Gail referenced, and this is below our expectations, we're really pleased at how members reacted to our emphasis on D-SNP as well as our HMO products as we go forward. From a profitability perspective, I will say the mix of the lives that we lost was very consistent with our strategy. A majority of the attrition occurred in PPO products and in HMO products in geographies where we didn't offer a comparable alternative, where we were intentionally disciplined in repositioning our product vis-a-vis the broader market. The outcome that we've seen in January AEP reflects deliberate choices. The products and the members that we exited were less aligned with our long-term objectives, particularly as we continue to focus on our D-SNP products. Importantly, and I think this is critical, we're positioned to deliver meaningful Medicare margin improvement to at least 2% in 2026. It's a meaningful step up year over year. So very pleased at how things turned out. Higher membership losses, but very consistent with the expectations. And then I'll turn it over to Mark for the rest of the responses. Mark Kaye: And, Andrew, on your question on the employee group risk membership, we are expecting to end 2026 down in the high single-digit percent range. And the short answer here is it's just a strong focus on margin discipline. Some of the expected decline is really driven by deliberate price decisions that we've made, maybe more specifically in a subset of accounts, including some of the lower or negative margin public sector business that we had. And we really did make a conscious decision to hold the line on pricing and not pursue business that returns below our margin threshold. Gail Boudreaux: Yep. So thank you for the question. And I think the headline there again is this played out in a very disciplined way against the pricing expectations we set. And I think we feel very good about where we're coming into '26. Next question, please. Operator: Next, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead. Justin Lake: Thanks. Good morning. I wanted to ask about margin in the health benefits business for '26. So you mentioned Medicaid margins of minus 1.75%. I appreciate the help there. And you did say that margins were a little better than expected, I think, Mark, in the fourth quarter. Can you expand on the drivers of that in terms of pricing and cost as you go into 2026? And then any color on where guidance assumptions sit for margins for the exchanges in Medicare Advantage would be helpful as well. Thank you. Mark Kaye: Justin, thanks very much for the question. I thought a good place for me maybe to start here is really to talk about how we ended the year from a margin perspective, then I'll give a little bit of color in 2026. So overall, health benefit margins very much in line with our outlook and our expectation. On Medicaid, margins were pressured in the fourth quarter, but they did track slightly better than our outlook that we gave in October. That really reflected two things. One, we had some favorable prior period development come through. We also had some modest retroactive rates. And if you exclude those two items, Medicaid margins completely in line with expectations. They still reflected that elevated utilization, they still reflected that ongoing reverification-driven risk called deterioration and the misalignment of our rates and acuity. On Medicare, fourth quarter margins, inclusive of the IRA-driven Part D seasonality, were largely in line with our expectations. They reflected the prudent assumptions that were embedded in our 2025 bids and overall guidance. And then in the commercial large group, cost patterns and margins, I would say, were, again, largely consistent with our expectations. On the ACA side, a smidgen better than our prudent outlook. Cost trends were significantly above historical levels, but, again, very much in line with what we were expecting. And so as we think about 2026, the guidance that we put out this morning really incorporates that framework. That really means that continued pressure in Medicaid offset by improvement in Medicare Advantage, as you heard Felicia talk about, and then better performance in the individual ACA space. And then lastly, I had a quick question on flu. So maybe let me go ahead and cover that here. We did see a meaningful uptick in influenza-like activity in December, that did have a modest adverse impact on the fourth quarter benefit expense ratio, and we have carried some of that experience into our 2026 planning. Specifically, we are expecting a first-quarter headwind of about 20 basis points for flu that's already embedded in our outlook. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead. Lance Wilkes: Great. In the Medicaid business, could you talk a little bit about rate outlook for 2026? And then could you help frame for us how we should be thinking about this on a go-forward basis? Respect to, obviously, you've given the trend estimate, how should we be looking at kind of rate expectations, what states are doing as far as program changes, and then what are the opportunities and the achievable objectives for medical management? Thanks. Felicia Norwood: Good morning, Lance, and thank you for the question. We are contemplating a composite rate increase in 2026 in the mid-single-digit percent range net of certain known risk corridor impacts. I will say the final rates that we've received from states for January, and as you know, January represents about a third of our Medicaid premium, those rates were in line with our expectations. But for these states, the rates, while modestly above the historical levels, will still lag trend in 2026. Given the ongoing membership attrition and the shifting risk pools, we continue to see as a result of some ongoing state reverification activities. You mentioned program changes. You know, I will say the rate discussions today are increasingly tied to broader program changes and benefit designs that states are more receptive to consideration. And I think that's very important as we think about trying to maintain long-term sustainability and the adjustments that need to be made in states around budget challenges that we're going to see in 2026. We are always engaged in constructive conversations with our state partners, and we're also taking actions ourselves to help control what states are seeing in terms of their Medicaid budgets by doing all of the things that states expect, that tightening our cost management, increasingly focused on those high trend drivers that you heard earlier around behavioral health, ADA, and other services. Certainly very much engaged in program integrity activities to make sure that the program reflects soundness as we look at ongoing issues in the program. Gail Boudreaux: So good constructive conversations with rates, a continued lag though in terms of the trend. But I would say we continue to be very engaged in having a program this long-term sustainable in our Medicaid program. Thank you. Next question, please. Operator: Next, we'll go to the line of Josh Raskin from Nephron Research. Please go ahead. Josh Raskin: Hi. Thanks. Maybe just big picture. If you could give us a little bit more details and speak to what gives you that confidence to confirm the long-term EPS growth target of 12% plus starting in 2027? In light of the trends that you've seen in the past two years. Is there something specific in Medicare or Medicare or the commercial markets that's just an opportunity to start growing earnings in '27? You seeing something in Carillon's side that maybe leads to a stronger acceleration of growth there? And lastly, I assume this includes your view of the 2027 MA rates post the prelim notice? Gail Boudreaux: Yeah. Thank you for the question, Josh. You know, I think it helps as we frame '27. Let's start with '26. We guided to an adjusted diluted EPS of at least $25.50. And, again, as I shared, you know, we see that outlook as prudent and achievable. And it's based on actions that are already underway to reposition our business and improve margins across the enterprise. As I step back, '25 was about strengthening the foundation. We tightened pricing discipline, we improved our execution, and we advanced our affordability through Carillon. And as you just heard, Mark, the fundamentals came in where we expected them to. And I think that work matters as we think about the next few years because it gives us a very clear line of sight and a lot of confidence in the outlook that we're laying. My headline for '26, it's all about execution. The fundamentals are there. Looking to '27, we have confidence in at least 12% adjusted EPS growth coming off of our '26 ending baseline. And again, that's because it's driven by the same fundamentals that we saw at the '25 and into '26. You know, again, over the past two years, we've made very specific portfolio targeted decisions, our pricing has hardened, and our operating decisions are designed to protect our earnings base and position the enterprise for durable growth. That leverages the unique capabilities, and I think our diversified platform, we're going to start to see come through. And there's three points I just want to underscore. First, the key earnings levers are already in motion. So that puts upsets in place for '25 and '26. Again, pricing, care management, and the portfolio we feel are positioned. Second, our '26 outlook is intentionally prudent, so the actions so if those actions mature, we can capture more operating leverage, and that sets up clear step up into 2027. And third, and I think this is really important to your question, the path isn't predicated on a single assumption. It's built on multiple independent levers and disciplined execution across commercial, Medicare, Carillon, and Medicaid. And that's why we have the confidence both in the twenty-seven and in long-term in our long-term earnings algorithm. Thank you for the question. And that confidence is behind our outlook in 2020 and the growth in '27. So, hopefully, that provides some clarity. Next question, please. Operator: Next, we'll go to the line of Lisa Gill from JPMorgan. Please go ahead. Lisa Gill: Hi. Thanks very much. Good morning. I want to go back to Mark's comments on the investments that were pulled forward. Mark, I want to make sure that I heard correctly. You said it was roughly $1 of investments, but a quarter was pulled forward. So should I think that 75¢ is still embedded in your guidance for 2026? And can you talk about specifically what bucket those investments are in, and how do we think about how it flows through the model? Mark Kaye: Lisa, good morning, and thanks very much for the question. Maybe let me do a little bit of a broader framing, and then I'll get specifically to your question. So our results this morning do include $3.75 of discrete noncore items embedded in our outlook, and that is $2.75 more favorable than what we contemplated in our October call. So what changed versus prior expectations? Well, that incremental favorability that was driven entirely by strategic tax items that came in better than expected as we finalized results, particularly in the fourth quarter. Importantly, and I want to emphasize this point here, you know, underlying operating performance came in as expected. Meaning medical cost trends. So given that outperformance, operating execution, they're consistent with our outlook. In those tax-related benefits, we made two intentional decisions. One, we pulled forward a quarter of the approximately $1 incremental investments that we had previously planned for 2026. And two, we deployed an additional 25¢ towards retention and targeted workforce investments here. So it gives us a lot of confidence as we set the baseline for 2026. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Ann Hynes from Mizuho Securities. Please go ahead. Ann Hynes: I know in your long-term guidance, you're lowering the margin profile of each segment. Within the Healthcare Benefits segment, can you let us know what changed your long-term targets for Medicaid, Medicare, and commercial? And then on Carillon, it looks like you're lowering the Rx part of it. Is that just driven by membership losses, or is there anything else that's lowering that target? Thanks. Mark Kaye: And good morning. So most important here, we have not changed the underlying margin expectation for any line of business within health benefits. And that continues to reflect the risk that we assume and the value that we deliver for employers and the government programs that we support. What has changed is how we calibrate the health benefit segment margin to the portfolio we are operating today, applying the same line of business margin frameworks that we've always used. So as we worked through an elevated cost trend environment, I would say commercial growth has been more measured than we originally anticipated. Also, as we prioritize disciplined pricing and margin integrity over volume. At the same time, the composition within commercial that's also evolved. So individual ACA now represents a larger share of the statement relative to group commercial, and that obviously carries a different margin profile. So when you reflect these dynamics through the existing line of business margin ranges, the result is that mid-single-digit health benefits segment margin expectation. The key point here, look, this is not about a changing strategy, change in underwriting discipline, or pricing. This is just a recalibration to better reflect the mix of our business today and a prudent view of the operating environment. Gail Boudreaux: And why don't we have Pete talk a little bit about Carillon? Peter Haytaian: Okay. No. Thanks a lot for the question, Ann. So you asked about the Rx margin longer term. And, yes, we are adjusting them. It's a positive story around really growth and diversification of our portfolios. We talked about we're seeing a lot of growth in Rx. And in fact, just to reflect on what happened this past year headed into '26, it was our best growth year ever. And part of that is the composition of the business that we're growing through. We're starting to see a lot more large, upmarket jumbo accounts flowing through our business. That's one factor, and that comes with a different margin profile. In addition, we continue to build out our specialty business, and that's going really well both internally and externally. And again, that comes with a bit of a lower profile. And you've heard Gail and Mark talk about the investments that we're making in that regard. Then finally, I would say longer term, we're very mindful and respectful of what's going on from a perspective, and I think we're being very prudent in this regard as we think about the longer-term profile of the Rx business. For that question. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Ryan Langston from TD Cowen. Please go ahead. Christian Borgmeier: This is Christian Borgmeier on for Ryan Langston. Can you share where you began the year in terms of ACA membership after the annual enrollment period? Data on sign-ups nationally came in higher than we expected given the firing sub, but I know there's some attrition typically in the first quarter. I know it's early in the year, but any notable changes in utilization patterns from this line of business in January? Thanks. Felicia Norwood: Christian, good morning, and thank you very much for the question. On the individual ACA, we are guiding towards at least 900,000 members at year-end 2026. And that outlook really reflects two drivers here. First, the expiration of the enhanced premium tax credits, which we expect is going to pressure retention and increase lax activity. And second, intentional exits that we've made as part of our repositioning of the book for a more sustainable profile. Importantly, coming out of open enrollment, membership is up approximately 10%. And that helped in part by some of the modest growth that we've seen in markets. We first entered in 2025, which offsets some of the intentional attrition that we expected in our core blue states. Overall, I'd say trends through open enrollment are largely in line with what we've seen in the broader market. The key swing factor, and I think this gets to the heart of your question, is really now a situation rates. And, you know, that's going to come down to member premium payments, and that's behavior, and that typically is going to become much clearer through early April as members work through that normal billing cycle over the next few months. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Scott Fidel from Goldman Sachs. Please go ahead. Scott Fidel: Hi, thanks. Good morning. Interested if you can provide us with an update on capital deployment priorities for 2026. And in particular, maybe just sort of touch on the M&A priorities in terms of, one, just appetite for doing transactions this year just given the dynamic backdrop. And then two, you know, looking over the last several years, certainly, you've had a lot of activity on the M&A side on Carillon services and in particular, acquiring risk-based platforms to integrate into that. Just interested if that remains a priority at this point or whether you're more focused on integration of those assets you've acquired over the last several years? Thanks. Mark Kaye: Scott, thank you very much for the question. I'd say in the near term, our capital allocation is going to reflect a more conservative posture. Our priority here, look, is to maintain balance sheet strength and strong credit profile, fund targeted investments that accelerate margin stabilization, and Carillon's continued growth, and then to remain opportunistic around share repurchases, especially where we see compelling value. Over the longer term, the capital allocation framework is unchanged. We remain completely committed to a balanced approach that supports a long-term growth algorithm, including reinvestment back into the business. Disciplined M&A focused on some of the integration or integrated capabilities have strengthened our competitive position and then, of course, consistent capital return back to shareholders through dividends and share repurchases. On M&A specifically, our near-term priority is really focused on that integration execution, really fully scaling and realizing the value from recent acquisitions. And so at least in 2026, you should expect a lower level of M&A activity and a much greater relative emphasis on opportunistic share repurchases. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please go ahead. Kevin Fischbeck: Great. Thanks. Wanted to follow-up kinda on this margin commentary and the changes you're doing there. I guess, maybe putting in the framework of just the changes that you've had in enrollment across the different businesses that you know, I definitely applaud when managed care companies exit markets that are not profitable, low margin. I think it's 100% the right thing to do. But given that the membership numbers have been lower than we would have thought, I guess, across most of the products, is there anything that we should be reading into as far as where you are strategically or competitively in these markets? You know, the magnitude is more than we would have expected, and it's a broad-based across-the-board dynamics. So just trying to understand if there's something we should be reading into this and why, like, this business mix that you're now forecasting isn't is different than the business mix you thought, you know, a few years ago when you provided your previous margin assumptions? Thanks. Gail Boudreaux: Yes. Thanks for the question. I guess I would simply say the headline is no. This is a very disciplined approach in each of the businesses. And let me just touch on them. In the commercial business, we made very specific decisions around the ACA and feel very good about the sustainability of where the platform and the membership is coming out. And as you heard from Mark a few minutes ago, I think we've been we positioned ourselves well for sustainable business there. On the broader commercial risk-based business, we actually had quite high retention amongst our commercial business. But made some very conscious pricing decisions around public sector accounts that have been below profitability. So, again, this is a repositioning of the portfolio ready for growth. On the ASO, we had a very strong national account selling season, with great retention. I think Medicaid represents really just the redetermination impacts, but we continue to grow and have won accounts in some of the more complex populations. So, feel good there. And I feel very good about the positioning in Medicare Advantage. We came into this. We were very clear what we needed to do. As you heard, we believe we have improved our margin and, again, our sustainability. So I actually would say where we are entering '26, we feel quite strongly positioned for future growth in a very sustainable strong margin position. So thanks for the question. Next question, please. Operator: Next, we'll go to Erin Wright from Morgan Stanley. Please go ahead. Erin Wright: Great. Thanks. So, clearly, the industry was somewhat caught off guard with the MA rate notice this week, and just can you remind us of just your response? I think we know that to some extent, but just ability to mitigate this on top of the cuts that you're making this year as well. I assume you'll continue to take a disciplined approach here, and just your thoughts on what this means for the industry, for the MA market as a whole, and from a policy perspective. What we could see going forward? And just do you think also more of the risk adjustment changes being made? Are you more or less exposed relative to the industry on that front? Thanks. Gail Boudreaux: Yeah. Well, thank you for the question, Erin. And I'll start with just your sort of between-the-lines question, which is we will continue to take a very disciplined approach in positioning of our Medicare book. But I think it's important to start off by first framing the implications of the advance notice. Medicare Advantage is a critically important program for seniors. And it brings together, as we've said, affordable coverage, coordinated care, and supplemental benefits that members rely on to stay healthy and independent. We are still going through the details. We just got some of the advance notice. But at a high level, the advance notice is effectively flat, which you've all reported on. And quite frankly, it just doesn't keep pace with the current medical cost and utilization trends, and that does create real pressure on benefit stability and affordability for seniors. For MA to remain strong, the program needs to be stable and sustainable. And stability gets undermined when payment rates don't keep pace with the utilization and cost trends, especially as the member needs grow more and more complex. So, you know, we're going to continue to advocate, obviously, because if funding consistently lags the reality on the ground, the levers that we have are benefits, networks, premiums, exiting geographies. And quite frankly, that's not good for seniors, and I don't think it's good for the program. And we do believe this you know, we see more than 55% of seniors selecting this program, so it's very popular. We're also supportive of the measures that protect the integrity of the risk adjustment program. Now if you think back, risk adjustment exists for a reason. It's to ensure that plans are paid appropriately for the health status of the members they serve. So as we look ahead, we're going to continue to work with CMS on two things that have to go together. One is the appropriate funding that reflects the actual utilization and cost trends to support program stability, and two, if changes to that risk adjustment framework are proposed, they need to be accurate, and predictable and trusted to avoid disruption, I think, in negatively impacting seniors. So our priority is, again, work with CMS and also protect seniors' access and affordability because we know a very popular program that delivers significant value for seniors. So thanks very much for the question. Next question, please. Operator: Next, we'll go to the line of Ben Hendrix from RBC Capital Markets. Please go ahead. Ben Hendrix: Great. Thank you very much. I just wanted to go back quickly to the Carillon margin discussion. You noted expansion of risk-based solutions in Carillon services through 2025. I was wondering if you could remind us of the new services and your product lines where you're taking risk. To what degree could that expansion provide any offset to the shifting margin dynamics you mentioned in CarillonRx? Thanks. Peter Haytaian: Thanks. I'm going to have Pete address your question. Thank you. No. Thanks for that question. I think it's important to step back and just talk about how we address risk in Carillon because I think it's very important strategically. We're very intentional and disciplined about how we do that and take on risk. We, as you noted, have a diverse set of services and products and offerings. And importantly, in the infrastructure of Carillon, we're very disciplined around cost of care and managing trend across all these relationships. Also say that we have a good mix of fee-based business as well as risk business. And then when you break down our risk portfolio, we approach it in a very, you know, different way, in a diverse way. We're taking risk on a category of service basis in some cases, as well as on a whole, you know, health risk basis. And, again, we built in appropriate protections, with risk corridors and in terms of how we approach that. So I do think, you know, from an enterprise perspective, the way we approach that is very important in protecting our growth and our margin, you know, profile. In terms of services in which we deploy risk, because you asked that as well, it varies, you know, in most of our product offerings, we are assuming risk, like I said, sometimes on a category of care basis or on a whole risk basis. In some instances, we're on a fee basis, but we're excited about the proliferation of that. Our advancement of Whole Health going forward. When you think about our new offerings like SMI, when you think about what we're doing around oncology, when you think about what's happening with CareBridge, these are all risk offerings that are deploying a lot of value from a cost of care and quality perspective for the enterprise. Gail Boudreaux: Yeah. Thanks, Pete. And the only thing I'd say is we have a very strong external growth pipeline, which I think validates what Pete is saying. And, again, we're looking at serving the more complex populations based on the experience we have in our own health plans. So a lot of those programs around oncology, severe mental illness, orthopedics really give us a growth opportunity. So thank you for the question. Next question, please. Operator: Next, we'll go to the line of David Windley from Jefferies. Please go ahead. David Windley: Hi. Thanks for taking my question. I wanted to ask on the Medicaid membership. Expected decline. Is that all same store, or does that contemplate an exit of a state or an end of a contract? I'm thinking about Georgia. And then the 9% in total is a little bit higher than we were expecting. Your 125 basis points, I think, of margin pressure in Medicaid is consistent with what you had said before, and so wanted to try to reconcile those that that additional membership decline doesn't further disrupt the margin? Thank you. Felicia Norwood: Good morning, David, and thank you for the question. You're right. We've guided to Medicaid membership decline around 750,000 members for 2026. And this really reflects really same store. So a continuation of the challenges that we've seen across states as some states have really implemented more stringent eligibility reverification requirements, and that has happened. It happened consistently in 2025. And we thought it was very important to be prudent as we took a look at 2026 to maintain that same posture. Continuing to work closely with our states, but certain eligibility requirements as well as program changes will lead to some of those reductions in 2026. Mark Kaye: And then, Dave, how that carries in forward into our margin guidance of approximately negative 1.75 for the year is really grounded in three core assumptions. Number one, cost trend is going to remain elevated. We have planned for medical cost trend in that mid-single-digit percent range, still materially above historical norms. And number two, rates as we discussed early on the call, are going to improve. But they will still lag trends. You could think about that as roughly a third of those Medicaid premiums reset in January. And then third, not relying on rates alone. We are using all the levers we control, medical and pharmacy cost management, expanded BH interventions, etcetera. And so taken together, we think our outlook for Medicaid margin is prudent for 2026. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Sarah James from Cantor Fitzgerald. Please go ahead. Sarah James: Thank you. Commercial risk guidance is down about 700,000 lives while ACA is growing. Can you quantify how much of that decline reflects pricing actions on those government accounts versus employers shifting preference to ASO? And in your long-term health benefits margin guidance, does the mix change assume further commercial risk attrition or mainly the impact of the actions taken this year? Mark Kaye: Very much for the question. Maybe just a moment here to clarify. So on the individual ACA, we are guiding to at least 900,000 members at year-end 2026. Important to put that in the context of, obviously, where we ended 2025. For the employer group risk-based membership, we do expect to decline year over year in that high single-digit percent range. We spoke a little bit about that earlier. And that's primarily because we're prioritizing margin. And then finally, in ASO, we are expecting a pretty good season. I'm actually going to ask Morgan to help here because he deserves a lot of credit for our success. How we're guiding 2026. Morgan Kendrick: Thanks, Mark, and thanks, Sarah. Regarding the ASO business, national accounts, and Gail mentioned it earlier, so just a spectacular year, which I think sort of speaks to the health of the assets across the entire enterprise when you look at it. And a couple things were sort of driving that. We, Gail mentioned beginning the conference today around second blue bid, where this is the first year that we've had the opportunity for employers in competing geographies against us could actually quote with our organization if they wanted. So when we think about how it came together, we've got about we had about 11 bids in the second blue category for 2026. Won nine of them. And the tee-up of the actual pipeline for 2027 looks strong and also '28 as we sit here. So whether we're talking the local markets or the national markets, the self-funded business has done quite well. We expect it to continue to. And with that, as you also heard from Pete earlier, the pull-through with the CarillonRx has been really, really strong. And notably in the upmarket where it had not been formally. So we're pleased with it, and look forward to continued success. Gail Boudreaux: Thank you. Next question, please. Operator: Next, we'll go to the line of Jason Kasorla from Guggenheim. Please go ahead. Jason Kasorla: Great. Maybe just a question on aggregate Carillon. It looks like for '26, revenue is growing across both Rx and services. Margins are generally holding in for both despite the enrollment losses. For your health benefits business. Maybe can you just help unpack or bifurcate CarillonRx and services revenue and margin impacts specifically coming from the health benefits enrollment losses versus perhaps the growth in margin maturation you're seeing from external clients? Be helpful. Thanks. Peter Haytaian: Alright. I'll let Pete address that. Thanks. Yeah. No. Thanks for that question. Let's step back and just talk about first setting up Carillon for 2026 of what we came off of in 2025, which was very, very strong. I think you saw that, you know, come through. We had almost 60% growth on the services side and on the pharmacy side, over 20% growth. And we're very encouraged in terms of what we're selling, a diversity of services. A growing portfolio of solutions. We launched CareBridge last year on the Rx side. As I noted before, we're selling, you know, upmarket to a much greater degree. And importantly, that momentum is continuing into 2026 with respect to your question. External sales. In fact, I'll emphasize this. We have the best year both in services as well as Rx in terms of growth. And when I mentioned external growth on the pharmacy side, that's the integrated, you know, ASO, you know, growth going forward. As you noted, those tailwinds are being offset by affiliated membership attrition. When you think about services, we also had one large external client which we had planned for, that went from a risk basis to a fee basis. But that was the largest driver in terms of, you know, headwinds overall. If you step back, though, and you take out that internal membership headwind, our overall growth would have been on the services side, high teens, low twenties. And on the Rx side, in the low double-digit range. So consistent with what we've guided to, longer term. And I would think of that as a mid-single-digit sort of opt-in impact on the affiliated membership. Gail Boudreaux: Thank you, Pete. I think we have time for one last question. Operator: And for our final question, we'll go to the line of George Hill from Deutsche Bank. Please go ahead. George Hill: Hey, good morning guys. And really appreciate you sneaking me at the end. Mark, the topic where I'm getting most questions is can you just contextualize a little bit more what does the ending baseline mean? Talked about earnings for fiscal '26 being front-end loaded. Should we kind of be thinking about that last period run rate as the baseline for 12% growth? And then maybe talk about any visibility to one-time any one-time items in '26 and whether or not they'll be included or excluded from the baseline. Thank you. Mark Kaye: George, thanks very much for the question. This is really a good one to conclude on. So let me try to bring it together the key themes and messages that we've delivered on the call today. So we have established the 2026 EPS guidance of at least $25.50 anchored in what I consider very prudent achievable assumptions supported by actions that we have already taken or underway to reposition our business and improve margins across the enterprise. And at a high level, you could think about the EPS bridge to $25.50 as really being driven by a few key building blocks. Stable performance in commercial fully insured, and continued strength in commercial fee-based, continued progress towards sustainable performance in ACA, Medicaid margins compressing to approximately negative 1.75 consistent with our view that 2026 is the trough year, more than a 100 basis points of operating margin improvement in Medicare Advantage to at least 2%, low single-digit operating gain growth in Carillon where external momentum is partially masked by those affiliated health benefit membership declines. And then below the line, a meaningful step down reflecting the nonrecurrence of the 2025 investment income and a return to a more normalized tax rate. So putting all of that together, again, the guidance of $25.50, prudent, achievable assumption. Gail Boudreaux: Okay. Thank you, operator, and thank you to everyone on the line. As we close, Elevance Health is entering this year with a clear strategy and a strong sense of purpose. We're focused on improving affordability, simplifying health care, and applying our capabilities in ways that drive better access, outcomes, and experiences for members and care providers and stronger health for the communities we serve. While the operating environment remains dynamic, our diversified platform and differentiated Whole Health approach give us confidence in the path ahead, and the actions we've taken position the enterprise to drive sustainable earnings growth over the long term. Thank you again for your continued interest in Elevance Health, and have a great rest of the week. Thank you. Operator: Ladies and gentlemen, a recording of this conference will be available for replay after 11 AM today through February 20, 2026. You may access the replay system at any time by dialing (888) 566-0046, and international participants can dial (203) 369-3677. This concludes our conference for today. Thank you for your participation and for using Verizon conference.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to V.F. Corporation's Q3 Fiscal 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed into today's call, please press 9 to raise your hand and 6 to unmute. I will now hand the conference over to Allegra Perry, Vice President of Investor Relations. Please go ahead. Allegra Perry: Hello, everyone. Welcome to V.F. Corporation's third quarter fiscal 2026 conference call. On today's call, we will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless we say otherwise, amounts that Bracken and Paul refer to on today's call are all on an adjusted constant dollar continuing operations and excluding Dickies basis, which we've defined in the presentation that was posted this morning on our Investor Relations website. We use those as lead numbers in our discussion as we believe they more accurately represent the true operational performance and underlying results of our business. We may also refer to reported amounts which are in accordance with US GAAP. Reconciliations of GAAP measures to adjusted amounts are found in the supplemental financial tables which are included in the presentation where we identify and qualify all excluded items and provide management's view of why this information is useful to investors. Joining me on today's call are V.F.'s President and Chief Executive Officer, Bracken Darrell, and EVP and Chief Financial Officer, Paul Vogel. Following our prepared remarks, we'll open the call for your questions. I'll now hand over to Bracken. Bracken Darrell: Thank you so much, Allegra. Before I get into anything else, I can't help but talk about Alex Honnold. Over the weekend, Alex set a record for the biggest urban free solo climb in history, climbing the 1,667-foot skyscraper Taipei 101. Alex has been an athlete of The North Face for over twenty years, and he's one of the many super impressive and brave human beings we work with as we develop products and marketing. You might remember just last quarter, we highlighted that Jim Morrison completed the first ski descent of the North Face of Mount Everest. That was captured by another athlete of ours, Jimmy Chin, and will be released as a feature film later this year. Jim's backstory is simply incredible. Our athletes continue to push the boundaries wearing The North Face product, and we continue to push the boundaries of our results. So let me get into the third quarter. We had a strong third quarter. I'm incredibly proud of the team, and I'd like to thank all of our employees for their relentless hard work and dedication. Importantly, our business improved in Q3 relative to the last quarter, returning to growth during our peak holiday quarter. In Q3, total revenue was up 2%, exceeding our own expectations. Over 75% of our business was up by revenue, and excluding Vans and Dickies, revenue is up 5% versus last year. On a global basis, DTC returned to growth, up 3%, driven by the US, particularly in digital. We also had one of our strongest performances in The Americas in over three years, up 6%, driven by growth in both DTC and wholesale. As you'll remember, fixing the US has been a top priority of our turnaround. Our revenue performance also helped drive stronger than anticipated operating income of $341 million. Reported net debt, excluding lease liabilities, was down almost $600 million versus last year, or down almost 20%. To summarize, we had a very strong Q3, growing revenue, expanding margins, and reducing debt, exactly as we said we'd do. Let's talk through some of our highlights from our brands where we continue to see continued progress across the board. Starting with The North Face, which delivered strong growth during the peak season with revenue up 5%. Both DTC and wholesale were up globally, and I'm particularly proud of the fact that we grew 15% in The Americas. The North Face is generating broad-based growth across categories. In the quarter, all product categories were up versus last year with strength in performance apparel and footwear, which was up double digits again this quarter. Last quarter, we talked about the expanded product offering of Summit Series, which is also performing strongly with double-digit growth in all regions. We're making inroads as well into elevated products and elevated fabrication. Let me give you an example. Our leather collection, I have the jacket right in front of me, with a leather jacket priced at $1,100 sold out in less than twenty-four hours. The brand was again recognized for design and innovation through multiple awards, including the top outdoor brand in America, in Times the world's best brands of 2025 list. You might remember we also won Fast Company's 2025 innovation by design award, Times Best Innovations of 2025, and the popular science 50 greatest inventions or innovations of 2025. In addition to elevating our product offering, we also continue to advance on another key strategic priority to enhance our distribution. During the quarter, we opened our largest global flagship store in New York on 5th Avenue, which represents how we're reimagining physical retail for the brand. The store has delivered strong results in its initial weeks of trading. We continue to refine and advance our marketing tactics. Our social-first marketing approach is driving brand heat while broadening reach, and Q3 marked our strongest social-first performance to date. And that was before Alex's climb. During the quarter, we launched the second installment of our collaboration with SCIMS, which also delivered strong results. As you can see, lots of great developments at The North Face. Moving onto Timberland, this is another brand with great momentum. Brand revenue was up 5% in Q3 with global growth across both wholesale and DTC. The Americas had another strong quarter, up 9%. From a product perspective, the six-inch premium boot was a key driver behind the brand's strong momentum. We're innovating against this core icon while also continuing to develop products across other categories. The boat shoe continues to grow strongly, up double digits in all regions, and we're developing the brand's product lineup, including new transitional styles for the warmer season. Timberland has incredible energy, and we're amplifying that brand's cultural relevancy and reach through social-first marketing as well. Building on last quarter's trends, search interest continues to grow in the US and key EMEA markets. The brand consistently shows up in key cultural moments and is embraced by celebrities everywhere, from courtside to the red carpet. As you can probably tell, I couldn't be more excited about Timberland's growth opportunity over the long term. More to come. Moving on to Altra, it's clearly a smaller brand today than our top three, but I have to tell you, I love the brand's energy and distinctive products. The potential here is large and probably underappreciated. The brand delivered another quarter of extremely strong growth, up 23% versus last year. Key franchises in both trail and road running continue to drive growth, and we're fueling this growth with more and more innovation. New products are delivering, including Via and TEMP six. We're investing strongly in marketing, given the very high ROI. We're well on track to exceed $250 million in revenue for Altra in fiscal '26. But the addressable market is large and growing. Now let's turn to Vans. We continue to make progress here, and we're seeing green shoots. In line with our expectation, revenue was down 10%, similar to last quarter. You already know that we're focused on executing the key commercial moments as we continue to refresh and upgrade the product lineup. This strategy is starting to deliver. In fact, global digital revenue grew in the quarter, led by The Americas. In terms of product newness, new products delivered growth again this quarter with consistently strong trends delivered by the super low pro, the skate loafer, which I'm wearing right now, and the CrossFath XC, where we continue to innovate with design, colors, and materials. Elevation, innovation, and newness are also increasingly visible and having an impact across our icons. The authentic and the slip-on are delivering improving trends, benefiting from a rising interest among the high fashion brands in skate-inspired shoes. The K-pop Demon Hunters collaboration launched in early December, just a few months after the movie hit the screens. In this one, we showed how fast we can bring a product to market. We went from idea to store shelf in ten weeks. We're working on product creations free to cross our portfolio now for 2027. Turning to marketing, our shift in strategy is visible. Our holiday campaign, Meet the Vans, featured lifestyle product and drove online energy during the gift-giving holiday period. Our digital traffic trends improved in The Americas and in EMEA, which led to growth in our global e-commerce sales for the first time in over four years, led by The Americas. We are excited about the influence we see as well. We'll see later this year from SZA. In her role as artistic director. Just last week, SZA was in Paris at Paris Fashion Week, seated in the front row at the Louis Vuitton and Dior fashion shows, wearing bespoke Vans, old school and authentic, bejeweled with gemstones by New York-based jewelry designer Rachel Goatley. We'll see more of SZA and her artistic vision for the brand in the coming months. In summary, Vans continues to make progress. I'd like to share a planned transition now within our global leadership team. Our Chief Commercial Officer, Martino Scabbia Grini, is stepping down from his role. Martino will continue to support the company as an adviser to me to ensure a smooth transition. Brent Hyder will assume the role of Chief Commercial Officer, in addition to his continuing role as President for The Americas, a role he's held since last spring with strong results. I want to sincerely thank Martino for his twenty years of outstanding contributions to the company. Martino's energy, passion, and deep focus on design and consumer-led brands have left an enduring impact on our business and on me. I'm confident this leadership team, comprised of best-in-class talent, will enable us to fulfill V.F.'s significant growth opportunities ahead. To conclude, we have momentum. And now we've gone positive for the first time in a while. We're on track to deliver our targets. I'll now hand it over to Paul who will dive in deeper into the numbers. Paul Vogel: Great. Thank you, Bracken. Before I go into the details of Q3 actuals and Q4 guidance, let me give you the punchline for how fiscal 2026 is shaping up. Annual revenue will be flat to up this year versus last year. Gross margin will be at 54.5% or better, within striking distance of our fiscal year 2028 target of 55%. Operating margin will be 6.5% or better. Operating and free cash flow will be up versus last year. Leverage will be 3.5 times or lower, down from 4.1 times at the end of fiscal 2025. So now let's turn into Q3. We delivered strong results with revenue up 2% and nicely ahead of our guidance. Our operating profit was also better than planned. As Bracken said, we had a good holiday selling period across our key brands. Q3 revenue was $2.8 billion, up 2% year on year on a constant dollar basis, above our guidance of down one to down 3%. The better-than-expected performance was primarily due to stronger results from The Americas, across both DTC, especially e-commerce, and wholesale. By brand, The North Face grew 5%, led by growth in both DTC and wholesale, with particularly strong results in The Americas region, up 15%. As anticipated, APAC was down 3% and EMEA was down 2%. Vans revenue in the quarter was down 10%, broadly in line with last quarter and in line with expectations. And finally, Timberland had another good quarter with continued momentum with revenue up 5%, reflecting growth across all channels and in The Americas and EMEA, while APAC was down. By region, the Americas region had a strong performance, up 6%, while the international regions performed as expected with EMEA region down 3% and APAC down 4%. And lastly, by channel, DTC was up 3%, our first positive quarter in a couple of years, driven by strong e-commerce performance, while wholesale was down 1%, although growing in the Americas region. Our adjusted gross margin was up 10 basis points versus last year, as mix and sourcing savings resulted in lower product costs and offset the impact from tariffs. As expected, we had the first meaningful impact of tariff flow through the gross margin in the third quarter. The unmitigated impact was approximately $40 million. And as a reminder, pricing actions were only implemented in Q4 and did not have an effect in Q3. Our SG&A rate leveraged 20 basis points as we continue to realize cost savings across the business. SG&A expense constant dollars was up 1%, due to increased marketing efforts and higher variable costs associated with higher revenue within the quarter. Our adjusted operating margin for the quarter was 12.1%, up 30 basis points year over year. Net interest expense of $35 million was a little better than expected and below last year. Tax was $81 million or a rate of approximately 26%, also better than our guidance due to slightly different geographical mix in the quarter. And finally, adjusted earnings per share was 58¢ for 61¢ in Q3 of last year. Now moving on to our balance sheet. Inventories were down 4% in a constant dollar year on year. On a reported basis, free cash flow through Q3 was $513 million in line with our expectations for the year and broadly flat to last year. Year to date, cash flow includes the payment of approximately $100 million of incremental tariffs. Overall, we are right where we expected to be. Reported net debt, including lease liabilities, was down approximately $500 million versus last year, or down 11%. In addition, earlier this month, and post the end of the quarter, we announced that in February, we will be prepaying the March 2026 euro $500 million notes. Turning to the outlook for the fourth quarter. We expect Q4 revenue to be flat to up 2% on a constant dollar basis. We expect a positive FX benefit of about 5% on the top line. The North Face is expected to be broadly in line with Q3 growth. We will see slower growth at Timberland as we discussed last quarter, and we expect Vans to decline roughly mid-single digits. Moving down the P&L, we expect Q4 adjusted operating income to be in the range of $10 to $30 million. Our gross margin will be flat to slightly up versus last year as the impacts from tariffs are expected to be offset by initial pricing actions and ongoing sourcing savings. SG&A rate is expected to be flat to slightly down versus last year due to cost-saving initiatives. And finally, we expect Q4 interest of approximately $30 million. Our Q4 tax rate is based on an estimated full-year effective rate of 33-34%. And this is in line with my recent comments about the increasing trend in our tax rate over the next one to two years and quarterly fluctuations as a result of the changes in global tax rates and in our geographic mix. Let me now give a bit more detail on our progress in fiscal 2026. As I said, we expect revenue to be flat to up for the full year. This will mark the first year since fiscal 2023, excluding Dickies and Supreme, in which revenue was stable or grew versus the prior year. We continue to expect operating income to be up versus last year. Within that, we expect gross margin to be 54.5% or better, reflecting progress made on various work streams unveiled at the Investor Day last year. In addition, we anticipate operating margin to be at least 6.5% for the year, up versus last year's comparable margin of 5.9%, reflecting further progress made on streamlining costs while also prioritizing investments in key strategic areas. On cash flow, we continue to expect both reported operating cash flow and free cash flow to be up year on year. This includes over $100 million negative impact of tariffs, and the negative impact from the sale of Dickies, which we estimate to be about $35 million. And finally, we expect to end the year with leverage at or below 3.5 times as we continue to make progress on our top financial priority to reduce debt and leverage. This is a nice improvement from where we entered the year at 4.1 times and continues to put us on a path to hit the goal of 2.5 times by year-end fiscal 2028 as we outlined at our investor day. I will now hand it back to the operator to take your questions. Operator: We will now begin the question and answer session. Please limit yourself to one question. If you would like to ask a question, raise your hand now. If you have dialed into today's call, please press 9 to raise your hand and 6 to unmute. Please stand by while we compile the Q&A roster. Adrienne Yih (Barclays): Your first question comes from the line of Adrienne Yih with Barclays. Your line is open. Please go ahead. Adrienne Yih: Great. Good morning. I think you can hear me. I think I unmuted properly. First of all, congratulations on the milestone. Great to see sales growing again. Bracken, I guess the big question for the year is kind of, you know, the price increases that are happening broadly, not just at your company, but broadly across the space starting to come through. Potential consumer, you know, demand erosion, and, obviously, we got some consumer conference board metrics yesterday. Some competing ones against sentiment versus consumer confidence. How are you thinking about the consumer? What metrics are you looking at to assess whether there is sort of a slowing? And what is your kind of plan if we do see that? Then number two for Paul, if you can just talk about you're close to your gross margin as you just said. The FY 2028 target. How should we think about that in terms of potential upside to the margin now that you're also gaining leverage on the sales? Thank you. Bracken Darrell: Thank you, Adrienne. And it is very exciting to be positive again. And that's what we're here for. It's all about growth. In terms of the market and price increases and, you know, all the consumer sentiment discussions we're all having, I think the good news for us is we have so much under our control. I've never been in a position where I felt we had as many levers to pull to really drive our business. So it's kind of the nature of a turnaround. We're in that sweet spot right now where we've just gone positive. We've got a lot of engines firing, a lot of green shoots in every direction. So I feel really confident even in a really choppy environment that we're gonna do well. Paul Vogel: Yeah. And then on the gross margin side, yeah, I mean, we are getting close to the 55%. I think all along, you know, our target was 55% or better, so it's great that we're sort of heading in that direction. I mean, obviously, keep in mind, tariffs are just starting to hit us. We've talked about our ability to mitigate those tariffs within fiscal 2027. And nothing's changed on that at all. So I'd say, a, we feel good about where we are on gross margin. We've made great progress. B, you know, 55% is obviously the target, but, hopefully, over time, we can do better than that. And see, we feel like we're in really good shape, but, obviously, we gotta make sure we we're able to manage the tariffs the way we expect. And we again, we have no reason to expect we won't. But, again, something to keep in mind for. Adrienne Yih: Great. Thank you very much. Bracken Darrell: Thank you, Adrienne. You sound kinda hoarse, Pa. I know. It's been a long day. Tom Nikic (Needham): Your next question comes from the line of Tom Nikic with Needham. Line is open. Please go ahead. Tom Nikic: Hey, guys. Good morning, and thanks for taking my question. Want to ask about Vans. So the last couple quarters, you know, you kind of said that the underlying trend was down high single digits. Excluding some of the deliberate actions you took. Was that the case also in Q3? And then, you know, for Q4, you're guiding to, you know, down mid singles, which is, you know, kind of an improvement from there. So is it kinda safe to assume that, you know, you're expecting some improvement in the underlying Q4 and, you know, hopefully thereafter. Bracken Darrell: Yeah. I mean, I think that's a pretty good assessment. Good description of what we see going on. You know, we're finally lapping that quarter, that year-ago quarter when we took a lot of strong actions and we feel really good about the steps we're taking. You know, I talked briefly in my introduction about some of the green shoots we're seeing. But, you know, I think it's the first time we saw e-commerce growth in something like 19 quarters or something. A long time. We feel really good about that. We're excited about what we saw traffic up in The US, we saw a lot of strength in The US in general. You know, the new products are picking up steam, you know, super low pro and the skate loafer, which I'm tempted to pull off my foot and show you because I bet a lot of you have not I'm gonna do it. A lot of you have not seen this is such a cool product because it literally is a skate loafer, so I could almost go out and shoot around and play basketball on this thing. But it's a loafer, and it looks good. So, you know, we've got a lot of good things. And even in the icons, which have been such a difficult area for us for so many years, we're seeing some bright spots. You know, really innovating against those icons, the Authentic and the Slip-On, both we've seen real improvement trends there. Even in the old school. So overall, I feel just very, very good about Vans, but we're gonna be patient. We're not gonna push it. We're not gonna force anything. We're gonna let this thing really play out as it should. Learned one thing about turnarounds. You don't wanna force a turnaround early. You wanna let it develop, and we are letting it develop. Paul Vogel: And just to Yes. You're right on the numbers. The reported constant dollar was down 10%. Again, on the like-for-like, it is kinda down high single digits in the same way we talked about it in quarters past. And so, yeah, the underlying trend kinda down high single digits and obviously, I got it to Alright. Mid single digits for Q4. So there's some improvement there in the underlying trend in Q4. Tom Nikic: Sounds good. Thanks very much, guys. Thank you very much. Bracken Darrell: Thanks, Tom. I'm waiting for an Alex Honnold question. The first one gets the prize. Brooke Roach (Goldman Sachs): Your next question comes from the line of Brooke Roach with Goldman Sachs. Your line is open. Please go ahead. Brooke Roach: Good morning, and thank you for taking our question. Bracken and Paul, I was hoping you could unpack the sequential acceleration that you at TNF Americas this quarter. How much of the strength is repeatable as you move into calendar 2026? How are inventory levels this season? And were there any one-time tailwinds that may have benefited the trend this holiday season? Bracken Darrell: I'm gonna let you talk about the inventories. What I'd say is, you know, we're not really forecasting into '27. What I would say is the underlying business was very strong in The Americas, but I think it's more a reflection of the fact that we were just very weakly developed in The Americas. We have a lot of upside there. You know, compared to the other regions of the world, whether you look at average price or our market share, we're just underdeveloped to what we could be given this is our home market. And we've got so many places we can grow there, and you start you saw them this quarter and you see them in The Americas. You've got We grew in our footwear business, we grew in e-commerce. We really just grew across the you know, we talked about elevated products we're launching. You know? So we've got just one after another thing that we really levers we can pull, and they're all very, very visible. In The Americas. Probably the strongest opportunity in the world right now is The Americas. So I feel really good about what's happening there. And I'm not going to forecast into '27, but I don't see anything extraordinary about this quarter. That makes it an outlier. I really think this is the kind of we should be able to deliver strong performance across The North Face over time. Paul Vogel: Yeah. On the inventory side, dollars are up slightly. That's just to support the strong sales we've had. But overall, inventory days are down pretty much across the board. Bracken Darrell: You know what else is really good, Brooke, is, so many things aren't working well enough yet. You know, we have so many things we can do better. And that makes me even more optimistic. If I look at APAC, you know, I'm sure I'm gonna get a question there. APAC, we're soft. You know, and we know we're gonna be soft. We'll be soft probably through most of next year. Because we've really consolidated gains. We've had such a long period of strong growth in APAC. We've really expanded our distribution. We're where we ought to be. Now we need to get we're missing some products we really need to have there and get our marketing revved up even more. By the way, thank you, Alex. And, you know, and then in EMEA, EMEA is just a macro kind of a macro slowdown. I mean, we have really good business in EMEA, I'm for The North Face there. But I think in general, if you just look across our portfolio, had a really good performance, and we can do a lot better. Michael Binetti (Evercore): Your next question comes from the line of Michael Binetti with Evercore. Your line is open. Please go ahead. Michael Binetti: Hey, guys. I'll add my congrats to the positive inflection there. Did you I guess, for Vans, did you see the traffic in The US stores improve sequentially? I know you said it improved all the way to positive digitally. Are the stores following that trend to lags? We see some impact from the new products working in the physical stores. And then I'm curious any kind of initial thought you can give us to how the order books are building up for Vans for back to school. Bracken Darrell: You know, we probably won't talk about the order books because we usually don't, but I'd say in terms of traffic in stores, no, we didn't see it in stores. I mean, it was just, you know, traffic physical traffic is much tougher to get rolling, and it's I think it's gonna take us longer. But we're really excited about the traffic we saw online. I think we're just going to have to keep going. We continue to try to identify ways that we think we can start to bring the traffic up in our stores. And that is the that's kind of the holy grail. When we get that going, look out. But right now, the traffic online is exciting to see. And, you know, I do think things like Demon Hunters, you know, like some of the some of the really specialized products we're launching, we need to direct them more into our stores first. You know, so that you really have to come to our stores to see them we've got some really cool things that are kind of exclusive. You know? And look at Demon Hunter. That was super oh, we refilled that already and we've already sold really strong in a second running of that. So we need to be bringing those more into our stores, making sure our customers are aware that's the place to buy them. We might have made it too easy to buy that stuff online. So, anyway, so bottom line is no. The traffic in stores wasn't up wasn't up yet. But give us time. I think we'll get there. Paul Vogel: Yeah. I would just add to that. Traffic is still down. We did see a slight improvement sequentially from Q2 to Q3. So traffic, to Bracken's point, it's still down. We haven't yet seen positive traffic yet. But at least the trend is moving in the right direction. Michael Binetti: Okay. Thanks a lot, guys. Bracken Darrell: Thanks, Michael. Simeon Siegel (Guggenheim): Your next question comes from the line of Simeon Siegel with Guggenheim. Your line is open. Please go ahead. Simeon Siegel: Hey, guys. Good morning. Curious if you could help how you're thinking about the broader just AUR versus unit dynamic across the brands as you're seeing these inflections? And then Bracken, feels like you're starting to speak at least mention Altra a little bit more than historically. Anything you can elaborate on the brand you're seeing there just to give you confidence that maybe this becomes a V.F.C. pillar brand if I'm reading the Easter eggs correctly. Obviously, early, but anyway, think about how you'd see sizing potential of that brand. And then just lastly, out of curiosity, what floor were you waving to Alex on as he did that? Bracken Darrell: What's my prize? It's the average unit retail, but I'll I've a AUR receipt in retail. Average in You you could see me wearing it a lot more. So first of all, on Altra, yeah, you do hear me talking about it more. I've become a raving fan both from a both because I love the business and also because I love the product. So I also got a few things I don't wanna talk about just yet, but we'll bring them out a little bit later. Other people that are now wearing this product that you're gonna be surprised at. So we've got a lot of quiet momentum, and as I've said before, we're really holding the brand back. I mean, it could be growing faster. We're just not letting it go. We want to control distribution. Make sure it's in the places where it establishes a really strong pedigree and awareness as a running brand. And a running brand not just on the trail but also on the road. So I am excited about Altra. I do think it's got you know, I've said it before, it's got billion-dollar plus potential, it's up to us to make that happen. I was with the founder yesterday, here in our Denver headquarters, and he said to me, you know, he said, said, when we said, I remember the day when I knew that business could hit $500 million. And I said, wow. You know, I remember the day when I knew it could hit a billion. So we're both living a little bit in the future. He was before, and we are now. But it's gonna go over $250 million this year, probably $270 million. And I see a lot of potential beyond that. You wanna average the answer? Yeah. I mean, I can say across all the brands, not much change. I'd say for in particular, you're seeing a little bit of an uptick in AUR in The Americas, which is great. And TNF AUR is up. As is Timberland. So they're all up. Nothing I would say, too crazy, but all up, like, you know, moderately. Bracken Darrell: You know, I know you're joking about the floor I was on waving at Alex. I was hiding under my couch waving at Alex. While he was on TV, and I literally had it on in the other room, and I would walk in and watch it for a few seconds, and I had to run back out of there. That was the most terrifying thing I've ever seen. But I talked to Alex when he flew back, you know, when he got back to Las Vegas. And it's amazing how humble the guy is. And he's such a great reflection of what it is to be a great human being and a great athlete. And he really reflects what, unfortunately, you can't see every day, which is we have 200 people, like, a lot like Alex. Who are super courageous, they really love what they're doing. They really would, and some of them do. It for almost free or free. And it's just exciting to be part of a business that has a little piece of that. Simeon Siegel: It's great. Thanks, guys. Best of luck for the year. Bracken Darrell: Thanks, Simeon. Tracy Kogan (Citigroup): Your next question comes from the line of Tracy Kogan with Citigroup. Line is open. Please go ahead. Tracy Kogan: Hi. Thanks, guys. I was hoping you could talk more about the drivers of the gross margin beat versus your expectations in this quarter? Wondering if you were able to mitigate more. I know you mentioned mix, and lower product costs. Was also wondering about promotions versus your expectations. And then if you could just talk about the drivers of your view for gross margin to be up flat to up slightly in Q4. Thank you. Paul Vogel: Yeah. So on the puts and takes on gross margins, it's a little bit less promotion, so the full price was better. We did have a tariff impact, which we did not mitigate. And we got a little bit of a benefit on the sourcing side. So those are kind of the main components on the gross margin side. And then for Q4, kinda similar trends. We will have some pricing benefiting us to help mitigate some of the tariff impact in Q4 that we didn't have in Q3. Tracy Kogan: Are you expecting lower promotions year over year, similar to March? Paul Vogel: We don't really talk that much mean, maybe slightly. We've been again, we've been getting a little bit better in that overall. But I would say slightly, but nothing really to call out. Tracy Kogan: Got it. Thank you. Jonathan Komp (Baird): Your next question comes from the line of Jonathan Komp with Baird. Your line is open. Please go ahead. Jonathan Komp: Yes. Good morning. I'm surprised nobody suggested yet Alex do the next climb in the skate loafer just as a thought for cross-brand initiative there. But, Bracken, if I could follow-up, just in your view, what's it going to take to translate positive global digital traffic for Vans into total growth, you know, as you think forward here, or better trajectory for total revenue. And then, Paul, if I could just follow-up. The medium-term targets, I think you've said, you know, you're not putting all the eggs in the basket for fiscal 2028. Can you just give any more flavor how you see your revenue and the margin progression? Playing out at a high level? Thank you. Bracken Darrell: I'll take the first two, and then, Paul, you take the one that was directed at you. So in total in terms of how's that translation of this of finally seeing some good traffic on Vans gonna eventually turn into growth on Vans. You know, I've just so carefully avoided ever saying, when will the brand turn positive? And I'll do it again? But I would say it is a very good sign. I think we've got we also have just a lot of there's a lot of good, brand discussion now happening, you know, at the tier zero accounts. You know, we've really got strong interest in our very premium elevated product that we're launching, which we're bringing down into our channels and into and over time into the wholesale channels too. So I really love the path that we're on. It really does feel like the right kind of meaningful path. When I talk to the team that's running the business, you could feel the enthusiasm they have for it. Now they're admittedly living into the future. You know, we live a year out and two out, but I feel really good about what they feel. You know? So it's really very, very exciting. I think I'm I will call Alex when we hang up and talk to him about the skate loafer climb. It seems like a great idea. Paul Vogel: So on the medium target targets, I mean, look, we still feel good about all those targets, so nothing changes from the perspective of what we've given you in terms of our goals where we where we get to. So you think about the operating margin, right, we said it'll be six and a percent or better this year. Exit run rate, fiscal 2028, 10%. So you can assume we're gonna have some improvements in 2027-2028 to get there. So we still expect to get that. Continue to pay down debt. So if you think about we went from 4.1 to 3.5 times leverage, so it's a you can see there's a pretty clear path. You go from 3.5 to 2.5. Just if we stayed where we are, we obviously expect our operating income to do better and our operating cash flow to do better over time. Will obviously help on reducing that leverage. And so we feel like we're in a really good place to hit that 2.5 times leverage. And our free cash flow, you know, was strong this year, and it was strong in the face of, you know, a $100 million headwind from tariffs, a $35 million headwind from Dickies, excuse me, we also are spending about 33-35% more in CapEx right now year to date. And so we're and we're able to do all that and still generate the free cash flow we want to continue to pay down debt. So we feel like we're in a really good place to hit those targets. And as we get closer to the end of the year, we'll give you more guidance and thoughts on fiscal 2027. Bracken Darrell: You know, I just throw out one thought on one thought on debt. You know, you heard those of you who've been listening for a while, you've heard both Paul and me independently and practically as a duet. How much we dislike debt, and it's certainly not changed, which is why we're aggressively bringing down debt levels. But there's a big benefit to that, which is it's really forced us to not rely on M&A. And so we've really focused on organic growth. It's the reason why you saw us go positive this quarter. It's the it that it complete obsession with getting our businesses growing and our brands growing the right way so systematically I think it's partly because there is that discipline of debt hanging out there that once we bring it down and we're bringing it down fast, we don't have a lever that we're gonna go try to pull on M&A. We're gonna grow these brands. We have amazing brands, and some of the particularly impressive brands we have, we don't talk about very much. So we've got growth opportunities across the board. Jonathan Komp: That's great. Thank you. Noah (Piper Sandler): Your next question comes from the line of Anna Andreeva with Piper Sandler. Noah: Hey, guys. This is Noah on for Anna. Thanks so much for taking our questions. So good to hear Vans expected down mid-single digits for 4Q. Can you elaborate how we should think about DTC versus wholesale for the brand? And then anything by geo going forward. And then as a follow-up on North Face, you've mentioned premiumization as a focus as an opportunity for the brand. How do you think about that, and why now is the right time to do so? How do you envision The North Face positioning for some of the newer brands in the category? Thanks. Bracken Darrell: Yeah. On DTC versus wholesale, I'd probably you had to rank them, I'd say probably we'll see first of all, if you ask me where where am I focused, I'm focused on The Americas right now. It's 50% of the Vans business. You know, if as the North American market goes, Vans goes. So we're really focused there. So and then within that, I would say, yeah, DTC first, but even there, e-commerce first. So e-commerce is the fastest lever we can pull because the products can get there faster. They can be displayed well. We're getting better at social marketing, which is we could we can bring consumers to our site. And so between good products and good marketing, I think you'll see we're really keeping our eye on DTC for Vans first. But particularly e-commerce. The stores are harder, you know, so that's gonna come. It's just gonna come with a little lag and then wholesale after that. In terms of premiumization for The North Face, you know, why now you know, it's kinda one of those things where there's just it's such a great opportunity. And I'll go back to the comment I made a minute ago, especially in North America. You know, we're not gonna go, you know, start selling 50% of our business at $1,100. But we do have opportunities around the world in premiumization. You know, Summit Series, we don't talk about it that way, but Summit Series is a very premium product lineup, and it's very small today. But it has a really good growth potential too. As does the more lifestyle-oriented product like the leather pack that we talked about. So there's why now? Because there's just such a good opportunity. You're not gonna see us go crazy. We're not we don't I don't like jigsaw. You know? I don't like these ups and downs. I like systematic growth. So you'll see us systematically change that North Face offering to systematically see us premiumize don't expect a revolutionary change. That would be dangerous in my view. We're going to do it systematically and carefully and well. Thank you. Noah. Otherwise, aka Anna. Jay Sole (UBS): Your final question comes from the line of Jay Sole with UBS. Your line is open. Please go ahead. Jay Sole: Hi. Is that working? Bracken Darrell: You are working. Yes. I thought you were on the 4th Floor, and you lost connection, like, Jay Sole: I don't think I would admit it to the 4th Floor on that. I would have been down, like, half a quarter up on that climb, but I think that the question is about guidance. You know, we're still doing one quarter time guidance. How are you thinking about possibly giving full-year guidance? What needs to change for you to start giving a longer-term outlook? Thank you. Bracken Darrell: You know, I'm gonna jump in ahead of Paul because I'm afraid he's gonna give an answer that we agree with, but we haven't decided whether we really agree with you yet. Look. At the end of the day, we pulled guidance because I think you can guide when you have predictability. And then we haven't put it back because, gosh, it's really nice not to give full-year guidance. It's really comfortable. But we also know that investors like it. And so we're seriously considering. We're gonna think through it. And we're weighing the pros and cons. You know, it's a really good thing in some ways and a really bad thing in other ways, you know, from some viewpoints. But we're thinking carefully through it, and I promise you that we are not underestimating that there's a lot of interest out there for it. So stay tuned. Jay Sole: Bracken, maybe just a follow-up on that. I mean, given that the fourth quarter is coming up, I mean, would the fourth quarter be a more important quarter to try to reintroduce that kind of full-year guide? Does it really not matter what quarter you're reporting? Bracken Darrell: Yeah. I mean, logically, if you were gonna reintroduce a guide, you'd probably do it in the fourth quarter of this year or next year or something. So yeah, I think that makes a lot of sense. Either they close the quarter, you know, kinda after you finish the year or something like that. Paul Vogel: Yeah. I would just add one thing on guidance too. I know this quarter, obviously, we exceeded expectations. Our philosophy on guidance in terms of whatever we guide hasn't really changed. Right? We're always gonna give ranges. Our goal is to stay at the top end of the range, you know, in a really good quarter. Exceed the range, but really at the top end of the range. And so nothing has changed with that. So I know sometimes you have quarters where you're right in the range. Sometimes you have quarters when you outperform. We outperformed just organically, in this quarter. If you look at the outperformance, it was really all DTC. DTC is, obviously a little bit less predictable than wholesale. And so our guidance philosophy hasn't changed. We just had a really strong quarter and was really led by DTC. Which can always be a little bit more valuable, in any quarter. So I just wanted to kinda reiterate sort of how we think about guidance. Jay Sole: Okay. Thank you so much. Bracken Darrell: Thank you, Jay. Oh, it sounds like that's the last question unless you have another one. Operator: There are no further questions at this time. Bracken Darrell: Okay. Well, I'll bring this to a close. You know, we feel great about our progress. We feel great about the results we delivered this quarter. There's so many things that we can do better. That's the best news. We're really seeing great improvement, and we have so many more things to make better. So I'm really excited about where we are. You know, at some point soon, I'm gonna stop calling this a turnaround to V.F. Because it will no longer be. It's about growth. And we're gonna stay focused on really fulfilling this enormous potential we have across each of our brands, all of our brands, and creating exceptional shareholder value. So thanks, everyone. Stay tuned. We'll see you in a quarter. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good evening, and thank you for standing by for New Oriental Education & Technology Group Inc.'s FY2026 Second Quarter Results Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Alice Chow. Thank you. Please go ahead. Thank you. Hello, everyone, and welcome to New Oriental Education & Technology Group Inc.'s Alice Chow: Second Fiscal Quarter 2026 Earnings Conference Call. Our financial results for the period were released earlier today and are available on the company's website as well as on newswire services. Today, Stephen Yang, Executive President and Chief Financial Officer, and I will share New Oriental Education & Technology Group Inc.'s latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of The U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental Education & Technology Group Inc. does not undertake any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental Education & Technology Group Inc.'s Investor Relations website at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead. Stephen Yang: Thank you, Alice. Hello, everyone. And thank you for joining us on the call. I'm pleased to report a strong set of results for 2026. Our continued focus on operational efficiency and disciplined resource management has been a key driver of our solid performance and continues to support our path to sustainable profitability. We are delighted to see strong profit growth accompanied by a significant improvement in non-GAAP operating margin, up more than four percentage points. Again, exceeded our expectations. This quarter, total net revenue grew 14.7% year over year, to $1.19 billion. Non-GAAP operating income more than tripled, rising 206.9% to $89.1 million. Non-GAAP net income attributable to New Oriental Education & Technology Group Inc. increased 6068.6% to $72.9 million. Our core business remains steady, and I'm pleased to share that our new initiatives are gaining traction and making meaningful contributions to the group's overall performance. For the second fiscal quarter, our K-9 new educational business and high school tutoring business reported accelerated year-over-year revenue growth, outpacing the previous quarter. Overseas-related business has shown resilience, delivering modest revenue growth despite the ongoing macroeconomic headwind, exceeding our earlier conservative expectations. Overseas test prep business recorded a revenue increase of 4% year over year. Overseas study consulting business recorded a slight decrease of about 3% year over year. Our adults and university students business recorded a revenue increase of percent year over year. As for our continued investments in new education initiatives, including non-academic tutoring and our intelligent learning system and devices, deliver solid, sustainable results. Revenue from this business grew 22% year over year this quarter. Our non-dynamic two-front business has been rolled out to around 60 existing fees. Market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contribute over 60% of the revenue. As for our intelligent learning system and device business, that has been launched in around 60 cities. We are encouraged by improved customer retention and scalability of the new initiative. The top 10 cities contribute over 50% of this business. Turning to our integrated tourism-related business. Our domestic and international study tours and research camp for K-12 and university students were held in 55 cities across China, with the top 10 cities contributing over 50% of the revenue. In parallel, our newly launched tourism offering for middle-aged and senior citizens has been well expanded and well received, now available in 30 key provinces in international markets. We have expanded our product portfolio to include culture travel, China study tour, global study tour, and camp education, all designed to deliver enriching experiences through culture and knowledge sharing and personal growth. We are now also exploring opportunities in the health and wellness sector for seniors. We will partner with over 30 health and wellness spaces in locations such as Hainan, Yunnan, and Guangxi, piloting the segments with a light asset model. With regards to our OMO system, our efforts in developing and revamping our online merging offline teaching platform continue. These efforts aim to deliver more advanced and diversified education services to our customers of all ages. A total of $28.4 million has been invested during this quarter to upgrade and maintain our OMO teaching platforms. Beyond OMO, we continue to focus on our venture in AI. Encouraged by the positive market feedback, we have been and will continue to refine and embed AI across our offerings to strengthen New Oriental Education & Technology Group Inc.'s core capabilities. Simultaneously, we are also leveraging AI to streamline internal operations, thereby boosting efficiency and providing enhanced support for our teaching staff. As an industry leader, we are dedicated to driving long-term revenue growth through a dual focus on product innovation and operational efficiency. In upcoming quarters, we look forward to sharing tangible results and positive highlights on performance that are backed by our investment in AI. Now turning to the East device performance. I'm pleased to share that during the reporting period, ESA buy remained customer-centric and made strong progress in both product development and supply chain enhancements. EsterBio has expanded beyond its original focus on fresh foods and snacks to offer a broader, more diversified product range. As of the end of the period, private label SPUs reached 801. New categories include seafood, healthcare products, kitchen condiments, meat, eggs, dairy, personal care, household and cleaning items, paper goods, home textiles, apparel, and underwear. These offerings are thoughtfully created to meet customers' growing demand for health, quality of life, and convenience. They have contributed to both sales and profit growth for the group while further optimizing its product mix. Beyond expanding SDUs, Eastbay also focused on product iteration, cost efficiency, and targeted marketing to build blockbuster products that resonate strongly with the customers. At the same time, Easter buy began exploring offline channels leveraging strong brand recognition and New Oriental Education & Technology Group Inc.'s learning center network. With the vending machine model now profitable in select cities, we plan to scale this initiative nationwide. All in all, we are pleased to see Easter buy refocused and back on track, making a positive contribution to the group, both top line and bottom line. We expect Easter buy to contribute more revenue and profits to the group in the future while continuously enhancing our brand's influence. Now I will turn the call over to Alice to share with you about the key financials. Please go ahead, Alice. Alice Chow: Thank you, Stephen. Let me now walk you through the key financial highlights for the quarter. Operating costs and expenses for the quarter were $1.1251 billion, representing a 10.4% increase year over year. Cost of revenues increased by 11.8% year over year to $556.9 million. Selling and marketing expenses decreased by 1.1% year over year to $194.1 million. G&A expenses for the quarter increased by 15.2% year over year to $374.3 million. Total share-based compensation expenses were allocated to related operating costs and expenses increased by 156.8% to $21.4 million in 2026. Operating income was $66.3 million, representing a 244.4% increase year over year. Non-GAAP income from operations for the quarter was $89.1 million, representing a 206.9% increase year over year. Net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $45.5 million, representing a 42.3% increase year over year. Basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were 29¢ and 28¢, respectively. Non-GAAP net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $72.9 million, representing a surge of 68.6% year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were 46¢ and 45¢, respectively. Net cash flow generated from operations for the second fiscal quarter was approximately $323.5 million, and capital expenditure for the quarter was $23.7 million. Turning to the balance sheet. As of November 30, 2025, New Oriental Education & Technology Group Inc. had cash and cash equivalents of $1.8429 billion. In addition, the company had $161.6 million in term deposits and $1.8752 billion in short-term investments. New Oriental Education & Technology Group Inc.'s deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as services or goods are delivered, at the end of 2026, was $2.1615 billion, an increase of 10.2% as compared to $1.9606 billion year over year. Now I'll hand over to Stephen to go through our outlook and guidance. Stephen Yang: Thank you, Alice. We are very encouraged by the strong results we have achieved this quarter and in the first half of the fiscal year 2026. These outcomes give us greater confidence in our operational resilience and growth trajectory. Looking ahead, we will continue to pursue a balanced approach to revenue and profitability growth. We remain committed to cost discipline and sustainable profitability across all business lines. At the same time, we will take a thoughtful strategic approach to capacity expansion and hiring, ensuring that growth does not come at the expense of quality. We plan to deepen our presence in cities that demonstrate strong top and bottom line performance while continuing to manage resources carefully. We will closely monitor the pace and scale of new openings, aligning them with operational needs and financial performance throughout the year. Given our positive momentum, including the healthy growth of our K-12 business and the recovery of Easter buy, we are now in a more optimistic position regarding our business outlook. We expect total net revenue for the group, including Easter buy, in the 2026 fiscal year to be in the range of $1.3132 billion to $1.3487 billion, representing a year-over-year increase in the range of 11% to 14%. For the full fiscal year 2026, we are raising our total net revenue guidance for the group to be in the range of $5.2923 billion to $5.4883 billion, representing a year-over-year increase in the range of 8% to 12%. These expectations reflect our current outlook, taking into account recent regulatory developments as well as our preliminary view of market conditions, and they remain subject to change. I would like to give you an update on our shareholder return plan for fiscal year 2026. In October 2025, we announced that pursuant to the previously adopted three-year shareholder return plan, the board of directors had approved an ordinary dividend of $0.12 per common share, or $1.20 per ADS, to be distributed in two installments as part of the shareholder return for fiscal year 2026. As of today, the first installment has been fully paid to shareholders and ADS holders. Details of the second installment will be determined and announced in due course. Additionally, we also announced a share repurchase program in which New Oriental Education & Technology Group Inc. is authorized to repurchase up to $300 million of its ADS or common shares over the subsequent twelve months. As of January 27, we had repurchased a total of approximately 1.6 million ADS for a consideration of approximately $86.3 million from the open market under this share repurchase plan. To conclude, New Oriental Education & Technology Group Inc. remains firmly committed to sustainable growth, high-quality offerings to our customers, and creating long-term value for our shareholders. We also continue to work closely with government authorities across provinces and municipalities in China to ensure full compliance with the relevant policies, regulations, and measures, and to adjust our operations as needed in response. This is the end of our fiscal year 2026 summary. At this point, I would like with Alice to open the floor for questions. Operator, please open the call for this. Thank you. Operator: Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please re-enter the queue. To cancel your request, you can press star 11 again. For the first question, Felix Liu: Hi. Good evening, Steven. This is Felix Liu from UBS. First of all, congratulations on the very solid second quarter results as well as on the lift to your full-year guidance. My question is on your guidance. Can management provide some breakdown on the segment growth as much as you can? I'm keen to understand the key drivers for the lift to your full-year guidance. Thank you. Stephen Yang: Yes. Thank you, Felix. So let us start with this quarter's revenue growth analysis. You know, we are very pleased to see the acceleration. What I mean is the growth of the K-12 business. You know, as you know, I think this our strategy this year is to improve the product quality and service quality. And I we have seen good results in Q2. You know? We have seen the higher student retention rates and the better feedback from the customers. And so this is the K-12 business. And so in the in Q3, I think the K-12 business will be grow somewhere around 20%. Year over year. Yep. Or or more. So let's say it's in 20% plus year over year growth. And overseas, yeah, overseas relative yeah, we meet some the the revenue growth pressure. But I think, you know, we in the Q2, you know, we still got the top line growth. Of the overseas test prep by, you know, 4% year over year growth. And, you know, we're quite resilient. And, actually, I think we we are taking the market share. From the, from the market. And, so in the Q3, let's say, in the second half of the year, so I do believe you know, the revenue growth will be flattish. Of the overseas related business. There's still a drag but it is but I think we will do as you know, as good as we can. College business you know, let's say the 14, 15% top line growth. And, yeah, this is a breakdown. And so in the second half of the year, I think, you know, we're quite positive about the revenue growth. And the you you know, even the higher margin. Because, you know, since last year, you know, March 2025, we started to the cost control. And I I think we have done a great job. And going forward, we'll do more on cost control. So it will improve the margin expansion going forward. In the second half of the year and the year after. Then it's Felix Liu: Okay. This is great progress, and thank you Stephen Yang: Thank you. Operator: Our next question comes from Alice Cai of Citibank. Please go ahead. Alice Cai: Good evening, management. Thank you for taking my questions, and congratulations on the strong results. We heard about the business unit integration between your tech and consulting units. There, I have two quick questions. First, what is the expected margin expansion from this merger? And can it effectively offset the headwinds in the U.S. market? Second, regarding efficiency, how much reduction do you expect in the customer acquisition cost? And what is your target for the cross-selling rate? Thank you so much. Stephen Yang: Yeah. Yeah. Yeah. Would you yeah. I think, yeah, we we I saw the news, you know, of the merging of the overseas test prep business and the consultant business. And as you know, before the merging, overseas test prep you know, the the the unit and the consulting business, you know, provide the service to their clients respectively. And each side has their own management teams teachers, marketing staff, admin staff. I think you know, we now we put it together. You know, we merged the overseas test lab and consultant business. I think the merge so let's say the restructuring aims to provide a customer with a one-stop service. And I think the we will provide even the better service to the customers. And also, to be reduced absolutely some cost and expenses. Because, you know, we put it together, and I think the, you know, one person can do more jobs, you know, in in stronger than before. So let's wait till the next quarter's earnings call I will share with you about the like, how much cost we can save or even the the to how much can get more revenue or improve the top end growth and to save some cost to help the margin profile. Alice Cai: Thank you. Okay. Thanks. It's very helpful. Operator: One moment for the next question. Next question comes from Lucy Yu from Bank of America Securities. Please go ahead. Lucy Yu: Thank you. Hi, Steven. This is Lucy Yu. Congratulations. So my question is on the margin expansion in the second quarter, which has been more than one percentage point. Could you please elaborate on the margin expansion? What is driving that? How should we think about the margin expansion magnitude in the second half? Thank you. Stephen Yang: Oh, yeah. Okay. Yeah. Lucy, you know, I think your question about margin. Yeah. Even as I said, even though we missed some margin drag, from the overseas related business, but we we still got the Group margin expansion in Q2. You know? The non-GAAP OP margin was increased by four hundred seventy basis points. I think the margin expansion was mainly driven by the better utilization, the higher operating leverage, and cost control. And also the profit contribution from the InstaBuy. And I think you know, we will, you know, continuously focus on operational efficiency and discipline resource management. Let's say, in a cost control. You know, we control the learning center expansion plan. And we control the marketing expenses. You you you saw the numbers, you know, the result. And I think going forward, even the Q3, and the Q4, the second half of the year, we will get the margin extension. You know? I won't give the detailed guidance because, you know, typically, we don't give the margin guidance. But, you know, we are quite optimistic about the margin expansion in the second half of this year. Lucy? Lucy Yu: Understood. Thank you so much, Steven. Stephen Yang: Thank you. For the next question. Operator: Next questions will come from the line of Yikun Zheng from Citi. Please go ahead. Good evening. This is Yikun Zheng. Thank you for taking my question, and also congrats on the strong results. So my question is about the overseas business. As you mentioned, that's the OSC business have Stephen Yang: or like, 4% of growth rates. Operator: Actually, the market condition is quite challenging. So just wondering the future trends and the main reason for the for the for this over the business that I can get such a good result. Thank you. Stephen Yang: Yeah. I think yeah. As I said, you know, the the overseer of the business, you know, needs some impacts of the economy environment, you know, outside. But I think our team have done a great job. You know? They have shown very resilient you know, in the first half of the year. And and we believe they will take in the more market share from you know, all the competitors. And, and also, you know, I think the group gave the team more support than before because it needs some pressure. We should help them to do more jobs. And going forward, in the in the second half of the year, you know, I think I just want to give the guidance. The flattish or little bit of a at low single digit growth because, you know, the the outside environment, you know, has no change. But I believe our team will do the great job as they did in the first first half of the year. Thank you, Steven. Operator: For the next question, Our next question comes from D. S. Kim of JPMorgan. Please go ahead. Hi, Stephen. Hi, Alice. Congrats on the great quarter, and I hope that this is first of many, many more quarters to come. Before I actually ask my question, can I double check on Lucy's earlier question? On margin? Can we talk about how much of the margin expansion in 2Q, not the forward-looking, but 2Q came from Core Education versus East Bay to the extent that you can elaborate? And I have my question after this. Alice Chow: Yeah. Actually, Ethiopi also reported their first year first half results, so you can roughly calculate. So if takeout is to buy all the rest together, our margin expansion is roughly about three per 300 bps. Margin expansion year over year. Operator: Thank you. And my actual question is for our new education business, it's great that we printed more than 20% growth. D. S. Kim: What do you think, in your view, is, like, sustainable growth rate for the segment from here? Say, assuming stable 10% capacity expansion for, like, next three to five years, say, you know, like, 10% for the group capacity expansion, maybe that means K-9 capacity can grow maybe 15% per annum and then we can add on maybe four, 5% of ASP growth and couple more points for efficiency gain or utilization gain, if you will. Does that mean that can we continue to expect say, 20% plus growth? Not I I'm not talking about second half, but like, next few years, based on this level of capacity expansion or, you know, the growth algorithm or formula can change versus what we had in the past. Stephen Yang: Yes. I think that it's a great question. You know, we changed our strategy you know, before the starting of this fiscal year. You know, we slowed down the learning center expansion. From 20, 30%, you know, the year the year before to, let's say, the 10%. So that means we put more focus on the quality and quality improvement. So I think all the business line, even the high school and the K-9 business, the student retention rate is guiding higher. You know? I think even better than we expected. And, also, that means we got a bit better word-of-mouth So we don't need to spend, like, crazy marketing expenses to acquire the new student enrollment. That means, you know, we get the new student enrollment by better word marks, And so I think in the second half of the year, you know, we got is the 20% plus top end growth of the K-12 business. I believe we will keep the the the sustainable growth during the year after. Because, you know, the better quality, and and also the even the more the high the competitive the ads of New Oriental Education & Technology Group Inc. I think we we deserve to get more student news. Student enrollment. You know, we we we cut some marketing expenses. And and also, you know, definitely, will see more leverage. Because, you know, we'll we'll just open, like, let's say, 10% new learning centers, but, you know, the revenue growth is something somewhere around 20%. So it will you will see the higher utilization rate and the higher margin of the catalyst. D. S. Kim: Yes. That thank you so much, sir, and I hope to I I I hope to see that coming through in many more years to come. Thank you. Stephen Yang: Yeah. And and, also, you know, I want to I do believe we got the add one point to Steve's comments. You know, in the Q3, margin improvement improvement from both core business. And Easter die. Operator: Thank you, sir. Thank you for the questions. As a reminder, to ask a question, please press 11 and wait for your name to be announced. Our next question comes from Timothy Zhao of Goldman Sachs. Please go ahead. Great. Hi, Steven. Hi, Alice. Congrats on the study results. So my question is that I recall in the last quarter results, you mentioned that think about some of the new AI initiative that you are launching. Just wondering if you can share any tangible results or any updates on the AI investments that you are making? For example, of of a new course format, that you launched probably in the late last year. Just wondering if there's any progress on that. Thank you. Stephen Yang: I think, you know, in the last three months, I think our team, you know, have done a lot on the new offerings of the new AI product. And I think we we need one maybe one quarter to testify, you know, the, new offerings. And, also, you know, and I I believe it will contribute more revenue going forward. And one more point is, you know, even the I think the AI technology help us on the existing product You know, you saw the higher student return for rate. Yeah. We we put more focus on the, like, the product quality and even the service quality. But I do believe the AI helps us to guide the even higher the student retention rate going forward. So and also the AI help us to get more efficient and efficiency to save some, you know, expenses and cost So AI helps the whole group, you know, three points new offerings and the the the existing products improvement and the cost of saving. So, you know, I think we should spend a little bit more on AI technology, but it's not that it's not that much. And we'll control the the the whole the spending. But I think we will bear more fruit from the AI. Investment going forward. Timothy Zhao: Got it. Thank you, Steven. Moment four, the next question. Our next question comes from Elsie Sheng from CLSA. Please go ahead. Elsie Sheng: Stephen and Alice, congratulations on the results. I have a follow-up question on the margin expansion because if we look into the details, in the second quarter, the gross margin is going up and also the marketing expense ratio is also going down. And because I noticed that you all earlier mentioned that you have initiated a cross-department customer service system to improve the service efficiency and also reduce the customer acquisition cost. So I wonder if the decrease in the marketing expense ratio is related to this initiative. And if so, how do we expect the impact of this going forward? Do we expect this trend of lower marketing expense ratio to continue in the next few quarters? Thank you. Stephen Yang: I think the situation will continue. Because, you know, yeah, first of all, we put more focus on the product itself. Rather than spend, you know, more money on marketing. But growth is still very healthy. And also, as you said, you know, we set up a new customer service department. And, you know, that means I think we will bring the information within New Oriental Education & Technology Group Inc. or even the old departments overseas consulting college, K-12 business, high school, K-9. And even other business, and the tourism business that needs to buy. So I think this new department will bring us, you know, more traffic even within New Oriental Education & Technology Group Inc. customer resources. So this is a I think that is a very good tool to save more marketing expenses. And also, you know, we we just to set up the 10% new learning center this year. So we don't need to spend more money on marketing. And, yeah, even in the Q1, you know, some I know some competitors, you know, did some summer promotion even the free course in the summer. But, you know, we we are happy to see more students from our competitors came back to New Oriental Education & Technology Group Inc. in autumn. So that means, you know, our core competency will be product quality quality turns to be better. And going forward, I think the selling marketing expenses as the percentage of the revenue will go down. Going forward. In the second half of the year and the year after. Elsie Sheng: Thank you. It's very helpful. Operator: Thank you for the questions. We are now approaching the end of the conference call. I will now turn the call back to New Oriental Education & Technology Group Inc.'s Executive President and CFO, Mr. Stephen Yang, for his closing remarks. Stephen Yang: Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Thank you. Thank you very much. Operator: That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.
Brad Chelton: Good morning. Welcome to The Scotts Miracle-Gro Company's First Quarter 2026 Earnings Webcast. I am Brad Chelton, Head of Investor Relations. Speaking today are Chairman and CEO, James S. Hagedorn, President and Chief Operating Officer Nate Baxter, and Chief Financial and Chief Accounting Officer Mark J. Scheiwer. Jim will provide a strategic overview, Nate will provide a business update, and Mark will follow with a review of our financial results. In conjunction with our commentary today, please review our earnings release and supplemental financial presentation slides, which were published on our website at investor.scotts.com prior to this webcast. During our review, we will make forward-looking statements and discuss certain non-GAAP financial measures. Please be aware that our actual results could differ materially from what we share today. Please refer to our Form 10-Ks filed with the SEC for details of the full range of risk factors that could impact our results. Following the webcast, Executive Vice President and Chief of Staff Chris Hagedorn will join Jim, Nate, and Mark for an audio-only Q&A session. To listen to the Q&A, simply remain on this webcast. To participate, please join by the audio link shared in our press release. As always, today's session will be recorded. An archived version will be published on our website. For further discussion after the call, please email or call me directly. With that, let's get started with Jim's update. James S. Hagedorn: Good morning, everyone. I am taking a slightly different approach with our call today. I am going to focus on the strategies we are employing to drive more value for The Scotts Miracle-Gro Company shareholders, along with a discussion around new, longer-term financial priorities we have established through 2030. Nate will take you through the progress on our plans, and Mark will close with his customary review of our first quarter results. I am really excited to share where the business is headed. There are a lot of great things happening at Scotts right now. Our company has real superpowers, our brands, R&D, supply chain, and sales. And we are investing them to greater levels, from innovation advertising, and digital marketing to automation and technology. We have unique and strong retail relationships. We are working with these partners to put more marketing and consumer activation dollars into driving purchases of our high-margin branded products versus lower-margin commodities. These investments, approaching $1 billion annually, are absolutely critical to engaging core and emerging consumers. We are delivering strong gross margin improvement through ongoing supply chain optimization, and by bringing new innovation to consumers. And we are in a way better place with our capital structure. We are on a path to leverage ratio between three and three and a half times, which is our sweet spot. We are comfortable in this range because of our ability to generate strong free cash flow. Our cost of capital works really well at this level too. Just as importantly, we are taking substantive shareholder-friendly actions that go well beyond our healthy dividend. In Q1, the Board of Directors approved a new multi-year $500 million share repurchase program that will begin later in '26, in a measured and disciplined manner. The ultimate goal is to get our share count to around 40 million shares. The bottom line is we are more focused than ever on being the best Scotts Miracle-Gro Company that we can be. We are advancing this concept at every turn. And it is having a positive impact on our results. We are on track with our key metrics and have full confidence that we will achieve the fiscal '26 guidance and potentially then some. That guidance is a conservative outlook that we projected at the end of last year. And since then, we have developed more aggressive longer-term targets to put our company solidly on a multiyear growth trajectory. That is the bigger story I want to discuss. My comments are less about the performance in this quarter and more about the future. I threw down a challenge to Nate earlier this year to deliver an incremental $1 billion in top-line sales and total EBITDA of $1 billion. I put no time frame on it. Nate came back with the framework of a plan that would have us reaching these targets around 2030 on the strength of a 5% annual top-line growth through innovation, pricing, volume, M&A—not crazy M&A, but modest tuck-ins that augment or fill in gaps in our lawn and garden portfolio. We are now implementing these growth targets, and Nathan and his operating team are putting together the building blocks that will unlock this level of growth. He will be ready to share that plan in more detail later this fiscal year at our Investor Day that we are planning for the summer. Mark and Nate are also anxious to meet with strategic shareholders who want to be part of this longer-term plan and hear more about it. Achieving these longer-term goals will require a growth rate that is more ambitious than the low single-digit gains we projected in our fiscal '26 guidance and mid-range goal through '27. I can help reconcile this for you. We are not changing our guidance. But we do believe there is a good probability that we will outperform it. Nate's operating plan for '26 establishes a path to a more accelerated growth rate. The better our performance in '26, the easier our long-term objectives come together. We have also built our incentive program this year on Nate's '26 operating plan, which includes strong branded sales growth and gross margin improvement that will drive higher EBITDA and lower leverage. To get 100% payout on the incentive plan, will require us to outperform the guidance. I am not only super excited by this, I am also energized by our commitment to significantly reduce our share count starting with the first tranche of $500 million. We believe our current share price does not reflect the true value of our business. Which is why our commitment to shareholder repurchases reflects our strong view of the long-term value of our company. Nate, Mark, and our Board of Directors are fully supportive. In addition, early feedback from key investors also shows support for this initiative. Upon full execution of the long-term objectives, we are looking at a potential shareholder return in excess of 50% with a share price well north of $100. Repurchases will begin in '26 as we get our leverage ratio comfortably below four. Reducing our share count to around 40 million shares over time will require an investment much greater than the $500 million. So this is a long-term commitment that will require future authorizations from the board. There is also flexibility in the plan. Mark is the gatekeeper. Repurchases will be made using free cash flow and modulated to ensure we stay within our leverage targets. If we fall short of our financial plan in any given year, we slow the pace of repurchases. The program is a win for shareholders all the way around. Being the best Scotts Miracle-Gro also requires us to be focused on lawn and garden. Free of distractions. The divestiture of Hawthorne will do just that. The pending sale of Hawthorne to Vireo Growth is good for Scotts Miracle-Gro and Hawthorne. It will allow each of us to do what we do best. While we expect to close the deal this quarter, we have already moved Hawthorne from our operating financials. Classifying it as a discontinued operation is having an immediate positive effect. It has contributed to a 40 basis point improvement in gross margin and further strengthens our balance sheet. It will eliminate the impact of the cannabis sector's volatility in our share price. There is a benefit to Hawthorne, too. Vireo's CEO is a guy named John Masarakis. A founder of the investment firm Chicago Atlantic, who is running the same play Chris and I sought to build in the cannabis space. He is driving much-needed consolidation and Vireo is on track to becoming a top operator with a terrific multistate map. He is treating many of the people who are part of those acquisitions as partners and retaining their expertise. Vireo was well-capitalized in acquiring Hawthorne, allowing it to expand into cultivation supply and open up more growth potential for Hawthorne. The sale of Hawthorne will be through an exchange of shares giving us a key investment in Vireo. Chris will also join the Board of Vireo. Chairing a newly formed Strategy Committee and joining the Comp nominating, and corporate governance committee. SMG will enter into customer agreements to continue providing R&D, transitional, and other services. Looking at the bigger picture, it is clear we found a good home for Hawthorne while further strengthening the most powerful lawn and garden franchise a category that is growing. Despite our delivering consistent positive performance quarter after quarter, we have not seen it show up in the stock price. There is one upside to being undervalued. It gives us even greater opportunities to buy more shares back and deliver improved results for long-term investors. We are not so much focused on quarterly results as we are on disciplined achievement of the milestones that will enable us to realize our financial goals. I hope everyone in this call is excited about what you are hearing today. We are at an inflection point. We are done looking in the rearview mirror. We have an aggressive, offensively driven plan for the future. And we are very confident about that future and its absolutely on the side of creating more value for our shareholders. Next up is Nate. Nate Baxter: Welcome, everyone. Jim laid out our strategy and financial priorities. And when it comes to delivering them, I view this as a three-stage approach to execution. The first involves our work to achieve the fiscal 2026 guidance. The second is what we are doing to accomplish our midterm financial priorities through fiscal 2027. And the third is the plan we are building for the longer-term goal of $1 billion in top-line sales growth and $1 billion in EBITDA. The message today is we are on track to deliver the '26 guidance and the mid-term priorities. And as Jim said, we see opportunities to outperform, but as you know, our season is just getting started. As for the aggressive longer-term priorities, my team and I are developing a comprehensive plan that we will share by our next Investor Day. This morning, I am going to talk mostly about fiscal 2026. Which is the building block to our mid- and long-term plans. Our growth algorithm is focused on these key areas. First, incremental listings, including new product introductions across all our categories. Second, e-commerce gains across our retailer base. Third, growth in our high-margin branded products and fourth, pricing. Path to achieving our targets is centered on the consumer. Period. Despite being the lawn and garden market leader, we have a clear opportunity to grow household penetration. In some of our biggest categories, it is as low as 10%. At the same time, our demographics are shifting. Our core consumer is the baby boomer and Gen Xer. But is evolving rapidly to the emerging millennial and Gen Z. The best news is the lawn and garden consumer is healthy and engaged in the category. Our products fit nicely in the space of small, affordable projects around the home. Consumers are increasingly spending time on their lawns and in their gardens, not just for the aesthetics, but for their physical and mental well-being too. All of this speaks to our opportunity. We must engage with a broader and more diverse group of consumers. You can expect us to increase household penetration and encourage greater in the use of our products. We will focus on expanding the channels in which we reach consumers. We are going to drive product development to expand our portfolio and include more organic, natural, and biological solutions. We are going to adapt our marketing to engage emerging consumers and enhance their experience, and we will seek M&A through strategic tuck-in acquisitions that can fill gaps or build out our portfolio. We are progressing in each of these areas. We have ramped up innovation across our categories. In lawns, a new granular turf builder lawn food with a formulation emphasizing safety for kids and pets will launch this quarter. We are also bringing to market the ten-minute long care program, an updated line of ready-to-spray liquid fertilizers that feature a new applicator tailored for ease of use. Expansion of our successful Miracle-Gro Organics line is also underway. And with Ortho, this month we introduced an indoor light trap for flying insects and new ant trap products. This builds on the success of last summer's Mosquito Kill and Prevent product launch. Frequency of purchase is also critical. We are doing more to educate consumers on the value of multiple feedings for both lawns and gardens. We have spoken in past calls how this effort boosted consumer takeaway with lawn fertilizers in 2025, and there is more to go get. We are taking a similar approach with indoor gardening to encourage gardening as a year-round activity. This is supported by our new Green Thumb indoor marketing campaign that launched in Q1, in conjunction with a new line of indoor gardening products. We have seen positive results with this effort. As for M&A, we are intent on finding innovative unique brands that resonate with consumers. And our initial focus is on licensing or distribution agreements to explore partnerships and test product strategies. Any tuck-in M&A we complete will be margin accretive and have no negative impact on leverage. Beginning in fiscal '27, we will be the exclusive national distributor manufacturer, and marketer of Black Cow products. This product line is led by black cow manure and organic soils. It is going to augment our Miracle-Gro organic line by appealing to a whole new consumer. Black Cow is a premium soil amendment product used primarily by gardeners who like to curate their own soils. Line reviews start next month with retailers. We have also entered into an agreement to become the primary representative for Murphy's Naturals. This partnership provides us access to a high-quality team focused on innovation in natural insect repellents, and will help enhance the current R&D, brand work, and products we offer in the naturals and organic space. Channel expansion continues to be a focus. Do it for me is an opportunity here. We are not interested in what we did in the past with the Scotts lawn service. However, we have the potential to be a key supplier of the best and most effective products for small and medium-sized professional lawn and garden service providers. We are testing this concept in two markets this spring, to gauge our full potential in this space. Looking at the online channel, more consumers across all age groups are turning to digital and e-commerce to learn about products, engage with companies, and ultimately make purchases. In Q1, we launched a robust digital platform where we consolidated all brands under scottsmiraclegrow.com with AI-driven consumer guidance, educational content, and e-commerce capabilities as well as the ability to offer loyalty programs in the future. With this enhanced website, we are better able to partner with our retailers as they look to sell more of our products online. It is one of the many ways we are enhancing the consumer experience. Overlaying all our initiatives is our ongoing work to drive down operating costs and optimize our organization while increasing investments in our franchise. This has contributed to the outstanding job the team has done on improving gross margin. We have budgeted an incremental $30 million in this year for a total of $130 million. We are planning Marysville plant upgrades to support fertilizer innovation. We are going to increase automation across our supply chain, expanding the capacity of our growing media network to stay ahead of growing demand in our branded soils business, and implementing transformational AI and technology company-wide. On the brand side, we will continue to increase investment to the tune of $25 million this year, focusing on key areas such as media, digital, and R&D. This incremental spend is enabled by the transformation work we completed last year coupled with thoughtful reallocation of resources to focus on our priorities. Some of this will include authentic marketing campaigns geared towards the growing Hispanic population. In addition, we recently secured the naming rights to the Columbus Crew Soccer Stadium, providing great brand recognition for the Major League Soccer season and upcoming World Cup events. Soccer is one of the fastest-growing sports, and its fans are a key demographic for us. As you can see, we are making progress on multiple fronts, and are on track to our guidance. Our '26 plan is solid and will serve as the stepping stone to the bigger financial goal. We have the best brands in a unique category, we are looking forward to bringing more consumers into the wonderful world of lawns, gardens, and green spaces. I am most excited about the momentum we are building. I see many more good things happening for our company and shareholders as our season gets underway, and the year unfolds. Here is Mark with the financial details. Mark J. Scheiwer: Thank you, and hello, everyone. Jim and Nate provided a great overview of our strategy. All the work we are doing to successfully execute upon it. We are making strong and consistent progress as we focus on actions that drive long-term value creation. We are off to a good start and optimistic for the year. We continue to strengthen our capital structure, advance our financial priorities, and invest in the growth of our core lawn and garden business. The new multiyear share repurchase program demonstrates our commitment to shareholder-friendly actions that go beyond a robust quarterly dividend. The repurchases will be executed in a measured manner, to ensure alignment with our capital allocation strategy, our focus on leverage reduction, and the guidance we established for fiscal '26. We anticipate a phased approach with the repurchases expected to begin in late 2026 and increasing over time as we further reduce our leverage ratio, to be in line with our financial goal of below 3.5 times. With this background, I will move to our performance, starting with the divestiture of our Hawthorne business. With our board's commitment and a pending sale transaction, starting this first fiscal quarter, we are classifying Hawthorne as a discontinued operation. We have removed Hawthorne from our ongoing operations and are reporting it separately as a single line item in the P&L called loss from discontinued operations net of tax. The prior first quarter result of operations has been updated to reflect this as well. We plan to recast the financial results to reflect Hawthorne as a discontinued operation for each of the quarterly periods in fiscal '24, and '25. This will occur within the next few weeks and will help with your financial modeling and comparisons when you look at the performance of our Consumer business these past two years. As part of the transaction, Vireo Growth will acquire Hawthorne in exchange for its equity. And moving forward, this equity will be reported as a minority investment in our financial statements. In connection with the classification of Hawthorne as a discontinued operation, we took a pretax asset impairment charge of $105 million recorded within the loss from discontinued operations representing the excess of Hawthorne's carrying value over its estimated selling price. Looking at our top-line sales this quarter, total company net sales, which exclude Hawthorne, were $354.4 million. US consumer sales of $328.5 million were ahead of expectations due to changes in the timing of early season load-in with certain customers. Our first quarter represents around 10% of our full-year sales, and mostly reflects load-in activities tied to the upcoming spring and summer lawn and garden season. We expect retailers to increase these load-in activities as we draw closer to the POS curve. In fact, retailer shipments in January picked up at a record pace. Making it one of the highest January shipment months ever. Moving to POS, I want to call out an update this quarter. To our reporting of U.S. Consumer POS activity to align more closely with our go-forward focus of driving growth in our branded product sales, broadening our customer base, and growing in e-commerce. We listened to your feedback and have taken steps to improve the clarity of our POS data we will use consistently in the future. Starting this quarter, we are providing a robust and comprehensive view of POS by expanding reporting from our previously reported three largest customers to include POS data from 15 of our largest customers including e-commerce. Reported POS will be for branded products only, excluding mulch, private label, and commodity items. In addition, POS by key business categories of lawns, gardens, and controls has been added to our supplemental financial presentation slides, posted on the website earlier this morning. This updated measure is more directionally aligned with our shipment activity and represents over 80% of our total US consumer sales activity. Under this new reporting approach, our fiscal '25 POS dollars were up 2%. Closely mirroring our plus 1% in US consumer sales. POS for the first quarter, which is less than 10% of our full fiscal year, was slightly down at 1% in both dollars and units compared to the '25. For context, the first quarter we just reported was comping against one of our strongest first quarters on record last year. Additionally, much of the fall season in calendar '25 was pulled forward due to favorable weather conditions and this showed up in our strong POS in August and September '25. Also, during the '26, we are starting to see POS dollars and units move more in line with one another compared to recent years due to a shift in our mix strategy. We expect this trend to continue. Some of the POS bright spots in Q1 included gardens, and Roundup. Nate explained the opportunities we see in indoor gardening, and this began to play out in Q1. POS and indoor gardening was up 7.7% in dollars and up 9% in units. In addition, Roundup saw strong consumer demand and was up 24% in dollars and 27% in units. We also saw good growth year over year in spreaders, weed, and insect control products. E-commerce was again a strong growth area. As we continue to drive substantial gains primarily through our retailer e-commerce sites. For the quarter, e-commerce POS dollars for our branded products were up 12%. And units were up 17%. Branded product e-commerce sales represented 14% of our overall POS in Q1, a 150 basis point increase over the prior year. Gross margin expansion is a financial priority and for the quarter, we delivered a GAAP gross margin rate of 25%, up 90 basis points over the prior year. The non-GAAP adjusted gross margin rate was 25.4%, compared with 24.5% a year ago. The improvement was primarily driven by ongoing supply chain cost efficiencies coupled with our planned pricing actions. Moving down the P&L, SG&A for the quarter decreased 7% to $106 million, the result of equity compensation decreases that were partially offset by an increase in media and marketing to support our brands. Looking at the non-GAAP adjusted EBITDA for the quarter it was $3 million ahead of our expectations due to the timing shift of U.S. Consumer sales tied to seasonal load-in activities of our retail partners. Below the line, interest expense continued to fall from lower debt balances and interest rates. Interest expense was $27.2 million, down 20% from the '25. We also reduced leverage nearly a half a turn ending the quarter at 4.03 times net debt to adjusted EBITDA, compared with 4.52 times in the '5. This was a result of continued deployment of free cash flow to debt reduction and improved EBITDA. Regarding free cash flow, it was favorable by $78 million in the quarter. Due to the timing of accruals, our continued focus on working capital management, including further supply chain optimization, and automation, making us more nimble during the seasonal inventory build. As for the bottom line, we delivered improvement here too. We typically report a loss in our first fiscal quarter. This quarter, the GAAP net loss from continuing operations was $47.8 million or $0.83 per share. Versus $66.1 million or $1.15 per share in the prior year. The non-GAAP adjusted loss for the first quarter was $44.6 million or $0.77 per share. Versus $50.2 million or $0.88 per share in the prior year. Overall, we are pleased with our first quarter performance. And have full confidence in our fiscal '26 financial guidance. Which includes US consumer net sales growth of low single digits, non-GAAP adjusted gross margin rate of at least 32%, and non-GAAP adjusted earnings from continuing operations per share range of $4.15 to $4.35 per share. Non-GAAP adjusted EBITDA growth of mid-single digits, and free cash flow of $275 million driving leverage ratio down to the high threes. As we continue to deliver, upon the key elements of our mid-range plan, through fiscal '27, we are shifting our sights to the long-term growth prospects for our company. Jim addressed the financial priorities through fiscal 2030 and you can expect us to share more details related to these priorities and the plan at an Investor Day event we are planning this summer. Thank you, and I will now turn it over to the operator. Operator: Star one one on your telephone and wait for your name to be in touch. To withdraw your question, simply press star one one again. As a reminder, the consideration of time, please limit yourself to one question and one follow-up. Please standby for our first question. Now first question coming from the line of Peter Grom from UBS. Your line is now open. Peter Grom: Great. Thank you, operator. Good morning, everybody. Maybe just going back to some of the original commentary around the work the team has been doing and I know we are going to get a lot more details at the Investor Day this summer. But the high degree of confidence that you can outperform the guidance this year. You maybe just talk about what is driving that? Or where you have increased confidence and visibility sales, margin, both at? You sounded quite optimistic. So any color, I think, would be helpful. Mark J. Scheiwer: Sure. Good to talk to you Peter. This is Mark Scheiwer. I will start with some of the bottom line confidence and then I will let Jim and Nate speak to some of the top line as they see it, as they work with the operators. You will see in the gross margin line, obviously, we announced the Hawthorne divestiture. So that, as Jim alluded to, provided 40 basis points of benefit on a full-year basis. In addition, given our track record and some of our planning as we have gotten further into the year, we feel comfortable as we navigate that you know, we should be able to outperform 32% as a number. So I feel, you know, as we guide further in the year, we will give our customary update after the second quarter. And we can provide a little more refined guidance around call it, margin. You did also see some good performance on interest expense down below the line as folks are navigating and managing cash flow really well. So I feel really good about how the team is navigating free cash flow on that side. And then just from my perspective on the finance side, on the top line, you know, as far as consensus and where we landed versus sales and what we have about on the last quarter call, you know, sales from retailers, it is a big load-in quarter for the quarter. And we saw really good positive momentum there. As we navigated the quarter. Maybe that exceeded some of our expectations initially at year-end. Nate Baxter: And I will just add real quickly, Peter. You know, between the innovation we are bringing to market and the focus that we have in partnership with our retailers on the branded products, there is a lot of bullishness about the season. So we think all those things together is what sort of gives us our confidence. James S. Hagedorn: And, you know, look, I would just throw in there from my point of view that when we put sort of the guidance together, and this is not unusual for us, it is really before our business plans are being finalized. Excuse me. And, you know, we are through the process of the work we do with our retailers. So, you know, I think that they were pretty conservative numbers. You know, I and I think that is what you guys would expect. I think everybody is saying, you know, under promise, over deliver. But between the guidance we gave and Nate and Nate's operating numbers, there is quite a big difference. And so Nate, I think, is feeling confident that you know, we are at least better than the plan that Scheiwer put together, which is kind of a safety plan. And so I think so far so good. And again, the part which is that at the consensus, and this goes to I think mostly confidence, in the numbers. We built an incentive plan that was approved by the board recently that is you know, the guidance numbers would not pay out at a 100%. And I think that is important to just know where the management team is because the incentive does matter. And so I think there is a lot of confidence. I think if sales were here, but is not talking at the moment. But if they were talking, they would say, we have got excellent programs in place for the year. And I think the operating part of the business is being very well managed. Peter Grom: Great. Thank you so much. I am going to pass it on. Operator: Thank you. And our next coming from the line of Christopher Michael Carey with Wells Fargo Securities. Your line is now open. Christopher Michael Carey: Hi. Good morning, everybody. Hey. Morning. Morning, Chris. So okay. So I I guess I sent some positive you know, early signs of, you know, retailer shipments both in the quarter and and perhaps even even quarter to date I believe the year is set up to be a bit more back half weighted from a growth standpoint. Can you just give us a sense of whether the early activity has evolved your view about, you know, the the the phasing through the year the timing of inventory loads? Or are these just weeks too small to read too much into and you are kind of still thinking the same thing? May maybe just give us a sense of how you are your thought process on on the cadence know, has has evolved through the year. And I guess that is really about your your ability to kind of shift to retailers and retailers receptivity. Thanks. James S. Hagedorn: Chris, I would just throw out that it is no joke that the direction that I am leading is going to be less focused on the quarters and you know, I I I think it is a really know, honestly shitty way to run a business. And I I know I think everybody probably say that knows our business and knows just generally, public companies would say, do not let the quarterly results drive you guys and make you nuts. And part of what I am trying to get the operating team is to say, look, let us go for our milestones. Let us let us you know, and so I I think the answer is Mark will will answer it, but I think the answer is yes. It is evolving and back to a more traditional kind of pattern. Than we had. But, you know, you get snow in in the Northeast and, you know, a lot of parking lots in the Northeast are going to be full. It will probably delay deliveries. And I think the the answer is it does not mean anything. You know? And so I I think the answer is yes. You are seeing evolution in that and maybe it is just back to kind of a more traditional Mark and I talked about this yesterday. It is like, what are you seeing on these patterns? You know, because I mean, think markets sort of I think it will get back to kinda fifty fifty. And, you know, I said, is that you see that really happening? And he is like, well, kind of. But I think the thing is we are we are looking for the fiscal year and making the sort of milestones that we need to get to to make like, I am going to say, our plan work. And so I think generally, the answer is yes. But what I do not want to do is get all freaked out over the fact that there is just no doubt that you will see deviation a lot of it depending on weather. Mark J. Scheiwer: Chris, just as a as a follow-up to what Jim said, I think going into the year when we talked to year-end, we we we kind of you know, had talked about effectively like a 2% shift in sales from call it, second half to first half unit. And I I would say we do not have a a a ton more data, you know, the first quarter is a small part of the quarter. But you know, could I see it being a little bit less than that? Yes. I think it could be potentially like a 1% shift. You know, first second half to first half. So it could could be a little bit less than our expectation. Just, you know, again, we are trying to navigate a few years being out from COVID now. And the sales patterns, but the retailers are really supportive of us. We have strong shelf space. And support, and and so that that that is very much the case. And so I I it could be less than what we had talked about at year-end. I think it could be but I think there will still be a little bit of a shift. Nate Baxter: Yeah. Just, you know, we ended last year in a really good place with retailer inventories where we were down call it, 5%. So I think this just signals a little bit of optimism from retailers you know, making sure they have the inventory they need as we get ready for spring. James S. Hagedorn: So I would I mean, you have talked to the retailers. You know? I do. You have out there, like, how are they feeling about this? Nate Baxter: Good. Good. And I think even some of them commented, you know, we loaded in a little more than we thought we would. And I think it is because of the healthy inventory level and the optimism you know, with the one big beautiful bill, we are expecting some tax refunds. And I think, you know, retailers are bullish on season. Christopher Michael Carey: Okay. Great. Thank you. Operator: Thank you. Our next question coming from the line of Andrew Carter with Stifel. Andrew Carter: Hey. Thank you. Good morning. Sorry. Was messing with the mute button. So if I understand it correctly, if you want to add a billion dollars from 2025 to the business, and you think about where '26 will land, which will be a good base of branded, I am getting, like, kind of a $6.06 kinda CAGR from '27 through or '26 through '30. Knows my math right? But if am I right range? And that would be kind of an acceleration at least a performance at the high end of what you expect the branded business to do this year. And how reliant is that on M&A? How reliant is some of these initiatives to be successful such as do it for me? And well as the e-commerce initiative. Nate Baxter: So I I I would look at it this way. First of all, a lot of the initiatives we talk about really will not be accretive '27 and beyond. So the M&A and some of the the do it for me and pro. What we are leaning into now is the e-commerce. And, you know, we saw Mark talked about it in his prepared remarks, but, you know, we we saw, call it, sort of flat to negative 1% growth overall. Most of that was brick and mortar, but we saw double-digit growth. In e-com. And from a market share perspective, while we were flat in brick and mortar, we saw almost two points of gain in e-com. So Jim said it, know, it is about 5%. And that is really the path we have to to to get to. And I think the sum you know, my operating plan for '26, as Jim said, is more aggressive. We can talk more when we when we do the investor day, you know, later this year, but definitely have a plan. We are we are willing to talk through with you guys. Andrew, as a follow-up, Mark Scheiwer here. You are right. You are in the ballpark as far as growth rates go. And, you know, on the finance side, as I kinda look at the building block, as as we set up this year for 26, pricing is a building block. Volume growth is a building block. And then innovation or new product listings are a building block. So if I was to break down that, call it five, 6% of incremental sales growth, you know, those three would be big components of that. We are introducing the tuck-in M&A as well. As part of that. So that would be a part of that growth. I think some of the partnerships we are looking at I think it is safe to assume they would add probably a point of sales growth in the future as we as we navigate those partnerships and and really like those, those businesses, in the future. So I those are probably the four biggest biggest blocks every depending on the year. You know, you may see you may see some of them outperform. And then underlying it all, obviously, would be the e-com growth. That that you are starting to that you have been seeing the past, call it, six quarters of our financial results. The second question, I know that getting back to share repurchase this year, you outlined 40 million shares, which would be down 30% from where you are right now. I want to make sure I understand that the commit to that and if that is flexible, like, if you if the right M&A target came, that that would be off the table. And I assume I am not I am not sure how that would be treated, given the trust ownership, but would the trust participate in that? I mean, it would it might hurt the the dynamics here. The trust moved up to, you know, 37%. So how are you thinking about all those things? James S. Hagedorn: Yeah. I, you know, I I put 40 million in you know, in this. So it is it is a long-term commitment. I frankly had a bigger percentage reduction in share count in mind but I thought this was a good sort of moderate to long-term target that I think people could get their head around and it it is it is sounded good to me. I think the limited partnership, not a trust, but the limited partnership would probably ride somewhere in the middle with you know, probably a little bit of liquidity selling into it, but majority accreting through that. So I I think that is what you are what you are likely just to see. And then, you know, I you know, it is where I am in my career. You know, I have got to look to my my partner that is sitting to my right side. Nate, and say, dude, I do not want you getting amnesia on this shit. I do not want you deciding like, to me this is a really good strategy for us. We you know, if you look at the investment we are making in the business, it is like three to one investment in the business relative to the repurchase. Okay? So I I think a lot of people have said, you sure you are investing sufficiently behind the business? And the answer is, absolutely. Nate is comfortable with that. He has got to drive these numbers. I think Mark is comfortable with it. I am comfortable with it. But you know, I I have got to say, I I have been the sort of architect of a lot of the M&A activity. And I think while putting Scotts together and sort of consolidating the United States lawn and garden market has been a good one for us. I think a lot of the other stuff you know, which would have re would have been billions of dollars, maybe it would have been better spent this is a super simple, easy to understand, not challenging, you know, it is a big deal for me to tell Scheiwer you got the keys on this and, you know, if you become uncomfortable, you you can delay or stop. And I do not want people to sort of get you know, just I am not going to use the word distracted, but to become convinced that some giant M&A deal is going to be the answer to it. I think that we like this company. And I think we think investing in this company and if we have to do M&A, like big M&A, billion plus M&A, we will do it in this company. And there is no integration risk. We can do it. We can maintain our leverage. So you know, I am not going to say never because I think in sort of Air Force multiple choice test, the answer was do not ever answer that one. That is definitely a trick. So I am not sure the answer is never, but I I did make Nate promise me like, you are not going to forget this commitment. Nate Baxter: Agreed. Yeah. No. And I look. I think when Jim shared his thoughts on the strategy, I think my response was something the effect of hell, yeah. I am all in. I mean, that is really why I came here. And we really believe in the business, and we think it is the best business around, so we will just invest in ourselves. And I am not worried about reinvesting in the business, like Jim said. 75% of that cash flow will be supporting growth in the business. So I am really comfortable with the plan. James S. Hagedorn: And it just by the way, like, I called Nate at five in the morning, at his home, and he lives in this loft thing in Columbus. So it is like a big room. And he was like, in the dark. And I and I sort of said, here is what I am thinking. And within ten seconds, he said, I am in. And so that really is kinda how this whole thing started is. Calling Nate, getting his view it was just that quick. I am in. And then we developed it. We started expanding it with the team, brought the board in. And people are people are pretty happy with this. My view is this is our plan. We are sticking with it. Andrew, what do you think? Andrew Carter: Well, I mean, I think that sounds like you got a nice opportunity cost filter for M&A now with a billion-dollar share repurchase commitment. That is my first blush. Nate Baxter: No. I think it forces us to be really careful. I think I said it in my prepared remarks, you know, consumer-friendly, tuck-ins that fill gaps or allowed us to expand adjacent and, you know, we will not allow them to be decretive in any way. I think it is a really smart approach. Andrew Carter: Thanks. I will pass it on. Operator: Thank you. Our next question coming from the line of Joseph Altobello with Raymond James. Your line is now open. Joseph Altobello: Thanks. Hey, guys. Good morning. A couple of questions on the e-com business. I think you mentioned it was up nicely double digits this quarter. And I think you said it was 14% of overall POS. How big can that business be? And I guess, maybe more importantly, what is the margin delta between e-commerce and and brick and mortar? Nate Baxter: Well, look. I think I think the business can be huge. The list that occurred across all of our retailers. You know, I I think that is an important point to make. They are really leaning into it. Very little of it comes from direct to consumer. So I think, you know, Joe, a cost I mean, look. The retailers obviously are highly competitive and trying to figure out how to continue to lower their costs. But we see less than five, you know, percentage point delta in some of the margins, and they are getting better, you know, every quarter. So as the the big guys and you know who they are, sort of invest in their infrastructure, we are riding along. And I think, you know, we are we are just seeing explosive growth, and it is it is not in just exclusive e-com. It is also in our traditional brick and mortar partners. We we see a lot of opportunity. It it will be a a big percentage of that billion will come from e-com, you know, from various retail partners. James S. Hagedorn: Look. I think that the e-com you know, if you look at I was at a top to top with with Nate and you know, e-commerce came up and Nate said we are underpenetrated. We have got to we have got to get to a level of you know, market share in e-com that we have in brick and mortar. And I nobody nobody argued the point. But if you just use that and say our share is the same and e-commerce that it is in and this is true across retailer sites. Everywhere. It it is a gigantic opportunity. More than half of that number. Yeah. So, I mean, that that is the that is the part. Now what is the challenge? To Nate and his operating team a lot of those SKUs are are different. You know, their packaging is different. And so it is a lot of work. I mean, we have talked about mean, part of this is our own fault. You know, in to some extent, which is where we are we are underpenetrated. That means other kind of hobos are overpenetrated. And that is a little hard to take. And I think in a world where brick and mortar was growing fast enough that you know, it just was not a great and it listen, we are simpletons here, I think, some ways. You know, you if you look at grocery, you look at e-commerce, we were doing incredible work in brick and mortar, and we have fabulous partnerships with with big retailers and they are absolutely you know, our our best friends. And they are building out this this this stuff too. But there is a lot of work for us to say, we we let us just say deserve to have market shares in e-commerce that we have in conventional retail. And that is going to require change. In Nate's organization and a level of entrepreneurship that says, we are going to get quite a bit more scrappy. And it because otherwise, you know, it just like everything else we have talked about whether it is grocery or e-com, like, if you want to succeed there, you have to have products and market and talk to people who are shopping there. Yep. Joseph Altobello: Very helpful. Maybe if I could follow-up on that. Obviously, we are here in late January. But how are are your retail partners thinking about the lawn and garden category this spring given all the, you know, the affordability issues and pressures on the consumer right now? Nate Baxter: Well, look. You know, I I I spend a lot of time with our retail partners. I think everybody is feeling bullish. I mean, it is, you know, it is the same story. It is a big part of bringing consumers back into the stores. And online. And I think they absolutely see those investments as worth it. I do not know, Josh, you want to make a comment on that? Josh Meihls: Yeah. Josh Meihls here. I would say retail partners are are very bullish on lawn and garden. To reiterate Nate's point, they see it as a traffic driver into the stores, a traffic driver to their e-commerce. In financial times like this. Relatively, you know, unburdened by small projects, paint, lawn and garden tend to overperform, and that is where our retail are leaning in to drive that traffic and that conversion for both in-store and online. Joseph Altobello: Got it. Thank you. Operator: Thank you. And our next question comes from the line of Jonathan Matuszewski with Jefferies. Your line is now open. Jonathan Matuszewski: Great. Good morning, and thanks for taking my questions. My first one was on supply chain. You have outlined a multifaceted plan here, you know, everything from automation to more capacity and and SKU rationalization. Any way to rank order some of these things as we as we think about kind of the the biggest opportunity for cost savings and and gross margin ahead? That is my first question. Thanks. Nate Baxter: Thanks, Jonathan. I you know what? Look. I think they are all important. I think if you look at the performance we delivered in last year, I think our team is pretty confident they can continue. As you recall, if we over-delivered, I think we ended up a $100 million out of supply chain, including commodities last year. Got $50 million to go in my original challenge. There will probably be another challenge coming. I it is a little bit of everything everywhere. So remember, the way we approach, for example, efficiency in our plants you know, a lot of these plants are 50 years old, and the equipment is nearly that old. Way Josh sort of manages that is when we have to replace a line, a bagging line, going to be a more modern, obviously, line that has probably at least a 20-30% improvement in throughput. So it is it is really the sum of a lot of small changes some of the bigger areas are automation in our distribution center. I think, you know, you know, we have been on a journey. So we will continue to deliver results there. And then you know, our our tech transformation. I mean, we are in the process of completely reimagining all of our business processes. Part of our ERP migration, but it is more than that. It is including do we reduce the number of touches on any given project, whether it is a finance project or a marketing one. So I I do not know if I can, rank order them for you, but I can say is I have a lot of confidence that these initiatives are going to continue to to help drive the bottom line. Mark J. Scheiwer: And, Jonathan, this is Mark Scheiwer. The other the other components of improving gross margin at the COGS line are going to be continue to be fixed cost leverage as we as we automate and get more efficient in our factories, we should be able to push more product through those, both distribution locations and factories. So we should get fixed cost leverage benefits going up. And then innovation as we look to continue to do cost out in our products and and continue to make them more eff stronger, better, all that. So I would say those two things also are part of that. That journey. Jonathan Matuszewski: That is helpful. And then just a quick follow-up here. Pro penetration continues to rise at your key retail partners. Just curious, what are you doing different to collaborate with the big retail partners of yours to, you know, move Scott to the the consideration sets of of more of their pro customers versus DIY Presumably, this would be something in addition to the DIFMF or you are pursuing in those pilot markets you mentioned. Nate Baxter: Yeah, Jonathan. I mean, I I I do not want to get into specifics, but clearly, big retail partners have big pro initiatives. And I would say the way we are addressing that is product development you know, looking at larger sizes, more value to bring to the pro side of the market. But as you point out, it is a it is a multipronged approach. We will work with retail partners. We will also work directly with small and medium-sized businesses. But at the end of the day, again, we are we are agnostic of where they get our product. So we would just want to make it available in channels that makes it easy for those pros and do it for me. Businesses to to thrive. And so it will it will be pretty broad. I think I will leave it there. We will probably have more to talk about this summer when we do our investor day in that space. Jonathan Matuszewski: Thank you. Operator: Our next coming from the line of William Reuter with Bank of America. William Reuter: Hi. I just have two. The first, Mark, when you were discussing M&A, you mentioned 1% growth. So is that to say that, that 5% annual growth target includes about 1% annually? Mark J. Scheiwer: That is correct. Yeah. That would be out in the not this year. But it would be focused on '27 and beyond. William Reuter: Got it. And then when we have been discussing the incremental 50 million of cost savings, in one of the most recent answers, we talked about the 50 million that we we still have. It seems like some of those are investments that are in the CapEx line. Will CapEx remain elevated in future years? Or is the elevated CapEx really related to the $50 million of cost savings we are targeting this year, and then we will move back towards maybe a $100 million or lower. Mark J. Scheiwer: We are still building out, I would say, like, our five-year road map as far as long-term plan. But I would expect our CapEx remain elevated at call it, a $130 million in '27 and beyond. And and be as we look to automate not only our factories, but also our back-office activities. But in in the near term, as as what I am seeing in the business and what we are working on, I would say for the next several years. That is that is correct. Nate Baxter: Plus there is the ERP component over the next, call it, two to three years. That will be part of that CapEx as well. William Reuter: Got it. That makes sense. Okay. Alright. That is all for me. Thank you. Operator: Yep. Last one. Thank you. Now last questioner will come from the line of Jakob Museven. From JPMorgan. Your line is now open. Carla Casella: Hi. This is actually Carla Casella from JPMorgan. Just your thoughts in terms of the longer-term capital structure. And you mentioned your leverage target, but how did you say how you are going to address the 2026 maturity? Mark J. Scheiwer: Sure. Hello, Carla. This is Mark Scheiwer. So the 2026 maturities, we plan to you you saw on our balance sheet, they they moved to current. Our expectation is we would leverage our free cash flow generation that we that we generate over the summer. That is built into our $275 million of free cash flow plan. Along with access to a revolver to to pay those to pay those off. You know, later this summer. You know, as they as they start to come due. So we will do that you know, at in the summertime. And leverage again free cash flow and then access to our revolving revolver. Carla Casella: Okay. Great. And then you mentioned you are going to post financials excluding Hawthorne. Can you just give us a goalpost for what EBITDA was last year with Hawthorne on kind of backing into like a $100 or sorry, $5.30. Does that sound like the right range? Mark J. Scheiwer: Yeah. So last year, we had adjusted EBITDA with Hawthorne of $581 million. We are still working through the finalization of the recast, but I would expect it probably decrease by approximately $11 million. When you back out the Hawthorne. So call it call it around $570 million from an EBITDA perspective for the 2025 fiscal 2025 recasted number. And we will we will provide you the 2024 number in those materials as well but that would be the 2025 number. Carla Casella: Okay. Great. Thank you. Operator: Thank you. And that is the time we have for our Q&A session. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. And you may now disconnect.
Operator: Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Fourth Quarter 2025 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. As a reminder, this call is being recorded and will be available for replay shortly after its completion on the company's website at www.cpb.bank. I would like to turn the call over to Mr. Jayrald Rabago, Senior Strategic Financial Officer. Please go ahead. Jayrald Rabago: Thank you, and thank you all for joining us as we review the financial results of the 2025 for Central Pacific Financial Corp. With me this morning are Arnold Martines, Chairman, President, and Chief Executive Officer; David Morimoto, Vice Chairman and Chief Operating Officer; Ralph Mesick, Senior Executive Vice President and Chief Risk Officer; Dayna Matsumoto, Executive Vice President and Chief Financial Officer; and Anna Hu, Executive Vice President and Chief Credit Officer. We have prepared a supplemental slide presentation that provides additional details on our earnings release and is available in the Investor Relations section of our website at ir.cpb.bank. During the course of today's call, management may make forward-looking statements. While we believe these statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to our forward-looking statements, please refer to slide two of our presentation. And now I'll turn the call over to our Chairman, President, and CEO, Arnold Martines. Arnold? Arnold Martines: Thank you, Jayrald, and aloha to everyone joining us today. I want to start by sharing that Central Pacific Bank was recently named to Newsweek's list of America's Best Regional Banks for 2026. This recognition reflects the strength of our franchise and the trust our customers place in us every day. It's also a testament to our team's commitment to deliver exceptional service and build lasting relationships across the communities we serve, which is foundational to delivering long-term value to our shareholders. Central Pacific closed the year with strong momentum in the fourth quarter and solid overall performance in 2025. The Q4 results were driven by disciplined execution across our core franchise. Our profitability strengthened as we grew revenue and expanded our margin while proactively managing expenses. As we enter 2026, Central Pacific Bank is ultra-focused on our core business, which includes a disciplined approach to organic growth, thoughtful diversification, and operational excellence. We are well-positioned to achieve consistent earnings growth, enhance shareholder returns, and strengthen our competitive advantage. Over the past three years, our total shareholder return was 77%, reflecting both solid share price appreciation and dividends. Additionally, our core earnings per share increased 24% from the prior year, underscoring the strong operating momentum across our franchise. Hawaii's economy continues to be resilient despite macroeconomic uncertainty leading to lower visitor counts and softer job growth. Offsetting such factors, Hawaii's key strength continues to come from strong construction activity at both the public and private levels, as well as the military sector. Total core deposits grew by $78 million during the quarter, with meaningful gains in interest-bearing demand, savings, and money market balances. At the same time, the average rate paid on total deposits declined to 94 basis points from 102 basis points. Noninterest-bearing demand deposits remained healthy, continuing to represent a sizable 29% of total deposits. In the fourth quarter, our total loan portfolio declined by $78 million from the prior quarter. During the quarter, we experienced several large construction and commercial mortgage loan payoffs, combined with a delay of certain new loan fundings. For the full 2025 year, total loans declined by $44 million. The full-year decline was driven by an aggregate $190 million decrease in residential mortgage, home equity, and consumer portfolios, which was partially offset by strong growth in commercial mortgage and construction. Average loan yields in the fourth quarter remained relatively stable at 4.99% as the impact from Fed rate cuts was mitigated by back book loan repricing. As we enter 2026, our revenue growth strategy will be further enhanced with sales management technology tools and consistent discipline to drive results. We continue to build our loan pipeline with a focus on our core Hawaii market, supplemented by select Mainland markets for diversification. Our deposit growth will be driven by a focus on deepening relationships in Hawaii and strategic partnerships in Japan and Korea. For 2026, we are conservatively guiding to full-year net loan and deposit growth in the low single-digit percentage range. With that, I'll turn the call over to Dayna. Thanks, David. Dayna Matsumoto: For the fourth quarter, we reported net income of $22.9 million or 85¢ per diluted share, compared to $18.6 million or 69¢ per diluted share in the prior quarter. Our return on average assets was 1.25%, and return on average equity was 15.41%, underscoring continued profitability improvement in a dynamic environment. For the full 2025 year, net income was $77.5 million or $2.86 per diluted share. Excluding $1.5 million in one-time pretax office consolidation costs in the prior quarter, adjusted non-GAAP net income was $78.6 million, representing a meaningful 24% increase over 2024 non-GAAP net income of $63.4 million, which excludes non-core items. Fourth-quarter net interest income rose by 1.3% from the prior quarter to $62.1 million, and net interest margin expanded seven basis points to 3.56%. We were successful in lowering our deposit cost by eight basis points to 0.94%, while our total loan yields declined by only two basis points to 4.99%. There was approximately $250 million in loan runoff in the fourth quarter. Our weighted average new loan yield this quarter was 6.8%, as compared to our weighted average portfolio yield of 4.99%. For the full year 2026, we are guiding to approximately a 4 to 6% increase in net interest income. We expect the NIM to expand, albeit at a slower pace than what we experienced in 2025. Our expectation for first-quarter NIM is an expansion of approximately two to five basis points. Total other operating income was $14.2 million, up $700,000 from last quarter, primarily driven by a $900,000 increase in bank-owned life insurance income. During the quarter, we recognized BOLI death benefit income of $1.4 million. Going forward, we anticipate total other operating income to grow by 1 to 2% in 2026 over 2025 normalized. Total other operating expenses were $45.7 million, down $1.3 million from the previous quarter, which included a one-time expense related to the consolidation of our operations center. We repurchased 788,000 shares at a total cost of $23.3 million. The board declared a first-quarter cash dividend of 29¢ per share, an increase of 3.6% from the prior quarter. Additionally, our board approved a new share repurchase authorization for up to $55 million in 2026. The increase in the dividend and share repurchase authorization reflects our strong earnings, capital, and liquidity position and outlook. Our current target capital ratios and priorities remain the same. We plan to continue to use capital for organic loan growth, dividends, and share repurchases to move towards our CET1 target of 11 to 12% to optimize our position. We enter 2026 with a strong balance sheet, improved profitability metrics, and a clear focus on delivering sustainable value for our shareholders. I'll now turn the call over to Ralph. Ralph Mesick: Thank you, Dayna. Our credit risk appetite continues to be informed by our strategic goals, emphasizing portfolio design, underwriting discipline, and risk-based pricing to achieve optimal returns, balance, and diversification. In the fourth quarter, we maintained strong credit performance. Asset quality indicators were stable, as credit costs stayed within an expected range, and the level of NPAs, past due loans, and criticized assets remain near cycle low. Net charge-offs were $2.5 million or 18 basis points annualized on average loans, with consumer book losses continuing to stabilize. Nonperforming assets were $14.4 million or 19 basis points of total assets. Past due loans over ninety days totaled $1.6 million, representing just three basis points of total loans. Criticized loans declined to 135 basis points of total loans, maintaining low levels. Provision expense for the quarter was $2.4 million, including $1.7 million added to the allowance, and $700,000 to the reserve for unfunded commitments. The decrease in provision expense was primarily driven by a decline in loan balances as well as improvements in our asset quality and macroeconomic forecast. We hold a strong capital position to support the bank through the credit cycle and against unexpected outcomes. At quarter-end, our total risk-based capital was 14.8%. Looking ahead, we'll continue to take a prudent approach to growing our loan portfolio to build durable earnings. Let me now turn the call back to Arnold. Thank you, Ralph. Arnold Martines: In closing, our fourth-quarter results reflect strategic execution and prudent risk management. We delivered improved operating efficiency, margin expansion, and execution of strategic initiatives that position Central Pacific for sustainable growth. As we look ahead, we remain focused on creating an exceptional experience for our customers and long-term value for our shareholders. I'm very proud of our team's accomplishments in 2025 and look forward to continuing the momentum in 2026. We are now happy to take your questions. Operator: Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your questions, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, pick up your handset and ensure that your phone is not on mute when asking your question. We will pause for a moment to compile the Q&A roster. Our first question comes from the line of Matthew Clark with Piper Sandler. Please go ahead. Matthew Clark: Morning, Matthew. I just want to start on the delay in new loan fundings this quarter. Somewhat expected. And it sounded like they're gonna fund here in the first half. And I believe a couple of them are construction projects that require higher reserves. I'm just trying to get the timing down. And what that means for your provisioning in the first half. David Morimoto: Hey, Matt. It's David. And, yeah, you're right. We did have some delayed closings that pushed into the first half of this year. I would say that the closings are probably a little more weighted to the second quarter versus the first quarter. And you are correct that some of it is funded deals. Some of it is construction. So it's gonna be a combination of the two. But probably a little more weighted to the second quarter versus the first quarter. Matthew Clark: Okay. Great. And then, Dayna, did you have the spot rate at the end of the year on deposits? Costs? Dayna Matsumoto: Sure, Matthew. Yes. Our deposit spot rate at December 31 was 89 basis points. Matthew Clark: Okay. And then you had a 30% deposit beta this quarter. Seems like that's what you're trying to manage to. Is that fair or has there been any change in deposit competition that might put that at risk? Dayna Matsumoto: Yeah. Matthew, that's correct. You know, the current cycle thus far, our interest-bearing deposit beta is about 30%. And with the outlook for two rate cuts this year, we anticipate that our cycle-to-date beta to remain roughly in the 25 to 30% range. We do still have some room to lower our deposit cost to offset our floating rate assets. Matthew Clark: Okay. Great. And then last one for me. Just on the buyback, I know it's for 2026, but just want to confirm the plan is to complete that buyback this year. Dayna Matsumoto: Yeah. Matthew, on the capital side, I want to start with, you know, just sharing that our strong earnings have built up our capital to a really solid level. And given this, our board approved a larger share repurchase authorization for this year. You know, that gives us flexibility. You can expect that we will be active on the buyback as we return capital that can't be used to organically grow our business. But the amount that we buy back each quarter, it's really gonna be dynamic. Matthew Clark: Yep. Understood. Thank you. Our next question comes from the line Kelly Motta with KBW. Please go ahead. Kelly Motta: Maybe kicking it off with the loan growth. I know you here over by the Hawaiian report test up in the last release. So wondering, incrementally, as you look to the year ahead, how you feel about the outlook for growth specifically in Hawaii and with that low single-digit loan growth, the mix of that from the islands the mainland? Thank you. David Morimoto: Hey. Hey, Kelly. It's David. Yeah. You're right. Uhiro did upgrade their forecast but it was an upgrade from a deeper downturn to a lighter downturn. So it's moving in the right direction. But it's you know, as far as Hawaii growth opportunities, we do have a nice pipeline of some growth opportunities there primarily focused in the commercial area. So it's C&I, commercial mortgage, and construction. And as we stated before, the growth between the Hawaii and Mainland will it'll fluctuate from quarter to quarter. But we are expecting 2026 to be a stronger growth year than 2025. And the balance between the Hawaii and Mainland will be a function of you know, risk-return opportunities as they arise. I did want to just point out one thing on 2025. Loan growth. You know, while growth was muted in 2025 for the full year, I did want to point out that we did see strong growth in the areas that we were targeting specifically construction and commercial mortgage. In the aggregate, those two portfolios grew by 10% year over year. And then the overall decline in loan growth was a result in drawdowns on the in the residential mortgage, home equity, and consumer portfolios. So that was sort of that was by design. You know, we did we are trying to shift our portfolio mix more to commercial. From consumer. And then another thing to note is on the consumer drawdowns, that somewhat within management's control. You know? We portfolioed only about a third of our resi mortgage production last year. And so that's a management decision that's within our control. So I think the loan growth in 2026, the reason we're more cautiously optimistic on 2026 is that we're expecting stronger growth in the commercial portfolios and less drawdown on the consumer portfolios. Kelly Motta: Got it. That's helpful. And then putting together the pieces of your guide, it seems to suggest some positive operating leverage as we head into 2026. I know expenses have been a focus for you guys. You've done a nice job managing them. As you look ahead, you know, if growth comes in weaker or there's more challenging margin expansion, is there additional room? Or conversely, if growth picks up, are there areas that you might be able to look to add to as you think about the overall platform? Thank you. Dayna Matsumoto: Hi, Kelly. Yeah. Definitely. You know, we continue to be very focused on managing our expenses and maintaining strong expense discipline while continuing to invest for growth. We have some flexibility. You know, if revenue is more or less, we can adjust. But overall, this year, we plan to continue to invest in technology to drive returns and efficiency. We do have a couple of projects planned for sales management systems and tools as well as some data platform enhancements. But those investments will have some offsets with savings coming from our continued automation and process improvements as well as optimizing our resources. Kelly Motta: Great. Thanks so much for the color. I'll step back. David Morimoto: Thanks, Kelly. Operator: Our next question comes from the line of David Pfister with Raymond James. Please go ahead. David Pfister: Hey. Good morning, everybody. David Morimoto: Hi, David. David Pfister: Maybe just following up kind of you know, on the loan growth side, you know, just with the focus on optimizing your loan portfolio towards more commercial, you know, and some of the commentary on a delay in some fundings, would you maybe expect growth like, again, this low single-digit growth, maybe a bit slower in the first part of the year? And would you expect continued declines maybe the back half of the year you know, accelerate as you work through that optimization? Just kind of curious how you think about the trajectory. David Morimoto: Hey, David. Yeah. I think what you described is the base case. Right? I think the first quarter is you know, a seasonally slower quarter for loan growth, and I think that's what we're expecting. You know, we're hoping we can still get some net loan growth in the first quarter, but it probably will be it'll probably start off slower, and then growth will, like, accelerate as we roll through the year. David Pfister: Okay. Okay. And then maybe just touching on you know, I'm just kind of curious how originations are trending and kind of how the pipeline's looking at this point. And if you could give any a bit more color on what's driving the elevated payoffs and paydowns, you know, whether it's, you know, asset sales or again, you talked about some strategic. You know, versus competition. Just kind of curious, you know, again, the origination side and then how some of the drivers behind payoffs and paydowns. David Morimoto: Yeah. David, the loan pipeline remains consistent with past levels and originations. Fourth-quarter originations were in the $300 million range. And, you know, that's where we likely need to be to keep the portfolio relatively flat to slightly down. So we need to get originations higher than that to see net loan growth. And again, we're forecasting cautiously optimistic that we'll see low single-digit growth and, we can outperform that. And then the second part of your question, David, was the drivers behind it, the payoffs and paydowns. Oh, I'm, yeah, I'm sorry. Yeah. I think I would chalk that up to just the construction portfolio has been on the smaller side. And, you know, when you have a small construction portfolio, and you do encounter payoff, you know, it really impacts loan growth. What we're trying to do now is we're obviously focused on building the construction portfolio, getting it a little more critical mass. And then when you do that, you know, the paydowns are somewhat offset by new construction draws. And so we got to get to that critical mass on the construction portfolio side. And we are working towards it. Last year, we did have a good year for construction originations that we'll be funding in the quarters ahead. David Pfister: Okay. Okay. And then maybe just touching on the switching gears to the deposit side. Just kind of curious how you know, the competitive landscape is from your perspective on the island. You guys have done a great job, you know, reducing deposit costs. But just kind of curious, you know, the competitive landscape, and then the core deposit growth that you saw, you know, was great to see. Curious how much of that is new clients versus gaining share with, you know, existing clients. So just kind of curious what you're seeing on the deposit side. David Morimoto: David, it's been a little bit of a combination of both. You know? Core deposit growth is you know, it's basic banking. Right? Blocking and tackling. It's calling on new customer prospects, and it's deepening our relationships, what we refer to as primacy, customer primacy, you know, improving primacy with our existing customers. So it's been a combination of both and I think we're optimistic on core deposit growth for 2026 as some of the initiatives that we put in place, you know, with calling efforts, being more disciplined on calling efforts, sales culture, and a focus on customer we think all of those will lead to stronger core deposit growth in 2026. David Pfister: Okay. Is that also kind of what's driving your confidence in accelerating originations due to that kind of cultural shift? David Morimoto: Yes. Yes. Exactly. It's just a stronger focus on deepening relationships with the existing customers, which we believe there's good opportunity there. But it's also customer prospecting. Right? You know, we have about 13% of the banking market, and there's a lot of opportunity to grow that. David Pfister: That's great. Thanks, everybody. David Morimoto: Thanks, David. Operator: Once again, if you would like to ask a question, please press star followed by the number one on your telephone keypad. At this time, we have no further questions. I will now turn the call back over to Jayrald Rabago for closing remarks. Jayrald Rabago: Thank you for joining our fourth-quarter 2025 earnings call. We appreciate your continued engagement and look forward to updating you on our progress next quarter. Operator: This concludes today's conference call. You may now disconnect your lines. Have a pleasant day.
Operator: Good day, ladies and gentlemen, and welcome to the MSCI Fourth Quarter 2025 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. Sir, you may begin. Jeremy Ulan: Thank you, and good day, and welcome to the MSCI Fourth Quarter 2025 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the fourth quarter 2025. This press release, along with an earnings presentation and brief quarterly update are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of today's presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures. You'll find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO; Andy Wiechmann, our Chief Financial Officer; and Baer Pettit, our President. Lastly, we wanted to remind our analysts to ask one question at a time during the Q&A portion of our call. We do encourage you to ask more questions by adding yourselves back to the queue. With that, let me now turn the call over to Henry Fernandez. Henry? Henry Fernandez: Thank you, Jeremy. Good day, everyone, and thank you for joining us today. MSCI is generating impressive momentum across product lines and client segments. Our leadership in the global investment ecosystem and relentless focus on innovation has enabled us to drive a strong financial performance. In the fourth quarter, we achieved organic revenue growth of over 10%, adjusted EBITDA growth of over 13% and adjusted EPS growth of almost 12% for the quarter and almost 14% for the full year. Our attractive all-weather franchise, client centricity and alignment with favorable long-term secular trends have positioned us to deliver on the long-term growth targets we have set for MSCI. Since MSCI's IPO a little over 18 years ago, we have achieved a compound annual growth rate of nearly 13% for total revenue, nearly 15% for adjusted EBITDA and over 16% for adjusted EPS. In addition, we have now delivered 11 consecutive years of double-digit adjusted EPS growth. We intend to continue with all these records at MSCI for the years and decades to come. In the fourth quarter and through yesterday, we also bought back nearly $958 million of MSCI shares at an average price of about $560 per share. Over the last 2 years, we have repurchased almost $3.3 billion of our shares at an average price of $554. As you can see, we have a very strong conviction on the prospects and potential of MSCI, and we believe our franchise remains undervalued. In Q4, MSCI's operating metrics included net new subscription sales of $65 million and nonrecurring sales of $31 million, bringing total net sales to over $96 million. Q4 was, in fact, our second best quarter ever for recurring net new subscription sales, and we grew a growth rate of 18%. Across MSCI, our retention rate was over 94% for the full year. All of this resulted in total run rate of over $3.3 billion, growing 13% and comprised of total ABF run rate of $852 million, growing 26% and recurring subscription run rate of over $2.4 billion, growing over 9%. Q4 showed how MSCI is using our deep rooted competitive advantages to drive growth. With newer client segments, in particular, we are doubling down on key opportunities while reinforcing our position as the essential intelligence layer of global investing. So for example, our index flywheel is helping clients form thematic baskets, gain global exposures, unlock new distribution channels, launch tradable products and hedge exposures. In Q4, we delivered our best quarter ever for new recurring subscription sales in Index. Meanwhile, total ETF and non-ETF AUM linked to MSCI indices reached approximately $7 trillion, driven by record inflows into our clients' ETF products linked to MSCI indices, particularly listed ETF products in Europe. In general, asset-based fees remain a consistently strong contributor to our top line with a durable track record of positive annual cash inflows into ETFs linked to MSCI indices every year stretching back more than a decade. We also had a strong quarter in Analytics, where we posted our second best Q4 on record for new subscription sales. In Private Capital Solutions, we drove recurring sales growth of 86%, supported by our rollout of innovative new products and landing new client relationships. In Sustainability and Climate, our new subscription sales were lower than last year's levels, with particular softness in the Americas. In Sustainability, MSCI is expanding our solutions across all client segments and asset classes to address emerging risks and opportunities that go beyond environmental, social and governance matters. Examples include AI and supply chain disruptions on companies and fixed income instruments in people's portfolios. In climate, MSCI is emphasizing physical risk and energy transition tools that promote consistent standards and a common language across companies, industries and regions. Physical risk is just one area where we have been leveraging AI to enhance our capabilities with tools such as geospatial asset intelligence. We're also harnessing AI to enhance our solutions in custom indices, risk insights, ESG controversies and private assets. For example, MSCI has decades worth of historical data on private markets, and we're now using AI to process this data in significantly larger volumes and then feed it into our total portfolio insights. Our company-wide total embrace of AI represents a technology power transformation that will increase the value of our tools for clients across the board. I will now review our Q4 performance among individual client segments. In general, MSCI is unlocking significant opportunities across high-growth client segments. With hedge funds, MSCI delivered 13% subscription run rate growth and 26% recurring net new sales growth. One prominent deal in the quarter was the index rebalancing team at a top global hedge fund for MSCI's new extended custom index module, which spans almost 5,000 custom indices. This highlights the growing appeal of our index product ecosystem and the need for more tools from MSCI. Moving on to wealth managers. MSCI achieved nearly 11% subscription run rate growth, including 15% recurring sales growth. As we drive further adoption of our index and analytics tools among home offices and wealth platforms of large investment managers. For example, in Asia, we closed 2 major CIO office deals for our multi-asset class factor models, which helped make 2025 our best year ever in new recurring subscription sales in the wealth segment in APAC. Among asset owners, MSCI posted close to 11% subscription run rate growth along our strongest recurring net new sales growth in 5 years, driven by private capital solutions and analytics. For example, we are seeing rising demand across regions from pension and sovereign wealth funds for our total portfolio solutions spanning public markets, multi-asset classes and especially private markets as clients increase their private asset allocations. Shifting to banks and broker-dealers, MSCI delivered subscription run rate growth of over 9% with large deals from index and analytics. The expansion of basket trading among banks has created new opportunities for us given our capabilities in quantitative investment strategies and custom indexing. In Q4, this trend helped MSCI secure a landmark deal for our new basket builder solution with a prominent bank in the Americas. Using our tool, traders can rapidly create a standard and custom index baskets across client and internal workflows with MSCI index content and IP forming a fundamental basis of these baskets. Turning finally to active asset managers. MSCI achieved recurring net new sales growth of 13%, primarily driven by index, along with subscription run rate growth of over 7%. Our Q4 results bode well for the gradual recovery of our performance with this important client segment. Active ETF products remain an exciting opportunity for active asset managers and for MSCI. In 2025 alone, MSCI supported our clients' launch of over 50 new fee-generating active ETF products in the market. As Q4 demonstrated, we are well positioned to benefit from AI, accelerate innovation and drive adoption of new and existing products for established and emerging client segments while still delivering compounded EPS growth for shareholders. And with that, let me turn things over to Andy. Andy? Andrew Wiechmann: Thanks, Henry, and hello, everyone. It's great to see the strong momentum across the business. This momentum is supported by our pace of innovation that is fueling growth across client segments and product areas. Index subscription run rate growth accelerated further to 9.4%, including 16% growth in custom indexes with some key wins among banks and hedge funds, as Henry highlighted. We also had success with asset managers, where index recurring subscription sales growth was nearly 10% and index subscription run rate growth was slightly above 8%, reflecting the expanding usage of our content. Index retention remained strong at nearly 96% for the full year and 95% for the quarter. The acceleration in index subscription run rate growth was complemented by asset-based fee run rate growth of 26%. Equity ETFs linked to our indexes captured a record $67 billion of inflows during the quarter, totaling $204 billion for the full year. This growth is driven by extremely strong inflows into ETFs linked to MSCI developed markets ex U.S. indexes, including EFA and World and MSCI Emerging Markets Indexes, where we see large and rapidly expanding ecosystems being established around our indexes. We see extraordinary runway to fuel those franchises well into the future, and we are extending the ETF agreement with BlackRock through 2035 to solidify that tremendous future growth. To enable this growth, we will lower the fee floors impacting certain superscale ETFs on which we have been capturing a larger share of the overall economics. The aggregate impact will translate to be roughly 0.1 basis points based on year-end 2025 AUM levels with roughly a 0.05 basis point decrease on January 1 of this year and another 0.05 basis point decrease on January 1 of next year. Outside of the timing of these adjustments, we expect the fee dynamics to remain consistent with the trajectory we have seen before with respect to our overall ETF basis points. Our close partnership with clients like BlackRock and the shared success we've achieved together position us well to drive enormous upside. In Analytics, we had subscription run rate growth of over 8%, driven by our second highest Q4 ever for recurring sales and higher retention. Recurring sales in Analytics benefited from strong sales of our enterprise risk and performance tools, notably with banks and asset owners in addition to continued momentum with our risk models. In Sustainability and Climate, one of our largest Q4 new subscription deals was with a large European wealth tech firm, positioning MSCI to be the embedded provider of Sustainability Solutions for small- and medium-sized wealth managers in Europe aided by our clients' distribution network. This win drove a meaningful contribution to the product line's new recurring subscription sales in Q4. In Private Capital Solutions, we saw growth accelerate on the back of closing almost $8 million of new recurring subscription sales in the quarter, an increase of 86% from the prior year. We've seen strong traction with our total plan offering and our transparency data, both of which have benefited from numerous enhancements and new capabilities. In Real Assets, run rate growth was almost 6% with improving retention as well as sales of new solutions. Turning to our 2026 guidance, which we published earlier this morning, our expense outlook reflects the powerful operating leverage benefits of our business with continued investment initiatives fueling future top line growth. I would highlight that CapEx reflects the anticipated build-out of a new London office space as well as increases in software capitalization related to key business investments across products. Our full year tax rate guidance reflects an expected Q1 tax rate of 18% to 20%, which is higher than past years as we will likely have a slight stock-based compensation headwind this quarter. Free cash flow guidance reflects the expectation of approximately $100 million of higher expected cash taxes in 2026 compared to 2025 due to various onetime discrete tax benefits in 2025 and the timing of cash tax payments between '25 and '26. Our capital position remains strong with an ending cash balance of over $515 million at the end of December. Subsequently, we have paid down $125 million on our revolver, which now stands at $175 million. We will continue to pay down and draw the revolver in modest amounts from time to time to support our capital uses and optimize interest expense. In summary, MSCI's strong Q4 results are reflective of our mission-critical, durable solutions and our accelerating pace of innovation. We are seeing solid momentum in delivering new products, capabilities and enhanced go-to-market efforts, and these are translating through to tangible results. We are focused on meeting client needs and enhancing value across client segments by delivering increasingly integrated solutions. As we've said in the past, the goal of MSCI is to have a fully integrated company in which each product line benefits from and contributes to every other product line. This will amplify the powerful compounding financial algorithm that has fueled our business, and we remain committed to delivering the firm-wide long-term targets of low double-digit revenue growth, excluding ABF, adjusted EBITDA expense growth of high single digit to low double digit and adjusted EBITDA growth of low to mid-teens, enabled by the powerful operating leverage of our business. And we expect ABF to be an outsized double-digit grower through cycles and a key driver of the financial algorithm. However, we will no longer maintain product line-specific long-term targets to better reflect our focus on managing our investments across integrated product lines and delivering outsized growth across the company. Lastly, this change will not impact our current reporting, and we will continue to provide the same level of transparency and disclosure with continued reporting along product lines. As you can tell, we are very excited with the strong pipeline and opportunities in front of us, and we look forward to keeping you posted on our progress. Before we open the line for questions, I'll turn it back to Henry, who wants to take a moment to recognize Baer as he approaches retirement. Henry Fernandez: Thanks, Andy. I want to take this moment to recognize my business partner and friend of 26 years, Baer Pettit, who has played a critical role in turning MSCI into the standard setter we are today. Baer announced his retirement in November, and he will formally step down as President on March 1. I know I speak for the entire senior leadership team at MSCI when I say that we will miss him tremendously. Looking ahead, I'm now excited to work with Alvise Munari and Jorge Mina, who many of our shareholders and the analysts that follow us already know very well as we seek to build on MSCI's momentum and deepen our relationships with both newer and more established client segments. And with that, over to you, my very good friend and business partner of many decades, Baer Pettit. Baer? C. Pettit: Thank you, Henry, and greetings to you all on this my final earnings call. As you may doubtless imagine, this is something of a difficult moment for me and one about which I have mixed emotions. Serving as MSCI's President and a member of our Board of Directors has been a tremendous honor and privilege that I could not have imagined when I joined the firm's Head of EMEA coverage over 25 years ago. Not many people get the chance to impact the global investment ecosystem, and I'm grateful to have had the unique opportunity to help lead MSCI's growth and influence on the investment industry. As a long-term owner operator, I was clearly delighted by the Q4 results, which show the resilience of that all-weather franchise, which we have spoken about on numerous occasions on this call. If there's one thing that has characterized MSCI in the quarter of a century that I've been here, it is the firm's constant ability to reinvent itself and to seek new opportunities in a variety of market and industry context. Many of those opportunities have proven to be extremely resilient and will remain a source of shareholder value for many decades ahead. The highly creative and client-focused teams at MSCI are wired to always keep looking for new opportunities and to drive client value and hence, the growth of the firm. The evolution of MSCI into a truly multi-asset class provider of insight and actionable content for investors and other market participants has not happened overnight. The content and capabilities have grown both through organic investments and the variety of acquisitions with which you are familiar. The great power of the MSCI franchise is rooted in our talented people, who I know will continue to set new standards and drive innovation. It is also grounded in the value that our clients and shareholders derive from the growing number and variety of solutions MSCI deploys. This is what in the past I have referred to as 1 plus 1 equals 3. Notably, it is clear that the efforts that have been put into private markets are really starting to pay off and that this strong combination of public and private markets capabilities will be a key driver of our franchise. And these capabilities create opportunities in a variety of client segments across the globe. I have no immediate plans ahead of me. It truly has been an amazing journey for which I thank all my colleagues at the firm. I'm certain that as a shareholder, my retirement savings are in good hands and that this great franchise will continue to create value for clients, shareholders and employees for a long time to come. Thank you very much. And with that, operator, please open the line for questions. Operator: [Operator Instructions] Our first question for today comes from the line of Toni Kaplan from Morgan Stanley. Toni Kaplan: Baer, I really wish you all the best. Henry, I wanted to talk about AI. You talked about some of the launches that you made. Which do you think are going to be sort of the most meaningful for adoption in the near or medium term, however you want to frame it? Which clients are showing the most interest? And I guess, what could this mean for your growth rate both in maybe '26, but also even beyond that? Henry Fernandez: Thank you, Toni. The journey with AI started 3, 4 years ago for us and initially has been extremely focused on creating AI agents to help us with the day-to-day operations of the company. We use AI extensively in applying to understanding controversies, for example, on ESG ratings. We've been using AI very, very deeply in the gathering of tremendous amount of data in the private markets and private assets and the like. So those are 2 big examples, but we -- there are about 120, 140 projects that cut across the company in using AI to augment the capacity of our smart and talented employees to leverage their smartness and capabilities. Then halfway through it, we started focusing intensely on using AI for products. The first application of it was in our Analytics business in terms of putting AI insights into the portfolios that are running in our servers for our clients, AI insights to understand the performance, the risk, the correlations. So in a way, it's like adding hundreds of people on people's eyes, in this case, digital people, of course, agents to understand what's going on in the performance of our portfolios and the activities of our clients' portfolios. And therefore, that has taken off. We've had a lot of embrace of what we call AI insights in the Analytics product line. So that's been a big benefit. Then we look at AI in terms of automating the custom index creation capability. As you know well, we've been working for a couple of years on designing a software application integrated with our production environment to create a large number of very fast custom indices and custom baskets for trading, for investment, for investment products and the like. One of the things that we realized was a slowdown in that process is the human interaction of understanding the methodology, back testing the methodology and all of that. So we've been training AI agents to do that process much faster than the humans with obviously a lot of human supervision, right? So that is something that is already in place and it's already being rolled out as another example of that. So I think that most of our product lines will benefit enormously with AI agents in terms of either servicing the client or giving insight to the portfolio to our clients or being able to much faster create IP and the like. But I just wanted to highlight 2 examples on the efficiency side in terms of controversies and data capture and private assets and 2 examples on the product side. But I could give you 20 other examples in each category, but I just wanted to exemplify the enormous potential. The last thing that I would say is still early days in our application of AI across the board in MSCI. And we're extremely excited. The company is turning into a total AI machine, and we think it's a godsend to us, as I've said in the prior call. Operator: And our next question comes from the line of Alex Kramm from UBS. Alex Kramm: I wanted to come back to a topic that I think I asked about a couple of times last year, which was this whole idea of international flows picking up and flows moving away from the U.S. I think we've started to really observe this in the marketplace now. I heard there was a recent asset management conference in Europe where the sentiment was better than it's been in years. So it seems like there's excitement growing in your customer base. So wondering if this is actually starting to drive new sales, better conversations? And maybe most importantly, is it giving you better opportunities for maybe pricing a little bit more aggressively? Henry Fernandez: Thank you, Alex. All of the above for sure. Now we're a subscription business, as you know. So things don't take off immediately the same way that they don't go down immediately. So all of this stuff takes time. And of course, you -- a lot of what we do is serve the long-term asset owners in the form of pension funds, sovereign wealth funds, endowments, foundations, family offices and the like. And a lot of those parties don't turn their portfolios on a dime, right? They look at the secular trends, they take their time and all of that. So obviously, as you know well, Alex, the immediate effect has been in the devaluation of the dollar. Obviously, the dollar has been out of favor and people have been selling the dollar and selling dollar assets, as we know. And therefore, that has translated into significant flows into MSCI equity indexes that are ex U.S., developed markets ex U.S. And likewise, we've seen the revival of emerging markets as well. I mean, we saw Korea hitting an all-time high for a couple of days this week. and the like. So we are definitely seeing the benefit of that. And we're seeing the benefit in the flows, the $200-plus billion of flows into ETF linked to MSCI indices, the ETF of our clients linked to MSCI indices. That is a strong indication that people are putting their assets in non-dollar assets, right, in those dollar securities. So that's another trend. On the subscription side, we, for sure, have seen a significant uptick in activity in Europe, in EMEA. Evaluating our -- in one of our QBRs last week, we were very pleasantly -- or pleased and surprised to some extent that our run rate in EMEA in Index including subscription and ABF is higher now than the Americas, which is an incredible feat, right, to achieve given the nature of the capital markets in the United States. And that is on 2 fronts. One, the subscription of our products in EMEA plus obviously, the huge inflow of assets into EMEA listed ETF. I mentioned that in my prepared remarks that we have seen a significant increase in inflows into ETF listed in Europe. So we're seeing that. And we had a very strong quarter in Asia Pacific, obviously, in the fourth quarter. Obviously, sometimes it is -- one quarter is very strong. The other quarter may be a little weaker or softer. But I think that we have a very great franchise in APAC, and we're beginning to see significant activity inside APAC, and away from the APAC investors going into dollar assets. But it's still very early days in all of this. The great rotation of assets away from dollar assets in the U.S. is just an early analysis. It is too early to tell whether that will continue on a secular basis or it's just cyclical for now, given the geopolitical aspects and the economic aspects, but we're well positioned either way. Operator: And our next question comes from the line of Manav Patnaik from Barclays. Brendan Popson: This is Brendan on for Manav. Just wanted to ask on the private assets, look like it has its best net new quarter. And it's been -- you've obviously been excited about the opportunity there, but it's been taken some time for it to unfold. But I guess what drove that? And then is this the early innings of a trend do you think? Or is there some kind of onetime item? Or what do you guys see there? Andrew Wiechmann: Sure, sure. Yes. Thanks, Brendan. It's Andy. So yes, it's been great to see the PCS run rate tick up. We also saw the real asset run rate growth tick up a bit. And we are seeing encouraging trends on a number of the key areas that we've been investing in and building out and enhancing over the last couple of years. Maybe just to give a couple of areas of focus and areas where we've seen traction on the PCS side first. The strong sales were around areas like our total plan offering, which we've been really developing and proactively going to market around as well as our transparency offerings. Both of those, we've seen very good momentum on and a pickup in growth rates. We saw good growth not only in Americas, which, as you know, is a big part of the PCS franchise, but we saw actually tremendous success and traction in EMEA as well. That's been an area we've been intently focused on and building out our go-to-market effort, and we are starting to see some shoots there, which is encouraging. The outlook is positive. We believe this is a massive, massive opportunity for us. We've got a very robust product development pipeline. And so we've mentioned some of these in the past, but we continually come to market with capabilities and content sets that really don't exist in the market today, and we know there is strong demand for. So things like our recently launched Document Management and SourceView offering. We're seeing significant client interest around that and positions us to do more for clients, so continue to expand the value that we are bringing to them. And by the way, that's something that is enabled by AI as well. And AI has been a key enabler, not only on the data sourcing front, as Henry said, but also expanding the range of capabilities and insights we can give to clients. I would also highlight things like our asset and deal level metrics, things like our suite of indexes, including our private capital -- or sorry, private credit indexes are all things that we're now in a position, I think, to drive that adoption and standardization. And so it is good to see the strong fourth quarter. We see attractive opportunities ahead of us. We see good momentum here and think we can continue to drive that. And we are also getting strong traction with a wide range of partners and distribution channels such that our content and solutions are going to be increasingly accessible and easily usable across a wider range of the ecosystem, and that includes in areas like the wealth channel, which we believe is a big opportunity. On the real asset front, definitely some positive signs there. I think we've seen some green shoots in the industry. I think investment rose in the U.S. across nearly all commercial real estate sectors. There are some areas like office and retail, where there is double-digit growth. And we've seen private capital moving from not only institutions, but we've seen private investment dollars coming back in as well. So it's all good signs, and we're seeing that translate through to some early movement. We still got a ways to go, but early movement with our Index Intel offering and traction with our -- some of our new products like our data center product. So early days on that front, but definitely encouraging, but very exciting around the PCS opportunity. Operator: And our next question comes from the line of Ashish Sabadra from RBC Capital Markets. Ashish Sabadra: Andy, I wanted to ask you a question about the free cash flow puts and takes. You obviously called out the $100 million of cash taxes impacting free cash flow. I know you don't guide -- so I was just wondering if you could talk about some other puts and takes like CapEx and interest expense and stuff like that. And I know you don't guide to adjusted net income and EPS, but we all look at free cash flow as a proxy. So is the right way to think about it like on top of free cash flow as that cash tax and the reduction in share count, and we should still get the low to mid-teens EPS growth in '26 in line with the long-term targets? Andrew Wiechmann: Yes. So I would -- I'd highlight a few things in addition to the cash taxes, which was a meaningful item here. But we've got a couple of sizable timing-related items that are depressing the free cash flow in 2026. But I would highlight that we are projecting strong double-digit collection growth with stable working capital dynamics. So the core fundamental underlying dynamics of the business remain quite healthy. In addition to the cash taxes, which, as I alluded to, is expected to be roughly $100 million higher than 2026. Part of that relates to some tax payment deferrals from '25 to '26, about $30 million of those and roughly $50 million of onetime discrete benefits in '25. But on top of that, we also, as a reminder, issued -- had 2 debt issuances in the third and fourth quarters of 2025. Just given the interest payment schedules on those, we had no cash interest payments in '25. So there's going to be a meaningful step-up in the cash interest expense in '26 to the tune of $90 million. And so that creates some noise in that period-to-period comparison. And then the last thing I would highlight, and you see this in the CapEx guidance is we are building out a new London office space. As you know, London is one of our key offices, one of our bigger offices. We are moving locations there, and we'll have meaningful CapEx around that build-out, which will amount to about $25 million of occupancy CapEx. Beyond that, we are -- and I alluded to this, we are continuing to invest in software solutions. Henry touched on this, notable investments into custom index and basket builder capabilities, which we're very excited about, many of the PCS capabilities that I just alluded to. And so that also is adding to the CapEx. But those 3 items are leading to some comparison noise when you look at '25 versus '26. But if you look at top line and cash collections continues to be very healthy. And we continue to believe there's a strong trajectory of free cash flow growth going forward here, particularly free cash flow per share. Operator: And our next question comes from the line of Alexander Hess from JPMorgan. Alexander EM Hess: First of all, Baer, congratulations on your retirement. And yes, congratulations again. I want to maybe ask about the reiteration of the medium-term targets and then some comments, Andy, that you said that about the strength of the pipeline. Can you give us a little bit more color on how you break down that pipeline strength into sort of a cyclical uplift, the megatrends that have been discussed on the call versus new product innovation? I know that you called out sort of a number that, that was last quarter on new sales. But just sort of any color on what's driving that pipeline would be really helpful and how that might convert into the low double-digit target. Andrew Wiechmann: Sure. Yes. So as I mentioned, we're definitely encouraged by the pipeline. Henry alluded to this earlier, but there is an environmental dynamic here on the margin. I think we've seen constructive buying behavior across many client segments. On the margin, we've seen a good degree of confidence on a number of fronts. I think the sustained favorable market momentum is something that does feed into that confidence. And as we mentioned, we saw pretty good results and some improvement in sales and growth with asset managers, which is an area where, listen, we continue to see the secular pressures, and we'll continue to see some of those secular dynamics at play. But we've seen on the margin a slightly healthier environment across asset managers. But I would highlight, most importantly, as you alluded to, a lot of the momentum we see and the pipeline opportunities are related to the actions that we are taking. And so it does relate to the innovations that we are releasing across the company, our enhancements to client service and go-to-market and our orientation around client segments. I think on all those fronts, we're opening opportunities up in many of these new big client segments as well as within our existing well-established client segment areas. So we're seeing decent momentum on both fronts here. Just to specifically hit your question about new product contribution to sales. Listen, we saw in 2025, roughly a 20% increase in the contribution to recurring sales from recently introduced products. We continue to see a strong and building pipeline of opportunities related to those new products and those cut across almost every part of the company, but it's something that is definitely creating pipeline opportunities for us. So we're definitely excited. Operator: And our next question comes from the line of Kelsey Zhu from Autonomous. Kelsey Zhu: On ESG, I guess, a while ago, we talked about the regulatory headwinds or regulatory uncertainty in Europe and how that's impacted growth. What are you seeing in that market more recently? And when should we expect ESG to recover in Europe? Henry Fernandez: So the recovery in Europe is already taking place. No doubt about that. Not at the pace that we wish it will be happening, but it's already taking place. Obviously, it's in the context of a new reality that not everything in terms of performance and portfolio construction needs to be ESG when the pendulum swung too far on that side. The big, big focus is on financial materiality in people's portfolios. And we're also benefiting from a consolidation of suppliers of ESG data and ratings and analytics into the European market. We alluded to this in the prepared remarks that one of the important sales that took place in Sustainability was this wealth technology platform in which we have -- we become the supplier of choice compared to others, and they've eliminated that other supply. So there is a benefit that we're getting from that. I think -- so I'm hopeful and the pipeline indicates that we will continue to grow at a decent clip in Sustainability in Europe. I don't think we have reached bottom yet in the Americas market, in the U.S. market, not in Canada, but in the U.S., given some of the political sort of undertones in the various states and all of that. So that will continue to be soft. I think we're holding our own, and we're consolidating. We're being very aggressive in displacing others in the marketplace, et cetera, but that is going to remain a pretty significant battleground on that. And in APAC, the business never took off totally, and it kind of slowed down a little bit given all the issues around the world. But we've been putting in place new management, new salespeople, new dialogue and penetration. And I think that it will be a meaningful, maybe not a strong contributor to our Sustainability sales. Now more importantly than all of this, I will say, strategically, is one of the things that is completely dawn on us was that the onset of the ESG revolution, so to speak, was just the early days of understanding emerging nontraditional risks and opportunities and the analysis of securities and then the build-out of portfolios. So as time goes by, we will be using a lot of our expertise and our data and our client relationships to expand the ESG/Sustainability franchise into analyzing the effect of other risks in portfolios. And those are obviously, tariffs. We have enough data and capabilities to analyze where companies are producing goods and services, right, and where they're selling them. Supply chain, the effect of AI on companies, we have enough data and are getting much more to analyze the effect of AI. Is it a good thing for a company? Is it a bad thing for a company and the like. So obviously, climate will be the mother of all emerging risks in clients' portfolios. We will be doing that, especially on a physical risk basis. We're really pivoting significantly from not just transition risk, but to physical risk, which is where the big demand is today and especially with shorter-term pools of capital like banks and insurance companies in addition to the longer-term pools of capital. So we're very excited about this area of our business. It is going through a transformation for sure. It has slowed down, but we're hopeful that with all the comments that I made plus the pivoting towards other forms of emerging risk, given the franchise that we have and the expertise that this will be a long-term grower for us. Operator: And our next question comes from the line of Craig Huber from Huber Research Partners. Craig Huber: Baer, all the best to you going forward. I thought you did a great job. Andy, on the cost side of things, have a couple of quick questions here for you. As you know, the last 4 years or so 2021 to '24, your Analytics costs were flat, give or take. And then the last 2 quarters, back half of last year, they're up 11% to 12%. Can you just give us a little more understanding about what you guys are investing in there in the Analytics area? And is this -- what should we expect there in 2026? And then my nitpick question on the Sustainability and Climate side of things, your costs there in the fourth quarter, I guess, were down about 6% year-over-year. Was that just some true-up maybe you did on maybe bonus accruals? Or what happened there? I want to understand that also going forward for Sustainability. Andrew Wiechmann: Sure. Yes. So Craig, on the Analytics side, we can get some natural lumpiness, both on the revenue side and on the expense side and the expenditure side more generally in Analytics. Things that will impact EBITDA expenses, but overall operating expenses as well are things like the level of capitalization that we see in any given period. Expenses like severance, and that's something where we did see some variance, particularly in the fourth quarter, can cause some swings in period-to-period comparisons. FX is one that you've probably seen in the past. We do have some meaningful exposure to non-USD employee expenditures on the Analytics side. So FX, especially when you see a depreciating dollar can lead to some expense pressure there. And so a lot of it is just kind of the traditional drivers of lumpiness that we will see. There have been some elevated expenses related to infrastructure investments that we've been making. Again, I wouldn't focus too much on that, but that has been a piece that stepped up. We are, as Henry alluded to, making a number of enhancements around our AI insights, many of the capabilities that he alluded to in terms of being able to dynamically build baskets, look at signals -- investment signals on a real-time basis. We've got some very cool projects going on and continue to build out capabilities in other frontiers across our equity analytics and multi-asset class analytics. So I wouldn't focus too much there. And as you know, we don't necessarily solve for -- aren't driving for specific margin or even expense growth rate in any specific segment, but continue to allocate just based on where we see the attractive investment opportunities. Yes. On the Sustainability and Climate front, listen, I would say along those same lines, we always manage our expenditures dynamically, and we are proactively allocating based on the opportunities we see and market dynamics. We are continually reallocating to those areas that we think generate the fastest payback and have the highest return. We continue to invest in definitely key areas in Sustainability and Climate. Henry touched on a number of those areas that we are focused on. But on the margin, there are areas where we're investing less. And so on the full year, you did see roughly flat. I think it was 2% expense growth, as you alluded to in the fourth quarter, down 6%. So there is some noise around other expenses that can be lumpy, but you can see we are generally growing expenses less in Sustainability and Climate. Operator: And our next question comes from the line of Owen Lau from Clear Street. Owen Lau: For private asset, you highlighted a number of opportunities there. One of the key themes in this space is tokenization. How does this tokenization trend impact your world or you don't see much of an impact at this point? Andrew Wiechmann: Sure. Yes. So I think it is potentially a big catalyst for us on a number of fronts. I'd say it hasn't been significant to this point. I think it can have a significant impact on markets and financial products, a number of areas that we are focused on and see big potential. But your question specifically around private assets, listen, we know there is -- and this is why we are investing in the space and seeing tremendous opportunities. Investors are getting deeper into what is in their portfolios, understanding their risk, what's driving returns, what's the value that managers are providing, how to think about, I'd say, more of a traditional asset allocation across private assets. And so you see a tendency, especially with more open-ended type vehicle structures and continuation funds that people are more dynamic in how they invest their money across private assets. And it is a cumbersome process today. I think as many of you appreciate, we have seen tremendous growth in the secondary markets there, both secondary funds, but also secondary transactions of LP interest. As the world moves towards tokenization and really streamlines ownership transitions, sales and purchases of private assets, it's going to necessitate the need for things that we are investing in, like evaluated prices, like credit risk, like portfolio tools. And so we think tokenization could be a big accelerant for not only the private markets generally, but the tools that we offer. Operator: And our next question comes from the line of Scott Wurtzel from Wolfe Research. Scott Wurtzel: Just wanted to go back to some of the remarks you made on the active asset manager end market. I mean it sounds like there's been a little bit of a shift in tone towards kind of more positive outlook on that end market. So just wondering if you can kind of share a little bit more color on some of the trends you're seeing there and what's driving maybe a little bit more positive sentiment on the outlook there. Henry Fernandez: Yes. So clearly, active asset management in a world of high concentration in indices, especially the superscalers and technology have had a tough time performing relative to indices around the world. So we have seen continued outflows, cost pressures and the like. So what we have done throughout '25 is evaluate which is the best way that we can help this industry. They need us badly in order to return to high growth and profitability. And so I alluded to the move of active portfolios to an ETF wrapper and MSCI can play a very large role in doing that. Secondly is to help a lot of these clients create investment products so that we are turning -- gradually turning MSCI from a cost center in the -- inside many of these managers to trying to be a profit center, a revenue-producing center, a new product development center. Now not every manager will want us to be as proactive, but we are offering that opportunity to people in that. We are also helping clients consolidate suppliers into us. We're an extremely reliable, dependable supplier. Many of these active managers have a lot of -- a dozen index suppliers, a dozen analytics suppliers and all of that, and they can easily consolidate to us. So that's another initiative that we have and therefore displacing competitors in that area. So it's a gradual process. But the important part, and I think what you're seeing in the results is that we are -- we took a meaningful part of the first half of '25 to say we need to change the way we approach this segment. We cannot continue to be just one more cost pressure on them, and that's bearing a lot of fruits. And the journey is still early, and we believe that we can return to higher growth with them. Operator: And our next question comes from the line of Faiza Alwy from Deutsche Bank. Faiza Alwy: I wanted to ask about the AI efficiencies that you referenced earlier in the call and have referenced previously. So sorry for the 2-parter. But one, I'm curious if you're able to potentially quantify some of the benefits from the efficiencies that you're expecting this year and how much incrementally you're able to reinvest in the business? And then I guess, longer term, I know you haven't changed sort of your longer-term outlook around profitability, but I'm curious if at some point, this can result in better profitability over time? Or do you think there's just going to be continued reinvestment, whether it's in the form of new products or potentially some pricing give back to your clients? Henry Fernandez: Yes. So it's definitely a question that necessitates maybe a long answer, but we're going to try to be as brief as possible. We can follow up with you offline. The first thing strategically to recognize is AI is a godsend to us in 2 directions. The first direction, very importantly, is that through the application of AI, we can lower the run rate of expenses in our existing business. And in doing so, we can then take those savings and put them back into the run rate of investments in what we call the change the business, the new innovation, the new areas. We have enormous opportunities at MSCI, and we are severely handicapped in prosecuting all those opportunities by the size of our investment dollars. And we have been extremely disciplined not to take the money out of the profitability of the company. It has to come from the reallocation of cost in the company. So that is something that is beginning to play into the expenses of the company in 2026. It started a little bit in '25, but it's going to play in '26, it's going to accelerate in '27 and then accelerate further in '28 to the point in which we can grow the rate of growth of our organic investments in the company at a much higher pace, probably double the pace that we've been growing so far. So that is a significant opportunity for us. The second one is AI is going to help us accelerate significantly the pace of product introduction because, for example, we've been able to -- through AI and the application of AI to gather much more data and more granular data in private assets. And that has allowed us to create terms and conditions of credit in private credit, have been able to help us analyze the holdings of funds so we can create eventually holdings-based private asset indices and things like that. So that's going to accelerate us quite a lot. And since we've never been a big workflow software applications company, AI also will help us accelerate the ability of people to use our content. We have something called at MSCI, how do our clients consume our content? We do analysis of every product line like that. And through AI, our clients will be able to consume our content much easily, much broadly than through sort of inflexible sort of workflow applications and the like. So those are a few examples of that. Why don't we take it offline so we can -- our team can tell you more about the quantification of all of this. Operator: And our next question comes from the line of George Tong from Goldman Sachs. Jinru Wu: This is Anna Wu on for George Tong. I wanted to start by extending our congratulations and best wishes to Baer. My question is on cancellations. Can you give us some color on conditions you believe that needs to occur before we might see a sustained reduction in cancellations? And how do you see those underlying dynamics across segments? Andrew Wiechmann: Yes. Maybe an overarching comment here, and I alluded to this earlier, we are seeing some improvement in overall client dynamics on the margin. Generally, it's relatively consistent. But on the margin in areas like asset managers, even in places like EMEA, we are seeing some improving dynamics. So that's helpful. I would say the areas where we see lower retention rates are in -- and you've seen a slightly lower retention rate in Sustainability and Climate. I think Henry alluded to some of the pressures that we're seeing in the Americas on the Sustainability and Climate front. And then in real assets, we've seen a slightly lower retention rate, although it has been lumpy and has improved in spots. And as I alluded to, we are seeing some encouraging trends on the real asset front. Outside of that, we, I think, are seeing pretty good engagement from clients. We're seeing overall health improving. And I think a key component of driving the higher retention rates beyond just the environment are the things that we are doing. So enhancements to client service, which are resulting in enhanced client satisfaction, improvements in the products that we're releasing and the innovations we talked about, many of which are to facilitate and support price increases. And so I'd say we'll continue to see some of the pressures in those same areas. I've mentioned this in the past on the Sustainability and Climate front, on the real asset front, some lingering pressures in parts of the asset management market. But overall, I'd say we've got good momentum, and we're doing the right things to drive strong engagement and retention. Operator: And our next question comes from the line of David Motemaden from Evercore ISI. David Motemaden: Andy, in the past, you had mentioned some potentially elevated cancels for asset managers in Europe. I'm wondering if that played any impact on the retention levels this quarter and how you're thinking about that in 2026? Andrew Wiechmann: Yes. It's -- listen, building off the last question and my response there. Yes, it has been one of the dynamics that we've seen for the last couple of years actually. We've seen a slightly lower retention rate in EMEA. Just good to mention that. I think we saw a retention rate slightly below 93% in EMEA in Q4 versus a retention rate slightly above 94% in the Americas in Q4. It does bounce around quarter-to-quarter, but generally, we've seen a higher retention rate in the Americas for the last couple of years, and I think that is a reflection of those dynamics that I've alluded to in the past around some of the pressures on asset managers there, some of the M&A transactions that have occurred. I'd say we're not expecting any pickup in the future. As I alluded to, if anything, we're seeing some improvement in client dynamics on the margin. But I would say we're generally seeing a fairly consistent dynamic on the EMEA front. And that lower retention rate actually, we see it across product lines other than S&C. So Sustainability and Climate does have a higher retention rate in EMEA versus the Americas. But outside of that, we see a slightly lower retention rate in EMEA versus the Americas. So I'd say no notable change in dynamics, if anything, slight improvement on that front. Operator: And our next question comes from the line of Jason Haas from Wells Fargo. Jason Haas: I'm curious if you could help reiterate what's driving the strength in index recurring subscription revenue outside of asset managers. Is there any way to help like stack rank what those drivers are and just your level of confidence in those continuing? Andrew Wiechmann: Sure. Yes, it is multifaceted. But at the highest level, we are seeing a move in the investment industry, and this is one of the most powerful trends impacting the investment industry is a move towards personalization, customization, customized outcomes, custom portfolios. And index is a very efficient and effective mechanism to reflect a specific investment view, investment objective or a strategy that an investment industry participant has. And so that is underlying the opportunities we see across the new products we're releasing, existing products that we have as well as the client segments that we're going after. Maybe to tackle your question along client segment lines, our highest growth client segment has been and in the fourth quarter was hedge funds. You've heard us talk a lot about the trading ecosystem and opportunity with hedge funds, broker-dealers, trading firms. That growth is being fueled by their thirst for content. That's content to help them better understand markets better, better understand our indexes. They are increasingly looking for more content sets that we're actively releasing that ultimately help them navigate the markets and capitalize on opportunities more effectively. And so we saw 19% growth with hedge funds in the fourth quarter. We saw 10% growth with broker-dealers. And related to that, we see broker-dealers developing things like over-the-counter derivatives, index-linked swaps, structured products as tools to help their clients, whether those are institutions or even high net worth individuals achieve specific investment objectives and risk and return and exposure objectives across their portfolio. And then even on asset managers and asset owners, when you look at the growth we've seen there, it is -- and the growth is, I think, 8% on both asset managers and asset owners and index. It is licensing more content from us across more parts of their organization and more use cases, and they are just finding more utility in the breadth of content and tools that we are providing on the index front that enable them to achieve their specific objectives via index portfolios. And so I'd say broadly, it's being fueled by this need and demand for custom outcomes, we're feeding that with our existing Index IP, but also more and more custom indexes. Henry alluded to some of the new capabilities that we are releasing now and on the verge of releasing over the coming quarters, things like our Basket Builder, advancements on the custom index front that allow clients to actually directly interact with and back test portfolios and build their outcomes. We think that's going to unlock massive opportunities. So listen, in the near term, we're fueling the growth, you're seeing nice growth, and we have been for several years with the trading ecosystem buying more content, but we're seeing elevated growth and enhancing opportunities across all parts of the investment ecosystem to use our index content. So I'd say it's a very compelling opportunity and part of the reason we remain so bullish and excited about the future. Operator: And our final question for today comes from the line of Alex Kramm from UBS. Alex Kramm: Sounded like you wanted some follow-ups, so hear this. Now this is a quick one, and it's actually a follow-up to my earlier question. I think Henry suggested that you are having a little bit more pricing power as the environment has gotten better. So maybe for you, Andy, any more meat you can put around this? I think in the past, you've talked about contribution from pricing, et cetera. So maybe a little bit more in terms of 2026, what are you expecting across the different segments? Andrew Wiechmann: Yes. I would say, generally, the contribution from price increase has been relatively stable. There are puts and takes across the business based on innovations, enhancements we make to existing services, client health and usage of our tools. And as I've alluded to before, there are certain areas or Henry talked about it in areas like S&C where the health does vary in different geographies. But overall, we've seen a relatively stable contribution from price increases. As you're asking about, and I think I alluded to this back in December, and we've mentioned before, the enhancements we are making on many fronts, we are monetizing through price increases. And so that's something that's not only supporting up sales, but price increases. So I would say there's some nice sustainability and durability to our ability to continue to increase price because we are significantly enhancing the value that our clients get from our tools. And this is an area where AI is particularly exciting, where it's allowing our clients to do more with the services we provide and be more efficient in how they operate. And those should allow us to continue to unlock commercial value through price increases over time. Operator: And I'd now like to hand the program back to Henry Fernandez, Chairman and CEO, for any further remarks. Henry Fernandez: So thank you, everyone, for joining us today. As we have described this morning, MSCI's all-weather franchise helped us complete another strong year of underlying business performance and attractive margins. We are also building momentum in the company in terms of creatively and aggressively selling across all client segments what we currently have. And the new product machine and the new innovation mode of MSCI is getting into high gear, and that will help us continue the momentum that we have generated in the last 2 quarters. It feels like we kind of bottom out in the second quarter of last year. Obviously, too early to tell at this point, but we feel pretty confident and pretty encouraged by the pace of innovation, the pace of selling, the dialogue with clients, the market drop and for sure, the level of innovation and product launches that we are achieving. I'd like to take this opportunity one more time to thank my long-time friend and business partner, Baer. MSCI would not be what it is today without Baer, your contributions, your leadership, your dedication, your owner-operator mentality. We wish you great happiness and fulfillment and good health in your retirement. And we, for sure, will be taking care of your retirement dollars here and make them multiply. So with that, again, I'd like to thank everyone. C. Pettit: And thank you, Henry, for your partnership, an incredible leadership, which I'm very confident will continue. Henry Fernandez: Thank you. Thank you all. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good morning, and thank you for joining us today for QCR Holdings, Inc.'s Fourth Quarter and Full Year 2025 Earnings Conference Call. Following the close of the market yesterday, the company issued its earnings press release. If anyone joining us today has not yet received a copy, it is available on the company's website, www.qcrh.com. With us today from management are Todd Gipple, President and CEO; and Nick Anderson, CFO. Management will provide a summary of the financial results, and then we will open the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations and predictions of the future are forward-looking statements, and actual results could differ materially from those projected. Additional information on these factors is included in the company's SEC filings, which are available on the company's website. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP and non-GAAP measures. As a reminder, this conference call is being recorded and will be available for replay through February 4, 2026, starting this afternoon, approximately 1 hour after the completion of this call. And will be accessible on the company's website. At this time, I will turn the call over to Mr. Todd Gipple at QCR Holdings. You may begin. Todd Gipple: Good morning, everyone. Thank you for joining us today. I'd like to start with an overview of our fourth quarter and full year 2025 performance, followed by some additional color on our business. Nick will then walk us through the financial results in more detail. We delivered our strongest quarter of the year in the fourth quarter and produced record full year results. Performance was strong across all key operating metrics, approaching or exceeding the upper end of our guidance ranges for net interest margin expansion, gross loan growth and capital markets revenue. I am very proud of our 1,000 teammates for their hard work, providing exceptional service to our clients, growing all parts of our business by creating new client relationships, taking exceptional care of the communities in which we live and work and generating superior returns for our shareholders. Their work not only produced record earnings in 2025, but also sets the foundation for continued momentum in 2026. Our exceptional earnings were driven by significant contributions from net interest margin expansion and robust loan and deposit growth, which drove a substantial increase in net interest income, along with continued strong capital markets revenue. In addition, our wealth management business remains a key strategic growth engine, providing a meaningful contribution to our record results. As I have mentioned previously, I view our company as operating through 3 primary lines of business: traditional banking, wealth management and our LIHTC lending platform. Each of these businesses produced outstanding results for the quarter and the year. We continue to deliver strong organic growth and drive enhanced profitability in our traditional banking operations. Our unique multi-charter model anchored by autonomous community banks that attract outstanding talent and high-value clients enables us to consistently outperform competitors and take market share. We continue to grow market share last year as we added significant new clients in all parts of our traditional banking business. Our markets remain very healthy, supported by solid growth, stable economic conditions and very strong commercial and industrial activity. Our digital transformation is also progressing as planned with the successful completion of the first of 4 core system conversions in October. These upgrades are already delivering meaningful benefits for both our clients and our employees. Looking ahead, 2 additional conversions are planned for April and October of this year, further improving and modernizing our technology stack. These investments will expand our service capabilities, enhance the overall client experience, drive productivity gains and improve our operating leverage. Our Wealth Management business continues to be a significant component of our earnings growth. In 2025, we added nearly 500 new client relationships, bringing in over $1 billion in new assets under management. Our strong capabilities in this business have created 5-year compound annual growth rates of 10% for both assets under management and revenue. This success reflects the expertise of our team and the strength of our relationship-based model, which connects our traditional banking clients with dedicated wealth advisers across our markets. As we expand our wealth management business in Central Iowa and Southwest Missouri, we are building momentum, deepening client engagement and taking market share from our larger competitors. Our LIHTC lending business also delivered exceptional performance in the second half of the year, reflecting the sustained demand for affordable housing and the expertise of our talented team. Developers continue to successfully advance their projects despite earlier headwinds, underscoring the resilience of the affordable housing industry. In addition to robust demand for affordable housing, recent legislative actions have expanded available tax credits and further strengthened the outlook for the federal LIHTC program. These enhancements, which continue to receive bipartisan support, represent a significant milestone in the program's 39-year history. Our deepening relationships with leading LIHTC developers across the country, combined with healthy market appetite, position us to further grow this business and deliver meaningful and consistent contributions to our overall financial performance. Having operated in the LIHTC business for nearly a decade, we continue to view this platform as a highly durable, profitable and differentiated growth engine for the company. Our success is anchored in deep relationships with developers nationwide. And in 2025, we added 18 new developer partners to our network. Our relationships with some of the top affordable housing developers in the country position us for continued strong and sustained production. While we continue to punch above our weight class in this business, industry data suggests that our current level of production represents only a small fraction of the total LIHTC market. This highlights the substantial growth opportunity ahead and potential to further scale our platform. Building on our momentum and the depth of our pipeline, we are raising the upper end of our capital markets revenue guidance, resulting in a range of $55 million to $70 million over the next 4 quarters. We also made significant progress on our strategic objective of improving balance sheet efficiency within our LIHTC lending business, particularly during the 2- to 3-year construction phase, which is typical for many LIHTC projects. In the fourth quarter, we successfully sold $285 million of LIHTC construction loans at par to a third-party investor. This strategy expands our capacity for additional permanent LIHTC lending and further enhances our opportunities for additional capital markets revenue. It also strengthens our regulatory capital position by reducing risk-weighted assets, providing greater flexibility to allocate capital more effectively. Having the capability to sell these LIHTC construction loans will allow us to generate capital markets revenue more efficiently with less capital, improving our operating leverage and our financial results. In addition, we used the proceeds from this transaction to retire our highest cost FHLB term advances, further lowering our overall funding costs. Because we are originating new LIHTC loans at such a strong pace, our new loans added during the quarter essentially offset the impact of the construction loan sale, minimizing the impact to NII. In the future, we plan to strategically execute additional LIHTC construction loan sales and securitizations. While the timing will depend on market conditions and other factors, the strong growth in our LIHTC platform is expected to mute the impact of these transactions on net interest income and support opportunities to further grow our capital markets revenue. In addition, LIHTC securitizations and construction loan sales will allow us to cross the $10 billion asset threshold more efficiently and effectively. We began proactively incorporating the costs associated with operating at the $10 billion level into our noninterest expense run rate several years ago. We also recently secured increases in our future interchange revenue and lower debit card processing costs through our digital transformation initiatives and new third-party contracts. As a result, we are well positioned to control the timing of surpassing the $10 billion asset mark with limited financial impact. 2025 was a record-setting year for our company, marked by exceptional growth across all core businesses. We are focused on continuing to deliver top quartile financial results, and we hold ourselves accountable for creating long-term sustainable growth in earnings per share and tangible book value per share. Our team has built a foundation for sustained momentum, supported by investments in talent and technology that enhance our competitive advantage. In our investor presentation released yesterday alongside our Q4 earnings, we showcased several slides that underscore our exceptional long-term performance. One highlight is on Page 5 of the investor presentation, which evaluates the performance of all publicly traded banks with assets between $1 billion and $20 billion. Out of 216 banks, QCRH is 1 of only 7 that achieved a 5-year average ROAA above 130 basis points, a 10-year TBV CAGR exceeding 10% and a 10-year EPS CAGR greater than 15%. Our exceptional performance in all 3 metrics resulted in a 10-year total shareholder return of more than 250%, far exceeding the TSR for our high-performing peer group. Our ability to generate top quartile EPS and TBV per share growth is a result of our unique business model and the strength of our team. We truly have the best bankers in each of our markets, backed up by a shared services team that allows them to focus on providing raving fan service to our clients. As we begin this year, we are focused on advancing our digital transformation to deliver optimized technology to our clients and our team, further expanding our wealth management business and continuing to grow our LIHTC lending platform. Combined with a positive NIM outlook, expanding operating leverage, solid loan and deposit pipelines and a stable credit outlook. The initiatives position us to deliver superior financial performance and create continued strong returns for our shareholders. I will now turn the call over to Nick to provide further details regarding our fourth quarter and full year 2025 results. Nick Anderson: Thank you, Todd, and good morning, everyone. We delivered record adjusted net income of $37 million or $2.21 per diluted share for the quarter and record full year adjusted net income of $130 million or $7.64 per diluted share. These exceptional results were driven by significant growth in net interest income from increased average earning assets and net interest margin expansion. In addition, we had solid wealth management revenue growth, strong capital markets revenue and improved asset quality. Net interest income increased $4 million or 22% annualized in Q4 and $23 million or 10% for the year, driven by continued margin expansion. The LIHTC construction loan sale late in Q4 did not materially impact net interest income. On a tax equivalent yield basis, NIM increased 6 basis points from the third quarter, near the upper end of our guidance range. This expansion was supported by a 14% increase in average earning assets, a significant improvement in our cost of funds and a favorable mix shift to noninterest-bearing deposits. Our disciplined approach to deposit pricing, combined with a liability-sensitive balance sheet has driven cost of funds betas that are more than double those of our earning assets in the current rate cutting cycle. Since the Fed began cutting rates in 2024, our deposit costs have declined by 56 basis points compared to a 32 basis point decline in loan yields. We continue to experience the repricing of lower-yielding loans into higher market rates as new loan yields added during the quarter exceeded loan payoff yields by nearly 30 basis points. As we move further into the rate cutting cycle, however, we expect that positive arbitrage to moderate. We still remain positioned to benefit from future rate reductions with rate-sensitive liabilities exceeding rate-sensitive assets by approximately $700 million, providing meaningful upside to margin in a declining rate environment. For future cuts in the Fed funds rate, we expect 1 to 2 basis points of NIM accretion for every 25 basis point cut in rates. If the yield curve steepens, we'd expect NIM expansion at the top end of that range. And if the yield curve remains relatively flat, we would expect NIM expansion at the lower end of the range. Our NIM to EY has expanded 32 basis points over the past 7 quarters, reflecting disciplined execution and favorable balance sheet positioning. We expect this momentum to continue and are guiding to additional core margin expansion in the first quarter between 3 to 7 basis points, assuming no further federal rate cuts. Further upside in our first quarter NIM is supported by repricing opportunities on approximately $140 million in fixed rate loans currently yielding 5.55%, which are expected to reset nearly 50 basis points higher. We also anticipate continued CD repricing during the first quarter with approximately $390 million of maturities, currently costing 3.94%, which we expect to retain and reprice nearly 50 basis points lower. We also expect investment yields to continue to expand, supported by a solid pipeline of new municipal bonds priced in the high 6% range on a tax equivalent basis. In addition, the retirement of the FHLB term debt is expected to contribute nearly 2 basis points of incremental margin improvement. Noninterest income totaled $39 million for the fourth quarter, driven primarily by $25 million in capital markets revenue. Despite the slower first half of the year, capital markets revenue reached $65 million in 2025, surpassing the upper end of the $50 million to $60 million annual guidance range we established to start the year. Our Wealth Management business delivered $5 million in revenue for the fourth quarter, a 4% increase compared to the prior quarter. For the full year, wealth management revenue grew $2 million or 11%, underscoring the strength of this business. Continued growth in assets under management across our markets not only enhances our platform, but also provides stability and diversification in our revenue mix. Now turning to our expenses. Core noninterest expenses increased $4 million in the fourth quarter when excluding the $2 million nonrecurring prepayment fee associated with retiring higher cost FHLB term funding. The linked quarter increase was primarily due to elevated variable compensation resulting from strong capital markets performance and record earnings. Higher professional and data processing expenses related to our first core system conversion as part of our digital transformation also contributed to this increase. Our variable compensation structure is designed to maximize operating leverage and provide expense flexibility across changing revenue cycles, aligning employee incentives with shareholder returns. Despite the increase in noninterest expenses, our adjusted core efficiency ratio came in at 56.8%. We continue to prudently manage expenses while investing in talent and technology to support our operations team with initiatives that enhance future operating leverage to strengthen the scalability of our multi-charter community banking model. Even with continued investments in our business during 2025, we maintained strong discipline over core noninterest expenses, which were up only 4% for the year, in line with our strategic goal to hold noninterest expense growth below 5%. Looking ahead, we expect noninterest expenses to be in the range of $55 million to $58 million for the first quarter of 2026, assuming capital markets revenue and loan growth are within our guided ranges. This outlook reflects our continued commitment to disciplined expense management aligned with our 965 strategic model, which targets noninterest expense growth below 5%, while driving operating leverage and strong profitability. Looking ahead, our continued investments in technology, combined with the flexibility of our variable compensation structure will enhance scalability and efficiency, positioning us to deliver sustained operating leverage as we grow. Moving to our balance sheet. During the quarter, total loans grew by $304 million or 17% annualized before the impact of the construction loan sale and the planned runoff of the M2 portfolio. Our traditional loan portfolio demonstrated strong growth, increasing $92 million or 8% annualized in the fourth quarter and $185 million or 4% for the year when excluding the runoff of the m2 portfolio. Looking forward to 2026, we have a solid pipeline and expect to sustain this momentum as we are guiding to gross annualized growth in a range of 8% to 10% for the first quarter. with growth ramping up to a range of 10% to 15% for the remainder of the year. Complementing our loan growth, total core deposits grew $64 million or 4% annualized in the fourth quarter. Average deposit balances rose by $237 million or 13% annualized when compared to the third quarter. For the full year, core deposits increased by $474 million or 7%. Our deposit mix improved for the full year with an increase in noninterest-bearing balances and a 34% reduction in higher cost broker deposits, further strengthening our funding profile. Strong deposit growth across our markets highlights the success of our relationship-driven approach and validates our efforts to expand our deposit market share while providing a stable core funding base for future growth. Asset quality remains excellent. Net charge-offs were static compared to the third quarter, while provision for credit losses increased by $1 million. Total criticized loans continued to improve, decreasing $5 million in the quarter and $20 million for the full year, reflecting a 12% reduction. Total criticized loans, a key leading indicator of loan quality, are at their lowest level since June of 2022. As a percentage to total loans and leases, total criticized loans declined 7 basis points to 1.94% during the quarter, the lowest level in more than 5 years and remains well below the company's long-term historical average. Our total NPAs to total assets ratio remained constant at 0.45%, which is approximately half of our 20-year historical average. Our allowance for credit losses to total loans held for investment increased 2 basis points to 1.26%. While our asset quality remains very strong and our criticized loans continue to decline to record low levels, we increased our provision at year-end to bolster our already strong level of ACL. This is consistent with our long-standing credit culture of maintaining robust reserves even during times when credit quality is favorable. We executed additional share repurchases in the fourth quarter, repurchasing approximately 163,000 shares, returning $13 million of capital to shareholders. For the full year, we returned nearly $22 million to shareholders, repurchasing approximately 279,000 shares at roughly 1.3x our current tangible book value. Through last week, we repurchased approximately 32,000 additional shares, increasing total repurchases under the program to more than 310,000 shares since commencing in the third quarter of last year. Our tangible common equity to tangible assets ratio rose by 27 basis points to 10.24% at quarter end, driven by strong earnings and improved AOCI, partially offset by share repurchases. Our common equity Tier 1 ratio increased 18 basis points to 10.52% and our total risk-based capital ratio increased 16 basis points to 14.19% due to our strong earnings growth and the construction loan sale, partially offset by share repurchases. We delivered another quarter of exceptional growth in tangible book value per share, which rose $2.08 to approximately $58, reflecting 15% annualized growth for the quarter. Over the past 5 years, tangible book value has grown at a compound annual rate of 13%, highlighting our continued strong financial performance and long-term focus on creating shareholder value. Finally, our effective tax rate for the quarter was 8%, down from 10% in the prior quarter, reflecting lower pretax income and an increase in the mix of our tax-exempt income relative to our taxable income. Our tax-exempt loan and bond portfolios have continued to support a low effective tax rate. Assuming a revenue mix in line with our guidance ranges, we expect our effective tax rate to be in the range of 8% to 10% for the first quarter of 2026. With that added context on our fourth quarter and full year results, let's open the call for your questions. Operator, we are ready for our first question. Operator: [Operator Instructions] Our first question today comes from Damon DelMonte from KBW. Damon Del Monte: First question, just appreciate the guidance on the capital markets revenues, $55 million to $70 million over the next 4 quarters. Just curious, do you guys expect any seasonality kind of in the beginning part of the year? Just trying to kind of model out a cadence for expected revenues. Todd Gipple: Damon, thanks for asking that question. We certainly did want to set expectations a bit for the first quarter. And this is a chance to remind everyone that our first quarter is historically our slowest quarter of the year for capital markets revenue. It's really not just us. The entire affordable housing industry gets off to a bit of a slow start each year. I really think developers push themselves and their teams to get things closed by 12/31, then maybe take a little breather for a month or so. So as a result, we expect our first quarter here in '26 to be far better than it was the first quarter of last year. But I do want to make sure we set expectations. We should not all expect another $20 million-plus quarter here. Our Q1 capital markets revenue has averaged $11 million in the past 5 years. We had last year $6 million in there. We've had a $13 million. We've even had a $16 million. But yes, Damon, I'm grateful you asked the question. Q1 is a bit slower start. It's one of the reasons we're so focused on providing rolling 12-month 4-quarter guidance. That's really how we evaluate our performance. That's how we evaluate the strength of our business. And yet we know the first quarter can be a bit seasonally slow. Damon Del Monte: Got it. Great. Okay. That's helpful. And then in the past, you've talked about the securitization of moving some of the loans off the balance sheet. And I think last quarter, you kind of talked about midyear here in '26. Is that still on the table to be done? And if so, do you have a kind of an updated target size of loans to securitize and move off? Todd Gipple: Yes, Damon, thanks for asking about that as well. We do continue to target sometime in the first half of this year. I expect us to have that perm loan securitization happen prior to June 30. We do that with Freddie Mac. And Freddie is not -- well, they're a GSE and not a full government agency, but they can sure act that way sometimes. So they're undergoing some changes in their securitization program for the M Series program we use. And what I mean by changes is they're making it harder and it's taking longer. But we still expect something in the $300 million to $350 million range prior to June 30. Operator: Our next question comes from Nathan Race from Piper Sandler. Nathan Race: Could you just help us with some guideposts in terms of a starting point for earning assets in the first quarter, just some of the -- just given the moving pieces with the securitization in 4Q and then just the expectation of pay down some wholesale borrowings as well? Todd Gipple: Yes. So earning assets heading into the first quarter would be very consistent with where we ended earning assets. That construction offtake happened very late in the quarter, actually December 22. So that's why NII was really not impacted by that. So where we ended 12/31 in terms of earning assets is where we're going to begin. We talked about very robust loan growth plan for this year. We do feel like we're going to be 12%-ish for the full year, but that's going to be a little backloaded as well. That's why we're guiding to more like 8% to 10% gross loan growth in the first quarter. We think that will accelerate in the last 3 quarters of the year, closer to 12 15. We feel really good about loan pipelines, both traditional and LIHTC. So we'll be ramping earning assets up here throughout the quarter, but starting point would really be the 12/31 number. Nathan Race: Okay. So not necessarily the average balance in the fourth quarter for earning assets, right? Todd Gipple: Correct. Correct. Average balance is far greater because that loan sale happened 12/22. Nathan Race: Understood. Okay. And then, Todd, can you just update us in terms of what inning you're in, in terms of having the cost and the expense run rate around the transformation and the investments you're making? And then just any thoughts in terms of how that translates in terms of the expense run rate over the second quarter and back half of this year relative to the guidance you provided for 1Q? Todd Gipple: Yes. Nate, I think I'm going to let Nick talk a little bit about NIE run rates, and I might tag on a little bit about how we're thinking about $10 billion. Nick Anderson: Looking ahead here, obviously, you saw we increased our guidance range for NIE, the $55 million to $58 million. Updated range continues to assume that we make further investments in the digital transformation. The approximate midpoint of the $55 million to $58 million range is just about 5% increase over our core NIE year-over-year. So what's making up some of that increase, I would kind of lay it out this way, about $4 million of digital transformation spend, another $4 million in salary benefit costs and a couple of million in occupancy related. So, despite the increase in the 26% range, we still expect to create more operating leverage and pushing that efficiency ratio lower as we see some expansion in our revenues that outpace our NIE here. Todd Gipple: Yes. So Nate, I'm going to go ahead and tag in on this with the $10 billion thoughts. We ended the year right on top of $9.5 billion. We still expect to stay under $10 billion here at the end of '26. That will have a lot to do with the timing of some of our construction loan offtake later in the year. I don't know that we'll be as precise as doing that almost near the end of the year. But certainly, we're going to be very mindful of the impact on NII when we do term loan securitizations and construction loan sales. Many of you are familiar with our 965 strategy, and we want to grow NII close to that 9% for the full year. And because of a strong organic gross loan growth, we're going to be able to do both. But we certainly expect to come in just under $10 billion at the end of calendar '26. We will go above $10 billion in '27. And as a result, starting in July of '28, we're going to have the rigor of $10 billion and the Durbin impact. But we are layering in, in that 5% guide that Nick gave everyone, that is not just digital transformation, that is building for the infrastructure we need for $10 billion at the same time. So we're building it in. We don't expect there to be a blip in '28 as a result of going over. And that's really important to us. The 5% and 965, we are very diligent about making sure we don't have expense creep so we can continue to improve EPS and TPV per share. So sorry for the long answer to your short question, but thought we'd give a little bit of current color and a little bit of future. Nathan Race: That's great and very helpful. Just a question in terms of kind of the deposit gathering expectations. Obviously, you have a pretty robust loan growth outlook out there for this year. Just curious kind of what you're seeing in terms of opportunities to continue the momentum on the deposit gathering front. And just as you look at kind of the balance sheet growth outlook for this year, if we just assume maybe a flat rate environment or a static rate environment, do you see kind of incremental balance sheet growth accretive to the margin? And just within that context, curious what kind of opportunities you're seeing to continue the deposit gathering efforts within the clients that you work with on the low-income housing tax credit side of things. Todd Gipple: Sure, Nate. Thanks. Great question. I'll talk a little bit about how we're looking at deposit growth, and Nick can give you a little bit more of the margin and NII implication after that. But the one thing that all 1,000 of our teammates universally understand is we have to continue to improve the right side of our balance sheet, both core deposit growth and improving our mix. So everyone is focused on that. And there's really 3 underlying strategies. We continue to lean in hard to net new retail checking accounts. That doesn't move the needle in dollars. But over 10 and 20 and 30 years, that is incredibly meaningful in terms of the stability of our funding costs. So we are very focused on growing net new retail checking accounts and it only counts in our scorecard if we get their direct deposit and really become their bank. We're really leaning hard into private banking, that top 10% to 15% of retail in each of our markets. It's a big part of our Quad City and Cedar Rapids and Southwest Missouri markets. I'm proud of our leadership in Central Iowa. They've added some really great talent in private banking in Central Iowa, which happens to be our largest MSA. So that's going to help us with core deposits and wealth management pipeline. And then where we can move the needle more significantly each year is treasury management. We have a great technology platform. We have great people. We are just being more precise and intentional on non-borrowing targets. Typically, bankers tend to focus on lending, and we're getting them all focused on gathering deposits. We've got to get NIB back up. That's going to take a while, but we're really focused on the right side of the balance sheet. And I would just end before I turn it over to Nick, we expect our growth to be funded with core deposits, not wholesale. And we've worked that down a fair amount during the year. So that's our continued focus. Nick, maybe talk about -- and both NIM and NII. Nick Anderson: Yes. So Nate, I'll probably reference a little bit our success in '25 in moving the deposit mix shift. We did have some success in reducing brokerage. We lowered that by $120 million. That's just 3% of our total deposits today, and that's helping reduce some of our cost of deposits. As Todd said, NIB continues to be an area where we need to move the needle further faster. We did increase that $24 million. They're about 13% of our total deposits. So when I look at the growth for '25, and this kind of leads into maybe how you can think about the growth in '26, about half our growth came from the correspondent network. so about $238 million. That's more priced probably at the market, if you will. There are some noninterest-bearing deposits inside of that business that do help. We also saw the other half of the growth then really came from a couple of hundred million in commercial and $32 million in retail. So I would highlight there our success in really continuing to drive into our markets, getting those operating accounts on the commercial side over time, that should continue helping our noninterest-bearing deposits. So I think the short answer is a lot of our success in '25 is similar to how we move into '26 and think about the growth there. Nathan Race: Okay. Got it. If I could just sneak one more in along those lines. Obviously, a notable M&A announcement involving a long-time Iowa competitor recently. So just curious if there's any kind of early indications on opportunities for share gains, particularly on the deposit gathering front in light of that announcement and potential disruption. Todd Gipple: Sure. yes, Nate, we are already on top of the MOFG sale. It is really adjacent to the Cedar Rapids market. We have great leadership in that market, very focused on taking clients and taking market share. We don't have to be located in that market to do so. And we already have a target list and are working it pretty effectively. We expect to take some of the best clients out of that platform. [ Nikolai ] is an incredibly good performer, but we're pretty certain that some of the folks in Iowa City, Iowa are not going to be all that thrilled that all the decisions are made out of state, and they're certainly going to lose some talent. So we view it as an opportunity. Again, our entire company was founded on the backs of not very good M&A in the Quad Cities and Cedar Rapids. So we know how to take advantage of that, and we certainly expect to. Operator: Our next question comes from Daniel Tamayo from Raymond James. Daniel Tamayo: Maybe starting on the LIHTC business. So you gave the updated guidance increase from last year's guidance. It would be kind of flat to down a bit if we took the midpoint from -- on a year-over-year basis. And then that would be kind of a, I guess, 2- or 3-year trend of just a little bit down on the revenue side. Obviously, longer term, it's up. It seems like there's great opportunities there. You've been growing it a ton. Just curious kind of long term, how you think about growth opportunities within the LIHTC business. Are there bankers that you would need to add to do that? Are your current bankers at capacity or near capacity? You talked about the developer relationship opportunities. But I'm just curious kind of as we take a step back on this LIHTC business, which continues to be more important for your business overall, kind of what the growth opportunities might look like on a longer-term basis? Todd Gipple: Thanks for the great question, Danny. We are very excited about the future of this business. If anything, I would just ask everyone to focus less on the top end number of our range and more on the direction that we here in the last 2 quarters have moved it up a couple of times. We understand that might look a little light considering the back half of this year. candidly, I'm okay with that if maybe the biggest concern folks might have is we're being a little conservative with our guidance. I think what it has to do with Danny, is we have worked really hard on this business this year. And while we've all worked hard on making this a better business, our LIHTC team is incredibly talented, and I don't know that they've ever worked harder. And so we're just trying to be realistic about the fact that we need to operate in this space a little bit with the new construction offtake that we have, make sure we're fully prepared and ready to grow that business. But certainly, we expect to be able to take the new developer relationships, the new third-party relationships on construction offtake and continued strong performance by this team and further grow the business. So we do have expectations for further growth. I think I'd just say let's operate in this environment a little bit, let's prove the numbers up. We want to maintain our [indiscernible] ratio here. That's always been important to us. So we think the future is quite bright. Daniel Tamayo: Understood. I appreciate that. I guess from an efficiency perspective, you talked about the expectation for positive operating leverage in the business and certainly contributing to the overall franchise. How should we think about that 5% kind of expense target that you've had for a long time. What does that contemplate from a LIHTC growth perspective? Is that kind of the range of fee income growth that you've provided, so somewhere around the midpoint and then you would perhaps be above 5% if the LIHTC revenue got better? And then sorry for a long question here, but wrapping that into a profitability discussion, how do you think you -- how much further do you think you can take this thing? I mean you're over 1.50% ROA last couple of quarters. Does that -- do you think that can continue to move higher? Todd Gipple: Danny, first, I'll just say your assessment of the guide on NIE is very accurate that when Nick is providing that guide, we're assuming we're kind of down the middle in terms of guidance on loan growth, on capital markets revenue, on performance. So you've got that nailed. We're quite proud of the back half of this year and finishing with core ROA at 150. But we expect to continue to grow earnings per share and tangible book value per share at a better than average clip and stay in the double digits there. And so for us to do that, we have to continue to move up ROAA, and it's pretty frothy already at 150%. But the way we get there, Danny, is -- and so I'm really glad you asked the long question because I think it's important to me that people understand we are not going to achieve greater ROA simply by further growing the LIHTC business. that will help, and we expect that to happen, and we expect that to add tremendously to profitability. But at the same time, we have to improve the ROAA performance of our traditional banking space, and we have to get continued 10% growth in wealth management. We do not want to grow earnings solely on the back of our LIHTC business. It's really important to us. Our team is really good at it. We expect it to grow. It's a tremendous ROA and EPS engine, but we're not just focused on that. We have to get traditional banking to improve and wealth management to continue to grow at 10%. So we want all 3 to grow ROAA in the future, and we expect that to happen. So on the traditional side, really 2 things, improving the right side of the balance sheet and how we fund. As we get better at that, that will help earnings. And then the operating leverage we're going to get from digital transformation and some other things. We expect that in really starting in '27, more fully in '28. So those 2 things will help traditional. So Danny, I answered your long question, a long answer, but I wanted to take everyone down that path that while we expect great things out of the future of our LIHTC business, we really need all 3 segments to continue to improve performance. Daniel Tamayo: Understood. That's helpful, Todd. And then maybe just a cleanup one, although also a little longer term in nature, but for you, Nick, just on the effective tax rate. Obviously, the tax-exempt portion of the balance sheet has been growing as you indicated. I mean, should we expect the effective tax rate to continue to trend downward in coming years or quarters and years as that business continues to be a bigger part? Nick Anderson: Yes. Danny, when we look at our effective tax rate, obviously, very high performing, very low effective tax rate there. We did -- I think full year, we landed around 6.5%, and that was compared to 7% in '24. And both those years had some pretty decent performance, both of those years were record years. To your point, though, the percentage of our tax-exempt business on our balance sheet that drives our income statement, it's about 30%. So when it hits the income statement. So that's -- I think that's probably pretty consistent of where we're expecting that to head. We did give guidance for the next quarter, 8% to 10%, but I think that makes sense given some of the lighter activity we're expecting here in Q1. So I think, hopefully, that helps to answer your thoughts there. Can that continue to trend lower over time? I guess my short answer is it depends a little bit on the makeup of our balance sheet. But we continue to off balance sheet some of our LIHTC business, so that's going to moderate. And I think kind of the level we're at and have been at here more recently is what you should assume. Operator: Our next question comes from Brian Martin from Janney. Brian Martin: Nick, maybe I just missed the end of that on the tax rate. But just the tax rate over the balance of the year, just -- do you expect it to change materially off the first quarter level? Or I guess, did you suggest otherwise? Maybe I just didn't catch that. Nick Anderson: Yes. I think it will continue to be pretty static. So I think your 8% to 10% or the 8% to 10% we guided to, I think that's a fair assumption to use for the '26 model. Operator: Got you. Okay. That's helpful. And just one other housekeeping on the earning asset number. What was the end-of-period earning asset number versus the average? How much lower was the end of period than the average? Do you have that? Todd Gipple: Nick has that, and he is pulling that up right now, Brian. Nick Anderson: Yes. No worries, Brian. It really was right on top, slightly under where we ended the average. So average was like $8.872 billion. So it's, call it, $20 million, $30 million below that. Brian Martin: Below it. Okay. Got you. I just want to make sure that. And then, Todd, your comments about just getting better elsewhere. I mean, do you see an opportunity on -- I mean, it sounds like there's an opportunity on the funding side, certainly with the DDA at around 13%. I mean, do you expect to be able to -- do you see an opportunity to move that up? Or is that -- I guess, do you have targets kind of on where that may trend over time? And then just kind of how you're thinking about the loan-to-deposit ratio here? Todd Gipple: Sure. yes, Brian, we know we have to improve the right side of our balance sheet for us to continue to improve the performance of our traditional banking space. So we're right now at about 13% NIB. We've been in the 20s. And we know that the rapid increase in rates previously changed the behavior of virtually every deposit client in the country, and they became rate sensitive after spending well over 10 years being non-rate sensitive. And so that has impacted our NIB. We have to have a clear path to improving that, and I do expect it to improve. I would certainly expect us over time to move that up to be more peer like, something in the high teens and maybe even 20%. That is not going to happen in a couple of quarters. Candidly, that's not going to happen in a couple of years. That's just going to take a lot of hard work over a long period of time. We're going to have to see some of our clients become less rate sensitive and allow us to have higher PE balances of noninterest-bearing because of our relationship. And we think over time, we'll have some success with that. But that is not going to happen quickly. It's going to take a lot of work. And the other thing is, over time, we want to be better funded with core deposits and be able to lower our loan-to-deposit ratio. It will never get I don't anticipate it's ever going to get below 90%, but we'd like to operate more in the low 90s than the high 90s. And I think over time, we'll get there. But again, our big focus on the traditional banking space is 2 main things, and that is our funding mix and our operating leverage. And we have plans to improve both. Brian Martin: Got you. And that operating leverage, Todd, I mean, in terms of getting that lower, I mean, you're targeting kind of getting to the low 50s from where you're at today, that's kind of where the trend line is moving toward or the hockey puck moving to? Todd Gipple: Exactly, Brian. That is not going to happen here for a couple of years while we're investing in the bank of the future and still paying for the bank of the past or current. We're going to stay within that 5% growth on expenses and have that discipline, but it's really going to start more in '28 and beyond where we think that efficiency ratio can drop from the mid-50s to the low 50s. Brian Martin: Got you. No, that's helpful, and it makes sense. Maybe just last 1 or 2 for me. Just on the loan guide or just kind of the loan outlook. In terms of -- it sounds like there's obviously a securitization and maybe potentially later in the year, a couple more of these construction offtakes. Just when we think about the loan growth of the guide, I mean, is this a number that's net of kind of all the activity that you're anticipating here in terms of the sales and the securitizations? Or how do we think about the net loan growth kind of as you go through with all the actions you expect here over the next couple of quarters? Todd Gipple: Yes. Brian, that's a fair question. It's kind of a difficult answer simply because the exact timing of some of this offtake is not real precise just yet, and that's not because it's uncertain. That's because it's going to depend on how fast our loan growth is and when we think the right time is to sell some of that off. We're blessed to have a tremendous partner in the construction aspect of this business, and they are very anxious to have more of our construction loans, and we're anxious to do that with them. But -- so I apologize that's a little choppy. So what we can talk about is our gross loan growth. We think that's going to be very strong. What I'm really thrilled about is last quarter was the best quarter of the year in terms of loan growth. And while 70% of that was LIHTC, traditional bank was 30%, and that's the best traditional bank growth we've had in a long time, and our pipelines on traditional bank growth are very strong. What I will tell you is because I know what you really need to do, Brian, is figure out the impact on NII. And I know that's why some more precision would help. What I will tell you is we are very focused on doing all this with the balance sheet, but also growing NII. And we are going to target that 9% and 9.65%. So the offtake will mute loan growth year-over-year. But during the year, we expect it to help produce NII growth. Brian Martin: Got you. That's understood. That's super helpful, Todd. I guess you know what we're trying to get to. So -- and just the last one for me was just on the capital management and just the buyback. You talked about M&A not being an issue or not being really a factor. It certainly sounds like that continues to be the case. But in terms of the buyback, how do you think about -- is this opportunistic here? Or I guess, is it ongoing? -- you plan to be in the market kind of regularly? Or just how are we thinking about the repurchases? Todd Gipple: Yes. Brian, thanks for asking about that. We hadn't really talked about the buybacks. And I would beat your word, opportunistic. That's how we've always felt about it. At current valuations, even today's, buybacks are an attractive use of capital for us. We know it benefits our shareholders. There's no real algebraic formula on when, how much, what price. It's certainly more of an art than a science. But we would intend to be opportunistic. And when we think about buying shares back, we tend to think forward about where TBV and EPS are headed. So sometimes we get a little more confident about buying shares at these valuations, knowing where EPS and TBV are headed in the future. So a good example of that. We spent $25 million so far under the current authorization. That's 312,000 shares. And what's lovely about that is that was at a weighted average price of $78. So we feel really, really good about having done that for our shareholders. And we'll remain opportunistic and try to do that when it makes sense. Operator: Our next question comes from Jeff Rulis from D.A. Davidson. Ryan Payne: This is Ryan Payne on for Jeff Rulis. Just one for me here. Revisiting the loan growth and LIHTC side, what kind of competition are you seeing in LIHTC and maybe the reasons it feels isolated? And then anything you're seeing on loan competition in general? Todd Gipple: Sure. Yes. Thanks for the question. What I would tell you is in terms of competition in the LIHTC space, -- we talked a little bit about this in our scripted comments, but what makes us really encouraged about the future growth of LIHTC is we have really -- our team is tremendous. And we hear that from our developer clients directly about how much they appreciate our team. And we've grown this business pretty nicely. But based on industry data that we can get, we only have around 2% of the market. And that obviously makes us very encouraged about potential for future growth. So in terms of headwinds and competition in that space, -- the candid about it, the only time we really end up losing deals is when the equity provider to that developer also has either an in-house perm loan or a relationship with someone on the perm side because developers, first and foremost, need equity. And so equity sometimes will drive the selection. Not to be cavalier about it, but that's about the only time we lose transactions is if an equity player comes in and says, I'm only going to give you the equity if you do the perm with us. So to combat that, we are working with equity providers that are perm loan agnostic, where they would love to partner with us because they know developers like our program. So we are working really hard to further our relationships with equity providers that can be partners with us on the firm. So that's why the future growth of LIHTC, we're optimistic about it. In terms of local competition for traditional banking, in several of our markets, there is not a transaction that happens in the market without us knowing about it. And candidly, maybe all 4 markets. We tend to be at the table for most anything of substance in our 4 markets. It's because of our structure and our great team. So sometimes what we're deciding is are we willing to do it at a certain price. And so pricing is tough right now. We're doing a great job. Our bankers are doing tremendous work, maintaining relationships and getting paid as well as we can. But typically, the competition for deals is going to be more about pricing and whether we can make it or not. Operator: And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Todd Gipple for any closing remarks. Todd Gipple: Thank you for joining our call, everyone. We very much appreciate your interest in our company. Have a great day, and we look forward to connecting with you soon. Thank you. Operator: And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Operator: Thank you for joining Packaging Corporation of America's Fourth Quarter and Full Year 2025 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the call over to Mr. Kowlzan. Please proceed when you are ready. Mark Kowlzan: Thanks for the introduction, Jamie. Good morning, everyone, and thank you all for joining us today and participating in Packaging Corporation of America's Fourth Quarter 2025 Earnings Release Conference Call. Again, I'm Mark Kowlzan, Chairman and CEO of PCA. And with me on the call today is Tom Hassfurther, our President; and Kent Pflederer, our Chief Financial Officer. I'll begin the call with an overview of our fourth quarter results, and then I'll be turning the call over to Tom and Kent, who will be providing more details. After that, I'll wrap things up, and then we'll be glad to take questions. Yesterday, we reported fourth quarter net income of $102 million or $1.13 per share. Excluding the special items, fourth quarter 2025 net income was $209 million or $2.32 per share compared to the fourth quarter of 2024's net income of $222 million or $2.47 per share. Fourth quarter net sales were $2.4 billion in 2025 and $2.1 billion in 2024. Total company EBITDA for the fourth quarter, excluding special items, was $486 million in 2025 and $439 million in 2024. Excluding special items, we also reported full year 2025 earnings of $888 million or $9.84 per share compared to 2024's earnings of $815 million or $9.04 per share. Net sales were $9 billion in 2025 and $8.4 billion in 2024. Excluding special items, total company EBITDA in 2025 was $1.86 billion and $1.64 billion in 2024. Fourth quarter net income included special items expense of $1.19 per share, primarily for the Wallula Mill restructuring charges as well as costs relating to the acquisition and integration of the Greif containerboard business and costs related to the closure of corrugated products facilities. Details of these special items for both the fourth quarter and full year of 2025 and 2024 were included in the schedules that accompanied the earnings press release. Excluding the special items, our earnings decreased by $0.15 per share compared to the fourth quarter of 2024. The decrease was driven primarily by lower production and sales volume in the legacy PCA business for $0.23; higher operating costs, $0.23; higher maintenance outage expense, $0.14; higher depreciation expense in the legacy PCA packaging business for $0.07; higher freight expense, $0.06; higher interest expense, excluding the Greif acquisition debt for $0.01; and lower production and sales volume in the Paper segment for $0.01. These items were partially offset by higher prices and mix in the Packaging segment for $0.50; lower fiber costs, $0.10; lower fixed and other expenses, $0.04; and higher prices and mix in the Paper segment, $0.01. The acquired Greif operations, including interest on the acquisition indebtedness generated a loss of $0.05 during the fourth quarter, primarily as a result of extended outages at the Massillon Mill in October and December to perform reliability maintenance activities and manage our inventory at the acquired operations. Looking at our Packaging business, EBITDA, excluding special items in the fourth quarter 2025 of $476 million with sales of $2.2 billion resulted in a margin of 21.7% versus last year's EBITDA of $426 million, sales of $2 billion or a 21.5% margin. For the full year 2025, Packaging segment EBITDA, excluding special items, was $1.83 billion with sales of $8.3 billion or a 22.1% margin compared to the full year 2024 EBITDA of $1.6 billion with sales of $7.7 billion or a 20.8% margin. We ran to demand during the quarter and with the planned DeRidder maintenance outage and a full quarter of ownership of the acquired Greif operations, we produced 1,407,000 tons of containerboard. The legacy mills produced 1,235,000 tons of containerboard 20,000 tons less than the third quarter and 75,000 tons less than the fourth quarter of 2024. System-wide, our inventories were at the same level as at the end of the third quarter and with the acquired Greif operations, 84,000 tons up from the beginning of the year. Operational performance during the quarter was again strong across the entire mill system and corrugated system, and we managed costs extremely well throughout the company. We made good progress on the integration and improvement of the acquired Greif assets with better reliability and performance at both mills and completion of key systems integration activities. We do not expect to take any additional outages at the mills until their annual maintenance outages later in the year and we will operate the business at capacity. We're on track to complete the Wallula restructuring activities by mid-February, and we begin -- and we will begin to benefit from the improved cost structure beginning in March. I'd like to give an update on the gas turbine energy projects that we're currently working on in the engineering phase. The plan includes the installation of gas turbines at the Jackson, Alabama mill and the Riverville, Virginia mills over the next 30 months. These locations have relatively high purchased power costs and good reliable gas supply as well as demand for the additional power that we can internally generate. We expect that these projects would involve roughly $250 million of total capital, some to be spent in 2026, but most of it coming in 2027 and 2028. The expected returns are in the mid- to high teens and most importantly, it would make us energy electricity independent at these facilities and protect us from future rising electric rates. We're finalizing the scope, and we'll seek Board approval during the first quarter. We're also working on plans for a third installation at one of our mills, and we'll provide more details at the appropriate time. We have a lot of good options, and we're considering all of these. I'm now going to turn it over to Tom, who will provide more details on containerboard sales and the corrugated business. Tom? Thomas Hassfurther: Thanks, Mark. Domestic containerboard and corrugated products prices and mix were $0.50 per share above the fourth quarter of 2024 and down $0.32 per share compared to the third quarter of 2025. This is mix related as our fourth quarter is seasonally less rich, incorporating more holiday-driven e-comm. Export containerboard prices were flat with last year's fourth quarter and down $0.01 from the third quarter of 2025. Export sales volume of containerboard was up 12,000 tons from the third quarter of 2025 and down 15,000 tons from the fourth quarter of 2024. In the legacy business, corrugated shipments per day and in total were down 1.7% versus last year's record fourth quarter when per day shipments were up more than 9% over 2023. That said, 2025 fourth quarter legacy box plant shipments were the second highest ever. For the year, our corrugated shipments were essentially flat with 2024. Our order book strengthened in November and December, and though we were ultimately disappointed with December shipment volume, we've seen this strength reflected in January shipments so far. While our corrugated volume and mix ended up below our fourth quarter forecast, the underlying volume trends were positive heading into 2026. To provide a little more color, December got off to a strong start, leading us to believe that we would grow our volume over last year. Later in the month, customers appeared to manage their already low inventories further down for year-end. The exception was e-commerce, which continued to remain strong well into the first week of January. In addition to the volume implications, this unfavorably impacted our December mix. The good news is, is that January is up significantly in terms of bookings and billings from a strong comp in 2025, where we were up 5% over 2024. January bookings in our legacy corrugated and sheet plants are up over 11% and billings are up 8% on a per day basis through last Thursday. We are seeing improvement across our customer base, which is a good sign for healthier underlying demand. Based on what we've seen so far, we are forecasting solid year-over-year growth for the first quarter and seasonal improvement in our mix. Our containerboard system is tightening up, and we will need to run at full capacity to support our demand. Including the acquisition, shipments were up 17% over last year for the fourth quarter and 6% for the year. The acquired plants had a very good quarter, outperforming our expectations and are also off to a strong start to the year. We made good progress on integration and are working toward operating as a single corrugated system as soon as we can with systems integration work ongoing. We still have work to do to optimize the inventory levels and paper grades carried by the acquired plants. We are working off the remaining containerboard purchase and trade commitments and ended the quarter at approximately the same inventory levels that we began, which is higher than what we had forecast. We had planned to bring the inventory levels down significantly while simplifying the grades carried at the plants and leveraging the larger integrated system. This will take place over the next 2 quarters and better day-to-day visibility once our systems are in place will certainly help us. Last week, as you know, we notified our customers of a $70 per ton price increase on our linerboard and corrugated medium grades effective March 1. We will work as we normally do to implement the full price increase. I'll now turn it back to Mark. Mark Kowlzan: Thanks, Tom. Looking at the Paper segment, EBITDA, excluding special items in the fourth quarter was $37 million with sales of $154 million or 24.2% margin compared to the fourth quarter 2024 EBITDA of $39 million and sales of $151 million or a 25.9% margin. Sales volume was 1% above the fourth quarter of 2024 and 4% below the third quarter of 2025. Prices and mix were up 1% from the fourth quarter of 2024 and down less than 1% from the third quarter of 2025. Performance exceeded our expectation on higher sales volume and strong underlying operating performance at the International Falls mill. For the full year, Paper segment EBITDA was $148 million or -- well, with $615 million of sales for a 24.1% margin. 2024's EBITDA was $154 million on sales of $625 million for a 24.6% margin. I'll now turn it over to Kent. Kent Pflederer: Thanks, Mark. Cash provided by operations was a fourth quarter record $443 million. And after $319 million of CapEx, free cash flow was $124 million. In addition to CapEx, the primary payments of cash during the quarter included share repurchases of $153 million, dividend payments of $112 million, net interest payments of $53 million and cash tax payments of $15 million. We repurchased 760,000 shares during the quarter at an average price of $201.03. We have approximately $283 million of remaining repurchase authority. For the full year '25, cash from operations was $1.55 billion with capital spending of $829 million and free cash flow of $725 million. Our year-end cash on hand balance, including marketable securities was $668 million, with liquidity of about $1.25 billion. Our final recurring effective tax rate for 2025 was 24.7%. Regarding full year estimates of certain key items for the upcoming year, we currently estimate dividend payments of $450 million, total CapEx to be in the range of $840 million to $870 million and DD&A is expected to be approximately $700 million. Our full year interest expense in 2026 is expected to be approximately $139 million and net cash interest payments should be about $147 million. The estimate for our book -- 2026 book effective tax rate is 25%. We have planned annual outages in 2026 at all of our mills, which will cover a higher number of outage days and tons in 2025. Including lost volume, direct costs and amortized repair costs, we currently expect the outages to total about $1.39 a share. The current estimated impact by quarter during the year is $0.16 in the first, $0.35 in the second, $0.24 in the third and $0.63 in the fourth. I'll now turn it back over to Mark. Mark Kowlzan: Thanks, Kent. Our employees put in a tremendous effort and delivered outstanding results for PCA during 2025 when business conditions were challenging at various times. We completed the acquisition of the Greif business and achieved significant progress on integration and improving the operations. We successfully started up our Glendale, Arizona plant and completed numerous capital and operational projects to improve our capabilities and efficiency in our corrugated business and continue to serve and profitably grow with our customers. Our Paper business continued to deliver outstanding results through its commitment to customer service and manufacturing excellence. As a company, we still have many key strategic capital opportunities in progress or ahead for the 2026 year and beyond. Our balance sheet remains high quality. We have flexibility to continue to take advantage of internal or external investment opportunities that generate shareholder value. We continue our time-tested and balanced approach towards capital allocation, investing in our business to profitably grow our earnings and cash flows and returning value to shareholders through dividends and buybacks. We accomplished a lot in 2025 and are positioned to accomplish even more this year. Looking ahead, as we move from the fourth and into the first quarter, as Tom mentioned, we see demand improving and expect year-over-year growth in corrugated volume in our legacy box plants and strong shipment volume from the acquired plants. First quarter volume is seasonally lower than the fourth quarter. And even with 1 more shipping day, overall volume is expected to be slightly lower than the fourth quarter. We'll now be running our mills full, but production will be lower than the fourth quarter with 2 fewer operating days, slightly more outage tons and Wallula running in its new reconfigured state. We expect slightly lower inventory levels at the quarter end. Price and mix will seasonally improve, and we expect to see some benefits from our containerboard price increase in March. Export containerboard sales will be slightly higher than the fourth quarter and prices should be flat to slightly down. Paper volumes will be lower with 2 fewer operating days and price/mix is expected to be slightly lower and will begin to improve in March with our recently announced uncoated freesheet price increase. With the exception of fiber prices, we expect price inflation across most of our direct, indirect and fixed operating and converting costs. In addition, wood, energy and chemical costs will also increase due to winter conditions that impact usages and yields for these items. Our cost structure will begin to benefit from the Wallula reconfiguration during the month of March. Labor and benefits costs will be higher due to the normal timing-related items that occur at the beginning of the new year for annual increases, the restart of payroll taxes and share-based compensation expenses. Freight will be slightly higher, and we expect slightly lower depreciation expense. Lastly, scheduled outage expenses will be lower, and we assume a lower corporate tax rate. Considering these items, we expect first quarter earnings of $2.20 per share, excluding special items. We are, in fact, assessing last weekend's winter storm across multiple regions, which caused some of our plants to be down earlier in the week and which could negatively impact shipments and operating and transportation costs for the quarter. With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constituted forward-looking statements. The statements were based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in the annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in the forward-looking statements. And with that, Jamie, I'd like to open the call for the Q&A. Operator: [Operator Instructions] Our first question today comes from George Staphos from Bank of America Securities. George Staphos: I hope you're doing well. I guess the first question I had is on operations in the mills. And I guess -- yes, in the mills overall, we have the outages. You call out the sequential pickup in variable costs for inputs. We have fewer days and also you're going to try to take down inventory to some degree. Kent, is there a way to maybe size or give us a bit more granularity on what looks like it will be a decent increase in cost per ton in the containerboard business? We're not surprised by the 1Q sequential drop, but just trying to figure out in earnings. Just trying to get maybe a little bit more granularity on what the cost per ton might look like 4Q to 1Q. Mark Kowlzan: I'm not sure we're going to run the system full. We've got the typical seasonal weather impacts taking place along with the recent storm. So there's some uncertainty there. But again, we're basically faced with the normal year-over-year inflationary concerns that we always see in January with labor, medical benefits, cost type matters. And then just the winter usage and yield matters with energy and wood. Again, I'd like to give you a number, but I don't have that off the top of my head. George Staphos: No, that's okay, Mark. I guess maybe a related question. I know you're still assessing but what have you built into your guidance for the quarter related to the winter storms from an earnings standpoint or more sort of a factor standpoint from a volume versus cost qualitatively? Mark Kowlzan: George, we're just starting. We've had plants down from the Texas region all the way across the Gulf region up through the Mid-Atlantic. Some of these areas are still down without power. We've got power outages continuing in Tennessee. The Dallas region is -- has sought out and coming back, but things are coming back as we speak literally on the call this morning. The mills ran through this. The 2 biggest mills that were impacted, the Counce, Tennessee mill and the Riverville, Virginia mill. Both mills did run through this quite well. We had exceptional support from all of the employees and the mills ran through this. The problem was we couldn't ship any tons out during the period of time. So just in the last 24 hours, we started moving trucks and rail into Counce and Riverville. But nevertheless, we've had a huge number of the box plant system down for the few days. Tom, do you want to add a little color on that because it's a pretty significant... Thomas Hassfurther: Yes, I think the important thing is, George, to understand, it's going to be very hard for us to get our arms around this until we find out what the impact is on that book of orders that were not shipped in the short term and whether they'll pick back up with our customers going forward. Obviously, our customers were down as well. So it's -- we've been through these before. And sometimes if it's too long of a process, there are orders lost. Other times, we get right back up and we can catch up. So we'll just have to see as this month goes on and really kind of probably as this winter goes on because they're calling for another big storm coming on in the Mid-Atlantic and Southern region this weekend. So we'll just have to see what happens. But I think overall, I mean, we've -- I think we weathered it pretty decent, although we had a lot of box plants down. And the transportation is another big issue that exists, whether it's rail or truck, if we can get the product out once we get the plants and mills up and going. Kent Pflederer: George, back to your first question, it's Kent. Ex freight and with a little bit of Wallula benefit in, but not all of it, we're about $15 million total on the cost line in the mills. And so running that through, that's maybe $10 a ton. George Staphos: Okay. I appreciate that, Kent. Last one, and I'll turn it over, just to be mindful. What gives you comfort that at Massillon, you're through the reliability issues? And for that matter, what gives you comfort? And what caused the inventory mismatch in the acquired facilities? Again, presuming it's going to be worked down, but hopefully by 1Q, but what caused that? Mark Kowlzan: Yes, I'll talk about the operational matters and then I'll let Tom talk about the inventory. During the month of -- if you went back to the acquisition date in September, we spent 6 straight weeks with probably 200 PCA personnel assisting Massillon along with contractors, essentially rebuilding Massillon Mill from bearings, bushings, pumps, motors, we put our hands on everything, gas turbine rebuild, again, all of the mechanical infrastructure. And then during the period of time during December that the mill was down, we continued to address some of the even finer detail items, some operational improvements, even down to lubrication technology, again, more bearing monitoring. So I'd like to say that over a 3.5-month period of time, we've essentially rebuilt the Massillon Mill. So it's become the little mill that could. It's -- we've improved operational efficiency at both Massillon and Riverville from the -- from probably a 15% improvement overall in operational efficiency, the way we measure efficiency. So both mills are very close now to running to the PCA standard efficiencies. Tom, do you want to talk about the inventory again? Thomas Hassfurther: No. Go ahead, Kent. Kent Pflederer: So George, I'll at least start on the Massillon piece to quantify it. We were maybe 10,000 tons above where we'd forecasted finishing up the year. Some of that were taking purchase commitment tons. Some of that was -- we were a little bit lower than forecasted shipment volume. So Tom, I'll let you expand. Thomas Hassfurther: Okay. So I think, George, think of it this way. We had -- we knew we had a lot of work that needed to be done. We knew we had to get our reliability up in a number of things. And fortunately, we had the financial flexibility to go do that right away to prepare us for 2026 and the demand we saw coming forward in 2026. Now that said, that -- everybody did an outstanding job, and we've got -- we're in good shape starting in 2026. But there's another big piece of this that was part of that inventory miss, and that is that we had -- again, the Greif had a lot of containerboard purchase and trade commitments that were in place that we just chose to absorb basically in the fourth quarter. And we don't have a lot of visibility from a systems point of view into a lot of their day-to-day activities like we do at PCA. So those were the main drivers for the inventory miss. And -- but I think the most important thing is we got all that work done upfront and put ourselves in good shape for 2026. Operator: And our next question comes from Michael Roxland from Truist Securities. Michael Roxland: Just wanted -- Tom, I wanted to follow up on that last point in terms of the purchase and trade commitments that Greif had in place. Can you just provide some more color around those commitments? Is it something you're looking to keep? It's something that you're looking to get rid of once those contracts expire? Just any color you can provide around those commitments and what you're looking to do with them? Thomas Hassfurther: Okay. Mike, I'm going to ignore the color part and just tell you that those commitments and purchases, we no longer are keeping or pursuing or anything like that. Those were agreements that Greif had. We would not typically have any of those in place, and we're discontinuing those. We met the commitments, and we're moving forward from there. Michael Roxland: Perfect. Got it. And it sounds like demand has inflected and need to run full. But you have 2 less shipping days in 1Q. So this is a theoretical question, I mean if you had those 2 extra shipping days in 1Q, would things be looser and volumes be softer? Or has demand firmed up enough such that you would still be running full even with those 2 extra shipping days? Mark Kowlzan: If we had the 2 extra days, we'd still be running full. I mean the way we've looked at the entire year for the full 2026, we expect to run the entire mill system full out. And so -- which is a high-class problem to have. So Tom, do you want to add anything? Thomas Hassfurther: No, we'd -- it's -- this is just a matter of a 30-day period that we're looking at as opposed to the long term. So we would absolutely be running full out if we had the 2 extra days. Michael Roxland: Got it. And then just from a demand perspective, you guys have called out in recent quarters, the housing environment, you've called out protein. Any inflection in those particular end markets that are contributing to this better demand? Thomas Hassfurther: Well, I think as I mentioned in the comments that the underlying demand is improving, and it's improving in all the segments, which is what's really positive for us. As I've talked about over the last -- certainly last year and maybe even going into the previous year, auto, building products, durables, those segments were down and continue to be down all the way through the fourth quarter. But -- and they work their inventories down to the bare bones also, by the way. And we're seeing some pickup in that area, and that's a real positive for us because those are still large segments for us. And obviously, we're doing well in the other segments and the other segments continue to do well. But I think consumer sentiment is getting better. The GDP is up. 4% the previous quarter, a little over 4%, forecast to be up over 5% this quarter. If you just think about at worst, box demand could trend at half of the GDP, and that's a big number in terms of demand. So everything underlying demand has been -- is very positive right now, Mike. Michael Roxland: Got it. Just one quick follow-up just on a housekeeping question. Are you reflecting the $70 per ton in your 1Q guide? So is that part -- is that -- are you the guys that say $70 per ton for March 1. Is that included in the $2.20 you're guiding for 1Q? Kent Pflederer: The answer is no. We have a little bit into March, but not the full benefit. Michael Roxland: So you are baking in though that -- so you are counting that in your 1Q guide a little to some extent. Thomas Hassfurther: Just a small amount is what we're putting in the forecast. As you know, these price increases, I mean, they take place over -- for us, they take place over about a 90-day period. And then we have some contracts that extend to midyear and that sort of thing. But for the most part, I mean, we're baking in. Of course, it's effective starting March 1, but we can't bake in the full amount, obviously. Michael Roxland: Got it. Very helpful, a lot. Good luck in 2Q. Mark Kowlzan: Thanks, Mike. I appreciate it. Operator: Our next question comes from Mark Adam Weintraub from Seaport Research Partners. Mark Weintraub: Just a few -- 2 quick clarifications. One, just to be clear, the $70, you get that in containerboard in March, but you're talking about because it takes a while to flow through into boxes is why it would have a fairly de minimis impact in 1Q. Is that correct? Thomas Hassfurther: Correct. Correct, Mark. Yes. Mark Weintraub: And just second clarification, just to make sure I wasn't missing something. If there were 2 more shipping days, then you would have more demand on your mill system, not less in the short term? Thomas Hassfurther: Correct. Mark Kowlzan: Yes. Mark Weintraub: Okay. And then just 2 -- just going back to costs. Last year, you had talked about $0.50 to $0.60 impact going from 4Q to 1Q and that you expected to get about half of it or even perhaps a bit more than that back in the second quarter because some of it is seasonal, et cetera. Could you share those types of metrics this time around? Kent Pflederer: Yes, we can, Mark. It's about $0.45 to $0.50 4Q to 1Q. We will get, excluding Wallula, a little under half of that back. But then Wallula, the cost improvements there start kicking in more so in the second quarter. Mark Weintraub: Okay. Super. And then the -- can we also contrast how the containerboard box markets feel now relative to how they felt this time last year? I mean, obviously, you went with price increases January 1 last year. You got -- at least in terms of what Pulp & Paper Week reflected partial increases. How does it feel this time around versus the last 2 years? Thomas Hassfurther: No, I'm only going to -- I can only speak for PCA. So let's just -- I want to qualify that. How does it feel for us? I mean it feels improved. In fact, much improved, I think, because there were still a lot of question marks in place a year ago. A new administration was going to take hold. A lot of things were up in the air. We dealt with -- we were already dealing with potential tariff stuff and all these other things, there were question marks hanging in the air. Those are all pretty well cleared up at this point in time. And I think the most encouraging thing is what I just mentioned earlier relative to GDP and consumer sentiment. GDP being up over 4% last quarter, projected to be up over 5% this quarter. Those are big numbers and make a big difference in terms of corrugated box demand. And also, I think another great metric is, is for the first time in over 4 years, you've got wages that are now ahead of inflation. And that will also improve the consumer sentiment going forward. They may not feel it immediately, but I think throughout the year, I think that's an important metric for our business. Mark Weintraub: Great. I appreciate it. Mark Kowlzan: Thank you. Operator: Our next question comes from Gabe Hajde from Wells Fargo Securities. Gabe Hajde: Not to be combative here, but I'm curious like I think GDP is projected to be up 3%, 4% in 2025, yet box demand has been pretty muted, sluggish, disappointing. There seems to be a clear inflection in your tone. I'm curious if you can, is this something specific to what PCA is doing, maybe the new Glendale box plant and internal initiatives? We heard from someone else this morning more hunters on the field versus gatherers. It's just -- there's obviously been a clear change in tone on the demand side. And then we've been dealing with this seemingly jockeying around of orders and inventories at quarter end and then the first month of the new quarter. Any visibility, any work you guys have done to try to discern if that's going on here or again, if this is more durable in terms of order patterns? Thomas Hassfurther: Well, Gabe, I wish I could emphatically give you great answers here. But all I can do is anecdotally talk about the fact that we do have these discussions with our customers. We are trying to find out what they're thinking and what they're doing because that's important to our ability to adapt our business accordingly. But I can tell you, there is a much more positive vibe across our entire customer base right now. These starts and stops we experienced last year was quite unusual, quite frankly, because I think everybody was trying to figure out what consumer demand really was and what -- and CapEx spending from companies and all these other sorts of things, what was really going to occur because start, stop, start, stop. I mean, we had -- I have customers that talked about having product that they were importing that they then add value to and then sell in the market that were stuck in ports in different places, waiting for tariffs to find out what the tariffs were going to be, all these other sorts of things. So it was an unusual year, in my opinion. And a lot of that's now cleared out. And I think that's helped the visibility going forward. And I think it's also helped the positivity going forward in terms of predictability. So that's about the best I can tell you. Gabe Hajde: All right. On the Greif acquisition, some of the feedback that we've gotten is that it feels maybe a little bit of flow out of the gate. And I know you guys had a plan going in. But maybe, Mark, can you just talk about, let's say, an impromptu mill rebuild in 3.5 weeks. Was that part of the plan? And as you project forward and think about the acquired assets, you talked about running full for the rest of this year, but for planned maintenance outage, do you expect that to be kind of reaching that, I guess, EPS accretion level in the second quarter, first quarter, second half of this year? Just any thoughts on that? Mark Kowlzan: As far as the 2 mills, the Massillon mill and the Riverville mill, we learned a lesson from Boise. And we also have a different organization in place now than we did 13 years ago. But we took advantage of the fact that we have the technology engineering group in-house and decided that after the acquisition, we would execute an immediate corrective action at the mills and go in, in force and do what PCA does well, and that's provide operational expertise. And so we took a couple of months in the fall right through December at Massillon and essentially addressed all of the issues that normally might take a few years to address. And so all of the normal maintenance matters are behind us now. We've got -- we've identified -- like the gas turbine opportunity at Riverville. We've identified some bigger long-term cost takeouts at Riverville. And then we'll continue just to instill the day-to-day normal practice at Massillon and Riverville in terms of operational expertise. But no, we accelerated that execution and took advantage of the opportunity this fall when we not only had the capability, but we were going to manage inventory to our needs, and so we took advantage of that. Gabe Hajde: Got it. One last thing on... Kent Pflederer: And Gabe, sorry, on the accretion piece, we are forecasting it to be slightly accretive in the first quarter and then improving as we get on and seasonality improves as well there. So... Gabe Hajde: One quick last one, hopefully on CapEx. Just, I guess, directionally, I think things are probably coming in maybe a little bit heavy in '26, and you talked about maybe only a smidge of the $250 million for the 2 gas turbines, the majority of that hitting in '27. Just directionally, would we expect things to be flattish next year on CapEx or down? I know we're just kicking off '26, but just any preliminary thoughts? Mark Kowlzan: I think we're in a range right now that is in this low $800 million. The gas turbines will continue to keep the number on the higher end here. We're finishing up the big box plant in Ohio. We've got a couple of other projects that will finish up this year on the box plant side. We've got -- on the bigger pieces of capital, you've got the Jackson, Alabama winder installation and improvements there. So there's a few discrete big pieces. Some of those will be wrapping up this year. My goal, quite frankly, would be to see the number come down. There's a number of reasons for that. Part of it is just the psychological discipline that you want the organization to take a pause once in a while and step back and then look at what's been done over the last few years and then go truly put some optimization on all of the capital. So without giving you a number and quantifying that number, my goal would be to bring the number down below the $800 million level. We did that back in 2022 into 2023. And then we had the opportunities, and we brought that number up into the $600 million level. Last year, $800 million with the bigger projects and new box plants. So it really depends on the opportunities, but we are mindful of the discipline required to spend the money wisely. So long answer to a question, but the goal would be to get it down, but we will take advantage of the opportunities. Gabe Hajde: Good luck. Mark Kowlzan: Thank you. Operator: Our next question comes from Anojja Shah from UBS. Anojja Shah: I just wanted to ask more specifically what changed in January? It does seem like there was a pretty sudden upturn in demand. And I know you talked about less uncertainty versus last year, but consumer confidence numbers are still kind of depressing and CPG earnings tone hasn't really changed. So do you think your customers are responding to maybe the promise of stimulus in the one big beautiful bill? And then after we get through tax refund season, we can see some choppiness again in demand? What are you hearing from your customers on that? Thomas Hassfurther: I think the upturn in demand is a couple of things. One is, obviously, as we've talked about from an inventory standpoint, they ran inventories incredibly low. So you can't continue to operate forever at these tremendously low inventory numbers. But I think there is a lot more positivity going forward with tax reform, a number of different things. I mentioned wages and some other things, consumer sentiment. It depends on who -- it depends on what survey you're looking at, too. One day, you get a survey that's positive. The next one, it's a little more negative. I think the questions get slandered and a number of different things occur. But I think overall, any time you get more money in the pockets of the consumer, we're going to see more demand, and that ultimately reflects in the box business. And I think from our customers' point of view, of course, we try to align with the very best and the ones that are the -- tend to be the winners in their space, they tend to have a much more positive viewpoint going forward. And as I said, all the noise that took place in 2025 with all the different things that were going on with the new administration, I think a lot of that -- the air is cleared on that. And I think people can see demand improving and count on it a little bit better than they did in the past. Anojja Shah: Yes. Okay. That's good to hear. Let's hope you're right. And then for my second question, did I miss the cash tax expectation for 2026? And could you get a meaningful step down year-over-year this year because, I don't know, maybe immediate depreciation expensing provisions on Glendale or anything else? Kent Pflederer: Anojja, we didn't provide what the cash tax forecast would be for the year. It will be higher though than we paid out in '25. The Greif acquisition and being able to take some of the immediate depreciation on those assets was a big help. So -- but we'll be approaching maybe a little more normal levels, but we will still get some benefit from the bonus depreciation provisions. Anojja Shah: All right. Sounds good. I'll turn it over. Mark Kowlzan: Thanks, Anojja. Operator: Our next question comes from Anthony Pettinari from Citi. Anthony Pettinari: For the price increase for containerboard and boxes, should we expect the timing and implementation of the price hike for the kind of the Greif portion of the business to be pretty much identical to the legacy business? Or do they -- are there any sort of existing contracts or terms that might make it a little bit different or longer? Thomas Hassfurther: We would expect the acquisition plants to roll out the same as PCA. Anthony Pettinari: Good. Got it. And I mean, there were some pretty large mill closures in the industry last year. And obviously, you have Wallula. I understand that you don't sell into the open market as much as others. Can you just talk about sort of availability of board in the open market from a PCA perspective and just sort of what the market feels like given some pretty major supply actions that happened at the end of last year? Thomas Hassfurther: Yes. All I can tell you is from a PCA perspective, we're going to have to run the mills full out. Things are going to be tight. We're not going to have additional board that we're going to be able to sell into the open market. And that's all I can comment on. You can draw other conclusions from your comments relative to the industry. Anthony Pettinari: Got it. Got it. Maybe just one last one. In terms of the CapEx for '26, $840 million to $870 million, I think you said the energy projects would be a small sliver of that. I'm just wondering if you can quantify that. And then if there are any other major projects maybe on the box plant level that we should think about for '26 that you'd point out? Mark Kowlzan: We're -- again, we're finishing up the detailed engineering right now and getting ready to get approval. So there'll be a small amount of -- if we're spending $250 million, you might spend $50 million this year on ordering equipment and getting steel and different things ordered. But the bigger pieces of capital this year of the $800 million-plus are coming from the completion of the new Ohio box plant, the big project down at Jackson, the Jackson Winder project and all of the expansion down at Jackson was over $100 million of project over a 2-year period. And then we've got a couple of other big projects at the Counce #2 machine. It's a couple of phases of work, but the first phase begins this March. And so we're putting in a considerable amount of effort to upgrade the #2 paper machine. And then we're finishing up a project in Syracuse, New York. And so there's a couple of other big box plant upgrade projects that are finishing up. And then the rest is just the numerous normal projects that we always bring on, on the converting side, new converting pieces of equipment that are being installed, corrugators, converting lines, upgrades so it's spread out evenly, but that's the good news that we're continuing to invest and grow with the customers as they need us to. Anthony Pettinari: Okay. That's very helpful. I'll turn it over. Mark Kowlzan: Thank you. Operator: Our next question comes from Phil Ng from Jefferies. Philip Ng: A question for Tom. The pickup in orders in January, how much would you attribute that being from that destock that you saw reversing? Is that uptick pretty broad-based, isolated a few end markets? When I look at the spread between bookings and billings, it's quite large, large than normal from what I can tell. I think that's a bullish indicator, but just give us a little more color on how we kind of interpret some of these things. Thomas Hassfurther: Okay. I think, Phil, it's very difficult to separate out anything relative to inventory restocking. There's some of that. I don't think that's the majority of it by any stretch. I think that our customers are preparing for more demand. They've got more demand. That's what we're hearing. I think that the -- right now, being late in the month, we've got a lot more visibility as an example, into February, and February remains very strong. So it's kind of following on to January, which helps the bullishness of the forecast. And in general, it's just a much more positive feeling across the board. And as I mentioned earlier, we've got some of those segments that were real laggards last year that are beginning to show some new life and come back to what I'd consider to be a little more normal demand that we've seen in the past. And I think as housing begins to come forward again, I think with mortgage rates now having dropped under 6%, that's a real catalyst for new homebuilding and remodeling, et cetera. So that will be a big benefit for us in that sector. Philip Ng: Got you. And then pretty encouraging, all that great stuff. And then I think your commentary is you expect to be running full out all of this year. Thomas Hassfurther: Yes. Yes. Philip Ng: Is that a function of demand getting much better this year? I mean, certainly, the Wallula piece is part of it. But predicated on that, like what kind of box shipments should we assume for you to be running full out? Thomas Hassfurther: Well, it's -- we're definitely going to be up. And I think one of the things that we're really focused on this year, although the capital intensity in this business is tremendous, as alluded to in these numbers, that we have to spend capital every year to get the job done. I think as Mark mentioned earlier, we are going to be really focused on maximizing the returns on the capital that we've put in place, and this is going to be a great year for us to really test that. And so we're very well positioned for significant growth in the business. And -- but again, you don't build for some exorbitant amount of growth because that never happens in this business. So we're well positioned for the normal growth plus a little is where we're really positioned for. So I think we'll be in good shape. And of course, then we've got the ability to spend more capital if needed, if those opportunities present themselves. Philip Ng: Okay. Tom, I don't want to pin you on the number, but it sounds like you're expecting '26 box demand for the broader industry to be more normalized this year and then do PCA kind of stuff kind of grow... Thomas Hassfurther: No. What I'm saying is that the -- I think the demand is going to definitely be up this year. And we at PCA will do what we normally do in terms of how we perform versus the total demand. Philip Ng: Okay. Makes sense. And then a question for Kent. It was helpful color. You said you expect the Greif deal to be modestly accretive in 1Q. I think last quarter, you gave us a framework in terms of LTM EBITDA in that $240 million range and maybe $20 million of run rate synergies by 2Q. Appreciating things move around. Is that still a good way to think about it? Or perhaps some of that gets pushed out a little bit in terms of achieving those targets? Mark Kowlzan: No, that's a very good way to think about it. That's where we still are. And I think we'll be in a better position to talk about some synergy opportunities in the next couple of calls going forward now that we're able to operate this thing at full capacity. Philip Ng: Okay. Super. I appreciate it guys. Mark Kowlzan: Thanks, Phil. Operator: [Operator Instructions] Our next question comes from Charlie Muir-Sands from BNP Paribas. Charlie Muir-Sands: Just a couple of follow-ups. You've obviously outlined a big list of all the projects that are the focus of CapEx at the moment. If we think ahead sort of 12 months from today, given that you're going to be running, you said, all out throughout this year, you anticipate, how much more capacity do you think you'll have in a 12 months' time from today versus now? And how are you thinking about any kind of constraints or things you might need to do in order to get ahead of that? And then I've got one follow-up question. Mark Kowlzan: The short answer to that is I'll let you know then what we're planning to do going forward. Nothing's changed in terms of how PCA goes about our business to look at supplying containerboard into the converting side of the business. Tom just said it, we never get too far ahead of ourselves. Part of the impetus for the Greif acquisition is that we had 2 mills that we looked at that say we're producing in that 600,000 tons run rate a year. We looked at that. We know how to improve the operations. And we said we'll probably get over a couple of year period of time, depending on how much capital we want to spend, probably another 200,000 tons out of the 2 mill system. And so that provides the growth runway for the next couple of years for us. So that's how I'm looking at it. But it's going to be tight. We're going to have to run very well as we normally do, run very efficiently. But never forget, we're always looking out on the horizon of where the next containerboard capacity will come from in PCA. And we've got different levers to pull and different ways to get there, but that's one of the high-class problems that we face all the time. Tom, do you want to add that? Thomas Hassfurther: No. Nothing really more to add other than we're -- we'll grow with our customers. That's how we operate. Charlie Muir-Sands: And just the follow-up was you quoted your bookings and billings numbers so far. Can you just clarify, is that a fully legacy PCA number? Or is that line getting blurred now? Have you sort of moved customers from Greif operations into PCA or vice versa? Or is that an all-in number? Thomas Hassfurther: Okay. That's -- I'm giving you essentially the legacy PCA number. But I also -- the visibility I do have into our Greif business, it -- doesn't quite mirror that, but it's pretty close to that. Mark Kowlzan: Thank you. Are there any other questions, Jamie? Operator: Mr. Kowlzan, at this time, there are no more questions. Do you have any closing comments? Mark Kowlzan: Yes. Again, I want to thank everybody for joining us today. And also, I just want to put out a big thanks to the folks at the Riverville Mill and Counce Mill in particular, a number of the employees and managers spent 3 or 4 days living at the mill during the storm and protecting the assets and running the mill and safeguarding things. So from up here in Lake Forest to the facilities, thank you. And then all the box plants that are down and people that have been without power, again, it's been a struggle, but things are coming back. So we appreciate everybody's effort and the dedication that we have from our PCA employees and look forward to talking with everybody on the next call in April. Thank you. Have a good day. 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: Thank you for standing by. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the First Commonwealth Financial Corporation Fourth Quarter 2025 Earnings Release Conference Call. [Operator Instructions] Thank you. I'd now like to turn the call over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead. Ryan Thomas: Thank you, Jordan, and good afternoon, everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation's fourth quarter financial results. Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue Officer; Brian Sohocki, Chief Credit Officer; and Mike McCuen, Chief Lending Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our Investor Relations website with supplemental information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on Page 3 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Today's call will also include 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. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike. Thomas Michael Price: Thank you, Ryan, and welcome, everyone. Headline performance numbers for the fourth quarter include core EPS of $0.43 per share, which beat consensus earnings estimates alongside a net interest margin that expanded to 3.98%, a core ROA of 1.45% and a core efficiency ratio of 52.8%. During the fourth quarter, average deposits and total loans grew modestly at 2.8% and 1.2%, respectively, due to seasonal headwinds and several larger commercial loan payoffs. Net interest income grew as the margin expanded on the heels of healthy new commercial loan volume at good rates. Deposit costs fell 1 basis point to 1.83%. Fee income was flat, as gains in SBA were offset by seasonal declines in wealth and mortgage. Our fee income at 18% of total revenue compares favorably to peers, and we have a concerted effort and long-term focus on growing fee income through our regional banking model. Wages and incentives remained pressured due to market conditions. The provision for credit losses decreased by $4.3 million compared to last quarter to $7 million. The elevated prior quarter provision was reflective of the continued resolution of a previously disclosed dealer floor plan credit. The credit required no further reserve in the fourth quarter. While NPLs increased 4 basis points to 94 basis points versus the prior quarter, we are appropriately reserved for these loans and did not experience a provision impact like the third quarter. Nonperforming loans include both the unguaranteed portion of SBA loans and the government-guaranteed portion of any SBA loan, which is owned by the bank. As of December 31, 2025, $98 million of nonperforming loans included $39.2 million of total SBA loans, of which $31.2 million was government guaranteed. As a result of our 94 basis points of NPLs, 32 basis points is guaranteed. In the fourth quarter, we repurchased $23.1 million of our stock or 1.4 million shares at $15.94 per share. We repurchased 2.1 million shares in total in 2025, which incidentally is roughly 2/3 of the 3 million shares we issued in the Center Bank acquisition. For the year, core EPS of $1.53 compares favorably to the consensus earnings estimates of $1.40 that was in place in December of 2024 as well as the highest revised midyear consensus estimate of $1.54. Net interest income of $427.5 million in 2025 was up an impressive $47.2 million year-over-year, while net interest income benefited in general from higher for longer interest rates, more specifically, net interest income was driven by better loan yields, good loan volumes, lower deposit costs and a better commercial business mix. All this mixed together drove the NIM markedly higher over last year. Loan growth was 8.2% annualized and 5% without the Center Bank acquisition as commercial banking, equipment finance and indirect led the way. Average deposit growth of 6.1% for the year largely kept pace with loan growth and was approximately 4.2% without Center Bank. Here, money market and CDs accounted for over $534 million in growth, while noninterest-bearing DDA added another $116 million to a now $10.3 billion depository. For the year, noninterest income fell only $3 million year-over-year, despite another $6.3 million in Durbin amendment debit card headwinds that resulted from crossing $10 billion in assets. In short, our fee businesses are filling the gap. In sum, 2025 was a year in which strong growth in spread and fee income more than offset the impact of higher expenses and lost Durbin interchange income, resulting in year-over-year improvements in PPNR, core EPS, core ROA and efficiency. During the year, and oh, by the way, the team completed the acquisition of Center Bank and grew deposits 3% annually for the year. Before I turn the call over to Jim, I wanted to take a moment to recognize Jane Grebenc, who will be retiring at the end of March. Jane has been a friend and a mentor to me and many other leaders throughout her distinguished career, and she has left an indelible mark on First Commonwealth. Jane's dedication, leadership and wisdom have played a pivotal role in the strategic transformations that have helped position First Commonwealth as a top quartile performer. Thank you, Jane. And with that, I will turn it over to Jim Reske, our CFO. James Reske: Thanks, Mike. Core operating results for the fourth quarter of 2025 continued the momentum of the third quarter. Core ROA improved 11 basis points to 1.45% and core ROTCE improved 93 basis points to 15.83%. Spread income increased $2.1 million from the previous quarter, primarily due to a 6 basis point increase in the net interest margin. The yield on earning assets increased 3 basis points, while the cost of funds decreased 3 basis points. Looking ahead, our NIM guidance has little changed from last quarter, a near-term dip as our margin to our variable rate loans fully reflects fourth quarter rate cuts, followed by gradual improvement each quarter, ending the year 2026 at around 4%. At year-end, we designated a portfolio of approximately $225 million in commercial loans as held for sale. These loans represent a pool of commercial loans that were originated primarily in our Philadelphia MSA, which the bank had previously decided to exit in order to focus the bank's resources on customers in other areas. Subsequent to that decision and communication to borrowers, a bank approached us with an offer to purchase the portfolio. Since discussions regarding that sale are ongoing, we moved the portfolio to held for sale as of year-end. The ongoing effect in 2026 should the sale be consummated, would be to reinvest the cash proceeds from the sale of $225 million in loans into lower-yielding securities at a rate differential of approximately 1.5%. The sale is consummated, will also have the ancillary benefits of improving our liquidity and our capital ratios. As Mike mentioned, total average deposits increased $72 million or 2.8% annualized over last quarter. Seasonal outflows in public funds were more than offset by growth in consumer checking and time deposits, along with growth in small business and corporate money market deposits. Core noninterest income of $24.3 million decreased $200,000 from the previous quarter. SBA gain on sale income increased by $800,000, but this was more than offset by a $700,000 decrease in wealth advisory fees and a $200,000 decrease in swap fees. In 2026, we expect noninterest income to be relatively flat over 2025. Though longer term, as Mike mentioned, we would expect our regional model to improve fee income results. Core noninterest expense of $74.3 million increased $1.7 million from the previous quarter, mostly due to increases in salaries and benefits as we filled a number of open positions in the fourth quarter. The bank, however, was able to achieve positive operating leverage over last quarter. The core efficiency ratio remained below 53%, and we expect to be able to limit operating cost increases to approximately 3% year-over-year looking ahead. Mike mentioned our buyback activity in the fourth quarter. I would add that remaining repurchase capacity under the current program was $22.7 million as of December 31, 2025. On top of that, an additional $25 million of share repurchase authority was authorized by our Board yesterday. Of course, we only repurchased shares using excess capital generation in any given quarter, which effectively caps repurchase activity at approximately $25 million to $30 million per quarter. And with that, we'll take any questions you may have. Operator: [Operator Instructions] Your first question comes from the line of Daniel Tamayo from Raymond James. Daniel Tamayo: Congratulations to Jane on your retirement. I guess, first on the -- on the credit side, and I apologize, I don't think I heard anything, but if I did, I apologize if I missed it. But just curious, you did, Mike, touch on the impact of the SBA guaranteed in the NPLs. But just thoughts on where the net charge-offs and provision might go in 2026? And then if you have any update on the floor plan loan that had been given you guys some issues where that stands at the end of the quarter as well. Thomas Michael Price: Yes. The charge-off guidance we normally give is 25 to 30 basis points. And the floor plan credit, we have maybe $1.5 million left to resolve. Is that right, Brian? Brian Sohocki: Yes, I'll jump in there. Thanks, Mike. First, I'll just start in the fourth quarter for the dealer floor plan loan. We ended the year with a $2.5 million outstanding balance. So we're nearing resolution with just a number of [ cards ] left in the liquidation process. There was no additional reserve as noted previously, and we have just a small release, about $80,000 in the quarter. Since you mentioned the net charge-offs, there was a $2.1 million charge in the fourth quarter related to the dealer floor plan loan and also within that 47 basis points that was reported on an annualized basis. And I concur with Mike's guidance on the forecast moving forward. Daniel Tamayo: Okay. Great. And as it relates to the provision or reserves, with the reserves coming out over the last couple of quarters, does this feel like a pretty good run rate for stability, just over 130, or do you think that still can trickle down? Brian Sohocki: Yes. I wouldn't say there's any change in our philosophy. Credit costs remain manageable. Reserve levels remain strong, consistent with peers, slightly ahead in some cases at the 132. Where we've seen emerging stress, we've already responded, whether that's through the specific reserves in prior quarters. We've kept our qualitative overlays in place. And overall, comfortable that the reserve is just appropriate, reflecting where the risk is in the portfolio. Daniel Tamayo: Okay. And maybe just changing gears here, but just as it relates to the loan sale that you're expecting here probably near term, is that something you could see happening more in 2026 in terms of additional loans being moved off the balance sheet? Or is this kind of a one-off situation that you don't see recurring? Thomas Michael Price: It's more of a one-off. We really withdrew from that market, our branches and kind of our C&I commercial banking depository ground game. And about 2 years ago, we sent customers letters, and this is kind of really one of the last acts of the play. Mike McCuen is our Chief Banking Officer. He's on the line. Do you want to add anything for Daniel, Michael? Michael McCuen: No, I think you covered it, Mike. Taking those resources that Jim alluded to, investing in the other markets that we have retail locations makes all the sense in the world for our business model. Daniel Tamayo: Okay. Terrific. Appreciate it. Thomas Michael Price: Thank you. Operator: Your next question comes from the line of Karl Shepard from RBC Capital Markets. Karl Shepard: Congrats, Jane. I guess I wanted to start on your loan growth expectations. It looks like you had pretty good production in some of the segments maybe you're targeting, and then you had the payoff headwind. So I guess just kind of what's the buildup for loan growth in '26, and just kind of just talk about maybe health of the pipelines and what you're seeing in your markets? Thomas Michael Price: Yes. I think -- last year, we grew 8%, 5% without Center Bank. And I would expect that kind of loan growth to continue, although we really had elevated payoffs probably in excess of over $200 million from the second half of the year to the first half of the year. So that created some palpable headwinds. We feel like our business banking, mortgage could have a good year, although we'll sell that. And really, we just feel good about our commercial pipelines, commercial real estate and elsewhere. We had really let our construction portfolio attrite, and we feel that is going to build and add probably $20-plus million of drawdowns a month. We feel like we're well positioned. Typically, the first and the fourth quarter are a little slower for us than the second or third, and that's where we get most of our loan growth in a given year. But the payoffs are indeed a little elevated. And -- but I suspect just like we were here last year, I think we probably guided to maybe 5% to 7% and we've got to 5%. And that's, again, without the center bank. And I think we're well positioned. And our teams are maturing, and we're just -- I think we get a little better every year. Karl Shepard: Okay. And then I guess maybe one for Jim. Just on the buyback, quite a bit of authorization out there now and the stock is a little bit higher than maybe where it was in 4Q when you're active. Just how do you want us to think about that? James Reske: Yes. It's really more about capital deployment right now. There is a price sensitivity to it. We always operate on a grid so that we can -- and we use the same words every time. We want to keep a little bit of dry powder available if prices dip. That's kind of why if you look back in calendar year 2025, for a good part of the year, we weren't buying back anything. And then the later part of the year, we stepped up the buyback. So right now, the capital ratios, we're just generating so much capital to easily self-capitalize loan growth at the level we wanted. So if our future guidance is mid-single digits. We're generating far more capital than it takes to capitalize that kind of loan growth. And so we don't want to -- and I'll repeat myself because I know we said this before, but we don't want to accelerate loan growth beyond what we think we can organically do. We do it at the right pace for our region, for our credit appetite, for our demographics based on the rate environment. For all those reasons, the loan growth rate is where we want it to be. And then we still generate a ton of capital. And so we have to do something with that other than just let the capital ratios go up, up, up. So that's why we are doing the buyback, and we'll continue to do more this year. Operator: Your next question comes from the line of Kelly Motta from KBW. Kelly Motta: Congrats, Jane, on your retirement. Just to start off, I'd love to kick it off on margin. It came in quite a bit above where I had been expecting. You guys noted you had some payoffs. I'm just wondering if there was any loan fees in there or if that's a good run rate to go off of. And as we look ahead, I appreciate the commentary about the reinvestment from the HFS portfolio when that closes, but how we should be thinking about these dynamics here? James Reske: Yes. Kelly, it's Jim. Great question. Thanks. Yes, we were really pleased with the margin performance this quarter as well. We -- you recall last quarter, we were giving guidance that we expected a dip. And first thought when we saw the margin coming in so strongly was is the dip actually happening the way we thought it was going to happen. And it did. It did. So the rate cuts hit the variable rate loan portfolio, the SOFR-based loan portfolio took that down. But you nailed it. We had some other things that offset that. And the part you nailed is we had some payoffs; we had some paydowns in loans that were previously on nonaccrual status. And when we did that, some of the previously -- we recognized interest on those loans that have been on nonaccrual. And so that -- and some other factors together work together to offset that hit we took in the variable portfolio and kept the margin performance really strong in the fourth quarter. But looking ahead, we think that the Fed cut rates a couple of times here in the fourth quarter in December. That's not fully reflected yet. We're going to feel that in the variable -- in the SOFR-based loan portfolio, the variable portfolio. So that's going to hit in the first quarter, dip it down a little bit. But then all the other factors that have been working to keep it going strong, the continued upward repricing of the fixed rate loans, the macro swaps coming off the book here, the remainder of that in 2026, including a big chunk in May, that will really help keep the margin up. And so that's why we kind of have this forecast of drifting upward to around the 4% level in 2026. So I hope that gives you some additional color. Kelly Motta: No, that's super helpful. Maybe turning to the expenses. Q4 it was up about $1.5 million, I think. Just wondering if that was just kind of year-end true ups. And then as we think ahead, how you guys are -- it seems like you're calling for pretty strong margin here, solid loan growth. So as we look ahead, your expectation for expenses, any places you're hiring and how we should think about that run rate? Thomas Michael Price: Just the efficiency was certainly on the back of the revenue side. We're normally very, very good at the expense side and maintaining operating leverage, and we have a nice little chart in our investor deck that shows that we're pretty good at putting our shoulder to the wheel. And we'll need to do that in hustle this year, watch our FTE count closely. That being said, we've invested pretty heavily in our commercial bank, our equipment finance group. And we expect more production there, and we expect for those investments to pay off for us. But we can do a little better job on the expense side as well. And we've invested pretty heavily, quite frankly, the last 2 years, I think, yes, $25 million or so... James Reske: Yes. Thomas Michael Price: Up over 2 years. And we were a little higher than we thought we would be, but that's just a matter of discipline, and we're a pretty disciplined group. James Reske: And Kelly, you mentioned the word true ups. There were a couple of things that were one-offs that hit us in the fourth quarter that are not part of our thinking going forward. So we have some contract terminations and some other things in addition to what we said in our prepared remarks about filling open positions that what Mike talked about, about the staffing increases. So a couple of those one-offs are not in our future forecast for operating expense going forward. Operator: Your next question comes from the line of Matthew Breese from Stephens Inc. Matthew Breese: I had a couple of questions. Maybe first starting with the NIM. It sounds like the guidance is calling for around a 4% NIM by the end of the year. And I'm usually just a bit skeptical of the sustainability of 4% NIMs. And one thing we've been hearing a lot about this quarter is spread compression, both on the C&I and CRE front. And so I guess I had a 2-part question, which is, one, how does the pipeline yield look? And what are you getting for spreads on new C&I and commercial real estate business? And then maybe just touch on expectations around deposit costs for 2026? Thomas Michael Price: Yes. I'll hand it over to Mike McCuen in a minute for the loan expectations. But I mean when I look at our commercial variable and the new stuff we're putting on, it's 7.3% in the last quarter and commercial fixed is in the high 6s, even our indirect is in the high 6s. So -- and that's like kind of at that 2.5-year point on the shoulder of the yield curve, and we like that. And so I don't know, replacement rates still look good. Even with rates down this past quarter, our commercial variable, the replacement rate was low, but nevertheless, it was still positive. James Reske: Yes. I think just I'll interject quickly, and then Mike McCuen and turn it over to you for just thoughts on the market and the spread and the spread compression to give that kind of real-time color. But in the fourth quarter, we didn't see a real differential on the rates that were for the variable rate portfolio, the ones that are coming on and coming off. So that said like from -- in the aggregate, there wasn't an evidence of a lot of spread compression in that portfolio. As Mike was talking about is all the fixed rate loans still nicely repricing upward. And because those are all repricing towards the middle of the curve, if the yield curve inflects a little bit, that drop at the short end, won't affect that dynamic a whole lot. And I think, Matt, we talked about that before. So -- but that -- just the variable rate portfolio, the ones that came on, came off, it was like a 1 basis point differential in the fourth quarter. So not a lot of evidence on that macro level of spread compression, but I'll turn it over to Mike for [indiscernible]. Michael McCuen: Yes. Just to answer specifically on the segments. I would start with our business lending to the family-owned owner-operated business. We put a real focus on that about a year ago. And we're seeing healthy growth in that segment. I would say that's a prime, the prime plus based business. I don't see that changing from a spread perspective. Secondly, the equipment finance group, if they're doing mostly fixed rate loans. Their yields are holding up pretty well. And then thirdly, I would say the commercial real estate business, that's a little trickier because as probably you've heard from others, the agency markets, the insurance markets are very aggressive these days. We have a pretty healthy pipeline, and we have a number of construction loans that are converting to permanent markets. The balancing act is those spreads are compressed, and we're trying to maintain our discipline around the real estate business, not just from a rate perspective, but also from a structure, term, recourse, all those things that go into those decisions, as our construction loans roll off, we have every chance to match those rates. We, in many cases, choose not to and let those move on, and then grow the construction loan portfolio, which, by the way, is up around $120 million over the last year, and that will lead to future funding. So that's a quick snapshot of why we're a little more comfortable based on the segments that we play in versus large corporate investment grade, things like that. Matthew Breese: Got it. Okay. So it still sounds like you're putting on loans accretive to where the average yield is, and I'm assuming there's still some room to reprice deposits down. I guess, Jim, as we look to 4Q '26 and beyond, do you feel like there's momentum to carry the NIM above 4% as we get into 2027, all else equal? James Reske: Yes. But -- I'll borrow the phrase everyone says that the crystal ball gets fuzzy that far out. And we usually don't give guidance that far out anyway. But I know we've talked about this before. If we look ahead in the projections, and again, it's really funny. So I'll hedge that again. The NIM would hover in the low 4s in 2027 in the current projection. So it depends on lots of factors and lots of things could change by between here and then. By then, our macro swaps will be fully off, and so we'll have the benefit of that. We think there's room to drop the deposit rates a little more. We've been pretty thoughtful about that, watching the rates in the market that have been around us. We -- in 2025, that was a big issue. We thought it would be very difficult to fund the loan growth with deposit growth and drop rates at the same time. And yet we did it very successfully in 2025. So we kind of think there's -- we think we can continue that in 2026 as well. That will help the margin as well. Matthew Breese: Got it. Okay. And then last one before I'll hop back in the queue. I feel like you laid a few breadcrumbs on the stock buyback front. At least in the very near term, the next 1 or 2 quarters, should we be penciling in $25 million, $30 million in buybacks per quarter? James Reske: It's hard for me to definitively say it in the next 2 quarters because it's not entirely dependent on the stock price, but it's sensitive to the stock price. So if the price shoots up, we'll slow the buyback down and it would not all be in the first half. If the price stays where it goes lower, then it -- a lot of it will be in the first half. Even then, though, it may not all be in the first half. It will be -- we intend to use the authority and be fairly aggressive with it overall, but there's still price sensitivity to it. Operator: [Operator Instructions] Your next question comes from the line of Manuel Navas from Piper Sandler. Manuel Navas: On the NIM, how big of a dip are we looking at this first quarter? Did you discuss how much the -- I might have missed it, how much the NPLs benefited the NIM this quarter, like a dollar amount or basis point in the NIM? Just trying to quantify what's going to come out of the NIM next quarter? James Reske: Yes. The NPLs were uphold was about 3 basis points of total impact on the NIM. It was a little bit bigger. I just say the impact on that one portfolio because we spent a lot of time looking at the variable rate portfolio in the fourth quarter to say why didn't it -- the yield on that portfolio dropped the way we thought it was going to drop. And the answer is what I said before, it did drop for the effect on SOFR, but it was offset, I think, by the nonaccruals and a couple of other factors, too. But the overall effect on the total NIM for the nonaccruals coming back was about 3 basis points for the fourth quarter. [indiscernible] what was the other part of your question? Manuel Navas: And then from there, how big of a dip that we are looking at in the first quarter? James Reske: Yes. The amount of the dip, we think is anywhere from 5 to 10. And I'm hedging that way because we always hedge our forecast because they're always within 5 or 10. I think -- yes, on the model going forward. And then it drifts upward around 5 basis points a quarter. It ends up not quite 5 basis points a quarter, but it drifts upward enough to end the year at around 4%. Manuel Navas: And as those loans are sold, your loan-to-deposit ratio ex those loans is like in the low 90s, you could be a little more aggressive on deposits, right? James Reske: Yes, and yes. Thank you for [indiscernible] that. That's a big part of our thinking actually. We're happy to see that loan-to-deposit ratio. And then these were securities we buy will be current rates; they won't be underwater. So they're perfectly available to sell as liquidity to fund loan growth we wanted to, of course, we have ample borrowing capacity. So it's not -- liquidity is not an issue, but it does give us a little more liquidity, a little more dry powder to fund future loan growth, and then also not be so aggressive at the margin on deposit rates to fund the loan growth. Thomas Michael Price: We're probably 2/3... Manuel Navas: Are there some other -- go ahead. Thomas Michael Price: No, we're probably 2/3 of our peers in terms of the deposit beta over the last year in terms of cost of deposits. So if they're down 33%, we're down about 22%. And we've done that on purpose, and we've really -- probably kept them a little higher than we could because we wanted the growth, and we didn't want the borrowings. And so we achieved both. And that's kind of the balance. But I think there's probably in the long run, if rates go down, more downward opportunity. But we'll keep trying to grow the deposits. The other thing is it also has to be a game of acquiring new accounts, noninterest-bearing, new checking, and we're trying to -- and we have a sales force that under Jane's leadership and Mike's leadership has really delivered that for us. And we'll continue to beat that, [ down ]. Manuel Navas: Are there other impacts from the sale of these loans across OpEx, across -- you're more focused away from the filling area? Are there other impacts in the loan loss reserve? Anything that -- in those areas that we can start to plan for now? James Reske: I'll give a financial answer. The impacts on loan loss reserve that marks, all that was felt in the fourth quarter. That's all reflected in the financials already. Just in terms of operational expenses there's not much. We've already -- we have a couple of physical locations that we exited a while ago. So there's nothing further from a facilities expense standpoint to come. But it does allow management bandwidth to refocus on other areas. And Mike, I'm in the queue, and I don't know if you want to comment on that more, that's more of -- how we run the business of... Michael McCuen: No, we -- I mean, Philadelphia is a great market. It's also very greatly competitive, and we would not be -- the investment to really compete the way we would like be too great, and that money can be used in other markets for producers, physical locations where we already have really good presence, and we want to grow those. So it's just a trade-off we made. And I think we'll see more profitable growth in some of those markets than we otherwise would. But nothing against Philadelphia. It's a great market. It's just there's a lot of competitors there. James Reske: And Manuel.... Manuel Navas: Sorry. Go ahead. Go ahead. James Reske: Yes. Just from a financial effect, these were already in relationships, so we were deciding to exit it. So it was kind of a slow bleed on the loan growth. It was a net against other loan growth. So that will be removed now that we've moved them into held for sale. Manuel Navas: I appreciate some of the extra commentary. James Reske: You bet. Operator: Your next question comes from the line of Matthew Breese from Stephens Inc. Matthew Breese: Again, I just had one more, but I want to be cognizant of everybody. The securities book has been in this kind of 3.50% to 3.65% range, but yields have been down for the last couple of quarters. Jim, you had mentioned buying some at-the-market type securities with the HFS portfolio. So I'm assuming that's like a 4.75% pickup. And then -- so I was hoping for maybe securities yields outlook for the first quarter. And then cash flow estimates for the year, I would think at some point here, either late this year or next year, we start to see a more aggressive pickup in securities yields, but was hoping for some help there. James Reske: Yes. No, it's a great point. The portfolio has a duration of between 4 and 5 years. So that right now, the philosophy is just replace the runoff. And the opportunities we get, the number I gave a moment ago when I talked about reinvestment, the reinvestment of the HFS loans upon a sale of consummated into securities was assuming a repurchase rate of about 4.5%. But you're right, we just looked at the other day, we see some opportunities like more in the high 4s. It depends day to day, but I was using a 4.5% rate just as a rule of thumb right now. But you see some pickup and [indiscernible] some opportunities for some [indiscernible] no investments that are more like 4.75% right now. So that will naturally allow the securities portfolio to drift upward as well. It's -- we're not -- the position it holds in the balance sheet right now is not where we want it. And so we're not really expanding it. We're just replacing it well. Does that help? Matthew Breese: Yes. I'm just curious, is that 4- to 5-year duration, is that good to use for 2026? I haven't quite done the math yet on what that means for quarterly cash flows, but... James Reske: Yes. And I don't -- yes, I don't have any... Matthew Breese: It could be lumpy sometimes. James Reske: Yes. Yes, it can be. And obviously, a lot of those are mortgage-backed securities. So a couple of years ago, rates fell that duration is all extended. Let me see if I have the duration of the securities portfolio right now. Right now, the duration of the securities portfolio is actually only 4.28%, 4.28% in the fourth quarter. So there should be some repricing opportunities as that rolls over. Matthew Breese: Okay. Operator: That concludes the question-and-answer session. I will now turn the call back over to Mike Price, President and CEO, for closing remarks. Thomas Michael Price: Thank you, as always, for your interest in our company. Great questions. I look forward to being with a number of you over the course of the next quarter. And we're excited about the future of our company. We're excited to grow it, maintain operating leverage, add to our fee businesses. That's a big goal. In our regional model, really deliver good low-cost deposit growth in each of our markets to fund. I think our -- we have enough diversity of lending businesses, I think we're less worried about growing the loans long-term than funding them with low-cost core deposits. So thank you for your time today, and stay warm. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may disconnect.
Operator: Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions' Fiscal Second Quarter 2026 Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. Thank you. And at this time, I would like to turn the conference over to Vibhuti Nayar, Head of Investor Relations. Please go ahead. Vibhuti Nayar: Thank you, Abby. Good afternoon, everyone, and welcome to Viavi Solutions fiscal second quarter 2026 earnings call. My name is Vibhuti Nayar, Head of Investor Relations for Viavi Solutions. With me on today's call is Oleg Khaykin, our President and CEO, and Ilan Daskal, our CFO. Please note this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including the guidance that we provide during this call, and our expectations regarding the acquired business are valid only as of today. Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results discussed on this call except revenue, are non-GAAP. Thank you, Vibhuti. Good afternoon, everyone. Ilan Daskal: Now I would like to review the results of the 2026. Net revenue for the quarter was $369.3 million, which is at the high end of our guidance range of $360 million and $370 million. Revenue was up 23.5% sequentially and on a year-over-year basis, was up 36.4%. Operating margin for the second fiscal quarter was 19.3%, above the high end of our guidance range of 17.3% to 18.5%. Operating margin increased 360 basis points from the prior quarter and on a year-over-year basis, was up 440 basis points. EPS at $0.22 was also above the high end of our guidance range of $0.18 to $0.20 and was up $0.07 sequentially. On a year-over-year basis, EPS was up $0.09. Moving on to our Q2 results by business segment. NSE revenue for the second fiscal quarter came in at $291.5 million, which is at the high end of our guidance range of $283 million to $293 million. Revenue from Spirent was $43 million, which was slightly below our expectation of $45 million to $55 million due to timing of certain opportunities. On a year-over-year basis, NSE revenue was up 45.8% as a result of the acquisitions of Inertia Labs and Spirent product lines. We also saw strong demand for lead and production and field products driven by the data center ecosystem. NSE gross margin for the quarter was 64.7%, which is 10 basis points lower on a year-over-year basis. NSE's operating margin for the quarter was 15.6%, compared to 8.7% during the same quarter last year. NSE operating margin was above the high end of our guidance range of 12.9% to 14.3%, primarily driven by higher fall through. OSP revenue for the second fiscal quarter came in at $77.8 million, slightly above our guidance range of about $77 million and was up 9.7% on a year-over-year basis. The increase in revenue for the quarter was primarily a result of strength in anti-counterfeiting and other products. OSP gross margin was 50.8%, up 20 basis points from the same period last year. OSP's operating margin was 33.4%, an increase of 100 basis points on a year-over-year basis. OSB operating margin came in slightly below our guidance range of 33.5% to 34.5%, due to slightly higher variable costs. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q2 were $772.1 million compared to $549.1 million in 2026. Cash flow from operating activities for the quarter was $42.5 million versus $44.7 million in the same period last year, mainly due to timing of working capital. CapEx for the quarter was $5.6 million versus $8.2 million in the same period last year. During the quarter, we successfully exchanged principal amount of about $100 million 1.625% convertible notes due in March 2026, for 7.9 million shares of Viavi's common shares at the price per share of $17.88. We have remaining principal amount of about $50 million on these notes, which will be paid in cash. The associated premium on these convertible notes will be settled in shares. Additionally, we prepaid in January 2026 $100 million of the $600 million term loan B. This is in line with our continued financial discipline. During the quarter, we did not purchase any shares of our stock as we prioritized our capital allocation towards debt management. The fully diluted share count for the quarter was 233.4 million shares, up from 224.8 million shares in the prior year and versus 228.7 million shares in our guidance for the second fiscal quarter. Last week, we approved a restructuring and workforce reduction plan to improve operational efficiencies and better align workforce and resources with our current business needs and strategic priorities. We expect approximately 5% of our global workforce to be impacted and estimate to incur approximately $32 million restructuring charges in connection with this plan. Upon completion of this initiative, we expect annual savings of about $30 million, which will mainly benefit our operating expenses. We intend to reinvest a portion of these savings with higher growth areas of our business. We expect to recognize the majority of these charges by June 2026, with a plan to be substantially completed by December 2026. The savings of about $30 million include previously communicated $16 million of synergies from the acquisition of Spirent's product lines. Moving on to our guidance for 2026. We expect the third fiscal quarter revenue for Viavi to be up sequentially as a result of continued strength in many of our end markets. For NSE, we expect quarter-over-quarter revenue to be higher as a result of continued strong demand for lead and production and field products, which is driven by the data center ecosystem as well as aerospace and defense customers. Our guidance for the third quarter also includes full thirteen weeks of Spirent product lines, versus ten weeks in the prior quarter. For OSB, we expect quarter-over-quarter revenue to be higher in line with seasonality of higher demand for anti-counterfeiting and other products. For 2026, we expect Viavi revenue in the range of $386 million and $400 million. We expect total NSE revenue between $304 million and $316 million. OSP revenue is expected to be in the range of $82 million and $84 million. Operating margin for Viavi is expected to be 19.7% plus or minus 50 basis points. NSE operating margin is expected to be 15.5% plus or minus 50 basis points. OSB operating margin is expected to be We expect other income and expense to reflect a net expense of approximately $12.5 million and the share count is expected to be around 245 million shares. During the third quarter, we expect to pay earn-out liability for Inertia Labs of about $75 million as a result of their strong performance in calendar 2025. With that, I will turn the call over to Oleg. Oleg? Oleg Khaykin: Thank you, Ilan. The 2026 came in at the high end of our guidance driven by strong growth in many of our end markets. The results were significantly up both year on year and quarter on quarter. NSE revenue in Q2 grew approximately 46% year over year, primarily driven by strong demand from the data center ecosystem and aerospace and defense customers. The data center ecosystem, which includes high-performance semis, optical modules, and NAMS, drove strong demand for lead and production products in support of AI data center build-out. In addition, we are now also seeing emerging strong demand for our fiber field instruments by hyperscalers and service providers to build, operate, and optimize the next generation of fiber networks to interconnect the data centers. The Q2 quarter-on-quarter and year-on-year growth was also helped by the acquisition of Spirent's HSE product line, which came in slightly below our expectations due to the timing of several opportunities. Given strong and growing customer demand, we expect the data center ecosystem revenue momentum to continue through the calendar 2026. Our aerospace and defense business also saw another strong quarter of growth driven by continued high demand for our positioning, navigation, and timing products. We expect this trend to continue through the rest of the calendar year. The service providers business was generally stable during the quarter. We are seeing some opportunistic demand from the cable operators as they transition to new DAA architecture and access 4.0 standard. The demand for wireless infrastructure test continues to be weak but stable. We expect NSE revenue to be counter-cyclically up Looking ahead to Q3, quarter on quarter driven by continued strong and growing demand from data center and aerospace and defense customers. Now turning to OSP. OSP saw strong year-on-year growth driven mostly by recovery and anti-counterfeiting and other products. 3D sensing demand was in line with seasonal expectations. We expect From innovation. And execution and thank our customers and shareholders for their continued support. With that, I will turn it back over to the operator for Q&A. Operator: Thank you. And we'll now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you're called upon to ask your question and are listening Ruben Roy: Thinking about it in terms of data center, I would say, some events in telco. If you could give us an update on what the mix looks like? And then as we think about the guidance, if you could kind of dial in a little bit into the moving parts. On the growth for the March, that would be great. Thank you. Oleg Khaykin: Sure. So, you know, I think, you know, last quarter, we kinda talked 45% service provider, 40% data center, 15% aerospace and defense, I think with the significant growth in data center, right, and the other I think we are now I'd say, closer the other way around 40% service provider, 45% data center, around 15% aerospace and defense. To be more precise, I think we're gonna see you know, service provider to kinda trend a little bit below 40% The aerospace and defense trend up about 15%. And the data center turned up about 45%. And it's not because the service provider is going down. Actually, steady and showing slight recovery. It's just fundamentally the percentage allocation and the growth across different segments is vastly different. So that's kind of the mix. So I think now we are I would say, we are, you know, narrow it we're now only about 40% a little bit under 40% exposed to service provider. Additional telecom service provider, And I'd say 60% is driven by the data center ecosystem and the aerospace and defense. In terms of the guidance on the Q3 that you've seen pretty strong numbers, it's continued, very strong growth in the data center ecosystem that's again, semis, modules, systems, and the NAMS. But also it includes a growing component of our traditional field instruments And it's actually a meaningful pop in that we're you know, we're now seeing the what I call next gen service providers to who are doing interconnect of data centers. And the data center operators themselves investing into our fiber monitoring and fiber measurement systems to monitor and optimize performance of their data centers. And I mean, you know, if I looked at a year ago, you might have been single digits data center for our traditional field instruments. I think we are now looking at about a third of our revenue in the field instruments coming out from data center. So it's been a truly amazing, you know, turnaround and think the recognition is growing that the fiber networks are generally crap. And they need to be significantly improved And we are seeing a lot of pressure from the hyperscalers on service providers to improve the performance. But they're also going further and they're putting a lot of what we call, monitoring and policing on their networks to ensure that they pay for what they they get what they pay for. So it's actually, been another very positive development for us. On the fiber instruments. That's on the NSE. Thanks a lot. Ruben Roy: Yeah. Yeah. I I guess yeah. I I had a follow-up on that, you know, obviously, with, you know, Corning and Meta, you know, sort of, expanding their partnership and, you know, $6 billion commitment on new fiber. I would imagine that, that's something that would play into your longer-term opportunity set for the field instruments. But I guess, if I think about that and I you made a statement, Alec, on your prepared remarks regarding your expectations for DC growth to continue through 'twenty six. I mean, are things like that and like the scale across opportunities that you On demand relative to sort of what the order book might have looked like just mentioned giving you extended visibility? you know, twelve months ago? I mean, are you are you getting a a longer look on on backlog and bookings at this point? Engagements. Oleg Khaykin: And, you know and so when it comes to data center, I would say, for us, traditionally, we only have, like, maybe one, one and a half quarter visibility. We we we have a pretty good view, at least on the base demand from this type of activities up to three quarters ahead. Got it. If I could sneak one in for Ilan, just on the Ruben Roy: restructuring, Ilan. Is that impacting any specific product area or or group? Or, you know, is this just sort of your annual, you know, look at the business and, know, there's a lot going on in D. C. And aerospace and defense that maybe you want to focus more on. It it you know, maybe you could if you could help us out on how to think about that restructuring, that'd be great. That's it. Thank you. Ilan Daskal: Yeah. So, Ruben, thanks for the question. Generally, it's it's across multiple function just to make sure that we operate, you know, under a much higher efficiency. So it's not targeting, you know, specific areas. And and I wanted also to highlight that some of these savings, do plan to reinvest in in those higher growth areas that Oleg just discussed. So some of it could be a trade off. Oleg Khaykin: Yeah. I think, you know, clearly, if we look at, where most of the cost is coming out, it's coming out of the slower or stagnant, product segments. So it's really point here is to free up resources and take some of it as the financial leverage, but others as the ability to invest and grow the could move what be wood behind the arrow on things like data center ecosystem, aerospace and defense, things like that. Ilan Daskal: Right. And and in addition to some support function optimization. Oleg Khaykin: Mhmm. Operator: And our next question comes from the line of Ryan Koontz with Needham. Your line is open. Ryan Koontz: Great. A lot of activity in and aerospace of late. Oleg, I hope you could double click on you know, what you see as exciting, you know, defense programs, aerospace programs that you're involved in with your product lines and how you think about that business going forward? Oleg Khaykin: Sure. I think the the the biggest driver is what we call resilient PNT. Position navigation timing. In in the absence, it's alternative GNSS So everything that allows you to operate in the absence of GPS signal And as you can imagine, it's drones, drones, and more drones. It's very much targeting all autonomous systems like drones above ground, you know, robotic vehicles, you know, surveillance, you know, heavy industrial machinery, undersea, and seaborne drones. So it's pretty much anything that's above ground, underground, you know, underwater, in the air, robotic systems. So that's mainly where a lot of these product products are going to. On the other hand is also our P and C timing. Is, you know, we are seeing emerging opportunities in data centers. Because you we're seeing more and more as you increase the speeds in the data centers, you need accurate timing for synchronization. And if you think about traditional distributed clock model, from one end goes across all the racks, It may be fine when you're a 100 gig data center when you're going to one point six three point two. The latency becomes unbearable. So we are looking we're seeing demand for timing Great. Thank you for that. Ryan Koontz: And in the optical domain, you talked a lot about strength in data center, driving out here. You know, any evidence you can share with us around you know, the cadence of, you know, optical innovation getting to to 1.6 t broadly within the data center, between the data centers, where are you seeing the most demand for your products, and what what are maybe some new areas of growth, some green shoots that you're excited about in the in the optical data center domain? Oleg Khaykin: Well, I'd say every segment, we see growing. I mean, clearly, the semiconductors or memory vendors that they are driven Oh, you're, you know, dozen so companies in Asia making pluggables and, of course, the big leaders in North America for cross points, which is optical switches. And various modules. And then all the NAMS who are providing equipment into these data centers. So I would say there's I would say there's two groups One is the lab. Heavily driven. So let's say one everything to do with 1.6 and PCI Express six point o. And in production, heavily with all of our things making, you know, anything from testing passive and active components to the final product but also including testing fiber as you we're now seeing emergence of hollow core fiber and multiport fiber And this is a whole new thing, and that's why action. But I would say starting last quarter, we are seeing what we normally call field is becoming a I mean, the the the hyperscalers themselves. So it's the actual data center is becoming a huge user of field instrumentation mean, for example, when you would go to the traditional fiber service providers, they never really care about putting in monitoring of the fiber. Well, if you go to one of these AI data centers, you see at the edge they are they want to monitor every incoming you know, wavelength. Right? And would they light up or dark fiber? So they know as they turn on or up the bandwidth, they know exactly characterization and bandwidth and latency they're gonna get out of each fiber strand. And, of course, there is a SLA agreement, service level agreements there. Assigned with the service providers. So they are monitoring that these things are coming in within a very narrow spec. And they maintain the narrow spec of performance in every fiber. And that's a big departure from the old fashioned well, you know, it works. It's good enough. If it's a little bit, you know, lossy or has a higher latency, so what? Well, that's not something that these guys accept. And the beauty of it is they're deploying these things directly. It's using the same fiber tools that which were developed for traditional service providers, they are really finding converts among the hyperscalers. And that usually means when they deployed, there's a leg maybe by a couple quarters before the service providers recognize, oh, wait a second. I'm not being measured, so I better measure myself. Because before I get nailed. For my performance problem. So we see it as a very positive trend to ensure a very high resilient fiber network. Interconnecting the data centers. Ryan Koontz: Okay. That's great. Thank you. Operator: And our next question comes from the line of Andrew Spinola with UBS. Your line is open. Andrew Spinola: Thanks. Oleg, can you expand on that a little and give Oleg Khaykin: It's That's why we don't really break these things down within that category. We just call it generally data center ecosystem. Which includes semis, modules, systems, and field instruments that are used in data centers themselves. Andrew Spinola: Makes sense. I'm I'm thinking about how to model that business into, like, fiscal twenty seven and beyond. And I wanted to ask you this might be wrong based on what you just said, but I I thought we think about lab as being maybe more consistent as the customers continue to invest in the next generation fiber monitoring growing as the number of data centers grow. But maybe production being more cyclical and having some bigger swings up and down as as various generations get introduced, Trying to think about how I should think about production assuming that's a bigger growth driver right now, how to think about how that evolves over a cycle? Oleg Khaykin: So it's a good question. So lab instruments are driven by number of customers and number of projects. Right? And ultimately, it relates best way to look at is the r and d CapEx at semis system vendors, and module vendors. Right? The production is heavily driven by volume that is demanded. Right? And you could see the volume of much pluggables and the racks and all this. I mean, that is a but, you know, I look at the where are you gonna see higher percentage of growth? It's clearly clearly gonna be the production. Because it's, you know, as you increase number of units you build in every generation and and, let's say, every node, And that that's you need to basically for every tranche of volume, you need to increase capacity. So it's heavily linked to the I would say, production run rate. Okay? And the I would say, field instruments is that say linked to the number of data centers being built. Got it. Ilan Daskal: It. Okay. That that's very helpful. We think about the longevity of this cycle is probably Yeah. And that from what I see in terms of the, Oleg Khaykin: you know, pretty much every ounce of capacity that was kinda abandoned by service providers when they cut back about three years ago in investment. It's been totally repurposed into the data center. And it's a fraction of what they need and what they if you take all their announcements, how much they're gonna spend, how much they're gonna invest, what you have in terms of production capacity you're gonna see significant growth over the next two years. Right? And, of course, keep up with it, you need to keep introducing We now see the new each technology notes turning over. Every two years. So no longer, let's say, between between a 100 gig and a 400 gig you have six years. You really now have two years between Ilan Daskal: Right. So your question the dynamic of the higher operating margin? Andrew Spinola: Oh, I I I guess the the guide for the NSC op margin at 15 and past. That's right. Right. Flat. Revenue's up 20,000,000. I was just curious if there are some Right. Mix or anything kind of Ilan Daskal: So there is some, obviously, mix Oleg Khaykin: Joe with Operator: Northland Capital Markets. Your line is open. Tim Savageaux: Congrats on the results and especially the guide. And, I wanted to kinda focus in on that a bit. I guess, I'll let you describe it as countercyclical. You usually see declines, but I guess I'd like to try and parse out you got thirteen weeks of spiron you know, at your Q1 run rate or sorry, at your December quarter, I'll just say, rate that gets you to about, I don't know, 55,000,000, sort of the high end of where you were where you guided last quarter. Is that a reasonable assumption to try and get to Spirent contribution versus organic growth Ilan Daskal: So so, Tim, I can chime in here and and Tim Savageaux: In fiscal Q3? Ilan Daskal: and, you know, in terms of the thinking. So first, for last quarter, in the very first few weeks of the quarter, they actually did not have much revenue. Tim Savageaux: The second aspect to call out Ilan Daskal: and I think, you know, we Oleg Khaykin: last quarter, there were some government orders that got pushed out into this quarter. Between the shutdown and, of course, you know, this one time grant to the government employees of Christmas holidays. I mean, there basically was fewer days between December and the December to get the, orders placed. So some of the volume actually pushed out into the March quarter, As a result, we expect March quarter relatively to be stronger for them. Than it normally would have been, and the December quarter was a bit weaker than it normally would have been. Tim Savageaux: Right. Yeah. That's kinda what I'm trying to get to is, you know, to the continuation of this organic growth. And sounds like I'm a little high with my first pass and you know, I think it was a $200,000,000 run rate you were looking for. And if it's stronger in the first and the second, I'd I'd imagine Ilan Daskal: it's it's below that $50,000,000 level Tim Savageaux: And if that's the case, you know, you're looking at In a normally seasonally down quarter and Mid single digit sequential growth organically for Viavi in Q1. coming off 15% sequential growth in the December So that's pretty extraordinary. Ilan Daskal: What's what's driving all that? And am am I looking at that right, number one? And what's wrong? No. No. You're you're looking exactly right. So remember, Oleg Khaykin: the old I say old Viavi before data center, aerospace, and defense, we were heavily influenced by service provider. Dynamics. And the days one, service providers were over 80% of NSC Remember, first quarter is they don't release their budgets for the year until the February. So as a result, you would have a very weak NFC quarter. By the way, service provider is no different again than it was normally. There's always it is seasonally weaker. But the strength in the data center, aerospace defense, and also, the sparring business is not only offsetting, it's actually more than offsetting. That's why the net net, the quarter is gonna be up for NSE. Tim Savageaux: Okay. Makes sense. And one final piece of that question, is you know, the again, going back historically, you typically see a nice seasonal uptick at least on the service provider side, In your fiscal Q4. Should we assume Oleg Khaykin: that's a genuine directionally true for the business Tim Savageaux: Are there any changes as your mix and exposure becomes more aerospace, you know, defense and and AI data center driven, Oleg Khaykin: Awesome. Tim Savageaux: Thanks again. Congrats. Thank you. Sure. Thanks. Operator: And that concludes our question and answer session. I will now turn the conference back over to Vibhuti Nayar for closing remarks. Vibhuti Nayar: Thank you, Operator: thank you, Abby. This concludes our earnings call for today. Thank you for joining, and have a good afternoon. Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to CONMED Corporation's Fourth Quarter Fiscal 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook, its plans, and objectives. These statements represent the forward-looking statements that involve risks and uncertainties as those terms are defined under the federal securities laws. Investors are cautioned that any such forward-looking statements are not guarantees of future events, performance, or results. The company's actual results may differ materially from its current expectations. Please refer to the risk and other uncertainties disclosed under the forward-looking information in today's press release as well as the company's SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially. The company disclaims any obligation to update any forward-looking statements that may be discussed during the call, except as may be required by applicable law. You will also hear management refer to non-GAAP or adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management uses these figures to aid in monitoring the company's ongoing financial performance, from quarter to quarter and year to year on a regular basis, and for benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measure the income of the company, excluding credits or charges that are considered by the company to be special or outside its normal ongoing operations. These adjusting items are specified in the reconciliation supporting the company's earnings releases posted to the company's website. With these required announcements completed, I will turn the call over to Patrick J. Beyer, president and chief executive officer for opening remarks. Mr. Beyer? Patrick J. Beyer: With me today is Todd W. Garner, our Executive Vice President and Chief Financial Officer. Good afternoon, and thank you for joining us for CONMED Corporation's fourth quarter 2025 Earnings Call. I'll start and provide you with an overview of our fourth quarter and full-year results, and then share updates on our strategic priorities. Todd will then take you through the financials and our 2026 guidance in more detail before we open up the call for your questions. Before I dive into the quarter, I'd like to recognize the continued dedication of our global team. Their commitment to our mission, to our customers, and to one another is evident in every part of our company. I'll start by briefly reviewing our fourth quarter and full-year results. Total sales for the quarter were $373.2 million, representing a year-over-year increase of 7.9% as reported and 7.1% in constant currency. For the full year, sales were $1.375 billion, representing year-over-year growth of 5.2% as reported, and 5.1% in constant currency. Orthopedic sales increased 12.1% in the fourth quarter and 5.5% for the full year on a constant currency basis, and general surgery sales increased 3.8% in the fourth quarter and 4.7% for the full year in constant currency. Fourth quarter adjusted earnings per share of $1.43 grew 6.7% while full-year adjusted EPS of $4.59 grew 10.1%. Earlier this month marked my first anniversary as CEO of CONMED Corporation. Over the past year, through extensive discussions with internal and external stakeholders that culminated in a comprehensive portfolio review, my conviction in where CONMED Corporation can win has only strengthened. We win where innovation and minimally invasive surgery converge in robotic and laparoscopic surgery and smoke evacuation, and in orthopedic soft tissue repair. These are high-growth, high-margin markets, where we are uniquely positioned to lead with our differentiated products and strong commercial teams. As part of that portfolio review, in December, we announced the decision to exit our gastroenterology product lines. While this creates some near-term earnings dilution, the move aligns with our resources tightly to our strongest growth drivers and is expected to improve our long-term consolidated growth margin profile by approximately 80 basis points once complete. This was a thoughtful and strategic decision that positions CONMED Corporation to deploy capital and talent where we create the most value. When I stepped into the CEO role, it was clear that we needed to resolve the chain constraints in sports medicine that had weighed on the growth of our orthopedics portfolio. We put the right focus and resources in place, people, planning, and production. We engaged a top-tier outside consultant, invested in infrastructure, and are building out a strong operations team. We made meaningful progress in 2025, culminating in our strongest growth quarter of the year in the fourth quarter. We ended the year with our backorder value and number of SKUs on backorder at a three-year low. And we continued to make additional progress in the first quarter. We are not yet at our goal of operating a world-class supply chain. But we have made significant progress and are at a point where our sales force can once again be proactive with our growth drivers. Looking forward, we view the work ahead across two primary objectives. The first is to stabilize and scale. Build reliable, repeatable processes that give us sustainable supply resiliency and enable our teams to be on offense. We have made meaningful progress here. The second, longer-term, objective is to build a high-performance supply chain that is agile, data-driven, and capable of supporting sustained innovation. Completing the second objective is what we believe will allow us to deliver sustained above-market growth in our orthopedic portfolio over time. Now turning to our three high-growth platforms. I'll start with AirSeal, our clinical insufflation system, used in robotic and laparoscopic surgery. AirSeal was used in approximately 1.6 million procedures in 2025, reflecting its established role in complex surgical cases with a clinical benefit of stable, low-pressure insufflation are most pronounced. Utilization in robotic surgery remains in line with expectations with consistent engagement from surgeons who value its clinical profile. The expansion of the robotics market outside the US and into lower-cost settings, such as ambulatory surgery centers, represents an additional opportunity for AirSeal. These environments are well aligned with the clinical and economic benefits AirSeal delivers and we expect them to play an increasingly important role in our long-term growth. We continue to see meaningful white space in traditional laparoscopy. In the US alone, there are more than 3 million laparoscopic procedures performed annually and AirSeal today is utilized in only about 6% to 7% of cases. As we scale our commercial efforts and drive greater awareness of the clinical and economic benefits that mirror what we've demonstrated in robotics, we believe that laparoscopy represents a substantial long-term growth lever. Taken together, these dynamics reinforce our confidence that AirSeal can deliver high single digits to low double-digit rate growth over the long term. Which is what we saw in both the fourth quarter and the full year 2025. Next, I'd like to turn to Buffalo Filter which remains one of our most compelling long-term opportunities. Surgical smoke evacuation is now recognized as a billion-dollar plus potential global market, yet is still in the early stages of adoption. Today, 20 US states representing approximately 51% of the population have enacted smoke-free operating room legislation, and we continue to see steady progress internationally. Including early momentum across the Nordic countries and Canada. We are also leading the market with product innovation. Our next-generation PlumeSafe x5 launched in 2025, delivers significantly enhanced performance, quieter operation, and faster, more efficient smoke clearance strengthening our competitive position and expanding the clinical and economic value we bring to customers. Our third high-growth platform is BioBrace. Which has become a signature element of our sports medicine strategy. BioBrace is now used across more than 70 unique procedures demonstrating both the breadth of the surgical adoption and the versatility of the technology. Our BioBrace RC delivery system repair more reproducible, launched last year has further strengthened this momentum by making rotator cuff repair more reproducible and expanding access to a broader set of surgeons. Clinically, the BioBrace platform is backed by a growing body of evidence. Our 268 patient randomized control trial remains on track to complete enrollment in 2026 with publication expected in 2027. And as of 2025, the American Academy of Orthopedic Surgery guidelines recommended augmentation for rotator cuff repair. We are also seeing increasing utilization of BioBrace in foot and ankle procedures where surgeons are recognizing the same benefits in strength, healing, support, and workflow efficiency. Expect this trend to continue as BioBrace becomes further embedded across a wider range of soft tissue repairs reducing revision rates and promoting faster healing. Turning to the balance sheet. Our strong cash engine brought leverage to 2.9 times in the fourth quarter, giving us the flexibility to lean into innovation, growth, and capital returns. As we announced in the third quarter, our Board suspended our dividend and approved a $150 million share repurchase authorization. Historically, the dividend represented roughly $25 million annually and deploying at least that level into repurchases equates to approximately 7¢ of EPS in 2026. Importantly, we view this as a minimum, not a ceiling. Taken together, our financial strength, our operational progress, and the potential of our growth platforms give us confidence in the path forward. Our focus remains clear. Getting CONMED Corporation back to above-market growth, we will do this by leaning into our core strengths, continuing to normalize supply and sports medicine, operating with discipline and focus, and investing in high-growth high-margin platforms. I'm proud of our progress in 2025, and energized by the opportunity ahead. Before I turn the call over to Todd, I want to briefly address the CFO transition we announced earlier this month. Todd and I have been discussing long-term leadership structure and alignment for some time. And together, we concluded this is the right moment for both him and for CONMED Corporation. Todd will remain CFO through the transition, and will then move into an advisory role ensuring continuity while we complete a comprehensive search for our next CFO. He has been instrumental in strengthening CONMED Corporation's financial foundation over the past eight years. And on behalf of our board, and our entire leadership team, I want to thank him for his partnership, contributions, and unwavering commitment to CONMED Corporation. With that, I'll turn the call over to Todd, who will provide a more detailed analysis of our financial performance and discuss our 2026 financial guidance. Todd? Todd W. Garner: Thank you, Pat. It's been an honor to be CONMED Corporation's CFO and working with you focused on delivering for our shareholders. I'm committed to a smooth transition with a continued focus on what is best for CONMED Corporation and our shareholders. All sales growth numbers I reference today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release. As usual, we have included an investor deck on our website that summarizes the results of the quarter, the year, and our financial guidance. For 2025, our total sales increased 7.1%. For Q4, our sales in the US increased 1.4% versus the prior year quarter and our international sales grew 15.4%. Total worldwide orthopedic sales grew 12.1% in the fourth quarter. In the US, orthopedic sales grew 6.6% and internationally, sales increased 15.7%. Total worldwide general surgery sales increased 3.8% in the quarter. US general surgery sales declined 0.4% while internationally general surgery sales increased 14.8%. The decline in the US was driven by our OEM smoke evacuation SKUs, which we've been clear as a nonfocus area for us. The second biggest decline in the US general surgery in Q4 was related to strategic portfolio management within our energy platforms. As you've heard from us, we're increasing focus on our growth drivers, and as Pat said, AirSeal grew globally within our expected range, with positive demand in the US. For the full year 2025, our total sales increased 5.1%. For the full year, our US sales grew 3.5% and international sales grew 7.1% versus the prior year. Total worldwide orthopedic sales increased 5.5% for the full year 2025. In the US, orthopedic sales grew 2.3%, and internationally orthopedic sales increased 7.6%. Total worldwide general surgery sales increased 4.7% for the full year 2025. US general surgery sales grew 4%, while internationally, surgery sales increased 6.4%. Now let's move to the expense side of the income statement. Discuss expenses and profitability in the fourth quarter and the full year, excluding special items, which are detailed in our press release. Adjusted gross margin for the fourth quarter was 56.6%. Down 100 basis points from the prior year period driven by the expected tariff impact. For the full year, adjusted gross margin was 56.4%, an increase of 10 basis points over 2024 despite the new tariffs. Adjusted research and development expense for the fourth quarter was 3.8% of sales, the same as the prior year quarter. For the full year 2025, adjusted R&D expense was 4% of sales, 20 basis points lower than 2024. Fourth quarter adjusted SG&A expenses were 35.6% of sales, the same as the prior year quarter. For the full year, adjusted SG&A expenses were 37.1% of sales also the same as 2024. On an adjusted basis, interest expense was $5.8 million in the fourth quarter, and $25.4 million for the full year. The adjusted effective tax rate in Q4 was 25.7%. For the full year, our adjusted effective tax rate was 24.9%. Fourth quarter GAAP net income was $16.7 million compared to $33.8 million in 2024. GAAP earnings per diluted share in Q4 were $0.54 this quarter compared to $1.00 a year ago. For the full year, GAAP net income was $47.1 million compared to GAAP net income of $132.4 million in 2024. GAAP earnings per diluted share were $1.51 in 2025, compared to $4.25 in 2024. Excluding the impact of special items discussed earlier, our Q4 adjusted diluted net earnings per share were $1.43, an increase of 6.7% compared to the prior year quarter. In the fourth quarter, we reported adjusted net income of $44.4 million, an increase of 6.2% compared to 2024. For the full year of 2025, we reported adjusted net income of $143.1 million, an increase of 10.1% compared to 2024. Our full-year adjusted diluted net earnings per share were $4.59, also an increase of 10.1% compared to the prior year. Turning to the balance sheet. Our cash balance at the end of the year was $40.8 million compared to $38.9 million as of September 30. Accounts receivable days as of December 31 were sixty days, the same as the end of Q3 and two days lower than a year ago. Inventory days at year-end were 207 compared to 191 at September 30 and 211 days a year ago. Long-term debt at the end of the year was $834.2 million versus $853 million as of September 30. Our leverage ratio on December 31 was 2.9 times. Cash flow provided from operations in the quarter was $46.3 million compared to $43.3 million in 2024. Cash flow provided from operations for the full year 2025 was $170.7 million compared to $167 million in 2024. Capital expenditures in the fourth quarter were $5.1 million compared to $4 million a year ago. For the full year, capital expenditures were $19.8 million in 2025, compared to $13.1 million in 2024. Now let's turn to financial guidance. Let's start with revenue. We're guiding the full year reported revenue between $1.345 billion and $1.375 billion, which represents constant currency organic growth between 4.5% and 6% with FX tailwind between zero and fifty basis points. We've provided the detailed assumptions in our investor deck in conjunction with this call. That deck also shows the moving pieces in adjusted gross margin from 2025 to 2026. We're guiding a net improvement of 50 to 100 basis points for the full year. Despite digesting headwinds from incremental tariffs between 100 and 110 basis points. The improvement is driven by our continued strong organic mix tailwind and cost improvements. We expect adjusted SG&A expense as a percentage of sales to be between 38% and 38.5% in 2026. The increase is due to lower sales because of the GI exit, and increased investments to accelerate our key growth drivers. We expect full-year adjusted R&D expense in 2026 to be between 4.5% and 5% of sales. This represents increased investment to support our key growth drivers. Based on current forecasts of interest rates from our banking partners, we expect adjusted interest expense to be between $25 million and $27 million in 2026. This includes room for debt refinancing midway through the year. We expect the adjusted effective tax rate to be in the mid-24% range in 2026. We are guiding adjusted EPS to be between $4.30 and $4.45 in 2026. We've provided the detail of the moving pieces in our investor deck. The significant headwinds are $0.45 to $0.50 from the GI exit, and $0.30 to $0.35 from the incremental tariffs. We estimate currency to be a tailwind of about 10¢. With the initiatives we have underway, we expect full-year operating cash flow in 2026 to be between $145 million and $155 million with capital expenditures in the $20 to $30 million range. Putting free cash flow around $125 million for the year. We project adjusted EBITDA between $255 million and $265 million for 2026. For Q1 specifically, we expect reported revenue between $308 million and $313 million. We expect adjusted SG&A expense in Q1 as a percentage of sales to be the highest quarter of the year and above the range we guided for the full year. We expect adjusted EPS in Q1 to be between $0.80 and $0.83. The 2026 plan is built to strengthen the portfolio by increasing the focus and investments on our key growth drivers. As Pat said, our financial strength, our operational progress, and the potential of our growth platforms give us confidence in the path forward. With that, we'd like to open the call to your questions, and I'll hand it back to the operator. Operator: Thank you. As a reminder, to ask a question, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. You will be limited to one question and one follow-up. Our first question comes from Vikramjeet Chopra with Wells Fargo. You may proceed. Vikramjeet Chopra: Hello. Thanks for taking the questions. Todd, thanks for all your help over the years. Really, I enjoyed working with you. So I appreciate the call you gave on Q1, but perhaps can you talk about how you see the rest of the year playing out from a cadence standpoint? And any selling day differences to highlight for the year? And then I had a quick follow-up. Todd W. Garner: Yeah. No selling day differences. Thankfully. All the quarters were looked the same. You know, of course, we're all around the world. Right? And so there could be some rounding, but they all round to the same number of days for the quarters. And I wouldn't call anything out other than, you know, normal seasonality that we're typical, but as med tech plays out through the quarters. So we called out Q1 and I would say the rest of the year should follow, you know, the normal sequence that the med tech calendar does. Vikramjeet Chopra: Great. And my follow-up question is for Pat. Pat, can you maybe just talk about where you are with the CFO search? I'm sure they're pretty big shoes to fill, and maybe talk about what you're looking for in a new CFO. Thank you. Patrick J. Beyer: Vic, appreciate the question. And, again, it is an important role for the company. We've been blessed to have Todd as our CFO at CONMED Corporation for eight years, and I've been lucky to have him as a teammate. We are actively searching now. I'm looking for a CFO that exhibits the same dynamics that Todd did, which is a CFO that will be focused on shareholder value accretion, will be a great teammate to the leadership team, and will be a steward of the CONMED Corporation shareholders that we have. Thank you. Operator: Our next question comes from Robert Marcus with JPMorgan. You may proceed. Robert Marcus: Oh, great. Thanks for taking the questions. Two for me. Todd, I just wanted to ask on the slides you showed at our Healthcare Conference and the slides you showed today, different organic revenue numbers, same similar growth rates but different organic revenue numbers. Maybe you could just walk through that. And then I had a follow-up. Todd W. Garner: Yeah. Absolutely. Robbie, your conference was, I think, on the fifth business day of the year. So the final 2025 numbers were still rolling up. What we guided was in the neighborhood of 4% to 6% organic constant currency growth at your conference. As the final 2025 numbers come into play and that's now the base, we landed at four and a half to six. Which is just more precise. So I would say at your conference, we were a little wider on the characterization, and now we're a little more precise with the final 2025 numbers and the specific 2026 pieces of how it all lays out. Robert Marcus: Great. Then a follow-up. It looks like versus The Street, you beat pretty handily in ortho and missed in surgery. I was hoping you could just talk through what drove the ups in ortho, what drove the downside, and how you're thinking about the two different businesses throughout 'twenty six? Patrick J. Beyer: Robbie, thanks for the question. Pat here. I'll take that. Again, we feel good about both pieces of our portfolio. Again, soft tissue augmentation and sports medicine repair is a strong platform for us, and robotic and laparoscopic innovation platforms also continue to be a strong platform for us. I'll take the orthopedic side first. We really had four things, Robbie, I would call out on the side. So how did we beat? Number one, I would just level set everybody. The base of our ortho performance is a group of committed sales professionals that have continued to support our clinicians tirelessly through the supply chain challenges we've had. So when you have that, and then you have the benefit of an improving supply chain, continued strength of BioBrace, and we've got a positive benefit of some of the clinical solutions CONMED Corporation has had approved in the United States that we're now getting those approved around the world. And in the fourth quarter, our European business was able to launch our AIM meniscal repair program, that had just been approved on it. So, really, three good things happening on the international on the global side for our orthopedic business. On the general surgery side, you know, Robbie, I want to confirm that our smoke and our AirSeal business performed in line with guidance that we've said it would do. Which is high single digits to low double digits. On the backdrop of that, the USA, GS growth was impacted by our continued execution on portfolio management. And focusing on our growth drivers. During the fourth quarter and during 2025, we've been doing heavy portfolio management. And we exited some minor products in the GS range. And we continue to focus on our direct smoke business. Those things will continue to evolve. But our focus continues to be accretive growth over the long term and continue to factor this approach into our guidance. And so we knew what we were doing in quarter four. We tried to include that in our guidance and, and their overall macro level for CONMED Corporation. Thank you. Operator: Our next question comes from Matthew O'Brien with Piper Sandler. You may proceed. Matthew O'Brien: Afternoon. Thanks for taking the questions. Todd, maybe just a follow-up on Robbie's question. And I'm trying to do this on the fly and get all these numbers correct. With that fax and the GI divestiture, but it just seems like the constant currency full-year number for CONMED Corporation is a little bit lower than what you said at JPM a few weeks ago. Am I doing the math on that wrong? Or is it just is it just a delta in terms of how you did versus the street in '25? That makes things maybe a little skewed in terms of how we're calculating things? Todd W. Garner: Yeah. It really is just the finish of five and then the mix between what's expected in the GI business going, you know, that's the only piece really, there's FX, and then the GI sales. So we got to the total dollar range that we gave at JPMorgan. But the pieces shook out just slightly when you add in the prior year starting point for both the GI business and the organic side of the business. Matthew O'Brien: Okay. But no change in the organic full-year expectation, no slowdown in the core organic number? Todd W. Garner: Yeah. Again, and again, I think we just spoke a little more generally at JPMorgan when we said, you know, the four to six range. And when you put a decimal point on that on the final numbers, including where 2025 ended, it rounds to four and a half to six. So it's just a little more precision in that communication today versus at JPMorgan. Matthew O'Brien: Got it. And then maybe for Pat, just going back to AirSeal. You know, it has decelerated from, you know, the 20% range down to high single digits to low double like you've mentioned. Still good growth there. Is that still a $20,250,000,000 business roughly kinda growing at that rate? And then the confidence in that growth rate going forward I know that traditional lap is underpenetrated. I get that, but, you know, robotic has been so easy, you know, to drive that growth. And then, you know, the ASC setting is a lower-cost setting generally. So and AirSeal is much more expensive than traditional insufflators. So you know, again, putting all that together, why are you so confident in the high single, you know, to low double-digit growth rate going forward? Thanks. Patrick J. Beyer: Matt, fair question and good question. Again, I'm not going to comment on the scale of specifically AirSeal. I will draw your attention to the investor deck which has a pie chart that kinda shows the AirSeal our direct smoke as a pie. So you see that it's a significant portion of the company. We also believe it's a high single-digit, low double-digit grower. Based on what we're seeing in the clinical performance and the clinical acceptance and demands from customers we're seeing globally. And we still feel really strongly about the two lanes that we can swim in there. Being the laparoscopic robotic opportunities we have globally, and the laparoscopic non-robotic procedures that we're seeing as an opportunity globally. And we continue to see those evolve and strengthen as the clinical outcomes that we're seeing with reduction in length of stay and reduction in pain continue to play out there. Thank you. Operator: Our next question comes from Travis Steed with Bank of America. You may proceed. Travis Steed: Hey. Thanks for taking the question. I guess there's still some people confused, Todd, because on the slides, if you look at the organic constant currency dollar number, it's about $100 million lower than it was at JPMorgan. So I just want to understand any way to kind of bridge that $100 million difference I think it was, like, $13.24 on the current slide deck versus $14.23 to $14.50 before? Todd W. Garner: Yeah. So the organic, you know, we communicated with 25 in the base, we were talking about organic from that base, which has GI in that base number. But, you know, as we move to 26 and GI is out of the number, we're now talking about the organic without that number. So that's really just and you'll notice if you go look at the JPMorgan deck, the GI impact was presented as a negative from that number. Right? But now the presentation is GI revenue as a positive number. So instead of taking the GI impact subtracted from that top number, you now have the true organic going forward with 20 in the 26 baseline. And then the GI sales as a positive of what we expect to sell in the GI business. So there is a difference in how it was presented. That's true, Travis. Thanks for that clarification. Yeah. I just want to make sure it was clear. And going forward, how will the GI be reported? Yeah. It'll be reported separately as we're doing it in this deck. Operator: Thank you. Our next question comes from Mike Matson with Needham and Company. You may proceed. Mike Matson: Yeah. Thanks. So I know there was a question on kind of the growth in general surgery versus orthopedics, but the other kind of difference I saw was US versus OUS. So OUS seemed particularly strong, whereas US was a little weaker. You know, taking both businesses into account, so can you maybe talk about what happened there? And then on the international side, was any of that kind of one-off, like stocking orders for distributors or anything like that, or is that just true kind of in demand? Patrick J. Beyer: Two things I'd say. Let's focus on the US general surgery. Again, when I talked about the portfolio management, the two items were the exited one of our small minor product lines that impacted the US more than international. And when I talked about focusing on our direct smoke business, our OEM business is in the United States. So those two items impact the US more than they do internationally. And no. International again, you're right to call out that we do have distributors around the world. But we're not in, you know, we don't stock distributors there. Distributors are managing their business at year-end. And the demands they have with their customers and their supply chains and their, economically around the world. And so it wouldn't have called that. But we did have a strong international fourth quarter. And it does cause us to pause and think about how Q1 will be internationally in that. Mike Matson: Yeah. Okay. You know, just given the supply chain, I didn't know if there were some backorders that you, you know, filled or something like that, but I understand what you're saying. So then I guess the other question would just be, you know, so you did the GI. It sounds like you did kind of a comprehensive review of the entire portfolio. So is there a potential to see any other exits or divestitures from here, or are you happy with what's left at this point? Patrick J. Beyer: Two things. You know, portfolio management is gonna be a continual, you know, operational execution that we will go through. When you that in quarter four in the United States where we exited a small product line. We feel really strongly about our growth platforms and our growth drivers today. That's something our portfolio review showed us. We feel strongly about our sports medicine tissue augmentation and repair market. And feel strongly about our laparoscopy, minimally invasive market. And we'll continue to drive at our growth drivers there. And today, we do not see any major portfolio management that would warrant signaling that like the GI opportunity we saw and was appropriate to do. Thank you. Operator: Our next question comes from Young Li with Jefferies. You may proceed. Young Li: Alright. Great. Thanks for taking our questions. Todd, great working with you and wishing you all the best going forward. I guess first question, just on AirSeal, is it possible to get a little bit more color about maybe OUS growth trends? Because, you know, tied a little bit less to DV5 and intuitive. And then also for the US laparoscopic opportunity, you know, underpenetrated, but how has that share capture or share gain been trending over the past few years? Patrick J. Beyer: Hi, Young. Pat here. You know, as we think of again, macro comments, I would say, AirSeal. It continued to perform in the range that we said. Globally. High single-digit, low double digits. The attachment rate to DV5 continued to be in the range that we said it would be between 10% and 20%. What we're seeing globally is these two opportunities we have laparoscopic and robotic pace itself differently. So we're internationally our business was more tilted towards laparoscopic, we're now seeing more XIs and the robotic opportunity present itself. And so we're expanding into that opportunity. In the United States, we've been more 3 million plus procedures annually in the United States. And the laparoscopic laparoscopy opportunity presents itself and we're moving more into that. We think of those four swim lanes being presented in two geographies. And they're not going to sequence themselves perfectly at the same time in each area, in each geography. But we see those as strong growth opportunities for us. That we're continuing to drive into. Young Li: Alright. Got it. I appreciate the comments. I guess, one on investments. You know, now that your leverage is below three, can you maybe talk about the appetite and interest in M&A again? Thoughts on valuation and the target environment out there. And then I think you also mentioned at JPMorgan a focus on organic investments. Maybe if you can talk about some of the things in the pipeline at a high level, that would be helpful. Patrick J. Beyer: Young, I'll comment some macro comments, and then turn to Todd if he has any other things. Again, we're continuing to look at M&A. And areas that we can, you know, technologies that we can tuck into the segments we're focused on. And so it's important that we continue to do that. We're also continuing to be prudent and pragmatic with internally investing organically. You would see in our in the earnings script, we talk about our investment into R&D. And we're spending more on that in 2026 than we have done historically as we continue to invest in these growth platforms that we feel strongly with. So I think what you're gonna see from us is a continued balanced approach there. You're seeing our leverage go down, which makes it more easier and more appropriate for us to consider and pursue external acquisitions. At the same time, I would remind you we've continued to tell the outside world we have not walked away from any M&A opportunity that we felt was the right technology or the right company to be in CONMED Corporation's hands. And we continue to follow that approach. Todd, anything I missed? Todd W. Garner: No. Think it's well said, Todd. I don't have anything to add. Operator: I would now like to turn the call back over to Patrick J. Beyer for any closing remarks. Patrick J. Beyer: Thanks, Josh. I want to thank everybody for joining us on our quarter four earnings call. We feel good about a strong quarter four for CONMED Corporation. We've had a solid 2025. We move into 2026 smarter and with a strong conviction to deliver on our commitments to our shareholders and the patients we serve in 2025 and 2026. Thank you very much. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the LendingClub Corporation Q4 2025 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand and 6 to unmute. I will now hand the conference over to Artem Nalivayko, Head of Investor Relations. Please go ahead. Artem Nalivayko: Thank you, and good afternoon. Welcome to LendingClub Corporation's fourth quarter and full year 2025 earnings conference call. Joining me today to talk about our results are Scott Sanborn, CEO, and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via email or through the SAi Technologies platform. Our remarks today will include forward-looking statements, including with respect to our competitive advantages, demand for our loans and marketplace products, and future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and earnings presentation. Any forward-looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures relating to our performance, including tangible book value per common share, pre-provision net revenue, and return on tangible common equity. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation. Finally, please note all financial comparisons in today's prepared remarks are up to the prior year period unless otherwise noted. And now I'd like to turn the call over to Scott. Scott Sanborn: Alright. Thank you, Artem. Welcome, everyone. We had a strong close to what was one of the best years in LendingClub Corporation's history. Our results are validating our strategy and demonstrating our commitment to deliver a combination of growth, profitability, and shareholder returns. In the quarter, we grew originations 40% year on year to $2.6 billion, with all product lines contributing to the growth. We also more than tripled return on tangible common equity to almost 12%. For the full year, we grew originations by 33% to nearly $10 billion and more than doubled earnings per share. And we are looking forward to building on our success. Our substantial originations growth was driven by continued product innovation and marketing expansion, while also supported by improved marketplace pricing and sustained credit outperformance. Our discipline, combined with our advanced underwriting capabilities, delivered 40 to 50% better credit performance versus our competitive set. And we're seeing stable performance and consistency in our borrowers' behavior. Strong credit performance continues to support loan investor demand, with marketplace revenue increasing 36% year on year, driven by higher marketplace volumes and loan sales pricing improving back towards our historical range. We introduced a rated structured certificate product in 2025 designed to meet the needs of insurance capital. Insurance investors have a cost of funds and a risk appetite similar to banks, and so growth in this segment should further support the marketplace. We initiated our first direct forward flow agreement in Q4, with a top US insurance company, which is a nice addition to the previously announced agreements with BlackRock and BlueOwl. Investors remain selective about who they choose as partners. Our depth of credit data, performance history, and stability as a bank positions LendingClub Corporation as a counterparty of choice. Turning to our bank, our balance sheet is continuing to grow, with our loan portfolio driving net interest income up 14% year over year. Our funding is supported by our award-winning deposit products that deliver real value to customers while also driving ongoing engagement with LendingClub Corporation, supporting efficient revenue growth over the long term. LevelUp Savings, which rewards good savings behavior, is growing by double digits and driving 20 to 30% more logins per month than our legacy savings product. Personal loan borrowers account for over 15% of new accounts, and borrowers who have paid off their loans are using the product to build a financial cushion, accumulating average balances of over $15,000. Our more recently launched LevelUp Checking is also growing by double digits, with 60% of new accounts coming from personal loan borrowers, 84% of whom say they are now more likely to consider a LendingClub Corporation loan in the future. This virtuous cycle is exactly how our engagement model is designed to work. Importantly, we entered 2026 in a great position with multiple competitive strengths. First is our unmatched underwriting advantage enabled by proprietary models and informed by over 150 billion cells of data. Second are our products that attract members for life by delivering instant meaningful value. Third are our experiences that keep members coming back. Fourth is our agile, scalable technology which is engineered for innovation. And fifth is our digital marketplace bank business model, that combines the speed of a fintech and the resiliency of a bank. The best of both worlds. These competitive strengths are driving success in our core personal loan debt consolidation use case and have application far beyond, opening additional vectors for growth. Our significant advantages in funding reliability, underwriting, and user experience are allowing us to win over the competition and expand our major purchase business. Building on this momentum, last quarter, we shared our planned entry into the half-trillion-dollar home improvement financing market, an industry that aligns well with our capabilities. With our acquisition of foundational technology, hiring of leadership and key talent, and our first distribution partnership signed, we are well-positioned for growth over the medium term. We are currently integrating the acquired code base and remain on track to launch the partnership midyear. Our announced entry has also generated substantial inbound interest from additional partners, presenting potential opportunities to strengthen our trajectory. We're excited about the year ahead and expect our marketing investments to continue scaling, credit performance to remain best in class, and operating discipline in AI-driven to help expand margins. We're also excited to launch our new brand later in the year, to better reflect the scale of our ambition. Before I turn it over to Drew, I want to take a moment to thank Hans Morris, who will be stepping down from our board in March after thirteen years of extraordinary contributions. Hans has been instrumental to me and to LendingClub Corporation, from early investor to long-serving board chair, and his impact on the company is difficult to overstate. I am deeply grateful for his leadership and support. We are very fortunate that Tim Mayopoulos, who's been a high-impact member of the LendingClub Corporation board for nearly a decade, and who brings extensive experience in banking and fintech, will be assuming the role of chairman. With that, Drew, I'll turn it over to you. Drew LaBenne: Thanks, Scott. And good afternoon, everyone. Scott already covered the high-level results that made 2025 a fantastic year. So let's get into the details of our fourth quarter. Turning to Page 10 of our earnings presentation, loan originations grew by 40% to $2.6 billion. Borrower demand remains strong as the value we are providing continues to be compelling. Loan investor demand also remains strong, as marketplace loan sales prices continued to increase in the quarter. Our credit performance sets us apart from our competitive set and is one of the reasons we have been able to sell these loans without any need to provide credit enhancements. Leveraging one of the benefits of being a bank, we grew our held-for-sale extended seasoning portfolio to $1.8 billion, consistent with our strategy to expand our balance sheet while maintaining an inventory of seasoned loans for our marketplace buyers. We also retained nearly $500 million of loans in our held-for-investment portfolio. Now let's turn to the two components of revenue on page 11. Noninterest income grew 38% to $103 million, benefiting from higher marketplace sales volumes, improved loan sales prices, and continued strong credit performance. Net interest income increased 14% to $163 million, another all-time high, supported by a larger portfolio of interest-earning assets and continued funding cost optimization. Turning now to page 12, our net interest margin came in at 6%, up 56 basis points over the prior year. I'll note we retained higher cash balances to enable accelerated growth in 2026, which resulted in a sequential decline in net interest margin. If cash balances had been flat, net interest margin would have been 17 basis points higher and nearly flat to the prior quarter. We expect the deployment of this liquidity to be supportive of net interest margin as we grow the loan portfolio, in line with what we shared at investor day. On balance sheet funding, we ended the quarter at $9.8 billion in deposits, which was an increase of 8% compared to the prior year, and we continue to see healthy deposit trends across our product offerings. Turning to expenses on page 13, noninterest expense was $169 million, up 19% year over year. The majority of the sequential and year-over-year rise was due to planned higher marketing spend as we continue to invest in paid channels to unlock future growth. Now let's move on to credit where performance remains excellent. We continue to outperform the industry with delinquency and charge-off metrics well below our competitive set. Provision for credit losses was $47 million, reflecting disciplined underwriting and stable consumer credit performance. I note this quarter, a higher percentage of our held-for-investment loans were from our major purchase finance business, which is a longer-duration asset and therefore carries a higher day-one provision. In terms of net charge-off ratio, we experienced strong performance across all our vintages and we were down 80 basis points over the prior year. As we discussed on the last call, we saw the expected sequential increase as more recent vintages mature. On page 14, our expectation lifetime losses on our held-for-investment portfolio under CECL are also stable to improving across all annual vintages, including 2025, which contains a higher level of qualitative reserves. Going forward, given the stability of these metrics, and our move to fair value option for all new loan originations, we are no longer going to be updating this slide on a quarterly basis. Turning to the balance sheet, total assets grew to $11.6 billion, up 9% year over year. Our balance sheet remains a competitive strength, allowing us to generate recurring revenue through retained loans, maintaining the flexibility to scale up marketplace volume as loan investor demand grows. We ended the quarter well-capitalized with strong liquidity, and positioned to fund future growth. I'd like to provide a brief update on the $100 million share repurchase and acquisition program we announced in November. In Q4, we deployed approximately $12 million at an average share price of $17.65 and expect to continue to deploy additional excess capital through the program to support our shareholders. Moving to page 15, net income before taxes of $50 million more than quadrupled compared to a year ago. Taxes for the quarter were $8.5 million, reflecting an effective tax rate of 16.9% and included a nonrecurring benefit for research and development tax credits. There were also some beneficial changes to California and Massachusetts tax law in the quarter. As a result, we expect a normalized effective tax rate of approximately 24% going forward, with some potential for variability due to the valuation of stock grants and other factors. All of this translated to diluted earnings per share of 35¢, and tangible book value per share of $12.30. Our ROTCE of 11.9% came in above the high end of our guidance range. For the full year, we earned $136 million with diluted earnings per share of $1.16 and ROTCE of 10.2%. Now let's turn to our outlook. Looking ahead, we remain encouraged by the underlying fundamentals of our business, and our guidance assumes a healthy economy with stable macro conditions throughout the year. Before I get into the guide, I'd like to spend a few minutes on our move to fair value option. As we discussed at investor day, this change is about simplifying our financials by better aligning the timing of revenue and losses, and creating a consistent accounting framework across our marketplace and bank businesses. As you can see on page 18, over time, we expect this to result in a higher rate of return on invested capital by removing the front-loaded CECL impact we currently experience as we grow held-for-investment loans. We recognize that many of you have questions around how this change flows through the financials, so we've added a new section to this earnings presentation to walk through the mechanics in detail. This includes how fair value is established at origination, how revenue and credit flow through the P&L after day one, and how fair value adjustments will show up in noninterest income. To make this tangible, page 21 provides an illustrative single vintage example showing both day one and day two economics. And page 22 shows the select financial measures of our current fair value over the last two quarters. As one-time support to help with first-quarter modeling, we are also providing estimates for both fair value adjustments and credit provisioning. Expect total fair value adjustments in the first quarter to be roughly double fourth-quarter 2025 levels due to three factors. First, there is more volume receiving a day-one fair value adjustment as we are transitioning 100% of all new held-for-investment originations to fair value option. Second, loans from the major purchase finance business have a longer duration and a higher discount rate, which will mean a higher day-one fair value adjustment. Third, day-two fair value adjustments will also be larger due to a higher average balance of loans carried under fair value during the quarter. Separately, moving to fair value means there will be no day-one provision for loan losses on new originations. We will still have CECL expense from the remaining legacy portfolio, which we currently estimate at approximately $10 million for the quarter, subject to quarterly variability. Further, we will no longer defer loan origination fee revenue nor marketing expense for held-for-investment loans, which means both line items should increase from Q4 2025 to Q1 2026, independent of any changes in origination volume. For Q1 2026, we expect to deliver loan originations of $2.55 billion to $2.65 billion, representing 28 to 33% year-over-year growth. Additional investments in marketing to fuel 2026 growth. For the full year 2026, we expect originations of $11.6 billion to $12.6 billion, up 21% to 31% year over year. On earnings for Q1 2026, we expect to deliver diluted earnings per share of $0.34 to $0.39, a 240 to 290% increase year over year. For the full year 2026, we expect to deliver $1.65 to $1.80 earnings per share, consistent with the 13 to 15% near-term ROTCE target we shared at investor day, and up 42 to 55% year over year. With that, we'll open it up for Q&A. Operator: Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please raise your hand now. If you have dialed in to today's call, please press 9 to raise your hand and 6 to unmute. Please stand by as we compile the Q&A roster. And your first question comes from the line of Tim Switzer with KBW. Your line is open. Please go ahead. Tim Switzer: Hey, good afternoon, guys. Thank you for taking my questions. So the first one I have is on the expense trajectory here. There is a little bit of an increase across several line items this quarter. You know, the comp line was flattish, but then, you know, marketing was up quite a bit. Equipment went higher. Other expenses seemed a little bit elevated. Now is this kind of just some weird one-offs, or is this indicative of a little bit higher investment cost you guys are putting in the company right now as you look to ramp up? Drew LaBenne: Yeah. So I'd say, first of all, I think marketing spend was the obvious one that increased quarter over quarter. That was, I think, the vast majority of the increase. And as we've signaled, you know, last quarter and at Investor Day, we're continuing to invest in ramping our marketing channels, improving our capabilities, improving our modeling, and really, you know, a lot of this investment is to help 2026 performance. And so you can probably expect us to continue more of that as we go forward in Q1 as well. The other expenses, I'd say, you know, were largely noise in the quarter for the most part. Even having an investor day costs a little bit of money. So you gotta factor that in. But in all seriousness, I think as we go into Q1, other investments we'll expect to make would be, you know, ramping up our investment in people for the growth in the home improvement business. And then as we're looking to do the rebrand in the first half of 2026, there'll be some expenses related to that as well. And all of that is included in the guide. Scott Sanborn: I say investment, just to be clear, investment in the '26 rollout. Drew LaBenne: '26. Yep. Tim Switzer: Okay. So you're saying the investment cost should start to moderate into the second half of the year? Scott Sanborn: I'd say when we're through the transition. That's right. So we're not being specific on the timing of that yet, but we're obviously starting the work now. Tim Switzer: Okay. And your comment on marketing, like, is the marketing required for targeted? Is that higher than what you were maybe previously expecting? Or, like, what's the efficiency looking like so far? Scott Sanborn: Oh, if you remember, if you just go back to what we talked about at Investor Day. So one, all of our product categories were growing last year, and we're expecting future growth this year. Not all of them are marketing-driven in terms of their origination, so the SBA program and our purchase finance, you know, those are driven by different dynamics, as same with home improvement. But specific to PL, there's really three areas that we're pushing on for growth. One is product innovation. You know, we talked about how TopUp has successfully driven increases in take rate and higher originations. We have more ideas in the pipeline around the product innovation. There's funnel efficiency, you know, as magic as our experience feels, there are still evolutions possible to make it faster and more frictionless, and that'll be a growth driver. And then the third is marketing. And there, you know, we shared we're still that there are certain things that are quite robust, and I'd say, you know, close to very mature, like our partnership program, and I think we're getting there on direct mail and we're well on our way with paid search. But there are other areas that we're still quite early innings at having the right data models, the right attribution, and that paid social display connected TV. And I would say those are future growth vectors for us. They're, you know, one of many drivers of origination growth. And, you know, I think we gave at Investor Day that over the medium term, we think there's a couple billion dollars worth of originations to come from those added channels. What you're seeing us do now is normally for, you know, Tim, you've been following the business for a while. We normally don't push on new initiatives like this in Q4 and Q1. We usually wait till Q2 and Q3 because they are seasonally just a lot more forgiving and favorable. But given the momentum in the business, we're pulling those in to Q4 and Q1, which means they are going to be, you know, test programs and I would call this R&D spend. They're always, you know, less efficient because it's a learning agenda as opposed to a volume agenda. We're not driving much volume through it, but we are spending dollars. It'll be even less efficient when we pull them into less seasonably favorable quarters because response rates and all that are lower. But we think the trade-off is worth it because it, you know, sets us up for sustained growth, you know, later in the year and in the years beyond. Tim Switzer: Okay. Got it. That was all really helpful. One last question, and then I'll jump back in the queue. At the investor day, your slide deck indicated you're looking for a lower efficiency rate over time to '25. I think closer to the 55 to 60% range. But given all the, you know, the like, 2026 kind of transition year, the accounting is changing a little bit. Is the efficiency ratio moving up in '26, and then it starts to move back down as we get past the impact of the accounting? And, you know, you guys start to get better scale. Drew LaBenne: That's yeah. You're precisely right. So if you think about this transition from CECL to fair value, early in '26 or now, basically, in this first quarter, there's a bit of a tailwind that's created, and we're using some of that tailwind to do these investments that we were just talking about. Right? Reinvesting because once that tailwind fades, we want to make sure we continue to have momentum in growth top line and bottom line going forward. So we're using the first part of the year to make those investments to accelerate the back half of the year. Once you get through 2026, that comparison point that impacts efficiency ratio, you know, in PPNR basically is gone, and then your year-over-year comps will normalize at that point. But what's really important to note is you have these dynamics going on, but what we're getting is more pull-through by making this move. Right? So even though you're having some of these impacts on revenue and expenses, what you're pulling through to the bottom line because of the offset provision is higher. Tim Switzer: Got it. Alright. That makes total sense. I'll jump back in line. Thank you. And your next question comes from the line of Vincent Caintic with BTIG. Operator: Your line is open. Please go ahead. Vincent Caintic: Hey. Good afternoon. Thanks for taking my questions, and thanks for all the detail on the accounting change. I do want to focus on that. I understood that very helpful slide with slide 21. So are these key drivers sort of the discount rate 7%? Is that sort of what we should be thinking about going forward? I think in the prepared remarks, you kind of talked a bit about the, you know, the large the major purchase finance and other things having higher discount rates and higher duration. So you launch new products, I'm wondering how these assumptions will evolve, and if you could give us like, how we should think about the duration of these other products and the rates of these other products and coupons as well, that would be very helpful. Thank you. Drew LaBenne: Yeah. Great. I mean, there's only a certain level of detail we're gonna give just for competitive reasons, but it's a great question. And the first thing I'd say is just it's right on there, but this is illustrative of one vintage coming in. So the 7.3% discount rate in this illustration, we're actually at 7.1% discount rate for the quarter, so we're a little lower than this illustration. But how that discount rate will move if everything else remains equal, it will depend on the mix of loans that we're putting into fair value. And so some of the businesses like major purchase finance that have longer duration and they're less developed. Secondary market or marketplace are going to have a higher discount rate. Not necessarily all of that is true for home improvement where there's a very developed secondary market and marketplace. But it also is longer duration. So net-net, you'll have some offsetting effects on an asset class like that. But over time, it's gonna depend on what the mix within our held-for-sale portfolio looks like. But you can expect that we're probably adding more diversification of those other product types coming into the portfolio. Vincent Caintic: That's helpful. Thank you. And then I guess, relatedly, you know, now that the accounting is sort of making the market the held-for-investment loans look similar to the marketplace loans, at least from your income statement and balance sheet now. Like, your thoughts on the mix between what you will sell, what you'll maybe season and then sell versus what you'd return retain on the balance sheet? Drew LaBenne: Yeah. Interesting that and I'm glad you asked because there's another point I want to make as well. So we will continue to have an inventory of held-for-sale loans. We've, as we've said before, we found that program to be very helpful to onboard new investors and to make opportunistic sales and maybe better prices than we would otherwise get. There's actually, you know, one new development in CECL accounting this quarter which could be beneficial not for us, but for potential bank buyers. So I think one of the reasons that the bank pipeline has been slow to evolve is banks having to take that upfront CECL charge, sometimes it's difficult to get over that hump before you start building a portfolio of purchased LendingClub Corporation loans. Under the new CECL guidance, if you buy loans seasoned more than ninety days, you no longer have that upfront impact as you would if you were originating loans or buying or buying newly originated loans. So I'm not saying this is an immediate unlock in the bank pipeline is about to explode open. But I think net-net, it will be a positive for bank investors that are considering purchasing from us. So for all the reasons I mentioned before and for that reason, we'll continue to hold a held-for-sale portfolio available. Scott Sanborn: Yeah. Do you want to talk a little bit about the other part of the question, which was, you know, now that they look the same in period aspirations for balance sheet growth. You know, we gave some targets at investor day. Drew LaBenne: Yeah. I mean, I think in terms of balance sheet growth and aspirations, nothing has changed from investor day regarding that. As far as our mix going forward in terms of structured certificate securities, and I'll just call it whole loans, which would be loans held for investment and loans held for sale. We'd say that that distribution that we're at today probably roughly holds as we go forward in terms of our forecast. Vincent Caintic: Okay. Great. Thanks very much. Operator: And your next question comes from John Hecht of Jefferies. Your line is open. Please go ahead. John Hecht: Can you guys hear me? Scott Sanborn: Yes. Hey, John. John Hecht: Hey, guys. How are you? The I just one question I have is just on the fair value adjustment. You give the discount rate, is there some way we can take that and decide for what kind of annualized loss rate might be, I guess, in your primary product? Drew LaBenne: I don't know that you can exactly get to that. What we are going to do next starting next year, is we'll update our disclosures to include the charge-off much like we do today just for the CECL portfolio. We'll start to do that for the CECL the run of CECL portfolio, and be held for sale portfolio combined. But currently, you know, under our platform mix, we're still in that four and a half to 5% loss rate estimate on an ANCL basis. And then, you know, as we add new products, we think they have similar profiles, but, obviously, you know, we can we might move around their mix that could have some minor adjustments to those numbers. John Hecht: Okay. But the general tenor of the credit is consistent with what you've been underwriting, you know, for the last several quarters. Scott Sanborn: Yes. Yeah. No major no major pivots. Yeah. If you just think about, John, what we're doing is we're taking the capabilities, but I think we've demonstrated that we're quite good at, you know, appropriately assessing the risk, pricing the risk, you know, delivering value through the cycle from, you know, all the way through servicing just applying it to different categories, but it is the same core skill set. So different channels have slightly different SKUs, but the overall return profile coupons and all that are pretty similar. Like, purchase finance as an example, has a higher average FICO score, but the actual ROEs on that, we expect to be similar and in line. And home improvement obviously has homeowners, skews heavily homeowners and slightly higher coupon. John Hecht: Okay. And then just so I'm clear, the revenue yield on the loans is gonna be more akin to the discount rate. So the net interest margin will be reflective of that lower yield. But the offset from the upfront fair value mark is bigger than that. Is that an accurate description? Drew LaBenne: The coupon in the NIM take in the net interest margin table will be higher than the discount rate. Where the offset will be is in those fair value adjustments downward. So what you need to do is take the component of interest income offset with the component the fair value adjustments from noninterest income, and that will get you the revenue yield equal to the discount rate. John Hecht: Okay. And then from that, there you also subtract charge-offs the fair value marks. Is that correct? Drew LaBenne: Those are included in those adjustments. John Hecht: Okay. And then final question is, you know, it seems like a fairly good environment from the perspective of relatively stable credit. I think the macro expectations are reasonably constructive too. And then there's a lot of capital in the markets. Maybe could you guys describe your thoughts on the operating market and the competitive environment within your subset of products? Drew LaBenne: Well, I'll start with the marketplace, and Scott can cover, you know, credit dynamics and competition. The marketplace is very healthy. There is a, as you said, there is a lot of capital out there to be deployed, very active environment, you know, where the insurance capital that we're now starting to sell loans to and having more conversations, you know, we think has been a great addition to our marketplace customers that we are working with now. And as I mentioned, this CECL change in CECL accounting, hopefully, can give a little more tailwind to opening up some more banks as well. Scott Sanborn: Yeah. And on the competitive front, John, I'd say, you know, I think we say this almost every call. This is a competitive market. It always been a competitive market. Who we are competing with at any point in the cycle changes. You know, this past quarter, we had, you know, a fairly aggressive, ambitious, reasonably new entrant kind of pull out of the market similar to, you know, Marcus's arrival with much fanfare and then retraction. So we have that, but that's offset by some of the direct fintech competition who are, you know, on balance being more aggressive given, you know, the availability of marketplace capital. So let's say no real change in our view of how that's affecting what we do. We remain, you know, we feel very good about our ability to compete. We've shared multiple times statistics not only on the credit side, but also on our pull-through rate in our marketing and how we're able to convert the customers we want. So but we're just gonna be very selective, and we agree. We're, you know, as you can see in our materials, our credit looks very stable. And that's because we're maintaining our discipline. It's not clear that we're seeing that across the full industry. So we'll be watching. John Hecht: Great. Thank you guys very much. Operator: And your next question comes from Kyle Joseph of Stephens. Line is open. Please go ahead. A reminder, you may need to unmute. Kyle Joseph: Sorry about that. You guys hear me alright? Scott Sanborn: Yes. Yep. Kyle Joseph: Sorry about that. Anyway, yeah, kinda piggybacking on John's on macro, just looking at your DQ curves on slide nine. You know, anything you'd say about kind of the k-shaped economy and how you're thinking about 2026. We, you know, we've been reading a lot about elevated tax refunds, but yeah, just kind of a little bit deeper dive in terms of macro and how you're thinking about things. Scott Sanborn: Yeah. So, you know, I think the most important thing is post the inflationary period a few years ago, we did move upmarket, upmarket in terms of income, upmarket in terms of FICO. And, you know, as you can see there, we're seeing stable results. The, you know, customer we serve, you know, who we call the motivated middle, we think represent a lot of TAM for us both immediately today, but also over time as we evolve the use cases and credit products we serve at. You know, on tax refunds, we are expecting, right, or it is expected, it's not us, that this will be a larger than usual year. That, you know, that can have a positive effect on payment and a temporarily downward effect on loan demand, but, you know, all of that's factored into our guide. Kyle Joseph: I got it. And then, you know, not asking you guys to speculate any more than, you know, we can, but, you know, I think we'd be a little bit remiss if we didn't address the, you know, potential rate cap, obviously, given, you know, kind of your core product is on credit card refi, but just kind of want to get your initial thoughts and how you guys are thinking about, you know, everything that's out there. Scott Sanborn: Yeah. I mean, obviously, there's not a lot of specifics on how this could actually take shape and what it could do, and I think there's at the moment, not a lot of confidence that at least as initially articulated, anything like that would come through. You know, our view is there is an affordable alternative to credit cards available today. No government action required. And that's LendingClub Corporation. And, you know, we're already saving people, you know, 700 basis points off of the cards. And, you know, no price controls needed. Kyle Joseph: Got it. Fair enough. Thank you for taking my questions. Operator: And your next question comes from David Scharf of Citizens Capital Markets. Your line is open. Please go ahead. David Scharf: Hey. Good afternoon. Thanks for taking my questions. Most have been addressed. So a couple things I just wanted to ask if you could clarify. One, actually, just very near term. On the Q1 origination outlook, did I hear you correctly that the guide kind of factors in a larger than normal refund season in pay down cycle? Scott Sanborn: Well, what I'd say is I think that's pretty difficult to factor in with any degree of specificity. But, you know, our experience has been that larger than normal refund seasons, as I said, kind of flow through our business as I indicated, which is customer payment rates are higher, so you see good DQ trends, but you can see, you know, maybe, different demand for credit temporarily. I wouldn't expect anything significant, but, obviously, that'll be difficult to really predict, and we're not gonna give intra-quarter guidance. Then and hard to measure the impact of that together with any other, you know, broader macro events going on. So, you know, we're very confident that we've got a lot of tools in the toolkit to deliver the outlook that we provided. David Scharf: Got it. Got it. Fair enough. And then, just digging back to the fair value assumptions, it sounds like on the next quarter Q1 call, you know, we'll get kind of the obviously, current period losses and charge-off rate embedded in that change in fair value line. Is it, I think John may have asked this, but is it fair to assume that embedded in your earnings guidance is sort of a flattish year-over-year loss rate in that fair value mark? Or is there anything about the asset mix? You know, there've been more so many references to, you know, larger purchase, longer duration loans. Does are there any nuances that might kind of raise the loss rate purely due to the asset mix? Drew LaBenne: No. I don't think so. I mean, I think we're assuming we're obviously assuming a stable environment as we go through the year. We will have an increase in duration because our as our purchase finance, the major purchase finance business is, you know, growing and doing well, and home improvement will come on. So duration will go up. But in terms of the ANCLs, I'm not expecting a major shift in that. Now I think if you look at the net charge-off rate, there's seasonality, there's vintages, seasoning in there. There's a lot of portfolios. But in terms of the annual loss rates, we're not assuming a major change in those numbers. David Scharf: Got it. And, you know, you know, in regarding the vintages, you know, obviously, this is we're laying to rest this slide where you give the sort of components of provisioning and reserving for amortized cost accounting, is there a way to translate, you know, that sort of most recent vintage macro layer, you know, that one, one and a half percent kind of conservative upfront provisioning. Does that translate into a certain number of basis points of discount on a day-one fair value mark going forward? Drew LaBenne: Well, under fair value, we're not explicitly layering in qualitative reserves as we do under CECL. So it's a difference in methodology. Now if we see more stress coming through the portfolio, we may have, you know, take that through the fair value marks in some manner, but we're not going to speculate on what's gonna happen two years from now to the economy. In terms of how we reserve, which I think has been personally one of the most frustrating parts of CECL accounting. David Scharf: Yeah. No. Fair enough. I think you're about the seventh company we cover that's adopted the fair value option. Drew LaBenne: Yeah. Yeah. David Scharf: That's all I have. Thank you. Scott Sanborn: Alright. Thanks. Operator: And your next question comes from Giuliano Bologna of Compass Point. Your line is open. Please go ahead. And a reminder that you may have to unmute. Giuliano Bologna: Thank you. Congrats on another good quarter. And I appreciate all the, you know, the new detail on the fair value disclosures. One thing that, you know, I don't know if it's come up yet, but under fair value, there shouldn't be any more deferrals when it comes to marketing expenses. Is there a rough way to think about, you know, where your marketing expenses would be as a percentage of volume, you know, in the fourth quarter and third quarter, you know, for example, just to get a rough sense of what, you know, your marketing costs would have translated to on a pro forma basis? Drew LaBenne: Yeah. I mean, I think it would have been higher, obviously. We haven't disclosed the number. I mean, I think the obviously, the offset to that is also higher origination fees or origination fees are no longer deferred in that net. We're net beneficiary of those two dynamics happening together. Right? So I think if you're thinking about the marketing spend deferral, you know, then you then probably gotta think about the origination fee deferral as well. Giuliano Bologna: Got it. Yeah. And, I mean, obviously, the net impact is positive. So that's, you know, it's all significantly positive. When I think about the outlook for volumes for the or at least any guide for the year, it implies, you know, especially after one Q that you'd kind of reaccelerate from a volume perspective. You know, that they'll probably be flat to up slightly in the first quarter, but then you'd see a, you know, a pretty good reacceleration of volumes, you know, to hit, you know, kind of the midpoint of the volume guidance? Is that a good way to think of it that you should have a good step up into Q2, Q3? Drew LaBenne: That's correct. Yep. That's exactly right. And, you know, there's part of that is our normal seasonality, but, obviously, we believe we're going to have more benefits beyond that from the newer business lines that we're launching and the investments in scaling marketing paying off. Giuliano Bologna: That is very helpful. Yeah. I appreciate all the, you know, the enhanced disclosure, and I will jump back in the queue. Thank you. Operator: And next in the queue is Tim Switzer of KBW. Your line is open. Please go ahead. Tim Switzer: Hey, guys. Thanks for taking my questions again. One of the follow-ups I have is just on AI. You know, how I know you guys are using that quite a bit in the back office, but, you know, what areas that are a little bit more forward-facing that's helping you with either growth, or maybe getting a little bit better pricing and or demand? I know you guys had, like, the Cushion acquisition a few years ago, and I think you've mentioned it's helped speed up the doc verification process as applications come through. But just wondering if you guys could update us on that. Scott Sanborn: Yeah. So, you know, I'd say, at this point, there's probably not a department in the company that is untouched in some way. I think we have over 60 initiatives underway across the company, and you're right. They range from, you know, operations efficiency, you know, guiding agents on next best action to taking in, you know, sort of diverting customer contacts whatsoever to, you know, compliance, marketing material generation, audit, testing, generation. Obviously, heavy, heavy, heavy use in the engineering group for flow development and streamlining our QA efforts. On the growth side, you've hit the couple areas that we're really focused on. Now there's obviously longer pull in the tent, marketing, and credit. You know, continued evolution of our efforts there, which we won't talk about too much because we view that as part of our secret sauce. But then within the customer experience, the Cushion acquisition, including the team, is really will be evolving the NetIQ experience to bring more intelligence to evaluating people's transactions and history and helping, you know, recommend the actions to customers that improve their financial position. So and, you know, one you mentioned, we put into testing in Q4 and are, you know, expanding across the board is for the rare cases where we do need to require some kind of documentation that we can't get electronically, using AI to both assess whether the documents are what we ask for, whether or not they are real and not fraudulent, and then to extract that information, populate models, and render a decision is all improving, you know, or reducing the friction in the funnel and improving our pull-through. So there's just a ton of things happening across the company. Tim Switzer: Okay. Got it. And the last question I have it's a difficult one, but you guys the guide for this year is the 13 to 15% near-term ROTC guide you gave. Can you kind of help us map out how we get to the 18 to 20% medium-term target over time? Like, with this fair value accounting, is it a gradual steady build quarter over quarter as you guys continue to scale up? Or is there a point and I know it can this is very dependent on the pace of originations and the seasoning of the portfolio. Was there a point where maybe, you know, the ROTCE increase starts to slow down as, you know, the portfolio gets larger and that day-two impact on the fair value gets larger. Am I thinking about that a little bit wrong? Drew LaBenne: I think no. I mean, I think it will be our goal would be a steady, you know, increase up towards those medium-term targets. The dynamics of moving from CECL to fair value, I will say, by the time we're entering 2027, they are largely they should be largely behind us. And from there, you know, we're continuing growth through all the steps we laid out at Investor Day. You know, mainly growing originations, growing margin, expecting a little help from the Fed, obviously, but that's not the biggest component of it. Scott Sanborn: Growing originations, yeah. Growing the balance sheet, both are gonna be accretive to the bottom line. Tim Switzer: I guess another way to think about it is the impact to profitability is relatively steady as long as you continue to grow the balance sheet at 25%. So, like, if you're growing it with, say, $4 billion of loans or if you're growing it at $7 billion of loans, that doesn't impact, you know, the profitability as long as you're still growing a similar level. Is that the right way to think about it? Drew LaBenne: Yeah. I mean, the only growth headwind that we used to have was CECL. Right? And so with that gone, you know, the growth we should have positive operating leverage from growth, or maybe I should say positive pull-through now from growth. As we grow over these next three years. So but the keys are really, you know, grow the business lines we have, the expansion in the home improvement, growing originations, growing the balance sheet, and then pulling it through to net income. Tim Switzer: Okay. Got it. Thanks for taking all my questions. Scott Sanborn: Thanks. Operator: There are no further questions online. I will now turn the call back to Artem Nalivayko for retail investor questions. Artem Nalivayko: Alright. Thank you, Kevin. So, Scott and Drew, we have a couple questions here that were submitted by our retail investors via say technologies and email. So the first question is on the rebrand. The question is, once a name change has been made, what are the marketing plans that you have in place? Scott Sanborn: Yeah. So just a reminder, what's the of the rebrand? The initial LendingClub Corporation brand really was tied to our pioneering model of peer-to-peer lending, which is obviously no longer part of the model. We're now a bank. We don't just do lending. We've, you know, launched multiple consumer-facing savings products and checking, of which the name LendingClub Corporation on your debit card is quite strange. So the rebrand is really meant to capture the broader ambition of the company, what we do for our customers beyond just lending. So the plan is to do that later this year. Our first focus, you know, there could be a question of, like, what are we doing between now and then? We are mapping out the literally thousands of touchpoints we have with our customers across email, mobile app, third-party sites, and call center and all the rest and making sure that we've got everything captured, make sure our equity translates from the old brand to the new brand. And then, yeah, we will be putting some weight behind the new brand. I wouldn't expect, you know, we're not gonna go from being a highly data-driven, you know, efficient curve-oriented direct response marketer to getting stadium rights in 2026. You're not gonna see a big step change in how we think about marketing. But this is absolutely the beginning of us moving, you know, further up the funnel, if you will, as our offering to consumers broadens and what we stand for broadens, the marketing tactics we can use can also get more broad. And so, you know, we do expect over time, you'll be seeing us, you know, beyond these direct response channels just won't be immediate. Artem Nalivayko: Thank you. So the second question saw a recent press release on a partnership with a company called Wonder. Can you please elaborate on that? Scott Sanborn: Yeah. So if you recall, an investment we talked about how we're taking our capabilities in unsecured consumer and which, you know, is applied. Our largest use case is debt consolidation, credit card refi, but, you know, those same capabilities apply to any way you can use a personal loan, which is to finance any large purchase. We've been seeing really great traction there. We think there's a real we feel a real need in the space, which is we've got the resilient stable funding of a bank, but we've got the customer experience and the speed and the interaction model of a fintech. So we've been gaining distribution and growing that business. Our, you know, our kind of core verticals that we're in today, like elective medical, dental, teeth implants, fertility, tutoring, few others, and we're expanding into others, ophthalmology, wellness. You know, these are all we're testing some purchase verticals. So that's what that is. These and other things, which some of which get announced and some of which we're just doing as part of our testing, are all meant to assess consumer demand in incremental verticals that'll diversify our use case, diversify our acquisition channels, and provide future vectors for growth. So excited about it, seeing very solid traction in the business overall, and excited to keep growing it. Artem Nalivayko: Perfect. And last question. Just in terms of increasing shareholder value, in the long term? How does leadership intend to drive shareholder value? Drew LaBenne: Alright. Well, always a great question, and thank you, retail investor, for that. I'd say the number rather than me explaining it all again on this call, I'd say the number one thing investors should do is go watch our Investor Day that we did in November because I think there's a lot of time dedicated to going through the strategy and how we expect it to evolve over the next several years. But citing, you know, what we accomplished in 2025, a lot of which we already covered on the call, for the full year. We grew originations 33%, we grew revenue 27%, and we grew diluted EPS by 158% year over year. So I think 2025 was a great year. And if you look at our guide for 2026, we're looking to obviously improve upon performance again as we go into this year. Then finally, we announced the share repurchase and acquisition program of $100 million, which, you know, we think is also beneficial to shareholders now and in the future. Artem Nalivayko: Alright. Thanks, Drew. Alright. So with that, we'll wrap up our fourth quarter and full year 2025 earnings conference call. Thank you all for joining us today, and if you have any questions, please email us at ir@lendingclub.com. Thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia, you may begin. Olympia McNerney: Thank you. I'd like to welcome you to International Business Machines Corporation's fourth quarter 2025 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's Chairman, President, and Chief Executive Officer, and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks with a replay of today's webcast on the IBM investor website within a couple of hours. The earnings presentation is already available. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of our presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. So with that, I'll turn the call over to Arvind. Arvind Krishna: Thank you for joining us today. Let me start by reflecting on our strong performance in 2025 and the execution of our Investor Day model, then get into more detail on the quarter. We are excited about the progress we made in 2025, delivering 6% revenue growth, our highest level of revenue growth in many years, and $14.7 billion of free cash flow, our highest level of cash generation in over a decade. As we laid out at our Investor Day in February 2025, we are executing on our strategy to advance IBM as a software-led hybrid cloud and AI platform company. We entered 2025 intently focused on investing in innovation and productivity initiatives to accelerate our shift towards durable higher growth end markets in software, with expanding margins and strong free cash flow. Today's software represents approximately 45% of our business, up from about 25% in 2018. Software grew 9%, our highest annual growth rate in history, with three of our four software sub-segments delivering double-digit growth rates. Innovation value can also be seen in our IBM Z performance, up 48% this year, achieving the highest annual revenue for Z in about twenty years. I am proud of our achievements in 2025 as we exceeded all of our target metrics for revenue growth, profitability, and free cash flow that we laid out at our Investor Day. Our flywheel for growth is underpinned by client trust, flexible and open platforms, sustained innovation, deep domain expertise, and a broad ecosystem, and that's exactly what played out for the year. Let me now touch on the macro. We continue to operate in a dynamic environment but one where client demand remains resilient in the categories that matter most to IBM. Enterprises are prioritizing technology investments that drive productivity, resilience, and flexibility, particularly in hybrid cloud, AI, and mission-critical infrastructure. These technologies are no longer viewed as incremental tools but as platforms that fundamentally change how businesses scale, compete, and operate. As clients modernize core systems, redesign workflows, and seek to extract more value from growing volumes of data, expectations for integration, security, and performance continue to rise. These trends are structural, and they align closely with IBM's strategy and strengths. Now turning to our execution in the fourth quarter. Delivered total revenue growth of 9%, our highest level in over three years. Software growth accelerated to 11% in the fourth quarter, driven by the strength of our diversified portfolio. Both data and automation are gaining strong momentum with clients, growing 19% and 14%, respectively, in the quarter. As AI adoption accelerates, enterprise clients are increasingly focused on how to keep operations running smoothly in a more complex and hybrid environment fueled by a surge of new applications. Our end-to-end portfolio of leading automation and data solutions helps clients manage and optimize operations, automate infrastructure and workflows, build resiliency, secure and govern data, and drive cost efficiency. Consulting continued to grow, up 1%, reflecting increased demand for AI services as clients need help designing, deploying, and governing AI at scale. And Infrastructure delivered another robust quarter, growing 17%, driven by strength in Z17, which has been outpacing Z16 performance. A key contributor to this momentum is the innovation value we are delivering with Z17, processing 50% more AI inferencing operations per day than Z16 and bringing real-time inferencing capabilities inside IBM Z. The breadth of our AI offerings is another key differentiator. Combining an innovative technology stack with consulting at scale, and our client zero journey. Our cumulative Gen AI book of business now stands at over $12.5 billion, of which software is more than $2 billion and consulting is more than $10.5 billion, with both seeing their largest quarterly increase to date. As we look at the evolution of AI, our opportunity is to make it easy for clients to build AI that is specific to their data, their processes, and their competitive needs, including the effective use of smaller, more efficient models where they make sense. That is why IBM's approach spans consulting, Watson X, or AgenTeq platform, Orchestrate, and Red Hat AI. Our announced acquisition of Confluent is another pillar in this strategy, helping unify our hybrid cloud and automation solutions through a smart data platform. Confluent has the most capable technology to unlock the real-time value of data across applications, clouds, APIs, and as AI agents enter the enterprise, they will need access to that data in real-time. Confluent is a great way to deliver that in a controlled, secured, and governed manner. Our hybrid approach to models also enables clients to use the best option for each use case. IBM's Granite models, third-party models, or open models from Hugging Face, Meta, and Mistral. In addition to being a demand driver, AI is also a powerful productivity driver for IBM. Contributing to our strong financial performance. In 2023, we set out on a goal to achieve $2 billion of productivity savings exiting 2024. And today, we are well ahead of that, exiting 2025 with $4.5 billion of annual run rate savings. We have been accelerating our productivity initiatives to enable investment in innovation, and highly strategic acquisitions like HashiCorp and Confluent while continuing to deliver strong margin expansion and free cash flow growth. HashiCorp continues to accelerate within IBM, benefiting from our go-to-market distribution and joint product innovation. We see a similar opportunity with the announced acquisition of Confluent, leveraging IBM's global go-to-market reach to accelerate growth and disciplined G&A structure. Accelerating organic innovation is a core focus for IBM. Project Bob is IBM's next-generation AI-based software development system designed to transform developer productivity. Bob introduces intelligent orchestration between industry-leading frontier models such as Anthropic, Claude, and Mistral small language models, including IBM Granite and custom models, all optimized for cost and performance. We have more than 20,000 IBMers that are using Project Bob, reporting productivity gains averaging 45%, a powerful client zero use case. We are also advancing innovation through deep M&A product synergies. For example, we recently developed Hashi InfraGraph, a real-time graph of infrastructure and application configuration. By fusing InfraGraph's insights with IBM automation products like Concert, we unlock true root cause analysis and proactive prevention for clients. All this leads to real tangible value for our clients. Companies like Morgan Stanley and FedEx are leveraging our technology solutions and infusing our Gen AI products into core workflows, and Mastercard is leveraging our technology solutions, including data management platforms, software platforms, and GenAI products and solutions. In infrastructure, clients such as CVS are turning to Z17's AI capabilities for enhanced management of mainframe application workloads and increased resiliency. We also announced new or deepened strategic partnerships through the year, with AMD, Anthropic, AWS, Microsoft, OpenAI, and Oracle. Recently, we announced a partnership between Red Hat and NVIDIA that aligns our hybrid AI solutions and NVIDIA's AI stack. This collaboration allows enterprises to deploy AI-accelerated applications across any environment, from the data center to the public cloud, using a unified automated infrastructure. It represents a significant step forward in making high-performance AI more accessible and scalable for the hybrid enterprise. Innovation, combined with our strategic partnerships across consulting, with key hyperscaler and ISV relationships, and software with key data providers, drive a multiplier effect that fuels our flywheel for growth. We continue to make steady progress in quantum computing. Over the past quarter, we advanced our development roadmap, improved error correction capabilities, and expanded ecosystem partnerships. Our collaboration with organizations such as Cisco, participation in government initiatives like the U.S. Department of Energy's Genesis Mission, and DARPA's quantum benchmarking initiative reflect growing confidence in IBM's approach to building scalable, fault-tolerant quantum systems. Quantum Advantage will require high-performing hardware. And in December, we deployed our first 120-qubit IBM Quantum Nighthawk-based system for use by our clients. Back in 2024, we predicted that we'd see Quantum Advantage by 2026, and with the help of IBM hardware, software, and rapid cycles of learning, our partners in the scientific computing community are starting to make the first credible advantage claims. We remain on track to deliver the first large-scale fault-tolerant quantum computer by 2029. To conclude, we finished the year with strong execution and continued progress against our strategy. IBM has long been known for innovation. What matters most is how that innovation is used to help clients operate better, grow faster, and compete more effectively. We made a clear set of strategic choices over the last several years to help our clients do exactly that, and it is playing out in our results today and going forward. We enter 2026 with momentum and confidence in our ability to sustain 5% plus revenue growth and grow free cash flow by about $1 billion. With that, let me hand it over to Jim to go through the financials. Jim Kavanaugh: Thanks, Arvind. As we enter 2025, we provided guidance of accelerating five-plus percent revenue growth, greater than a half a point of operating pretax margin expansion, double-digit adjusted EBITDA growth, and about $13.5 billion of free cash flow. We exited 2025 beating all of these metrics. Delivering 6% revenue growth, a 100 basis points of operating pretax margin expansion, 17% adjusted EBITDA growth, and $14.7 billion of free cash flow, growing 16% over last year. This represents our highest free cash flow margin in reported history. And we delivered 12% growth in operating diluted earnings per share. This performance reflects strong execution of our flywheel for growth. Through client trust, leadership in hybrid cloud and GenAI, accelerating innovation, deep domain expertise, and an ecosystem multiplier effect. In 2025, we were intently focused on strengthening and accelerating our software portfolio. Delivering innovation value with our next-generation mainframe launch, expanding our early leadership in Gen AI and Quantum, and executing M&A growth synergies across IBM. All of our segments accelerated in 2025. With these drivers playing out and demonstrating momentum across our diversified business. For the full year, software grew 9%, our highest annual growth rate in history. With three of our four sub-segments delivering double-digit growth rates. Infrastructure was up 10%, reflecting a record Z17 launch. Achieving the highest annual revenue for IBM Z in about twenty years. And outpacing Z16 over the first three quarters of the program. And consulting inflected back to growth in the second half, driven by GenAI momentum, with our GenAI book of business in consulting, at more than $10.5 billion inception to date. Let me now dive deeper into our fourth-quarter performance. Software revenue growth accelerated to 11%. On top of last year's growth of 11.5%, which was the highest in fifteen years. Growth was driven by the strength of our recurring revenue base, our shift to higher growth end markets, innovation including our early leadership in GenAI, M&A growth synergies, and monetization of our strong IBM Z placement with an inflection in transaction processing. Our ARR was strong at $23.6 billion, up over $2 billion from 2024. This quarter's performance was broad-based. Across our synergistic portfolio, with organic growth accelerating to over 7%. Data grew 19%, fueled by the demand for our Gen AI products and strong performance with established strategic partners. Who enable customers to power our AI innovation and mission-critical workloads. These market dynamics underscore the synergy opportunity we see with Confluent. Automation grew 14%, including another record bookings quarter for HashiCorp. Red Hat decelerated to 8%, driven partially by the wrap on last year's elevated consumption-based services that we called out last quarter. And also from the in-quarter yield on single-digit bookings growth driven by delays in US federal business deal activity related to the government shutdown. While a longer growth arc virtualization continues to gain momentum including over $500 million of contracts signed over the last two years. OpenShift is now a $1.9 billion ARR business, growing more than 30%. And as we expected last quarter, given the record Z17 placement this year, transaction processing inflected back to growth of 4%. Consulting revenue grew 1% in the fourth quarter. With intelligent operations up 3% and strategy and technology remaining stable. Performance was driven by steady demand across key offerings. Business application transformation, application migration and modernization, application operations, and cybersecurity. As clients prioritize cost efficiency, while continuing to invest in AI-enabled transformation. As Arvind noted, clients are moving beyond experimentation and need support designing, deploying, and governing AI at scale. Our consulting generative AI book of business surpassed $2 billion in the quarter. Our largest quarter of GenAI. Reflecting continued momentum. We are also expanding our impact through client zero, applying our generative AI experience in driving productivity and efficiency to help clients operationalize AI at scale. This practical experience combined with our domain expertise is resonating with clients. While overall signings were down as we wrapped on record fourth-quarter signings last year, the mix continued to improve. With a greater share of strategic wins from both new clients and expanded engagements within existing ones. Infrastructure revenue grew 17% this quarter. With hybrid infrastructure up 24% and infrastructure support down 2%. Within hybrid infrastructure, IBM Z had another outstanding quarter delivering its highest fourth-quarter revenue in more than two decades. Up 61% year to year, reflecting the enduring value of the platform and the success of our latest Z17 program. Clients are investing in Z17, for its differentiated capabilities, real-time AI inferencing, quantum-safe security, and AI-driven operational efficiency. Which are critical as enterprises modernize mission-critical workloads and scale for data-intensive environments. IBM Z continues to be the backbone of enterprise IT. Enabling clients to integrate seamlessly with hybrid cloud by unlocking new levels of resiliency, scalability, and performance. Distributed infrastructure revenue was flat with product cycle dynamics impacting storage offset by growth in power supported by solid adoption of our newly launched solutions. Now turning to profitability. In 2025, we delivered our highest operating gross profit margin in reported history. And highest operating pretax margin in a decade. Demonstrating the evolution of our portfolio mix and our laser focus on productivity. For the full year, productivity mix, and revenue scale drove expansion of operating gross profit margin by 170 basis points. Adjusted EBITDA margin by 230 basis points, and operating pretax margin by 100 basis points. And we achieved this despite absorbing more than $300 million of dilution from HashiCorp. Given the announcement of our intent to acquire Confluent, we accelerated productivity initiatives in the fourth quarter. To help mitigate 2026 dilution. Similar to our playbook on HashiCorp. Excluding resulting workforce rebalancing charges, we took in the fourth quarter, operating pretax margin expanded by 140 basis points for the full year. Segment profit margins expanded by 100 basis points in software, 180 basis points in consulting, with consulting margins at the highest level in three years. And 450 basis points in infrastructure. For the full year, we generated $14.7 billion of free cash flow, up $2 billion year over year. Resulting in the highest free cash flow margin in reported history. The primary driver of this growth is adjusted EBITDA. Up $2.8 billion year over year. Partially offset by increased investments in CapEx, higher cash taxes, and higher net interest expense as we expected coming into 2025. Let me talk about our free cash flow evolution in a little more detail. Our repositioning to a software-led business in addition to our cost discipline and productivity initiatives, drive significant operating leverage in our financial model. Since 2022, we have consistently delivered double-digit growth in free cash flow. Well in excess of revenue growth. Demonstrating this business model evolution. Our flywheel for growth and disciplined execution of productivity initiatives lead to sustainable, and high-quality free cash flow generation. This durable cash flow engine enables us to invest in our business to accelerate growth. This includes increased organic innovation with R&D up about $2.5 billion since 2019. And it allows us to pursue highly strategic M&A transactions like Apptio, Software AG, HashiCorp, DataStax, and Confluent that drive M&A synergies across IBM. Our diversified and integrated business drives a platform multiplier effect that uniquely allows us to deliver M&A synergies. This includes synergies from our global go-to-market distribution scale, platform synergies that amplify value, with IBM's complementary offerings, and operational synergies through our G&A discipline. Most recently, this can be seen with HashiCorp, delivering adjusted EBITDA accretion ahead of expectations within the first full year in IBM. Our financial flexibility fuels innovation, and our disciplined capital allocation policy. Including our commitment to return capital to shareholders. We exited 2025 with a strong liquidity position and a solid investment-grade balance sheet. With cash of $14.5 billion. We invested $8.3 billion in acquisitions and returned $6.3 billion to shareholders in the form of dividends. Our debt balance ending the year was $61.3 billion. Including $15.1 billion of debt for a financing business. With the receivables portfolio that is almost 80% investment grade. Now let me discuss our expectations for 2026. Our strong performance in 2025 reflects the strength of our diversified portfolio and a multiyear execution of our strategic repositioning. Consistent with our Investor Day model, we expect to sustain constant currency revenue growth of 5% plus in 2026. And free cash flow to be up about $1 billion year over year. Growing high single digits. Our revenue expectations are underpinned by our durable and accelerating software business. Which we expect to grow 10% this year. This acceleration is led by organic growth. Driven by the strength of our recurring revenue base, our shift to higher growth end markets, GenAI traction, M&A growth synergies, and monetization of our record Z placement with an inflection in transaction processing. A tremendous source of profitability and free cash flow for IBM. And we continue to expect Confluent will close by 2026. In consulting, our backlog levels and momentum in GenAI with backlog penetration over 25% support an acceleration in revenue growth to low to mid-single digits for the year. The powerful combination of our integrated platforms services as a software model, and client zero experience allow us to deliver differentiated value to clients. We enter 2026 three quarters into the Z17. We expect infrastructure revenue to be down low single digits. About a half a point impact to IBM. With Z growth in the first quarter balanced by product cycle dynamics throughout the rest of the year. The strength of our Z placement fuels our flywheel for growth. With its attractive three to four x stack multiplier across IBM. Let me now touch on our GenAI book of business before I turn to profit. We have been reporting our cumulative Gen AI book of business since 2023. When it was in the low hundreds of millions of dollars. We exited 2025 with the Gen AI book of business greater than $12.5 billion. Demonstrating strong momentum in consulting and software. This will be the last quarter in which we report this metric separately. AI is now embedded across our business. From how we deliver services to our software portfolio to the capabilities we're adding to our infrastructure platforms, and how we drive our own productivity. As a result, a standalone Gen AI metric no longer reflects the full scope of how AI is driving value across IBM. For the full year, we expect IBM's operating pretax margin to expand by about a point. Our software portfolio mix and ongoing productivity initiatives continue to drive margin expansion and mitigate Z product cycles. And the impact of dilution from acquisitions. Our operating tax rate for the year should be in the mid-teens. And the timing of discrete items can cause the rate to vary within the year. Let me give a little bit more color on Confluent dilution dynamics. We anticipate absorbing about $600 million of dilution from Confluent in 2026. Driven largely by stock-based compensation and interest expense. We expect Confluent will be accretive to adjusted EBITDA within the first full year and to free cash flow in year two. Post close. We have multiple levers that underpin our confidence in these accretion targets. Including revenue synergies, operational spend synergies, and ongoing productivity savings. Revenue synergies include both the ability to accelerate revenue leveraging our go-to-market distribution platform, as well as drive product synergies, which play out over time. We expect to realize about $500 million of operational spend run rate synergies by 2027. We continue to accelerate our productivity initiatives and now expect an incremental $1 billion of productivity savings this year. Driving $5.5 billion of annual run rate savings by 2026. Taking this all into account, we are confident in our ability to expand operating pretax margin by about a point in 2026. For free cash flow, we expect to grow about $1 billion in 2026. In line with our Investor Day model of high single-digit growth. Given the strong fundamentals of our business, adjusted EBITDA growth will be the primary driver of our free cash flow. Offset by similar factors as last year. Including cash tax headwinds, higher CapEx, and higher net interest expense. Looking to the first quarter, we expect our constant currency revenue growth rate to be similar to the full year. And for operating pretax margin, we expect about 100 basis points of expansion. With workforce rebalancing fairly consistent with the prior year. Our first-quarter operating tax rate should be in the mid-teens. We are excited about our prospects in 2026. Our growth accelerators portfolio mix, integrated value, and continued investment in innovation are driving sustainable revenue growth and strong free cash flow. As we shift toward a software-led business, and speed our pace of innovation, our growth flywheel continues to strengthen. We enter 2026 with solid momentum across our business, and remain focused on disciplined execution with unwavering focus on productivity. Enabling investing for the future and delivering value for our shareholders. Arvind and I are now happy to take your questions. Olympia, let's get started. Olympia McNerney: Thank you, Jim. Before we begin Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from asking multipart questions. Operator, let's please open it up for questions. Operator: Thank you. And at this time, we'll begin the question and answer session of the conference. On your telephone keypad. You may press 2. Our first question comes from Brent Thill with Jefferies. Please go ahead. Brent Thill: Arvind, good to see the comment around software growth accelerating to double-digit growth this year. I was just curious if you could maybe dig in the components and why you're excited for that organic-led initiative and then anything else that's important to note this year on the software portfolio that we maybe we haven't seen in '25? Thanks. Arvind Krishna: Give you a bit of a perspective on the dynamics of the different parts of the software business. And then for quantification, I'll turn it over to Jim. So first, we are incredibly pleased with how we got to the end of the year on software. We are pleased with the organic growth in software, and we are pleased with the inorganic contribution. If I sort of peel it first from the subsegments, automation, I think, is on a secular demand increase. The reason for that is as people have more and more infrastructure, they put more and more AI, they put more and more compute. They need that software to help them manage all of it. And we're seeing that play through in the demand for HashiCorp, which helps you deploy hardware and software with the demand for Apptio, which helps you manage the costs and gives you a perspective of what is happening. As well as all of the pieces around how do you integrate applications, how do you integrate data, and all of those components. So I think that expecting well into double-digit growth for that part is appropriate, and we see that in our early demand signals. If I look at data, data benefits both from our data products that we provide, the organic innovation we have done with Watson X, both the AI pieces and the Orchestrate piece for agents, and we expect that that demand keeps pulling through and going forward as people are deploying AI enterprise productivity, and inside the enterprise. Then we also have a lot of partnerships in the data space that we see strong demand for and that we expect are going to continue. Mainframe, given the very strong cycle we had, somewhere between low to mid-single-digit growth, is reasonable and we have seen that dynamic play through but it kinda follows the hardware placement by a few quarters. So all that hardware as people consume it, is gonna cause that to grow. And then we get to Red Hat. First, we are very pleased with their doubling almost more than doubling of the Red Hat business since we acquired it. It was early $3 billion, $3.2 billion when we made the acquisition, finishing the year at seven and a half on a run rate just extrapolating from the fourth quarter towards $8 billion. We see strong demand in many of the pieces there. Including on Red Hat Linux, that probably in the mid-single digits more than in the high to double. Which is in line with server growth. You're still taking share. And the piece there that continues to be very, very attractive to growth is OpenShift. Which is almost at $2 billion and running at a 30% growth rate and we expect that to continue both for containers for hybrid applications, and virtualization. So if you put all of that together, then that gives me confidence on the growth that Jim laid out. About 10% for the year. This all assumes a midyear closing for Confluent which is sort of baked into our expectations right now. Now of course, we're gonna strive to do even better. I think that this is a prudent set of numbers to put out. Jim Kavanaugh: Yeah. The only thing I would add just to wrap it up and I'll say it on behalf of Arvind, given how humble he is. When you look at 2025 and our software execution, I think what you see, one, is the strength of our portfolio, and the diversification of that portfolio. And that's a reflection of a multiyear strategic repositioning of the IBM company to a software-led platform-centric company. We finished '25 with one of the highest growths we've ever had in software overall, but it's pervasive with three of our four software categories growing double digits. You dial back only about three years ago, we only had one growth factor. And that was Red Hat. That is the foundation of our hybrid cloud and AI strategy. The work we've done around repositioning the portfolio, a disciplined capital allocation to build out an automation portfolio, a data portfolio, and always capitalizing on that high-profit margin transaction processing portfolio has just been phenomenal, and it's leading to a sustainable durable, growth engine that gives us that conviction of double-digit growth here in 2026. But when you cut to the underpinnings it reflects that diversity ARR roughly $24 billion growing high single digits. Gen AI, over $2 billion book of business, up two x in the fourth quarter, and that M&A growth synergies, you're just seeing the beginnings of that play out. With Hashi with another record quarter overall. So we are excited about the opportunity ahead. And we feel confident about software now at double digits, not approaching double digits. Olympia McNerney: Great. Operator, let's take the next question. Operator: Your next question comes from Amit Daryanani with Evercore ISI. Please state your question. Amit Daryanani: Good afternoon, everyone, and congrats on some nice numbers here. I just want to focus on free cash flow a bit. If I go back to the start of the year in '25, you know, you folks talked about $13.5 billion free cash flow guide. Said it ended up being $14.7 billion, I think, when it's all said and done. And I think revenue growth helped you somewhat, but it was really good free cash flow margin conversion. So I'd love to know from your perspective, what drove the strength of better performance in free cash flow in '25 where I really wanna go with this is I wanna understand the $15.7 billion free cash flow guide for this year, which is impressive. But it implies high single-digit free cash flow growth versus the 16% that you saw last year. So just help me appreciate. Was it something unique that you saw in '25? That led to the 16%, and any puts and takes around the $15.07 number for this year? Jim Kavanaugh: Thanks, Amit. I appreciate the question. As we've been talking about for five years, six years now going on as Arvind's taken over this company, we've got two key measures that we drive this company on. Revenue growth and free cash flow generation. And by the way, they're synergistically aligned because it provides that flywheel of investment flexibility. But you're exactly right. We entered the year, and I remember a year ago sitting in this chair, I got asked the question, I think it was either you or Ben about are we you know, my words, are we sandbagging free cash flow? And at that time, we said $13.5 billion, and the underpinnings behind that was double-digit growth and adjusted EBITDA and that we would have partially mitigating that some headwinds on or I would talk about tailwinds, higher cash tax because we got a higher profit profile, higher CapEx, because we're gonna invest in this business for long-term future growth. And we were gonna have higher net interest and acquisition-related charges. Now you fast forward a year later, we posted $14.7 billion. By the way, up $2 billion, up 16%. Highest free cash flow we've seen in well over a decade. Highest free cash flow margin on record of a hundred and fourteen-year history of our great company. And the underpinnings behind that cash flow were entirely driven by the fundamentals of our business, the acceleration we saw in our revenue growth throughout the year, and the strong operating leverage we continue to get out of this business. So where we started with adjusted EBITDA, at double-digit growth, we finished at 17%. That's an incremental $1 billion of adjusted EBITDA from where we were a year ago. And by the way, that's a flywheel engine. Revenue acceleration operating leverage, and driving an efficient balance sheet where we're very proud about a solid investment-grade balance sheet. Generates significant substantial free cash flow. So now you fast forward to this year. We enter 2026 with a lot of momentum, confidence. By the way, I should have said over the last three years, we've grown free cash flow five and a half billion dollars. So that growth factor, what's been happening. But you look at 2026, our investor model's high single digit. We got a lot of work to do in 2026. We said we'd guide confidently up a billion dollars at $15.7 billion. That's on a high single-digit growth. It's early in the year. High single-digit growth of adjusted EBITDA. And we are sitting here with a tremendous amount of leverage and opportunity just like we were a year ago. And our goal is to continue driving the durable sustainable performance of this company as we move forward. Why do we feel excited? One, we have a focused portfolio. Disciplined capital allocation, diversification of our business model, and a relentless focus on profitability. That drives the durability of free cash flow engine in this company that gives us the financial flexibility to continue to invest for long-term sustainable advantage. So we feel confident about that fifteen seven, and our job is to beat it this year. Olympia McNerney: Operator, let's take the next question. Operator: Our next question comes from Ben Reitzes with Melius Research. Please state your question. Ben Reitzes: Yes. Hey, guys. Thanks a lot. At the risk of getting in trouble with Olympia here, on Amit's question, I was surprised you didn't say there's a multi $100 million hit due to Confluent. In the cash flow guide, which, you know, without it, it would be higher. But my real question is with regard to Red Hat. And I wanted to just clarify, I appreciate the double-digit guidance for software. I wanted to see what how we're going to bridge Red Hat, what how do we get the eight to the mid-teens or is mid-teens no longer the growth rate there? Obviously, everything else was great. And better than our model. But I'd like to just focus laser focus on Red Hat and how we bridge it to within your forecast and towards the prior goals. Thanks. Jim Kavanaugh: Yes. Thanks, Ben. And I didn't say the dilution effect because to be honest with you, dilution's part of our model. Our investors expect us to be disciplined capital allocators think we've earned the credibility about that, and we have to take that into account. That's why we drive portfolio mix. We drive revenue scale. We drive productivity, which by the way, I also didn't say we exited last year 4 and a half billion dollars over the last two years. And we see that going up by another billion dollars this year. So we got a lot of levers. In this business, and we understand that dilution. But you know what? The strategic value of Confluent and the synergistic value of what it does to our portfolio, we definitely could take into account that dilution. So I know you were trying to help on 15 seven's higher. Yes. It is. But all in, which is how we operate and report, we gotta deliver or beat that number. So but let's get back to software. You know? And we talked a lot about the first question. We entered 26 with confidence around the momentum, the diversification of our portfolio, about the strategic repositioning, about the flywheel of growth, and we expect now double-digit growth. Underneath that, one, that's gonna deliver four and a over four and a half points to IBM's growth in '20 above our model. And as Arvind said, an acceleration organic growth. Organic will be north of seven points this year and acquisitions about three points. How are we gonna do that? We're gonna do that one. We have to acknowledge we're operating in an attractive TAM. With a market backdrop for tech that we think is pretty exciting. And Arvind has been on that point about opt opportunistic. Two, we continue the thing I think is underappreciated in our disciplined capital allocator, we continue to shift this portfolio mix to higher growth end markets with companies that we buy, which we always say category leaders in structurally growing markets, that we can provide unique value, integrate and deliver differentiated synergies to accelerate growth. That is shifting our underlying portfolio that's also advancing our organic growth profile. Annuity strength, $24 billion exiting the year, growing high single digits, eight plus percent. New innovation, GenAI, Gen AI in the fourth quarter up two x, and we see that continuing. As we move forward. M&A growth synergies kicking in off of a record Hashi year, and Arvind talked about TP cycle monetization. By the way, one point on TP that I think is underappreciated. We talk about it very similar to Z16 cycle. Z sixteen first year of that cycle, TP was flat. We finished this year flat. One big difference. That flat on Z16 was off a down nine. The flat this year in 2025 was off a plus 10. So you could see the compounding effect of what's happening to TP, and we see that inflecting the growth. So underpinning and Arvind gave you some of the math. One, data, high teens, contributing about four points to that software growth, well above model. That's gonna be driven by new innovation, Gen AI capability, platform economics, Two, hybrid cloud. We think that's double digit. Back to where I started my first answer, Three, four years ago, we only had one growth factor. Now we got three growth factors that are growing double digit. Underpinning that, we got a subscription revenue under contract that's growing mid-teens. That's not at model. We only delivered single-digit ACV bookings in the fourth quarter because as we stated in prepared remarks, we were disrupted by the down of the federal government. We gotta get through that. We're monitoring it. And I would say the word choices were being prudent. On Red Hat's guidance right now. Because we only need that at double digit to get software over the line of double digit. Upside, will deliver upside to software overall. Automation, great portfolio, low double digit, two and a half point contribution to software. On or better than the model. And that's leveraging M&A growth synergies off Hashi's success. And then TP, we're pretty much back to model. Low single, mid-single-digit growth, capitalizing on that economic multiplier. So it gives you a little of the underpinnings behind why we're confident in that 10 plus percent growth of software. Olympia McNerney: Take the next question. Operator: Your next question comes from Wamsi Mohan with Bank America. Please state your question. Wamsi Mohan: Yes, thank you so much. Just a follow-up, a clarification quickly on the last couple of questions around hybrid cloud growth. Are you anticipating any potential pressure on the server refresh cycle from higher memory pricing? And could that sort of have any, adverse effect on the Red Hat Enterprise Linux side of things. And my question really is, Jim, on the cadence of PTI improvement, clearly, you're driving a lot of productivity improvement and being able to absorb entirely the dilution from Confluent and then some. So how should we think about the cadence of the progress of that? Given that Confluent is to hit midyear, but you've already taken some productivity actions here and 4Q of last year. So should we be seeing more outsized DTI improvements in maybe the second quarter? I think you already said where it is in the first quarter, but like in the second quarter, is that the right way to think about it? Thank you so much. Arvind Krishna: Okay. So Wamsi, let me take the first part of that question and I'll ask Jim to address the second part of your question. Look, the server dynamics are volatile. And you're right. If I remember correctly, spot memory DRAM prices are six times that of last year. A big reason for that for those who are interested, is because a lot of the capacity is moving over to HBM. Or high bandwidth memory, which is required for AI servers. And if I remember correctly, it takes about four maybe eight times the capacity of DRAM to do HBM. Pricing and the demand for HBM is driving all the vendors into that. I personally believe as long as that dynamic is there, those pricing issues are going to be there through the year. Now the demand side. There is no AI server without a bunch of CPUs right next to it. So the reality becomes that the AI demand also drives demand for normal servers that in turn feed and load up those servers. So I don't expect that the overall server dynamic on which there may be a little bit of an issue, is actually gonna be any headwind to us on the hybrid cloud or the Linux side. And the reason for that is that there is enough growth going on. There is also a market share movement towards Red Hat as opposed to alternate answers in the marketplace. So that mix overall I think keeps us growing well. I also believe that both Red Hat AI and OpenShift AI will feed into the demand from the AI servers which was gonna help that demand. So let's acknowledge is gonna be memory pressure, and that probably lasts at least a couple of years. But as look at that, it also gives opportunity AI portions of the portfolio to get a lot of tailwinds. So with that, I'll give it to Jim for, I think, another free cash flow question. Jim Kavanaugh: Yeah. The skew of profitability, Wamsi, I think was your question. So thanks very much. And I appreciate that. Just given we do still expect Confluent to close by midyear this year. Obviously, very excited about the strategic capabilities that's gonna add, but I think I was very transparent in the prepared remarks about the level of dilution etcetera. But let me bring it up a level first. Around how do we run this company and how do we drive the operating leverage that's been going up well above our model over the last three to four years. Portfolio we drive this through portfolio mix, That's why software being the underpinning of IBM's leverage around 45% of IBM's revenue, but about two-thirds of our profit. Also, high-value recurring revenue, our ARR book of business, high marginal profit dollars. So portfolio mix being one lever, productivity, every dollar we invest in this company around go-to-market around R&D, around innovation, and around our consulting services, we look and we drive a very maniacal ROI concept around that profile just as you would expect us to as an investor like an inorganic M&A acquisition. And three, we drive to bring this company the most productive company in the world and getting G&A scale leverage overall. Fundamentally, you manage those three separate buckets differently. When you look at 2026, we set about a point growth in margin. Gonna get about a half a point out of revenue scale just given the leverage of the acceleration of revenue. We will lose a half a point on portfolio mix because we are gonna wrap on an unprecedented launch momentum on mainframe. Which carries higher prior profit and higher mix. The remaining full point basically is gonna be driven out of productivity. And our model, as you know quite well, we've been driving north of 300 points per year of productivity, and we've been reinvesting about 200 basis points of that. That's why you've seen over the last handful of years, our R&D up double-digit growth year over year. And we've taken over the last what, five years, we've taken $2.5 billion of R&D up overall. But when you look at 2026, productivity is gonna drive the day, We feel confident. We took up our productivity target to $5.5 billion. We will get revenue scale leverage on G&A. Which will mitigate dilution and mitigate product cycles overall. To your last question, we think the skew of that profitability is gonna follow our normal historical attainment. First quarter, will be pretty much on historical attainment. By the way, you do the math, that's double-digit profit growth, double-digit EPS growth. So pretty consistent building off the momentum in the fourth quarter. Olympia McNerney: Operator, next question, please. Operator: Thank you. And your next question comes from Jim Schneider with Goldman Sachs. Please state your question. Jim Schneider: Good afternoon. Thanks for taking my question. I just wonder if you could maybe outline the path or trajectory you're expecting for the consulting business throughout the year? Signings were a little bit weaker in this quarter, but you noted the strong backlog in AI that you're seeing. So maybe talk about how you expect that to convert into revenue over the course of the year and whether you see any kind of further improvement in discretionary or short cycle spending and projects, as you head throughout 2026? Thank you. Jim Kavanaugh: Great, Jim. It's good to hear from you, and I appreciate the question. First of all, we're encouraged by the inflection shift that we see in consulting exiting '25. We returned the business back to durable sustainable growth in the second half, a little bit over 1%. But more importantly, and I think underappreciated, we got a lot of headroom to go, and the team is working diligently around improving the fundamentals of this business. And our operating pretax margins were up by almost 200 basis points in 2025. When you look at the market, the market definitely remains dynamic as we talked about earlier. We continue to see opportunity for growth as clients accelerate their investments in AI-driven transformation to unlock operational efficiency, to unlock business model innovation, and now unlock growth. I think it's a very different mindset and client buying behavior than we saw eighteen months ago when it was pure disruption and discretionary spend that's moving out. So as we look at '26, that's what gives us the confidence that we guided low single to mid-single which we think is gonna be pretty much where the market is at overall. And we still believe we've got continued headroom on operating margins. We guide about another point and a half improvement year over year. Both of them are gonna be accretive in contribution to IBM overall. How's that gonna happen? One, I would put it in a handful of buckets. One, backlog realization. In what we see. Two, our Gen AI momentum and the rate and pacing growth and acceleration we're seeing three strategic partnership headroom that we still have, four our portfolio composition we've been talking about is aligned to much more growth end markets, higher growth end markets, you know, where our portfolio is less around pure BPO, it's more around digital transformation, modernization, AI, around data transformation, cybersecurity, governance, And then five, you know, Mohammad and team, we've been doing a ton of work around reshaping our model to an asset-based services as software model. Our industry-leading IBM consulting advantage. So let me talk about just a couple of them to give you some math and statistics on why we feel confident. One backlog, $32 billion up 2% overall. But underpinning record low erosion duration that has continued to come down. And our realization to your question we see a realization out of that backlog that fully supports that low to mid-single-digit growth. And we see it pretty much modestly growing throughout the year. So low single-digit first quarter, and then growing throughout the year. Two, we added over 400 new clients this year. And that has improved our net new business contribution as we've been talking about by eight points which is having a higher revenue realization by four points year over year. So backlog composition and the acceleration is one aspect. Gen AI is the second. Gen AI now represents over a third of our bookings, over 25% of our backlog right now, $32 billion backlog, and over 15% of our revenue on an exit run rate. We have a $3.6 billion ARR Gen AI revenue run rate. In consulting, and we see that continue and accelerate. And then finally, the repositioning. We see more headroom on margin leverage about a point and a half as we go forward, and that's through productivity portfolio mix, But we have to manage we are operating in a very aggressive pricing environment. We'll continue monitoring that. Olympia McNerney: Operator, next question. Operator: Thank you. And your next question comes from Eric Woodring with Morgan Stanley. Please state your question. Eric Woodring: Awesome. Thank you guys for squeezing me in here. Arvind, a really strong infrastructure year, obviously outstanding performance in Z. I think there's an argument to be made, and I hear from you that, you know, with the Telum two processor, given the amount of data and transactions on the mainframe, you know, the mainframe can be an AI workhorse. You had really strong outperformance relative to your historical model in Z. You're guiding to a bit of infrastructure decline in 2026. And so I'm just trying to understand was there just some kind of different buying trends in '25 and perhaps a bit of pull forward that was different than maybe past Z launches? Or could you just be a bit conservative as you look out into 2026? I know you cycle dynamics, but could you see some more sustainability in video, in the infrastructure business in the Z cycle that maybe isn't fully accounted for in the infrastructure guidance that you gave? Thanks so much. Arvind Krishna: Yeah. Eric, as Jim actually in the answers to a few questions, We want to give guidance and we want to be where we have incredibly high confidence that we can hit or beat those numbers. So let me just caution that all guidance we give with that in mind. Let me just actually go back to a few of the dynamics that are driving even stronger adoption of the mainframe. Let's point out. Z17 has been the strongest start three quarters in. Before that, Z16 the strongest in about twenty years. Before that, Z15 was better than 14, 13, and 12. So we have been on this continuing improvement. Let me point to, I think, at least three secular factors under it. Number one, there is a lot more demand for people to have we can use the word sovereignty. Or we could use the word on-premise control which goes along with the economics of the mainframe platform. I think more and more clients have woken up to that for certain workloads, the mainframe is actually the lowest unit cost economics platform, and that is really important. Number two, the ding often is but it's a very hard platform for our developers to use. And for our operators to leverage. The Gen AI tools we have provided with the Watson Code Assistant for Z really takes that bonus away. It can refactor COBOL into Java. It can help people understand code that is already running on the platform. It can help you refactor that code if you want to keep it exactly as it is. It can help you take things out so that headwind of people saying this is a hard platform to modernize has gone away. That then comes to your AI capabilities. You're right. I'm incredibly excited by our ability AI right in line. If you can do it right in line with the transactions, that's a milliseconds delay. Opposed to multiple seconds if you take it off-platform. Which is how people have been doing it so far. That capability, while we introduced it in 2025, really came to market only in 2025. So I do expect and we look forward to helping our clients install that. And a very large number of our clients actually told us they're interested and they kept space in the machines to put in those cards. We call them the spire cards or you can think of it as the Gen AI card. Gives you all that capability. As those cards go in, then the software stack to support that goes in. But we also have to give help to our clients to let the models run on the platform and to get their use cases up and going. Expect that will take some months to happen, but that provide tailwinds against some of the dynamics that both Jim and I have explained. Olympia McNerney: Great. Operator, let's take one last question. Operator: Thank you. And this question comes from Matt Swanson with RBC. Please state your question. Matt Swanson: Great. Thank you. Arvind, if I could maybe take a more holistic view of part of your answer you just said. So I mean, as you were talking about, there's been a lot more conversations right now about where enterprise GenAI workload should reside. It really feels like that conversation is the intersection of your dual pillars of AI and hybrid cloud, when looking at, you know, the strength of the refresh cycle, as you mentioned, but also the strength in demand for the data, segment, the automation segment. Conversations and consulting. What do you think combining all these things says about the current state of enterprise transformation for GenAI maybe today and know, heading into '26? Arvind Krishna: Matt, thanks. Thank you for that question because it is one, as you can imagine, that we both think about a lot. And then play out the various scenarios. So let's look at GenAI so far. Gen AI so far has largely been a consumer topic. People use chatbots, people use it to improve their emails. People are using it to improve document writing. Half the videos, if I believe the statistic I read, are now generated with the help of AI, I'm not saying only AI, but with the help of AI. All of that tends to be AI. That is running on a hyperscaler public cloud somewhere. And that people go leverage. As we look forward now to the enterprise, I am convinced this is an and world. I'm not saying that the hyper scale or public model usage is going to decline. But the enterprise is gonna get concerned with how much of not the data. I don't think people are gonna steal data, though that has happened a few times. But I do think that there is gonna be a lot of concern around the nature of what are the models learning from answering these questions do we really want to share that with everybody else? Or not? There is gonna be issues around sovereignty on the users of these models. And there is gonna be questions around just basic privacy. Hey. This is not data that we wanna take anywhere else. So I take that into I believe if I look out three to five years, 50% of the enterprise usage of AI going to be in either a private cloud or is going to be in their own data centers. And the other 50% is gonna be usage of public models. Now there's also an efficiency question. So if what's being used on-premise is smaller models, then actually, it could be that 80 to 90% of all the inferencing is really in a private slash on-premise. And 10% of the inferencing is on a public 10% could be at five to 10 times the price hence the dollar sort of even out. We see this playing out really importantly over the next three to five years. And that is why we've been positioning very strongly. We use the word sovereign, sovereignty for how people want to manage their technology. We announced a sovereign core offering last week help get this done. But we do believe that this is gonna play out. The mainframe is an important element. But not the only element in that story. So it's an and. Matt. Sorry. Really long answer. But this is what is gonna play out over the next three to five years. So thank you all for all of these questions. As you can see, we have been excited about our year and the changes we have made to our business over the last few years and our performance in 2025 reinforce our confidence on the next chapter of our growth. We look forward to continuing this dialogue through the year. Olympia McNerney: Thank you, Arvind. Operator, let me turn it back to you to close out the call. Operator: Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.
Operator: Good afternoon, and welcome to the Ethan Allen Interiors Inc. Fiscal 2026 Second Quarter Analyst Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. It's now my pleasure to introduce you to our host, Matthew J. McNulty, Senior Vice President, Chief Financial Officer, and Treasurer. Thank you. You may begin. Matthew J. McNulty: Thank you, operator. Good afternoon, and thank you all for joining us today to discuss Ethan Allen Interiors Inc.'s fiscal 2026 second quarter results. With me today is Farooq Kathwari, our Chairman, President, and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will then open the call up for your questions. Before I begin, I'd like to remind the audience that this call is being webcast live under the news and events tab within our Investor Relations website. A replay of the transcript of today's call will also be made available on our Investor Relations website. There you will find a copy of today's press release which contains reconciliations of the non-GAAP financial measures referred to on this call and in the press release. Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our most recent quarterly report on Form 10-Q. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. With that, I'm pleased to now turn the call over to Mr. Kathwari. Farooq Kathwari: Well, thank you, Matt. And thank you for joining our second quarter ending December 31, 2025, earnings call. The second quarter results were strongly impacted by the government shutdown resulting in lower consumer confidence, lower traffic to our design centers, and lower orders at retail, especially from the U.S. government contract. Also impacted by a very strong previous year comparison. The good news is that we have started the third quarter with stronger traffic and positive written sales in January, as we mentioned in our press release. During the last few years, we have made major changes to our vertically integrated structure, including our retail network, manufacturing, marketing, logistics, and are positioned well. After Matt provides a brief overview of our second quarter financial results, I will provide more details of our business initiatives to grow our business, and then we'll open up for any questions or comments. Matt, please proceed. Matthew J. McNulty: Thank you, Mr. Kathwari. Our financial performance in the just completed second quarter was highlighted by a robust balance sheet and strong margins despite a challenging environment. Our consolidated net sales of $149.9 million benefited from a higher starting retail backlog, a higher average ticket price, incremental clearance sales, and fewer returns. These increases were offset by fewer contract sales and lower demand. Retail written orders declined 17.9%, while wholesaler orders were 19.3% lower than a year ago, with both metrics declining sequentially throughout the quarter as our prior year comparables got tougher. Our demand trends reflect the combination of macroeconomic challenges and a difficult prior year comparison, as well as an 11% decline in design center traffic. With that said, we are pleased to see positive written order growth in January. We ended the quarter with a wholesale backlog of $49.8 million. A lower volume of contract orders combined with improved customer lead times helped reduce our backlog. Our consolidated gross margin was 60.9%, up 60 basis points from a year ago due to a change in sales mix, reduced headcount, a higher average ticket price, and lower inbound freight, partially offset by increased promotional activity, incremental tariffs, and elevated clearance sales. Our adjusted operating income was $13.5 million with an operating margin of 9%. For historical context, the adjusted operating margin during the pre-pandemic 2019 second quarter was 5.4%, or 360 basis points lower than it is today. Our current year operating margin was impacted by cost deleveraging from lower sales combined with delivering out orders with higher promotions, additional marketing, higher occupancy costs from new design centers, increased employee benefit costs, as well as incremental tariffs. These increases were partially offset by a disciplined approach to controlling operating expenses, including reduced headcount. At quarter end, we had 3,149 total associates, a decrease of 5.1% from a year ago. Adjusted diluted EPS was $0.44. Our effective tax rate was 25.3%, which varies from the 21% federal statutory rate primarily due to state taxes. Now turning to our liquidity. We ended the quarter with a robust balance sheet, including total cash investments of $179.3 million with no debt. Our liquidity position remains strong, although we generated an operating cash flow deficit of $1.8 million during the quarter due to changes in working capital, including lower customer deposits, and the timing of our biweekly payroll. In November, we paid a regular quarterly cash dividend of $10 million or $0.39 per share. Also, as just announced in our earnings release, our Board declared a regular quarterly cash dividend of $0.39 per share, which will be paid in February. We are pleased to continue to pay cash dividends while maintaining a strong cash position. Before closing, I'd like to spend a few moments on tariffs. We are exposed to tariffs assessed on raw materials and finished goods we import into the U.S. Recently enacted Section 232 tariffs made effective in mid-October resulted in manufacturing of both upholstered and wood products being subject to a 25% tariff. Our non-U.S. manufactured case goods are currently subject to a 10% tariff that is partially reduced based on the consumption of U.S.-sourced materials. With regards to imports, our exposure is primarily concentrated on imported case goods from Indonesia, select fabrics from Asia, and imported accents consisting of lighting and area rugs. To help offset some of the tariff impact, we worked with our vendors on cost sharing, performed additional sourcing diversification, and recently pushed through selective retail price increases which averaged 5%. These carefully measured price increases applied strategically across select SKUs rather than broadly. We will continue to review pricing and will respond quickly and thoughtfully as conditions evolve. We believe our North American manufacturing, which represents approximately 75% of the furniture we sell, provides us with a strategic advantage by controlling more aspects of the production process within North America. We believe we can mitigate some of our tariff exposure. As I conclude my prepared remarks, we are pleased that our disciplined investments and strong expense management are helping to build a fundamentally stronger company. We delivered another strong quarter and enter the 2026 calendar year with a debt-free balance sheet, strong liquidity, and a proven ability to provide clients with custom furniture and complementary design services. With that, I will now turn the call back over to Mr. Kathwari. Farooq Kathwari: Thank you, Matt. I'm pleased to share our initiatives to help us grow our business as we move forward. Our key focus remains to continue to strengthen our unique vertically integrated structure, including continued strengthening of product programs. Our design centers have started to receive our new products introduced in the fall of last year. Our products continue to be developed under the umbrella of classics with a modern perspective. About 75% of our furniture is made in our manufacturing workshops in North America, and all products are custom made on receipt of orders. This is possible because of our North American manufacturing and provides a strong competitive advantage. Strengthening our marketing programs in our second quarter, we continue to utilize various mediums including direct mail and digital advertising. We increased our advertising by 25%, mostly in digital mediums. While we did not get the full benefit in our second quarter of this increased marketing spend due to the economic slowdown, we feel it will benefit us in the future. Our retail network today operates 172 design centers in North America. The design centers reflect the reduction of the size due to strong interior design talent and digital technology. Continued strengthening of manufacturing, as I mentioned, about 75% of our furniture is made in our North American facilities. The combination of strong talent and technology is key to our productivity. Again, I repeat, that all our manufacturing in North America is based on custom-made furniture. You know, twenty years back, 80% was in stock that we sold furniture, especially what we call case goods. Strengthening our national and retail logistics continues to be a very important initiative. We deliver our products to our clients all across North America at one delivered price with what we call white cloud service. Very unique. If a customer is in Seattle, or in Florida, or in Texas, it's exactly the same delivered price and it took us a long time to do this, and it reflects the investments we have made to have a very strong logistics network. And again, very, very important, focus on continued strengthening of talent combined with technology is key to the future. With this, happy to take any questions. Operator: Thank you. And with that, we will now be conducting a question and answer session. Our first question comes from the line of Taylor Zick with KeyBanc Capital Markets. Please proceed with your question. Taylor Zick: Yes. Hello, Farooq. How are you? Farooq Kathwari: Hi, Taylor. I'm doing well. How are you doing? Taylor Zick: Good. I just wanted to ask about the retail written orders during the quarter. You noted that the monthly trends decelerated during the quarter just due to difficult comparisons. But as you kind of look through that, have any sense of what the underlying trends were during the second quarter? Farooq Kathwari: Yes, I can, Matt can give you the exact numbers of the retail. I mean, from our retail business in the quarter was somewhat impacted. But Matt, what are the numbers? Matthew J. McNulty: Yes. Each sequential month during Q2 decreased by a higher percentage. We don't typically disclose the breakdown on a month-to-month basis. But it did lend to an average decrease of 18%. But started out stronger in October and it decelerated more so. For the government shutdown combined with the prior year comparison, if you recall, November, December last year were very strong. So it was a difficult prior year comparison. If we go back two years, the fiscal 2024, that calendar year '23, we're only down very low single digits. Compared to this past to a year ago, it's much higher. Taylor Zick: Got it. Yes. And certainly good to see the positive written comps here in January. That's great. And Farooq, maybe for my second question, can you touch a bit on the contract side of the business? You have obviously cited the government shutdown as sort of a headwind here, but since the government has reopened, have you seen any improvement in the orders? Or do those remain relatively soft? Farooq Kathwari: Well, during the last quarter, the orders stopped. That, of course, had a major impact on our results last quarter because of the fact that, you know, the government's being closed. They were not sending any orders. The good news is the orders are coming in, and they are coming in reasonably high, but not as strong as, you know, last year because it is now taking the government, all the embassies all over the world, a little time to get back on. So, yes, we are seeing new orders. It's a little bit lower than last year. But every week, it's growing. Taylor Zick: Understood. And then maybe one last question before I turn it over to others. The company continues to put up very strong gross margins here despite the difficult environment and tariffs and all that. So should we think about the sustainability of these margins as we look to 3Q and 4Q ahead? Farooq Kathwari: I think we have a good opportunity of maintaining them. Because of the fact that a lot of work has been done at all levels. In terms of combining great talent and technology. That has really impacted all elements, especially our retail network, in our manufacturing, our logistics. So I believe that, obviously, the volumes have an important factor, but we have an opportunity of maintaining them. Taylor Zick: Great. Thanks so much. Matthew J. McNulty: Alright. Thanks. Taylor Zick: Thank you. Operator: And our next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please proceed with your question. Cristina Fernandez: Hi, good afternoon. Hi, Farooq. Hi, Matt. I appreciate all the color on the tariffs, Matt, that you gave. I wanted to see if you could give more detail as far as I guess, what the total impact is. And you mentioned that you were mitigating some of it. So I want to see if you can give some color on what the mitigated amount is and how should we think about that impact as we move forward? Do you think with the price increase and some of the changes you've made, you can mitigate the cost or we're going to see some impact flowing through the cost base? Farooq Kathwari: Yeah. Go ahead, Matt. Sure. Yeah. I'm happy to answer that one. So Matthew J. McNulty: there are a couple of strategies we took. It's really a three-pronged approach to trying to mitigate some of the tariff impact. One is vendor cost sharing or partner cost sharing, reaching out to partners to help negotiate and sharing some of the cost. That we did over the last several months and was very successful. Another strategy that we've employed is supplier sourcing diversification. Trying to source from other countries, which we've done to some extent. And then the third prong is really the retail price increases, which I've mentioned we pushed through a select about a blended average of 5% in October this past quarter. Increase. Those did help mitigate some of the tariff impact. It did not do all of it. Now price increases were late in October, but late from a delivered a lot of those orders did not get delivered out fully. In the quarter. So we'll see a little bit more of a benefit from price increases moving forward. With that said, there will still be some more headwinds. You mentioned the Section 232 tariffs that came into play mid-October. That so we hadn't really experienced a full quarter worth of those. That's probably the largest. That's about 40% of our overall tariff exposure is there. And then the IEEPA tariffs, which are currently under review by the Supreme Court, is about 40% and the remainder is Section 301 tariffs. I would say all in, we're still seeing a headwind. We don't disclose the actual percentage of the headwind. Overall, but I think the steps we've taken will help mitigate a significant amount of that plus our current structure of being 75% in North America does help mitigate it naturally that way. Farooq Kathwari: Yes, Cristina. And also, of course, I mean, we are not counting on it. But the U.S. Supreme Court has still not decided on the validity of the IEEPA tariffs. And it's, you know, it's possible that it goes away and which will impact 40% of our exposure if they take it down completely. An annual savings of approximately $8 million. But, again, I said, we are hoping that happens, but our plans are to keep them on the side while making all changes that we can to maintain strong margins. Cristina Fernandez: Thank you for that color. I had a question on the January trend relative to the second quarter, what would you attribute it? Do you think it's marketing? I mean, promotion seemed pretty similar to last year. What would you attribute the improved trend? Farooq Kathwari: I think the most important one is that the consumers came back. I think in the last quarter, with all the uncertainty, government shutdowns, all were scared. People were not coming in. What we've seen in January, people are coming back. Now the good news is because of our structure, because of our interior design network, we have most likely the strongest interior design network. They have maintained good contacts with their clients. And what we've seen is our traffic has increased. People are coming back. Again, you know, there's still some concerns. But the concerns we had in the last quarter about all the uncertainty in the marketplace. That created issues. We see in January, you know, our government shutdown was not there. Somewhat of a better consumer attitude. So people also the people are designers, worked with clients. And as in last quarter, the ones who did not close, they are closing the business now. Cristina Fernandez: And the last question I had was on marketing. The 25% increase, I mean, do you expect that level to continue as we move through the year? And where are you mostly seeing the benefit of this marketing? Is it better traffic? Is it new customer acquisition? How are you measuring the efficiency of that marketing spend? Farooq Kathwari: Now that's a very important issue. Now if we knew that the government shutdown and all of those were going to take place, we would not have increased our marketing by 25%. That's what we did. But the reason, it is mostly on digital marketing. This is a digital marketing is where clients today, you know, it used to be that our designers had to spend a tremendous amount of time working with the clients physically. Today, consumers and our clients and our designers are able to work virtually with the amount of technology that we have. So all this was to help bring more people through our virtual advertising and also help them close business. And that we'll continue to do. But having said this, we are going to reduce some of our advertising expense in some other mediums. Look at ten years back, we spent a lot of money on national advertising. Then we in the last year or so, we spent a fair amount of money sending magazines, digital magazines, and print magazines. One of the things we do we looked at was the impact of our digital magazine where we're spending close to, I think, close to $18 million a month decided that we'll take it down to $9 to $10 million and still make an impact and especially spending this more money on the digital marketing will help us. So those are the areas where we are looking at. Cristina Fernandez: Thank you. Alright. Operator: Thank you. And with that, there are no further questions at this time. I would like to turn the floor back over to Farooq Kathwari for any closing remarks. Farooq Kathwari: Well, thank you for joining. I would say that we are stronger today. We have spent a fair amount of time. First, we've got, you know, as you know, every week, I get about 40 reports. They don't all report to me. But they have to write on five things. First is talent. What have they done to improve talent? The good news is we've got strong talent, have less people. But strong talent. As I said, our headcount today is, what, 30 less than what was only five or six years back. Now that is due to high talent, and it's also due to technology. So we're going to continue to have technology as tremendously important. Second, third thing is marketing. And marketing, again, is tremendously important, but the means of marketing are constantly changing. And this also reflected what we did last quarter in terms of spending more money on digital mediums. We'll continue to do that. And service is critical. That's our fourth tremendously important area. And the services provided by interior designers, services provided by our logistic teams. As I said, that we today deliver our products at one price nationally. To a consumer with service. And then finally, social responsibility is tremendously important. We'll continue to do that. So thanks very much for joining. And look forward to our continued discussions next quarter. Operator: Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day. Farooq Kathwari: Okay. Thank you.