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Operator: Welcome, everyone. The Texas Capital Bancshares, Inc. Full Year and Q4 2025 Earnings Call will begin shortly. To ask a question, please press star followed by one on your telephone keypad. Thank you. Hello, everyone, and thank you for joining the Texas Capital Bancshares, Inc. Full Year and Q4 2025 Earnings Call. My name is Claire, and I will be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two on your telephone keypad. I will now hand over to Jocelyn Kukulka from Texas Capital Bancshares to begin. Please go ahead. Jocelyn Kukulka: Good morning, and thank you for joining us for Texas Capital Bancshares' Fourth Quarter 2025 Earnings Conference Call. I'm Jocelyn Kukulka, of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Today's presentation will include certain non-GAAP measures, including, but not limited to, adjusted operating metrics, adjusted earnings per share, and return on capital. For reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to the earnings press release and our website. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-Ks, and subsequent filings with the SEC. We will refer to slides during today's presentation which can be found along with the press release in the Investor Relations section of our website at texascapital.com. Our speakers for the call today are Rob Holmes, Chairman, President and CEO, and Matt Scurlock, CFO. At the conclusion of our prepared remarks, the operator will open up the call for Q&A. I'll now turn the call over to Rob for opening remarks. Rob Holmes: Thank you for joining us today. 2025 was a defining year in this firm's history. In the third quarter, we achieved our stated financial targets, marking completion of our transformation and delivering the largest organic profitability improvement of any commercial bank exceeding $20 billion in assets over the past two decades. We reinforced this achievement in the fourth quarter with a 1.2% ROAA, demonstrating that our third quarter performance was not an anomaly but instead reflects firm-wide client obsession, unwavering commitment to operational excellence, and a balance sheet and business model increasingly centered on the high-value client segments that we are uniquely positioned to serve. Full-year adjusted ROAA of 1.04% represents a 30 basis point improvement versus 2024 and signals a fundamental improvement of our earnings power. The result of disciplined execution, strategic investments, conservative portfolio management, and sustained operational leverage. Our comprehensive 2025 results validate this trajectory. Record adjusted total revenue of $1.3 billion. Record adjusted net income to common stockholders of $314 million. Record adjusted earnings per share of $6.8. Record adjusted pre-provision net revenue of $489 million. Record fee income of $192 million from strategic areas of focus. Equally important, we achieved record tangible common equity to tangible assets of 10.56% and record tangible book value per share of $75.25. Metrics that underscore both the quality of our earnings and the prudence of our capital allocation strategy. Our disciplined capital allocation process remains focused solely on driving long-term shareholder value. We continue to bias capital towards franchise accretive client segments, evidenced by commercial loan growth of $1.1 billion or 10%. And interest-bearing deposits excluding brokered and indexed, increased $1.7 billion or 10% year over year. During periods of market dislocation in 2025, we opportunistically repurchased 2.2 million shares, or 4.9% of prior year shares outstanding, and approximately 114% of prior month tangible book value per share. Since 2020, we repurchased 14.6% of our starting shares outstanding at a weighted average price of $64.33 per share, while adding 340 basis points to our peer-leading tangible common equity to tangible assets ratio. These achievements demonstrate a fundamentally stronger business model, one positioned to deliver consistent, industry-leading returns and sustainable value creation for shareholders. Having established a strong foundation, our strategic focus now shifts to consistent execution and realizing the full potential of our investments. Our infrastructure, talent, and platforms are designed for scale, enabling us to handle significantly higher volumes and revenue while maintaining disciplined expense management. A defining driver of our improved profitability is the diversification and growth of our fee income streams. Fee income areas of focus generated $192 million in 2025, with substantial growth opportunity ahead. These businesses are differentiated in the market, capital efficient, and provide revenue stability across economic cycles. Focused investment in product capabilities, technology platforms, and talent will drive fee income as a percentage of total revenue higher, further enhancing our return profile and reducing earnings volatility. Transformation over the past several years has fundamentally repositioned Texas Capital as a scalable, high-performing franchise. This positions us in a new phase of consistent execution and compounding returns. The combination of balance sheet growth, operating leverage, and fee income expansion creates multiple paths to enhance profitability and sustainable shareholder value creation. Our focus is clear: execute with discipline, scale with intention, and deliver consistent superior returns. Our strategy, platform, talent, and momentum position us to achieve these objectives. Thank you for your continued interest in and support of Texas Capital. I'll turn it over to Matt for details on the financial results. Matt Scurlock: Thanks, Rob, and good morning. Starting on Slide five. Fourth quarter results capped a record year with broad-based improvements across all key metrics. Our increasingly durable business model, uniquely positioned to deliver high-quality client outcomes, is translating into sustainably strong financial performance that we knew was possible when this transformation began. For the second consecutive quarter, adjusted return on average assets exceeded our legacy 1.1% target, reaching 1.2% in Q4. The 2025 delivered 1.25% return on average assets, while full-year adjusted ROAA of 1.04% represents a 30 basis point improvement versus 2024. A testament to the strategic repositioning we've executed since September 2021. Over year quarterly revenue increased 15% to $327.5 million as a resilient net interest margin, strong fee generation, and improved expense productivity supported the second consecutive quarter of pre-provision net revenue at or near all-time highs. Full-year adjusted total revenue reached $1.26 billion, the highest in firm history, up 13% year over year. This reflects 14% growth in net interest income to $1.03 billion and 9% growth in adjusted fee-based revenue to $229 million, marking the third consecutive year of record fee income and underscoring the durability, diversification, and scale potential embedded in our current platform. Full-year adjusted noninterest expense increased modestly by 4% to $768.9 million, consistent with our full-year guidance, demonstrating our proven ability to effectively support investment and growth capabilities while delivering continued operating model improvements. Quarterly adjusted noninterest expense decreased 2% or $4.2 million to $186.4 million, benefiting from continued expense realignment and regular accrual adjustments that resulted in outperformance relative to the guide. Taken together, full-year adjusted PPNR increased $119 million or 32% to $489 million, a record high for the firm. This quarter's provision expense of $11 million resulted from $10.7 million of net charge-offs on a relatively flat linked quarter total loan balance. With our continued view of the uncertain macroeconomic environment, which remains decidedly more conservative than consensus expectations, full-year provision expense as a percentage of average LHI, excluding mortgage finance, came in at 31 basis points, the low end of our prior 2025 full-year guidance. Supported by year-over-year improvements in portfolio quality metrics. Adjusted net income to common at $94.6 million for the quarter or $2.8 per share increased 45% year over year, while full-year adjusted net income accounted for $313.8 million or $6.8 per share improved 53% over adjusted 2024 levels. This financial progress continues to be supported by a disciplined capital management program contributed to 13.4% year-over-year growth in tangible book value per share to $75.25, an all-time high for the firm. Our balance sheet metrics continue to reflect both operational strength and financial resilience, with ending period cash balances of 7% of total assets and cash and securities of 22%, in line with year-end targeted ratios. Focus routines on target client acquisition are delivering risk-appropriate and return-accretive loan portfolio expansion. The commercial loan balance is expanding $254 million or 8% annualized during the quarter. Total gross LHI increased $1.6 billion or 7% year over year to $24.1 billion, with growth driven predominantly by commercial loan balances, increased $1.1 billion or 10% year over year to $12.3 billion. As expected, real estate loans declined $31 million quarter over quarter, as payoffs and paydowns outpaced construction fundings and new term originations in the fourth quarter. The full-year average commercial real estate loan balances did increase modestly year over year. Our expectation is for commercial real estate payoffs to continue into 2026, with full-year average balances down approximately 10% year over year. Our portfolio composition remains weighted to conservatively leverage multifamily, further characterized by strong sponsorship and high-quality markets. Average mortgage finance loans increased 8% linked quarter to $5.9 billion, driven by strong industry demand, our clients' preference for our offerings, and what is an increasing holistic relationship. And modestly increasing dwell times. Average mortgage finance loans grew 12% for the full year, slightly outpacing guidance. Given unpredictability and rate expectations, we remain cautious on our outlook for average mortgage finance balances going into 2026. Estimates from professional forecasters suggest total market originations to increase by 16% to $2.3 trillion in 2026, compared to our internal estimates of approximately 15% increase in full-year average balances should the rate outlook remain intact. As we contemplate potentially higher volumes in the mortgage finance business, it is important to note the material changes in this offering over the previous few years. In addition to the significant credit risk and capital benefits of the approximately 59% of existing balances now in the well-discussed enhanced credit structures, over 75% of current mortgage warehouse clients are now open with our broker-dealer. Nearly all maintain treasury relationships with the firm, which collectively drives significantly improved risk-adjusted returns should the industry realize anticipated 2026 growth. Full-year deposit growth of $1.2 billion or 5% was driven predominantly by our continued ability to effectively leverage growth in core relationships, to serve the entirety of our clients' cash management needs, partially offset by our continued programmatic reduction in mortgage finance deposits. Trends are evidenced in part by our sustainability to effectively grow client interest-bearing deposits, which when excluding multiyear contraction and index deposits are up $1.7 billion or 10% year over year, while also effectively managing deposit betas, which are 67% cycle to date inclusive of the mid-December cut. The quarter, ending noninterest-bearing deposits excluding mortgage finance increased 8% or $233 million. Average noninterest-bearing deposits excluding mortgage finance remaining flat at 13% of total deposits linked quarter. Period-end mortgage finance noninterest-bearing deposit balances decreased $963 million quarter over quarter as escrow balances related to tax payments begin remittance in late November, and run through January, before beginning to predictably rebuild over the course of the year. For the quarter, average mortgage finance deposits were 85% of average mortgage finance loans, down from 90% in the prior quarter and 107% in Q4 of last year. We expect the mortgage finance self-funding ratio to remain near these levels in the first quarter, with potential for further improvement expected during the seasonally strong spring and summer months. The cost of interest-bearing deposits declined 29 basis points linked quarter to 3.47%, and 85 basis points from 2024. Accounting for realized beta on the December cut, we expect cumulative beta to be in the low seventies by the end of the first quarter assuming no Fed actions during Q1. Our model earnings at risk increased modestly this quarter, with current and prospective balance sheet positioning continuing to reflect the business model that is intentionally more resilient to changes in market rates. Despite short-term rates declining approximately 100 basis points during 2025, we delivered 14% full-year net interest income growth, 13% total revenue growth, and a 45 basis point year-over-year increase in net interest margin. This resilience is in part the result of disciplined duration management and acknowledge of our improved ability to deliver returns through cycle. During Q4, $250 million in swaps matured at a 3.4% receive rate. Replace this with $1 billion in receive fixed over swaps executed at 3.41%. Additional $400 million in swaps at a 3.32% received rate became effective early Q1. Looking ahead, we will continue disciplined use of our securities and swap book appropriately augment rates following generation, embedded in our current business model. Quarterly net interest margin declined nine basis points and net interest income decreased $4.3 million reflecting timing differences related to lower interest rates on our super weighted loan portfolio relative Fed fund driven deposit cost reductions realized in the quarter. The benefit of reduced deposit costs will be more fully reflected in January's financials. Year-over-year quarterly net interest margin expanded 45 basis points, driven primarily by favorable deposit betas and structural improvements in portfolio efficiency, including a reduction in our mortgage finance self-funding ratio from 107% to 85%. Fourth quarter adjusted noninterest expense increased 8% relative to the same quarter last year, primarily driven by higher salaries and benefits expense aligned with investment in our areas of focus. As a reminder, first quarter noninterest expense is expected to be elevated due to annual accrual resets and seasonal payroll and compensation expense. Full-year adjusted noninterest income grew 8% to $229 million, a record for the firm. Fee income from our areas of focus continues to differentiate our client positioning and strengthen our revenue profile. Treasury product fees again delivered industry-leading growth, increasing 24% for the full year. This growth reflects robust client acquisition and 12% gross P times V expansion, both significantly outpacing industry benchmarks and demonstrating our competitive advantage in getting the primary operating relationship with our target clients. Investment banking achieved substantial scale expansion, with transaction volumes across capital markets, capital solutions, and syndications climbing nearly 40% year over year. While average capital markets deal sizes contracted relative to 2024, this material increase in volume underscores our deepening market penetration and the expanding nature of relationships across the target client universe. Total notional bank capital arranged increased 20% this year, positioning us as the number two ranked arranger for traditional middle market loan syndications nationwide. This ranking reflects our market leadership and a core client segment. and ours. While highlighting our ability to provide client financing solutions that best fit both their balance sheet Texas Capital Securities delivered noteworthy traction as well. With 2025 volume increasing 45% year over year. Together, these results validate our focus on building diversified, scalable revenue streams while deepening our primary operating relationships with middle market and corporate clients. Total allowance for credit loss, including off-balance sheet reserves of $333 million, remains near our all-time high. Which when excluding the impact of mortgage finance allowance and related loan balances were relatively flat linked quarter, at 1.82% of total LHI. The top decile among the peer group. Net charge-offs for the quarter were $10.7 million or 18 basis points of LHI, related to several previously identified credits in the commercial portfolio. Positive grade migration trends over the first March of the year resulted in an 11% reduction year over year in criticized loans. During the fourth quarter, select commercial real estate multifamily credits migrated from past to special mention. These projects and lease up continue to require ongoing rental concessions to gain or maintain occupancy. Impacting net operating income in spite of material project specific equity and sponsorship support. Capital levels remain at or near the top of the industry. CET1 finished the quarter at 12.1% with full-year improvement 75 basis points, reflecting strong earnings generation, and disciplined capital management. Tangible common equity to tangible assets increased 58 basis points for the full year. A significant driver of capital strength is our mortgage finance enhanced credit structures. By quarter end, approximately 59% of the mortgage finance loan had migrated into these structures. Bringing the blended risk weighting to 57%. This improvement is equivalent to generating over $275 million of regulatory capital. With client dialogue suggesting an additional five to 10% of funded balances could migrate over the next two quarters. Further enhancing both credit positioning and return on allocated capital. During the quarter, we purchased approximately 1.4 million shares $125 million at a weighted average price of $86.76 per share. Representing a 117% of prior month's tangible book value. Full-year share repurchases totaled 2.25 million shares or $184 million, equivalent to 4.9% of prior year share outstanding. Finally, tangible common equity tangible assets finished at 10.6% ranked first amongst the largest banks in the country. While tangible book value per share increased 13.44% year over year to $75.25. The fifth consecutive record quarter for the firm. Looking ahead to 2026, our outlook reflects continued realized scale from multiyear platform investments. We anticipate total revenue growth in the mid to high single-digit range. Driven by industry-leading client adoption and continued growth in our fee income areas of focus. With full-year noninterest revenue expected to reach $265 to $290 million, anticipated noninterest expense growth in the mid-single digits reflects increased compensation expense tied to improved performance. Target expansion into fine client coverage areas, and platform investments meant to expand upon best-in-class client execution, further enhancing our operating resilience, supporting future enhancements to structural profitability. Given continued economic uncertainty and our commitment to operating from a position of financial resilience, we are moderating our full-year provision outlook to 35 to 40 basis points of average LHI excluding mortgage finance. Taken together, this outlook reflects another year of positive operating leverage and meaningful earnings growth. Operator, we'd like to now open the call for questions. Thank you. Operator: When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Woody Lay from KBW. Woody Lay: Good morning, Lucas. One wanted to start on the investment banking and trading outlook and specifically the investment banking pipeline, I believe in 2025, you know, deals kinda got pushed to year-end just given some of the tariff volatility over the first half of the year. So how does the pipeline look entering 2026? And how do you think about pacing of investment banking fees relative to the back half of the year? Rob Holmes: Woody. Let me just give you a little facts on the investment bank performance in '25. We arranged about $30 billion of debt across term loan B, high yield, and private placement. And then on top of that, about $19 billion in lead less indications in the bank market. So we ranged about $49 billion of debt for our clients, which is very impressive. Broad new client penetration and leadership in the segment. IB transaction volume was up about 40%. The fees were much more granular. So people like you and others would suggest that's a healthy, better earning stream. Equities, we participated in more transactions than we had forecasted. And even though some got pushed, and sales and trading is past $330 billion of notional trades since the opening of the business. That's up about 45% since last year. So there's broad growth. We're starting to see repeat refinancings. Remember, we just really got into this business in earnest, like, three years ago. And so now you're starting to see the repeat of a client that came onto the platform three years ago, which will add to the earnings going forward. I would say that what you are really focused on in terms of things that got pushed was more in the M&A space and equity space. And we are seeing, and we do expect to see that pull through and pipelines remain very healthy. But it's very broad now. Public finance, best we can tell our public finance desk has grown for a de novo public finance desk faster than any public finance desk that we can find. And the synergies in the investment bank across commercial banking and corporate banking is proved to be very, very strong. Like, just the example, stay on public finance. Have a government, not-for-profit segment in corporate. Well, before we had Pug Finance, all we could really do lend to them short term and do the treasury. And now we can lend to them short term. We can do the treasury. We can do financings for them as well in the public markets. So it's working as anticipated. And we remain very, very optimistic and proud of the business. Matt Scurlock: What did the fee income from treasury wealth and investment banking top? $50 million for the second consecutive quarter which when you compare that to the $47.4 million of total fees for the full year 2020 from those three categories, so it's just how much progress we've made since announcing the transformation. Full-year guide for noninterest income is to increase 15 to 25% to $265 million to $290 million which is underpinned by investment banking fees of $160 million to $175 million. And if you just think about Q1 outlook as for stable linked quarter performance. So total noninterest income is $60 million to $65 million investment banking $35 million to $40 million which to Rob's comment, expectation of continued platform maturity and integration all the hires and capabilities that we've built over the last twelve to eighteen months. Driving positive trajectory both in fee income and investment banking as we move through the year. Rob Holmes: And I would just add one more first. It didn't happen in the fourth quarter. It happened this quarter, Woody, but we did lead our first sole managed lead left equity deal. Which we think is a first for a Texas-based firm for any period that we've been went back and found. So, really, really excited about the business. Woody Lay: That's great to hear. That's really, great color. I appreciate that all. Next, I just wanted to hit on capital and a little bit of a two-part question. First, just you were pretty active on the buyback front in the fourth quarter. Was that a reflection of the elevated CRE paydowns freed up some capital? And then the second question is, you know, you reiterated the CET one guide of over 11%. You know, you've been price sensitive on the buyback. Historically, stocks now trading well above where you bought in the fourth quarter. How do you think about additional buybacks from here? Matt Scurlock: Yeah. We're pushing CET one up 75 basis points to 12.13% while growing loans $1.6 billion or 7%, buying back 5% of the company for 114% of prior month tangible, and billing tangible book value per share by 13.44%. We're obviously pretty pleased with how we utilize shareholders' capital for their benefit in 2025. We're highly focused on doing it again in '26. And to your point, I think we have a lot of options at our disposal. The published strategic objective of being financially resilient to market and rate cycles for us is a core is paramount. And while we think we have significant capital in excess of internally observers profile Rob said repeatedly that carrying sector-leading tangible common to tangible assets is a raw material contributor to our ability to attract the right type of clients. That's gonna benefit the shareholder over time and is an advantage that we're currently unwilling to give up. I would say as the profitability continues to improve, the resources available support items on the capital menu also expands. So if you're trading at 1.3 times tangible, take the 2026 and 2027. Consensus estimates for ROE buying back today suggests that you're purchasing it book value in two and a half years. Which could certainly make sense for us given our internal view of forward earnings trajectory and then an ability to generate both book equity and regulatory capital. Rob Holmes: I think also what if we could to really focus well, I think humbly, we proved it pretty good allocators of capital over these over the past several years. With that Matt just outlined. But we also continue to drive structural improvements in the platform. So if you remember, we talked about the SPEs structure and mortgage finance. We have the majority of our mortgage finance sector clients in that structure now. 77% or over 70% of those clients are open with the dealer. We do treasury with basically a 100% of those clients. But when you move those clients, the sophisticated best of class clients to the SPE structure, you go from the risk weighting of a 100% down to sub 30% now on average, which clearly is a better model and releases capital. And, we're not gonna we'll forever try to drive efficiencies both in cost, but also capital in the businesses that we have to firm. Woody Lay: Alright. That's all for me. Thanks for taking my questions. Thanks. Operator: Thank you. Our next question comes from Michael Rose from Raymond James. Michael, your line is now open. Please go ahead. Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Maybe just on the expense outlook. I think you mentioned, obviously, some wage inflation clearly and some hiring efforts. Can you just talk about some of the areas where you're looking to kind of incrementally add? Is it on the lender front? Has it continued to build out the capital markets platform to is it all of the above? Just trying to get a better breakdown of how we should think about that mid-single-digit expense guidance as we move forward. Matt Scurlock: You bet, Michael. We are highly focused on leveraging the material previous material investments that we've made by expanding capabilities and adding targeted coverage with the 2026 expense guide continue to heavily feature growth in salaries and benefits with select increase in technology. We now have a, we think, a multiyear pattern of effectively improving the productivity of the expense base through the deployment of technology solutions which we anticipate is only gonna accelerate as we more fully adopt AI across the franchise. I would call out this expected seasonality in the expense base, which will increase at a higher percentage this year just given the larger portion of total salaries and benefits that's currently tied to stop. So the current guide does anticipate Q1 noninterest expense between $210 million and $215 million with about $18 million of seasonal comp and benefits, the expense and then another $10 million from the combination of incentive comp reset late quarter merit increases and full quarter impact of late year hires. As you exit Q1, we think about salaries and benefits around $105 million a quarter and then other noninterest expense in that $75 million or so a quarter range. And then importantly, the mid-single-digit expense guide is sufficient to cover the current revenue expectations and the composition inclusive of the fee growth. Do you wanna add on that, Rob? Rob Holmes: I guess the only thing the last thing I would say as we as we change the mix of investment, to a higher mix front office, in terms of expense mix with salaries and benefits. That's been a long journey. We continue to do that. But the revenue synergy today that we get from an incremental front office hire, is dramatically more. So remember, you know, Matt talked about this a lot, Michael. We talked about it with you a lot. When we're building these businesses, we had to build the back, the middle, and front office. The back and middle are substantially complete as we discussed a lot. So we add somebody to the front line the return on that hire is much greater. Which is reflected in everything that Matt said. Michael Rose: Great. I appreciate the color. Maybe just as my follow-up. Can you just talk about the opportunities? I know you're not going want to talk about loan growth figures per se, but high single-digit commercial loan growth, CRE down a little bit. There's obviously been some market some mergers in and around your markets. Can you just talk about and then you obviously have hired a lot of lenders, right, as you've kind of upgraded the staff. Is there any reason to think that the loan growth LHI momentum again, I'm not asking for a target. But that wouldn't continue against kind of a more, in theory, favorable backdrop some of the, momentum that you have just on the hiring front that you've made already then just a more conducive loan market? Thanks. Matt Scurlock: Mike, I think a lot of the trends that you seen in the 2025 should really continue into 'twenty six with strong C and I and more finance growth offsetting contracting commercial real estate balances. So that we noted in the prepared remarks, the guide contemplates a $2.3 trillion mortgage origination market, which sits on top of a 6.3% thirty-year fixed-rate mortgage. Which for us would drive about a 15% increase in full-year average mortgage finance balances. As Rob just noted, it's obviously a completely different mortgage finance offering than the legacy warehouse we've had at TCPI. 59% of these loans are in the enhanced credit structure, which have the average risk weighting of 28%. 80% of these clients are both the dealer, nearly all of them take advantage of our treasury products. We which suggested any realized pickup in one to four family originations is gonna generate significantly higher and more diversified per unit risk-adjusted return for us this year. We also think we'll have another record year of client acquisition in the C and I focused offerings, which should be enough to offset continued balance reductions in CRE, which in our view should be pretty expected given multiyear pullback in originations really across all property types. I think all those things together, Michael, would support another year of mid to high single-digit growth in gross LHI. Rob Holmes: Yeah. And, Michael, there the reason I said you know, when we first started, I said loan growth doesn't matter. Was is because we knew loan growth would come if we had the right clients left in. And we also knew that I mean, like like we just talked about, we ranged you know, $30 billion of term loan B high yield and private placement debt for clients that wasn't bank debt, which helped the client and was a great risk management tool for us. And then also, as as we mentioned, we're number two in the country in middle market, lead left bank syndication leads. Well, there's a lot of banks out there that would just kept that exposure. Which we don't think is the right decision for the client, but it's certainly not the right decision for us from a risk management perspective. So we're not trying to maximize loan growth. We're trying to provide the clients with the right solutions and keep really good credit discipline. And have a great client outcome. So that's why we said what we said before. Loan growth does matter. But it's going to come. In spite of our prudent risk management because of our client acquisition and client selection. Matt Scurlock: Another way just to think about that client acquisition Michael, is mean, commitments for us in the C and I space. Linked quarter, we're up over 25%. So we continue to drive low double-digit growth in C and I balances and our last quarter, think we grew commitments 18, but we grew commitments percent year over year and again those are up to 25% linked quarter. A lot of client activity showing up on platform. Michael Rose: Okay. So a lot of momentum, to continue. Thanks for all the color, guys. Appreciate. Rob Holmes: Sure. Operator: Thank you. Our next question is from Casey Haire from Autonomous Research. Your line is now open. Please go ahead. Jackson Singleton: Hi. Good morning. This is Jackson Singleton on for Casey Hare. I was wondering if you could just provide some more color into recent credit trends and maybe help us kinda understand what factors drove the increased in the provision guide year over year? Matt Scurlock: Yeah. We did experience modest linked quarter increase in special mention loans, which as we noted in the comments was tied exclusively to a handful of multifamily properties. That are experiencing net income net operating income pressure just given required rental concessions to maintain target occupancy levels? These are extremely high-quality sponsors that are in historically strong Texas markets, which we think over time are gonna benefit from the limited new supply and increased level of absorption. I would say, importantly, the ratio of criticized loans to LHI as we exited the year marked the best level since 2021. With really strong credit metrics generally across all categories. We've had a 35 to 40 basis point guide, years ago, moved it to 30 to 35 basis points this year, came in obviously at the low end of the guide and we're certainly a group that wants to operate from a position of financial resilience to felt it prudent to move to 35 to 40, again, consistent with things we've done in the recent past. Jackson Singleton: Got it. Okay. Thank you for that. And then just for my follow-up, just a NIM question. Can you help us think about the drivers for 1Q and then maybe any sort of range you could help for our modeling? Matt Scurlock: Yeah. I think two fifty to two fifty five for one q on NII. Flattish margins, so somewhere in the mid threes. That's with one month average SOFR down about 27 basis points. If you think about the mortgage finance business in Q1, stay at the 85% self-funding ratio on $4.8 billion average balance. Again, with 27 basis point reduction in average one month SOFR quarter over quarter, that should push the yield on the mortgage finance business down to three eighty five or three ninety or so. So those are probably the factors that I would incorporate. The other comment that I'd make is we're 67% recycled beta inclusive of the December cut. Once all those pricing actions are passed through the deposit base, you're somewhere in the low seventies, probably by the end of January. For the full-year outlook, we've been pretty noting our expectation that straight deposit betas were going to moderate. So any incremental cuts in '26 the guide would incorporate a 60% interest-bearing deposit paid up. Which is obviously also what we'd now have in our earnings at risk down 100 scenarios. Jackson Singleton: Got it. Okay. Great. Thanks for taking my questions. Matt Scurlock: You bet. Thank you. Operator: Our next question is from Anthony Elian from JPMorgan. Anthony Elian: Hey. Hey, Matt. On mortgage finance, I'm curious what specifically drove the sequential increase in 4Q average balances. Was there any pickup in refi activity in, in that business? Matt Scurlock: Rates were lower than had incorporated in the Outlook, which it did drive a pickup in aggregate originations in inclusive of refi. Then you had slightly slightly longer dwell times as well, Tony, which supported those average balances. Anthony Elian: Okay. And then my follow-up on credit, can you give us more color on what drove the increase in special mention? Know you called out the multifamily credits, but why did this surface now? And do you expect some sort of resolution on those credits? Thank you. Matt Scurlock: Yeah. You bet. So it's a $100 million. We $205 million $250 million, excuse me, of special mission commercial real estate on a 5 and a half billion dollar portfolio. That we've experienced, I wanna say, $5 million of charge-offs on in the last thirty-six months. So we like to be proactive in communicating with you guys any potential downgrades or realized downgrades and as I noted in the previous question, simply a handful of Central Texas based multifamily properties where you had significant new product come online. That the market is working to absorb. Many of these properties offer rental concessions to bring folks into the apartment complex and they had to those for another year longer than they originally anticipated. We grade based on cash flow, Tony, not appraised value. Which is why we sometimes have more sensitivity and downgrades than peers. So that rental concession is pressuring their net operating income and resulted in us moving it to special mention. So we feel very well reserved against these properties. They're clients that we do a lot of business with. Well structured with significant equity. There's no, in our view, pending wave. So if you look further upstream in the credit, scale or the credit grades, watch list was essentially flat. So there's nothing sitting behind this other than these properties that we've identified. Rob Holmes: I would say just to say, I think Matt three years ago, was ahead of all the bank peers pointing out that we were gonna have a small wave of provision increase in commercial real estate for a number of factors but we didn't we did not anticipate any real credit problems. We had worked through them. And that's exactly what happened, and I think this is very akin to that. Just to add what Matt said, I mean, we're in the top decile of firms since we started in and reserves added. And we're at an all-time high of reserves in the history of the firm at 1.82% excluding mortgage finance. So just think the percentages are high because the numbers are so small. Anthony Elian: Great. Thank you. Operator: Thank you. Our next question comes from Janet Lee from TD Cowen. Line is now open, Janet. Please go ahead. Janet Lee: Good morning. For to clarify, on NIM, so mid three thirty range for '26. If I were to think about the direction of travel for NIM beyond that point, can you sustain flattish NIM from there given mean despite rates coming down, a potential improvement in self mortgage self-funding ratio. I guess that would looks like you know, considering your $265 to $290 million fee income range for '26. Your NII could be, you know, very low single-digit growth to almost mid-single-digit growth there depending on where that lands. So I wanted to get some color. Matt Scurlock: Yeah. I think given some pretty good detail on expectations for deposit repricing, self-funding, the only component of the liability base we haven't described as expectations commercial noninterest bearing. Which we continue to experience and anticipate record new client acquisition with a lot of those economics showing up in treasury product fees. Which we've grown over 20% for multiple quarters now and delivered north of 10% growth in p times v for the last five years. We think about their contribution to overall deposit balance portfolio mix to stay around that 13% level. So, obviously, deposits are going to grow, commercial NIV will grow, but their percentage stay relatively static. Given some good hopefully, some good insights into how we think about the loan portfolio. We'll continue to invest cash flows from the securities book. We added about a billion 1 of securities last year at five and a half percent sold almost $300 million at 3%. So nice sequential picture of 80 basis points of improvement and the securities portfolio yields a nice sequential impact. To margin there. The hedge book today should cost us about $10 million pretax NII. In 2026. We are a little higher than we traditionally wanted to operate. On earnings at risk in a down one hundred. So you will see us selectively add to the swap book moving through 2026. We're much more active. The spread obviously changes. Depending on the curve, but we're much more active today. When we see the negative spread between two-year and one month. So for inside of 30 basis points, which as of yesterday, we were sitting there. So you'll see us add some swaps. I think all that together should give you a pretty good sense for how we're thinking about margin moving into 2026. And then just to reiterate, perhaps counterintuitively, all the all the work that we've done as a firm to reduce our reliance on margin NII as a sole contributor to earnings is perhaps again counterintuitively actually really supporting NII and margin because we're relevant to these clients across a wide range of products and services. They're generally less price sensitive. And then just the final comment there, Janet, I mean, we've shown an ability to deliver increasing net interest revenue and PPNR in a wide range of interest rate environments. Including delivering 14% increase in NII, 13% increase in revenue, and 32% increase in PPNR, with rates on average down 100 basis points this year relative to last year. Rob Holmes: Only thing I'd to reiterate is what Matt said at the end, because I think it's I just wanna make sure everybody got it. I think it's it's a key to the strategy. The clients are less price sensitive on rate when you're adding value a lot of different ways and you're relevant to your client with quality client coverage and proactive ideas and execution on other fronts. Become much less price oriented on deposits. So just wanna make sure like, I think all the lines of business are contributing to that improvement in them. Janet Lee: Got it. And just one follow-up for me. Appreciate the comments around commercial real estate payoffs and balances coming down 10% year over year. That commentary seems somewhat different from most of the banks that are beginning to see CRE balances inflecting or stabilizing. Is it just a function of your appetite to not grow CRE originate CRE loans as much or your CRE is more tilted towards construction? How what is the underlying factor there? Matt Scurlock: Honestly, Jan, we're somewhat perplexed by that industry trend. I mean, volumes have been at historic lows for multiple years. There's a lot of capital in the space. And by the space, meaning financial services where folks are looking to deploy into loan growth. As a primary way to drive earnings. That obviously is gonna push down spread on high-quality transactions, which is a shop that's really focused on through cycle return on equity with the right clients. We have no desire to go chase lower spread. So our view is that it's just gonna take a couple of years for the market to chew through the supply that's coming online. And ultimately to correct and see new originations maybe in 2728. We do not anticipate growth in commercial real estate this year, again, not a byproduct of us devoting less focus, intensity, or resource into space, but mostly just because of the market dynamic where there's just not product coming online. Rob Holmes: Also, I think it's an indicator of a very healthy commercial real estate portfolio with regularly scheduled payoffs. Janet Lee: Got it. Thank you. Operator: Thank you. Our next question comes from Matt Olney from Stephens. Matt Olney: Hey, thanks. Good morning. Question for Rob. Since you achieved and exceeded those legacy ROAA targets in 2025, I heard you mention the focus now becomes recognizing the full potential of the recent investment. So we'd love to appreciate what this full potential at full scale look like as far as the operating metrics at the bank longer term. Thanks. Rob Holmes: Matt, great question. Obviously, we're not gonna give multiyear guidance. I'll tell you that the platform is the synergy of the platform the talent we've been able to recruit, the talent we've been able to maintain, the pipelines, and the platforms even working in a better coordinated synergistic way than even I could have hoped for. Supported by a really good investment and historical technology improved operating efficiency, improved operating risk and controls, which I you know, and we talked about the credit portfolio and the discernment there. I feel really, really good about the future. And, we're very optimistic. We look. We've got a lot we got a lot to do. What I would say is the theme of this year is execute and scale. We've got we just gotta execute. We've got all the parts and services we need. We've got the majority of the banker roles filled that we need. We just need to execute. There is so much investment that hasn't reached scale in the platform. But if we could beat these profitability levels, with that investment already in the platform, which is proven will work, with record client acquisition every year. We just gotta execute and scale. That's it. Which really derisks totally derisks the investment thesis. Matt Olney: Okay. Appreciate the, the color, Rob. And then as a follow-up, going back to the capital discussion, we've already talked about the buyback and the enhanced credit structure. It does look like on capital, you have a few instruments that either mature or become callable here. Pretty quickly. So we'd love to get your know, preliminary thoughts around these instruments and any any plans you may have as far as some of these debt instruments? Thanks. Matt Scurlock: Thanks, Matt. We've got a ton of optionality in the capital base and we'll look to behave accordingly in Q1 when some of these instruments become callable. Matt Olney: Okay. Appreciate it. Thanks. Matt Scurlock: Thanks, Matt. Operator: Our next question comes from Jon Arfstrom from RBC. Jon Arfstrom: Thanks. Good morning. Rob Holmes: Good morning, John. Jon Arfstrom: Hey. Rob, just to follow-up on Olney's question. You'd use the term subscale on some of your businesses. What are the top few areas where you feel like you're the most subscale, where you've already made the investments, where are the opportunities? Rob Holmes: Seven trading, equity, public finance, treasury, I don't think any of our businesses are at scale yet. Like, not one. Mean, business banking is not at scale. So you know, we're this is just the prefaces of what this firm can do. Matt's gonna get mad at me and we hang up because he's gonna say I was too optimistic, but there's literally not a business approaching scale. You know, we've done our first lead left equity deal. We have one of the best equity teams on this platform. If you look at their historical body of work. Our public finance team I'm super proud of. Our sales and trading like, it I could keep I'm gonna get in trouble also because I didn't name everybody. I don't know of a sub business on the platform that's at scale. Which I think is great. And then we've proven to be we're really improving our operating risk and we're really improving our ability to syndicate risk you know, being number two in the country, We're not we don't need to we're in the risk business, but we don't need to take risk and hit returns. Like a lot of pure banks need to do. Jon Arfstrom: Okay to turn the heat up on that a little bit. That's okay. The other thing I wanted to ask about it's kind of a related, but you you guys have this relationship management return hurdle exercise. And I know it's been around for a while, but as the business has evolved and you we just said things were immature, but as the business has matured, how was that evolved and how has that allowed you to maybe keep clients around with less of an ask than maybe you did two or three years ago? Rob Holmes: Yeah. It's thank you, John. It's I think it's it's evolved to being from an exercise to being part of our culture. So when we commit capital for a client, it's the relationship management exercise you talked about is balance sheet committee. The heads with LLPs are on that. The head of risk are on that. Madison's at a lot. Remember, everybody every LOB is fighting for the same amount of finite capital. And so if they're gonna vote to deploy that capital, it's then it's good for the farm, and we have the right current ROE for loan only, but also for the relationship as a whole. Both in a downgrade scenario with the credit, and when you do that, you have other lines of business signing up to support that client. So over 90% of the loans we've done since we started have other lines of other business tied to it when we onboard it. Treasury is probably the most, about 90%. But you have private wealth signing up to do business with them or private banking. And then if you have a banker leave or something, which every bank does, people retire or what have you, you have like, four or five touch points with that client. So the client's been institutionalized. It's not a banker relationship. It's an institutional relationship. So which I think makes the client much more valuable in the current state and a go-forward state to the firm. And we're bringing more value to the client, so it's a win-win. Jon Arfstrom: Okay. Thank you very much, guys. Rob Holmes: Thank you. Operator: Currently have no further questions, and I would like to hand back to Rob Holmes for any closing remarks. Rob Holmes: I just wanna thank all the employees of Texas Capital for another very solid quarter. I look forward to a great '26. Thanks, everyone. Operator: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Second Quarter Fiscal Year 2026 Earnings Conference Call. Today's call is being recorded. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions and instructions will be given at that time. If you should need any assistance during this call, please press 0, and someone will help you. At this time, I would like to turn the conference call over to George Price, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir. George Price: Thanks, Rob, and good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI International. Thanks for joining us this morning. We're providing presentation slides, so let's move to slide two. There will be statements in this call that do not address historical fact and as such constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night's press release and are described in the company's filings. Our safe harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include a discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's go to slide three, please. To open our discussion this morning, here's John Mengucci, President and Chief Executive Officer of CACI International. John? John Mengucci: Thanks, George, and good morning, everyone. Thank you for joining us to discuss our second quarter fiscal year 2026 results as well as our updated fiscal 2026 guidance. With me this morning is Jeff McLaughlin, our Chief Financial Officer. Slide four, please. I'd like to start the call by reiterating our strategy, why CACI is a company that no longer fits within traditional industry labels, and how we are expanding the limits of national security. You've heard us say many times that strategy is a place we come from. Our strategy defines where we are going, what we are building, and how we are executing with discipline and consistency. We serve seven markets. We possess decades of mission knowledge so we truly understand what our customers need. Within these markets, we focus on enduring national security priorities with narrow deep funding streams. We differentiate ourselves by delivering software-defined technology to address critical needs with the speed, agility, and efficiency our customers demand. We invest ahead of customer needs, showing them the art of the possible, exactly what the current administration is asking for. We've been doing this for years. The market is coming to where we already are. Through deliberate actions, informed investments, and flexible and opportunistic capital deployment, we have expanded our technology portfolio to nearly 60% of total revenue. Over the long term, expect technology to continue to increase as a percentage of revenue and support margin expansion. I will share some additional information about two areas of our technology portfolio later in my remarks. Our results and accomplishments clearly demonstrate that CACI is not the company we were ten years or even five years ago. We are continuing to evolve. That's why you see us competing and winning against a wider range of competitors, including defense primes and defense tech companies. It's why we're delivering consistent financial performance despite a dynamic and sometimes uncertain environment. And it's why we are confident we will continue to drive long-term shareholder value. Slide five, please. Speaking of performance, our strong second quarter results are another example of the success of our strategy and execution. We delivered free cash flow of $138 million, driven by revenue growth of 6%, and an EBITDA margin of 11.8%. We won $1.4 billion of awards, representing a book-to-bill of 0.65 times for the quarter, 1.4 times for the first half, and 1.3 times on a trailing twelve-month basis. As a result of our strong first-half performance, increased visibility, and the continued momentum of the business, we are raising our fiscal 2026 guidance. Slide six, please. Within technology, we have built a leading position in electronic warfare, which alone represents about $2 billion in revenue. We have also established CACI as an industry leader in agile software development and software modernization, part of our enterprise technology portfolio. And we recently announced a fantastic acquisition, ARCA, which represents the latest step in our technology-driven portfolio evolution and the execution of our space market strategy. These are all areas of significant and enduring investment by our customers, which support long-term growth for CACI. I'll spend some time talking about EW and enterprise technology. Our software-defined capabilities in electronic warfare illustrate how our strategy and technology-driven evolution are driving our performance. It's a critical warfighting domain and an area where we position CACI as a leader by investing ahead of need and delivering differentiated software-defined technology. We've known for years that virtually everything with a power button emits a signal. And today, we are seeing the significance of this in conflicts around the globe and how it's impacting our customers' priorities and their budgets. We've developed and deployed proven technology that allows warfighters to sense, identify, locate, and defeat these signals. Whether through targeted non-kinetic effects or by tipping and queuing other systems for kinetic ones. Our software-defined approach provides increased speed, flexibility, lethality, and the ability to adapt as threats evolve. Exactly what's needed on the battlefields abroad and in defense of the homeland. We won a number of programs of record with the Army and the Navy, rapidly developing, delivering, and fielding our EW technology. And based on that success, we see growing demand for other services, including the Air Force. An important benefit of our software-defined approach to EW is our ability to quickly adapt to new mission requirements, accelerate delivery of new capabilities, and sell commercially to alternative acquisition models such as OTAs. We previously highlighted Merlin and RMT, our latest counter-UAS and counter-space systems, as two examples of this concept. And customers are responding positively to these proactive investments, deploying a Merlin demo unit to the southern border, and placing the first production order for RMT. We've been saying for years that software would be the enabler of greater speed, agility, efficiency, and lethality, and we are proving it by rapidly addressing an expanding set of missions. This is a repeatable process. These successes are a clear validation of our strategy and differentiation. And they position us well for additional opportunities and growth in the coming years. Slide seven, please. Enterprise technology is another area where CACI is strategically positioned well ahead of market demand. The current administration has made modernization a clear priority to drive efficiency, transparency, and operational improvement as well as enhanced security. We've been focused on this for many years, investing in commercial agile software development methodologies and building differentiated capabilities that are driving measurable results and significant value for our customers. That's why we've won the three largest agile software development programs in the federal government. A great example is our work with Customs and Border Protection. We're not just modernizing software. We're delivering transformational efficiency. Nearly 200% increase in software releases over the last five years, like-for-like cost reduction, and exceptional software quality. We're also bringing new AI software capabilities to CBP to help secure our borders, including AI-based object tracking technology that we initially developed for the intelligence community. This cross-pollination of innovation is a direct result of our strategic focus and investment approach. Slide eight, please. We continue to see a constructive macro environment and good demand signals from our customers. While post-shutdown activity is still a bit uneven in the near term, our strategy has positioned CACI exceptionally well to outperform in this environment. As you know, 90% of our revenue comes from national security customers, and we are seeing reconciliation funds starting to flow to several areas of our business. As a result of our strong performance and continued business momentum, we are raising our fiscal year 2026 guidance. We now expect free cash flow of at least $725 million, revenue growth of nearly 8% to 10%, and an EBITDA margin in the 11.7% to 11.8% range. Finally, looking at our three-year financial targets, we expect to exceed the $1.6 billion free cash flow target even after normalizing for the benefit from the changes to R&D capitalization from the one big beautiful bill. As for our revenue and EBITDA margin targets, we are highly confident in our ability to hit the high end if not exceed them. And I should note that none of our projections include any benefit from our planned acquisition of Arca. With that, I'll turn the call over to Jeff. Jeffrey MacLauchlan: Thank you, John, and good morning, everyone. Please turn to Slide nine. As John mentioned, we're pleased with our second quarter performance despite the lengthy government shutdown. Our revenue and awards generally reflect the modest shutdown disruption we expected, while our strong margin and cash flow highlight the enduring differentiated elements of our business enabled by our strategy and the deliberate actions that we've taken. In the second quarter, we generated revenue of $2.2 billion, representing 5.7% year-over-year growth, of which 4.5% was organic. While we saw some lingering impacts from the shutdown that impacted program timing and delayed some government material purchases in Q2, our confidence in raising our fiscal '26 guidance reinforced the broader strength that we're seeing. EBITDA margin of 11.8% in the quarter represents a year-over-year increase of 70 basis points. This performance was driven primarily by strong program execution, timing of some higher-margin software-defined technology deliveries, and overall mix. Second quarter adjusted diluted earnings per share of $6.81 were 14% higher than a year ago. Greater operating income along with a lower share count more than offset higher interest expense and a higher income tax provision. Finally, free cash flow was $138 million for the quarter, driven by our strong profitability and increasing cash generation from working capital management. Day sales outstanding or DSO were fifty-seven days. Slide 10, please. Our leverage at the end of Q2 is 2.4 times net debt to trailing twelve-month EBITDA. We intentionally allowed leverage to drift slightly below our target range in anticipation of the acquisition of Arca. As we announced in the call a month ago, we expect leverage to increase to 4.3 times once the acquisition closes. I'll remind you, though, as I did on that call, that we have a strong track record of successfully quickly delevering after major acquisitions. Which is illustrated by our historical leverage we provide in the appendix. This underscores our consistent financial performance, disciplined approach to capital deployment, and our demonstrated access to capital. In fact, we expect leverage to return to the low threes within six quarters of closing ARCA. Based on the strong cash flow characteristics of the combined business. The acquisition of ARPA is just the latest example of our flexible and opportunistic capital deployment strategy and the evolution of our technology portfolio. Which position CACI to deliver long-term growth and free cash flow per share and additional shareholder value. Slide 11, please. We're pleased to be increasing our fiscal twenty-six guidance across all metrics. We now expect revenue to be between $9.3 billion and $9.5 billion. This represents total growth of 7.8% to 10.1%, which includes slightly less than two points of growth from acquisitions. We're increasing our fiscal twenty-six EBITDA margin to be in the 11.7% to 11.8% range. Underscoring our strong execution and continued evolving portfolio. As a result of our higher revenue and EBITDA margin outlook, we are also increasing our FY 'twenty-six adjusted net income guidance to be between $630 million and $645 million. This yields an attendant increase in adjusted EPS to between $28.25 and $28.92 per share, representing growth of 7% to 9% despite last year's unusually low tax rate. And finally, we're increasing our free cash flow guidance to at least $725 million. As we consistently say, we see free cash flow per share as the ultimate value creation metric. Our FY '26 guidance now implies a 65% growth in free cash flow per share. To assist you with your modeling, I'll note that for Q3 revenue, we're comfortable with the current consensus estimate. And we expect second-half EBITDA margin to be consistent with what we saw in the first half. As John mentioned, our guidance does not include any assumptions for 12, please. Turning to forward indicators, all metrics provide good long-term visibility into the strength of our business. Our second-quarter book-to-bill of 0.65 times and our trailing twelve-month book-to-bill of 1.3 times reflect good performance in the marketplace, even with the protracted government shutdown and slow rebound in award decisions. The weighted average duration of our awards in Q2 was over six years. Our backlog of $33 billion increased 3% from a year ago, and our funded backlog increased 7% for the same period. For fiscal year twenty-six, we now expect 95% of our revenue to come from existing programs, with 3% coming from recompetes and 2% from new business. Progress on these metrics reflects our successful business development and operational performance and yields confidence in our higher expectations for the year. In terms of pipeline, we have $6 billion of bids under evaluation. Over 70% of which are for new business to CACI. We expect to submit another $20 billion in bids over the next two quarters, with over 70% of those being for new business. In summary, we delivered strong results in the second quarter and continue to demonstrate our differentiated position in the marketplace. We are winning and executing high-value enduring work that supports long-term growth, increased free cash flow per share, and additional shareholder value. And with that, I'll turn the call back over to Jonathan. John Mengucci: Thank you, Jeff. Let's go to Slide 13, please. In closing, I want to emphasize that our continued strong results are not by accident, but rather the direct results of our deliberate strategy execution. We built CACI to be resilient and differentiated, delivering strong performance despite the sometimes challenging macro dynamics. That's what happens when you focus on expanding the limits of national security. For us, this isn't just a phrase. It describes our relentless focus on anticipating tomorrow's challenges, in developing solutions to stay ahead of our customers' needs, not just meet them. What truly differentiates CACI is our ability to shape the future rather than simply respond to it. We don't wait for RFPs. We proactively show our customers what's possible through strategic investments and innovation. This approach allows us to be disciplined in our shop selection, shaping opportunities where we know we can win. As we look ahead, we remain confident in our ability to execute our strategy and deliver on our financial commitments. The momentum of our business, our healthy pipeline, and our strong first-half performance enable us to raise our fiscal 2026 guidance across all metrics. And with the pending addition of ARCA, we're further enhancing our position in a critical space domain that will drive additional growth and shareholder value. As is always the case, our success is driven by our 26,000 employees who are ever vigilant in expanding the limits of national security. To everyone on the CACI team, I'm extremely proud of what you do every day for our company and our nation. And to shareholders, I thank you for your continued support of CACI. For that, Rob, let's open the call for questions. Operator: Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, simply press 1 again. We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Gavin Parsons from UBS. Your line is open. Gavin Parsons: Good morning, You have Maximo on line. John Mengucci: Ah, good morning. Gavin Parsons: Yeah. So in light of recent developments around the world, I wanted to ask at a higher level what higher US military op tempo means for CACI specifically? And how that changes the opportunity set in front of you. John Mengucci: Yeah. Thanks. Terrific opening question. Look. Today's op tempo is extremely good for CACI because it requires much of what traditional companies, frankly, don't traditionally do. Our customers are demanding mission technology at the speed of mission. So we can talk about Exquisite EW, differentiating rogue drones from friendly ones and mitigating risk. I like to say welcome to EW. Enemy changes their tactics and their technological footprint, welcome to EW. Getting 20 helos in and out of a country without any issue, welcome to EW. We, frankly, do EW better and more strategically and more surgically than anyone. So what does the AppTempo demand? A few things. One would be resiliency. I look at our solutions. They're software-defined. They share a common baseline with a multitude of other sensors. What that really means is when one sensor anywhere detects a new signal, all of its features and how to mitigate that signal is sent across a broad network of already deployed sensors. The out combo demand speed We've been really clear that we build enhancements and mitigations almost instantaneously. It demands optionality. So whether you're looking at handhelds, backpack, mobile, fixed, short-range, long-range solutions, they all come with a common software baseline. And what the customer absolutely demands is it has to have some type of optionality that allows them to acquire commercially under FAR part 12. So to us, think of Optempo, quick response, build in delivery, provide your customers your best tech, provides investors with increased shareholder value, commercial terms, commercial investment model, commercial margins. You know, at the end of the day, we're doing a lot of what commercial companies do. And we deliver EBITDA as well. Great. Gavin Parsons: Thank you very much. And then it looks like the pipeline of submitted bids remains a little low. Exiting the quarter, but that you know, the expected bid number filled up pretty nicely in the quarter. Can you talk a little bit about how you're expecting things to flow through that pipeline and what the cadence of conversion might look like as we move through the rest of the year? John Mengucci: Yeah. You're connecting those dots the same way we do, Gavin. The you know, one of the implications of the protracted shutdown that is a little less obvious. You could see the awards obviously, but what you can't see is sort of the slower level of activity in ramping back up. And I think the length of the shutdown combined with the ending of it leading into the holidays put some amount of acquisition processes sort of behind the curve. We do see that filling back up. We feel that, getting back on pace and we you know, and that's visible, I think, in the pipeline. You see what we plan to submit over the next hundred and eighty days. We obviously, for competitive reasons, aren't gonna comment on any particular opportunities or, you know, or make any predictions about win rate or anything like that. But you can look at our historical performance on those metrics that we provide regularly on a consistent basis over a number of years, and you can draw your own conclusions from that. Gavin Parsons: Great. Thank you all. Operator: Thanks. You bet. Your next question comes from the line of Peter Arment from Baird. Your line is open. Peter Arment: Yeah. Good morning, John and Jeff, George. Nice results. John Mengucci: Hey. Thanks. Peter Arment: John, could you maybe give us an update? You recently had a protest that you won. I think it was last Friday. It was a big award that you won in August. Maybe how should we think about kind of the timing of that and just maybe any color you wanna give around the protest? Thanks. John Mengucci: Yeah. Sure. So as you mentioned, the JTMS protest was virtually denied last week. So we are in the process of starting to ramp up on that program. We've already had very detailed meetings with our customer during the protest period. You would imagine we were ready for go as soon as this was announced. It is a longer-term technology program, so that's gonna wrap up over an extended period of time. So I think it'd be more of a benefit to growth in 2728, but you would clearly given the timing of the protest decision, that's gonna help us drive our fourth-quarter revenue number which I know you'll all be watching. You know, it's a ten-year, $1.6 billion job. It's gonna be task order based. And that's which is very, very standard. And, look, we're extremely pleased. We're gonna take the off-the-shelf software platform. We're gonna use SAP. Which is a strong OEM. We're gonna take fast-paced solutions. We're gonna use our agile software, our agile solution factory. And our agile software development processes and I would expect, Peter, the JATMS is gonna consolidate a large number of disparate legacy systems, which falls directly in line with some of the EOs that we've read. And we have a couple of other protests out there, still. We're looking for them to resolve by the end of this month, and we'll be sure to advise all of our investors in that effort. Peter Arment: That's great color. Thanks, John. And just as a quick follow-up, you talked about reconciliation funding starting to flow. Could you just maybe and then there's been a lot of activity behind the scenes on Golden Dome. How do you see that kind of impacting, as you think about, you know, the second half of this year, but also the setup for '27. Thanks, John. John Mengucci: Yeah. Thanks, Peter. Look. We're we have our eyes on ride reconciliation funding, and I know there was a lot of talk. You know, is that gonna be early in '26, like, in '26? Is it total into '27? I think at the end of the day, the answer is yes to all three. You know, for us, we're seeing border security programs being positively impacted, by seeing reconciliation funds starting. I did share something in my prepared remarks about taking some intel AI-based technology. That was a, you know, quote, unquote, plus up using record reconciliation. Funds. You're gonna see a lot of that in the counter UAS area. We're always seeing already seen in indications of that. Space programs, we've been called on to look at modernizing a lot of the critical space force infrastructure, so we're working on that. I think I believe there was an EO out around modernization of Department of War Financial and Logistics System. Ties directly to that EO. We are seeing reconciliation funds show up there. And then as this sort of relates to Golden Dome, we are seeing the number of intelligence programs receive additional funding around left of launch. Because that provides the ultimate situational when you're looking to protect this nation in a golden dome scenario. So, you know, we have included a range of outcomes in our updated guidance, your left goalpost, clearly a smaller amount of funding. The right goal post more funding. But, look, at the end of the day, anytime somebody wants to add a $150 billion to a market that this company is doing extremely well in, it's a constructive macro environment overall. It really just doubles down on the strong demand signals that a company like us can make great use of. So thank you for those questions. Peter Arment: Appreciate the color. Thanks. Yep. John Mengucci: Yep. Operator: Your next question comes from the line of Colin Canfield from Cantor. Your line is open. Colin Canfield: Hey. Thank you for the questions. John Mengucci: Sure. Colin Canfield: We should be starting out with the federal acquisition regulation. You mentioned it before, John. Just talk us through kind of where are we at in terms of the reforms of the FAR and how should we expect both the magnitude and timing in terms of impact on any kind of we'll call it, CACI cost plus exposure? John Mengucci: Yeah. I mean, we're pretty much in line with the acquisition reform. There's a large number of deals out there, and there's a large amount of print around, you know, driving from cost plus to firm fixed price and know, are we gonna completely move from FAR part 15 to FAR part 12? Or we're gonna talk elements of 12 into 15? Go 12. I mean, there's a whole bunch of different avenues. What I like about what has come out and what's great for this company is that there's a new recognition of exactly what FAR part 12 is. Right? I mean, I think you're seeing that tied to OTAs. Look. At the end of the day, I think in items that are not highly specific but could be born by our own corporate investments and taken to the government in an 80% solution manner and then do some development work, you know, co-development with the government funds in our funds. That offer that into a long run of production. I mean, I think that's the ultimate best way. We're seeing other long-term cost plus programs. Right, Colin? Those are trying to be moved into some different investment models, which is great. You know, we don't possess any of those. So we're still doing some cost plus work, but make no mistake. This company was intentionally built to have a FAR part 12 commercial part of our business and a FAR part 15. We're able to provide customers either and or both. And, it's really driven the $2 billion of electronic warfare that we've been talking about. So we are very well poised to support where the government's going. TLS manpack outstanding example. Even RMT, even though it wasn't a specific OTA, they had a lot of investment on our part. That then led to a larger production order. So I think probably the third or fourth inning of acquisition or reform. But for this company, I believe that our results are shown that we're well aligned, and we're gonna drive even greater growth as we go forward. Colin Canfield: Colin, I'd add to John's point. We really are finding our rhythm here on OTAs. We've seen two and a half times the level of OTA contracting in the last two years that we saw in the previous five years. So it's really a mechanism that we and our customers are well aware of and taking advantage of. John Mengucci: Got it. No. I appreciate that color. And then moving over to Arca, maybe talk through kind of how you think about the scalability of the intelligent like, the related intelligence services that you might gain or kind of grow over time thanks to the acquisition of Bandberry? Optics business? Essentially, like, beyond just manufacturing work, I think back to when you first bought us Photonics and essentially utilizing the space-based hardware to inform the intelligence business? You know, maybe just talk through kind of how you think about that earnings algorithm and then the scalability of it. And where there's any kind of roadblocks that we should think about in terms of, like, data conflicts and the like. John Mengucci: Okay. I'm gonna unpack that one, Colin. Look. Let me just start off by saying that I'll share what we can share. We're going to hold a lot of discussions around financials and backlog and the like until we get that across the finish line and we close. But it suffices to say that it's great for us to be able to share what we see in this company and in the business. They are a leading developer and supplier of scents and scents making tape. Capabilities. Make no mistake. They were involved in just about every critical national security mission. What I liked about it similar to this company, they're at the forefront of technology developments. And they've been there since the Cold War. So these capabilities are not new. How they have to deliver is not new. The architectures that ARCA delivers into literally have acquisition plans that go out as far as planning goes to around 2040. They are right in the middle of long-term growth funding streams for both DOD and classified NRO space budgets. They're focused on the fastest growing parts of the market. Their laser warning systems are equipment of record on every platform which they deliver. They and they're talking about the Danbury business to your other set of questions. Extremely high technical barriers to entry. It's an environment of constant capability and upgrades. Their contract portfolio, combined with their outstanding record of execution even in fixed price environments, does distinguish them with their cost customers. You know, when I looked at this business and we've been studying it for quite a long time, the folks at BlackRock continue to invest in this business. Blackstone. Sorry. Continued to invest in this business. They continue to understand that the national security world needed an asset like ARCA so they didn't hold it for five years. They grew it, and they invested in it. What I like about them is they invest ahead of need. They innovate and execute with agility. They deliver predictability given cost and schedule focus. So they are well set up to the earlier question around acquisition reform. They are well understanding of cost plus versus firm fixed price. They do have a tremendous backlog that we'll be able to talk about when we get, you know, hopefully, as we get to the end of our third quarter. And we shouldn't ignore the sense-making part of their business. You know, that's a lot of work that they do similar to us, in an agile software development manner. They work on parts of the intelligence data. We work on other parts. They do some things that we don't do. We do some similar things. But, you know, they have differentiated capabilities. They have long-duration contracts. They're involved in very critical national security programs. Nothing speaks larger than this company doubling down again in the space market than this acquisition. I know it drives our leverage, you know, up to four three and such. We have the right buy-down mechanism. At the end of the day, you make bold investments to drive bold growth. And that's what this acquisition is about. And this is why we're very involved in the space market and driving future growth there. Appreciate the questions. Operator: Thank you. Your next question comes from the line of Seth Seifman from JPMorgan Chase. Your line is open. Rocco Barbero: Good morning. This is Rocco on for Seth. John Mengucci: Morning, Rocco. Rocco Barbero: Morning. Digging in more on Peter's question, how are you thinking about CACI's addressable market from the reconciliation bill both for CUAS in general and Merlin more specifically? And how are you thinking about that market growth in the coming years? John Mengucci: Yeah. I knew as soon as I shared the way $2 billion slice of revenue in EW, we'll be all looking for growth rates. You know, news flash are probably not gonna share what we see. But look. The reconciliation funding will do a lot in the EW area because, as you all know, we consider counter UAS being part of our EW market. It's probably worth spending just, you know, twenty seconds on why we answer questions like this, like that. Okay? If we provide a cyber effect to mitigate a dangerous drone, is that cyber, or is that counter UAS? Answer is it's all EW. So that's why we lump this, in one area. Because we share software baselines. We share talent. We share technology solutions. So the reconciliation dollars is a, you know, tens of billions of dollars to our addressable market. We continually assess that as many on this call know. We're looking at about a $300 billion TAM. We're nine, you know, roughly $9.4 billion company. So plenty more room to grow. And even though that reconciliation funding is driving that, the world of counter UAS is going to completely explode beyond what the record reconciliation funding needs. We're involved in the national market marketplace. You mentioned Merlin. We've done some outstanding work there. But it suffices to say in the counter UAS area, there's no less than about 25 acquisition organizations that have stood up and actually brought some of my notes. There's eight within DOD. Six within DHS. You've got DOT via FAA. Department of Justice, Department of Energy, Department of State, and, you know, Department Elemental B. So there's a lot of folks out there. The acquisition infrastructure is just getting set. We're actively engaging to expand our presence specifically with GYNA four zero one. DHS, and then Golden Dome. So there's a great spend looking to be done here, and we are extremely well positioned. Rocco Barbero: Great. Thanks. Rocco Barbero: Then are there any specific items to call out in the civil business? News over the last year plus has been pretty negative about the demand environment, and yet CACI is growing in the mid-teens on average over the period. Jeffrey MacLauchlan: Yeah. Those that's really dominated by our CBP work, DHS work, and the ramp-up on NASA end caps. So it's a little different flavor of civil than you may see in some others, really driven by DHS and NASA. John Mengucci: Great. Thanks, Ash. Rocco Barbero: Yeah. Thanks, Malcolm. Operator: Next question comes from the line of Scott Mikus from Melius Research. Line is open. Scott Mikus: Morning, John and Jeff. John Mengucci: Morning. Scott Mikus: A quick question. With all the acquisitions you've made over the past fourteen years and the announced deal of Arca, tend to find that you're shifting more away from services and you're here more becoming defense electronic suppliers, in particular, L3 Harris. Just given that the government is actually taking an ownership stake, L3's missile solutions business, you think that puts CACI and L3 Harris's other competitors at a disadvantage when competing for work with the Pentagon given that the government owns a will own a stake in L3 Harris? John Mengucci: Yeah. So, awesome question. Look. We see what's going on, and we read about all of those various engagements. But at the end of the day, we're seeing outstanding demand for our technology that we deliver. We're able to meet that demand. We continue to execute our business well. We continue to invest ahead of need and have access to capital we need to enhance our delivery capabilities. See, what makes us different is that we got in the market at a time where we expected that because of one of the earlier questions, because of the OpTempo, and because of the need to not only protect other countries under nations and our interest abroad, but also defend our nation that it was going to require. The fact that we would ourselves begin to invest ahead of customer needs. So we are one of those companies. We have a, you know, NAICS, GICS, whatever code you wanna call it, that makes us a government service company. But, you know, it's been a number of years since you all asked me what my bench strength is. It's been a number of years since you asked me what my direct labor numbers were. Because we're not that company. So I enjoy being compared against others. Who are trying to make changes to adjust. Okay? Those are changes you make because change has been presented. We've actually built this company purpose-built. In this last instantiation of CACI to be in seven markets with strong funding streams that drive shareholder value year-over-year growth regardless if the government shutdown or not, regardless of reconciliation budgets are slightly behind plans, K. We're not a quarter-to-quarter company. We're a year-to-year, and we're gonna be a decade-to-decade company. We are exactly driving this business and measuring ourselves to make sure we are providing eye-watering technology to Department of Warning Intelligence Community, that's what makes acquisitions like SA Photonics so important and LGS. And Mastodon and Arca and others that is driving where this company goes. So really appreciate that question. There's a lot of other things that are going on within this marketplace. We focus on what we can control. And we like to think that we've got an outstanding strategy that moves along with the times. And I think if you've been a shareholder in this company in the last ten to twelve years, you've been quite excited by the way we have navigated different funding forces and moving this company from delivering people to delivering enterprise and mission tech. So thanks for that question. Scott Mikus: Okay. And then just a quick question. I wanted to follow-up on Merlin. I don't know if I missed this earlier in the call. But are there any ITAR restrictions or obstacles that would prevent you from selling that internationally? John Mengucci: No. The actual system itself, no. There's a software load which has different ways to mitigate specific threats. And as you would imagine, like any weapons system, there are software and hardware provisos of what the US government allows all of us in the defense technology space to be able to deliver. So there will be some software proposals with that. But when it comes to defending this homeland, which is what Merlin was specifically built for, there are no issues of what we can do in The US between finding and providing exquisite non-kinetic effects to remove this entire drone layer threat to the homeland. Scott Mikus: Okay. Got it. Thanks for taking the questions. John Mengucci: Yeah. Thanks so much. Sure. Operator: Your next question comes from the line of Tobey Sommer from Truist Securities. Line is open. Tobey Sommer: Thank you. I'm wondering if you anticipate another strong year of defense spending growth in 'twenty-seven. The present articulated a relatively large indication and wondering what your thoughts are on the matter. John Mengucci: Yeah. Toby, thanks. Look. I did read the fiscal year twenty-seven tweet of $1.5 trillion. You know, a little extra color, I believe it's supported by SAS and Haas. But I'm not clear whether it has the support of the appropriators. I think we've got a little bit of time to see this one play out. And I also think that's pretty it's still early, so we'll have to wait and see what comes from the government fiscal year '27 president's budget request. From what I understand, it'll be a little bit later this year because he usually tags along when the state of the union announcement is, so we may see it a few weeks off. But, look, I've often said, this company, where I don't focus on the budget top line, either way, our $300 billion TAM for a $9.4 billion company then we have plenty of room to grow. We have shown that when budgets have decreased, and when they've increased. I think we're in the right markets, the right capabilities. Right customer sets. And at the end of the day, in the national security realm, if the threats present themselves, I've never seen this nation not invest to protect us either abroad or at home. Tobey Sommer: Thanks, John. My follow-up would be the of the large marquee contract wins that the company has won over the last maybe few or handful of years. How much incremental program ramp remains in front of the company to help support future growth? Jeffrey MacLauchlan: Yeah. That's no small amount. I mean, some of the recent contract programs that we've won we've talked about the fact that the changing profile is such that the early phases of the program are really focused on designing and developing the balance of the program. And so that has led to slower ramp-ups. And in fact, we're still seeing growth in ITAS. Earlier in this call, we talked about the fact we pointed out the growing NASA end caps activity. Even though those winds were, you know, still a couple of years ago. So if you think back to the ramp profiles that I talked about in our investor day I guess, a year ago now, there were three or four sort of standard profiles and most of our longer-term wins have been the profile where we don't really sort of reach our max until we're, you know, good three or four years into the program. So we still have wins from the last several years that are still ramping up. John Mengucci: Yeah. Toby, I'd also add. Perfect example of that would be spectral. Right? You know, we're in our third year, I believe, on spectral. We have just recently done all the paperwork and testing that we needed to submit. That would lead to a milestone c decision. So and that is one that once we receive that, that allows us to get into low-rate initial production, which then starts to ramp. Spectral. So just one of many examples. Tobey Sommer: Exactly. Right. Thank you very much. Bye. Bye. Operator: Your next question comes from the line of Jonathan Siegmann from Stifel. Your line is open. Jonathan Siegmann: Good morning, John, Jeff, and George. Thanks for taking my question. John Mengucci: Yeah. Good morning. Jonathan Siegmann: Sure, John. Hey. So I thought margins are definitely a good news for the quarter, and the second time that it's really beating your expectations. Maybe for you, Jeff, can you talk a little bit about what the drivers are? We noticed there are indirect costs or third quarter in a row less than 21% of revenues, just any one-time things to consider or how to think about the upside here? Thank you. Jeffrey MacLauchlan: Yes. Thanks, John. There's a couple of things going on in here. We talked a little bit about mix. We continue to see favorable acceleration in the technology part of the business. Which clearly has positive margin implications. Also noticed the indirect cost number. We're in our fourth year now of doing something that's pretty hard to do, which is reducing indirect cost as a percentage of running the business, while we're in a strong growth mode. Organizations have a natural impulse to grow indirect cost in times of accelerating business activity and we have been really hyper-focused on making sure that, you know, we don't do that. So in absolute dollars, while there is some modest occasional increase, that's in spots that's consistent with what we talk about often, John has a lot to say about investing at a need. We're certainly not giving any of those things short shrift. We're investing where we need to invest but at the same time, we're resisting the impulse to just sort of let the infrastructure grow as the top line grows. So both the technology revenue component acceleration and the management of the cost structure are both strong drivers of the margin performance that you see. Jonathan Siegmann: Thank you. And then maybe if I could flip one more for John. We you know, recently, we've seen some unexpected displeasure with dividends and buybacks. By the government for among the contractors. So the majority of the industry prioritizes that, and CACI has only done opportunistic buybacks and prioritized M&A. The question is, you know, the Pentagon clearly is not supportive of large-scale consolidation. But how does the Pentagon react to the acquisition that Dale at CACI does? Thank you. John Mengucci: Yeah. I mean, I haven't heard a lot about any blocking us to continue to do smart acquisitions that support the national security infrastructure, which at the same time then as a product of doing that, drive shareholder value. Look, we've read the EO, and we are supporting it. We believe we're in line with it. We have strong exit. We deliver where we're asked to deliver. We continue to invest ahead of need for probably seven years is where we've been. On that model. You know, as there's been a lot of talk about to some of the larger players, you know, divest. Do we unwind the current div we have today? I don't see that. Reaching us on the unwind piece. Should that happen, we're a buyer of capability and customer relationships that continue to drive us forward in these seven markets. And if that were to happen and it were to become much more specific, you know, is that an opportunity for us to look at, you know, pieces of other businesses that may have a better fit here that allows them to transform the parts of their business that are strongly far part 15 and get into more of an agile commercial model so we can address the nation's needs better, then it, then that would be additional M&A opportunities for us. But you know, I don't see anything that we're doing today that's in conflict with that EO, and we'll continue to watch where that one goes. Thanks, Sean. Thank you. Thank you. Operator: Your next question comes from the line of Mariana Perez Mora from Bank of America. Thank you so much. Good morning, gentlemen. Mariana Perez Mora: Good morning, Rana. Mariana Perez Mora: So my first question is gonna be around the Department of War wanting to hire more technical talent. They have telegraphed that in the past, but then through this Advana transformation, memo they put out a couple of weeks ago. They also mentioned that they wanna hire more technical talent. What does that do about CACI? Like, do you see any pressure to any, like, FTE type of roles, or how are you thinking about that? John Mengucci: Yeah. Thanks, Mariana. Yeah. I think it's January 12 was on that one came out. You know, when we look at the Advanta Park program, I think it's in three different teams and just, like, a war data platform team, the applications for the war data, and then financial management team. You know? We look at that as a great opportunity on the financial management team. It is if I read the language correctly, it has a lot to do with financial and acquisition. Readiness systems and spend this drive to drive a clean FOIA 27 defense working capital fund and clean FY '29, you know, pan agency audit, really big on financial modernization. We've got great examples with both the Air Force and US Marine Corps, and then we're already passing major audits. So for us, you know, on that pillar, that one reads well. On the war data platform team and the apps, already do that. Across the federal government. Today. On the hiring piece, it's not a risk to us. We actually deliver technology in low in those areas. We don't provide FTEs. There may be other government services companies that do, but we're not one of them. We're out there delivering outcomes to customers in those spaces, and which is why we don't track just pure FTE deployment. So and this isn't the first time the government's looked to, you know, to quote, unquote, in-source or bring that kind of work in-house, but, you know, that's a good question for them to answer. But it just doesn't so we don't see any threat. From those from that EO. Mariana Perez Mora: Thank you so much. And one more joint to assess potential risks. And you I think you have done through the prepared remarks and the questions a really good job explaining why you're well positioned to commercial terms, fixed price, OTA. That on the other side, do you see any risk for any of your existing early-stage programs to get canceled or a stop work order or anything, kind of like a stop and realign, redesign in order to have that contract or that program be more commercial in terms of, like, 80% type of capability, but, also, being able to be, like, higher volumes, ramp up faster or even cheaper. Like, do you see that risk in any early-stage programs? John Mengucci: Yeah. No. I mean, I don't see any risk. In fact, I like the opportunity of what the government has taken a look at. You know, we one example yes, two examples. One would be customs and border patrol. Our legal program, and one might be TLS Manpack. If you look at Beagle, we approached the customer and asked them, why you're buying 400 FTEs when you should be paying a fixed rate for every new upgrade to every app? That, you have. So we were ahead of government's thinking on that and worked with a tremendously creative acquisition folks at DHS within customs and border to actually put that program in place, and that's driven to other customers, you know, NASA and CAPS. Transcom, JEDMS. They're not buying people. They're actually putting orders in place to actually deliver our outcomes. On the TLS Manpack one, look. That was a job that was owned by a major defense contractor. And we went and we approached the army, with a concept of let's an OTA in place. Let's do some development work. And then let's take our 80% solution and see where you can go with that. So, you know, those are both examples of not the government coming to us and asking us to change what we're currently doing. We actually approached them, or we were in with them on TLS Manpack. So the OTA model does work. You have to be willing to invest upfront. You have to have mission knowledge and you have to have something that the government absolutely needs and wants. And that differentiates us, you know, every day, including Sundays. The one thing we need to understand about OTAs that we're gonna see as the government moves more towards that. You're gonna see smaller initial awards for the development work but it's gonna lead to a faster, larger production value of awards. So when I think about and I wouldn't call it risk marion, but when I think about how we look at businesses like ours, you know, we're used to know, nailing down multibillion-dollar awards. In the pure technology areas. But much sooner than that, we'll see that actual source production award come out. That's what you saw with, TLS Manpack, a $1 million initial award and a $500 million production contract. Jeffrey MacLauchlan: Yeah. The size will not correlate with the strategic significance. Mariana Perez Mora: Thank you so much for the color. Jeffrey MacLauchlan: Yeah. You bet. Operator: Your next question comes from the line of John Godin from Citigroup. Your line is open. John Godin: Morning, John. Thanks for fitting me in here. Where customers gonna do FAR part 12 the initial awards are gonna be a million to 5 or to 7 million. John Godin: I wanted to ask about margin. You know, the margin performance has been very strong. Of course, there's been some mix in there. You know, this isn't about sort of new multiyear guidance. You know, and, obviously, Arca kind of will change the margin outcome. But just bigger picture, wanted to dialogue about where margins could go. If we look at recent incremental margins, they would suggest it could go a lot higher. What are some of the puts and takes as we think about margin from here? You've done a tremendous job the last few years. Getting margins higher. I'm just curious if that trend can continue. Jeffrey MacLauchlan: Yes. John, I think you've heard us may have heard us talk about this before, but this is really for us maybe somewhat not intuitively a free cash flow question. The decisions that we make, you know, our North Star is free cash flow. So if we have the opportunity to invest in a way that accelerates the top line and maintains margin, we'll generally select that over expanding the margin. Because we're generating free cash flow. So it's really about dollars and free cash flow generation. And we're in the happy position of seeing a pretty opportunity-rich environment and plenty of opportunities to invest. And I think as we're starting to see the fruits of the accelerating technology content along with the management of the cost structure that I talked about a few questions ago, I think we actually have plenty of opportunities to invest and maintain or modestly expand the margin but more importantly and more excitingly, have opportunities to further accelerate our free cash flow generation. John Godin: Perfect. That gives me a great sense. Appreciate it. Jeffrey MacLauchlan: You bet. Thanks, John. Operator: And your last question today comes from the line of Sheila Kahyaoglu from Jefferies. Line is open. Sheila Kahyaoglu: Good morning, guys, and great quarter. John Mengucci: Hey, Sheila. Good morning. Sheila Kahyaoglu: Guys are morning, expand upon John's last question. As we think about margins, Duffy just gave a bunch of long-term thoughts. That's super helpful. Maybe a little bit more on the long term. Like, do you think you know, this is the new margin range for CACI, and how much further can it go? And then maybe short term, you mentioned some disruption to material purchases due to the shutdown. How do we think about that mix factoring into the second half margin? Jeffrey MacLauchlan: The material purchases are not I mean, they're a fact, obviously. They're we saw them, and it was a contributor. Not as big an issue as the mix in terms of waiting. You will see some growth. We do expect to see some growth in the material content year over half over half, but it won't significantly impact. It's considered in our guidance. It won't significantly impact the margin expectations that we've communicated to you. If that gets to your question. Sheila Kahyaoglu: Yep. Perfect. Thank you so much. John Mengucci: You bet. Operator: And that concludes our question and answer session. I will now turn the call back over to John Mengucci for some final closing remarks. John Mengucci: Alright. Well, thanks, Rob, and thank you for your help on today's call. We want to thank everyone who dialed in or listened to the webcast for their participation. That many of you will have follow-up questions. Jeff and George Price and Jim Sullivan are available after today's call. Please stay healthy, and all my best to you and your families. This concludes our call. Thank you, and have a great day. Operator: Concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Northern Trust Corporation Fourth Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead. Jennifer Childe: Thank you, operator, and good morning, everyone. Welcome to Northern Trust Fourth Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Michael O’Grady, our Chairman and CEO; David W. Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team. Our fourth quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This January 22 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through February 22. Northern Trust disclaims any continuing of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements in the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Michael O’Grady. Michael O’Grady: Thank you, Jennifer. Let me join in welcoming you to our fourth quarter 2025 earnings call. Turning to Slide four, in 2025, we made significant progress executing on our One Northern Trust strategy, delivering strong and improving financial performance and providing solid momentum going into 2026. In the fourth quarter, compared to the prior year, trust fees grew 7%, net interest income increased 14%, and revenue was up 9%, excluding notables. For the sixth consecutive quarter, we delivered positive trust fee and total operating leverage while continuing to invest meaningfully in the business. Excluding notables, pretax margin expanded to 33% and EPS grew 19%. For the full year, revenue rose 7% and expenses grew 5%, delivering over two points of operating leverage and a 30% pretax margin, 14.8% return on equity, and 17% EPS growth, all excluding notables. We returned $1.9 billion to shareholders in 2025, including a record $1.3 billion of share repurchases, which reduced share count by 5%. These results reflect strong market conditions and demonstrate the strength of our One Northern Trust strategy, which serves as our roadmap to becoming a consistently high-performing company that delivers meaningful value for clients, partners, and shareholders. Turning to Slide five, we've made significant strides across each of our strategic pillars, starting with optimize growth. We advanced several initiatives at both the enterprise and business unit levels, resulting in deepened client relationships and expanded market share in key areas. We broadened our private markets footprint across the enterprise and further enhanced our capital markets and banking penetration, which now contributes more than one-third of enterprise revenue. These firm-wide efforts improve collaboration across our businesses, allowing us to bring the full capabilities of Northern Trust to our clients while accelerating the pace of product development and innovation. Turning to productivity, we initiated significant changes to enhance and scale our operations. Our client-centric capability operating model provides a unified and consistent way of working across the company, standardizing core processes, increasing spans of control, reducing organizational layers, and empowering the broad adoption of AI-driven automation inclusive of our AI platform NT Byron. For example, the chief operating officer's organization, which encompasses more than half of our workforce, increased managerial spans of control by over 35%, while reducing management layers by over 20%. This is improving speed, accountability, and efficiency across the firm, creating a leaner, more agile operating structure and fostering enhanced collaboration. Our accelerated deployment of AI across high-volume activities, such as digitizing documents and automating manual tasks, is driving efficiency gains while improving quality and consistency across key workflows. Overall, we increased productivity savings last year representing more than 4% of our expense base. We strategically reinvested these savings into growth and resiliency initiatives, fueling our future performance. For 2026, we plan to raise our productivity target by 10%, supported by maturing initiatives, further structural and workforce improvements, and broader AI deployment. On resiliency, we strengthened the firm's risk technology and operational foundations. We advanced cybersecurity, upgraded our data environment, expanded cloud adoption, modernized key software platforms, and enhanced core risk and control processes. These initiatives help future-proof the company. Turning to our business unit performance, starting with wealth management on Slide six. We delivered strong momentum in the fourth quarter, particularly in our upper-tier segments, continuing to deepen our leadership position in global family office and the ultra-high-net-worth market. GFO achieved record new business in 2025, surpassing last year's high watermark with strong contributions from both domestic and international markets, the latter up 15%. Last year, we launched Family Office Solutions, extending our world-class GFO platform to families with more than $100 million in net worth, to serve as their outsourced family office. FOS exceeded its goals for clients and assets last year, and we're scaling this proven model across all markets. Together, GFO and FOS position us exceptionally well to meet the needs of the most complex segment of the market. Another area of focus is talent. In 2025, we unified sales across GFO and the regions, strengthened coverage models, and enhanced pipeline rigor and win rate expectations. We will continue to invest in high-performing, growth-oriented front office talent while sharpening incentives around new client acquisition and organic growth. The third area of focus is expanding our suite of investment solutions. Alternatives remain a key priority in 2025, as we more than doubled the number of funds launched on the platform and tripled assets raised, broadening client choice across strategies. We also made the fund launch and distribution process more scalable, which will support a faster cadence in 2026, including our first evergreen fund. Finally, we will enhance our client acquisition strategies across segments, geographies, and channels, including deeper engagement with centers of influence and intensified digital engagement initiatives to generate more high-quality leads. Across each of these areas, we are simplifying processes, upgrading platforms, and applying AI to reduce friction in service delivery. These steps will enhance both the client and partner experience and strengthen wealth management growth. Turning to Asset Servicing on Slide seven. Overall, we ended the year with improved organic growth and profitability, driven by our strategic focus on scalable growth in core product areas. Capital markets performed particularly well in 2025, ending the year with robust FX trading and integrated trading solutions activity in the fourth quarter. Private markets were another highlight, with wind-related revenue up 18% over the prior year, further solidifying our leading position with global hedge fund managers and UK LTAS. We will build on the success in 2026 by further scaling core fund administration and depository services while increasing cross-sell of capital markets activities. Led by our industry-leading front office solutions offering, which continues to be a key differentiator, we will further expand our global asset owner franchise, building on the over 100 new mandates in 2025. Finally, we will sharpen our focus on selectively enhancing the products and services we offer, such as growing ETF servicing in the US, expanding European transactional banking, and building out our digital asset capabilities. Asset servicing enters the year with solid tailwinds and a clear path to accelerate profitable growth. Turning to Asset Management on Slide eight. NTAM delivered another solid year and is well-positioned to continue executing on its growth initiatives. Liquidity was particularly strong, with the fourth quarter marking the twelfth consecutive quarter of positive flows, and liquidity AUM reaching nearly $340 billion. We continue to broaden our successful liquidity franchise by leveraging digital capabilities, including introducing a tokenized share class of one of our money market funds. Building on last year's strong alternatives fundraising, we will continue to expand our product capabilities and strengthen distribution across wealth and institutional channels. On the product innovation front, we maintained a high-velocity cadence last year, doubling product launches year over year, including 11 new ETFs, meaningful expansion of our SMA fixed income suite, and the rollout of multiple custom solutions across alternatives. NTAM will maintain an elevated new product base and work closely with Northern Trust Wealth Management to co-develop tailored solutions, building on the first-of-their-kind distributing ladder ETFs introduced in 2025. Direct indexing and customized SMAs remain areas of strong client demand, supported by $5 billion of net organic flows in our tax-advantaged equity suite in 2025. We will extend this momentum through the launch of a long-short tax-advantaged equity strategy and expanded customized fixed income SMAs, reinforcing our position as a top-three industry provider. Together, these priorities strengthen our growth trajectory, deepen our client engagement, and expand our ability to deliver differentiated high-demand investment solutions. Turning to Slide nine. The execution of our One Northern Trust strategy over the last two years is translating into improved financial performance. Productivity and expense discipline are driving positive operating leverage, reducing our expense to trust fee ratio, and improving pretax margin levels. While ROE has been at the high end of our target range, and EPS have grown at a double-digit pace for the past two years. Turning to Slide 10, as we move forward, we're doing so with a clear vision, good momentum, and a resolute commitment to consistently deliver on our strategic pillars, producing financial performance that rewards shareholders. With the goal of generating attractive returns on capital and double-digit EPS growth through cycles, we have the conviction to boost two of our medium-term financial targets. In addition to targeting expense to trust fees below 110%, we're now targeting a pretax margin of 33% and return on equity in the mid-teens. To wrap up, this progress is only possible as a result of the exceptional efforts of my fellow Northern Trust colleagues. I want to thank them for their commitment to delivering for our stakeholders. With that, David will take you through our fourth quarter and full-year financial results. David W. Fox: Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our fourth quarter 2025 earnings call. Let's discuss the financial results of the quarter starting on Slide twelve. This morning, we reported fourth quarter net income of $466 million, earnings per share of $2.42, and our return on average common equity was 15.4%. Our fourth quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 90 basis points and unfavorably impacted our expense growth by approximately 140 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth. Trust, investment, and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 7% increase compared to last year. Net interest income on an FTE basis was up 10% sequentially, to $654 million, a new record, and up 14% from a year ago. Our assets under custody and administration were up 3% sequentially and up 11% compared to the prior year. Our assets under management were up 2% sequentially and up 12% year over year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. We recorded an $8 million release of the credit reserve in the fourth quarter, largely reflecting refinements to factors used to estimate losses for the C and I portfolio. Our effective tax rate was 26.5% in the fourth quarter, up three ten basis points over the prior year's rate, largely as a result of higher tax impacts from international operations. We expect the effective tax rate in 2026 to be approximately 26 to 26.5%. Our results included $69 million in net unfavorable notable items, including $19 million in expenses associated with our Visa swaps, recognized within other operating income, $59 million in severance-related expense primarily recognized within compensation expense, and a $10 million release of our FDIC special assessment reserve recognized within our other operating expense. Relative to the prior year period and excluding notable items, revenue was up 9%, expenses were up 5%, our pretax margin was up 250 basis points to 33.2%, we generated over four points of positive operating leverage, earnings per share increased 19%, and our average shares outstanding decreased by 5%. Turning to our wealth management business on Slide 13. Wealth management had a good quarter with strength in both GFO and the regions. GFO won three of its largest wins of the year in the quarter. Priority markets delivered their best overall quarter of the year, and the regions posted their best quarter for flows. Assets under management for our wealth management clients were $507 billion at quarter end, up 13% year over year. We saw healthy incremental flows late in the quarter, including $5 billion within GFO. Trust investment and other servicing fees for wealth management clients were $578 million, up 6% year over year, primarily due to strong equity markets as the favorable flows occurred late in the quarter. Trust fees within the regions were up 5% year over year in the quarter and were up 6% for the full year, with strength mostly attributable to favorable equity markets as strong advisory fee growth was mostly offset by continued product pressure. Within GFO, trust fees were up 6% in the fourth quarter relative to the prior year, showing healthy improvement from the third quarter's more muted performance. They were up 5% for the full year. Wealth management average deposits were up 5% sequentially, reflecting year-end portfolio repositioning coupled with new business momentum. Average loans were down 4%, reflecting the repayment of a large GFO loan. Including severance charges of $15.2 million, wealth management's pretax profit decreased 3% over the prior year period's record levels, and the pretax margin contracted by 300 basis points to 38.9%. Excluding these charges, the pretax margin was down 120 basis points. Moving to asset servicing results on Slide 14. Our asset servicing business also had a very strong finish to the year. Transaction volumes accelerated, capital markets activities were robust, while new business generation continued to be healthy and margin accretive. Assets under custody and administration for asset servicing clients were $17.4 trillion at quarter end, reflecting an 11% year over year increase. Asset servicing fees totaled $730 million, reflecting an 8% increase over the prior year. Custody and fund administration fees were $496 million, up 9% year over year, reflecting the impact from strong underlying equity markets, net new business, and favorable currency movements. Assets under management for asset servicing clients were $1.3 trillion, up 12% over the prior year. Investment management fees in asset servicing were $166 million, up 6% year over year, largely due to favorable markets. Asset servicing average deposits increased 3% sequentially, reflecting normal seasonal patterns, and were up 6% year over year. Loan volume increased 6% from third quarter levels but remained down 8% year over year, albeit off a small base. Asset servicing pretax profit grew 23% over the prior year or 40% excluding severance charges. The pretax margin expanded two ten basis points year over year to 25.5%, an increase of five fifty basis points excluding severance. The segment level margin benefited from the NII associated with the seasonally strong deposit levels, the pivot in our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services, which translated to a pretax margin on our new business that was above 30%, as well as our efforts to streamline our operations. Moving to Slide 15, and our balance sheet and net interest income trends. Average earning assets were up 3% on a linked quarter basis, as higher deposits drove an increase in cash held at the Fed and other central banks and in our securities portfolio. We issued $1.25 billion in new debt in November, $500 million in senior and $750 million in sub debt. The debt was swapped to floating and proceeds were invested in floating rate securities at a positive carry. As a result, the fixed percentage of the securities portfolio dropped to 52% from 54% in the third quarter, including the impact of swaps. The duration of the securities portfolio dipped slightly to 1.48 at the end of the quarter, and the duration of our total balance sheet continued to be under one year. Average deposits were $119.8 billion, up 3% compared to third quarter levels, reflecting normal seasonality. Deposits performed largely as expected throughout the quarter, but we saw a higher than usual surge in the last two weeks. We expect deposit levels to normalize in the first quarter. Within the deposit base, interest-bearing deposits increased 2% sequentially and noninterest-bearing deposits increased by 10%, climbing to 15% of the overall mix. Net interest income on an FTE basis was $654 million, up 10% sequentially, up 14% compared to the prior year. Sequentially, NII was favorably impacted by higher deposit levels, a greater proportion of noninterest-bearing deposits, and the ongoing impact from deposit pricing actions we've taken outside of rate cuts. Our net interest margin increased sequentially to 1.81%, reflecting the favorable deposit pricing actions taken coupled with a more favorable deposit mix shift. Turning to our expenses on Slide 16. Expenses increased 9% year over year in the fourth quarter, but excluding the notables listed on the slide, they were up 5% over the prior year. Excluding both notables and unfavorable currency movements, expenses were up just 3.8% in the quarter and 4.3% for the full year. This translated to an expense to trust fee ratio of 110.8% excluding notables, and our sixth consecutive quarter of year over year improvement. Turning to Slide 17 and our full year results. Including notable items listed on the slide, full year revenue decreased 2% and EPS declined by 11%. Our ROE was 14.4%, and we returned 111% of our earnings to shareholders. Relative to 2024, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth by approximately 60 basis points. Our full year results included $69 million in net unfavorable notable items, all reported in the fourth quarter. 2024 results included $536 million in net favorable notables recorded in quarters one through three, including an $878 million gain related to the Visa B share monetization. Excluding notable items in both periods, 2025 revenue was up 7%, expenses were up 4.9%, or 4.3% excluding unfavorable currency impacts. Our pretax margin was up 160 basis points to 30%. We delivered over 200 basis points of positive operating leverage, and earnings per share increased 17%. Turning to slide 18, our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier one ratio under the standardized approach increased by 20 basis points on a linked quarter basis to 12.6%, driven by capital accretion and a decrease in RWA. Our tier one leverage ratio was 7.8%, down 20 basis points from the prior quarter driven by our larger balance sheet. At quarter end, our unrealized after-tax loss on available for sales securities was $401 million. For the fourth quarter, we returned $522 million to common shareholders through cash dividends of $152 million and stock repurchases of $370 million. For the full year, we returned $1.9 billion, including a record $1.3 billion in share repurchases. This reflected a 113% payout ratio in the fourth quarter and 111% for the full year. Turning to our guidance on Slide 19. As I've been signaling, we're moving away from an expense growth target instead focusing on positive operating leverage, which is our North Star. We want to maintain the flexibility to opportunistically invest in growth initiatives when top-line growth is more favorable and dampen expense growth when the market environment is more muted. But generally speaking, I can assure you that the direction of travel for expense growth will be down. As shown on the slide, we now expect full-year 2026 NII to grow by low to mid-single digits over the prior year, which is up from our previous guidance. This assumes current market implied forward curves and relatively stable deposit mix. We expect to generate more than 100 basis points of positive operating leverage and we expect to return more than 100% of our earnings to shareholders. And with that, operator, please open the line for questions. Operator: Thank you. If you're dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up in order to allow everyone an opportunity to ask a question again. Press star 1 to ask a question. And our first question is going to come from Brennan Hawken from BMO Capital Markets. Brennan Hawken: Good morning. Thank you for taking my questions. Good morning. Michael O’Grady: Hi. Brennan Hawken: Hi, Mike. Really encouraging to see the targets moved higher on the medium term. And actually, looks like really some encouraging ambition in the targets. Can you speak to your conviction in driving change across the organization? And like when you think the timing of some of this traction could start to come through in the financial results? Michael O’Grady: So I would say, Brennan, that we have a high level of conviction that we're seeing the change transmit through the entire company. I talked about in my comments there just the fact that this is an effort on the part of all of our employees, all of our partners to do this. And I think you're seeing, you know, what I think I'll call the early days of the results from a financial perspective. And that to the extent we continue to maintain that conviction and execute on the strategy, we'll continue to see consistently high performance like we did this quarter. That's why we had the confidence to move the targets up in the medium term, which we look at as kind of a three to five-year time frame. And if you just think about, you know, what Dave has said even for the year that we're in right now, trying to generate more positive, operating leverage, you know, that will take us in the direction towards those targets. Brennan Hawken: Right. Okay. Thank you for the timing around that. And definitely really encouraging to see it. I it was great. Maybe one on the balance sheet. So the deposit cost trends were encouraging here in the quarter. Can you speak to what drove the lower cost on the IB side? We saw the net the NIBs, the noninterest-bearing balances move higher, but sometimes that's seasonal. So you spoke to I think, stable deposits in the outlook. For the NII, does that mean that that include maybe the IB composition normalizing and how sustainable is the ability to drive down the interest-bearing deposit costs? Thanks. David W. Fox: Yeah. So there's a lot to unpack in that question. I would say generally speaking, fourth quarter growth in NIB particularly, I think had a lot of definitely seasonal, but also keep in mind that the government was closed for forty-three days during the quarter. And I do think there was some cash stockpiling during that period because of the lack of economic data. So I think it may have been a little inflated because of that. And going forward, into Q1, you should expect the seasonality of that to fall. Too soon to say when and how. Usually, it happens sort of after audit season when they when the funded admin companies decide that they've spent all their money for that particular quarter. So it will normalize at some point during Q1. I would just say that Q4 is definitely not a jumping-off point. For NII going forward into Q1. It will Q1 will definitely be lower in terms of total NII. In terms of the deposit pricing, we continue to spend a lot of time through our liquidity solutions efforts to look at our deposit pricing. We still have a lot of tools in our tool shed to continue to lower that going forward. We also had in the quarter, though, some expensive wholesale funding that rolled off, and we need to replace it. And so because of that more stability there, we're able to bring down our deposit cost accordingly. Brennan Hawken: Okay. Thanks for that color, Dave. David W. Fox: Sure. Operator: And our next question is going to come from Ebrahim Poonawala from Bank of America. Ebrahim Poonawala: Hey. Good morning. Michael O’Grady: Morning. Ebrahim Poonawala: I guess, maybe Paul, if you could just start on the fee growth side. And just talk to us, I appreciate you don't want to sort of pin down the guidance if we assume a relatively sort of a steady state macro backdrop, one, what does that imply for fee growth this year? And then you and just talk to us in terms of, like, one or two areas you think drives trends. You talked about GFO ending 25 on a strong note. Would love to get some color around sort of the two or three drivers of growth that you are seeing on the fee side. For 2026? Thank you. David W. Fox: Yeah. So, you know, the way we look at '26 and we just finished our planning period, is if the market conditions as are you as the way you described, we would think that we would be around mid-single digits in revenue growth. And trust fee and revenue growth, maybe revenue growth a bit higher, but around mid-single digits. And that would also give you an implication in terms of where we wanna solve for our expense growth for the year as well. So that's sort of how we're thinking about it going into '26. You know, in terms of the fee growth, you know, as you know, in GFO, the business there can be very lumpy. And when you win, you usually win very large amounts. And so the traction win rate in GFO really picked up in Q3. And because of the quarter lag, you saw a lot of it in Q4. We even had additional inflows in GFO of another $5 billion, and Q4, which you're going to see primarily in Q1. So that's driving a lot of the growth. The other thing I would say, and Mike can comment on this as well is the traction we're getting in the ultra-high-net-worth segment around from the front of or the family office solutions. Which really we're finding our win rate and our traction and our backlog in that particular area of the $100 million plus that don't have a family office. Has really picked up considerably. Michael O’Grady: Yeah. And I would just add beyond wealth management that in the asset servicing business, again, with our strategy focused on moving upmarket, just meaning some of the larger more complex asset owners, where we had the success in the wins, in 2025. You know, some of those are being onboarded now. So you'll see some of the strength in the fee growth, in '26, and that's both in The Americas, but also, UK and more broadly. And on the asset management front, you know, we've, as you've heard, continued to have strong flows in liquidity. And in many respects, that's been offset from a flow perspective by outflows on the index side. To the extent that that slows down, that drag goes away, and we still have the strength and liquidity, know, that'll add a boost on the asset management front. Ebrahim Poonawala: Got it. And just maybe just sticking with asset management, you know, this leadership changes eighteen months ago. You we've seen the results in terms of the targets. When we think about on a go-forward basis, the capital position that you have where the stock's trading, are there opportunities in asset management to bolster that business inorganically? Via tuck-in deals or something larger? Just give us a sense of how you're thinking about that business over the next year or two. Thank you. Sure. Michael O’Grady: Yeah. So and as you heard in my opening comments there, the strategy is pretty focused, in asset management. And so, know, looking to continue to execute on that. From an organic perspective. To the extent that we can accelerate it, with inorganic opportunities, whether that's acquisitions or partnerships, we're certainly open and looking to do that. If you think about where those might be, on the capability side, you know, you've heard about the success we've had in alternatives, but it is an area that continues to grow. And so that's an area that we certainly look at ways to increase our exposure there. And then on the other side, opportunities to expand our distribution. You know, the majority of, NTM product is distributed through the partners in the business through wealth management and through the asset servicing side and quite well. But anything we can do to expand to know, third-party intermediary, which we do, but it's right now a smaller portion than we'd like to see long term. Operator: And our next question is going to come from Michael Mayo from Wells Fargo. Michael Mayo: Hi. What is it about now that gives you the confidence to increase your pretax return targets? And three to five years, I guess, that would be what, somewhere between 2029 and 2031 if I'm reading that correctly. Michael O’Grady: Yeah. And Mike, I would say it's a few things. And they're aligned with strategy and with what we're seeing. So the from the first perspective is we've talked about optimized growth. And we've talked about it now for a few years here. And the whole point on that was focusing on scalable growth focusing on profitable growth. And that has a couple dynamics. One is just the mix overall for the company. So the emphasis on growing the wealth management business faster and asset management and those two businesses have higher margins. So just the mix shift that we'd like to see as we grow those businesses. And then even within asset servicing, focusing on, again, scalable opportunities, and where we've built out our capabilities. In those specialized areas or segments. Where we have the scale to not only compete effectively but do so in a profitable way. So we're seeing that work. So that's the first thing I'll say. They that gives us confidence as we go forward. The second is around productivity. You know, again, you heard me mention our productivity for 2025 was about 4% of our expense base. And this year, you know, we bumped that up. It's gonna be know, closer to 5%. And a lot of that is because of the impact we're seeing of AI. It lends itself to a lot of our activities. Across the company, but I would say particularly in asset servicing and in the COO organization. So that makes the business more scalable is what we're seeing. Long way to go. But that's why, you know, I'll say that three to five-year time frame makes sense. To see that. And then the third is on returns. We have a strong capital position. We always wanna have a strong capital position. You know? So we feel good about the level that we're at. And as you saw, we purchased repurchased more than 100% of our net income this year. Dave mentioned we'll be, you know, somewhere in that neighborhood next year or excuse me, 2026. So that is a demonstration of just the level of capital we think we need in the business. But, also, I would say, the clarity and stability on the capital regime and regulations around that also gives us more confidence in that level. So you put that together and also just trying to raise the bar to make sure that we're doing everything we can to meet the financial expectations of our shareholders. And, there's still the lingering question about Wood Northern combined with another bank. I assume your board saw these revised targets, approved that. So I guess that puts a fork in the idea of you doing anything other than this organic growth you know Yeah. To the into the medium term. And but if you can confirm that, but also as far as you pursuing acquisitions, I mean, seeing some of your peers do some smaller deal. Deals. Sure. So as we've said consistent, we have to earn our independence. And so, yes, that involves having strong financial performance like that. And so that is absolutely our strategy and our intention. And as always, you know, the board also takes its fiduciary duties very seriously and has to always consider, you know, what would be best, for our stakeholders and for our shareholders. So that is absolutely the plan. And, yes, to your point, you know, we'll look at acquisitions. We do look at acquisitions. But we're primarily focused on organic growth and generating these types of results. If we see opportunities that we think can help in those areas that I mentioned, along the strategy, that's when we look to deploy capital. Or we think we can get an attractive return on it. Will help us further, meet those targets. Operator: And our next question is going to come from Steven Chubak from Wolfe Research. Steven Chubak: Hi, good morning, and thanks for taking my questions. Michael O’Grady: Sure. Good morning. Steven Chubak: So maybe to start just on the expense to trust fee ratio. When we think about the in margins that are contemplated in the medium-term guidance, given some of the enhanced focus on improved profitability at what expense to trust ratio are you underwriting new business today? And does the mid-single-digit revenue growth that's contemplated in the guide for earnings this coming year, assume any revenue attrition from shedding less profitable business? Just trying to gauge how the enhanced focus on profitability might impact some of that through the cycle revenue growth. Michael O’Grady: So the answer to the first part of your question is, yes. When we price new business, we absolutely look at that expense to trust fee ratio. But that's at a, I'll call it, high level. Just meaning that it really depends on the nature of the business as to what the right expense to trust fee ratio is. So you can just imagine, you know, certain relationships, the fee portion of that relationship is going to be, you know, higher or lower relative to other businesses, other relationships that you're looking to price. So that's one, you know, important factor. Second is it gets broken down even further as to the types of expenses as a percentage of those fees. So it's very much, you know, the expense of trust fee we use is the broader metric. It breaks down much further by business, by product, and by client type on that front. And I would just say that to the second part of your question, yes. We continually look at client profitability. That's something that we view as a part of good relationship management. It's something where, you know, we don't wanna have relationships that are not value-generating for both partners, meaning ourselves and our clients. And we look to, you know, address those relationships in a way that we can get improved profitability as opposed to just necessarily exiting relationships. But from time to time, if it's not aligned, that's when we have to take those types of actions. I wouldn't say there's anything, you know, dramatic in there, but it is just something we do on a continual basis. Steven Chubak: That's great. And for my follow-up, just on the NII and maybe the NIM outlook more specifically, NIM in the quarter reached a post GF high. You guys have been very focused on optimizing the balance sheet. Was hoping you could unpack as we think about the glide path towards a 33% margin, how much of that is a function of continued benefit from rate tailwinds versus volume? Just trying to gauge what's gonna how you're thinking about sustainable NII growth over the next couple of years, so beyond 2026? David W. Fox: Yeah. So a couple of things. The NIM in the quarter, of course, was artificially boosted by about three points because of the FTE true-up that we did. So think more high high one seventies than one eighty one. The second thing would be that as we go forward, we have a lot of levers we can pull both on the asset and the liability side. And we don't see a lot of compression in the NIM until we get to much lower interest rates. And so from our perspective, we think during the course at least of 26, would never wanna do an estimate of 27 at this point. But in '26, we think we can keep the NIM pretty stable during the course of the year in the January. And that's how we're looking at it going forward. So obviously, deposit growth something that we're looking at. Quite carefully and in particular in the wealth management business. There is an effort going on to get our loan to deposit ratio higher within that business. And so from that perspective, we're trying to drive more deposit growth, but we're also looking at both sides, asset and liability side, to make sure we have offsetting measures. And we really feel like we have a lot we can still do I would also tell you to keep in mind that a lot of deposit pricing actions that we took we took in the middle to the end of last year. And so we haven't lapped those yet. So as we go into the first and second quarters, it gives us more confidence around our NII guide, and our ability to continue to kinda grow that line going forward. Operator: And our next question is going to come from Betsy Graseck from Morgan Stanley. Betsy Graseck: Thank you. Just one follow-up on the deposit question here. I know you indicated there was a bit of a boost in the quarter with the government shutdown. And when I look at the balance sheet, it looks like most of that boost came from non-US offices and interest-bearing. I just anticipate that the q q increase that we got there around $7 billion comes out over the course of the quarter. As you've been discussing, it's gonna take some time to flow out. Is that the level about that you see as being unusually high from the government shutdown. David W. Fox: No. I mean, I think the increase in the noninterest bearing was around 3 I do think there was a lot of new business as well that we grow with new business, but I think there was also some cash hoarding as I mentioned previously, because of the lack of economic data. So I wouldn't take out the entire $7 billion. A lot of that was just normal growth that we would have in the quarter. Betsy Graseck: Okay. Perfect. And then follow-up question here is on the buyback. You indicate, you know, over a 100% payout ratio. And I just wanted to understand, what's the governor on the buyback? Which capital ratios are you thinking about with regard to how high and how long you let that over a 100% ride? Thank you. David W. Fox: Yeah. It's a good question. And, you know, the variables the number of variables in that decision are many. It's regulatory capital. It's earnings power. It's ROE, loan growth, dividends, m and a. You go through the entire menu of what you're looking at, and then share price obviously has a role. But at the end of the day, if we feel there's an opportunity to reinvest in the business, that's also compelling. But right now, we feel as if we'll have that ability going forward into 2026 sort of the same way we did in 2027. That's how we're looking at it. Operator: And our next question is gonna come from Glenn Schorr from Evercore. Glenn Schorr: Let's start with an easy one. FX trading was strong, better than peers. In the text, you talk about lower FX swap activity on your part. Could we just break down what's what's you driven versus client driven and just so we can get our expectations going forward? Thanks. David W. Fox: Yeah. So, obviously, volatility and volumes will help us quite a bit in the quarter, but we also added quite a few new clients. And one of the things we don't talk about a lot as it relates to foreign exchange flows is the integrated trading solutions business or the outsourced business we have in both FX and brokerage. And we've seen a much greater adoption as clients start to realize that they can offload middle and back office functions on an agency basis to us. As a result of that, we get more flows because of it. So the growth in that ITS business has really been strong and continues to be strong. So I would say it's a combination of volume, I'd also say it's also a lot to do with the traction we've gotten in our integrated solutions business and outsourcing going forward. Michael O’Grady: And just to add to that, Glenn, that level of activity that Dave's talking about, is more consistent than what comes through the FX line there because of that swap activity. And so this quarter, just the nature of the swap activity, I resulted in more of that showing up in the FX line and less in NII. Even though know, the actual level of activity was not that much greater than the previous quarters. Glenn Schorr: Okay. I don't wanna put words in your mouth, but does that mean this quarter is as good as we got as a jumping-off point? David W. Fox: But, know, obviously, dependent on the markets. Yeah. I mean, volatility is gonna play a huge role there. I do think it's gonna steadily tick up because of the additional clients we're bringing in. So I would just say that in that business generally, there is more traction than just waiting around for clients to make a decision around their hedging. There's proactive sourcing of new business going on as well. Operator: And our next question is gonna come from Kenneth Michael Usdin from Autonomous Research. Kenneth Michael Usdin: Hi. Good morning, guys. This is Bob Chetzalin in for Ken. Sure. How are you guys talking about growing the wealth and asset businesses, which helps the PTM. How do you guys just think about the split between the two businesses? Do you still envision high twenties for the asset servicing while wealth grows at current? PTM margins? Michael O’Grady: Yeah. So I would say that with the asset servicing business, it had a good quarter from a margin perspective, but there's still more work that needs to be done in order to get it consistently at the level of margins that we expect for that business in the high 20s. And with the wealth management business, it already has very attractive margins. We're looking to grow that business faster. And, you know, to the extent that that came at some margin dilution, if it if you will, that would be okay if we were getting the growth that's creating more value, on that side. So it's you know, in the right range, but not something where we operate that business in order to just maintain high margins. Bob Chetzalin: Got it. And just in terms of just organic growth trends, within each business, what was the organic growth rate for this quarter? And how do you envision that to pick up over the next few years? Any color on that would be great. Michael O’Grady: Sure. So within the wealth management business, the organic growth rate was somewhere in the for the year which is also consistent with the quarter, kind of the 1% to 2% range. As Dave talked about earlier, there are different parts of the business that are growing faster or slower within that. So a GFO, for example, is at a higher organic growth rate. The business the ultra-high-net-worth, so think about families with a net worth above $10 million. Growing faster. And then also, the advisory, component of what we do. Has a higher organic growth rate right now, whereas the product portion, of the fee has been flat. And so as we go forward, we expect that combination, to increase. And that's why the strategies that I talked about are focused on that. Asset servicing, it had strong organic growth rate in fourth quarter. You know, closer to kind of 2%, 3%. And as we've talked about before, very focused on making sure that that's scalable profitable growth for us. So it's at an attractive level for us, at this point. Operator: And our next question is going to come from David Charles Smith from Truist Securities. David Charles Smith: Good morning. I was wondering if you'd help us frame out how the degree of operating leverage might move depending on the revenue backdrop I think this past year, for example, you did about 7% revenue growth and got closer to 200 points of operating leverage. You know, if the revenue environment ends up being similar next year, you know, is that 200 basis points, like, plus or minus a decent way to think about how you might, you know, keep the expense growth moving. And on the flip side, you know, how you know, painful would the revenue environment have to be for you to feel like you would be better served going below a point of operating leverage in order to keep all the investments that you still wanna make for the longer-term health of the business? Michael O’Grady: Yeah. I think the way I would have you guys this year focus on the expense line in particular and then the operating leverage that comes out of that is the fact that our planning process this year is a little bit different than it was last year. In that, we start with productivity. We don't start with, I got this much last year in expenses, and I'm gonna increase it by x or y. We start with productivity. And then we look at that number relative to the investments we wanna make during the course of the year. And that implies an expense growth rate. And you kinda go back and forth that until you sort of land where you think you should land. And so from our perspective, keeping that 1% is critical. In any environment. And the idea is from my perspective, not to be attached to a particular expense growth number but to know that we have the discipline built in in the muscle memory developed within the company to flex up or flex down if we need to. We don't wanna starve our businesses of growth opportunities. And right now, we're seeing a lot of really interesting growth opportunities organically within the company. And so to the extent that the environment lets us do that, we wanna maintain the one point of operating leverage, but at the same time, be able to invest in those businesses. So we don't sell for one, two, three, four. We sell for greater than one. Right? And so and then we look at every quarter in terms of the relative investments we wanna make, and we balance that against know, what we're seeing in the following quarter as well. David Charles Smith: Okay. I mean, just in your base case, though, if you're doing about five points of efficiency, and net expenses are growing something like 4%, you know, of those 9% of, like, gross expense growth approximately, could you break it down for us how much of that would be volume and revenue related versus new investments to grow the bank? David W. Fox: Well and obviously, a large part of our expense base is compensation. Right? And then it's gonna be our technology spending. If you look at equipment and software as an example of that, you know, depreciation is two-thirds of that. So when you think a little bit about the additional investment we're gonna be making in the course of the year, a lot of that is gonna be growth investment. Right, from the business perspective. So that's really what I'm talking about is the growth investment. So if we're able to free anything up, during the course of the year, it's going to go towards the business growth. Not towards the, you know, the operate the bank growth, for example. We feel like we've got a very good handle on our tech expenses, on our modernization expenses at this point. So that additional dollar flow would go into those growth levers. Operator: And our next question is going to come from Gerard Cassidy from RBC Capital Markets. Gerard Cassidy: Thank you. Hi, Mike. Hi, Dave. Michael O’Grady: Good morning. David W. Fox: Good morning. Gerard Cassidy: At the risk of being called a commotion again like I was on one of your peer calls earlier in the week. Can you guys the setup for yourselves, your peers, the banking industry is very positive. Going into 2026. And you know, we always are looking at, you know, both the positives and risks. Can you share with us, aside from the geopolitical environment that we're all dealing with, what when you look around corners, what are you guys watching for? Is that know, you gotta make sure we don't get surprised by as we as 2026 unfolds. Michael O’Grady: Sure. So as you know, Gerard, that can be either incredibly complex, or relatively simple. And I would say we look around all the corners as best we can. We worry about everything. But if you boil your question down to, okay, what can have a very negative impact on the environment, which to your point right now is very positive, certainly, on one front, if interest rates change dramatically, that is more difficult for us and for other financial institutions to adjust. You know, we've seen that in the past. When interest rates go up 500 basis points in a year, that is a challenge to the financial models of financial institutions. So that can be up. Certainly, one direction, it creates big issues. And also down. When you think about the impact on zero rates, when you have waivers on money market funds, things like that. That's where, like, big impact second, obviously, is the market. You know, much of what we do is priced on AUM levels, AUC levels, AUA levels that are based on the market. And a lot of our growth that we've had this year is based on those strong market levels. So anything that obviously causes the markets to go down, almost like regardless of what it is, is concerning, and we'll have a big financial impact to us. Then the last thing I would just say is you have challenging operational environments. Just given the nature of our business. The pandemic is certainly an example of that. Where it's extreme and how you have to be able to operate the business to continue to provide the services to your clients. And once again, hard to predict those. We try to do a lot. To prepare for them, to anticipate them, and you've seen in the last few years, invest to be able to deal with those types of environments as well. So trying to do everything we can. Can't predict it, but, you know, hope for the best. Gerard Cassidy: No. Very helpful. I appreciate the insights, Mike. Thank you. Michael O’Grady: Sure. Operator: And there are no further questions in the queue at this time. I'd like to turn the conference back to Jennifer Childe for any additional or closing remarks. Jennifer Childe: Thanks for joining us, and we look forward to speaking with you again soon. Operator: And this concludes today's call. We appreciate your participation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the GE Aerospace Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Liz, and I will be your conference coordinator today. If you experience issues with the webcast slides or there appears to be delays in the slide advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Blaire Shoor from the GE Aerospace Investor Relations team. Please proceed. Blaire Shoor: Thanks, Liz. Welcome to GE Aerospace's Fourth Quarter and Full Year 2025 Earnings Call. I'm joined by Chairman and CEO Larry Culp and CFO Rahul Ghai. Larry Culp: Thanks, Blaire, and good morning, everyone. I'd like to begin with our purpose. We invent the future of flight, lift people up, and bring them home safely. Right now, nearly 1 million people are in flight with our technology under wing, connecting people and goods worldwide. We play a vital role in powering the warfighters who defend freedom. While we work to deliver for our customers today, we're also inventing technology that will propel the industry forward tomorrow. Our purpose is our call to action. I could not be prouder of what our team achieved in 2025, but also how we got there—with our culture of respect for people, being customer-driven, and continuous improvement. Turning to our results on slide four, 2025 was an outstanding year for GE Aerospace. We made operational progress, delivered on our financial commitments, and continued to invest in our future. The fourth quarter was a strong finish to the year. Orders were up 74%, reflecting continued robust demand for our services and equipment. Revenue increased 20% with double-digit growth in both segments. EPS was up 19% to $1.57 and free cash flow grew 15%. For the full year, we drove substantial improvement across all key metrics. Orders were up 32%, Revenue increased 21%, operating profit grew $1.8 billion, and free cash flow was up $1.5 billion. In CES, orders were up 35% and revenue grew 24%, including services orders up 27% and revenue up 26%. This supported our profit growing 26% to $8.9 billion. In DPT, orders increased 19% and revenue was up 11% with increased deliveries in defense. Profit increased 22% to $1.3 billion. Our performance reflects the impact of flight debt, driving incremental gains that compounded into meaningful improvements. This enables us to accelerate output to deliver on our roughly $190 billion backlog, which is up nearly $20 billion over the last year. We are also investing to improve time on wing and reduce the cost of ownership to deliver value to our customers, supporting growth today, tomorrow, and into the future. I want to thank the entire GE Aerospace team, our suppliers, and our customers who put their trust in us. Looking to 2026, we're poised for another year of substantial revenue, EPS, and cash growth. Demand remains robust with 2025 orders up 32% and continued backlog growth, supporting our expectation for revenue to be up low double digits including commercial services up mid-teens. We expect operating profit of $9.85 billion to $10.25 billion, up a billion dollars at the midpoint. This translates to EPS of $7.10 to $7.40, up nearly 15% at the midpoint. And we expect to generate $8 billion to $8.4 billion of free cash flow with conversion remaining well above 100%. This outlook builds on the progress we made in '24 and '25. We expect to deliver mid-teens revenue growth between '24 and '26 compounded and $10 billion of profit in '26 two years earlier than our outlook has been. We continue to convert this into cash, expecting to generate more than $20 billion of cash between '24 and '26 to reinvest in our future, including in US manufacturing to support both our commercial and defense customers. GE Aerospace is an exceptional franchise, servicing and growing the industry's most extensive installed base of 80,000 engines. As we further embed flight deck, we'll unlock greater value for our customers and shareholders. Turning to Slide six, in their first year, our technology and operations, or T&O, team made a meaningful impact. We partnered more effectively with our suppliers, resulting in material input from our priority suppliers growing over 40% year over year in 2025 and up double digits sequentially in the fourth quarter, both translating to higher outputs. While we're making progress, we know our customers need more from us. To further accelerate our progress in 2026, we're expanding CES to include T&O, now led by Mohammad Ali. Integrating our product line, engineering, and supply chain teams will improve our end-to-end engine life cycle management. We're also elevating our customer-facing teams, led by Jason Tonich, now reporting directly to me, aligned with our customer-driven approach. These changes will enable greater cross-functional problem-solving, agility, and alignment to deliver for our customers. I also want to take a moment to thank Russell Stokes, who announced he'll retire from GE Aerospace in July after 29 years of service. His continuous improvement mindset and passion for developing leaders helped build this world-class business. Russell was one of the first leaders I met here at GE. He's been a critical partner over the last seven years. We wish him nothing but success in his next chapter. These changes, along with flight deck, will further support growth in deliveries in '26. Across our MRO network, we're removing waste to improve shop visit output and turnaround times. For example, we're converting from batch to flow production, which supported LEAP, CFM56, and GE90 turnaround times, improving over 10% year over year in the fourth quarter. Additionally, at our Wales facility, CFM56 turnaround time improved by 20%, and at Selma, we sustained turnaround times below 80 days. This enabled us to deliver our highest LEAP shop visit output of the year. With the LEAP installed base expected to roughly triple between '24 and '30, we're expanding capacity across our global MRO network to support aftermarket demand. In 2025, we added MTU Dallas as our sixth premier MRO partner supporting third-party shop visit growth, now representing around 15% of total LEAP shop visits. We're dedicating approximately $500 million of our more than $1 billion of investment in MRO to LEAP. This includes expanding several MRO sites, including Malaysia, Selma, and Dallas, and a new on-wing support facility in Dubai. We expect these investments will roughly double LEAP's internal capacity. Taken together, these actions drove meaningful progress in services and equipment output in 2025. CES services revenue increased 26% with internal shop visit revenue up 24%, including LEAP internal shop visit volume up 27%. Spare parts revenue grew more than 25%. Deliveries across commercial and defense increased 26% for the year, including a strong finish with 8% sequential growth in the fourth quarter. Commercial units increased 25%, including LEAP up 28%, exceeding 1,800 units, a record output for the program. And defense engine deliveries increased 30%. While 2025 marked a year of progress, we know there's more to do to meet customer demand. And I'm confident we'll deliver. Turning to slide seven, one of the behaviors that guides us is to be customer-driven in all that we do. We're leveraging over 2.3 billion flight hours and nearly $3 billion in annual R&D to drive meaningful improvement for our customers. Our focus remains on delivering mature levels of time on wing and lowering costs of ownership. In November, the GE NX fleet leader, equipped with the upgraded HBT blade, which has improved time on wing over two and a half times in hot and harsh environments, achieved a new milestone surpassing 4,000 cycles. Informed by our progress with the GE NX, the LEAP 1A durability kit will improve time on wing by more than two times, matching our industry-leading CFM56 performance. This is now incorporated in all LEAP 1A new engine deliveries and shop visits, with nearly 1,500 kits shipped since certification. In addition to improved durability, we're also expanding our LEAP repair catalog, which will lower costs of ownership and improve turnaround times. In '25, LEAP parts certified for repair increased 20%, and we expect continued growth in '26. Combined with our progress on delivery, we're actively working to meet customer expectations on LEAP. At the same time, utilization of our mature engines remains robust. CFM56 is the most widely owned and operated engine in commercial aviation. With retirements in '25 consistent with '24 levels, the third-party MRO ecosystem provides customers with optionality for servicing their fleets, supporting higher asset values, and lowering costs of ownership. We continue to strengthen MRO access to OEM materials to support further CFM56 longevity. Last quarter, for example, we reached a materials agreement with EFTIA Aviation to support the service of its growing fleet of CFM56 engines. We're also progressing the next generation of engines. We recently completed a ground test campaign demonstrating our first hybrid-electric narrow-body engine architecture. This first-of-its-kind propulsion milestone demonstrates systems integration, advancing the technology from concept to practical, scalable application. As we deliver greater customer value and advanced breakthrough technologies, we're growing our backlog. At the Dubai Air Show, we recorded over 500 engine wins across narrow bodies and wide bodies. Including Riyadh Air's commitment for 120 LEAP 1A engines and fly Dubai's selection of 60 GE NX engines. Additionally, Pegasus Airlines committed to up to 300 LEAP 1B engines to power its future Boeing 737-10 fleet. And we're honored that Delta, a new GE NX customer, selected us to power and service their new fleet of 30 Boeing 787s. In defense, Indestin Aeronautics ordered 113 F404 engines for the Tejas fighter jets. Demonstrating our position as a trusted partner for allied fighter programs. Overall, we're driving progress, improving field performance, turnaround times, and advancing future propulsion technologies. We're well-positioned to strengthen our leadership across both the commercial and defense sectors in 2026. Rahul, over to you. Rahul Ghai: Larry, thank you, and good morning, everyone. We closed out 2025 with another strong quarter. Fourth quarter orders were up 74%, with CES up 76% and DPT up 61%. Revenue was up 20%, led by CES Services, up 31%. Operating profit was $2.3 billion, up 14%. Service volume, productivity, and price were partially offset by the impact of lower spare engine ratio, OE growth, including 9x shipments and investments. Margins, as per prior guidance, were down 90 basis points to 19.2%. EPS was $1.57, up 19% from increased operating profit, a lower tax rate, and a reduced share count. Free cash flow was $1.8 billion, up 15%, largely driven by higher earnings with over 100% conversion. For the year, our results exceeded the high end of our guidance on all key metrics. Orders were up 32%, with commercial services orders up 27% and total equipment up 48%. Revenue increased 21% from commercial services, which was up 26% and higher deliveries of both commercial and defense units. Operating profit increased 25% to $9.1 billion, with margins expanding 70 basis points to 21.4% as commercial services volume and price offset OE growth and investments. EPS increased 38% to $6.37. Free cash flow grew 24% or $1.5 billion to $7.7 billion, with conversion over 110%, driven by earnings growth and continued contract asset favorability, which was partially offset by inventory growth to support continued output increases in 2026. Overall, very strong performance for GE Aerospace, positioning us well for 2026. Turning to our segments, starting with CES. In the fourth quarter, orders were up 76%, with services up 18% and equipment more than doubling. Revenue increased 24%, with services up 31%. Internal shop visit revenue grew 30%, from higher volume and increased work scopes. Spare parts sales were up over 25% as improved material availability supported increased output. Equipment grew 7%, with engine deliveries up 40%, including LEAP up 49%. This more than offset a decline in spare engine ratio due to the timing of back-end-loaded spare engine deliveries in 2024. For the year, spare engine ratio was lower than '24 as planned. Profit was $2.3 billion, up 5% from higher services volume with improved margins, price, and favorable mix. This was partially offset by the impact of lower spare engine ratio, higher installed shipments, including NINEX, and an increase in R&D. As expected, margins were down 420 basis points to 24%. For the year, CES delivered outstanding results, with orders growing 35% and services revenue and engine output both up roughly 25%. This supported profit growing 26% to $8.9 billion, with margins expanding 40 basis points to 26.6% from services growth, productivity, and price. Moving to DPT, orders were up 61%, with defense book-to-bill above two. Revenue grew 13%, with defense and systems revenue up 2%. Defense units were down 7% due to a difficult compare, which was more than offset by price and customer mix. Sequentially, this was the third consecutive quarter of strong defense engine shipments, with full-year deliveries up 30%. Propulsion and additive technologies grew 33%, led by higher commercial and military volume at Avio. Profit was up 5% from volume, favorable mix, and price, partially offset by investments and inflation. Margins were down 70 basis points to 8.9%. DPT also had a solid year, with orders up 19% and defense book-to-bill at 1.5, with backlog now at $21 billion, up nearly $3 billion. Improved output reported revenue growing 11%, profit was $1.3 billion, with margins up 110 basis points to 12.3% from volume, mix, and price. Going deeper into the drivers of our 38% EPS growth for the year, growth in operating profit drove $1.32 or 75% of the improvement in EPS, with the increased profit in CES and DPT partially offset by higher corporate cost and eliminations. Corporate cost was roughly $570 million, up about $170 million due to lower interest income. Eliminations were about $530 million, up approximately $70 million. Lower tax rate, a reduction in share count, and interest expense accounted for an additional 46¢ of EPS growth. Tax rate was down three points for the year, primarily from the benefits of long-term tax planning projects. Share count reduced by $26 million. Turning to Slide 12, we're updating our segment reporting to reflect the organizational changes announced last week. Importantly, there is no change to total company metrics. Aero derivative engines, which were previously reported in CES, will be included with DPT to drive greater supply chain alignment with the marine and mobility business. As a result, roughly $1.4 billion of revenue and a couple hundred million of profit will move from CES to DPT. With the expansion of CES to include T&O, we are also transitioning the cost of remaining sites and external engineering revenue to their respective businesses. This results in a small change to corporate cost and eliminations. The resegmentation impact is reflected in the 2025 segment financials on the left side of the page. We've also included a preliminary bridge in the appendix and plan to provide recast segment financials for first-quarter earnings. Turning to guidance, starting with CES, we expect mid-teens revenue growth, including services up mid-teens. This includes internal shop visit revenue and spare parts revenue, both up mid-teens from low double-digit engine removals combined with higher work scopes and price. LEAP internal shop visits are expected to grow 25%. We expect equipment up mid- to high-teens, including LEAP deliveries up 15% with higher growth from wide-body programs. We expect $9.6 billion to $9.9 billion of profit, up about $1.2 billion at the midpoint. This reflects the benefit of services growth and price, which is partially offset by OE growth, including NINEX, a lower spare engine ratio, and continued investments. In DPT, we expect mid-to-high single-digit revenue growth and profit of $1.55 billion to $1.65 billion. Higher deliveries will be partially offset by inflation, mix, and investments. Corporate costs and eliminations are up year over year to $1.2 billion to $1.3 billion from lower interest income, AI investments, and higher eliminations from internal BAT growth. In total, we expect low double-digit revenue growth for the company, with profit in the range of $9.85 billion to $10.25 billion, up $1 billion or more than 10% at the midpoint. Further unpacking the drivers of EPS and free cash flow growth, we expect EPS in the range of $7.10 to $7.40, up nearly 15% at the midpoint. About 85% of the improvement will be from higher operating profit. The balance will be from a marginal improvement in the tax rate to below 17% and a reduction of 18 million shares from our previously completed and announced capital allocation actions. Interest expense is expected to be roughly $900 million. We expect to generate $8 billion to $8.4 billion of free cash flow, primarily from higher earnings. Working capital and AD&A combined will be a source year-over-year from slower inventory growth. We continue to expect CapEx at roughly 3% of sales. Overall, we expect another year of conversion solidly above 100%. Taken together, GE Aerospace is poised for another year of solid growth ahead. Larry Culp: Rahul, thank you. 2025 was another outstanding year. Our sustained competitive advantages support our in our leadership positions across both commercial and defense. With the industry's largest fleet of 80,000 engines and growing, we've accumulated over 2.3 billion flight hours. This experience keeps us close to our customers through decade-long life cycles, building enduring relationships, and making us the partner of choice. This field experience combined with our nearly $3 billion in annual R&D investments allows us to drive continuous improvement across our services and products, enhancing time on wing and lowering the cost of ownership. As a result, across our narrow body, wide body regional defense platforms, we offer the best performing products under wing. Our world-class engineering teams develop next-gen technology to improve durability, efficiency, and turnaround times, along with advanced defense capabilities. Through flight deck, we're turning strategy into results with a focus on safety, quality, delivery, and cost, always in that order. Stepping back, the GE Aerospace team is focused and ready for what's ahead. In 2026, we're well positioned to deliver for our customers and shareholders, and I'm confident in our trajectory. With that, Blaire, let's go to questions. Blaire Shoor: Before we open the line, I'd ask everyone in the queue to consider your fellow analysts and ask one question so that we can get to as many as possible. Liz, can you please open the line? Operator: Ladies and gentlemen, if you wish to ask a question, if you wish to withdraw your question or your question has already been answered, please press 11 again. Our first question comes from John Godden of Citigroup. Your line is now open. John Godden: I was hoping you could elaborate a bit on the commercial aftermarket backdrop. Obviously, it was a great services quarter with revenue growth accelerating versus the quarter, so I'm just curious to what extent this momentum has carried through to start the year. And if you could just unpack some of the assumptions underlying the mid-teen services growth guidance for 2026. Is there any room there to outperform if recent momentum continues? Larry Culp: Well, John, good morning. Thanks for getting us started. I would say we haven't seen anything here at the beginning of the year that gives us pause relative to the tailwinds, the momentum that you referenced continuing. We've all seen Delta and United out since last week, I think, talking confidently about 2026. So when you couple their outlook, the fact that we come into the year with a $190 billion backlog, we know our share of cycles with LEAP in particular in the narrow body segment being up and the opportunities to leverage that underlying unit volume in the aftermarket with both expanded workscopes in both narrow and wide body as well as price, we feel like we have another very strong commercial services year supporting the aftermarket. Again, I think we've commented in the prepared remarks at a rate that should be up mid-teens. Will we be able to do better than that? We're certainly going to aim to do that. But as we talk through the course of 2025, we're not particularly concerned about the demand environment. It's really all about our ability to move spare parts out to third parties to complete our own shop visits. While we were pleased with the sequential and the year-over-year numbers that we cited in the fourth quarter, there's much more to do here in 2026. It's a bit of what undergirds the organizational move that we announced. To the extent that we can continue to make progress, and we think we will, perhaps not in line with the 40% bump we saw from our prior suppliers last year on a full-year basis, I think we'll be able to satisfy that demand better than we did in 2025. Rahul Ghai: Yeah. Just a couple of things, John, welcome to our call here. Just as we said in our prepared remarks, we expect both shop visits and spare parts to be up kind of the same range as mid-teens as the overall services growth. On spare parts first, our delinquency when we ended 2025 was up 50% over where we ended 2024. So as Larry mentioned, strong demand environment. As you think about the spare parts growth, it's gonna be primarily driven by narrow body. That's coming as the LEAP external channel continues to grow, and more than 15% of the LEAP shop visits are now performed by a third-party channel partner. CFM56 continues to be strong as well. Larry mentioned in his prepared remarks about how we ended 2025 retirements, which were similar to 2024. As we think about 2026, we expect retirements to be in the 2% range. Our prior expectations were in the 2% to 3% range, so trending a little bit better, and that puts CFM shop visits in the 2,300 to 2,400 range between 2026 and 2028. External demand environment looks good. We're expecting double-digit removals this year from engines that have already flown. Plus, the work scope continues to increase a little bit of price. All of that leads to that 15% growth that we mentioned on shop visit. Overall, we feel good about the services outlook for 2026. Operator: The next question comes from Myles Walton with Wolfe Research. Your line is now open. Myles Walton: Good morning. Larry Culp: Good morning, Myles. Myles Walton: I was wondering about the LEAP breakeven or LEAP profitability on the original equipment side. Are we crossing the root count of profit or breakeven in '26 still? Larry, you must be feeling a lot better about the trajectory to get output on a LEAP to 2,500 by 2028. What, if anything, is required from investment within the supply chain, not the MRO network, but more the OE side of the supply chain still to get to where manufacturers want the production rates? Larry Culp: Well, Myles, from a NewMake perspective, and as you know, the supply chain supports new make and also the aftermarket. No one can really isolate the new make demand and invest for that without being mindful of the aftermarket demand as well. I think we have improved over the course of 2025 our visibility further out and deeper into the supply chain, further out timewise, and deeper into the supply chain with respect to readiness to satisfy our needs to serve both the airlines and the airframers. There will be capital investment in various places. I'll let different suppliers and different commodity categories speak to their own plans. But I think we're confident that as we move forward here through the rest of the decade, we'll be able to satisfy what the airlines need in the aftermarket and what the airframers are looking to do for the airlines as well, right from a new delivery, from a modernization and expansion perspective. But there's work to do. Again, I don't think we're gonna be up 40% every year, not that we have to, but I feel very good that with the body of work we put in 2025, we're poised to step up again with the supply base, be it process improvement, be it capital expansion, and the like, to keep pace with these considerable tailwinds that we're all fortunately exposed to. Rahul Ghai: And, Myles, to answer your question on the LEAP profitability, yes, we expect LEAP OE to be profitable in 2026 as per our prior plans. Operator: The next question comes from Douglas Harnett with Bernstein. Your line is now open. Douglas Harnett: Good morning. Thank you. Larry Culp: Good morning, Doug. Douglas Harnett: You talked about the improvement in turnaround times across the board, like LEAP, CFM56, GE90, by about 10%. For LEAP, I can see that, but CFM56 and GE90 are very mature engines. Is this turnaround time improvement for both internal and third-party shop visits? What levers enable you to do that? How should we see that improvement reflected in financials since CFM56 is largely time and materials and GE90, you'd be on CSAs, I would assume. Larry Culp: Doug, it's an internally oriented number. We watch turnaround time closely at every one of our shops across platforms across the network. The way I think about turnaround time improvement, it's really driven by two things: one, material availability, and two, efficient execution of our standard work on the shop floor. We've talked a lot about supply chain. You've written about it as well. To the extent that we are getting not only more from our suppliers but getting what we get in a more predictable way, the teams on the shop floor are better able to execute and bring down turnaround times. We talked about a 40% year-over-year improvement from our priority suppliers. Those suppliers delivering at a 90% plus level to their commitments takes a lot of noise out of the system. That is an unlock for us. I think to take full advantage of the process improvements by way of flight deck that we've laid in the various shops. It's not equally spread across every shop, but those turnaround times that you see improve in the fourth quarter, for example, really is a combination of better input materials and better execution. How does that show up in the financials? Well, we should be getting more shop visits completed in terms of the top line, but we also believe it's a considerable productivity unlock. If a team on the floor has to stop a shop visit, if they are idle waiting for a part delivery, that's obviously unproductive time. If they have everything they need from induction to certification, we will see and have seen early signs of real productivity bumps there as well. Operator: The next question comes from Scott Deuschle with Deutsche Bank. Scott Deuschle: Good morning. Rahul, can you quantify what the GE9X headwind ended up being in 2025? What is the incremental profit headwind from NINEX in 2026? If you could comment on the quarterly earnings cadence at CES in '26 as well, that would be helpful. The question is around 9x losses and earnings cadence. Thank you. Rahul Ghai: Scott, on 9x, our losses ended. We said a couple of hundred million dollars of losses in 2025, and we landed right about there, so right in line with our expectations. For '26, as we previously said, we are gonna ship more engines in '26, and the volume continues to grow. With that, our losses on the 9x programs will double year over year. Our current guidance for '26 incorporates those losses getting to that level, so all consistent with what we said previously. On the first quarter, let me just elevate the question a little bit, Scott, and just kind of speak to the total company here, including CES. First, we expect a solid start to the year. Our output started out slow last year in the first quarter, so we expect our engine and shop visit output to grow substantially here in the first quarter. That will drive our revenue growth, and we expect at the total company level high teens revenue growth for the company. Both CES and DPT expect above their respective full-year guides. For CES, we ended 2025 with 27% orders growth, so we're entering '26 with a strong backlog. About 85% of the spare parts that we need to ship in the first quarter are already in the backlog. We had a CMR charge in the first quarter of last year that we're not expecting to repeat. It'll be a strong start for us in our services business, and commercial equipment output is expected to be strong. That'll drive revenue growth. First quarter last year was our strongest spare engine shipment quarter, so there'll be some year-over-year impact due to that. Still, it'll be a strong revenue performance despite that. There will be 9x shipments here in the first quarter as well, which we did not have in '25, and DPT, they're on a good run here on sequential performance, and expect that to continue, driving revenue growth for the DPT segment. Switching to profit, expect that profit to be up year over year growth primarily from the services growth and absence of the CMR charge offsetting the higher deliveries and the 9x shipments. However, because of the lower spare engine ratio and 9x shipments, our total margins for the business will be kind of in line to slightly better or marginally better here versus where we ended 2025. Free cash flow, we expect certain payments here in the first quarter, will be down year over year, but overall, thinking about revenue and profit, we expect to get out of the gate strong. Operator: The next question comes from Sheila Kahyaoglu with Jefferies. Good morning, Larry, Rahul. Sheila Kahyaoglu: Maybe, Rahu, since you were just speaking about CES profit guidance for '26, if you could walk through margins at the midpoint, it implies margins are flat. I know you gave a few pieces on the GE9X headwind, how are you thinking about shipments there? What are you seeing offset the goodness to help overcome some of the mix issues you're facing with equipment growth outpacing services, 9x headwind, as you mentioned, spares ratio, and LEAP growing double digits while CFM is flat? How do we think about that? Rahul Ghai: I think, Sheila, you kind of outlined some of the key drivers here in the math. The margin story at the CES level is exactly the way you said it. Strong services growth, with 3 and a half billion dollars expected in services revenue growth in '26 that drops through at a healthy clip despite LEAP being a bigger share of growth, still, expect strong drop through from services revenue improvement year over year. OEM shipments are increasing, spare engine ratio gradually comes down as we expect it to, as time passes on. And then NINEX shipments and with R&D coming in as well. Those are the big drivers for CES margins here in 2026. The margins ended up better than expected during October guidance. Margins about 70 basis points better than what thought in October. So, despite that, expect margins to be flattish in 2026. Feel good about trajectory. Operator: The next question comes from Seth Seifman with JPMorgan. Seth Seifman: Hey, thanks very much, and good morning, everyone. Larry Culp: Morning, Seth. Seth Seifman: Maybe just to continue along that line of questioning, as we think about the headwinds accumulating from a mix perspective in CES and then look out beyond '26, how should we think about margin trajectory there with LEAP OE becoming profitable, LEAP aftermarket continuing to become more profitable, but maybe OE aftermarket mix headwinds and more 9x? I'm getting to, like, a 26.6% in CES for '26. So, kind of where do we think about that going directionally in the years beyond? Larry Culp: I think you captured some of the headwinds we've talked about not only for '26 but for '28. It's important to recognize that when we spun, thought to be at a $10 billion operating profit level two years from here. We're able to hit that milestone, and will hit it at the midpoint here in 2026. There are many things outweighing the headwinds as we continue to grow the install base. With suppliers grow the installed base at a low to mid-single-digit level, and get the full benefit of utilization in term volume, work scopes, and price. The commercial services business is the engine that drives profit growth. LEAP is better as we go forward and will look to have NINE do the same. Despite progress in defense, with 11% top-line operating profit up over 20%, we have opportunity to deliver on the $11.5 billion operating profit targeted for 2028. Potentially do better. Serve airlines, ramp with airframers to help modernization and expansion. Support warfighters fully. Rahul Ghai: Seth, if add a couple of things, back in July when we gave 2028 guidance, expected around 21% margins in '28. We got there last year, jumping off higher point. Margin profile maintained into 2026. Spoke about CFM56 goodness, retirements trending low, shop visits expected in the 2,300 to 2,400 range, maybe better than previously thought. LEAP service profitability continues to improve, external channel repairs to grow, incremental shop visits drive productivity in LEAP services. Wide body program, especially GE90, no retirements expected. All that looks toward 2028, improved margin profile. Operator: The next question comes from Ron Epstein with Bank of America. Ron, are you there? Ron Epstein: Hey. Can you hear me? Sorry about that. Rahul Ghai: No problem, Ron. Ron Epstein: Good morning, guys. Larry Culp: Good morning. Ron Epstein: So, yeah, a lot's been asked already, but back to prepared remarks, mentioned spending $3 billion a year on R&D, a big number. Can you elaborate on spending, investments being made? Larry Culp: Ryan, I'd say it's where anticipated it to be. Customer experience improvement on ramping engines, like LEAP, with improvements like the durability kit. Nine X coming under wing with the triple seven X. Programs EIS or ramping are the first order. Additionally, investing in future flight. RISE program, technology development, not product development but spends big chunk of annual spend, coupled with some defense next-gen programs, contributing to meaningful portion of R&D. NEX with the 2.3 billion flight hour experience base positions us well to shape future of flight. Balance of 2026-28 rests on protecting and expanding R&D envelope, key for innovation and technology. Operator: The next question comes from Gavin Parsons of UBS. Gavin Parsons: Thank you. Good morning. Larry Culp: Good morning, Gavin. Gavin Parsons: You guys talked about CFM56 retirements trending lower than expected, 2%, despite successful LEAP deliveries. Expecting that to pick up to 3% or 4%, what's changed, still expecting shop visit peak in '27? Thank you. Larry Culp: Gavin, it's really more of a demand function, keeping CFM56 powered planes in flight as airlines need them. Retirements in 2025 ended up at about 1.6%, in line with 2024, balance '26 a little better, expecting slightly better at 2% compared to two to 3% range given in July. From shop visit perspective, ranges 2,300 to 2,400 through 2028 sets better expectations. Expect no big decline come 2030. Floating better utilization with demand leading to subdued retirements, meaning CFM56 strong longer. Operator: The next question comes from Noah Poponak with Goldman Sachs. Noah Poponak: Hey, good morning, everybody. Rahul Ghai: Morning, Noah. Noah Poponak: Could you elaborate on the agreement announced with Eptai? Rahu, on free cash flow, this year flirting with what provided for 2028. Anything abnormally high in '26, fade away, bridge 26 to 28? Larry Culp: On Eptai agreement, third-party aftermarket seen as a strength, want maximum optionality how fleets serviced, both supporting asset values and lowering cost of ownership—foundation for agreement. Rahul Ghai: On cash flow, Noah, nothing abnormal in 26. Last year inventory growth was a challenge, added a billion-dollar inventory. Supply chain improving, but not there entirely, so investment made to continually increase output. For '26 expect less contract asset favorability this is getting offset here with slower inventory growth. Total working capital AD&A last year was a half a billion net headwind, expect slightly less this year. It's not a bad given low double-digit revenue growth. Really nothing abnormal coming into the cash number and more opportunity on inventory as we get out. Maybe less on contract assets, all in line with what was communicated before. Blaire Shoor: Liz, we have time for one last question. Operator: This question comes from Gautam Khanna with TD Cowen. Gautam Khanna: Hey, thank you. Good morning. Congrats to Mohammad and Russell. Customer behavior in the aftermarket, any change anticipated on overhauls scope, on wide-body engines or CFM56, any pricing pushback, discontinuity compared to recent times? Larry Culp: Nothing stands out frankly. Demand environment post-pandemic robust, with airlines wanting maximum fleet support. Talked about supply chain and flight deck over last years. CFM56's stability, demand leading toward some expanded workscopes. Satisfaction without compromising safety and quality is the reasonable ask, one committed to delivering new year. Blaire Shoor: Larry, any final comments to wrap the call? Larry Culp: Blaire, thank you. The hour flew there. Thank you, everyone.
Operator: Ladies and gentlemen, welcome to the S&T Bancorp Fourth Quarter and Full Year 2025 Conference Call. After the management remarks, there will be a question and answer session. If you'd like to ask a question at that time, please press star then the number one on your telephone keypad to raise your hand and enter the queue. Now I'd like to turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead. Mark Kochvar: Thank you, and good afternoon, everyone, and thank you for participating in today's earnings call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the fourth quarter and full year 2025 earnings release as well as this earnings supplement slide deck can be obtained by clicking on the materials button in the lower right section of your screen. This will open up a panel on the right where you can download these items. You can also obtain a copy of these materials by visiting our Investor Relations website at stbankcorp.com. With me today are Chris McComish, S&T's CEO, and David Antolik, S&T's President. I would now like to turn the program over to Chris. Chris? Chris McComish: Great. Thank you, Mark, and good afternoon, everybody. Thank you for joining us on the call. I'm gonna begin my comments on page three. We certainly appreciate the analysts being here, and we look forward to your questions. Before we discuss Q4 specifically, I'd like to take a few minutes to discuss and wrap up 2025. Overall, we moved forward through 2025 very well, producing returns, building record levels of capital, with increased momentum while receiving external recognition for both our financial performance as well as our high levels of employee engagement. For the year, we produced $3.49 a share, just under $135 million of net income, with a 3.9% net interest margin. Loan growth was over 4%, and customer deposit growth was just under 3%, while expenses were well controlled. Asset quality for the full year was well managed at 18 basis points of net charge-offs, while the ACL declined 16 basis points year-over-year, reflecting three straight years of overall improved asset quality. You know, none of these results would have happened without the commitment of almost 1,300 S&T employees or some of the most engaged and talented employees in our company. For those that are listening on the call, we thank you for your hard work and your engagement. We're using these numbers and results of yours. You should be very proud. Turning to the quarter, our $34 million in net income equates to 89¢ per share, down slightly from Q3. Our return metrics were again strong, highlighted by a 1.37% ROA. Additionally, our NIM rose to 3.99%, up six basis points on a linked quarter basis, which is the best performance we've seen since 2023, as is our 1.95% PPNR up six basis points quarter over quarter. Asset quality for the quarter was mixed due to higher charge-offs associated with some NPA resolutions while the ACL declined eight basis points due to specific reserve releases and an overall reduction in CNC assets. Dave will provide more details here in a few minutes. Moving to page four, loan growth was just under $100 million for the quarter at 4.5%, led by commercial banking with both growth in our C&I portfolio as well as our CRE line of business. Customer deposit growth was just under $60 million at 2.9%, and the quality of our deposit mix remains very strong with DDAs representing 27% of total balances. Before I turn it over to Dave Antolik to provide more details on the balance sheet and credit, I wanted to bring to your attention the other announcement that we made this morning announcing our new $100 million share repurchase authorization that was approved by our board of directors yesterday. Given the robust capital levels of the company, we are fortunate to be able to have an authorization of this size available to us. Our capital levels give us the ability to repurchase shares should the market warrant it, while not in any way impeding our ability to consider other opportunities including M&A. With that, I'll turn it over to Dave, and I look forward to your questions. David Antolik: Well, thank you, Chris. And as Chris mentioned, the loan growth of the quarter was driven primarily by commercial with C&I and CRE balances growing by $53 million and $34 million respectively. C&I growth was a result of an increase in revolving balances and new customer acquisition. Q4 was a particularly active quarter for our asset-based lending group, who onboarded several new names. Categories of C&I growth include retail, utilities, and service. Our CRE growth was entirely driven by construction funding in the quarter. We continue to see demand for construction facilities for multifamily, warehouse, storage, and industrial asset classes. These loans typically fund over twelve to eighteen months, move to our permanent CRE portfolio, and frequently move on to nonrecourse funding sources. Supporting growth in the coming quarters, our unused commercial construction commitments increased by $78 million quarter over quarter. As a result of the strong funding in Q4, our pipelines reduced slightly heading into Q1, and our focus is on rebuilding. This activity is consistent with our historical experiences. Regarding loan growth guidance for 2026, we believe that mid-single-digit growth is achievable while maintaining our asset quality profile. We expect loan growth to primarily come from C&I, where we've seen improved activity from investments we've made in team leadership and banker talent, along with CRE. We've demonstrated a long-standing ability to develop deep customer relationships in support of growth. We are also forecasting continued consumer home equity growth, which is focused on complementing our deposit franchise customers. If I can now direct your attention to slide six of the presentation, which provides additional details on our asset quality performance in Q4. Starting with the allowance for credit losses, we recognized a reduction relative to gross loans from 1.23% to 1.15% quarter over quarter, primarily the result of two factors. First, a reduction in specific reserves related to problem loan resolution. Second, a reduction in criticized and classified loans of $30 million or 13% in Q4. This reduction in criticized and classified loans at year-end 2025 represents our third consecutive year of successfully reducing loans in these categories. Over that period, the three-year period, we have reduced total CNC loans by 50%. It is also a reflection of our focus on asset quality as a key driver of financial performance, robust portfolio management, and an aggressive approach to problem loan resolution. As a result of aggressively addressing problem loans, we were able to fully resolve loans totaling $29 million during the quarter. These resolutions contributed to increased charges of $11 million or 54 basis points annualized in the quarter. In addition, we recognized new NPL formations that caused overall NPAs to increase by $6 million from 62 to 69 basis points. We have appropriately reserved for these loans and have resolution strategies in place. Although an increase relative to Q3 and 2025, this level of NPLs remains at a very manageable level. Looking forward, we anticipate full-year 2026 asset quality results to perform similarly to what we saw in 2025, with a focus on reducing NPLs and maintaining the lower level of CNC loans that I discussed earlier in my comments. I'll now turn the call over to Mark. Mark? Mark Kochvar: Thanks, Dave. Fourth quarter net interest income improved by $1.8 million or just under 2% compared to the third quarter. That was mostly driven by the margin expansion of six basis points. The margin improvement came from an 11 basis point decrease in the cost of funds, and that was offset by a modest decrease in earning asset yields of about three basis points. We have been able to successfully reduce exception rates and regular rates on non-maturity deposits as the Fed has reduced short-term rates. CD rates have been somewhat more sticky but are still coming down. We continue to expect that our more neutral interest rate risk management position and pricing discipline will mitigate any rate down impact, both what has happened and what is expected in 2026. Tailwinds from our maturing received fixed swap portfolio, security, and fixed loan repricing, some limited CD repricing all contribute to these tailwinds. If we look into 2026, we expect relative stability in the net interest margin, in the mid to high 3.9% range, with net interest income growth coming from earning asset growth. Next slide. Noninterest income increased by $500,000 in the fourth quarter with small improvements in our major customer fee categories. The increase in other is timing-related, primarily to the letter of credit activity. Our expectations for fees in 2026 remain at approximately $13 to $14 million per quarter. Expenses were in line in Q4, up by $800,000 compared to the third quarter. The largest variance was in salaries and benefits. Within that, medical costs were higher and also salaries due to some hiring. Marketing was impacted by the timing of some promotions. We expect to manage our 2026 noninterest expense year over year to around 3%, which implies a quarterly run rate of approximately $58 million. Lastly, on capital, the TCE ratio decreased by 29 basis points this quarter due to the share repurchases completed in the fourth quarter. We repurchased just over 948,000 shares at an average price of $33.82, a total of $36.2 million. Our regulatory ratios continue to be very strong with significant excess capital. Even if we complete the $100 million repurchase program announced today, we are comfortable that we will have more than sufficient capital to position us well both for the environment and to enable us to take advantage of inorganic or organic growth opportunities. Thanks very much. At this time, I'd like to turn the call back over to the operator to provide instructions for questions. Operator: Thank you. The floor is now open for questions. If you like to withdraw your question at any time, please press 1 again. Please hold while we poll for questions. Your first question comes from the line of Justin Crowley with Piper Sandler. Your line is open. Justin Crowley: Hey. Good afternoon, everyone. Hi, Hi. Just want to start on loan growth for the quarter. You know, it didn't really deviate from how you folks framed expectations previously, but bigger picture, curious, is there anything specific that you'd point to that that's maybe holding you back from that ramping to say you know, a mid to high single digit pace, something more along those lines? Maybe once discussed. You know, is that a function of the demand side of the equation or is there a desired pricing component to that? What, if anything, would you speak to there? David Antolik: Yeah. Justin, it's Dave Antolik. I think that it is not necessarily on the demand side. It's, you know, making sure that the asset quality of the onboarded new customers meet our criteria to maintain the lower levels of CNCs. Some of it is, you know, we're adding to staff. We're adding bankers. We plan on doing that throughout the year. So making sure that we have adequate coverage in all of our markets and all of our segments. I think about the C&I growth and, as I mentioned, the ABL activity. There were certainly bright spots in Q4. That's relatively new. So there are some tailwinds to help us grow and hopefully get to a higher rate of growth in terms of our loan. Chris McComish: Justin, it's Chris. The other thing I would add is we do think, you know, about the overall state of the economy. And things are picking up in positive, but we don't want to be out there predicting something that's dramatically higher than what you see from a GDP growth rate standpoint or what we believe organically is available in the markets that we serve. Dave touched on it too. You know, our desire is to continue to grow teams and bankers in the field. Our leadership in the field knows that there are no constraints around adding more folks to the team, and that we'll continue to do that. But we're trying to give you our best estimate based upon all of those factors. Justin Crowley: Okay. And you mentioned in terms of or both of you mentioned sort of the hiring efforts and, you know, maybe it's a mix, but you know, how focused is that on the C&I side of things? Is that kind of the top priority in terms of looking to add new talent? David Antolik: Yes. I would call that our number one priority in terms of moving ourselves forward and accelerating growth in the commercial space. And it's not just C&I, Justin. It's both CRE and C&I. You know, we're doing an awful lot of work in our business banking space as well. So focus those teams on deposit gathering and developing new relationships. So it's across the board, you know, in the fight for talent, we think we have a really good story to tell. We'll be able to acquire and add to the teams in order to support growth. Justin Crowley: Okay. That's helpful. And I guess pivoting, you know, just one on the margin. You know, was pleasantly surprised with the expansion you saw this quarter, and it looked like some nice moves lower in deposit costs. You know, I think the last update you gave, you're referring to some of the competitive pressures on the funding side. That had been maybe a little stronger than initially expected. So curious how that has been trending as we now move through the first quarter. And, you know, I guess, how that sort of informs the mid to high three nine, guide on margin here looking forward? David Antolik: Yeah. I think with the as the Fed moved lower, you know, we've seen the competitors a little bit slower than we anticipated, but bring rates down. So we're working within that framework and are pretty confident that we can hold these levels on the NIM. Chris McComish: Justin, if you think about the quarter itself and when rates dropped, I would say the competitive intensity around rates was higher early in Q4, than as we moved through Q4. And, you know, subsequent drop in rates. The market rates kind of went with it a little bit faster. I think it's a bit harder for people to cross, for example, four on CDs. You know, that dip below four on CD, that short six CD rate took a little bit longer than we had thought would happen. But we're through that, things seem to be moving a little bit better. Justin Crowley: Okay. And then maybe just M&A. You know, I know we've talked a lot about it, but just curious for Chris, maybe an update there, you know, where things stand, just sort of the pace of conversations you're having, if there's any or has been any shift in preference or bias as to what geography or geographies you know, you might be leaning toward or where you're seeing the most active discussions. Chris McComish: No. Nothing significant. Just that we've talked about over the past couple of months. We are in active dialogue across the geographies. And we continue to make it a priority for us. But we also want to do, you know, do the things that we have most direct control over, and those are the things that we're doing every day. So still lots of interest, lots of conversations. You know, reiterating something I said earlier. This stock repurchase authorization that we have, and we're very fortunate to be able to, you know, kind of walk and chew gum at the same time. That we can potentially, if the market avails itself, to the repurchase authorization, that's great. At the same time, it doesn't inhibit us at all from an M&A standpoint. Justin Crowley: Okay. Perfect. Great. I appreciate everything. Chris McComish: Okay. Thank you. Thanks. Operator: Your next question comes from the line of Daniel Tamayo with Raymond James. Your line is open. Daniel Tamayo: Thank you. Hey, Danny. Good afternoon. Chris McComish: Yeah. Hey, guys. Maybe we start on the loan growth side, but as it relates to the funding, mid-single digits not guiding to better than that, but sounds like it could be a good year for loan growth. Loan deposit ratio now over 100%, I believe. So just curious if you expect to be able to kind of fully fund that loan growth with deposits or if you're going to be using alternative sources, just outlook on the deposit growth, if you will. David Antolik: Yeah. Sure. What we're forecasting is our ability to fund that internally through deposit growth. We saw a really strong Q4 in terms of customer deposit growth, particularly in the consumer space. Was offset a little bit by some activity with some large commercial depositors that we consider more anomalous than anything. So I think that with the focus and the investments that we've made in technology, people, campaigning, we're really focused on driving core deposit growth, and we think we can achieve balanced loan and deposit growth trajectory. Chris McComish: Danny, it's Chris. If you'd be able to show you the Teams incentive plan, you would see very clearly where the importance of deposit growth and funding our asset growth through continued expansion of customer relationships. So we know in order to match profitable growth, the funding needs to come from the continued growth in our already strong core deposit franchise, and that's a key focus for all of us in all lines of business. Daniel Tamayo: Okay. And on the cost side, I suppose, I mean, this is kind of related to that as well as your commentary earlier about repricing the current deposits. What do you have in terms of implied or assumed deposit betas in margin guide? David Antolik: Well, I mean, we have maybe in our plan, we have a couple more cuts sort of built in. I mean, it's complicated because there's, you know, on the asset side, things are moving the other way. But on the deposit side, the betas are probably in the 30 range overall. Daniel Tamayo: Okay. Alright. Great. And then, I guess, one last one for you, Chris. You talked about the M&A, and you obviously have this buyback announcement. From a capital perspective, but you know, you're obviously just under $10 billion. You've been able to kind of flatten out the asset growth over the last few quarters. You know, I'm modeling in. I think you talked about last quarter likely crossing $10 billion next year. But is there a way or a desire to potentially keep that under $10 billion through next year and push the Durbin hit out a year? Chris McComish: Yeah. At this point, Danny, we're not thinking that way. We believe that we'll know, our Durbin hit is relatively small at $6 to $7 million. There's certainly some things that you could do, you know, Mark and the team do. But our focus right now is to continue to grow and show some reasonable growth. You know, if we end up with, you know, 5% loan growth for the year, 6%, you know, in that range, you're talking about $500 million worth of loan growth, and that would put us kind of meaningfully over the $10 billion. And then we have, you know, the good part of 2027 to work through that. So our focus is to continue to and recognize that, you know, that's a potential headwind, but it's also something that we're gonna we can also celebrate because it's been talked about for too long to stay around that level. Daniel Tamayo: Understood and agreed. We're all looking forward to not talking about that anymore. Chris McComish: Think about it, Danny. The call would be ten minutes shorter. Daniel Tamayo: I'll scratch that off my question for next time. Alright, guys. That's all I have. Thanks a lot. David Antolik: Thank you. Operator: Next question comes from the line of Kelly Motta with KBW. Line is open. Charlie: This is Charlie on for Kelly. Thanks for taking my questions, guys. Chris McComish: Sure. Charlie: Just to hit on asset quality quickly, can you provide more color on the specific resolution of the NPAs that drove kind of the $11 million in charge-offs? And whether that relates to the two CRE and one C&I credit you guys identified last quarter? David Antolik: Yep. Yep. Just got that. And you directly related to those previously identified and talked about credits. We were able to bring those to resolution, recognize the charge, reduce specific reserves as a result. We also had, as I mentioned, formation in the quarter. That were both C&I and CRE. And we appropriately reserved for those. And we have resolution strategies in place for those credits as well. And, yeah, I want to reemphasize the importance of the progress we've made in terms of the criticizing classified reductions over the last three years. So if you think about, you know, we talk a lot about loan pipeline and where's growth going. You know, that CNC bucket is the pipeline for future charges and NPLs. So having reduced that by 50% over the last three years, reduces the amount of problem loans coming into the funnel, that could potentially lead to further deterioration or charges within our book. So that's why we feel good about being able to say, hey. Look. Asset quality in 2026 is not going to perform any worse than 2025. And our focus on reducing NPAs and the feeder pipeline of CNCs has taken hold and it's really our focus. Charlie: That's helpful. Thank you. And then turning to expenses, it seems like growth is gonna be expected to be strong, and you guys saw 4% expense growth this year. Is that kind of a fair run rate in the years ahead? I know you mentioned adding talent in the C&I and CRE verticals and made investments already. Just if you could speak to initiatives ahead and maybe secondly, if there's room on the efficiency ratio or it's, like, mid-fifties a good sustainable place to operate from? Thank you. David Antolik: Sure. I'll start at the last one. I think mid-50s is the place to look for the efficiency ratio to be. On the expense side, we don't think we have a lot of infrastructure build. We've invested a lot over the last few years on the staffing side for a lot of our support areas. So the FTE growth that we expect in this year and really for a couple of years after that will be mostly production-related. So that limits the overall increase on the salary benefit side. So we're working with about a 3% year-over-year expense increase. So, you know, we're pretty confident that we could hold to that going into this year. Charlie: That's great. Thank you. I'll step back. Thanks for taking my questions. Chris McComish: Thank you, Charlie. Operator: Your next question comes from the line of Matthew Breese with Stephens. Your line is open. Matthew Breese: Hey, good afternoon. Chris McComish: Hi, Matt. David Antolik: Hey, Matt. Matthew Breese: Few more questions for me. You know, first, loans this quarter held up a bit better than what I was expecting. And so I'm curious what the roll-on yields are versus roll-off today and maybe what are your expectations for back book repricing in 2026? David Antolik: We're still getting a little bit of positive on the fixed side. You know, we're also getting benefit from this received swap book that we have. So that's been helping a lot to support the lack of declines on the asset side. Although that tailwind, if you will, starts to diminish as we get farther into the year. You know, so by the end of the fourth quarter, a lot of that will be gone. The replacement yields are not all that different on the floating side. I mean, they're just kind of coming off and going on, but we are still picking up, you know, maybe 25 basis points on other more fixed products net. Matthew Breese: And do you have the maturities for fixed asset repricing or fixed loan repricing in '26? David Antolik: Say tower bets? Yeah. But we have about a billion or so that we have to replace every year. Some of that will be our prepayments and not and also amortize it. Loans. So kind of a mix of that is that the It's a mix of fix and flow. Yeah. Matthew Breese: Got it. Okay. And then do you have the updated cost of funds either at or cost deposits either at year-end or more recently? One of the things I was looking at, you know, CD costs, just look a little elevated here at $3.86. I'm assuming there's quite a bit of downside as we think about, you know, rate cuts, additional rate cuts, and the maturity schedule there. What CD cost could be a year from now? David Antolik: Yep. So they have, like, a monthly margin, you know, from December that gets us a little bit closer. And for that period, our CDs were about at a $3.82. And overall deposits were about a $2.50. Matthew Breese: $2.50 for interest-bearing. David Antolik: Yes. Yeah. That doesn't include DDA. It's just Yeah. Matthew Breese: Okay. Okay. Thank you. I guess the last one for me, a lot of the questions have been exhausted, you know, for Community Bank, what are you doing, or what are you using for AI tools at this point? How are you using them and as we look ahead, whether it's a year or five years, you know, how do you think those tools might impact your P&L? Chris McComish: Yeah. Obviously, you know, in some of these areas, things are early days, but in other areas, it's, you know, it's work that is really important to our company. I think about in the area of BSA, AML compliance, and some of the fraud protection that occurs in our company every day relative to primarily to our deposit book and, you know, anomalies that are happening within commercial and consumer deposit relationships. So all of that information that's coming to our financial intelligence group is AI-driven. And alerts are created. And it has been a big factor in our ability to, you know, find potential fraud and make sure that we're stopping things before they actually happen. And it's, you know, it's millions of dollars of savings that we see on a quarterly and annual basis. Around potential things, all coming from you would consider some sort of AI alert. We're also thinking about, you know, generally, you know, compliance consumer compliance, and the ability to use AI there. Within our commercial bank, the underwriting and portfolio management infrastructure that we have has increasing levels of AI support to do things like auto spreading of financial statements. You know, support for it will continue to mature. Will be support around underwriting for originations as well as portfolio management. We're also using it to enhance our communication. You know, just this month, some of the work that we're doing in communicating to our board, we're running through some AI tools to help us communicate more effectively. So it's a lot of kind of some experimentation. Obviously, there's a big level of risk management associated with it. This is our information that we have to protect. And we have to make sure that it's not, you know, not available elsewhere. So we're working on that. You know, we've got a working group that thinks about these things, but you know, it'll continue to evolve, and it is a priority for us. You know, we talked about expense growth in the year and, you know, the commitment that we have is, you know, all FTE growth people expense growth will come in customer-facing and revenue-producing roles. We believe that, you know, back-office support and those sorts of things should be able to be held flat. And that's kind of a forcing mechanism to make sure that we're looking at opportunities that, you know, from a technology standpoint. Matthew Breese: How far away are we from, you know, you said millions of savings. You know? How far away are we from that actually impacting guidance and your outlook? Chris McComish: Well, a long way. You know, again, it's still early days. When I'm talking about millions of savings, these are, you know, fraud alerts that are protecting, you know, protecting our customers from potential losses that could have occurred otherwise. So as it relates to significant increases in operating expenses, I've, you know, we got a ways to go, I think. Matthew Breese: Yes. I'll leave it there. Thank you very much for all that. Appreciate it. David Antolik: Sure. Operator: Your next question comes from the line of Dave Bishop with Hoste Group. Your line is open. David Bishop: Yes, thank you. Good afternoon. Chris McComish: Hey. David Bishop: Quick question for you. Most of my questions have been asked and answered, but in terms of origination, loan production this quarter versus payoffs, just curious, maybe how those compare to fourth quarter to the back in the third quarters? Thanks. David Antolik: Yeah. Fourth quarter was robust. Originations were strong in Q4. We did have elevated payoffs in Q4 that talked about the, you know, the kind of the construction cycle. A lot of those loans were refinanced out of the bank in Q4. You know, it had led to some pipeline burn that we're actively rebuilding now and would hope to, you know, regain our momentum. And as we add additional bankers incrementally add to what our experience has been over the past year or two. So we, in total, need to originate somewhere around a billion and a half to a billion 7. And in total new loans each year to drive a, you know, five to 7% net loan growth number. David Bishop: Got it. And in terms of the targeted banker assets here, any geographies burning a hole in your pocket more than others as you budget out this year? David Antolik: Yeah. We're, you know, we're agnostic relative to the geography. You know, we want we know we need to add to the C&I teams. CRE, we're pretty well heeled in terms of the legacy market. But if we can find an additional banker who can help us grow, we're gonna hire them. As Chris mentioned, the focus of the leads of both the commercial real estate and C&I groups, our ABL group, is to add additional bankers in order to further enhance customer acquisition and that, hopefully, that translates into additional loan and more specific deposit growth. So it might be treasury management officers. It could be CRE bankers. It could be C&I bankers. You know, we're looking to grow all facets of our commercial teams and the products that they offer. David Bishop: Great. Thank you for that color. Operator: Your next question comes from the line of Daniel Karthaus with Janney Montgomery Scott. Your line is open. Daniel Karthaus: Hey. Good afternoon, guys. Chris McComish: Hey, Dan. David Antolik: Hey, Dan. Daniel Karthaus: Just, most of my questions have been asked and answered, but maybe could you provide a little bit of color as to competitive factors on the deposit side, given your goal to fund loan growth with deposits. Are the markets that you operate, are they behaving rationally right now, or how would you kind of describe those? Chris McComish: Yeah. We talked a little bit about that earlier. I would say that, you know, early in Q4 as rates started coming down in that 4% number was out there when you're talking about the CD book. There was some pressure from competitors to what I would call key, you know, hold on what I have. And offer, you know, an elevated rate. We were a little surprised that folks kind of reacted as slowly as they did. And I think particularly in the month of October, maybe even into early November. But second half of the quarter, things became more rational. You know, we don't aggressively post and advertise aggressive rates in the market, generally speaking. We operate with what I would call a very responsive exception pricing process that kind of combines the ability for our team leaders in the field to make decisions with the proper level of oversight between Mark's teams and Dave's teams. And that has worked really well for us, both in the ability to attract new deposits as well as to retain things from a competitive standpoint. So we feel, you know, optimistic about our ability to respond to the information that we're getting, to make decisions around and that's a big reason why we believe we should be growing deposits at least at the rate that we're projecting our loan growth. Daniel Karthaus: Excellent. Got it. Great. So I have for right now. I'll step back. Thanks. David Antolik: Thank you, Dan. Operator: And with no further questions in queue, I'd like to turn the call over to Chief Executive Officer, Chris McComish, for closing remarks. Chris McComish: Well, listen. Thanks all for being on the call with us. And we appreciate your engagement and your guidance. Be safe out there. There's a lot of nasty weather coming in various parts of the Midwest in particular. But we look forward to a successful 2026. We're certainly very proud of 2025. Look forward to moving forward. So have a great rest of the day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Hello, and welcome to Banc of California's Fourth Quarter 2025 Earnings Conference Call. I will now turn it over to Ann DeVries, Head of Investor Relations at Banc of California. Please go ahead. Ann DeVries: Good morning, and thank you for joining Banc of California's fourth quarter earnings call. Today's call is being recorded, and a copy of the recording will be available later today on our Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliations to these measures and additional required information are available in the earnings press release and earnings presentation, which are available on our Investor Relations website. Before we begin, we would also like to remind everyone today's call will include forward-looking statements, including statements about our targets, goals, strategies, and outlook for 2026 and beyond, which are subject to risks, uncertainties, and other factors outside of our control, and actual results may differ materially. For a discussion of some of the risks that could affect our results, please see our safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation, as well as the Risk Factors section of our most recent 10-Ks. Joining me on today's call are Jared Wolff, Chairman and Chief Executive Officer, and Joe Kauder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would like to now turn the conference call over to Jared. Jared Wolff: Thanks, Ann, and good morning, everyone. I have a prepared script here, but let me go off script for a minute. This was a really great quarter and end to the year. I really could not be more pleased with the execution of our team. As you all know, we spent 2024 integrating the merger that was completed at the end of '23. So 2025 was supposed to be business as usual. Well, in my view, there really was nothing usual about what we did in 2025. It really represented very strong performance by our teams on both sides of the balance sheet. Solid credit management, great expense controls, and we did a great job bringing new high-quality relationships to the bank. Our production these last several quarters has been particularly good. As I frequently say, we try to move the ball down the field each quarter, and sometimes it is a lot of plays that work. Other times, it is just a long pass that gets us there. But at least this quarter, it felt like we played a ton of offense. Our time of possession was very long, and we strung together a lot of good plays. In my view, we did this very well throughout all of '25, expanding our core earnings power and profitability, strengthening our balance sheet, and creating a ton of value for our shareholders. Let me highlight a few of our many accomplishments for the full year of '25. Our loan production disbursements were $9.6 billion, up 31% from '24. We added nearly 2,500 new NIB deposit accounts and nearly $530 million of new NIB deposit balances, getting us close to that 30% NIB as a percent of total deposits. Our margin expanded 30 basis points driven by a 47 basis point decline in deposit costs. Expenses came down 7% year over year, and our adjusted efficiency ratio dropped nearly 900 basis points. Our adjusted pretax pre-provision grew 39%, and adjusted EPS of $1.35 was up 69% year over year. We had tangible book value per share growth of 11%, including a pretty substantial growth in tangible book value per share in the fourth quarter. Importantly, we returned significant capital to our shareholders by repurchasing 13.6 million shares or 8% of our common stock outstanding at a weighted average price of $13.59, far below where it is trading today as we all know. If we turn to the specifics of the fourth quarter, our Q4 earnings per share grew 11% sequentially to $0.42, reflecting strong positive operating leverage and great momentum across our core earning drivers. During the quarter, we grew pretax pre-provision income by 10% and generated annualized loan and non-interest-bearing deposit growth of 15% and 11%, respectively. We also achieved double-digit return on average tangible common equity of 10.75%, an increase of 319 basis points since the start of the year. This quarter, like the complete 2025 year, as I said, there was nothing usual about it. I think our teams did a phenomenal job. Q4 core deposit trends were very positive as we saw a continuation of the strong growth in non-interest-bearing deposit balances that we had in Q3. For '25 as a whole, we achieved 10.5% annualized growth in NIB deposits, which was broad-based across our businesses, attributable to both new accounts as well as average balance growth. This growth reflects the continued success of our relationship-driven deposit strategy and our ability to attract and deepen very high-quality client relationships. Loan production and disbursements were very strong in Q4, at $2.7 billion, up 32% quarter over quarter, resulting in total loan growth of 15% annualized. As we said in our materials, loan growth was heavily weighted toward the end of Q4 and actually had a very limited impact on fourth-quarter financial results. The late-quarter loan growth positions us very well for earnings expansion in 2026 and beyond. Unfunded new commitments also grew significantly, up 90% quarter over quarter to $1.7 billion, providing an additional tailwind for further balance sheet growth. Loan growth during the quarter was driven by C&I generally, as well as in venture, equipment finance, warehouse, fund finance, and our lender finance businesses. We saw strong production from all of our business, including construction, life tech, and mini firm financing. We also continue to complement our origination activity with selective single-family loan purchases. Our pipelines remain strong, and we expect loan production activity to remain healthy in '26 across all of our business units. As we sit here today, so far in the quarter, deposit activity has continued to remain strong, and our pipelines look very, very good. We will see where we end the quarter, but as of right now, things look very, very good. The average rate on new production in the quarter remained healthy at 6.83%, well above the rate of loans that have been maturing. We expect to continue benefiting from the remixing of our balance sheet as our higher-rate loan production more than offsets maturities of lower-yielding loans. We continue to see positive trends in credit quality as well, with most credit metrics improving during the quarter. Importantly, nonperforming and special mention loan balances each decreased 9% quarter over quarter. Classified loan balances increased partially driven by a nearly $50 million CRE loan due to a delay in the closing of the loan. That closing actually happened yesterday. Excluding this loan, the adjusted classified loan ratio would have declined 17 basis points quarter over quarter to 3%. As I mentioned, the loan paid off yesterday. Our delinquency rate increased during the quarter due to two loans totaling $36 million, which became current in January. Excluding these loans, the adjusted delinquency ratio would have declined about one basis point to 66 basis points. Our coverage ratios were stable with our allowance for credit losses at 1.12% of total loans and our economic coverage ratio at 1.62%. We believe our reserve coverage remains appropriate, reflecting both loan growth and portfolio mix as net charge-offs remained very minimal in the quarter. Our strong Q4 and full-year results underscore the strength of our franchise and our consistent execution across the organization by a truly phenomenal team that we have here. The momentum we achieved is broad-based, spanning both loan and deposit growth, margin expansion, positive operating leverage, credit performance, and obviously generated a fair amount of capital. Our team is firing on all cylinders, and we believe we are very well positioned to continue delivering consistent, high-quality earnings growth and long-term value for our shareholders in '26 and beyond. Let me turn it over to Joe, who is going to talk about some of the details and give some comments on what we expect for 2026. Then I will come back with some comments, and we will go to questions. Joe? Joe Kauder: Thank you, Jared. For the fourth quarter, we reported net income available to shareholders of $67.4 million or $0.42 per diluted share, which was up 11% from $0.38 per diluted share in the third quarter. Net interest income of $251.4 million was down modestly from the prior quarter. The benefit of lower deposit cost was muted by the timing of our loan growth occurring late in the quarter. Lower loan income in Q4 was also driven by the impact of rate cuts on floating rate loans and lower accretion income, which was elevated in Q3 due to loan prepayments. The fourth-quarter loan growth had minimal impact on Q4 financial results; we expect this growth to be a tailwind. Net interest income in Q1. A full quarter impact of the strong loan growth we had in Q4 represents about $13 million in loan interest income before any associated funding costs. As we look ahead, we expect 2026 full-year net interest income to increase 10 to 12% from 2025. Our net interest margin in Q4 was 3.2%, while our spot NIM at December 31 was 3.22%, which is up four basis points from the September 30 spot NIM of 3.18%, driven mainly by lower cost of deposit. We expect NIM to expand throughout the year as margin expansion should come from both sides of the balance sheet. We expect to continue to drive deposit costs lower, and our loan production continues to originate at rates higher than loans expected to pay off. We do not assume any additional Fed rate cuts in our outlook. The average yield on loans declined to 5.83% versus the Q3 loan yield of 6.05% and versus the September 30 spot yield of 5.9%, which normalizes for the elevated accretion income and rate cut that we had in the third quarter. The Q4 loan yield reflects the impact of the two Fed rate cuts on the rates for new production and on our floating rate loan portfolio, which has grown to 39% of total loans. Spot loan yield at the end of Q4 was 5.75%. As a reminder, our strong loan growth had minimal impact on net interest income and yields in Q4 given the late timing of when those loans came on. As a result, we expect to see a more pronounced benefit to our results as we move into '26 and beyond. Total loan balances of $25.2 billion were up 15% on an annualized basis for the quarter and 6% for the year. Total average loan balances were essentially flat quarter over quarter given the timing of the loan growth. In '26, we expect full-year loan growth in mid-single digits, dependent upon broader economic conditions. For now, we expect that growth to be broad-based across all our C&I and real estate lending areas that meet our credit criteria. Deposit trends were generally favorable with a continuation of strong NIB balance growth in the quarter. We temporarily increased short-term broker deposits during the quarter to support our strong late-quarter loan growth. The cost of deposits declined 19 basis points quarter over quarter to 1.89%, driven by growth in non-interest-bearing deposits combined with the benefit of Fed rate cuts. We remain disciplined around our deposit pricing, achieving a 60% beta on interest-bearing deposits following the recent rate cuts. The spot cost of deposits at the end of Q4 was 1.81%. Looking ahead into '26, we are forecasting another good year of deposit growth in the mid-single digits. The interest rate sensitivity of our balance sheet net interest income remains largely neutral. Although the proportion of floating rate loans has increased, the net interest income impact is largely neutral when adjusting for deposit repricing betas. From a total earnings perspective, we remain liability sensitive due to the impact of rate-sensitive ECR costs on HOA deposits, which are reflected in non-interest expense. Should rate cuts occur, every 25 basis points currently represents about $6 million of ECR pretax savings. We expect fixed-rate asset repricing to continue to benefit net interest margin as we remix the balance sheet with higher quality and higher-yielding loans. We have $2.5 billion of total loans maturing or resetting over the next year, with a weighted average coupon rate of 4.7%, which is way below our Q4 average rate on new production of 6.83%. Our multifamily portfolio, which represents about a quarter of our loan portfolio, has approximately $3.2 billion repricing or maturing over the next 2.5 years at a weighted average rate that offers significant repricing upside. Non-interest income of $41.6 million was up 21% sequentially driven by gain on the sale of a lease residual, as well as higher market-sensitive income. Commissions and fees income increased 16% year over year, primarily due to our stronger loan production. While non-interest income can be lumpy at times, we still expect a normal run rate for non-interest income of about $11 to $12 million per month. Non-interest expense of $180.6 million declined 3% from the prior quarter, largely due to lower compensation expense from hitting tax and benefit accrual limits and the other adjustments, a reversal from a prior quarter FDIC special assessment expense of around $2 million, and lower customer-related expenses related to the impact of the Q3 Fed rate cut. As a result, our adjusted efficiency ratio improved to 55.6%, down 266 basis points from the prior quarter. We remain focused on managing expenses prudently while continuing to invest selectively in talent and technology to support long-term growth. In 2026, we are targeting full-year expenses to increase 3 to 3.5% from 2025. Note that for Q1, we expect lower customer-related expenses as the impact of Q4 rate cuts flow through. Also, the first quarter typically includes some seasonality around resets of compensation expense accruals, so expenses in Q1 will be seasonally higher in a few categories. Provision expense of $12.5 million was largely driven by the strong loan portfolio growth and updates to risk rating. We maintained our allowance for credit losses at 1.12% of total loans, and net charge-offs were minimal. As Jared mentioned earlier, overall credit performance trends were mostly positive. We are very pleased with the strong progress we made in 2025, scaling our franchise and delivering positive operating leverage while protecting our balance sheet and generating significant returns to our shareholders. In 2026, we are projecting pretax, pre-provision income to grow 20 to 25%, reflecting our ability to drive earnings growth while maintaining disciplined expense management. As we continue into 2026, we believe we are well-positioned to continue building on our momentum and delivering high-quality, consistent results. With that, I will turn the call back over to Jared. Jared Wolff: Thank you, Joe. Q4 was a strong finish to a great year for Banc of California. As we look ahead, we believe we are in a superior position to continue building on this momentum, and we have meaningful tailwinds to help accelerate our growth in '26 and beyond. The consistency of our results, the strength of our balance sheet, the momentum in our business, and the quality of our people reinforce our confidence in the path ahead. Our focus remains on growing high-quality, consistent, and sustainable earnings. We plan to achieve this by continuing to scale our franchise, maintaining disciplined expense management while investing in technology and talent to support long-term growth, as Joe mentioned, protecting the balance sheet through prudent risk management, and deploying capital strategically to drive long-term value. Our markets and niche businesses offer compelling opportunities as we continue to capitalize on the dislocation in the California banking landscape and beyond. Recent bank M&A activity has provided further disruption in our markets, with good opportunities to attract new clients and talent. Our relationship-driven approach and best-in-class franchise continue to resonate with clients, and our teams are executing at a very high level. Our fourth-quarter loan-to-deposit growth reflects the talent of our teams and positions us well for further earning growth as we continue in 2026. I am excited about the opportunity ahead, and I want to thank our talented employees who accomplished so much in '25 and set the stage for a successful '26. I am incredibly proud of our team's hard work and dedication and look forward to all the great accomplishments we can achieve together in '26. With that, operator, let's go ahead and open up the line for questions. Operator: We will now begin the question and answer session. To ask a question, you may press star then 1. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from David Feaster with Jefferies. Please go ahead. David Feaster: So wanted to sort it out on net interest income and the net. The guide you gave does not include rate cuts. Just curious about the NIM trajectory as well as NII, what could happen if the Fed does cut rates? Jared Wolff: So I will start and then let Joe jump in. You know, typically, our margin expands a couple of basis points every quarter. It is three to four basis points a quarter. Sometimes it jumps a little bit more. You get some accelerated accretion or something like that. We think that is kind of a reasonable guide for that. In terms of what happens if rates get cut, we do believe that our margin would expand a little bit faster. Joe, what do you want to comment on that? Joe Kauder: Yeah. So, you know, I think we said earlier in the call that, you know, a 25 basis point cut gives us $6 million annually in lower ECR cost. But I agree with Jared. It is, you know, when we do our, you know, technical ALM calculation, we come out to be neutral, and that is what we believe we are in our pure net interest income. We are neutral. However, when you have rate cuts, you know, you also tend to have, a lot of times, improved economic activity. You have more things that are happening to your balance sheet that are advantageous to banks. So I think we would benefit a little bit from our net interest margin from lower rates. David Feaster: Great. And in terms of your deposit beta, can you comment on what your expectation is with another couple of cuts? Jared Wolff: We have achieved in excess of 50% beta, I think, every single quarter. It is hard to maintain that momentum. We obviously started from a much higher place. But I think we are also very good at managing our deposits on a very granular basis. So my expectations for the time being are that we would achieve a 50% deposit beta. Until, you know, and hopefully outperform that. And until we modify it, that is kind of what our expectation is. Hopefully, we get into, you know, high fifties, low sixties. David Feaster: Great. Thank you. Jared Wolff: Thank you, David. The next question comes from Matthew Clark with Piper Sandler. Please go ahead. Matthew Clark: Hey. Good morning, guys. Just want to clarify some of your guidance on the NII growth for the year of 10 to 12%. Is that including accretion or is that excluding accretion? Joe Kauder: Matthew, that includes accretion, but we just do not really have it is just basically the baseline accretion. It is very little if any, any accelerated accretion. Matthew Clark: Okay. Jared Wolff: We have not had it. We really have not had any. Matthew, just to stay on that for a second, it has been one of those things that just has not shown up, and it is going to show up because we have all these loans that are going to mature, and so it is going to force itself on the balance sheet, and it is going to be a great kind of annuity for our shareholders when it happens. It just has not been happening. And it has got to eventually. And so, when that happens, it will be a good. Matthew Clark: Yep. Good. Okay. Great. And then within the PPNR growth guide of 20 to 25%, can you just clarify the base that you are using for fee income and non-interest expense just to make sure we are on the same page because there are. Joe Kauder: Yeah. The base is the year-end 2025 results. Matthew Clark: So it is off the fourth quarter? The fourth quarter run rate or it is off the full year? Joe Kauder: Full year. Twenty-five. Matthew Clark: Full year. Okay. But in terms of dollars, I do not know if you have it off hand. We can follow up. But just curious what base you are using in terms of dollars for fees and expenses. Because there are nonrecurring items, obviously. Joe Kauder: Maybe we take that offline and do that in the follow-up call, Matt. Matthew Clark: Okay. Okay. Then just on the loan growth this quarter, pretty broad-based. Maybe first, just if you could quantify the amount of single-family purchases you did in the quarter and whether or not you plan to do some within that mid-single-digit growth guide for the year. And I guess in terms of the stronger growth this quarter, what may have changed in the market? Joe Kauder: So we just. Jared Wolff: Let me go ahead, Joe. Joe Kauder: I was just going to say so, you know, on a net basis, SFR has increased about $216 million. I think the purchases were a little bit north of $250 million, and then we had some runoff as well. So Jared, I am. Jared Wolff: Yeah. That was right. And we expect to continue SFR for a while. We want that portfolio is doing really, really well. The prepayment speeds are much lower than what we model. And so the returns have been very good with really limited credit noise at all. These are very strong loans. And we are fortunate to have access to them, and our team does a great job sourcing them. So. Jared Wolff: And we buy a lot of them off our warehouse lines with our clients. And so it is a very good program that we have. And our balance of SFR, which are fixed-rate thirty-year fixed-rate, most of them, are mostly owner-occupied as opposed to investor. And they are well distributed geographically throughout California. So it is in some ways, it is a hedge to other floating rate portfolios that we have. And so we like that portfolio for that reason. So we will try to continue it in moderation. It probably will continue to grow a little bit, Matthew. In terms of loan growth overall, you know, our teams have just been hitting the streets. And have done a really good job being out in front of clients, and pipelines take a while to build. And, you know, the last the end of the year, it kind of came together really, really well. And, some you cannot really control the timing. So it was a lot of we saw the pipeline in Q4. We were not sure when it was going to hit, and it really a lot of it hit pretty late. And then some stuff picked up in the beginning of this year. So it seems just broad-based, and our teams are doing a really, really good job. Matthew Clark: Okay. Great. Thank you. Jared Wolff: Thank you. The next question comes from Christopher McGratty with KBW. Please go ahead. Christopher McGratty: Great. Thanks. Jared, on the expense growth, the three, three and a half, you have made a couple of points in the remarks about investing in technology. I am wondering if you could just unpack it a little bit. Whether you think this is kind of a 2026 little bit of a push, or is this kind of a new rate of investments required? Jared Wolff: Yeah. So, you know, just let me say as a starting point for you and I have talked about this, but maybe others might find it interesting. I mean, we are a growth company at this point. And we are spending to support the growth that we have in our company. It is very positive in my view. Like, we are not going to spend we are going to keep expanding earnings, and earnings are going to grow hopefully pretty fast. But we are going to make sure that we have the right infrastructure to give this company the talent and the technology that we need to do it the right way. We are getting benefits from AI. We have deployed AI across the company in a couple of different ways. And I have challenged our team to manage to that and figure out where we can deploy it better. We do not think about it as a way to shrink our employee base. We think about it as a way to maybe slow the growth of employment and also to redeploy our employees to do things that are more upskilled. And so, AI is something that we are leaning into. In terms of technology projects overall, there are a couple that I think will be ongoing. You know, one is, just back end and workflow technology, whether it is in Encino or Salesforce or less Salesforce, but more Encino and we have, you know, ServiceNow and some other things. We have a project to improve our data, a major project in the company where we are looking at how to, you know, optimize the data that we have and streamline it and make sure that it is organized in a way that our employees can self-serve around it. And build reports and, you know, kind of know what is coming ahead. So that is a really important project for us, including kind of our back-office finance modernization as a project. We are investing in our payments business. We continue to do that. Although that is a smaller portion of spend. We have our HOA platform, which we are investing in to make sure that it is, you know, really a top-tier platform that we have in Smart Street so we can really serve our clients well. And other client-facing technology. So there are a number of things, Chris, that are kind of here, but we all think that there is a good return on them. Some of them are back-office and some of them are client-facing. Christopher McGratty: Got it. Understood. Thank you. And my follow-up with Jared just on the medium-term targets. Any updated thoughts now that you are making a lot of progress towards them? Any timing updated what needs to happen to get that bridge rectified a bit. Thanks. Jared Wolff: Sure. Yeah. Without putting a specific date on anything, we obviously liked the progress that we made in the fourth quarter on our return on tangible common, which was a pretty big clip up. It does not stay steady, so it will back up a little bit, and then it will move forward again. Q1, I think it probably drops a little bit, and then it moves back up as we get through the year. But we are making really, really good progress. And, I mean, if you look at how much we are clipping intangible book value quarter over quarter, that is one of the things I think that people also do not really focus on is how much extra tangible book value we are putting on the table every quarter, which feels really good. I am not going to put a date out there, Chris, for that, but we have line of sight into our targets. We feel very, very good about them. Christopher McGratty: Awesome. And then maybe, Joe, just to clarify two quick ones. The FDIC benefit, you can give us $2 million, and then any help on the tax rate going forward? Joe Kauder: Yeah. So $2 million is about what the FDIC benefit was in the fourth quarter. And then I 20, you know, 24 and a half, 25 per probably 25% is a good tax rate. Going forward. Christopher McGratty: Alright. Thank you. Jared Wolff: Hey, Chris. Also, you know, on kind of our profitability targets, the one thing that people should also remember is we have preferred stock. That is a $40 million tax on the common. It is, you know, $10 million a quarter that comes out before we pay the common after tax. That matures next year. And so pretax, you know, it is a pretty big number. And after tax, it represents before you figure out what the funding cost would be to replace it, it is over $0.20 a share. $0.20. And so of earnings. And so, it should be, you know, maybe it is $0.16 or $0.17 of earnings that paying off that preferred stock is going to contribute to our company. In 2027. Which we feel really good about. So that is going to be an accelerant along with a whole bunch of other things. Christopher McGratty: Okay. So that is definitely coming out next year is what your message on the price. Yeah. It matures. Joe Kauder: Yep. It matures in We a couple of I think it is September 27. Jared Wolff: Immature. Yep. Joe Kauder: Yeah. So we have already planned for how we are going to handle that. Preferred stock, and, you know, there are a lot of ways we could take it out but it is going to be it is expensive. It is seven and three-quarters, and so you know, we have much lower ways to fund that. So even if you put a three and a half percent funding cost on it, you are saving four and a half plus percent and that contributes, you know, $0.20, $0.15 to $0.20 to earnings. Christopher McGratty: That is helpful. Thanks, sir. Joe Kauder: Yep. Operator: Next question comes from Ben Gerlinger with Citi. Please go ahead. Ben Gerlinger: Hey, wanted to double-check. I know we talked through the guidance here on NII, since no cuts. Is that fair to say the same thing as well for the expense growth of three to three to Is that that implies no cut? Jared Wolff: Yeah. Yeah. We do have no cut we have no cuts in our forecast. In any of our forecast numbers. Joe Kauder: But what the expense guidance does pick up is that the cuts that occurred in the fourth quarter do not benefit us until the first quarter. Of '26. So, yes, it does not matter. Yeah. Your HOA cost is going to be lower than one q, which should be obviously the fourth quarter cost. I am just thinking, like, if there is a cut in June or something, that is not contemplated in the in the fours, expense guide. No. Not contemplated. Ben Gerlinger: Correct. Not contemplated at all. Ben Gerlinger: Got it. Okay. So it is going to be a little downside there. In terms of just the longer-term strategic it seems like you, like you said, Jared, you went from defense to a lot more offense in '25. When you think about '25 or '25 going into '26, the hirings that you have made and kind of personnel and balance sheet cleanup, it has been pretty tremendous throughout the year of '25. Is there anything on '26 that it really has not even left the starting blocks yet, or is it momentum that from things we currently see today and then just continuing that game plan? Jared Wolff: I think it is more momentum. You know, I would love to point to something that says, god. This is low-hanging fruit. We have not even grabbed it yet. Know, I think that preferred stock is probably a good example. But in terms of kind of our core operations and what we are doing, Ben, it is just blocking and tackling and building on the know, our marketing team has done a superb job. We had a client we have a client that is in Vegas, and he was out here I am just sharing this as an anecdote. He was out here for a Laker game for his son. And he is, like, driving to downtown. And his wife takes a photo of our new building downtown, and he says, god. That is great signage. And I am like, have not even moved in yet, and our sign is already up. And then he is driving the next day to Orange County because he is going to Newport. He sees our building on the 405, and then he sees three billboards on the most trafficked highway in the country. For Banc of California. He is driving our name is out there a lot. And that is representative of all of our markets, not just Southern California. And so we are really capitalizing on that. You know, I like to say that our marketing and branding opens the door before we get to the building. It allows our teams to show up. People know who they are. They know the bank. They know the reputation of the bank. And it helps, I guess, grease the opportunity for us to be successful with clients. It gets us in the door for sure. But our team is the one that has to do the hard work of talking to the clients about the opportunity that they have here versus where they are. And why we can deliver a better solution in a more reliable way in a cost-effective way. And it takes really talented people to do that well. We keep hiring them. And we do plan to do significant hiring in '26. To support our teams, both in the front office and the back office, and that is going to continue to, I guess, support the momentum that we have then. It is more momentum than, you know, kind of finding an opportunity that we have not really latched onto yet. Operator: Was there a follow-up, Mr. Gerlinger? Ben Gerlinger: No. That is good. Thank you. Jared Wolff: Thank you. Thanks, Ben. The next question comes from Andrew Terrell with Stephens. Please go ahead. Andrew Terrell: Hey. Good morning. Jared Wolff: Morning. Andrew Terrell: I was hoping just to go back to expenses quickly. Do you have the or you have a quantified the amount of benefit you guys got this quarter from the lower tax or benefit accrual? In compensation? Joe Kauder: Yeah. It was probably around $5 million for the quarter. 4 to $5 million. Dollars Okay. Andrew Terrell: Great. And I guess just overall on expenses, I am trying to kind of bridge Can I clear I am going to clarify that? I am going to say that that is when we look when we look out to the first quarter. That is how much I think it is going to when we reset into the first quarter, that is the kind of the change that you are going to see. Andrew Terrell: Got it. Yep. Okay. That is helpful. Yeah. And I am I guess I am just overall trying to bridge the gap for the, you know, the three and a half percent growth off of $735 million was the baseline, the 2025 reported. At kind of the midpoint, that is, you know, $190 million a quarter in expense in 2026, but you have got, you know, a little bit of headwind from the comp picking up, but you will get the benefit back on ECR cost that should drop in the first quarter as well. So I guess I am just trying to get a sense of what is driving the kind of lift that they expenses into 2026. Jared Wolff: Well, we continue to remain conservative. And I think one of the things that we did and Joe and the team did a really good job of last year, is guide conservatively. And have the opportunity to have some things that come up to make sure that we do not get caught. And then, you know, if things do not come in and our teams manage their budgets well, we come in lower. One of the successes that we had last year was we actually distributed we decentralized some of our expense management. I gave to all of our business unit functional leaders their own budgets, and said, you guys manage your budgets. I am not I am going to stop approving everything. And so they did that really, really well. They have the authority to hire who they need to hire to move the company forward. And so there is some of it that we are letting people do. So part of our guide in being conservative is that we are going to let our teams do what they think is right because they did a great job last year. It comes in higher a single quarter, it is going to show up in a benefit later in the year. And we are comfortable with that. So we feel like we are in a really good spot, and part of this is, you know, less science and more.
Operator: Thank you for standing by, and welcome to the Sandfire Resources December 2025 Quarterly Report. [Operator Instructions] I would now like to hand the conference over to Mr. Brendan Harris, Chief Executive Officer and Managing Director. Brendan Harris: Good morning, everyone, and welcome to our quarterly call. Our executive team is here with me today for the Q&A as always. But before we start, I'd like to acknowledge the traditional custodians of the land on which we stand, the Whadjuk People of the Noongar Nation as well as the First Nations peoples of the lands on which Sandfire conducts its business. We pay our respects to their elders and leaders, past, present and emerging. I'd also like to acknowledge that today's National Day of Mourning in Australia for the victims of the Bondi Beach terrorist attack. Our thoughts and prayers are also with our Spanish team and the local community following the tragic train accident that occurred when 2 trains collided between Madrid and Huelva on Sunday. As we always do, let's start with safety. We finished the period with a group TRIF of 1.3, down from the 1.4 reported at the end of September. While a pleasing outcome, we must continue to learn from every injury and high potential incident to further raise awareness of the risks in our workplace and strengthen our control environment. More broadly, in the first half of the year, group copper equivalent production of 72,100 tonnes, representing 46% of the midpoint of our unchanged annual guidance range of 157,000 tonnes with volumes now expected to be incrementally more weighted to the second half. All other key annual guidance metrics such as underlying operating costs and capital expenditure remain unchanged. Notwithstanding I might add the significant benefit we're now seeing flow through to our C1 costs from the sharp increase in byproduct prices. Of course, this outlook reflects a strong forecast improvement in performance at Motheo in the second half, which I know Jason is looking forward to discussing with you. Having been forced to bring forward and complete planned maintenance ahead of schedule following the premature failure of an OEM specification grade in the SAG mill, we expect an uplift in Motheo throughput rate in the second half. While the improvement plan that our team and key contractor have in place is expected to deliver an increase in the availability of mobile fleet servicing our open-pit mines. This will, of course, support the transition into higher-grade ore at both T3 and A4, which has been further derisked by the early completion of the dewatering program that followed the extreme weather event of FY '25 and our decision to fast track the relocation of mobile equipment to A4 in the first half to ramp up deferred waste stripping. We believe this decision has also derisked our plans for FY '27, recognizing the importance of A4 and its higher-grade ore. I should also note that all ore mined at A4 during the second quarter was stockpiled adjacent to the pit with the delivery of its high-grade ore to the processing facilities ROM stockpile only now ramping up. Collectively, it's these key drivers that underpin our confidence in the 61,000 tonnes of copper equivalent production forecast for Motheo in FY '26. When thinking about cash flow and costs, you may have also noticed that only 3 concentrate shipments sailed from Walvis Bay in the second quarter with the planned fourth shipment having since departed in early January. Turning to MATSA. Its first half was far less eventful as the complex delivered copper equivalent production of 46,400 tonnes, representing 48% of the midpoint of its annual guidance range. This robust start to the year was underpinned by an increase in higher-grade polymetallic ore feed in the second quarter, which coincided with an improvement in flotation recoveries. An incremental uplift in metal production is expected at MATSA in the second half with a further increase in high-value polymetallic ore being mined within the Western extension of Aguas Teñidas. More broadly, we pride ourselves on getting the basics right and ensuring our operational teams are not distracted. In this context, I'm pleased to say that our underlying operating costs at both MATSA and Motheo remain, yet again, well aligned with annual guidance at $87 and $43 per tonne of ore processed, respectively. And as we've said before, we expect the UOC at Motheo to increase slightly in the second half as the proportion of higher-grade A4 ore feed rises given additional haulage and handling requirements. From a strategic perspective, we invested $5 million in regional and another $5 million in near mine and extension exploration programs in the Iberian Pyrite and Kalahari Copper Belts, and we expect our investment in regional exploration in the Motheo hub to accelerate following the recommencement of drilling activity in December 2025. During the quarter, we also signed a binding term sheet with Havilah Resources that provides a pathway to earn an 80% interest in the Kalkaroo copper-gold project and establish a strategic alliance to explore the highly prospective Curnamona Province in South Australia. These agreements create a wonderful opportunity to replicate our successful entry into the Kalahari Copper Belts. And since announcing the transaction, I'm also pleased to say we've made strong progress working with the Havilah team to advance the definitive transaction agreements ahead of their shareholder vote scheduled for the 6th of February. That brings me to the fully permitted Black Butte project. The recently announced results of the prefeasibility study for the Johnny Lee deposit and updated Mineral Resources estimate for Lowry confirmed the economic case for the development of a high-grade underground mine underpinned by a leading approach to sustainable mining practices. Importantly, this study, which derived post-tax NPV of circa $100 million at a copper price significantly lower than spot, only considered the Johnny Lee deposit with the satellite Lowry deposit, which would be accessed, I might add, from the same decline, providing a low-risk and low capital cost opportunity to materially extend mine life. As flagged, we've since commenced a review of the project's fit within the group's global portfolio, which will primarily consider the materiality of the opportunity within the context of Sandfire's own significant growth since the group made its original investment in the project in FY '15. So bringing this together, we have the talented people with proven exploration, operating and development credentials. We have high-quality operations. We're producing a preferred suite of commodities, and we're in a strong financial position. We generated unaudited group sales revenue of $344 million for underlying EBITDA of $167 million in the December quarter at a margin of just under 50%. And having achieved our targeted balance sheet position with net cash of $13 million at 31 December, we're perfectly positioned to fund the various commitments associated with our planned move into South Australia, including the AUD 31.5 million cash payment payable upon satisfaction of all conditions precedent and initial AUD 15 million cash payment that will kick start the proposed exploration strategic alliance with Havilah. It is an exciting time for our company. Let's go to questions. Thank you. Operator: [Operator Instructions] The first question comes from Levi Spry with UBS. Levi Spry: Straight on to the Black Butte news. So can you expand a little on the considerations here? So maybe some goalposts around hurdles, timing of these processes that are underway? Brendan Harris: Look, thanks, Levi, and happy new year to you and everyone on the call. I think the critical message that we want to get across here is that as we'd expected, the prefeasibility study, again, which doesn't contemplate Lowry, but of course, when we think about the project, it's pivotal to the NPV certainly showed a strong economic case. An economic case that if you start to build in prices that some of the market commentators are referring to shows the leverage of this project, given its scale and given its grade. And I also note, it's a fully permitted project. But you'll notice the reference that I made to the review. And I've talked about the fact that we would undertake such a review for many months as we approach the completion of the PFS. That review is primarily considering the entry and the logic venturing North America, building a project in North America, given the scale of the opportunity in reference to Sandfire's own at scale, recognizing the growth of the company in recent times and hence, the reference to materiality. We are absolutely convinced that this is a project that will get built. With regards to the timing, I don't want to go into the elements too much. I'm very respectful of the fact as I need to be that we are an 87% shareholder in a publicly listed company. And so having now formally confirmed that we are undertaking that assessment, I'm not going to go too much further other than to imagine we look at all alternatives with respect to the future. And what I would like to add, however, is I would expect that by the time we report our financial results for the full year, so circa August, that we will certainly be in a position to provide much more clarity in respect of that process. Thanks, Levi. Levi Spry: Yes, good. And so just one more on that, though. So just so I understand the impact -- potential impact of Lowry, like what sort of quantum could it have on the 30-odd tonnes of production? Brendan Harris: So it's not so much a capacity issue. I think we've mentioned a few times in the past. This is a fully permitted project. And I think it's fair to say that that's been a healthy but onerous process. I don't think anyone is contemplating changing the configuration with respect to the project that would necessitate different approvals. It's really around life extension, Levi, remembering that the initial life that's defined in the PFS is around 8 years. As I mentioned, Lowry is particularly interesting because it effectively is a continuation of the ore body, which really means its development across into another area of the ore body. And that comes at very, very low capital cost, particularly when you think that the plant and equipment will already be in place. So it wouldn't surprise you that the potential impact on net present value relative to the $100 million that was flagged in Sandfire America's release based on $4.70 a pound copper can increase significantly once that's taken into account. So I hope that helps. Levi Spry: Yes. Got it. And last one. So net cash you've got there, what happens now? So there doesn't seem to be any material CapEx on the horizon. Kalkaroo is a little bit out. Maybe this is not there. So can you give us a bit of some goalposts around how you're thinking about that in the context of your franking credit balance? Brendan Harris: Yes, sure. Levi, I think, first and foremost, no change to how we think. But I'll pass to Megan, and then I might just wrap up with a few thoughts. Megan Jansen: Thanks, Brendan, and Levi. So yes, very pleasing with the net cash position we've reported unaudited of $13 million at the end of December. So we've managed to reduce net debt by $301 million over the past 12 months. And I think achieving the rapid degearing that we have, albeit in a generally slightly lower price environment than what we've seen in recent months. I think that's a real credit to our operations team and that continued disciplined approach. And so as you noted, yes, we've got that net cash number. Important to note that doesn't yet include upcoming payments in connection with the proposed transaction with Havilah. So AUD 31.5 million payment upon completion of the transaction and a further AUD 15 million payment in relation to the initial phase of the exploration strategic alliance. And I think no change in terms of what we said before in terms of our approach and returning excess cash to shareholders. But we've been very deliberate in framing that as only when we have cash on the books, i.e., not prospectively. Brendan Harris: Yes. I think the one thing just to wrap that up, we've also said that we're not going to get to $1 of net cash and then distribute funds to move ourselves back into the negative side of the ledger. And as Megan said, I think, therefore, we just commend people to really take into account those commitments because effectively, they're just around the corner. Should conditions precedent be met on the 6th of February for the proposed Kalkaroo transaction, those payments come through. So we think about our net cash balance at 31 December very much in that context. Of course, as we look to the full year, if the prices are maintained as they are, and on that respect, your guess is as good as mine. We clearly find ourselves in a very, very strong net cash position and then that'd be obviously, I think, quite a different level of focus and discussion. Operator: Your next question comes from Kaan Peker with RBC. Kaan Peker: First question on Motheo. As you mentioned that weighting of 46-54. Just trying to understand the confidence around that and how that doesn't shift further to the right, particularly around Motheo and then the fleet availability, haulage intensity at A4. I know you mentioned the fast-tracking of mobile equipment. Maybe if you can provide a bit more on that. And then also the A4 mechanics, just the grade uplift into the second half and how quickly that feeds into the plant? Brendan Harris: Yes. Thanks, Kaan, and I appreciate the question. I think perhaps before I hand to Jason, we recognize that mining has variability. And I've often talked about standard deviations, error bands and so on. We started the year circa 6 months ago, suggesting we'd have a ratio of 48:52. We're sitting here at 46:54. So we've seen an incremental shift in that. I think the difference here compared to prior years in the past is we probably had more to make up at MATSA, where, in some cases, in an underground mine, you typically have less degrees of freedom. This year, for the first time, Motheo has arguably had a softer start than we would have anticipated, but we understand why. And therefore, as I mentioned, we have a high degree of confidence in the outlook. Of course, assuming there's no other unintended outcomes last year, we, for instance, had a once in a 200-plus year rain event. So we're certainly assuming that doesn't repeat. But I think before I pass to Jason to talk about the confidence in the outlook, it's probably quite nuanced. But one of the things that's really important to understand that with the dewatering having been completed at A4 ahead of what we'd assume when we spoke to you last -- in the last quarterly update, we actually proactively moved fleet back towards A4 more quickly to derisk the outlook for A4 not only in the second half but into next year. It was subsequent to that, that we started seeing lower fleet availability at T3. And so in effect, that exacerbated the outcome because we've moved that fleet. Of course, we don't make decisions for the short term. We think about maximizing value and trying to derisk that outlook as much as we can. And so we make that decision every day of the week. And it has put us in a very good position but not only giving us confidence in the back end for A4 and increasing confidence, but I think more importantly, from my perspective, also setting us up very well for FY '27. So maybe, Jason, you can -- because I think the grades in the SAG mill are also worth mentioning because that's not -- we're not the only party to have been impacted by this, if you like, floor in the foundry and the casting process. And so I think it's worth touching on that and the fact that's behind us and some of the other elements as we look forward. Jason Grace: Well, thanks, Kaan. And look, building on Brendan's commentary there as well. If we look at the last quarter, there's 2 key factors that really affected Motheo metal production. So Brendan touched on it there, we'll start with the grades. And if you look at the quarter, overall ore processed tonnes is about 7% below our 5% -- our 5.6 million tonne per annum annualized processing rate. So that's solely due to the premature wearing and -- of grades. Now we know that, that is related to our casting issue, right, related to OEM grades, which is supplied by the OEM. Now that OEM uses multiple foundries, right, to actually cast these grades. And during our routine inspections as we went through the quarter, we noticed that it was premature wear or accelerated wear in specific positions on each of the grades. So we could actually see lines running across the grades where we saw accelerated wear or additional wear through there as well. Once we started talking further with the OEM, they, as Brendan alluded to, had identified that the other customers had similar issues, and that related to a specific foundry. So they've informed us that they've stopped using that particular foundry. And the new grades that we now currently have in at the moment were actually cast by the original foundry that the OEM has been using in the long term, and they've had no issues with. So a short answer to that one is that issue is behind us. We've been working well with the OEMs. There were additional issues around -- so those grades were originally planned to be replaced in Q3. We've had to do that in Q2. But the time it took to actually replace those was probably about 3 days beyond what we had planned from the original shutdown for the purpose as well. Brendan Harris: Mainly because you're forced to react. And as I understand it, Jason, just to be really clear, with the new grades in, you're now seeing good performance, very good performance. And I think the other critical issue there is that -- therefore, we're not only confident. We know it's not related to changing characteristics of the ore, grind, hardness, those features. It's a specific fault in the casting process associated with one specific foundry. Jason Grace: Correct. And if you like, we took the opportunity during these shutdowns to do full mill relines. So where we are confident at the moment is that we are set up now to have a very strong ore processing performance there for the second half. So we've taken our major shut for the year, and that's behind us, and we've got a really good run throughout the remainder of FY '26. So if we look at the second key factor there, and that relates to lower grade presented to the plant and the root cause of that is lower fleet availability and particularly face positions that we achieved during the quarter related to overall mining performance. So if you look at it and where we are probably more sensitive to that in the last quarter than other times is that we're making a transition between Stage 2 and T3 and Stage 3 and T3, where the Stage 3 is currently taking over as being our major ore source coming out of T3, and at the same time, we're coming down on the ore body or the main part of the ore body at A4, right. Now if we look at fleet availability. So during the last -- probably the last 6 months, we've been undertaking or the contractor has been undertaking planned shutdowns, so midlife rebuilds on some of our key pieces of equipment and most notably on our trucks and drills. So if we look at it during the quarter, we had, during that time, 3 trucks out for most of the quarter, planned -- on planned downtime for engine replacements. So given the age of that equipment, they're hitting the -- about the middle of their life at the moment. So we do need to do that work. That work was known. But you put that in conjunction with our transition between Stage 2 and Stage 3, right? We are sensitive to impacts on face position. And if I direct everyone to Appendix A, you will note on there that we mined from T3 around about 700,000 tonnes of high-grade ore for the quarter, right, that relates to that transition. And hence, we're overall a lower grade or slightly lower grade than we expected for the quarter. Now looking forward. And now as I said, we've been working with the contractor on managing this period, which was known. We've had a very good response from the contractor. We've got very good attention. We have additional resources on site from both OEM and also elsewhere within the contractors group. And we're comfortable that the contract is making very good inroads. And particularly with our truck fleet, we're seeing significant improvements in that overall availability even as we speak now in January. So looking forward, there's no doubt that we'll come through this, and this is something that we've dealt with before with contractors. We're coming through this. And the other thing is that we have all of that ore and higher-grade ore sitting in Stage 3 and at A4 sitting in front of us for the rest of the year. Brendan Harris: I think, Jason, maybe just last point. I think we probably labored the point a little too much perhaps between the 2 of us, but I just observed that this isn't the first time that we've had temporary issues with availability. I think I'm sure every mine you've worked in from time to time, you've got to shift focus and bring attention to bear. During commissioning, we had exactly this issue. The top levels of management of both companies got very much focused on it. And we very quickly managed to arrest it. And as Jason said, we have teeth in the contract such that if in the event that we don't get the natural uplift coming from, if you like, we'll call it an intervention, we actually can call on additional equipment at the contractor's cost. So it's -- we feel very confident that we have numerous ways to get to where we need to be, Kaan. Kaan Peker: Very detailed. I appreciate it. Just on -- just one follow-up on that, the additional fleet that could be deployed at the contractor's cost. What's the trigger for that? And why can't that be used currently? Brendan Harris: I'll pass to Jason because I'm sure he'd want to make a comment, but we have a very good relationship, and it is a partnership. So you don't do those things lightly. But it's important that we understand that those things can be done and would be done if it needed to. Jason? Jason Grace: The trigger in that short answer to that, Kaan, is 3 months of underperformance below target in terms of total material moved. There are some other triggers in their result, but that's the one that's relevant for this. Yes. Operator: Your next question comes from Paul Young with Goldman Sachs. Paul Young: A really good summary on -- views on Black Butte and Motheo, so it answered most of my questions, but just -- not to labor on it, but just on the discharge grade at the SAG mill. Just Jason, were they originally from an OEM producing in China? Or are they from the traditional sort of German Scandinavian production facilities. Just trying to understand the quality and where that can happen again. Jason Grace: Yes. It was from an OEM -- so we source them through the OEMs. So that foundry was outside of China. So we do make sure, particularly both of our sites that we don't cut corners in terms of quality on a lot of our key components. So short answer, the information that we received from the OEM was, however, was a new foundry that they had been using. So they had not been using that foundry longer term, and they've given us the feedback as well that they've since stopped using that foundry. Paul Young: And then maybe switching to provisional pricing and hedging. I know you hedge your -- maybe a question to Megan. I know you hedge your QP tonnes that are outstanding. And hence, we don't see -- haven't seen the PP -- positive PP impact we're seeing for, say, per se, some of the larger copper producers globally. And I know you provided your historic QP hedging. Just curious around that -- I presume that program is continuing and you're hedging forward sales for this quarter and next quarter? Brendan Harris: Yes. I think -- and I'll pass to Megan. But I think in simple terms, Paul, the way you should think about it is our team will sell a parcel of concentrate. And so that contained copper is priced, as you know, at a specific quotational price, whether that be N+1 to N+5 depending on the specific customer, timing and other circumstances. And what we do is then we make sure that we use the forward curve to effectively lock that in. So there is no risk of major working capital variations. And it works -- it actually works very well for us, and it was particularly important when the company was in a position where it was carrying significantly more debt. And maybe I'll just pass to Megan to explain how it really plays out in practice because the only differential, therefore, relates to the shape of the curve. And of course, in recent times, been pretty flat. Maybe to you, Megan. Megan Jansen: Yes. Thanks, Paul. So Brendan described it perfectly well. So we need to continue with our QP hedging program. That's not before sales. It's only generally post the concentrate being loaded. And that's really just to protect on working capital volatility, such that we -- the price we invoice that provisionally is not at risk through to settlement of the shipment. So we will continue with that. As Brendan touched on, what that price looks like will be very much dependent upon the shape of the curve and the coincident settlement mark, N+1 or N+2, depending on how the contracts fall. In terms of the previous MATSA hedging program, which was in relation to forward sales, that was required under the previous MATSA debt facility. On Page 9, we do touch on that hedging program during the quarter. So our last parcel of copper sales was completed during the month, and that will settle in January. And so what that means is that both MATSA and Motheo, we're not -- we're effectively unhedged in terms of our forward sales. It's just a QP that we continue to execute really to protect on that working capital front, Paul. Paul Young: Yes. That's great. And just lastly, to sneak a third one in for Jason, just on the exploration. Thanks for continuing to, first of all, provide that information on the spend and details on exploration. Jason, just on a question on MATSA and the exploration drive, which you're commencing in 3Q. Can you just run through the program there on how long that's going to take to construct and then when the drilling would start post that? Jason Grace: Yes. We should finish that fairly close to the start of Q4 and then spend most of the Q4 drilling out of that area. So we have noted in there, we've been doing a lot of drilling particularly around Olivo. So that's a high priority for us in the short term. And we have seen some slow extensions and they're proving that up because that gives us a lot of additional ore, particularly -- it derisked the plan a lot having Olivo available as soon as possible and opened up so we can use that production in the short term. Brendan Harris: Just gives you more places, which we've talked a lot about. Paul Young: Yes, it's a very short exploration, right. That's good. Okay. I'll pass it on. Jason Grace: It's less than 70 meters. Operator: Your next question comes from Mitch Ryan with Jefferies. Mitch Ryan: Staying on the exploration spend, actually, just you've increased investment at Motheo, specifically to almost double the amount of drill meters there. Can you just talk to what drill results you've seen to date and exploration results you've seen specifically around A1 that are sort of giving you confidence to spend that and accelerate that spend? Brendan Harris: Yes. Look, very much in short, you can imagine, we've got to be very careful selectively talking about drill results under the dual code. So what I can tell you more broadly is that we obviously completed the prior A1 drilling program, and there's been a lot of work underway studying that to obviously put us in a position to declare a reserve towards the end of this year, this financial year. What we had identified through that process is the prevalence of some high-grade material in the hinge at depth. And so what we felt was we needed to go in and test that and test not only for repetition, but continuity along strike. And we're seeing encouraging results is probably the best way to describe it, which is why we're putting more meters into the ground. The A1 story hasn't really changed. I think I've said before that the main objective there is to try and identify a reserve that's somewhere in the order of, call it, from a scale perspective, half a year to 1 year of throughput capacity. It provides the pathway to open up the north and hopefully provide a pathway then to access, in the future, additional satellite deposits that we're obviously actively exploring for. Mitch Ryan: And my second question, you called out the enactment of updated regulations in Botswana in October. You've just given back some of the low priority drill targets. But then you said approvals are yet to be finalized. Can you just help me understand what those changes are and what approvals are outstanding at this point in time? Brendan Harris: Yes. No change to what we've said before. We just have -- I mean, you can imagine, we've got a very large tenure holding that we've been bringing back into line with the revised, if you like, legislation. We've done that proactively. We've done that through prioritizing, obviously, on the basis of what we see as prospectivity. And a large part of that is down in the Aqua area, which we've talked to you about before, which is not, call it, the traditional Kalahari Copper Belt. And I think the way to think about it is when we say approvals, it's really ongoing renewals, which we have high degree of confidence in. Jason Grace: The reference to those approvals are effectively their relinquishments, and those need to be processed and approved by the Mines Department in Botswana. So that's effectively it. Brendan Harris: So process really on both sides of relinquishment and renewals. But I'd say the relationship that we enjoy with government is continuing to prove to be very strong. Operator: Your next question comes from Adam Baker with Macquarie. Adam Baker: Just first call we've had since your announcement of the binding term sheet with Havilah and I understand that Havilah shareholders are yet to approve the deal. But just broadly speaking, wondering if you could touch on the attributes which attracted you to the Kalkaroo project. Brendan Harris: Yes. Look, I'm probably not going to say too much until we move through the process of their general meeting and the vote. Obviously, that's a key part of the CPs. And maybe it's just a -- it's worth noting for you that there's a really limited number of CPs. Clearly, the first one is a simple majority vote in favor of the transaction at the general meeting. It's us getting the necessary confidence that various titles will be transferable and approved, mainly at the government level at the appropriate time, which really relates to the second stage payment should we move forward with that, which obviously we're hoping we would. And then the last one is really just signing the definitive transaction agreements, which, as I said, are very well advanced now, as you might expect. If we think more broadly, there's a range of reasons that Kalkaroo was clearly at the top of our list at least of opportunities that we wanted to pursue. We like the team. This is a group of people that have been exploring in the Curnamona Province for decades. They know the ground. And they have, obviously, within that, done a lot of work around the Kalkaroo project itself, the opportunity that presents itself, and we had through dialogue with our people, I said earlier in my speech, the talented people engaged heavily. We've had people look at the core, built our own block models, formed a view on the geology and formed a view of the opportunity. But I think before we even go there, there are very few hundred million tonne reserves available today that have 0.83% copper equivalent grade with a strip ratio that's significantly lower than Motheo, 0.5% contained copper, close to 0.5 gram gold. And that reserve, I might add, was based on prices substantially below where we are today. I think numbers around $9,600 a tonne copper and $2,900 an ounce gold. So clearly, the strike length over 3.5 kilometers, our understanding of the geology, we believe that when you look at the resource of closer to 250 million tonnes, there's obviously a lot of opportunity there. We do think, however, that the way that we've, if you like, worked with Havilah to create that staged payment structure that allows us with success to get, if you like, an 80% interest in the Kalkaroo project is the right way to do these things for our shareholders. It recognizes that the project is well advanced, but there are risks, risks that we can work through in the prefeasibility study phase. And of course, very much sort of ties in with the way I described the strategy, which would look to bring in low dollar cost options for the portfolio. So clearly, we're looking forward to the shareholders approving the transaction by way of a simple majority. I would expect that being the case, we'll talk much more about it at the half year. Irrespective, there's a lot of work to do. There's particularly a lot of work to do over the next 2 years. You can imagine, given that stage gate process, we will run the PFS in many aspects towards a FID type level such that the big things that potentially can derail you, we have a very high degree of confidence in so that we can then move through an accelerated process towards ultimate development, again, with confidence. But clearly, we wouldn't be doing this if we didn't think it had the potential to deliver a very, very significant net present value to our shareholders, but also at a very, very attractive internal rate of return. Adam Baker: Makes sense. We look forward to further updates once Havilah shareholders approve it. Operator: [Operator Instructions] Your next question comes from Hamish Wiltshire with Jefferies. Hamish Wiltshire: Apologies. That must have been my finger on the table. Sorry about that. Brendan Harris: That's good. Thank you. Operator: There are no further questions at this time. I'll now hand back to Mr. Harris for closing remarks. Brendan Harris: Fantastic. Look, I know it's a really busy day. We keep doing it, too. A number of companies reporting, large and small. We wish you well. Good luck with that. Your interest is always deeply appreciated. As I mentioned, we think we're in a very strong position as an organization. The company has transformed dramatically over the last number of years. We're very focused operationally. Our people are focused, as I mentioned, on the basics. And critically for us, that means delivering on our second half commitments. We look forward to talking with you all about that more when we present our half year results and obviously, when we see many of you as we get out on the road. So good luck this year. Stay safe, and we'll see you soon. Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to the Mobileye Fourth Quarter and Full Year 2025 Earnings Call. At this time, all participants are on a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Galves. Mister Galves, please go ahead. Dan Galves: Thank you, Donna. Hello, everyone. Welcome to Mobileye Global Inc.'s Fourth Quarter and Full Year 2025 Earnings Conference Call for the period ending December 27, 2025. Please note that today's discussion contains forward-looking statements based on the environment as we currently see it. Such statements involve risks and uncertainties. Please refer to the accompanying press release, which includes additional information on the specific factors that could cause actual results to differ materially. Additionally, on this call, we will refer to both GAAP and non-GAAP figures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. Joining us on the call today, as usual, are Professor Amnon Shashua, Mobileye's CEO and President, Moran Shemesh, Mobileye's CFO, and Nimrod Nehushtan, Mobileye's EVP of Business Development and Strategy. And now I'll turn the call over to Amnon. Hello, everyone, and thank you for joining our earnings call. Amnon Shashua: As I look back on 2025, there are a number of meaningful positives to highlight, both for our company and the industry. In a very uncertain geopolitical environment, demand for our products came in higher than expected throughout 2025, demonstrating the resilience of the auto industry and our product offerings. Results were quite strong with revenue up 15%, adjusted operating profit up 45%, and operating cash flow up more than 50%. The industry began to clarify the structure and features of the generation of ADAS for mass market vehicles. Several forces are coming together here: demand for incremental safety, demand for convenience in the form of highway hands-off driving, and the need to consolidate the technology on a single ECU to keep the system's cost low. Mobileye's IQ6 high chip is very well positioned, and we won the first two major programs with two of the biggest fixed OEMs in the world. Waymo's commercialization provided a number of supporting proof points on consumer acceptance and demand for autonomous mobility services. This led to a major uptick in demand signals from transportation network companies and public transport groups, which led to an expansion of expected volume through our Volkswagen ecosystem to 100,000 units by 2033. We are now one year closer to the launch of our advanced product with the Volkswagen Group. We expect the first major public milestone to be the removal of the safety drivers in Moya's robotaxi fleet in 2026. We are implementing a unique first-think, slow-think structure to our advanced products that we believe accelerates both precision and scalability. This includes novel technologies like vision language, semantic action models, and artificial community intelligence. And finally, Mobileye took a decisive step to expand its footprint into the humanoid robotics field with the acquisition of Menti Robotics. Menti has achieved a fully vertically integrated, low-cost, highly capable robot that has a clear path to commercialization into the structured environment of industrial and logistics services field and with its distinctive technology to cater to unstructured environments like home use cases. Aside from our 2025 results, we detailed all of these areas in my CES talk on January 6. I encourage anyone with an interest in Mobileye or just physical AI in general to make sure to view that presentation. Turning to guidance, Moran will spend some time on it, but I'll address it briefly. We're encouraged by the volume growth we are expecting despite global auto production that's expected to be flattish again. And while we don't expect the volume levels of Q1 to be sustained throughout the year, it's a strong signal for the year, and order flows for Q1 have been rising for the last month or two. Turning to technology, at CES, I talked a bit about the debate around approach, specifically this concept of data in, command out, which is a false debate. Because no legitimate actors in our field are actually doing that. There's always a need for structure and architecture, and everyone's architectures have evolved given advancements in AI over the last few years, including ours. We introduced two new innovations that are accelerating our path to precision scalable autonomous vehicles. One is artificial community intelligence referred to as ACI. This is a simulation concept using a self-play reinforcement learning technique. That we are using to train our planning engine, also known as driving policy. This is the first-ever productization of a technique proposed in academic research. A strong motivation for ACI is that the sample complexity for planning is much higher than for perception, because the multi-agent nature of driving or actions that you take will impact the actions of other road users. Therefore, the amount of data one needs to collect could be unwieldy even for large data collection fleets. As a solution, we have created simulators that can achieve one billion hours of training overnight. Mobileye has unique advantages here since our REM maps, which cover much of the globe, can be used as a realistic and diverse baseline structure for training. The other advantage is we have developed sophisticated sim-to-wheel techniques that have the required understanding of the noise model of our perception engine when transferring the driving policy to the real world. That SIM to wheel technology is also very relevant to humanoid robotics, and will be a key area of technology sharing between Mobileye and Menti. We also introduced a fast-think, slow-think concept that utilizes specialized vision language models to provide contextual information and to address robustness to vehicle decision making. This is not necessarily about safety. It's more about understanding the semantics of complex scenes. For example, a scene where a policeman signaled the road they would like to take is blocked. The safety layer ensures that they won't hit the policeman. But we also need to understand the scene, figure out we shouldn't try to overtake the policeman, but rather we should either wait or take a different route. This is what slow thinking gives. Since this is not safety critical, the contextual information can be inputted into the system at a lower frequency than perception, which is typically analyzed at 10 frames per second. Structuring our architecture with fast-think and slow-think components saves compute and even brings the use of cloud-based compute into the picture. As a result, we can put a very sophisticated VLM on the in-car compute but call on much, much bigger VLMs in the cloud when the situation evolves. This has a very positive effect on the mean time between intervention metrics, but can also eventually lead to scalability benefits in terms of cars per teleoperator as the VLM can replace a human teleoperator in many cases. Turning briefly to our announced acquisition of Menti Robotics. Most of the AI that humans are using every day is in the digital world. The two main applications of AI in the physical world are autonomous vehicles and robotics. It makes sense for these two expressions of physical AI to be together because there's a great deal of technology overlap. Both extensively use computer vision and control, fast, slow thinking concepts, make heavy use of VLMs, and extensive simulator techniques. Menti itself, compared to other companies we evaluated, had a superior combination of strength, including a high level of vertical integration, a pure AI approach with the ability to demonstrate high-level capabilities with no teleoperation, a design strategy that results in an optimized cost versus usefulness ratio, and above all, a distinctive AI technique to do continuous on-the-job learning from passive demonstration. It's a really practical approach to capitalize on the most near-term industrial and logistics markets, then expand to more challenging markets over time. We believe access to Mobileye's tools, simulation, and data training infrastructure will accelerate Menti's development. And the number of technologies developed for robots, such as self-play simulation and think-to-real techniques, will also bolster Mobileye's AV development. Finally, there is potential for catalysts as we continue to demonstrate the strong capabilities of the Menti robot and execute on customer proof of concept work in the near term. I'll now turn the call over to Moran. Moran Shemesh: Thank you, Amnon, and thanks for joining the call, everyone. Before I begin, please be aware that all my comments on profitability will refer to non-GAAP measurement. The primary screen is Mobileye's non-GAAP number, is amortization of intangible assets, which is mainly related to Intel's acquisition of Mobileye in 2017. We also exclude software communication. Our full year 2025 revenue of $1.9 billion slightly exceeded the high end of our prior guidance. Full-year revenue was up 15% year over year, compared to our original guidance of 6% growth at the midpoint. It was a very good year where a combination of minor selling global production trend IQ program launches, and higher than expected ADAS and supervision volumes from China OEM led to significant growth. Full-year adjusted operating income was $280 million, up 45% year over year. And margin was 15%, up about 300 basis points versus 2024. The fourth quarter included a nonrecurring expense of $7 million related to workforce efficiency initiatives we undertook in Q4. That expense was not part of our guidance as of the October earnings call. So if you exclude that, adjusted operating income would have also been slightly above the high end of the guidance. Like I said earlier, we saw consistent positives from our customers throughout 2025, and we've continued to see that over the last month or two during our 2026 planning process. 2025 IQ volume was 35.6 million across the full year, which was well above our original expectation of 32 to 34 million. We've seen a fairly consistent demand trend of 9 million units per quarter, with some minor fluctuations across quarters. For example, in 2025, Q2 and Q3 were higher than trend, Q1 and Q4 were a bit lower. One more point on Q4 before turning to the future. Modest upside to the higher end of our prior guidance was related to higher than expected supervision. IQ volume was consistent with the high end of our guidance of about 8.2 million. This level at the start of the quarter looked a bit below the demand trend as our customers desired to end the year within inventory. But the demand trend in Q4 ended up higher than we expected. As a result, we believe that inventory at our Tier one customers ended 2025 extremely low. We believe there is some level of adjusting safety stock that will occur in Q1 to get back to normal levels. We expect about 10 million IQ units shipped in Q1, which supports an outlook of approximately 19% year over year growth in the first quarter. After that, customer forecasts indicate a reversion to the trend of slightly above 9 million units per quarter. Turning to the full-year guidance. We are expecting revenue in the range of $1.9 billion to $1.98 billion, representing flattish to 5% growth. The midpoint of our guidance incorporates our IQ volume of slightly above 37 million units, which again consists of 10 million units in Q1. And an assumption of a bit over 9 million per quarter in the balance of the year. If we look specifically at our top 10 customers, we are assuming that their overall production is down 2% but our volume with those customers is up 6% at the midpoint. This includes about 700,000 units for a new OEM program that requires two IQ4 chips per car. That program is clearly a positive and will generate higher gross profit in dollars per vehicle. But since the second chip is overpriced relative to the first, it has an impact on overall ASP and gross margin. For Chinese OEM, we are expecting a decline of about half a million units compared to 2025, which was a bit above 3 million. We are encouraged by the significant growth in China OEM volume in 2025. It's aligned with their export volume growth, the area where our business is the strongest with those customers. We see no reason why that wouldn't continue into 2026, but prefer to remain conservative given we only have short-term visibility into order flow with China OEM. Gross margin will be down somewhat on a year-over-year basis, driven by continuation of IQ5 related cost savings. We discussed this on the October earnings call as an impact to 2025 that would continue through 2026 and then will gradually decline beginning in 2027. We also have modest vehicle mix headwind and the impact of the dual chip program mentioned above. Turning to operating expenses. 2025 ended up at $1.003 billion. This was slightly above our original budget of $995 million, accounted for by the nonrecurring termination-related bookings in Q4 mentioned above. In 2026, we are expecting around $1.1 billion or 10% growth. The underlying growth in OpEx is approximately 5%, consisting of normal salary and benefit inflation as well as additional infrastructure to support execution of the advanced products in 2026 and 2027. On top of that, we are including Menti R&D expenses. Finally, we are experiencing a FX headwind related to appreciation of the Israeli currency versus the US dollar. That meaningfully raises our headcount cost in dollar terms. This is being mostly offset by the workforce efficiency initiative noted above, but not completely. To conclude, we are almost one month into 2026 and continue to see positive demand signals from our customers on the core business. As Amnon discussed, we are also seeing very good execution progress ahead of a large number of advanced product launches over the coming one to two years, as well as accelerating momentum in customer demand for next-gen higher ASP ADAS and the transformative robot activity. Thank you, and we will now take your questions. Operator: Thank you. The floor is now open for questions. We do ask that you please limit yourself to one question and one follow-up to allow as many people the opportunity to ask as possible. Again, that's star one to register a question at this time. Our first question today is coming from George Gianarikas of Canaccord Genuity. Please go ahead. George Gianarikas: Hi, everyone. Thank you so much for taking my questions. I'd like to ask first maybe on your view on the competitive environment, particularly in light of some announcements at CES from NVIDIA and others? Just your view on what's happening in the advanced autonomous solution space. Thank you. Amnon Shashua: So I think that we have been we've obviously seen a lot more announcements and excitement around advanced solutions and autonomous driving in general. Also robotics. It was one of the key things at CES this year for everyone who attended. We still believe that we are closer to launching our dense products than other competitors, and this is one of our strongest advantages combined with the maturity of our technologies and the advances of our technologies. And we are, as we said, one year closer to launching a spectrum of products that spans from surround data supervision to a firm robotaxi. And starting from '26 and through 2027, we believe this will be a major transformation for kind of positioning Mobileye in the market. It's having proven products on the field. Right now, there is a lot of demos, a lot of referral technologies and emerging technologies, and there's some, we think, noise. And, maybe simplistic description of some of these technologies and how useful they could be for a reliable system. There is a recent announcement by NVIDIA, but their open-source model, Alfa Romeo, that they announced and supposedly given others the ability to I mean, we'll maybe, want to say a word about this, but we don't see that as something that changes kind of our positioning in the market. George Gianarikas: Thank you. And maybe I can ask a follow-up on Menti specifically. I mean, you mentioned yourself that there were a significant amount of startups and competitors at CES in the humanoid space. I'm just maybe a synopsis, a brief bullet point or two as to what the differentiation from Menti will be as you try to attack the marketplace and commercialize the product? Thank you. Amnon Shashua: I think the other startups mostly in China, but a lot of startups in the area of the humanoid. Many of the demonstrations that you see out there are teleoperated. Now to win this game, you need to have a fully autonomous control of the robot. From perception to action to understanding the theme, having an AI stack that can control the robot economically, and this is what Menti has been demonstrating quite consistently over the past year, year and a half. And as you see, as I show the number of clips, Menti is also fully vertically integrated with the design of the actuators, the gear, the AI itself, all the software components, the electronics, which is crucial if you want to have an end-to-end system. Another, I would say, distinctive element is the ability to do continuous learning. So Menti has developed an AI technology that allows the robot to passively view a human performing the task and imitate that task in a very, very short period of time without having any equipment, no VR goggles or special suits. Just passively observing a given performing the task. This is, I think, very important as we move from structured to unstructured environments like homes. So taking everything together, we have here a company that is both thinking practical about what is going to be the first domain launch, which is structured environments like fulfillment centers, assembly plants, retail. And also developing the technology for the next deployment for unstructured environments like home use. Fully vertically integrated, very strong in AI components, whether it's reinforcement learning, simulation, or simply very strong, very interesting overlap. It's not technology overlap with Mobileye. It can go both ways to synergies. So, overall, this is a very good step for Mobileye to take decisive steps towards owning physical AI in its full scope. Nimrod Nehushtan: If I may add to this, I think to kind of differentiate between the different actors, Menti is, as we know, probably the only western humanoid robot company that is actively engaging with customers on proof of concepts and pilots that involve pure AI operations with no remote operation. It shows something about the advancements of the use of robots in a setting that a customer is willing to evaluate and deploy in a kind of a non-sterile setting. Unlike maybe some hype videos that show something on a liquid clip, this is an actual testing environment. This is a different stage of maturity and having engagement with potential customers. And we believe that through integrating Mobileye's technologies, we have obviously strong strength in computer vision, in AI using cameras, and using sensor fusion, and designing face systems for safety and reliability and how to integrate systems in a very cost-efficient manner and efficient compute. All of these will help them even accelerate the progress they made so far. George Gianarikas: Thank you. Dan Galves: Thank you, George. Next question, please. Operator: Thank you. The next question is coming from Mark Delaney of Goldman Sachs. Please go ahead. Mark Delaney: Yes. Good morning and good afternoon. Thank you very much for taking questions. For Surround ADAS, the company has already reported on some strong momentum. You spoke about the two big OEMs that have already committed and given series production awards. As you look at the opportunity set for 2026, could you give a bit more details on the number of OEMs you're engaged with for surround ADAS and how many might be able to convert into awards this year? Nimrod Nehushtan: So I think the important point about Surround ADAS is that this is the product that addresses a very clear pain point for customers. And for OEMs, I mean. In the sense that it simplifies the system. It reduces cost. It provides advanced functionality it needs. Future regulation. It ticks most of the boxes that OEMs want to tick for the high-volume vehicle segment in the, you know, the upcoming years. Therefore, you know, the first OEM that we announced with Volkswagen was kind of a starting a trend that created a flywheel effect of more and more OEMs being interested. Now having announced the second design win with, you know, two out of the top six OEMs in the planet in major markets adopting this and launching this in a few years. This has definitely created a stronger realization amongst other OEMs that this has to happen for them also. At least to some degree. We've seen an increase in the amount of engagements we have. I don't want to predict timing and, you know, in quantities, but we're definitely encouraged by the increase in different engagements we have with multiple OEMs across our customer base. And we also believe that we have inherent advantages for this product category because it requires a very reliable system performance, you know, very high safety standards, advanced functionalities like, you know, hands-free driving in primary and so on, but also be extremely cost-efficient. And just to give you some sense, these two programs we won are going to be integrated in the kind of a standard fit across the highest volume vehicle categories for these two OEMs. So every dollar counts. And the implications for the OEMs to adopt this product means how much conviction they have that they need such a product for, you know, it's not a balloon project in a small amount of vehicles, you know, that if fails and, you know, nothing happened. If this project is delayed, for example, this is obviously affecting the entire vehicle portfolio. So it shows about the confidence that Mobileye, how much conviction they have in this product. And it's definitely an encouraging sign. Mark Delaney: Thanks. My other question was on Menti. Given the announcement and engagements that you've had with potential future customers and industry participants, can you help us better understand to what extent it's catalyzed additional interest in partnering with Menti Robotics, including opportunities to have your humanoid robots in factory and commercial environments to gather data? And, you know, as you think about that 2028 commercialization target you shared at CES, how important is that data collection and gathering for hitting that time frame? Thank you. Nimrod Nehushtan: I think it's a very interesting question. We've had since two weeks since the announcement at CES, and we have received the reach out from a significant number of customers asking about our interest and readiness to support on-site pilot and concepts and kind of starting from our industrialization partners that want to contribute in manufacturing and components because they understand we do the full robot. Starting from that and really, you know, trying to attract us to work with them for manufacturing and for all of our industrial partners, whether it's tier one, OEMs, and others that want to see how they can, you know, work with Mobileye integrating robots into their logistics centers, warehouses, manufacturing lines. The need is definitely there, and for them, it made perfect sense. I think one of the encouraging signs that we've seen is that already at CES, we've had meetings with OEMs. And in most of these meetings, it came up as, you know, let's take a follow-up and schedule when we can actually talk about a plan to deploy this in our environment. I think that the fact that Mobileye comes out of this business and they trust the, you know, the standards of the company. And that they have a need for longer-term, you know, finding solutions for human labor is becoming a bigger and bigger problem for them. Especially in developed countries, this gives them an easier path to evaluate a new technology with a partner they trust. As opposed to working with a startup, you know, in humanoids that, you know, who knows what you can get from them and whether or not they can deliver. And, definitely, we're leveraging these relationships. So we definitely think of this as an area to continue to develop in the next few months. Amnon Shashua: Thank you. Dan Galves: Thank you, Mark. Next question, please. Operator: Our next question is coming from Chris McNally of Evercore ISI. Please go ahead. John Zager: Good morning. This is John Zager on for Chris McNally. Thanks for taking the questions. Amnon, you've made this sandwich analogy for ADAS and AV demand. Basically, with high demand for a surround at the low end. Or drive at the high end. If we could focus on just drive for the time being, you guys announced VW Moya, one of the two big partners, Marubeni and an unnamed OEM. But the forecast is for a fleet of 100,000 AVs by 2033, obviously, a bit of a ways away. So my question, can we get a sense for what the near-term demand for your drive system might be for just, like, the next two to three years, 2027-2028? Or on phase one for a growing, on the growing list of cities? Amnon Shashua: Well, we announced together with Moya six cities to expand to six cities in 2027, and that includes Los Angeles, together with Uber. We have another high-volume program with the Holland that will come six months later, have also its expansion. As the CEO of ADM T on stage mentioned that they foresee about 100,000 vehicles in the next eight years. The exact numbers of the rollout will depend on the success of 2027. And deployment of the first six cities. But we are talking about thousands of vehicles at this point. Nimrod Nehushtan: Just to add to this, I think, you know, it's maybe somewhat challenging to understand what it means, 100,000, because it sounds like a big number. I think what we're taking away from this, what it means is that Volkswagen has in place the manufacturing capacity to produce as many vehicles as needed. The 100,000, if we're successful in 2026 and '27, and then in '28, which we have high confidence in our chances. That 100,000 can also be a small number in hindsight. The manufacturing capacity they have and the funding they've, you know, pulled into this in the past few years to build everything needed to produce robotaxis in scale eventually, it's Volkswagen. So they can produce 10,000 per year, 50,000 per year, 75,000 per year. When the demand will be there. And the demand from, you know, from mobility operators, CNCs, municipalities is far greater than, you know, tens of thousands per year globally. Once the technology gets to this maturity level and allows quick economic and geographic expansion, which, you know, we believe we have clear advantages in. Then, you know, the numbers will the demand will not be a problem. And we have a partner that can scale and give the supply the best extent possible. John Zager: Understood. And just should we think about, like, the volume for a phase one launch? And, like, should that be, like, a thousand to, like, 1,500, like, Waymo in San Francisco? Nimrod Nehushtan: Think of it as a few hundreds of vehicles per city as a good testing as a good measuring stick. You know, just also seeing how Waymo rollout that roughly the numbers they've had. In some cities, it's 200. Some cities, it's close to 500. That's a sufficient number to kind of facilitate for the mobility demand in that city and also to build a meaningful business. And that's also roughly what we're planning. John Zager: And thanks, John. Just one last follow-up. Do the AV customers pay for anything before the purchase of the $45,000 drive content, like R&D in advance? Or do you get any protection if their volumes are less than planned? Nimrod Nehushtan: Without going into the details of our contract, we are receiving we're delivering samples and engineering samples throughout the year. There's an engineering budget that covers the direct engineering cost and development cost. So there is definitely a good amount of investment well before the commercialization. So we do I think we have high confidence in our chances of getting to driverless, I think we're not that concerned about the downside potential. John Zager: Okay. Thank you so much. Operator: Please go ahead. Thank you. The next question is coming from Joseph Spak of UBS. Joseph Spak: Thanks. Hello, everyone. Just to maybe talk about a couple of, you know, more near-term things. You know, obviously, memory has become a larger issue and concern in the automotive industry. And I know or I believe you don't really buy a lot of that memory directly, but, clearly, it is used in the modules at your tier one customers to assemble to sort of ship on to the OEMs. So I'm just curious, you know, what you're hearing from your customers and the supply chain as to and whether this is really a pricing issue? Is it an availability issue? Is there any sort of volume risk embedded in your outlook? And because if it's even if it's a pricing issue, I guess, you see any risk of decontenting? Nimrod Nehushtan: So, as you said, Joe, we're not, let's say the exposure that we have is not direct because we're not purchasing a lot of these units. It's mostly indirect through the fact that our tier one customers are purchasing memory components. We've been doing in the past few months, and we have been actively working on this I think, well, before it was public knowledge that this dynamic is developing. Is to create kind of maximizing our supply of these components and working with multiple vendors. Ensure that we have enough flexibility to kind of mitigate the direct cost impact from specific vendors. And that we will be able to ensure that vehicle manufacturing will not be impacted by these fluctuations. And we haven't I think that, like we did last year, our forecast for this year is maybe opting for the conservative side. You can see the difference between Q1 and other quarters. It does bake in some level of, you know, understanding that there is some volatility in the industry, so we wanted to be on the more conservative side. But we haven't seen any, like, let's say, direct evidence or indication that there is an imminent change to volume as a consequence. But we will keep close monitoring on this as it develops, and we're doing everything in our powers with our tier one partners to create the availability of these components. Joseph Spak: Okay. Thank you. The second question, just on you know, you mentioned some of the appreciation of the shekel, and I know you get very helpful exposure in your 10 Qs on what a change in that currency can do to your cost base. But I believe also, like, at this time, a year ago or, you know, earlier in '25, you made a comment on one of the calls about how a lot of the costs on the shekel were hedged. So did something change with the hedging strategy? Like, maybe you could just sort of update us on sort of why it's a little bit maybe more of an issue now than you thought a year ago. Moran Shemesh: Yeah. So I will start with 2025. So we have a hedging plan that basically, you know, caused that we can meet our OpEx expectation for 2025. So for example, for this 2025, the rate that we had in our financials was, like, 5 or 6% favorable than the average market rate. So and these are, you know, transactions that we made in the beginning of 2025. But as the appreciation of the shekel continues, into 2026, and we're talking about, I think, 10 or 12% in the last year, we still have hedging in place for 2026, so we are more than 50% hedged on our payroll expenses at a favorable rate. But the risk is obviously heavier as deterioration, you know, gets bigger. But we still can't into account in our guidance. So we took into account some, you know, further hedging, but it will be at a less favorable rate. The fact that we are already more than 50% hedged. I think we're in a good place in terms of the rate, but it's still the year-on-year impact because it's a significant impact. It's worth mentioning. Joseph Spak: Okay. Thank you. That's helpful. Appreciate it. Amnon Shashua: Thank you, Joe. Thank you. Next question, please. Operator: The next question is coming from Aaron Rakers of Wells Fargo. Please go ahead. Aaron Rakers: Yes. Thanks for taking the question. I want to kind of double click on the Porsche and VW and the Audi kind of programs. I'm curious as you kind of thought about your guidance for this year, I think the initial expectation was maybe early volumes on Porsche. Late this year. Just me an update on where we stand on some of those programs and how we should think about volumes appreciating that, I think, 2026 in the past has been more characterized as an execution year. Amnon Shashua: Right. 2026 is an execution year. The supervision on Porsche and Audi should start in Q1 next year, Q1, May 2027. There was some pushback of deadlines unrelated to 2027. Do I have something more? Nimrod Nehushtan: Okay. And just to say that you didn't really change the plans of the project. It's just a one-month change between December 2026 to February 2027. So it's not really material. And we think made clear in previous calls as well that we do not expect meaningful volumes in these programs in 2026. Aaron Rakers: Right. Appreciate that. And then as a quick follow-up, in the prepared comments, you talked about inventory levels that your customers, your major OEMs being fairly lean. I know you've guided 10 million IQ units this quarter. I'm just curious, can you kind of go a little bit deeper on what you're seeing as far as the inventory levels your customers are holding? And do you expect any replenishment when you gave the unit expectation for this year? Or is it more lean inventories continue? I'm just curious to how you kind of bake that into your guidance. Thank you. Moran Shemesh: Yes. So I think for what we're seeing I mentioned it also in the remarks, we are seeing increased demand in terms of order flow 2025 and then higher than expectation, 2026 is, you know, constantly increasing in terms of production. But what happened specifically in Q4 was also that the order the orders were relatively low in the first place. As December is a slow month in ordering. It's a short month with holidays, etcetera. It was low, and then production level came up even higher. So it basically means that, you know, we believe the inventory levels that our customers are, you know, not reaching their inventory target at the end of 2025. So they are tighter than usual, and had some impact on Q1. But, again, we're also seeing very good demand. The 2026 production levels are going up. But, yeah, Q1 does have some impact. Of Q4 low volume combined with heavier or bigger demand. Aaron Rakers: Yep. Thank you. Amnon Shashua: Thank you, Aaron. Operator: Thank you. The next question is coming from Edison Yu of Deutsche Bank. Please go ahead. Edison Yu: Hi, thank you for taking our questions. I want to follow-up on Menti. Can you give us a sense of what are the next steps with some of these customers you're talking with? I know you mentioned proof of concept. Are you going to basically ship maybe a few units? And then if that turns out well, you'll ship, you know, 30, 40 and then much more. How do we think about those kind of next steps to commercialization? Amnon Shashua: I believe that 2026 is going to be maybe high tens of units in terms of the POC. 2027 should be more, and 2028 should be even further. 2027 to go up until the into production with the production partner. So 2026 is tens of units. What we would like also is to have in addition to the POCs, also, to produce small units for the sake of Mobileye to start experimenting with the robots not only Menti themselves. But, again, it's going to be a high double-digit number of robots in 2026. Nimrod Nehushtan: And just maybe just to add from the viewpoint of the customers in these pilots, the purpose is to start with a smaller amount of robots that perform specific tasks that they're kind of outlining, and you just go to the logistics center, for example, and there are a few shelves with boxes, and human beings today are moving boxes according to their, you know, their instructions and so forth. And basically, they want to see how robots can perform over a certain period of time, what's the precision, you know, reliability, durability, maintenance, and so on? And, you know, gradually afterwards, expand this to more and more tasks and in larger volumes. You know, we are talking about companies that employ tens of thousands of employees today in these types of positions. So I think, again, going to be a question of supply, and that's why it's so important to have a manufacturing partner, as Amnon said, that already in '27 is able to produce robots in a serious production manner, which is important both for cost and also for scale of volume. Edison Yu: Understood. Appreciate the color. A follow-up on Robotaxi. Obviously, a lot of excitement coming out of CES. Has your view on owning more of the, should we say, ecosystem change at all? And that's just in the context of you obviously have a lot of parties involved. Could that kind of hinder the speed of deployment or some of the logistical aspects? And obviously, would require capital, but I think that's not that big of an issue anymore. Thanks. Amnon Shashua: I think the current arrangement we have with Volkswagen and Moya is really optimized for the speed of the volume of the deployment. So going right now more vertically integrated is not going to increase the volume of the deployment. This is something perhaps to be considered towards the end of the decade or further than that. I think what we have in place is really optimal to where Mobileye is at. Mobileye will be producing the self-driving system as a tier one, taking responsibility not only for the electronics, but also for the sensors, of course, the software stack and all the validation. And the revenue per vehicle plus recurring revenue per mile is very, very attractive. The focus is execution now. Edison Yu: Thank you very much. Amnon Shashua: Thank you, Edison. Operator: Thank you. The next question is coming from Tom Narayan of RBC Capital Markets. Please go ahead. Tom Narayan: Thanks a lot, guys. The first one I have is on the '26, I guess, adjusted operating expenses. I think you guys said it's up $100 million. And I know that FX was mentioned, some other issues. But then the one that I'm wondering if that's the biggest piece of it. Is the Menti R&D or maybe it's consolidating Menti if it's operating at a loss. Just curious how we should think about the OpEx going higher, what's really, you know, the biggest driver of that? Then I've got a follow-up. Moran Shemesh: Yeah. Okay. So I think I've mentioned that we have incorporated Menti R&D into our guidance. So the guidance includes in terms of operating expenses, mainly 5% of regular inflation, enhancement or something then. And the additional portion is the Menti R&D. So these are the significant two items. I also mentioned we have also a headwind from the FX rate, but that is mostly offset by the efficiencies initiatives we did in Q4. Hope that answered your question. Amnon Shashua: Just to follow-up. I mean, I think that's pretty clear. But just to follow-up, like, you know, we do expect to have normal OpEx inflation per year of around 5%. This relates to, you know, salary and benefit inflation as well as kind of additional infrastructure to support the AV activities and the advanced product activities. That's normal. On top of that, this year, we are assuming consolidation of the Menti R&D expenses. We talked about that as somewhere in the, you know, lower single digits, but, you know, probably think, you know, towards, you know, 4% type of thing. And additionally, we do have this FX headwind, which is mostly offset by the workforce initiative we did in the fourth quarter, but not completely. So that should give you a decent walk from 2025 to 2026. Nimrod Nehushtan: Yeah. I think you described it quite accurately. Amnon Shashua: But take into account that, also, growing in terms of being a tier one in a tier one net position with our programs with Porsche and Audi and drive. And sometimes you need to make adjustments in terms of increasing the headcount. Again, this is nonmaterial compared to the overall OpEx of the product. But it adds a few percentage. So take the walk through that you mentioned was quite accurate. And accurate, you know, view percentage of growth that we need to account for when we are taking a tier one position and investing heavily into the future. So two years ago, now we calculated our OpEx growth, but we cannot be precise to the single percent in an area which is experiencing rapid growth. Tom Narayan: Got it. And for a follow-up on Menti, and this I know this is very early to this question. But, I mean, look. We're seeing the market reaction to the potential news out of, you know, from Hyundai with Boston Dynamics and the credit that Hyundai is getting. Is this something you guys might think about in the maybe the distant future? I don't know about trying to crystallize the value? Right now, there's so much appetite where, you know, the capital market certainly. This something you could consider, I mean, monetizing Menti in some way? Or do you believe that, you know, together and is a combined entity that, you know, that's how you kind of view the business? Amnon Shashua: Well, I think that the market is taking some time to internalize the use of the acquisition. Or the use of Mobileye entering into humanoid. I do believe that in some, you know, near future, this would create the dividend the like of what happened between Hyundai and Boston Dynamics. Now Menti has all the potential to make big steps forward, has demonstrated quite a mature technology. As the clips that I have shown and the clips that they have on their website. And then together with Mobileye, they can make rapid steps forward. Now whether we're going to see this dividend in a month or whether we're going to see this in a year, I don't know. But it has the potential to catalyze the same benefit that Hyundai is receiving from Samsung. Tom Narayan: Got it. Thank you. Dan Galves: Thanks, Tom. Operator: The next question is coming from Colin Rusch of Oppenheimer. Thanks so much, guys. Can you talk a little bit about the near-term pricing dynamics on IQ? Just curious, how much movement there really is as you see some of these larger volumes move through in the first part of the year and how we should think about that trending to the balance? Nimrod Nehushtan: So maybe if you refer to the IQ prices, but to make sure I'm volume. Volume or prices? I didn't get the question. Colin Rusch: I'm concerned about, you know, pricing, you know, as you ship the higher volume here and then, you know, how that the pricing trends for the balance of the year as you normalize that. Nimrod Nehushtan: Yep. So the pricing is every year is affected by the mix of IQs. And as you know, the IQs have different generations with different software features and software packages. This has somewhat of a different price, but overall, on average, there's no, let's say, meaningful change. The prices. There is a different mix this year compared to last year. Last year, as Moran said in her remarks, but we see higher volumes of IQ5 based ADAS product and IQ5 has somewhat of a higher cost, but still it's the best product with, you know, meaningful volumes this year compared to last year. So this does have some impact, but it's all natural mix. Moran Shemesh: And also the second chip that I mentioned, the second chip that I mentioned combined the fact that the second chip is a lower price than the first one. So it's higher gross profit per vehicle. But lower ASP. I think that the combined natural mix with Nimrod mentioned and the second chip impact is approximately, like, 80¢ or so. Year on year. Amnon Shashua: But just to clarify, this second chip or the card has two IQ4 chips, this is a one-off thing. It's not that we see a trend having two IQ chips in the car with one of the IQ chips with the at the discounted price. This is what we call a bridge. This is a bridge towards IQ6, IQ6 light. The carmaker wanted to meet a certain regulatory environment, that IQ4 alone could not meet. Therefore, a second IQ4 was added. But, again, this is a one-off. We don't expect it to be a trend. Colin Rusch: Okay. Perfect. Thanks, guys. And as you think about, you know, doing the driver out demonstration here later this year, you know, can you talk about the regulatory process and any bottlenecks or hurdles that are still remaining here, things that are of concern that you guys are focused on, getting ready, to do that demonstration. Amnon Shashua: Well, in the US, it's self-certification. We have stringent KPIs in terms of meantime between February. That we are meeting towards going driverless. Outside of the US, there's homologation. And as we mentioned together with Volkswagen, homologation will occur in 2027 outside of the US. Colin Rusch: But nothing on a regional basis or city that you guys are concerned about? Moran Shemesh: No. We see. And, actually, the homologation in Europe will have a stronger tailwind given that the vehicles are produced by Volkswagen level four vehicles, and our cooperation together with AT&T and Moya and both of them, will allow us to go to the homologation in a much easier way than if we were doing it alone. Nimrod Nehushtan: And this is a significant entry barrier to the European market. It involves a lot of activities and direct engagements with the regulatory bodies that we are, you know, already doing with Volkswagen. So getting this approval in '27, as Amnon mentioned, will also separate us in the European market from others. Dan Galves: It's an important point. And just to clarify on the timing of homologation, we're saying that it will be completed in 2027. And start in 2026. And the six cities, commercialized in 2027 that Volkswagen talked about includes some European cities, which is gonna require the homologation process to be completed. Colin Rusch: Thanks so much, guys. Appreciate the color there. Operator: Thank you. We are asking remaining analysts to please ask your question and your follow-up at the same time. Our next question is coming from Joshua Buchalter of TD Cowen. Please go ahead. Joshua Buchalter: Hey, guys. Thanks for taking my questions. Guess both at once. I guess to start, highlighted the potential for conversions on surround ADAS this year, but you haven't made the same comments about supervision and chauffeur. Are those, you know, maybe you can provide an update there. Are you guys, you know, deemphasizing that in your go-to-market and conversations with customers? And then for my follow-up that's, you know, on a completely unrelated topic, Amnon, you've touched on this in the CES presentation, but I was hoping you could provide some more details about, you know, specifically how your IQ roadmap is gonna accelerate Menti's time to market? And perhaps as important, how much software development is needed to move further into robotics, you know, given IQ's design specifically for autos. Thank you. Nimrod Nehushtan: So we have multiple engagements also on supervision chauffeur. So there's definitely an active engagement there with the market. To put things in perspective, our relationship with Volkswagen Group with the different brands on these products started maybe in 2021. And it took us a couple of years to kind of cross all the items that need that is needed. And we are also focused now on opportunities that have a meaningful business potential. As opposed to, you know, smaller scientific projects some OEMs are trying to explore. Maybe in some cases, it's in-house development data that they're doing, and they want to allocate one car in the future and see if it works. And we're trying to focus on opportunities that present significant volumes, multiple vehicle models, you know, with complete timelines so that we can, you know, we're we can scale the products. We're not looking for the, you know, first opportunity. We want to scale, and we have several of those. I don't want to predict timing, but we are encouraged by the activities there. Amnon Shashua: I think the enrollment period, if we field of it. Too early to talk about IQ chips on, you know, the robots. We think this is a longer-term, this is a longer horizon issue. Currently, the robots are based on NVIDIA chips, and we see that we're very proud of that relationship. And we see that going on for the near for the foreseeable future. Now when we go into really high-volume production where every cent counts, then I think IQ8, IQ9 could be quite relevant. But it's not in the foreseeable future. Joshua Buchalter: Okay. Thank you both. Operator: Thank you. We're showing time for one final questioner. Our last question is coming from Samik Chatterjee of JPMorgan. Please go ahead. MP: Hi. Thank you for taking my question. This is MP on for Samik Chatterjee. My first one would be, like, since you said that Porsche and Audi programs are now pushed out to Q1 2027, will drive or robotaxi be the biggest swing factor for 2026 revenues? And on that itself, like, updated thoughts on the monetization for Drive in terms of upfront revenues versus recurring consumption-based revenues? And for my follow-up, I wanted to ask on the second Surrounded Ads customer. You said that you there could be a potential decision for the second architecture with this customer. That's it. Thank you. Dan Galves: MP, the answer to your first question is that there we did not expect any meaningful impact from the advanced products in 2026. We've been saying that for the last several quarters. So there's no change related to what you did what you talked about. Nimrod Nehushtan: And we did not account for drive revenue in 2026 guidance. So there is no it's not in the guidance. Regarding the second question on the second design with the surround ADAS, in Q1. So if that happens, like, will that potentially double your pipeline with that customer? The discussions are obviously ongoing, and, you know, we are making good progress. And again, don't want to go into predicting time, but we continue to work on this, and it's progressing. MP: Thank you, MP. Operator: Thank you. At this time, I would like to turn the floor back over to Mr. Galves for closing comments. Dan Galves: Thanks, everyone, for tuning into our earnings call, and we'll talk to you next quarter. Thank you very much. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
Faten Freiha: Good morning. This is Faten Freiha, VP of Investor Relations. Thank you for joining today's fourth quarter earnings call. To accompany this call, we posted a set of slides on our IR website, ir.mccormick.com. With me this morning are Brendan M. Foley, Chairman, President and CEO, and Marcos Gabriel, Executive Vice President and CFO. During this call, we will refer to certain non-GAAP financial measures. The nature of those non-GAAP financial measures and the related reconciliations to the GAAP results are included in this morning's press release and slides. In our comments, certain percentages are rounded. Please refer to our presentation for complete information. Today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or other factors. Please refer to our forward-looking statement on slide two for more information. I will now turn the discussion over to Brendan. Brendan M. Foley: Good morning, everyone, and thank you for joining us. McCormick & Company, Incorporated's performance in 2025 demonstrated the strength and resilience of our business. We delivered differentiated volume-led organic growth and share gains, powered by sustained momentum from investing in our brands, expanding distribution, and driving innovation across our business. We achieved solid profitability gains in the first half of the year. However, rising costs in the second half related to the dynamic global trade environment pressured gross margins. Despite these headwinds, our disciplined cost management and efficiency initiatives kept us on track. As a result, we realized operating income growth and margin expansion for the full year, all while continuing to invest to drive future growth. We are executing with focus and discipline on what we can control and staying agile as we navigate external challenges. Our strategy continues to position McCormick & Company, Incorporated for sustainable long-term value creation. Turning now to our results on slide four. In the fourth quarter, total organic sales increased by 2%, supported by growth in both consumer and flavor solutions. In global consumer, organic sales growth was driven by volume, which grew for the seventh consecutive quarter, as well as price contributions. In The Americas region, we delivered volume growth even as pricing actions took effect, with elasticities coming in broadly in line with our expectations. Volume performance in EMEA remained solid with continued benefits from price. In Asia Pacific, organic growth was supported by strong continued momentum in Australia and our China retail business. Importantly, we achieved the gradual full-year recovery in China consumer for the year as planned. Moving to flavor solutions. Volumes declined for the global segment. Our performance was impacted by customers' reset of inventory levels in Latin America, which we expect to be behind us in 2026. Volumes across the rest of the business were roughly flat and reflected softness in large CPG and branded food service customer volumes. These headwinds were mostly offset with growth from high-growth innovators, private label customers, and QSRs across The Americas and Asia Pacific. Turning to profitability. Fourth quarter gross margin was pressured by higher-than-expected inflation across our diverse basket of commodities, and we recognized more tariff costs than previously planned. It's important to note that pricing actions and CCI-driven productivity savings were delivered as planned. In addition, as expected, we continued to invest in the business, advancing our supply chain capabilities, innovation, and growth platforms. These investments continue to strengthen our foundation and reinforce our resilience, positioning us well for long-term success. Let's move to slide five. And let me highlight for the quarter some of the key areas of success. Across the global consumer segment, we have held or improved share across many core categories in key markets for the last six quarters. McCormick branded volume consumption growth continues to outpace the broader edible category in The US. In EMEA, unit and dollar consumption continue to outpace branded and private label fast-moving consumer goods or FMCG food. Let me provide some additional color starting with spices and seasonings. We drove strong volume growth across all the regions. In The US, we implemented pricing actions due to increased cost inflation. Elasticities as well as share performance were broadly in line with our expectations. Our performance in The US was supported by innovation, most notably with our newest lineup of holiday finishing sugars as well as growth in Gourmet Garden, our fresh convenience line. Importantly, our renovated McCormick Gourmet collection, highlighted by its countertop-worthy packaging, is now on shelf. As we transition the vast majority of the portfolio, velocities so far have exceeded our expectations. We anticipate continuing to benefit from this renovation in 2026. In Canada, we continue to grow overall share in dollars, units, and volume. In France and Poland, unit share growth in spices and seasonings are contributing meaningfully to EMEA's gains. Moving to recipe mixes. Performance in EMEA is strengthening. We drove unit and dollar share gains this past quarter as we expanded distribution with new customer wins in The UK. In hot sauce, we are achieving good results. In The US, for the fourth consecutive quarter, we continue to drive unit share gains fueled by investments in brand marketing and innovation. We continue to improve total distribution points or TDPs. In The Americas, we expanded TDPs with spices and seasonings driving the majority of the growth. Across our business, we continue to gain distribution in high-growth unmeasured channels like e-commerce, and we are expanding into social commerce in The US, a channel with significant growth opportunity. In flavor solutions, we continue to see strength in our technically insulated high-margin product category flavors. In flavors in The Americas, we are expanding and diversifying our customer base by winning both high-growth innovators and private label customers. We're also seeing strong momentum in reformulation projects with larger customers and outperforming the industry across key categories, including beverages and better-for-you snack seasonings. Turning to QSRs. In The Americas, QSR volume performance remained strong, driven by continued innovation. In the Asia Pacific region, specifically in China and Southeast Asia, our customers' new products and promotions continue to drive strong volume growth. In EMEA, QSR volume performance continues to stabilize. Let me now touch on some areas where we are seeing pressure. Starting with global consumer. In recipe mixes, our base business remains strong with continued consumer loyalty and growth across many product lines. Competitive activity in The US, particularly within the Mexican flavor category, tempered overall share performance. We expect these trends to gradually improve as we launch new innovation, expand distribution, and continue to build momentum behind our authentic Mexican brands like Cholula, supported by strong brand marketing investments. In mustard, where we have performed well for the majority of the year, in the fourth quarter, the category declined in dollars and units in The US. French's mustard trailed the category, and share performance was impacted by the timing of certain promotions, which we expect to normalize as we continue to execute on our plans in 2026. These include continued focus on innovation, increased brand marketing investments, expanding distribution, as well as strategic partnerships. Outside of The US and Canada, we continue to drive dollar and unit share gains in mustard for the fifth consecutive quarter. In EMEA, most notably in Poland, we drove unit and dollar share gains in mustard for the last three quarters. Moving to flavor solutions. In flavors, in The Americas and EMEA, some of our large CPG customers continue to experience softness in volumes within their own businesses. We expect these trends to stabilize as we continue to work with our customers on product innovation, as well as win new customers. In branded food service, foot traffic remains soft, which is impacting customer volumes. We continue to see growth in certain channels, particularly with non-commercial customers. This includes places of employment, hospitals, and colleges and universities. Now that we have covered the quarter, I would like to reflect on our performance for the fiscal year on Slide six. When we set our goals for 2025 last January, market conditions were very different. Although the external environment proved more challenging than anticipated, particularly with respect to cost pressures, we achieved many of our objectives, especially on the top line, and continue to strengthen the fundamentals of our business. I am proud of the results our teams delivered and the discipline with which we executed, even as the external landscape evolved. While we achieved our top line goals, our bottom line came under pressure. Inflation, commodity cost volatility, and the macro environment created incremental costs that impacted our margins. Despite this, we made deliberate choices to continue investing in our brands, capabilities, and people. Decisions that strengthen our long-term competitiveness and position us well for sustained growth. Our focus remains clear: sustaining our strong top line, strengthening profitability, delivering strong cash flow, investing in growth, funding shareholder returns through dividends, and further strengthening our balance sheet to position McCormick & Company, Incorporated for long-term success. A few highlights for the year. We delivered sales growth at the midpoint of our constant currency guidance, driven by positive volume. Our consumer segment delivered another year of industry-leading volume-led growth, up 2% for 2025, as we continue to expand and win in high-growth channels where consumers are increasingly shopping. Our flavor solutions segment continues to show resilience despite soft industry trends, reflecting the strength of our capabilities and customer partnerships. We continue to prioritize investment in our business while driving margin improvement, particularly in flavor solutions, where we made meaningful progress in expanding operating margins despite a challenging cost environment. We generated strong cash from operations and continued to delever, reducing our leverage ratio while also continuing to fund our growing dividends and capital investments. In terms of M&A, we further strengthened our global flavor leadership with the acquisition of a controlling interest in our long-standing joint venture, Pacoemer de Mexico. Lastly, at the end of 2025, our board of directors authorized a 7% increase in the quarterly dividend, marking the 102nd year of continuous dividend payments and 40 years of consecutive annual increases. This reinforces our recognition as a dividend aristocrat and reflects our long-standing commitment to returning cash to shareholders. Our performance reflects McCormick & Company, Incorporated's strength, resilience, and solid foundation. Beginning in 2024, we set a clear path for volume growth and have now delivered two years of consistent results. With our strong brands, effective strategies, and continued investment, we remain positioned to deliver sustainable growth and profitability. We have built momentum, and we intend to carry that forward into 2026. On slide seven, let me now share our current view on the state of the consumer and considerations for 2026. The environment across our key markets is marked by volatility and continued pressure from inflation, geopolitical and trade uncertainty, and the threat of rising unemployment. Overall consumer confidence remains low. Consumers, especially low to middle-income households, continue to make more frequent trips to the store while purchasing fewer units per trip, a trend that was evident at the start of the year and accelerated through the fourth quarter. In addition, consumers continue to stretch meals across multiple occasions and seek affordable ways to prepare fresh home-cooked meals. The consumer continues to show resilience by increasing their demand for value and behaviors that enable them to stretch their budget. These behaviors reinforce the importance of flavor in everyday cooking, with herbs and spices continuing to lead center store unit consumption. Health and wellness trends continue to gain momentum. Consumers are preparing healthier, more affordable meals at home while exploring new flavors and culinary creativity. Perimeter and scratch cooking categories are outperforming, while high-carb and high-sugar foods along with alcohol are declining. High-protein and better-for-you claims are driving purchase trends across retail and food service. In addition, convenience paired with flavor exploration remains an area where consumers are willing to pay more. E-commerce continues to accelerate, and social commerce is also reshaping how consumers discover and buy packaged goods, fueling momentum for emerging brands. The convergence of these enduring trends—health and wellness, affordability, flavor exploration, and convenience—underscores McCormick & Company, Incorporated's advantaged position in the marketplace. Our consumer portfolio meets consumer demand for home cooking and healthier meal preparation. At the same time, our flavor solutions business partners with large and emerging brand customers to deliver innovation and reformulation aligned with the same trends. We are winning across the food industry, from small emerging brands to large established players. And our success is not defined by any single segment or product category. Notably, recently issued USDA dietary guidelines for Americans again promoted herbs and spices as well as natural flavors as a healthy way to flavor nutrient-dense food, including proteins, vegetables, fruits, and healthy fats, to make them more appealing, further supporting the importance of our product categories. In terms of tariffs, recent reductions are a positive step from a cost standpoint. However, approximately 50% of the incremental tariffs on McCormick & Company, Incorporated items remain in place, and we continue to face related inflationary pressures. Our pricing actions have been surgical. We took pricing actions to offset inflation, but we have not fully passed through tariff costs, and we remain focused on partnering with our customers to meet consumers' demand for value, flavor, and quality. We are navigating inflationary pressures with strategies designed to best meet the needs of the consumer and maximize category growth. Our focus on the long-term health of the business, innovation, and execution continues to position McCormick & Company, Incorporated for sustained success in a dynamic marketplace. Before reviewing our growth plans, I'd like to briefly discuss our outlook. In 2026, our results are expected to benefit meaningfully from the McCormick de Mexico acquisition, which is driving significant contributions to both the top line and operating income. Additionally, the transaction is accretive to earnings per share. However, year-over-year earnings per share growth is reduced by the elimination of the 25% minority interest in McCormick de Mexico net income attributable to Grupo Herdes and several below-the-line items that are unfavorable relative to 2025, including a higher tax rate and increased interest expense. In our base business, we continue to drive underlying profitable growth through our strong execution. That said, we anticipate incremental costs associated with elevated inflation, including tariffs, continued digital investments, most notably related to our ongoing ERP implementation, along with the rebuilding of incentive compensation from 2025 to impact our profitability. We are partially offsetting these pressures through cost reduction efforts focused on restoring gross margin performance and enhancing overall productivity. These efforts are supported by our CCI programs, including SG&A streamlining. Importantly, our outlook for 2026 and beyond remains firmly supported by our proven strategies and disciplined execution of our growth plans. As we look beyond 2026, we expect the incremental costs impacting the year to remain on our base. Through our enhanced CCI programs and disciplined SG&A streamlining, we are well-positioned to manage these costs, maintain investment in growth, and deliver sustained profitability consistent with our long-term algorithm. As outlined on slide eight, our growth levers remain consistent: to drive growth through category management, brand marketing, innovation, proprietary technologies, and our differentiated customer engagement. These levers are supported and enhanced through data and analytics as we continue to accelerate our digital transformation. The strength of our base business continues across major markets and core categories. We have a number of initiatives in flight that will continue to support our performance for 2026 and beyond. We plan to address the details of our plans at CAGNY in February. To provide some perspective relative to 2025, we expect our consumer business to continue delivering volume growth, supported by higher pricing compared to last year. We expect distribution growth, accelerated innovation, and renovation across the portfolio, and increased brand marketing investments to drive higher purchase interest and velocity and support volume performance across our core categories. Importantly, we remain at the forefront of evolving consumer trends, delivering on the demand for flavor exploration, health and wellness, convenience, and value, while expanding our presence in high-growth channels where consumers are increasingly shopping. In flavor solutions, we anticipate stronger performance as we lap a challenging 2025 in terms of customer volumes. In flavors, our customer pipeline is very healthy across our customer segments. It has doubled relative to the prior year. We are leveraging expertise in regulatory, R&D, and product development to help customers navigate evolving regulations and meet growing health and wellness demands with innovation. And finally, in branded food service, we expect a gradual improvement as traffic trends improve. To wrap up, we remain confident in the long-term health of our business, our fundamentals, and in delivering on our plans to continue to drive industry-leading differentiated performance, supported by our broad and advantaged global portfolio anchored in high-growth categories that reinforce the strength and resilience of our business. Now before I turn it over to Marcos, I would like to comment on some recent changes to our board of directors. Maritza Montiel and Tony Vernon, who have each served as directors over the past decade, will be retiring from the board as of our annual shareholder meeting this April. I am grateful for their exceptional service and many contributions, which have significantly benefited McCormick & Company, Incorporated. We will miss them both. At the same time, I would like to welcome two new members to our board, Rick Dierker, President and CEO of Church and Dwight, and Gavin Hattersley, former President and CEO of Molson Coors. Both Rick and Gavin bring deep experience in the global consumer product industry, and I look forward to working with them and to the contributions they will bring to McCormick & Company, Incorporated. Now over to Marcos. Marcos Gabriel: Thank you, Brendan, and good morning, everyone. Let's start on slide 10 and review our top-line results for the quarter. Total organic sales grew 2% for the fourth quarter, driven by growth in both consumer and flavor solutions. Moving to our consumer segment on slide 11. Organic sales increased 3%, driven by price and volume. Our continued volume growth for the last seven quarters underscores our differentiation and ability to drive growth even in a consumer backdrop that remains challenging. Consumer organic sales in The Americas grew 3%, with 1% volume growth and 2% pricing. Pricing reflects the cost inflation-related pricing we implemented in September. Despite these pricing actions, volume growth was strong across core categories. The impact of elasticities overall was broadly in line with our expectations and is informing our plans for 2026. In EMEA, we grew consumer organic sales 3%, driven by a 1% increase in volume and a 2% contribution from pricing related to targeted actions taken as a result of increased commodity costs. We're pleased with the sustained volume growth for the eighth consecutive quarter in EMEA. Consumer organic sales in the Asia Pacific region increased by 2%. The increase was driven primarily by volume growth, as our growth in China was in line with our expectations. In addition, we delivered strong results outside of China, primarily in Australia. Turning to slide 12. Fourth quarter organic sales rose 1%, driven by a price contribution of 2%, partially offset by a volume decline of approximately 1%. In The Americas, flavor solutions organic sales increased 1%, reflecting a 3% price contribution partially offset by a 2% volume decline. Volumes for the quarter were impacted by the reset of some of our customers' inventory levels in Latin America, which we expect to be behind us in 2026. Underlying volume performance was flat, reflecting continuous softness in large CPG customers' volumes as well as softer foot traffic in branded food service, offset by growth with high-growth innovator and private label customers. In EMEA, organic sales decreased by 3%, including 2% from price and a 1% impact of lower volume, reflecting soft CPG customers' volumes. We're pleased to see that volumes remain stable in EMEA relative to recent trends. In the Asia Pacific region, flavor solutions organic sales increased 3%, with volume growth of 5% driven by QSR customer promotions and limited-time offers, partially offset by a price of 2%. Moving to slide 13. Adjusted gross profit margin declined 120 basis points in the fourth quarter due to higher commodity costs, tariffs, and costs to support increased capacity for future growth, partially offset by savings from our comprehensive continuous improvement program or CCI. Relative to our expectations, changes in tariff rules within the year contributed to higher-than-expected overall cost inflation in our broad basket of commodities. In addition, we recognized more tariffs in our cost of sales than previously planned. For the year, gross margin was down 60 basis points, reflecting the pressure from rising commodity costs and tariffs. As we look ahead, we expect to recover this margin compression in 2026. Selling, general, and administrative expenses or SG&A decreased 120 basis points relative to the fourth quarter of last year, driven by lower employee-related benefits expenses as well as CCI savings, including our SG&A streamlining initiatives, partially offset by increasing investments in brand marketing and technology. For the fiscal year, SG&A improved by 70 basis points compared to 2024. For the quarter, adjusted operating income increased by 3%, or 2% in constant currency. This increase was driven by improved SG&A, partially offset by gross margin and increased investments to drive growth. For the total company, we grew fiscal year 2025 adjusted operating income by 2%, or 3% in constant currency, and expanded adjusted operating margins by 10 basis points. Our performance in 2025 demonstrates our commitment to delivering healthy top-line growth and our agility in managing costs across the P&L to protect our profitability and to enable us to invest in growth. Our fourth quarter adjusted effective tax rate was 23.9%, compared to 25.4% in the prior year, as expected. For the full year, our adjusted tax rate was 21.5% compared to 20.5% in the prior year, driven by a greater level of favorable discrete tax items in the prior year. Our income from unconsolidated operations in the fourth quarter was flat, as expected. For the fiscal year, unconsolidated income decreased 3% as strong operational performance from McCormick de Mexico was more than offset by the unfavorable impact of foreign exchange rates. Turning to segment operational results on Slide 14. Adjusted operating income in the Consumer segment increased 1% for the fourth quarter, with minimal impact from currency. The increase was driven by sales growth and improved SG&A, partially offset by increased tariffs and commodity costs. For the year, adjusted operating income in the consumer segment declined by 1%, with minimal impact from currency. The decline in the consumer segment was driven by increased commodity costs and tariffs, which impacted the segment's gross margin, as well as continued growth investments. This was partially offset by improved SG&A driven by CCI and SG&A streamlining initiatives. In flavor solutions, adjusted operating income in the fourth quarter increased by 7%, or 6% in constant currency. For the fiscal year, flavor solutions operating income grew 9%, or 11% in constant currency, and operating margin expanded by 90 basis points, reflecting our continued focus on improving flavor solutions profitability. At the bottom line, as shown on slide 15, fourth quarter 2025 adjusted earnings per share was 86¢, an increase of 7% compared to the year-ago period, driven by increased adjusted operating income, improved interest expenses as we pay down debt, and a favorable tax rate. For the full year, adjusted earnings per share was $3, reflecting an increase of 2%, driven primarily by growth in adjusted operating income. On slide 16, we've summarized highlights for cash flow and balance sheet. We delivered another year of strong cash flow from operations, of $962 million. We returned $483 million of cash to shareholders through dividends and used $122 million for capital expenditures. Capital expenditures for the year were slightly below our plans due to the phasing of certain initiatives. Our investments include projects to increase capacity and capabilities to meet growing demand, advance our digital transformation, and optimize our cost structure. Our priority remains to have a balanced use of cash. This means funding investments to drive growth, returning a significant portion of cash to shareholders through dividends, and maintaining a strong balance sheet. We remain committed to a strong investment-grade rating. With another year of strong cash flow driven by profit and improved working capital initiatives, we successfully reduced our leverage ratio to below 2.7 times. Overall, results for 2025 reflected the strength of our business. On the top line, we delivered constant currency, volume-led, organic growth at the midpoint of our range, reflecting the continued focus on driving volumes and healthy sustainable sales momentum. While inflation and tariffs impacted our gross margin for the year, we effectively offset this impact through CCI and SG&A streamlining initiatives, all while continuing to invest for growth. As a result, adjusted operating income and earnings per share finished at the low end of our outlook, a solid outcome in light of the macro headwinds we faced. Importantly, we drove strong cash flow from operations for the year, paid down debt, and delevered, giving us ample flexibility to continue to invest in the business. Before turning to our outlook, let me provide an update on our tariff exposure mitigation plans on Slide 17. Since our last earnings call, our tariff exposure has been reduced by approximately 50%. Our total gross annualized tariff exposure is now approximately $70 million compared to $140 million we provided previously. As a result, we expect the incremental year-over-year cost impact of tariffs to be approximately $50 million in 2026. We plan to mitigate the vast majority of this impact with productivity savings across the P&L, alternative sourcing, supply chain initiatives, and, of course, leverage our revenue management capabilities, including surgical pricing. The reduction in tax rates is not expected to benefit the bottom line as some supply chain mitigation efforts have been adjusted in line with the new rates, and we are intentionally choosing to continue to invest in the business. Lastly, as you know, this is an evolving situation, and we'll continue to monitor how policies impact tariff rates and, therefore, our costs. Now let's turn to our 2026 financial outlook on slide 18. Our outlook reflects our continuing investments in key categories to sustain volumes and drive long-term profitable growth while appreciating the uncertainty of the consumer and macro environment, including global trade policies. In addition, this outlook reflects the contributions of our recent M&A transaction, the acquisition of a controlling interest in McCormick de Mexico. Turning to the details. First, current rates are expected to have a one-point positive impact on net sales, adjusted operating income, and adjusted earnings per share. At the top line, we expect organic net sales growth to range between 1-3%. Growth will be supported by sustained volumes growth, a higher contribution from pricing across both segments compared to the prior year. In our consumer segment, we anticipate some volume impact from price elasticity early in the year, followed by solid volume growth as the year progresses. In our flavor solutions segment, we expect the volumes to recover and deliver full-year volume growth for the segment. We expect the acquisition of McCormick de Mexico to contribute 11-13% for the top line, leading to total constant currency sales of 12-16%. Along with this top-line performance, we anticipate full-year gross margin expansion reflecting recovery from the compression experienced in 2025. This expansion reflects favorable impacts from product mix, cost savings from our CCI program, and margin accretion from McCormick de Mexico, partially offset by the anticipated impact of a mid-single-digit increase in cost inflation. In addition to our gross margin expansion, we expect SG&A benefits from cost savings to be offset by investments to drive volume growth, including brand marketing and digital investments, most notably ERP implementation, as well as a build-back in incentive compensation. In terms of our ERP implementation, we're still taking a phased rollout approach. We've made significant progress, and our deployments to date have been successful. To further minimize execution risk, we decided to consolidate the number of waves within the upcoming deployment phase, which moves forward our timeline. Overall, program costs remain unchanged. However, this refined execution plan shifts more expense into 2026 than originally planned. For the year, we expect our brand marketing spend to increase in the low to mid-teens as we continue to invest behind our brands and reflect brand marketing investments of McCormick de Mexico. As a result, our adjusted operating income is expected to grow 15-19% in constant currency. In terms of tax, we expect the adjusted effective tax rate to be approximately 24% for 2026 compared to 22% in 2025, where we benefited from a number of discrete tax items that are not expected to repeat in 2026, in addition to a higher tax rate in Mexico. Notably, we now expect an expense from unconsolidated operations in 2026, which reflects the elimination of the minority interest or 25% of McCormick de Mexico net income attributable to Grupo Herdes from our consolidated earnings. In addition, we expect net interest expense to increase compared to 2025, primarily due to the funding of the McCormick de Mexico transaction. Our 2026 adjusted earnings per share is projected to range from $3.05 to $3.13 on a reported dollar basis, reflecting benefits from operating income offset by unconsolidated expense, the impact of the increased tax rates relative to the prior year, and higher interest expense. Overall, we believe our outlook is balanced and gives us flexibility to continue to invest in the business while expanding margins. Moving to Slide 19, this slide summarizes the cost headwinds for 2026 and how we plan to offset them. Our guidance reflects a strong underlying base business performance and growth from acquisitions, with pressures from cost inflation, tariffs, and the review of incentive compensation that are expected to be offset through tariff mitigation plans, CCI initiatives, and SG&A streamlining. Our digital investments, most notably the refined ERP implementation plan, along with a higher tax rate, are impacting underlying growth but will become part of our base as we look beyond 2026. Importantly, we remain on track to sustain our volume momentum and drive strong top-line growth. Despite higher costs, we're investing strategically, executing with discipline, and driving efficiencies, enabling us to deliver strong operating income growth and sustain our differentiation. We are confident in our ability to deliver the 2026 outlook and in achieving our long-term objectives. Brendan M. Foley: Thank you, Marcos. Before moving to Q&A, I would like to close with our key takeaways on Slide 20. The long-term trends that fuel our attractive categories—consumer interest in healthy, flavorful cooking, flavor exploration, and trusted brands—are enduring trends. They continue to reinforce the relevance and resilience of our portfolio. In 2025, we drove differentiated volume growth and share gains across our core categories. Our results demonstrate that we are investing in the areas that drive the most value for consumers, customers, and shareholders. As we enter 2026, McCormick & Company, Incorporated is operating from a position of strength with a solid foundation and disciplined execution. Despite ongoing macro and cost headwinds, we remain positioned for sustainable profitable growth. Our 2026 outlook reflects continued top-line momentum, margin recovery, and strong operating profit growth, anchored by innovation, efficiency, and our acquisition of McCormick de Mexico. While global trade dynamics continue to drive cost inflation, we are leveraging our competitive advantages, productivity initiatives, and cost management discipline to mitigate these pressures, sustain volume growth, and fund our investments for the future. Looking beyond 2026, these incremental costs are expected to remain in our base. However, our enhanced CCI plans and SG&A streamlining discipline position us to manage these pressures effectively while sustaining investment and delivering growth in line with our long-term algorithm. Ultimately, we remain a global leader in flavor, driving growth that is both sustainable and differentiated. Finally, I want to recognize all McCormick & Company, Incorporated employees for their dedication and contributions. Your commitment and passion continue to drive our success. I'm confident that together, we will continue to deliver differentiated results and long-term shareholder value. Now for your questions. Marcos Gabriel: Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press 1 from your telephone keypad. Brendan M. Foley: And a confirmation tone will indicate your line is in the question queue. Marcos Gabriel: You may press 2 if you'd like to remove your question from the queue. Faten Freiha: For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Operator: Thank you. And our first question is from the line of Andrew Lazar with Barclays. Please proceed with your questions. Andrew Lazar: Great. Thanks very much. Good morning, Brendan and Marcos. Marcos Gabriel: Good morning. Brendan M. Foley: Maybe to start, your '26 outlook is predicated on continued volume momentum. I was hoping you could talk a bit more about the key drivers underpinning your view. And in particular, maybe you can speak to expectations in consumer Americas just given recent scanner trends have decelerated a bit. I'm assuming on elasticity but perhaps you can clarify. Brendan M. Foley: Sure. Well, a couple of thoughts just I think in terms of top line. I think our guide for '26 reflects obviously both segments. Factors in obviously the uncertainty environment. But when we look at kind of the range that we're providing, I think everyone, consumer drives sort of the mid to high end of that range, and then, you know, flavor solutions probably the low to the mid end of that range. You know, overall, we expect pricing to contribute more to our growth rate than it did in 2025, we also expect to maintain volume growth for the year with, you know, volume growth in both segments. I might just speak maybe to each segment just to give a little bit more color on that. On consumer, we expect to continue delivering volume growth. It will have higher pricing, I think, compared to, you know, let's say, the last year. You know, we have driven volume over the last one and a half years, and it has been driven by a lot of our, you know, actions and plans and a number of things that obviously we've talked about in the past. And as I look to '26, a lot of those levers really remain in place. We'll continue to increase our A&P with really strong messaging, you know, that resonates. We'll continue to benefit from the innovation that we launched in '25. And those are things like the US Cholula expansion or McCormick, you know, innovation like finishing salts or the type of innovation that we've launched in EMEA behind air fryer seasonings. I think one of the positive things now, it got launched in, sort of towards the tail end of '25 and really started to hit the shelf. But this US gourmet relaunch, you know, McCormick gourmet, you know, we really think is driving a lot of positive velocities right now. And we like what we're seeing on shelf, and so that we'll get a full three quarters of the year on that innovation. And the whole price gap management plan also still remains in our base as it did, you know, in '25. Incremental to this, we're expanding distribution across our core categories. We'll continue to launch new innovation. And we'll also continue to renovate parts of the portfolio. And, you know, one of the ones I'm also excited about is we're gonna be, you know, relaunching our entire blends and seasonings line, and that's really quite exciting. So we like that that's another renovation that's gonna be coming out in '26. And then we're just gonna continue to sort of focus on these high-growth channels that we're seeing a lot of success in. And so, those are the things that are really driving, I think, and underpin and underwrite the consumer growth. In flavor solutions, you know, we expect to do better than we did in '25. We know '25 was impacted by large CPG customer volumes and being soft as well as in branded food service, but we do expect improvement particularly as we continue to grow with those high-growth innovators and private label customers. You know, we're acknowledging that we are lapping a difficult '25, so expect to do better. But we, you know, it's difficult to predict the level and pace of that improvement. So I still expect some lumpiness in this business as we've experienced in the past. But the things that give me, I think, more optimism, if you will, is just I'm encouraged by the scope of our innovation pipeline in that part of our business. It's really healthy across a lot of our customer segments. The reformulation projects are increasing, and we talked about that, you know, before, particularly with large CPG customers. And we're partnering with a lot of emerging brands and private label players, you know, to sort of really work on flavor there. And it's in exciting categories like protein-based beverages or fiber-based snacks or, you know, these are the types of health wellness trends that we're seeing, you know, getting a lot of activity. That gives us some reason for optimism. And our win rate on health and wellness briefs, you know, remains strong. So, you know, we have, I think, a realistically, you know, positive outlook. But we're also, you know, remembering what happened in '25 and not counting on all of that to, you know, sort of necessarily rebound back really strongly, but we do think it's gonna be positive improvement over the year. And it will be volume growth in both segments. Andrew Lazar: That's really helpful. And then just a very quick one for Marcos. Just anything to keep in mind on sort of the cadence of EPS growth as we think through the four quarters ahead? Just things discrete to keep in mind, whether it's year-over-year issues or things of that nature. Thank you. Marcos Gabriel: Yeah. So, in terms of the EPS, the test should follow the operating profit over the course. So, we'll see operating profit fluctuating over the next few quarters. OP growth will be in Q1 will not reflect the full quarter of McCormick de Mexico. So we'll be slightly below guidance. So if you think about it that way, earnings per share will follow that fluctuations of OP, and we should see a Q1 that will be in line. I would say, would meet the high end of our guidance range, but then you will build up as we progress over the next few quarters. Andrew Lazar: Thanks very much. Operator: Next question is from the line of Peter Galbo with Bank of America. Please proceed with your question. Peter Galbo: Hey. Good morning, guys. Thank you for taking the question. Marcos, I just wanted to ask a bit on the gross margin in particular just given some of the nuance of what happened in the quarter. I think it came in obviously below even your expectations. You've talked a bit about, you know, the core inflation components maybe being stickier even though we've had some tariff relief and, you know, the outlook for '26 kind of implies gross margin expansion. I think you said, you know, recovery. I didn't know if that meant full recovery of '25 into '26. But maybe you can put some more parameters just around how you all are thinking about the gross margin expansion for '26 relative to '25, again, in light of kind of it coming in light of your expectations in the fourth quarter? Marcos Gabriel: Yeah. Sure. Let me just explain the 2025 Q4 results, and then I'll go into 2026. So at a high level, if you would take a step back, the external environment continues to create volatility in terms of our commodity costs. And, you know, we continue to focus on the elements within our control. We deliver CCI, enhanced CCI even to offset the additional tariffs impact that we saw in the year. We executed on pricing in line with our plan, and we continue to, you know, grow volume in the consumer business in Q4 despite all the pricing actions that we've taken. More specifically to the drivers of the gross margin, you know, there's two main drivers. One is the indirect consequences of the tariff-related market pressures that we've been talking about over the last couple of quarters. And it actually accelerated in Q4 relative to Q3, which means that, you know, it was more than we expected, meaning that there was some more inflation coming through our P&L through the balance of the year. And then the second point is the direct impact of tariffs, which is about recognizing more of those tariffs inventory in our P&L than originally planned. So we had that had tariffs on it. You know, it's a bit of a product mix in Q4, and those got sold through it, and we saw the impact of that in that impact of the additional cost hitting our P&L in Q4. So the combination of the two elements is the broader commodity cost is impacting our gross margin plus the impact of tariffs were what changed versus our expectations as we went through the year. But also, I think it's important to mention that in Q4, Peter, in this time of volatility, we are focusing on managing the P&L holistically, not only the gross margin line. And that's where we drove a lot of SG&A savings. We had done a lot of, made a lot of progress in terms of SG&A over the last, you know, few quarters. Q4 was also a quarter in which we focused on streamlining SG&A while increasing investments to drive growth and remarketing and digital. So managing the P&L holistically and getting to the OP number that was, you know, in line with our expectations, meaning SG&A offsetting the gross margin piece. But obviously, you know, the gross margin is something that we want to recover. Our expectations going into 2026 is that we are expecting to recover the margin compression that we saw of 60 basis points in 2025, and we provided a qualitative guidance in terms of gross margin. As it is a bit difficult to be precise at this time, given the uncertainty that we are facing in the market and the microeconomics, it is a little bit difficult to be precise in terms of gross margins. So we provided that view. But at the end of the day, the focus will be on recovering the margin compression that we saw in 2025. Peter Galbo: Great. Okay. Thank you for that. And Brendan, maybe if I could ask just more directly on Slide 19, where you kind of have the bridge on base business to the guidance. The ERP, I know, has kind of been discussed in the past now with the and maybe you put a more concrete number around it. But I want to make sure I understood you clearly that you're accelerating the spend or some of the projects into '26. But then those costs are actually expected to remain in the base. So we don't really expect maybe not even any relief on that in '27. Maybe you can just clarify specifically around the ERP and how we should think about the phasing of projects in '26 and then how to think about it for '27 and beyond. Thanks very much. Brendan M. Foley: Peter, first, let me provide some just some broad perspective on sort of what we were communicating, I think, throughout the script, but also on Slide 19, and then I'll ask Marcos to speak more specifically to how to think about ERP beyond '26. You know, overall, broadly, as we kind of thought about the year for 2026, you know, our top priority was to really think about how we maintain sales momentum. That being a top priority, you know, in terms of having a very healthy top line. And we're balancing volume and price. And so and still, you know, achieving, you know, sort of healthy sales growth. And still invest in the business also at the same time. But in 2025 and 2026, you know, we certainly saw a lot more cost come into our P&L, whether it be through inflation or tariffs. Or in this case, we go to '26, you know, building back incentive compensation. And we're offsetting that with, you know, targeted pricing, productivity initiatives, cost savings initiatives, but we can't fully offset everything. It's so, you know, those are the elements that you see in that bridge, which were which are. Tax and ERP. But I would say that the fundamentals and the health of our business are doing really well. And we just need to work through this dynamic environment in terms of cost. Now in ERP, you know, we decided that as this program is going well and we are seeing success in a number of our go-lives already to date. As we assess sort of the next one, it just felt prudent for us to minimize the number of waves that we would have to go through. Marcos, do you want to add on top of that? Marcos Gabriel: Yeah. So we have been very successful in deploying our ERP implementation over the last couple of years. It's a lot of work, as you can imagine. We've taken a very integrated approach in terms of how we deploy the ERP. It's not only the ERP implementation team, but it is them working together with the business as well as the technology teams with strong support from our external partners. So that is going very well. You know, this, the programs, you learn, you adapt, and you evolve. And one of the things that we were considering over the last three to four months is really about, you know, the number of waves within the next deployment phase that we have. Whether we would, you know, actually compress the waves to minimize risks. And that happens because as you shorten the periods between dual operations between legacy systems and new systems, that minimizes data reconciliation interface risks. So that is the key element of compressing the phases. Which is, you know, you'll eliminate that interfaces between the two systems for a longer period of time. So by doing that, we believe we are further minimizing risk. But as we do that, we bring forward the timeline of development and preparedness into 2026. As this last go-live will take effect in early 2027. So as you do that, you shift costs into 2026. As, which is different than we had originally planned. Overall, costs for the program remain the same. But it's just a shifting timing of expenses between '27 and '26. Due to this change in the approach that we're taking. In 2027, you should see that cost moderating, and then we should see further moderation down into 2028. Peter Galbo: Great. Thank you very much. Operator: Our next question is from the line of Tom Palmer with JPMorgan. Please proceed with your questions. Tom Palmer: I wanted to follow-up on Pete's question and clarify on the unexpected inflation you noted in the fourth quarter, really with implications as we think about '26. I think you typically carry more than a quarter's worth of inventory on your balance sheet, and you did give the guidance a month into the quarter. So I'm trying to think through to what extent this added inflationary pressure that maybe had some impact in 4Q might be even more of a consideration as we start out 2026. And kind of in that context, any help on thinking through that mid-single-digit inflation and the cadence of it in the coming year? Thanks. Marcos Gabriel: So we exited the year at mid-single-digit inflation. If you think about Q4 versus the prior years, it was the highest quarter of inflation that we saw coming into our P&L. And that is a combination of tariffs, but also commodity costs more broadly. As you know, we have a broad basket of commodities and source from 80 countries, 17,000 ingredients. We have a broad basket, and we saw inflation in the core commodities, but also tariffs coming in. As well as packaging. We saw packaging as well up in Q4. So we're exiting at a high cost base. As you go into 2026, you know, despite the moderation of tariffs, we'll still see a mid-single-digit inflation hitting the P&L and our expectations into 2026. It could improve, but if it does improve, it will be later in the year. Right now, we're estimating that it's gonna continue to be at the same run rate of Q4 into 2026. Tom Palmer: Okay. Thank you for that. And then on the consumer segment, you noted the expectation for volume impact from price elasticity. But recovery subsequently. What drives the price elasticity in the first quarter? And is there anything maybe related to shipment timing when we think about 4Q that relates back to that? Thank you. Brendan M. Foley: Sure. As we think about the consumer business and as we go into Q1 and then we think about the rest of the year, we do expect an impact from elasticities in the first quarter. And I think one of the things that that assumption is really that we have some pricing that we, you know, put in place. Targeted and surgical. In 2025, but we also have additional pricing to come on, you know, beginning in February, which is a reflection of this inflation that we've been referring to as well as the, to some degree, you know, partly offsetting tariffs. And so we expect some of that elasticity impact to really hit, you know, more in the Q1 overall. I wouldn't be surprised if we see volumes either flat to slightly negative in Q1 as a result of that. However, we do expect to sort of then improve upon that as we go throughout the rest of the year, and that there's a transition period we're going through right now in Q1 where we're seeing more pricing come into the shelf just as you try to offset these costs. But then we also have other programs in order to, you know, sort of recognize the reduction in tariffs and everything else that starts to kind of, you know, find its way to, I think, our consumption profile going through the rest of the year. Starting in Q2. Tom Palmer: Okay. Thank you for that. Marcos Gabriel: Sure. Operator: Our next question is from the line of Alexia Howard with Bernstein. Please proceed with your question. Alexia Howard: Thank you. Good morning, everybody. Marcos Gabriel: Morning. Brendan M. Foley: Morning. Alexia Howard: Can we just ask about the sort of you talked about the confidence that you have in the long-term objectives. On paper, you have a number of tailwinds. You're very on trend with consumer dynamics, interest in health and wellness and cooking from scratch, etcetera. The tariffs seem to be easing. Reformulation seems to be picking up. And yet, this seems I think we're now on year five where the earnings expectations are below your long-term algorithm. So I'm just trying to sort of square that away in thinking about what you said at the Investor Day in September, I think, in 2024 about the outlook for 2028. When might we expect to get back on algorithm, and are those 2028 goals still realistic from here? And then I have a follow-up. Brendan M. Foley: Sure. Well, Alexia, let me address the first one then. Thank you for the question. If you reflect back on the targets that we shared at Investor Day, that's reflected obviously, as we called out then, you know, our organic growth ambitions. And, you know, many of those targets were established before the onset of much of this uncertainty that we've been seeing from a global trade standpoint over the last, let's say, year. And also, it was established before the acquisition of McCormick de Mexico. Given everything that's kind of, you know, continued to sort of develop since Investor Day, you know, we are aligning our commentary to the long-term objectives, including organic growth and also accretive M&A. And I think from a sales perspective, we really feel pretty good about being able to hit those targets by 2028. From a top-line perspective. But we're also working very hard right now to offset the impact of what has been substantial incremental costs coming into our P&L over the course of 2025 and also as we look ahead to '26. And so a lot of our focus right now is on additional efforts to address these as quickly as we can. And our plan at CAGNY is to provide more color on, you know, how we look at the entire set of targets that we laid out. To make sure that we have, you know, illustrated sort of any adjustments in our pathway with regard to those targets, you know, set out at Investor Day. I just come back to from a top-line perspective, we feel really quite good and quite confident of our ability to hit those. But we gotta work through right now on a short-term basis, just really the amount of incremental cost activity that we're seeing in our P&L. We have to, you know, we'll provide you more perspective on how we look at that at CAGNY. Alexia Howard: Great. Thank you. Can I and a quick follow-up? On the reformulation activity, you've talked, I think, for much of the last year about how that's picking up particularly with private label and with some of your largest CPG clients. You still in investment phase on that because, obviously, you have to go through the process of actually figuring out how the innovation will the reformulation will work before you really get that revenue stream in the door once the product's launched. Is that expected to sort of pick up through the course of 2026? Brendan M. Foley: Yes. If I think I understand the context of your question, Alexia, and let me know if I didn't get it right, it's about, you know, from a development perspective, you know, how are we looking at reformulation activity in '26? But also, I think maybe your question also had to do with if you think about the commercialization of that development, you know, how might we think about that in '26? So if I look at sort of both ends of that question, from a development perspective, I do expect the development activity to continue to pick up. We've definitely seen that as we went through the course, especially the back half of '25. And we expect to see more of that come through in '26. And it is a reasonably, you know, sort of as we talked about before, a big tick up in our activity. I expect that to continue to, you know, increase overall. From a commercialization perspective, sort of, i.e., when it hits the market, I think that's a bit more delayed. I think, you know, late '26 is probably an early indicator when we start to expect to see that, but definitely more in '27 would be my expectation. Particularly as you think about maybe, you know, sort of large CPG customer type activity. At the same time, there's a lot of emerging brand activity going on, and they tend to move to shelf a little bit faster. Alexia Howard: Great. Thank you very much. I'll pass it on. Thank you. Operator: Next question comes from the line of Robert Moskow with TD Cowen. Please proceed with your questions. Robert Moskow: Hi. Thanks. Brendan, I think Andrew Lazar asked about the Nielsen tracking data for spice and seasonings in The US. And, you know, some weakening sales growth share, you know, share shares are down. Both in our data, both in terms of volume and value. In the last twelve weeks. And I was hoping you could be a little more specific as to whether that reflects what you're seeing or not. And whether there's any implications as to what the sell-through was from your holiday shipments in the fourth quarter? Thanks. Brendan M. Foley: Sure. Well, there's a number of different variables in your question, so I'm going to try and make sure I address them all, Rob. First of all, I'm going to maybe hit the last point first, which is if I think about overall our inventory in the channel, meaning the comparison between our sales and our consumption in the fourth quarter, it is exactly really where we thought we think it should be, and we don't see any anomalies at this point. That would make us think that we have to, you know, speak to any differences that are unusual as we think about, you know, sort of the seasonality of our business. So, that component feels very much in line. Overall. When I think about just overall performance of the fourth quarter, you know, we saw a really very good holiday performance, especially when you look at our business in The Americas. You know, specifically, you know, we were certainly, you know, delivered very much on what we expect would happen both from a price and a volume standpoint. From a sales perspective. But as we think about consumption, we believe that we had, you know, reasonably good, you know, consumption performance. You know, I will say that there was a period there, so many things happen and change obviously in the news, but there was a period there where we saw broadly in the market a bit of a slowdown for probably a couple of weeks related to, you know, sort of the news regarding, you know, SNAP, you know, funding, etcetera. And there was a little bit of a contraction period that we saw there broadly. In grocery, in terms of total results. And so a little bit of a dip, but then things started to come back. As we got closer to the holiday season and we saw consumers really kind of purchase more closely to the holiday, which is reflective of sort of that budget, you know, sort of control behavior or that value-seeking behavior. And so we saw, you know, certainly that type of, you know, profile, if you will, in the holiday consumption, etcetera. As we go into Q1, you know, we still have to wait and see what that post-holiday consumption looks like in terms of do consumers kind of maintain that level, or do they, you know, moderate a little bit after, broadly, what was a successful holiday season. But, also, you know, keep in mind that we expect some price elasticity impact in there too. As we talked about, and we certainly see that coming through a little bit. The price elasticities are operating as expected. So that is nothing that has, at this point in time, let you know, leave us to think that we didn't really have a good handle on what that might be. As we go through Q1, as I mentioned on a previous question, we expect maybe a little bit more variability in terms of price elasticity impact because there is a little bit more pricing coming to shelf as we offset these costs that we're talking about. We are taking a very targeted surgical approach, you know, in our pricing. I mentioned a lot of things there, but I think I'm trying to get at the spirit of your question. Let me know if I did not. Robert Moskow: I think that's fine. Alright. Thank you, Brendan. Operator: The next question is from the line of Max Comfort with BNP Paribas. Please proceed with your questions. Max Comfort: Thanks for the question. First, just a housekeeping one on tariffs. So your gross annualized tariff exposure has fallen from $140 million as of last quarter to $70 million today. You also said you expect to book $50 million of incremental tariffs in FY '26. So my simple reading would suggest that this means you expect to book $70 million bricks. Now this would imply you only booked $20 million of gross tariffs in '25. However, I know last quarter, you said you expected to book $70 million of gross tariffs in '25. And it sounds like if anything, it came in higher than that number. So I was hoping you could just give us a bit of clarity. Tell us what was the final gross and net tariff number that you booked in FY '25? Marcos Gabriel: Yeah. Sure, Max. I appreciate this can create a bit of confusion, giving you so many numbers from last year into 2026. So, try to clarify that. So in 2025 first, starting with our last call, was a gross impact of $70 million. And we mitigated $50 million out of the 70 last year. So a net impact of $20 million in 2025. Going into 2026, the annualized number now is $70 million, coincidentally the same. As we have already absorbed $20 million in the base, the incremental growth year-on-year impact is $50 million. So that's our call, the $50 million. And if you look on slide 19, that is a 5% of incremental tariff impact that we're seeing now in '26 versus '25, and we plan to offset most of it as we go into 2026 with the same strategy that we had before, supply chain savings, procurement initiatives, as well as some surgical pricing that will take place next year. Max Comfort: Okay. But I also looked like on that slide that you're referencing that you're offsetting all the tariffs. So if the net impact was $20 million in '25, it looks like the net impact is going to zero in year-over-year terms in '26. Is that fair? Marcos Gabriel: Yeah. That's fair. Max Comfort: Okay. And then just actually one other housekeeping one. Just with regard to your response to Andrew on cadence for EPS throughout the year, it sounded like you were saying EPS cadence will follow operating profit cadence. And I thought you said that operating profit starts off slightly below the guidance in 1Q because you don't have a full quarter of Mexico, which makes sense. Then it also sounded like you said that 1Q EPS is at the mid to high end of the guidance range. So if that's true, why is that? And then I think you said it even builds further from there, which might mean you'd be, you know, towards the high end of guidance for the full year. So I'm assuming I misheard you that 1Q EPS is at the mid to high end of guidance, and maybe it's the low to mid end, but just hoping for more clarity there. Marcos Gabriel: So, yeah. So, it's a little bit of a between OP and EPS. So OP will be soft because of the McCormick de Mexico not being included fully in the base. EPS will be at the mid to high in Q1, and then it will normalize towards the range throughout the year as we said. So it's a Q1, a bit of a different equation between OP and EPS. But then it gets more aligned to the OP flow between Q2 and Q4. Max Comfort: Okay. Thanks very much. Marcos Gabriel: Thank you. Operator: Our final question is from the line of Scott Marks with Jefferies. Please proceed with your questions. Scott Marks: Hey. Good morning, all. Thanks so much for taking our questions. Brendan M. Foley: Sure. Scott Marks: Wanted to just ask a little bit just if we kind of take a step back and look around the world. I know you've made comments about some different regions today. Just wondering if you can share maybe a little bit more detail in terms of how you're thinking about different parts of the world, what is encouraging to you right now? Where do you see some challenges maybe? And just, you know, any thoughts you have on kind of growth profile in '26 in some of the different regions. Thanks. Brendan M. Foley: Certainly. And, you know, what I might do is not speak to The Americas first because it feels like we sort of tended to focus a little bit more on that and some of the questions that we got. I'll start with Asia Pacific. In fact, Marcos and I were just in China two weeks ago. So we've been in the region, and we'll go back out to the region here in a couple of weeks. And, you know, my outlook on Asia overall is I'll focus a little bit more on China and then the rest of that region. We, you know, when we look at '25, got that gradual growth and that we were, you know, out projecting that we would get. And so we feel pretty good about sort of performance, broadly in China. And we still see continued gradual improvement in that marketplace as we look to 2026. The parts of our business that are performing well there are broadly, you know, we feel like we're at continue, throughout the year. See strength in our retail grocery business there. Certainly good trends driven by increased distribution and stronger marketing across that business. We also see strength in the business that we have in the middle of China, which really focuses a lot on more, you know, Chinese cuisine in terms of food service, and catering and a little bit on retail shelves, and that business has been, you know, strengthening. As we, you know, take a look at going from '24 to '25 and then '25 to '26. Our QSR business there is also doing really well, and we see just a lot of strong consumption happening in that channel. The only part of that business that's been soft is really our food service business, which tends to serve the higher-end restaurant more western cuisine, that's been soft just due to a lot of, you know, different, you know, conditions in that marketplace. But overall, we expect China to be doing, you know, reasonably well in terms of slight gradual growth again in 2026. And in the rest of that region, we continue to see, you know, pretty good growth in Australia and in Southeast Asia. And we're still gonna continue to build our plan for India as we've talked about before. I look to EMEA, we continue to see, like The US and The Americas, continue to strengthen our consumer business. It will be volume growth, with some pricing, and that's consistent with what we saw in 2025. And obviously led by continued sort of, you know, all the things that we talk about. Stronger brand marketing, increased distribution, and also, you know, even in those high-growth channels like e-commerce, we see a lot of growth there right now overall in the EMEA consumer business. When I look at flavor solutions there, I do feel like we're going to have a stronger year than we did in 2025 because we just feel like the stabilization of that QSR marketplace, you know, starts to really, you know, show a little bit more improvement. I'm not counting on a lot, but I am counting on it being better than 2025. And that gives us some optimism in terms of that part of our, you know, our segment in EMEA. And then coming back to The Americas, just feel again, you know, a reasonable amount of optimism as you see in our guidance for sales. Both in the consumer business and also flavor solutions for the reasons that I mentioned on an earlier question. I just don't want to repeat all that, obviously. Because it would be redundant. But we feel some really strength there. And, you know, lastly, I'll wrap it up with Latin America and, you know, obviously, the McCormick de Mexico business, and we anticipate having a good year there too. Largely being driven by, obviously, that being the consumer segment. Scott Marks: Got it. Appreciate it. We'll pass it on. Thanks very much. Marcos Gabriel: Thank you. Operator: I have no further questions at this time. I'd like to turn the floor back over to management for closing comments. Faten Freiha: Thank you, and thanks, everyone, for joining today's call. If you have any further questions on today's information, please feel free to contact me. And this concludes this morning's conference call. Thank you.
Regina: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Old Republic International Corporation Fourth Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Joe Calabrese with MWW. Please go ahead. Joe Calabrese: Thank you, Regina. Good afternoon, everyone. And thank you for joining us for the Old Republic International Corporation conference call to discuss fourth quarter 2025 results. This morning, we distributed a copy of the press release and posted a separate financial supplement. Both of the documents are available on Old Republic's website at www.oldrepublic.com. Please be advised that this call may involve forward-looking statements as discussed in the press release dated January 22, 2026. Assumptions, uncertainties, and risks exist that may cause results to differ materially from those set forth in these forward-looking statements. For more information on the assumptions, uncertainties, and risks, please refer to the forward-looking statements discussion in the press release and the company's other recent SEC filings. We may also reference net income excluding net investment gains, or net operating income, a non-GAAP financial measure, in our remarks or in our responses to questions. GAAP reconciliations are included in the press release. Presenting on today's conference call will be Craig Richard Smiddy, President and CEO; Francis Joseph Sodaro, Chief Financial Officer; and Carolyn Jean Monroe, President and CEO of Baldwin Public National Title Insurance Group. Management will make some opening remarks, and then we'll open the line for your questions. At this time, I'd like to turn the call over to Craig. Please go ahead, sir. Craig Richard Smiddy: Alright, Joe. Thank you very much. Well, good afternoon, everyone, and welcome again to Old Republic International Corporation's fourth quarter and full year 2025 earnings. In the fourth quarter, we produced $236 million of consolidated pretax operating income compared to $285 million, and our consolidated combined ratio was 96% compared to 92.7%. For the full year, we produced $1 billion of consolidated pretax operating income, and our consolidated combined ratio was 94.7%. Some other information on 2025: our operating return on beginning equity was 14.1%, and growth in book value per share, including dividends, was 22%. We think this reflects our strong operating earnings, our higher investment valuations, and our sound capital management strategy. In the fourth quarter, specialty insurance grew net premiums earned by 8.3% over 2024, and for the full year, grew net premiums earned by 10.9%, and we eclipsed the $5 billion mark for the first time. In the fourth quarter, specialty produced $178 million of pretax operating income compared to $228 million, and specialty's combined ratio was 97.3% compared to 91.8%. For the full year, specialty produced $900 million of pretax operating income, another all-time high for us, and specialty's combined ratio was 93.2%. In the fourth quarter, title group premium and fees grew by 12.4% over 2024, and for the full year, title grew premium and fees by 9.1%. In the fourth quarter, title also produced $65 million of pretax operating income compared to $55.4 million, and title's combined ratio was 94% compared to 94.4%. For the full year, title produced $140 million of pretax operating income, and title's combined ratio was 97.6%. Our conservative reserving practices were slow to release prior year reserves, but we react very quickly to increased reserves. We continue to produce favorable prior year loss reserve development in both specialty insurance and title insurance, and Frank will give you a little more color around that topic. With that, Frank, I'll go ahead and turn the discussion over to you, and then please turn things back to me. I'll discuss specialty insurance, and then I'll turn things over to Carolyn, who'll discuss title, and then we'll wrap up and open it up for Q&A. So Frank? Francis Joseph Sodaro: Thank you, Craig, and good afternoon, everyone. This morning, we reported net operating income of $185 million for the quarter compared to $227 million last year. On a per-share basis, comparable quarter-over-quarter results were 74¢ compared to 90¢. Starting with investments, net investment income increased 7.9% in the quarter primarily as a result of higher yields on the bond portfolio and, to a lesser degree, a larger investment base. Our average reinvestment rate on corporate bonds acquired during the quarter was 4.6% compared to the average yield rolling off of about 4.2%. The total bond portfolio book yield stands at 4.75% compared to 4.5% at the end of last year. Now, given the portfolio actions taken over the last few years that allowed us to accelerate improvement in the bond portfolio yield, our return of capital initiatives, and the current interest rate environment, we expect net investment income growth to slow in 2026. Turning now to loss reserves, both specialty insurance and title insurance recognized favorable development in the quarter, leading to a 2.4 percentage point benefit in the consolidated loss ratio compared to 2.9 points last year. Within specialty insurance, workers' comp prior year reserve development was slightly unfavorable in the quarter, as strong favorable development throughout the book was offset by a prior year reserve increase related to a credit loss on a single large deductible program. Commercial auto, general liability, and property all had solid favorable development in the quarter. Now for the full year, the specialty insurance loss ratio had a benefit of 2.9 points from favorable development, and there were no large pockets of unfavorable development to report. We end the quarter with book value per share of $24.21, which inclusive of the regular and special dividends equated to an increase of 22% for the full year, resulting primarily from our strong operating earnings and higher investment valuations. In the quarter, we declared nearly $700 million in dividends and repurchased $56 million worth of our shares. This brings total capital return this year to just over $1 billion, and it leaves us about $850 million remaining in our current repurchase program. I'll now turn the call back over to Craig for a discussion of specialty insurance. Craig Richard Smiddy: Okay, Frank. Thanks for that summary. Specialty insurance net premiums written were up 6.1% in the quarter, with strong rate increases on commercial auto and general liability. We also had solid renewal retention ratios, new business writings, and increasing premium in our new specialty operating companies. As a matter of fact, these new companies contributed over $300 million in net premium written in 2025 and collectively delivered positive operating income. As I mentioned in my opening remarks, in the quarter, specialty insurance pretax operating income was $178 million, and the full year was $900 million. While the fourth quarter combined ratio was 97.3%, and the full year was 93.2%. The loss ratio for the quarter was 67.6%, and that included 2.2 percentage points of favorable prior year loss reserve development. And that compares to 64.1% in the fourth quarter last year, which included 2.4 points of favorable development. The full year loss ratio was 63.9%, including 2.9 points of favorable development. Moving to the expense ratio, for the quarter was 29.7% compared to 27.7% in the fourth quarter last year. The full year expense ratio was 29.3% in line with expectations. And our continued investment into specialty operating companies that we have recently launched, as well as in the technology modernization, data and analytics, and AI, does place some short-term strain on the expense ratio, but we're confident these investments will provide significant long-term upside potential. Turning to commercial auto, net premiums written grew 6.4% in the quarter while the loss ratio came in at 80% compared to 77.9% in the fourth quarter last year. As we noted in the release, we increased the current accident year loss ratio by three percentage points, which for the year added 12 percentage points for the quarter, I should say. This action is consistent with what we've regularly communicated, and that is that we reserve conservatively and we're quick to react to increases in loss trends that we are observing. And those loss trends for commercial auto are now coming in a bit higher than we were observing earlier in 2025. And as such, as noted in the release, rate increases accelerated in the fourth quarter to 16% for commercial auto. Again, this would be in line with our philosophy of loss trends that are commensurate with rate increases. Workers' comp net premiums written was 6% lower in the quarter while the loss ratio came in at 65.2% compared to 35.5% in the fourth quarter last year. The big difference here is that the vast majority in the fourth quarter of 2025 vis-a-vis the fourth quarter of 2024 is a significant difference in the level of prior year favorable development. Rate decreases in work comp were about 3% tier two in line with loss trends we're observing where severities remained very consistent and loss frequency continues its decline. So given positive wage trend that we apply our rates to, relatively stable severity trend, and a declining loss frequency trend, we think our rates remain adequate even with a small level of rate decreases. I'll also touch on property here. We had net premiums written of which increased 21% in the quarter, bringing the full year property writings to $750 million. The property loss ratio was 55% in the quarter, and that included some favorable prior year loss reserve development. It's of note that our property writings are diverse and often written on an E and S basis, particularly at our new specialty operating company. So we expect solid growth and profitability in specialty insurance to continue through 2026, reflecting the growing contributions from our new specialty operating companies and also reflecting our commitment to underwriting excellence within all of our specialty companies, including a keen focus on pricing discipline and cycle management. It's also noteworthy that our specialty portfolio is now more diversified than it's ever been, which also helps set us up to successfully manage market cycles. So I will now turn it over to you, Carolyn, to report on title insurance. Carolyn Jean Monroe: Thank you, Craig. Title reported premium and fee revenue for the quarter of $789 million. This represents an increase of 12% from the fourth quarter of last year. The fourth quarter was our strongest of the year and is a continuation of the market story that we have been reporting all year. Seeing strong activity in the commercial sector and softness in the residential market driven by persistent price and some affordability challenges. Still, premiums produced in our direct title operations were up 18% from this time last year. Our agency produced premiums were up 13% and made up 77% of our revenue during the quarter, which is consistent with the fourth quarter of last year. Commercial premiums increased this quarter and were 29% of our earned premiums compared to 23% in the fourth quarter of last year. For the year, our commercial premiums made up 26% of our earned premiums compared to 22% in 2024. Investment income was also up this quarter by nearly 12% compared to 2024, primarily from higher investment yields. Our combined ratio improved to 94% this quarter compared to 94.4% in the fourth quarter of last year. During the quarter, our continued expense management efforts and increased revenues resulted in a decrease in our operating expenses of 1.2% relative to premium and fees. Our loss ratio increased to 0.8%. Although prior policy years continued to develop favorably, the amount of favorable development in the fourth quarter this year was less than in 2024. Our pretax operating income this quarter was $66 million, compared to $55 million in the fourth quarter of last year. This 18% increase during the quarter brings our full year pretax income to $140 million for 2025. As we start 2026, the cornerstone of our business continues to be our title agents. We remain focused on providing our agents with the innovative technological solutions required to maintain a competitive edge. Operationally, we will continue our margin expansion efforts to ensure that our structure efficiently serves our agents. We remain focused on maximizing efficiencies and implementing the Qualia operating platform across the title operations during 2026, as well as continuing our initiatives to service the large commercial transactions we are seeing in the market. And thank you. And with that, I'll turn it back to Craig. Craig Richard Smiddy: Okay, Carolyn. Thank you. So that concludes our prepared remarks. And we will now open up the discussion to Q&A. And I'll either answer your question or I'll ask Frank or Carolyn to chime in and help me out. Regina: We will now begin the question and answer session. In order to ask a question, simply press star, followed by the number one on your telephone keypad. Again, that is star 1 for any questions. Our first question will come from the line of Gregory Peters with Raymond James. Please go ahead. Gregory Peters: Good afternoon, and happy New Year to everyone. Craig Richard Smiddy: Happy New Year, Greg. Gregory Peters: I guess starting at just the high level, you know, in the past, you've talked about sort of what you think the specialty insurance target combined ratios should look like over a course of a year, and I guess, in the context of understanding those moving pieces, can you kind of provide us some perspective of how you think the budgeting is coming along and where you think the combined ratio targets might be for 2026? Craig Richard Smiddy: Sure, Greg. Yeah. So, you know, ending the year at a combined ratio in specialty of 93.2% feels pretty good to us. We hopefully over time, be a bit better than that. But I think where we're at in the PNC cycle, that feels pretty good. And relative to next year, our plan is to produce something around the same level. You know, it depends by we have 20 different operating companies. Depending on the operating company, that varies. You know, if it's longer tail lines of business, it might be a little bit higher. If it's shorter tail lines of business, it's probably lower. So all the businesses have a unique plan, and they have targets that they set relative to those plans. So I would say 2026 looking for a very consistent year. Obviously, there's talk of pricing pressure in the marketplace. But we're going to maintain our discipline. As I mentioned in my opening comments, we're keenly focused on pricing discipline, underwriting discipline, every company is focused on combined ratio over top line. And even in our incentive compensation plans, when we have soft pockets of business where pricing is too aggressive in the marketplace, we will remove any kind of growth or retention goal and make compensation based on strictly on combined ratios. So it's all about bottom line for us, and that's really driven by the combined ratio. Gregory Peters: Great. I guess, you know, the other two questions I had on the specialty insurance side, you know, one is just going back to, you know, just some more background and what led to the higher loss pick. Because you said it wasn't reflected in yet in the paid claim data. So I'm just curious what you're seeing, and I do recognize your approach to case reserves and loss picks. So and then the other question I had, just so we just get them out on the table there for you is, I think, Frank, mentioned a credit loss on one of the large deductible programs. Just some background on that well. Craig Richard Smiddy: Sure, Greg. I'll take both of those. Yeah. So, you know, we start beginning of the year with what we believe to be a conservative loss pick. And from there, as we go through each week, we study what's happening with case reserves, and also what's happening with paid losses. And we take those into consideration, and look at what trend we think that that implies. We take a closer look at severity. We take a close look at frequency. And come up with an overall trend. So what we saw in commercial auto this year for the better part of the year was trends. We said, I think, on prior calls, we were saying trends in the low teens, and that we were obtaining rate increases that were at least commensurate with those trends. And that was the case. As we got toward the end of the year, while we did not notice any paid claim difference, we did notice that case reserves were higher. And, as we communicate, we're conservative. And if we see case reserves at a higher level, we'll react. We did that, I think, a couple years ago, same exact thing. Where trends all of a sudden moved a bit higher than what we were seeing earlier in the year. And, as such, trends now look to be rather than in the low teens, the mid-teens. And as such, the three percentage point increase to the accident year loss ratio. We'd rather be conservative and go with what we're seeing in case reserves as opposed to being relaxed and relying on paid losses. So, you know, I just point out it's not something we missed. It's and to give everyone a little more color around that, you know, loss trends move. They're volatile. We follow them regularly. You know? Like, daily, weekly, monthly, quarterly, and it's always a moving target. It's impossible to instantaneously know what today or tomorrow's loss trend is. No one has a crystal ball. And the best anyone can do is make a projection based on current observations, and that's exactly what we do. We make a projection based on what we're seeing, and that's it's usually a conservative projection. In this case, a conservative projection around what we saw in the movement between case reserves in the beginning of the year as opposed to case reserves more toward the end of the year. And just to underscore this a little bit more, when I make the statement that it's impossible to precisely and instantaneously know what your trend's gonna be, it takes time from the first notice of loss to the time that an adjuster is able to set ultimate case reserves. You know, at the time of first notice of loss, the ultimate number of bodily injuries, the severity of the injuries, whether or not there's attorney representation, are all things that are not usually immediately known, and it takes time for that to play out. And that's why it's impossible to instantaneously know what your severity is until you get that kind of information and the year progresses and it comes through in your case reserves. So hopefully, that provides a little more color around what we saw, how we reacted, and you know, it's really 100% consistent with what we've communicated to all of our investors and analysts. We observe higher loss trends, we immediately react by adjusting the loss ratio. And, as you saw in the fourth quarter, as I mentioned in my comments, we immediately react with rate. And rate increases in commercial auto accelerated. In the fourth quarter and now are upwards of 16% compared to I think we were at 14% last quarter. So and we'll keep doing exactly that. So I'll move on to your second question. Regarding the $17.5 million offset we had on workers' comp favorable development. And that came from, as we said in the release, a large deductible program where the losses from prior years had developed. And in this case, there was a credit risk exposure, so we ended up with insufficient collateral and on large deductible programs when that happens. That's something that then falls to us. And, accordingly, we have to put up the reserves ourselves. So that's what happened. In this quarter, and you've been following us long enough to know that those kind of losses are somewhat unique and certainly, in our forty, forty-five year history, that's a pretty big number for us relative to past experience. And 99 out of 100 times, we have enough collateral to take care of things even if losses do develop unfavorably in prior years. But in this one instance, there was insufficient collateral. Gregory Peters: Well, that's excellent detail. So it's appreciated. Mindful that others might be asking questions, so I just close out. Carolyn, if you could just provide your crystal ball view on what 2026 might look for the title business. I feel like your pick might be as good as anybody's out there. So just curious about your perspective on that. Carolyn Jean Monroe: Sure. You know, in all of kind of the research that we do from people that report on that, it's still showing that commercial should have about a 20% improvement over this year, which was a wonderful year for commercial. But, you know, they see a single-digit increase in residential for next year. Less than 10%. So somewhere there's it goes between 3-7% depending on who you look at. So I think it's going to be, you know, another year like this year. With some improvement, especially if commercial does improve like it did. So you know, we're looking forward to 2026. Gregory Peters: When you say next year, you and Craig, I'd presume you mean '26. Carolyn Jean Monroe: Yes. I do. Right. Craig Richard Smiddy: Right. Yep. Yeah. Perfect. Gregory Peters: Yeah. Craig Richard Smiddy: We're stuck in fourth quarter, full year '25, mode right now. Gregory Peters: Right. I assume so, but thanks for the answers. Craig Richard Smiddy: Thank you. Regina: Once again, for any questions, simply press 1 on your telephone keypad. Our next question will come from the line of Paul Newsome with Piper Sandler. Please go ahead. Paul Newsome: Good afternoon. Thanks for the call. Maybe just to follow-up on the case reserves, and I apologize if I missed this because I got a little technical issues myself during the call. The case reserve increases, were there any sort of geographic or patterns within the case reserve that stood out or would suggest other than just pure sort of overall loss trend? That might give us a hint as to what might be happening under the hood? Craig Richard Smiddy: Yeah. Paul, that's a great question. The one we and we've looked at it in great detail. I can't say geographically there's anything we've detected. But there are a few things we do know, and that is that the number of people making bodily injury claims relative to the number of accidents that we have is higher. And the percentage of bodily injury claims with attorney representation is higher. And the percentage of claims that end up in litigation is higher as well. So, you know, a bit of an opinion section here. And that is our view is that litigation system abuse is accounting for these increases and that includes the ongoing proliferation of attorney advertising where plaintiff attorneys are attempting to vilify insurance companies and you only need to turn on a television or drive down the interstate and see the billboards. And it's amazing. You know? The number of advertisements on television, on billboards, is just continuing to proliferate. And, to us, it's clear that plaintiff attorneys have come to the conclusion that there's a return on these investments. So I think, you know, there's industry studies out there from some good industry associations that we're part of. And they have are coming to the same conclusion. So those are the only observations. Again, you know, if you have an accident, and you have a property damage claim, we track both bodily injury and property damage, third-party property damage separately. Third-party property damage frequency isn't going up. But bodily injury frequency is going up. Well, how can that be other than just more people willing to make bodily injury claims? And, so you know, it again, it comes back to the only conclusion that we can come to is that this litigation system abuse and proliferation of attorney advertising continues to rear its head. And we'll have to see where it goes. But that is what we would attribute a good portion of this to. Paul Newsome: Were the trends any different? Like, you cited long haul trucking. Is the trends any different in other portions of what you do in commercial auto, obviously? Trucking is your big piece, but I think you do some other stuff as well. Was it just consistent across anything that had to do with commercial auto? Craig Richard Smiddy: Another great question. Because on our other commercial auto, other than long haul trucking, the trends are there, but they're not as pronounced as they are on long haul trucking. I think coming back to litigation abuse, you know, a lot of these plaintiff attorneys try to target trucking companies and vilify insurance trucking companies and insurance companies. And, you know, so I Yeah. Yeah. And usually, trucking long haul trucking in particular has larger limit policies, and plaintiff attorneys know that. So there's more of a target on their back, so to speak. So there is a little bit more rearing its head on long haul trucking as opposed to other commercial auto. Paul Newsome: Well, I know in the past, you've been it was, you know, last question. Don't know if you asked it. I know in the past, you guys have been very disciplined about hitting loss trend rate. And I would've assumed that that's the plan prospectively as well. Are there other things that you're considering in terms of reacting to the loss trend change in terms of condition or, you know, areas to your right or anything else sort of non-rate actions? Is this gonna be just a matter of hit it with rate at whatever you think is happening from the loss trend perspective? Craig Richard Smiddy: Yeah. So, you know, we are out of all of our 20 companies, our most sophisticated data and analytics area is within our long haul trucking company. And we slice and dice the data and analytics in a very robust and sophisticated fashion, which helps us with targeting rate to those customers that elevate higher propensity for loss. And so part of that is risk selection as well. It helps us with risk selection. And being able to not broad brush rate, but target rate to the insureds that require more rate. And then also, continually refine our risk selection so that we're selecting what we think are the best risks and making it very punitive or not providing quotes at all to those risks that we deem too high. With respect to terms and conditions, you know, there's not there's, while in other of our businesses, terms and conditions are key, really key to the business, the specialty business they're in, long haul trucking, there's not a lot you can do with terms and condition on commercial auto. So I wouldn't say that there's a lot we're doing with terms and conditions. But you know, we react with rate. We make sure our overall portfolio rate increase is reflective of the trends that we're observing. And, you know, when I answered Greg's question, you know, I explained that understanding what the trend is is not instantaneous. But we use a conservative approach. We assume trend is going to if it's going up, we assume it's going to continue to either be where it's at or continue to go up and until we have clear evidence it's going down, we're not adjusting rates downward. You know, we adjust the rates upward and, just in one quarter, you know, two or 300 basis points and we'll have to keep our foot on the pedal on that. Assuming that we, our goal is to stay ahead of trend which, we will continue to do. I would also I would also just point out that you know, as far as what this means for 2026 are, because we do that, our expectations for 2026 are not different from where we're at now with respect to loss ratio. We assume we're going to keep up with trend. You may recall from a couple of years ago, we had similar kinds of observations back at the 2023. And we, for the 2023, we bumped up that accident year loss pick. And if you look at how that year has played out, can look at the financial supplement. You know, things after 2023 were remained pretty steady. And the '24 and '25, with 72% loss ratios following a 71.5% loss ratio in '23. So we would expect the same to happen here again. We're not changing our view on how 2026 looks. Paul Newsome: We always appreciate the proper insight. Thank you very much. Craig Richard Smiddy: Thank you, Paul. Regina: Our next question is a follow-up from the line of Gregory Peters with Raymond James. Please go ahead. Gregory Peters: Hey. One of the things I just wanted to touch upon just as to close out, the capital position of the company. I mean, you've been, you know, your record of special dividends alongside your regular dividends is pretty interesting. And I'm just curious how you view in light of the $2.50 dividend that I guess is paid out in was paid out already in January here, how you view the capital of the company at this point in time and, you know, what are the metrics we should be watching for, you know, to determine whether there's still, you know, excess capital, etcetera? Craig Richard Smiddy: Sure, Greg. I'll be happy to do that. So part of our regular planning cycle is to head into our February board meetings and present our plan for 2026, which includes a complete analysis of our capital position and our projected capital position. We still think we have plenty of capital. So we think that'll put us in a position to, again, recommend to the board a regular dividend increase somewhere in line with what we've been doing over the last couple of years. And, in the meantime, we also have $850 million still remaining on our share repurchase program. And, we'll put that to work. Especially, you know, when there's opportunity. We set all along that we like having both tools in our tool chest, the share repurchase tool as well as the special dividend and regular dividend tool. And, you know, to the extent that we think there's a buying opportunity, we've said we'll be opportunistic, and to the extent that markets react or overreact, it gives us a buying opportunity to repurchase more shares. So have that $850 million. We believe that, you know, if the opportunity presented itself, we could put most of that to good use throughout the year. And we would do that. And then, you know, as we get further along in the year, again, take a look at where we're at with that capital position, what we've been able to do with share repurchases, and if we as we did at the end of last year in December, if we think we are ending the year with more capital again, we'll reset it with a special dividend. Gregory Peters: Alright. Got it. Thanks for letting me ask the follow-up question. Craig Richard Smiddy: Thank you. Regina: And this concludes our question and answer. I'll hand the call back to management for any closing comments. Craig Richard Smiddy: Okay. Well, thank you. We appreciate the Q&A. We appreciate the opportunity to share our prepared remarks in addition to the earnings release and wrap up 2025 for the year with another very good solid year, and we think we're set up for a very good '26. We realize market conditions are in question, but we'll focus on bottom line and profitability and continue with our underwriting excellence initiatives and our pricing discipline and continue to produce growth, particularly as our new specialty operating companies are producing more and more premium. And we feel very good about where we're heading in '26. So thank you all for your interest and participation, and we will talk to you all again next quarter. Francis Joseph Sodaro: Thank you. Regina: This concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon, everyone, and welcome to the Preferred Bank Q4 2025 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on a touch-tone telephone. To withdraw your questions, you may press star and 2. Please also note today's event is being recorded. I would now like to turn the conference call over to Jeffrey Haas with Financial Profiles. Sir, please go ahead. Jeffrey Haas: Thank you, Jamie. Hello, everyone, and thank you for joining us to discuss Preferred Bank financial results for the fourth quarter ended 12/31/2025. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; Chief Risk Officer, Nick Pi; and Deputy Chief Operating Officer, Johnny Tzu. Management will provide a brief summary of the results, and then we will open up the call to your questions. During the course of this conference call, statements made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon specific assumptions that may or may not prove correct. Forward-looking statements are also subject to known and unknown risks, uncertainties, and other factors relating to Preferred Bank's operations and business environment, all of which are difficult to predict and many of which are beyond the control of Preferred Bank. For a detailed description of these risks and uncertainties, please refer to the SEC-required documents the bank files with the Federal Deposit Insurance Corporation, or FDIC. If any of these uncertainties materialize, or any of these assumptions prove incorrect, Preferred Bank's results could differ materially from its expectations as set forth in statements. Preferred Bank assumes no obligation to update such forward-looking statements. At this time, I'd like to turn the call over to Mr. Li Yu. Please go ahead. Li Yu: Thank you, ladies and gentlemen. Thank you for joining the earnings conference. I'm very pleased to report that for 2025, the bank's net income was $34.8 million or $2.79 a share. For the full year, the bank earned $134 million or $10.41 a share. Our profitability for the year is believed to be among the top tier of the banking industry. Amid interest margin for the fourth quarter declined from the third quarter. The principal reason for the decline was federal rate cuts. With a 70% floating rate loan portfolio, the rate cut did reduce our loan interest income. However, the cost of deposits remains stubbornly high. In fact, many analysts have reported that between quarters, the banking industry, the entire banking industry, cost of deposits may have increased slightly. Looking forward, we are seeing that our loan demand is getting stronger. For the quarter, our total loan growth is $182 million or over 12%. Deposit growth was $115 million or 7.4%. To round out the year, loan and deposit growth was 7.3% and 7.2%, respectively. During the quarter, we sold two large pieces of OREO, resulting in a net gain of $1.8 million between the two. The income was reported in the section of noninterest income. The loss, the result of the loss, was reported in the noninterest expense section. This is based on the current principle of generally accepted accounting principles. For the quarter, nonperforming assets declined slightly. However, criticized assets did increase by $97 million. Principally, this is due to placing a large loan relationship into the classified status. Our loan loss provision was $4.3 million. Most economists are forecasting 2026 to be a year of relatively stable growth. Our customers' feelings also indicate they have an improved outlook for 2026. Barring any sudden changes in the current policy or directions, which we just had one, we are hoping 2026 to be more of a growth year for Preferred Bank. Thank you very much. I will answer your questions. Operator: To ask a question, you may press star and then 1 using a touch-tone telephone. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Again, that is star and then 1 to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Matthew Clark from Piper Sandler. Go ahead with your question. Matthew Clark: Hey. Good morning, everyone. Just want to start on the margin and get some visibility there at least in the near term. Do you have the spot rate on deposits? Spot rate on deposit costs at the end of the year or even the month of December, and then also the average margin in the month of December? Edward Czajka: Hi, Matthew. This is Ed. The margin for December was 3.66%, slightly below that of the quarter. That was with the full effect of the December rate cut. Total cost of deposits was 3.17% for the month of December. So that's coming down about six, seven basis points a month. Matthew Clark: Okay. Yeah. And that's where I was headed. Deposit beta this quarter looks to be about 40% on interest-bearing. Sounds like things are still pretty competitive. What are your thoughts on the beta? The deposit beta? Going forward? Assuming we get maybe one or two rate cuts this year? Edward Czajka: Well, it's going to depend on a number of things. Obviously, the rate cuts will play a big key role, but the other thing that Mr. Yu alluded to is the competition for deposits still remains very, very strong. So I would foresee a similar pattern in terms of about five or six basis points a month as we have CDs rolling off and then coming on at lower rates. They're just not coming on at rates that we thought we would see at this point given what's happened with the Federal Reserve. Matthew Clark: Got it. And it sounds like loan growth you expect to maybe step up a little bit this year from the 7.3% pace last year. I would assume you're going to try to grow deposits at a similar pace. Is that fair, just given your loan-to-deposit ratio? Li Yu: That's a fair statement. Matthew Clark: Yeah. Okay. And then just last one for me on expenses, the run rate, a little noise this quarter, but stripping that out. A little better than expected on comp. How should we think about the run rate here in the first quarter? With some seasonality? Edward Czajka: I'm going to forecast probably somewhere in the neighborhood of 22. Maybe slightly below that. But, you know, 21.5 to 22 should be about right. You know? Matthew Clark: Okay. Thank you. I'm getting it now. Yeah. Operator: Our next question comes from Gary Tenner from D. A. Davidson. Please go ahead with your question. Gary Tenner: Thanks. Good morning. Just a quick follow-up on the deposit side of things. If you could kind of update us on the CD maturities in the first quarter and kind of the out and in rate that you expect? Edward Czajka: Sure. So we have about $1.3 billion maturing in Q1 at a weighted average rate of 3.96%. They're currently coming on right now at about around 3.70% to 3.80% on average. Gary Tenner: Appreciate that. And just out of curiosity, last quarter, when you talked about the CDs maturing in the fourth quarter, they were maturing at 4.1% and you sort of posited kind of new CDs in the mid to high threes. So it sounds like that number was towards the upper end of that repricing range in the fourth quarter? Is that kind of what played out? Edward Czajka: Yes. Yes. Yes. As we said, we would have expected CD rates, market rates to come down a little more than they did given the Federal Reserve's actions. Gary Tenner: Okay. And that 70% floating rate portfolio now, does that have you with the fourth quarter cuts, did you clear through any significant floors? Edward Czajka: It probably only affected about $150 to $200 million of the loan book. Right now, we have about 45% of the floors are in the zero to 100 basis point bucket in terms of their protection effectiveness. Operator: Our next question comes from Andrew Terrell from Stephens. Please go ahead with your question. Andrew Terrell: Good morning. I was hoping to just follow-up on the time deposit commentary. I was hoping you could just maybe expand upon that a bit more and just, you know, sounds like high threes for you guys right now. Is that generally in line with your competition? Are you trying to, you know, price ahead, price below to pick up more deposits? Just curious, you know, where you're at versus the market, kind of your strategy, your expectations there. Edward Czajka: I think the challenge is kind of walking the tightrope. Right? We want to bring deposit costs in. That's really a big goal of ours, but at the same time, we want to grow the deposits. So that's been kind of a challenge. What we've seen in the marketplace is not only local competition still being fairly stiff, but we're seeing some large money center banks still out there promoting CDs right in our marketplace. And when you have those guys doing that type of it makes it more challenging for us because of their size. Andrew Terrell: No. It makes a lot of sense. On the downgraded loan this quarter, the $123 million relationship, I appreciate all the color you guys put in the release around the LTVs and debt service there that both look pretty good. I was hoping you could talk a little bit more about the pathway to curing this. You know, what the timeline and outcome looks like as you see the big picture today. And then also just, you know, as a pretty large relationship, 2% of the loan book. Is this the largest relationship with the bank, or are there other, you know, similarly large that you guys have? Li Yu: I believe this is one of the large relationships. Correct. For the bank, that is small. In terms of the workout, it's a little bit early to be able to tell what the future is going to hold for this particular relationship. There are several options, you know, that we've utilized in the past. We've sold notes, we've foreclosed and taken back property, etcetera. But our first choice, obviously, we know these customers, they are late in payments, and they are having problems with other banks. But their principle is that because these properties still have value, very positive value in their eyes. And the information we have is that they are working very hard, trying to finance it out from other alternatives. So the bank is going to be waiting for them to get these procedures done. So in case they are not able to continue the loan, and we have to go through the foreclosure procedure, we are not going to shy away from that. We'll do it immediately. And the current marketplace is pretty reasonable as regard to pay for these properties at this point in time. So in other words, when I see in the market situation 2011-2012 that you have to bottom four off, it's not happening. The market has been very stable. So it's a matter of time to resolve the thing as these loans are basically fundamentally well, reasonably underwritten. Andrew Terrell: Okay. I appreciate all the color there, and thanks for the questions. Operator: Our next question comes from Tim Coffey from Janney. Please go ahead with your question. Tim Coffey: Great. Thank you. Good morning, everybody. Mr. Yu, as we start looking at loan growth this next year, what do you think are the best opportunities for growth? Or, like, what loan product? Li Yu: Basically, we are still a sort of like a commercial market that we basically focus on commercial real estate and C&I loans. We see both sides' demand is reviving a bit right now. In fact, internally, we're budgeting a higher number than the previous year right now. So it's still very early to tell. As you know, not only do we have the normal economy, but we do have a very active government that changes practices from time to time. So it will be, you know, if we mentioned some for the babies, it was lose no change, or go this way, I think that's overly optimistic. But I like to say that we're budgeting a higher number than last year for our upcoming year. Tim Coffey: Okay. Great. Thanks. And then, Ed, looking at noninterest expenses for the full year in terms of the growth rate, is kind of a mid to high single digits number reasonable? Edward Czajka: Yes. That's about what we're looking at, right in that neighborhood, Tim. You're spot on. Tim Coffey: Okay. And then the kind of just general thoughts on share repurchases for this year? Li Yu: Well, we just have to see what the total picture is. You know, first of all, obviously, we have to see what our loan growth is during the year. And all possibility, all funds will have to be reserved for loan growth. And secondly, the deposit situation will also be very important. So when we have the balance sheet fixed, then we probably would turn around to see whether there is additional availability for repurchases. But I would say that the situation is not quite as conducive to repurchase as last year. Tim Coffey: Right. Well, sure. Absolutely. And then I guess this is what I want to kind of make sure I dot the I and cross the T's on the classified loans. I mean, given the uniqueness of this situation, what does the timeline for disposition look like? Or how does this play out? Li Yu: Well, first of all, that amount of relationship there. There are several different loans. Some of them have earlier maturity dates than the other ones. So first of all, obviously, we will be giving our customary opportunity to that particular relationship, the opportunity of resolving matters to our satisfaction. And then the legal procedure will start if they fail to do that. Now I would say that internally, we will say that probably we will have the majority of a good portion of all resolved sometime within two quarters. Nick, do you think I'm too optimistic? Or what's your take? Nick Pi: That is the goal where we're heading, Mr. Yu. Yes. Of course, we'll try to solve the issues. I think we'll give ourselves that much time to get a lot of the work done. Tim Coffey: Okay. Great. That's very helpful. Those are my questions. Thank you. Operator: Our next question comes from Liam Coohill from Raymond James. Please go ahead with your question. Liam Coohill: Hi. Good morning, everyone. This is Liam on for David Feaster. So there's been a good amount of discussion surrounding the classified downgrade, but I did just want to touch on the well-secured multifamily loan that was downgraded to nonaccrual. Did you have the credit metrics for that loan, or is there anything in particular we should take into account? Li Yu: You mean the $19.4 million? Yes. Based on the most updated appraisal we conducted after we classified this loan, the value came out even higher than the previous one. So with everything in mind, the value is $49 million, and our loan is $19.5 million. Liam Coohill: That's very helpful. Thank you. And then just one more from me. For fee income in 2026, would the Q4 number excluding the one-time OREO impact be a good baseline? Edward Czajka: I think it would be, yes. I think that's probably a good baseline, maybe slightly below that. The LC fee income was very, very strong this year. Not sure we can exactly reproduce that number, but I'm sure we'll get close to that. So I would take that noninterest income without the gain on sale of other real estate. Liam Coohill: Thank you very much. I'll step back. Operator: Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and 2. Again, that is star and then 1 to join the question queue. Our next question is a follow-up from Matthew Clark from Piper Sandler. Please go ahead with your question. Matthew Clark: Hey. Thanks. Just want to clarify your expense guidance for this year. Does that exclude OREO costs? Because the midpoint of your guide for the first quarter of $22 million, you know, annualizes obviously to $88 million, would be below this past year and would imply some significant growth after the first quarter. Just want to make sure we're on the same page. Edward Czajka: Yes. It will grow through the year. There's no question about it. And we will have, you know, we still have a couple of small OREO properties, so there will be some expense related to those as well. Matthew Clark: Okay. And then did you repurchase any shares this quarter? Li Yu: No. Not this quarter. We did in October, but it was a nominal amount, Matthew. Matthew Clark: Okay. Then just last one for me on M&A. Just wanted to get an update on your appetite for M&A to the extent you see some opportunities with M&A expected to accelerate this year? Li Yu: Yeah. There are a few deals that have been brought to us that we end up taking a look at. As you know, that has been nothing main effort in M&A. But there are a couple of deals we take a look at, and probably the pricing structure required of us is not to our satisfaction. So we'll continue to look at it. We know that there may be another one or two coming up, we'll take a look at it. Matthew Clark: Okay. Great. Thanks again. Operator: And our next question comes from Arif Angad from Cygnus Capital. Please go ahead with your question. Arif Angad: Yes. Hello. Thanks for taking my questions. First question is really more just to clarify the diluted EPS of $2.79. If I'm reading it correctly, it looks like your gain on sale of the OREO property is included in that EPS, which after tax was about 20¢. Just want to confirm, am I reading that correctly? The effect of that gain on the EPS was $2.59? Edward Czajka: That sounds about right. Yes. Li Yu: $1.8 million after equal to $3.6 million. Yeah. So that's about right. Arif Angad: Okay. Thank you. And then my next question is on those OREO properties you sold in the fourth quarter, did you provide any financing to the buyers, or have you completely absolved yourself of any exposure to those properties going forward? Li Yu: One of them we provided financing. The other one was an outright cash sale. Arif Angad: Got it. So you still have a loan through one of those properties going forward? Li Yu: Yes. Much smaller loan. Arif Angad: Got it. Okay. And then the last question I had was with respect to the increase in the classified loans. Can you please confirm the $121 million of loans that are with the relationship where there's litigation going on with other banks, assuming you're referring to Western Alliance and Zions. Are those loans paying current? Are they performing or no? Li Yu: As far as I know, we don't know exactly the status of the other two banks' loans, and we don't have any idea about their structures. All I know is that we are in a first position, you know, trust lender to the world. Fully secured by a problem. Arif Angad: But are those loans being paid, you know, are you receiving current interest in debt service on those loans? Currently? Li Yu: Yes. We have been receiving the payments, but it's being slowed down. That's correct. Arif Angad: Sorry. So when you I did so they're behind in interest service or they're currently in interest service? I'm not following. Li Yu: Generally, they're behind in interest services. That's one of the primary reasons that's the weakness of the loan that we classified. Arif Angad: For clarifying. I'm just really more trying to understand the context of a 1.14 times debt coverage ratio if the loan's not paying. Li Yu: Because of the guarantors getting involved with litigation with other banks. So a property that is not 100% using all the cash flow from those properties to make the payment to our bank and to spend that. Arif Angad: Got it. Okay. That's helpful. And then, you know, just to finalize the question on this topic, you know, given where the allowance for credit losses stood at the end of the quarter or end of the year and your increase in the provision for credit loss, what gives you comfort that you're adequately reserved and we don't get surprised as we did this quarter with a significant increase in nonperforming and criticized loans? How recent of a scrub have you done of your portfolio to kind of give you that comfort that you're adequately reserved? Li Yu: All these loans under this or go with because it's substandard in care, we go with the principal one for case analysis. And as the release mentioned about the rookie virus, around 5%. So there's no specific reserve on this one. However, the $4.3 million provision for this quarter was mainly the result of a combination of many, many factors, including the loan growth, including other specific reserve for some of the loans. Just to give you an example, we fully reserve this relationship to under unsecured credit. And also based on Q factors. So due to the movement of all this relationship, and increase of the criticized loans, we have adjusted our Q factor side, especially on the credit trend area. We increased five basis points of the risk entire risk segment. So these are the components of our reserve at this moment. Our Q factors are actually kind of around 42.5% reserve. So we do believe the reserve should be more resolved to cover our credit situation. Arif Angad: Got it. Okay. Thank you very much. Operator: And ladies and gentlemen, with that, we've reached the end of today's question and answer session. I'd like to turn the floor back over to management for any closing remarks. Li Yu: Well, thank you very much for being with us. For now, Preferred Bank, we have a little challenge and they try to within the next six months period of time, try to resolve these issues on the credit side. But overall, everything remains the same. We are the same company with a well-structured balance sheet, normal operations, normal metrics, and so on, and we still look forward to 2026. Thank you very much. Operator: And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Operator: Good morning, and welcome to the RLI Corp. Fourth Quarter Earnings Teleconference. After management's prepared remarks, we will open the conference up for questions and answers. Before we get started, let me remind everyone that through the course of the teleconference, our alliance management may make comments that reflect their intentions, beliefs and expectations for the future. As always, these forward-looking statements are subject to certain factors and uncertainties, which could cause actual results to differ materially. Please refer to the risk factors described in the company's various SEC filings, including in the annual report on Form 10-K as supplemented in Forms 10-Q, all of which should be reviewed carefully. The company has filed a Form 8-K with the Securities and Exchange Commission that contains the press release announcing fourth quarter results. During the call, RLI management may refer to operating earnings and earnings per share from operations, which are non-GAAP measures of financial results. RLI's operating earnings and earnings per share from operations consist of net earnings after the elimination of after-tax realized gains or losses and after-tax unrealized gains or losses on equity securities. Additionally, equity and earnings of unconsolidated investees and related taxes were removed from operating earnings and operating EPS to present a consistent approach and excluding all unrealized changes in value from equity investments. RLI's management believes these measures are useful in gauging core operating performance across reporting periods but may not be comparable to other companies' definitions of operating earnings. The Form 8-K contains a reconciliation between operating earnings and net earnings. The Form 8-K and press release are available at the company's website at www.rlicorp.com. I will now turn the conference over to RLI's President and Chief Executive Officer, Mr. Craig Kliethermes. Please go ahead. Craig Kliethermes: Good morning, everyone. We appreciate you being with us today, and I'd like to introduce Aaron Diefenthaler, our Chief Financial Officer; and Jen Klobnak, our Chief Operating Officer, who are joining me. I'll start by saying we feel very good about where RLI Corp is today and just as importantly, where we're headed. 2025 was another strong year for our company. We delivered underwriting income of $264 million on an 84 combined ratio, grew book value per share by 33%, inclusive of dividends and achieved our 30th consecutive year of underwriting profitability. That kind of consistency is extremely rare in our industry, and it certainly doesn't happen by accident. It's too long to be considered a hot streak, it reflects disciplined execution over time and the principles we worked to uphold every day. The environment remains competitive, and premium growth was modest, but that's exactly when our model tends to show its strength. We don't measure success by how fast we grow, we measure it by how well we grow and whether today's decisions stand the test of time. Jerry Stevens, our founder, used to remind us that you don't win the long game by swinging at every pitch, you win it by knowing which ones to let go by. That mindset is deeply ingrained at RLI. We're comfortable pulling back when the risk-reward equation doesn't work, and we're confident leaning in where we have the expertise and when the market supports it. Our diversified specialty portfolio, strong balance sheet and ownership culture give us a lot of flexibility and a lot of confidence as we look ahead. We're well positioned and optimistic about the opportunities in front of us. And with that, I'll turn it over to Aaron to walk through the financials in more detail. Aaron Diefenthaler: Thanks, Craig, and good morning, everyone. Yesterday, we reported fourth quarter operating earnings of $0.94 per share, up from $0.52 in the year ago period. Better underwriting performance, minimal storm activity and increases in investment income drove most of the improvement compared to last year. For the quarter, we generated $71 million of underwriting income on an 82.6 combined ratio versus $22 million on a 94.4 combined ratio in Q4 last year. For the full year, we delivered $264 million of underwriting income on, as Craig mentioned, an 83.6 combined ratio, marking our 30th consecutive year of underwriting profit. I wanted to call your attention to a change we made to our definition of operating earnings. As referenced in a footnote on Page 1 of our release and in the non-GAAP disclosures on Page 2, operating earnings now excludes equity and earnings of unconsolidated investees and related taxes. Prior periods were recast to conform to that definition for comparability. Currently, unconsolidated investees only includes our minority investment in Prime Holdings. We believe excluding these investments from operating earnings, better reflects RLI's core operations, where we maintain full operational control and aligns the treatment of investee results with other equity investments. On a GAAP basis, net earnings were $0.99 in the quarter and $4.37 for the year, an increase of 17% over full year 2024. In addition to operating earnings, net earnings include net realized gains and losses, net unrealized gains and losses from equity securities and now earnings of unconsolidated investees from Prime. Our Q4 net earnings reflect Prime's core operating results based on our minority ownership and a reduction to Prime's value on our balance sheet to $53 million. Turning to premium. Top line growth was down 2% for Q4 and up 1% for the full year as competitive dynamics necessitated heightened discipline in several businesses while other products continue to find opportunities. Property premium was down 11% during the quarter, consistent with the rate environment for catastrophe-exposed commercial property although other parts of the segment, Marine and Hawaii homeowners continue to grow. Properties underwriting profitability was supported by $17 million of favorable loss emergence on prior year's catastrophes, modestly offset by $4 million of storm activity in the quarter. Inclusive of these net benefits properties combined ratio was 49.2 in Q4 and 57.2 on the year. Casualty premium was up 2% in the quarter and 7% on the year with strong contributions from personal umbrella. The bottom line for casualty benefited from $4 million of favorable prior years' loss development just under $2 million of this release was related to prior year catastrophe activity. Surety premium remains flat in the current period and up slightly on a year-to-date basis. The segment's quarterly underlying -- underwriting results included $2.7 million of favorable loss emergence from prior years, which improved surety loss ratio by 7 points in the quarter. On the expense ratio Q4 came in at 39.3%, up from 37.6% a year ago. Bonus and profit-sharing expenses were higher on strong results and business level expenses were up as we've continued to invest in people and technology. On the investment side, net investment income increased 9% in the quarter and a portfolio generated 1.5% total return in Q4 and 9% for the year. The yield environment has been relatively stable for intermediate maturities and we continue to find accretive fixed income opportunities. Purchase yields averaged 4.9% in the quarter, which was 70 basis points above our book yield. Putting it all together, we produced $5.29 of comprehensive earnings for the year, driving 33% growth in book value per share, inclusive of dividends. This level of generated capital again allowed for a special dividend to shareholders of $2 per share in addition to our ordinary fourth quarter dividend. Overall, a solidly profitable championship caliber closed in 2025. With that, I'll turn it over to Jen for more color on market conditions. Jennifer Klobnak: Thank you, Aaron. I will dive right into our segments, starting with Property. While premiums declined 11% in the fourth quarter, our property team delivered an excellent 49 combined ratio, underscoring the quality of our portfolio and ability to execute. E&S property premiums decreased by 18% on an intense competition from other carriers and MGAs along with increased risk retention in some areas by insurance. Hurricane rates were down 15%, while submissions continue to grow as insurance shop for the best terms. We are seeing pressure on terms and conditions, and our underwriters are flexing selectively to retain high-quality accounts. This competitive dynamic extends to other property lines as well. Earthquake rates declined 12% as insurers saw rate relief or decided to retain the risk. We see carrier competitors in the E&S property market slowly giving back terms and conditions, while MGAs are being more aggressive. Despite the rate moderation on catastrophe coverages, we continue to achieve returns on retained business that exceed our long-term targets. Our experienced E&S property team delivered a meaningful underwriting profits despite challenging market conditions. We have navigated many hard and soft market cycles with discipline and remain focused on securing terms and conditions at an appropriate rate while reducing uncertainty when a loss occurs. Hawaii homeowners premium grew 5% in the quarter, supported by a 16% rate increase. For the year, premium was up 26%, due in part to a couple of book rollovers we assumed following the Maui wildfires. We will continue to see growth in this profitable book through our outstanding local customer service, investments in customer experiences and additional rate increases from recent filing approval. Marine premium was up 2% in the quarter. Our diverse portfolio is evolving based on market opportunities. Inland Marine continues to grow through strategic talent additions and new product adjacencies. Ocean Marine remains competitive, particularly in cargo where we had pulled back. Our underwriting teams continue to apply patience and discipline, which resulted in underwriting profit across both Inland and Ocean in 2025. Surety premium was flat but produced a strong 80 combined ratio in the fourth quarter. Transactional surety grew 4% through continuous marketing efforts and investments in our distribution capabilities. These are very small premium bonds, so it takes significant volume to move the needle. Commercial surety also grew 4% as our talented team secured new accounts by closely engaging with our distribution partners. Increased customs bond requests offset the slowdown in renewable energy with both trends driven by government policy. On the contract surety side, premium declined 5% as we navigated the ending to a year that included multiple fits and starts in construction spending. We know that infrastructure investments are needed at the federal state and local level, and we remain well positioned to support that business as public funding increases. Our surety underwriting teams remain committed to underwriting discipline and prudent risk selection in this evolving environment. The casual segment premiums grew 2% on a 99.6 combined ratio for the fourth quarter. Personal umbrella led the way with premium growth of 24%. This included a 12% rate increase, and we secured additional approvals that will further add rate to the book in 2026. This controlled growth reflects reduced new business in several challenging seats where we have taken larger rate increases, required higher underwriting -- I'm sorry, underlying limits and works with our distribution partners to improve the quality of our book. The personal umbrella market continues to present opportunities as our competitors responded to deteriorate results by adjusting their appetite and terms and conditions. Our continuous product collaboration supported by intensive data mining, actuarial analysis and claim trend identification produced an underwriting profit for the year. Transportation premium declined 10% in the quarter despite a 13% increase in rates as we continue to prioritize profitability over volume in a highly competitive environment. Severity trends and economic pressures have reshaped the market with heightened volatility and increased expenses forcing some transportation companies to consolidate or close reducing the demand for insurance. At the same time, despite some insurance providers leaving this space due to poor financial performance, there always seems to be new markets entering and pushing for growth. Acute pressure on the largest size accounts has led to a decrease in our average account size over the last 2 years. Our in-house loss control team provides an advantage as they assess and try to improve the safety of our insurers, which helps all drivers. Our underwriters are empowered to make bottom line driven decisions. We remain disciplined, pushing for more rate and walking away from underpriced accounts. Our Executive Products group achieved an underwriting profit again this year. Premium in the fourth quarter was down 2% with rates down 1%. The market is stabilizing amid broader industry loss development. Our focus remains on marketing to increase access to business and disciplined risk selection to maintain our quality book. The E&S casualty team also produced an underwriting profit for the year. We saw increased competition in the fourth quarter, particularly on larger 6-figure premium accounts due to competitors chasing top line growth, presumably to meet year-end goals. Our primary excess liability premiums declined 8% in the quarter, but full year premiums finished up 10%. Competition varied by region with some markets exiting while others leaned in. Submissions increased by double digits, and we are constantly engaging producers to see the best new business opportunities. Much of our business is construction related and projects are taking longer to bind. We have many quotes outstanding waiting for permitting or funding. The group knows that words matter and have not relaxed terms and conditions despite competitive pressure. We continue to provide a stable solution for our business partners in the construction space. Before I provide perspective on the full year, I'll update you on our reinsurance renewals. On January 1, we renewed about 2/3 of our annual reinsurance spend. It was a buyer's market for property. We secured 15% to 20% rate decreases on our catastrophe programs and more modest relief on our property working layers. With our reduced exposure and continuing soft market conditions, we purchased $150 million less catastrophe limit for 2026, but we remain ready to approach the market midterm should an opportunity present itself as we have done in previous years. On the casualty side, rates were down around 5%. We achieved similar terms and conditions with some broadening of coverage in the property attributes. For the full year, we achieved modest growth while producing an 84 combined ratio. While E&S property prudently contracted in response to softening market conditions, other teams capitalized on opportunities, most notably personal umbrella, E&S casualty and Hawaii Homeowners. We pushed for rate change where we needed it, achieving an overall 16% rate increase in auto liability coverages across our portfolio. In 2025, we also spent time with our distribution partners, broadening and deepening those relationships, and we invested in operational efficiencies. This included simplifying and automating processes, developing new capabilities to improve ease of doing business and investing in our data infrastructure to support granular real-time decision-making. Internally, we brought our teams together regularly to talk about how we are doing and where we can improve. These actions position us well for another successful year in 2026. In a more challenging environment, capital discipline and alignment of interests differentiate successful insurers. Underwriting, which we define as underwriters, claims and analytics collaborating to evolve our products is the disciplined pursuit of opportunity. We are an underwriting company as evidenced by our unmatched track record of 30 consecutive years of underwriting profit. I'm incredibly proud of our entire team for producing these results and for how they do it by taking care of our customers and striving to improve every day because they are owners. With that, I will turn the call over to the moderator to open it up for questions. Operator: [Operator Instructions] Your first question comes from Michael Phillips with Oppenheimer. Michael Phillips: The accident year loss ratio in Casualty improved a bit from last year is once you back out the reserve addition you did. Can you talk about how much of that was because of the mix shift from pulling away from transportation book versus anything else that might have caused that improvement? Jennifer Klobnak: So as you look at the casualty loss ratio, you did see improvement. And we did pull back in both transportation and other areas of auto where we provide coverage like in our package businesses. Last year, in the fourth quarter, we did recognize additional reserving related to those auto-related coverages, both in our transportation and our personal umbrella product. This year, as we looked at losses coming in, we did not see the need to take such action. And so you did see that improvement. I can't quantify specifically the difference. Aaron? Aaron Diefenthaler: Yes. I think the bulk there on a comparative basis to Q4 of last year that you're seeing is the action we took for the full accident year in 2024 around auto-related exposures, also true of the 2023 accident year as well. So we feel we're on more stable footing around those exposures because we didn't take the same level of action in the current accident year. Still cautious around auto-related exposures. And our incentive structure is set up for those business leaders to pull back from those markets when they see underpriced competition coming to bear on Submission activity. So everything is set up for there to be a natural pullback from markets that are underpriced. But the underlying results themselves that we're seeing, we feel better about because of the stability relative to the action we took the last couple of years. Michael Phillips: Okay. I guess on that last year's reserve addition, I mean I think it was from higher severity in umbrella and transportation. And this year, you've seen a bit of -- in Casualty, a bit of a slowdown in favorable PYD. I assume that means you're still seeing that same level of severity that you -- that caused you to take those reserve additions last year. I guess the question would be, I'm not sure how much of that reserve addition was because of the accounts that you've now subsequently lost from midterm cancellations that you talked about last quarter. But to the extent some of that was and those accounts are no longer here, I guess, what does that mean for any potential favorable development if those accounts are no longer here, I guess, going forward? Aaron Diefenthaler: Yes. Well, it's hard to get down to the account level when you're -- when you're examining these things. But I'll just say, overall, you're right to identify lower levels of favorable development for Casualty here in the fourth quarter. I think you do have to rightsize that for a small proportion of the prior year catastrophe activity as well to get closer to that $4 million number that I referenced. However, just overall, we're seeing lower levels of favorable development out of casualty. We're still seeing drivers out of GL and commercial excess and still some challenges around auto-related exposures, all of that being maybe to a lesser extent than what we saw in the year ago period. Jennifer Klobnak: Yes. To supplement that, I would just add that there are many metrics that you can track to see what direction you're headed. And I'll tell you that new claim counts in 2025 were down significantly in those auto spots. So for example, our Transportation division, new claim counts were down 24% for the year, which is a positive indicator that the actions we're taking are going to translate into a more stable going forward. Michael Phillips: Yes. Okay. Perfect. That's helpful, Jen. I guess just switching gears, last question on the Property side. I mean last time, you talked a lot about how you've kind of leaned in and made some investments there as you were growing in that hard market. What does that mean today, given just the opposite? Is there any -- I guess, lack of a better term, fat there on the Property side that may need to be trimmed as there's pressure on the expense ratio in Property over the next year or so? Jennifer Klobnak: Well, that's an interesting question. I would say the one thing we did do to ramp up in addition to trying to be more efficient to handle more submissions is that we added additional talent. We've had some very experienced underwriters that have really enjoyed this hard market. And I think as they come towards the end of their career, not that I'm encouraging anyone listening to retire, but I think we will see a handful of retirements in that space, and now we'll be ready as we've already started training the next generation in that group. In addition to that, though, I would tell you our submission count is still up. We continue to see growth in submissions throughout that property book, and we do want to look at that business. So it's harder to work now. There's just as much work, if not more, despite the fact that terms and conditions are more challenging. So you can't necessarily shortcut that. You do want to support the producers that are sending you business. So there's a little bit of -- we still need to keep investing in supporting that. Operator: Our next question comes from Hristian Getsov with Wells Fargo. Hristian Getsov: On the property competition, I guess, what needs to happen in the market for us to see an inflection in the rate decreases, at least like moderate from here? Is it -- it's like thinking about it, is it simple as a large outsized cat event, call it, north of $50 billion? And then I guess on the competitive dynamics you're seeing in the space, like how much of that competition would you classify as being irrational in pricing versus a more rational normalization of the cycle given the strong rate increases and profitability we've seen in the line? Jennifer Klobnak: Well, this is Jen. I think what we need is a little bit less capacity. And whatever can cause that to happen would be beneficial to the market. So whether that's an incredible cat event, whether that's a change in the investment opportunities to shift to a better opportunity in the greater space, anything of that nature that would reduce capacity would be beneficial. Having said that, all we need is a stable market. I will tell you that the current catastrophe market is well priced with reasonable terms and conditions in a lot of places. So we can navigate this market easily if it would stay where it's at. Now with reinsurance renewals being a little more friendly on 1/1, it could soften further. And so again, looking for either a large cat or some other event that would take capacity out of the market would be beneficial. I can't quantify how many are reasonable or unreasonable as we are navigating that market every day, responding to our producers, we see business being stolen between producers. There's a lot of movement going on just because people have changed which wholesalers they work for. So that's one factor, but we also see carriers that have aligned interest being responsible. And so we don't mind competing against those people. That's a fair playground. It's where capital providers that don't have aligned interest. The MGAs, in some cases, have no downside. It's not aligned with the carriers who have to pay those claims at some point. That's where there's a disconnect and where the MGAs want to use up that capacity quickly because right now, the market could be better than it is a few months from now. So I don't know how much of that market there is. I can tell you there are examples where people have received capacity for this year that are multiples and multiples of what they were able to provide in terms of capacity last year. So we just know that we can't compete on some of that, so we don't spend a lot of time on those types of deals. We kind of moved in the spaces where we know we have a chance of the business. Hristian Getsov: Got it. And then switching to personal umbrella, are you seeing a shift in the competitive dynamics there, just given we're seeing more of a focus on growth from some of the bigger personal line carriers and mutual? I'm trying to get a sense of the ability to compete as a monoline provider becomes more challenging given a lot of these other players are focused on bundling, which would include personal umbrella. Jennifer Klobnak: Yes, I'm a fan of the [indiscernible] commercial. But other than that, I would say the personal umbrella market continues to evolve. Some of those personal lines carriers that bundle their business, I know, are increasing rates tremendously, changing their coverage. You see that in filings. You see them in the press. And we do partner with some of those same carriers to offer our personal umbrella when it doesn't match their appetite. We have a pretty wide moat around our business. We're pretty embedded with our business partners. They find value in our product and in how we support that product through servicing. So we update our information daily on what kind of business we're getting in the door. We're talking to our producer partners monthly to see what they need and how we can service that business. So I feel pretty good that we have a good base to go from a position of strength going into the next year. We're also still getting some rate increases in various states where we need some rate. And so I see opportunity for growth from both rate, but also from our continued great service that we provide to our producers, I think we'll have more opportunity there. So while there's some more competition coming in on the edges, I think people might be noticing that we do a pretty good job of this. There's some people talking about getting in. We're going to defend our space. We're going to continue to evolve this product and offer a quality product to insurers out there who need this coverage. Hristian Getsov: Got it. And if I could sneak one more. Have you seen any benefit on submission volumes from the elimination of the diligent search documentation requirement for surplus lines in Florida? I know that's a pretty good portion of your premium mix. And I just wanted to see if there's any updated thoughts there. And then also if you have any updated thoughts around the general tort reform we've seen, not only in Florida, but in states like Georgia on loss trends? Jennifer Klobnak: I'll tell you that in Florida, in the last year, we have actually tried to slow our new business a little bit given the severity that we were seeing previously. And we just talked about our actions from last fourth quarter, for example. And so with some of the actions we've taken between rate attachment points and curtailing some of the production we want from certain producers, we haven't really seen an impact from that specific regulations just because we're more controlling our growth at this point in that state. On the other side of it, I'll tell you total reform has been a positive. We don't necessarily have a number we can point to, but we do see on individual cases where we have a more reasonable resolution because we can present actual medical costs, what people pay, just -- the things that we can do to fight the plaintiff's attorneys and their playbook create a more fair playing field there to resolve claims fairly for that insurer who has an actual loss. We're willing to pay for that loss. We just don't want to pay the attorneys as much. And so that environment has changed and has improved. And we'll probably see that in other states. It's a little more early like for Georgia, for example, but some of the things they have passed have been favorable as well. And in addition to that, all of that third-party litigation, there's a lot of states now that have started passing legislation to get those kind of arrangements disclosed and that kind of thing, which will also help both in personal umbrella as well as broader auto coverages. Operator: Your next question comes from Andrew Andersen with Jefferies. Andrew Andersen: Recognizing really strong overall results and a very good long-term track record here. If we just kind of focus on Casualty over the last 2 years, 98% reported combined ratio, a little bit uncharacteristic to have that 2 years in a row. And I realize there were some headwinds on trucking, both on the reserving side and on the premium side. But do you feel that some of these headwinds within this Casualty segment are behind you or have really worked their way through and you're kind of entering '26 in a better position, both from a booking ratio and from any premium growth headwind into next year? Aaron Diefenthaler: Well, Andrew, I think as we've characterized the product level rate increases we've gotten within the Casualty segment, we think that's probably the strongest foundation we can offer in terms of data itself. We feel better about where the overall rate level is for a lot of these businesses that have had some challenges related to them. So it's hard to say the exact point in time where you turn the corner into something that may offer some additional potential for expanded margins, but having that rate profile and having some compounding of those rates over multiple years, we think, is a good foundation. Jennifer Klobnak: Yes. In addition to that, I would say we have clearly slowed a bit releasing reserves for some of those coverages. I mean we've talked about that in the past, too. Initial booking ratios tend to hold up a little longer. While we may be seeing positive signs like claim counts that I look at, we're not acting -- we tend to be pessimist. So we don't tend to act on the good news. We tend to wait and make sure that we are seeing enough good news for a while I think of a trend before we're going to recognize it for sure. Craig Kliethermes: Andrew, I grew up in the Show Me State of Missouri. So we got to wait and see. On good news, we're slower to usually recognize that. But if we see something go in the other direction, we obviously like to try to get that up as quickly as possible. So that's the way we look at things. Andrew Andersen: Understood. And on the property side, you've talked quite a bit about the MGA market being aggressive there. How would you characterize kind of more of the traditional or admitted carriers? Jennifer Klobnak: Well, I would say that everybody wants premium. So it's a fight out there, but I would say the other E&S carriers are fairly responsible. I'll give them credit. And so we don't -- again, we don't mind competing against them. I think if we could just reduce the little capacity in that market, it could -- it would at least stabilize, which would be great. Andrew Andersen: And then maybe last one. I think I heard 5% for Hawaii home. Is that just reflective of we've lapped kind of the book rolls here because it's quite a decel quarter-over-quarter? Jennifer Klobnak: Yes, that's correct. So we had a couple of book rolls that ended right at the end of the third quarter. And so now we're back to our outstanding local service and just competing on a regular basis at this point. In addition to getting green, we have gotten rate increases that will drive a little bit of growth as well. Operator: Your next question comes with Mark Hughes with Truist. Mark Hughes: Any granularity you can provide on that property dynamic just in terms of the competitive pressure as you think about Q4 relative to Q3 or even through the quarter, kind of the monthly pressure? Is there -- I know it's certainly more challenging year-over-year, but has it stabilized at all? Or is it still under incremental pressure? Jennifer Klobnak: That's a tough question. You're getting pretty granular, I would say. Every month, we -- obviously, we look at it on a very regular basis. And each month, we -- if it's good news, we hope it begins a trend. If it's down, we are like what's going on. So I don't know that I should provide color on a monthly basis. I'll tell you that in the fourth quarter, that's our smallest quarter for renewals. I mean there's just not as many renewal dates out there. So it's a tough quarter to really conclude about anything. If 1/1 is a big date and then in the spring 4/1, 5/1, 61, 7/1, all those are bigger dates, and that's really where you make your book of business. So all of that is coming up. And I think providing any 1/1 color on renewals probably provide a little too much information. So the market is still competitive. It continues to be, and we will see how that plays out this year. Mark Hughes: Yes. And then the -- thinking about the lower reinsurance costs, would you say pricing was already incorporating that? There seems to be a pretty wide expectation for 10% to 20% decline. Just thinking about whether -- when that actually happens, does that mean much for the market in the near term? Jennifer Klobnak: Well, as we prepare for our 1/1 renewals, we did contemplate a bit of a decrease in our cost. And so we built that into our benchmark pricing, which indicates how we need to price the business. I don't know what other companies do. I will tell you that last year in 2025, January, we didn't really see an impact from the reinsurance renewals. But in February, we noticed that that's when all of that information trickled down to the underwriter desk and people got more aggressive because they did get relief last year on 1/1. So January, we're just going to put it in the books, and we'll see if the behavior changes later this spring to incorporate that. We also see changes on 4/1 because that's when some MGA relationships renew their capacity. And so we may see further change in behavior at that point in time, but that's yet to be determined. Mark Hughes: And then one quick one, if I might. You've mentioned that you were seeking additional rate increases in personal umbrella, and that would help 2026. Can you size that? Jennifer Klobnak: Well, this is a 50-state product where we have to file in each state and each state has a different process. So I can tell you that effective December 1, we did get a California rate increase of about 20%. And so that will bleed into part of the book. California is one of our bigger states. I can tell you our process is that every quarter and now that we have year-end, it will be nice to, again, look at results to see which states require rate, where we're not getting adequate rate and where are we? Those analyses are underway already. And so we'll conclude in the next couple of weeks if we need to start taking additional action. But just based on these filings that were approved in the second half of last year, we know that there will be a pretty good amount of rate going into the book this year as well. Operator: Our next question comes from Meyer Shields with Keefe, Bruyette, & Woods. Meyer Shields: Jen, when you talk about lower auto claim emergence, is that across accident years? Or was that an accident year 2025 comment? Jennifer Klobnak: These are just new claims that are received in 2025. They could be related to 2025 accident year or previous accident years. Craig Kliethermes: I was just going to say, I think we did see a reduction last year as well, so 2 years in a row. Meyer Shields: Okay, that makes sense. I just want to make sure that I was understanding that correctly. The $150 million catastrophe reinsurance limit reduction, was that at the top end of the tower? Did your attachment point change at all because of the smaller book? Jennifer Klobnak: No. So we maintained our $50 million attachment on the cat tower and just brought that tower down. Meyer Shields: Okay. And then final question. Just -- you mentioned, I guess, concerns about competitors seeking to meet their budgets. How significant is maybe fourth quarter competition compared to other quarters? I've heard the comment a lot. I'm just trying to get a sense of how material you think it is in the market? Jennifer Klobnak: I mean, overall, the fourth quarter is always challenging, and our underwriters always say, oh, other people -- and it's legitimate, other people are compensated on top line directly, sometimes not even compensated on bottom line. It's just strictly top line. So you do see a rush to meet people's bonuses. But I argue with them that, that happens every year. So the real test is, is it worse this year in the fourth quarter versus last year fourth quarter, that's sprint to the finish. And in some of our segments, I would say people have this feeling it's worse, but it is a lot of feeling as opposed to something you can measure to some extent. That's offset by -- in some cases, like in property where we have just less business that renews. So you can't really measure what's going on as well as other quarters where there's just more business available. Meyer Shields: Okay. No, that makes sense. I guess the question for me is always is in the first quarter so far less competitive than the fourth quarter that just ended? Jennifer Klobnak: Sorry, I didn't follow that. Meyer Shields: I'm just asking whether some of that competitive pressure has abated in the first quarter because right now, people aren't as worried about 2026 premium budgets. I know it's early in the first quarter to even ask. Jennifer Klobnak: Well, it's too early to ask. Yes, we haven't closed January yet. So it's hard to see -- I see a partial -- a partial month is all I have right now. Operator: Your next question comes from the line of Carol Bruzzese with Philo Smith & Co. James Inglis: Sorry, it's James Inglis. Great quarter and year. But I've got a question about the reserve development. If you look at the '24 and prior cat events, there was a big swing in both the quarter and the year. And I'm wondering, is that just sort of a normal thing -- time to figure out what the cats actually ended up as? Or is there something specific or unusual in there? Aaron Diefenthaler: Not unusual, Jamie. This is Aaron. You think back to last year, we had a couple of sizable storms in Helene and Beryl. I think we outlined our expectations for there in our third quarter results and also at that time, offered a range of potential loss activity around Hurricane Milton, which was early days in the fourth quarter of last year. We tightened up our expectations as of the fourth quarter release last year, but that was close to $50 million of an estimate just on Milton alone. And so you get -- a year on from those events and then some -- and you have some more comfort around what actual losses are going to transpire, and we felt it's prudent to take down some of the IBNR. Those were not the only events that were incorporated in that analysis. We have cat activity going back over several years that we examined and each storm stands unto itself. And it's a hand-to-hand combat in terms of examining claim activity, what's outstanding, what may be in litigation, all fitting into our thinking on what to take down there. Operator: Your next question comes from the line of Gregory Peters with Raymond James. Mitchell Rubin: This is Mitchell Rubin. You referenced the 13% rate increase in transportation this quarter. Is there any quantification you could provide on the magnitude of the underlying loss trend you're seeing in the portfolio? And what level of rate increases you believe might be required in 2026 to sustain rate adequacy in the book? Craig Kliethermes: Yes. Mitch, this is Craig. So I'll speak to that. So -- I mean, we anticipate to continue to try to get increases going forward, probably double-digit increases. We have seen elevated severity trends in pretty much all auto businesses since COVID, since the courts have opened back up. At some point, we think that has to subside. I mean people are going to want to continue to pay 10%, 15% increases in their insurance or they can't afford to pay 10% to 15% increases in their insurance. So at some point, there's going to be a breaking point where we're going to get more tort reform in some of these states so that we can moderate this loss severity trend. In the meantime, you can expect us -- I can't speak for other companies, but you can expect us to try to at least get the increase to cover trend. And if we can't, we'll get smaller. That's just the way we operate. So we're going to try to continue to get 10%, 15% increases on auto business going forward until we see that loss cost trend subside. Mitchell Rubin: Great. That's very helpful. Can you provide any additional detail on how your technology investments over the past several years have impacted your underwriting performance, particularly touching on changes in submission to bind ratios within the transactional surety business? Jennifer Klobnak: Well, I would say our investments in technology have done a couple of things. I focus on a couple of things. One is really improving our customer experience, and that starts actually before the technology. So considering, for example, what questions we ask, we've tried to simplify it in a few places, the application questions that we're asking, making them more straightforward. I don't know about you, but whenever I get an application, I struggle with how do you answer this question. So trying to simplify it based on feedback and input from our producer partners and insurers has been really critical, then providing that through automation and modern systems, which we've been upgrading over the last few years. For example, in surety, we're rolling out an upgrade to our current offering. We've been in that business since 1992. As you can imagine, that technology has changed tremendously over the decades. And so our recent investment is rolling out to provide end-to-end ability to look at what's going on with surety bonds by those producers so that they can service that business better without feeling like they're bothering us to ask questions and whatnot. So that will be very helpful to them. So really kind of that customer experience and getting business in the door has been a big investment. Our second large bucket would be efficiencies. So there are a number of things we've done with efficiencies through various types of artificial intelligence and various types of other automation to try to just have people spend more time using their brains instead of doing administrative tasks. So that can include things like summarizing submission information, summarizing claims, lengthy claim information, they can mean inputting various e-mails that come in regarding claims go straight into claim files. So that we have to look at them and decide where they go, updating loss runs that come right in and go straight into our systems. So things of that nature on efficiencies have been a big category. And then lastly, I would say is just that improving that feedback loop that we have between underwriting claim and analytics, really getting our data in places where we can really look at it, slice and dice it very granularly, having the ability to update that daily where it makes sense. Some business units that doesn't make sense, we don't need to invest in that. But in others, there's data available to drive decisions that we like it updated more often. So we've invested in that. We've rolled out a number of dashboards to provide people insight into submission counts, binding percentages as well as marrying that up with loss information, so which producers, which states, which types of business, which attributes of an insurance drive loss activity. All of that information has been ramped up to help us make better decisions as we're underwriting and handling claims. So those are kind of the 3 big buckets that we have focused on. And I would say, given our diverse portfolio, you're never done, but we have spent a lot of time and effort, and I think we're reaping the rewards in that we continue to make an underwriting profit, which is in a more challenging environment as the market softens, we've got everything in place so that we can keep making great decisions for that bottom line. Operator: There are no further questions at this time. So I will turn the conference over to Mr. Kliethermes, RLI's President and CEO, for some closing remarks. Craig Kliethermes: Thank you. Before we wrap up, I want to take a minute to reflect on what this year, our 30th consecutive year of underwriting profitability truly represents. 30 years ago, RLI was a very different company. We wrote about $270 million of gross written premium. Roughly 1/3 of our business was earthquake insurance. We were still in the contact lens business. Our market cap was under $200 million, and we were proud to make Ward's top 50 performing insurance companies for the fifth straight year. For the record 2025 representing our 35th consecutive year on that list. The world was a different place, too. Public access to the Internet was just getting started with AOL and Prodigy. The Sony PlayStation that just hit the market. Cell phones were used for one thing, to make phone calls. A lot has changed over those 30 years, but the things that matter most to us haven't. There are still no shortcuts in this business. Sustained success is built the same way it has always been with discipline, accountability and a lot of hard work. What gives me the most confidence as we look forward is not just our results, but how we produce them. We have a strong balance sheet, a diversified portfolio and a team of engaged employee owners who care deeply about the decisions they make and the outcomes they produce. Every day, they show up committed to making RLI a better company for its customers, their coworkers and our shareholders. Our founder like to say that great companies are built one good decision at a time and that those decisions never seem easy in a moment. That philosophy has served RLI well for 3 decades, and it continues to guide us today. We're proud of what we've accomplished, but we're not done. We're optimistic about the future, confident in our approach and committed to doing what we've always done, staying disciplined, staying different and playing the long game. I would be remiss to end without thanking Todd Bryant, our CFO, who just retired at year-end after 31 years of dedicated service to RLI. I also want to thank our employee owners for their hard work, and we appreciate you all for your continued interest in RLI. We look forward to speaking with you again next quarter. Operator: That concludes today's call. Thank you all for attending. You may now disconnect.
Operator: Good morning, everyone, and welcome to the Horizon Bancorp, Inc. conference call to discuss financial results for the fourth quarter of 2025. [Operator Instructions]. Now I will turn the call over to Mark Secor, Executive Vice President, Chief Administration Officer, for the opening introduction. Mark Secor: Good morning, and welcome to our conference call to review the fourth quarter results. Please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the slide presentation. Additional information about factors that could cause actual results to differ materially is contained in Horizon's most recent Form 10-K and its later filings with the Securities and Exchange Commission. In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon's business. Reconciliations for these measures are contained in the presentation. The company assumes no obligation to update any forward-looking statements made during the call. For anyone who does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, they may be accessed at the company's website, horizonbank.com. Representing Horizon today are Executive Vice President and Senior Operations Officer, Kathie DeRuiter, Executive Vice President, Chief Administration Officer, Mark Secor, Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber, Executive Vice President and Chief Financial Officer, John Stewart; and Chief Executive Officer and President, Thomas Prame. At this time, I will turn the call over to Thomas Prame. Thomas? Thomas Prame: Thank you, Mark. Good morning. We appreciate you joining us. Horizon's fourth quarter results demonstrate the core strength of our community banking model and the excellent execution of the balance sheet repositioning. We have delivered on our shareholder commitment to create a top-performing community bank with durable peer-leading performance metrics and shareholder returns. The fourth quarter exceeded our prior performance estimates with annualized return on average assets above 1.6%, return on average equity approaching 16% and a net interest margin of 4.29%. Within the quarter, loan growth and credit quality continued to be excellent, and the team performed well, strategically reducing our portfolio of higher cost transactional deposits. Fee income continued to make progress, and our expense management efforts reflect our commitment to continually improve our operating leverage. We are very pleased with the fourth quarter results for our shareholders and the transparency the quarter provided to highlight the strength of Horizon's core community banking model that truly remains the cornerstone of our value proposition. Additionally, the company is kicking off the new year from a position of strength with the franchise well positioned to deliver durable earnings and continued top-tier performance metrics. As we look ahead, our thesis remains consistent with management focused on creating sustainable long-term value for our shareholders through our disciplined operating model, consistent profitable growth and peer-leading capital generation. I'll pass the presentation over to Horizon's Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber, who will share highlights for the quarter on our loan growth and our continued excellent credit performance. Lynn? Lynn Kerber: Good morning. Total loans were $4.9 billion at December 31, an increase of $60.7 million from September 30. Commercial relationship lending continues to be our lead strategy with modest declines in consumer loans and residential mortgage loans predominantly being sold into the secondary market. Commercial loans increased $76 million in the fourth quarter, representing 9% growth on an annualized basis. Growth in the portfolio mirrored our overall portfolio mix with 28% in commercial and industrial and 72% in commercial real estate. Our growth for the quarter was well balanced across our attractive footprint of Michigan and Indiana. This quarter, we experienced growth primarily driven by the markets of Troy and Kalamazoo, Michigan, Lake County, Indiana, Metro Indianapolis and Johnson County in Central Indiana. As noted on Slide 5, our commercial portfolio is well diversified by geography and remains consistent with the overall mix. As referenced in Slide 15 of the appendix, our portfolio remains very granular with our largest segment representing 6.3% of total loans. Overall, our pipeline remains steady and quarterly volumes are consistent with our averages, for new origination activity, payoffs and net line of credit activity. As we look forward to 2026, our focus remains on steady diversified growth, disciplined pricing and credit and growing well-rounded customer relationships to drive cross-sell activity with deposit gathering and treasury management services. Residential mortgage lending continues to be a foundation product for the bank and volume has been predominantly sold in the secondary market to align with our strategy to create capacity for commercial lending activities and the generation of gain on sale fee income. Balances for the fourth quarter were essentially flat in alignment with the strategy. Turning to credit quality and the allowance. Our credit quality metrics remain within expected ranges and are summarized on Slide 7 of the presentation deck. Substandard loans of $59.4 million represent 1.22% of loans for the fourth quarter, a decrease from 1.31% for the third quarter and 1.33% for the fourth quarter of 2024. Non-performing loans of $34.9 million represent 72 basis points of loans for the fourth quarter, an increase from 64 basis points in the third quarter and 56 basis points for the fourth quarter of 2024. The increase of $3.9 million in the fourth quarter is an increase of $2.2 million in commercial nonaccrual loans, $831,000 in residential nonaccrual loans and approximately $800,000 increase in consumer loans over 90 days past due. While there is a modest increase in this metric, our overall substandard loans have decreased by $5.2 million or 8% from the year ago period, and our net charge-offs remain within historical loan ranges and continue to compare favorably to the industry. Net charge-offs were $1 million in the quarter, representing 8 basis points on an annualized basis. Net charge-off results for the full year were very positive, totaling approximately $2.9 million, representing an annualized charge-off rate of 6 basis points. This is reflective of our conservative and consistent approach of Horizon's credit culture. Finally, our allowance for credit losses increased from $50.2 million to $51.3 million, representing 1.05% of loans held for investment. The net increase of $1.127 million was predominantly related to economic forecast assumptions. The related provision for credit losses of $1.6 million consists of the $1.1 million increase in the allowance, replenishment of our fourth quarter charge-offs, offset by a reduction in reserve for unfunded commitments with the completion of several large construction loans. We continue to monitor economic conditions and future provision expense will be driven by anticipated loan growth and mix, economic factors and credit quality trends. Now I'd like to turn things back to Thomas, who will provide an overview of our deposit trends. Thomas Prame: Thank you, Lynn. Moving on to our deposit portfolio displayed on Slide 8. Horizon's core relationship balances continue to show the strength of the franchise's community banking model. As noted in our Q3 earnings call, a deliberate strategy for the fourth quarter was to further reduce the organization's exposure to high-cost transactional deposits. As we review the quarter's results, we feel very confident in the strength of the deposit portfolio in terms of mix, relationship tenure and granularity entering 2026. Comparing the current portfolio to the fourth quarter of 2024 provides good insight in the stability of the noninterest-bearing balances, which are up year-over-year and the improved cost structure of the core relationships within the interest-bearing segments. The performance of the team transitioning and improving the profile of our balance sheet while capturing the benefits of previous rate cuts has created significant benefits for the organization heading into 2026. Additionally, we believe our deposit portfolio continues to have opportunity to benefit the organization moving forward with its granular composition and long-standing relationships in our local markets. The team is well positioned to fund our go-forward loans grow with a treasury management team that has renewed capacity, commercial relationship bankers with aligned deposit objectives and an excellent branch distribution in some of the most attractive markets in Michigan and Indiana. Let me hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through additional fourth quarter financial highlights and provide an outlook to what we believe will be a very successful 2026. John Stewart: Thank you, Thomas. Turning to Slide 9. Q4 marks the ninth consecutive quarter of net interest margin expansion, totaling 188 basis points from the low in Q3 of 2023. What you see now reflects the true economic profitability of our organic community banking operations without the distractions of the non-core assets and liabilities that were impeding our returns previously. Through these efforts, we believe we have built a balance sheet that is relatively neutral to changes in interest rates with a cash flow profile that should create reliable returns for our shareholders. As of the year-end, the restructuring activities are now complete and balance sheet activity from here is expected to be marginal and tactical, where growth will be driven primarily through commercial lending relationships funded with organic core deposit generation. Specific to Q4, the net interest margin increased by 77 basis points to 4.29% and above the upper end of our guidance range. Certainly, the remainder of the balance sheet repositioning played a big role in the linked quarter expansion, which can be seen in the transition of the earning asset base to more than 80% in loans and deposits are now 93% of total non-equity funding. The margin did see some modest upside relative to expectations from the decision to increase the planned deposit runoff to nearly $200 million in the quarter, which carried a weighted average cost exceeding 4% versus the planned $125 million. However, on an organic basis, we continue to see notable stability in our loan yields, as origination spreads held up well and reductions in our core deposit costs that exceeded prior expectations as realized deposit betas approached 40% for the rate cuts during the quarter. Looking ahead, to account for some of the favorable outcomes just mentioned, you will note that we have increased our net interest margin outlook for the full year 2026, which we now expect to be in the range of 4.25% to 4.35%. Importantly, as has been the objective all along, we are not anticipating there to be much volatility in that result over the year. New loan production coupons above 6.5% continue to exceed cash flows rolling off the book. At the same time, we are anticipating somewhere in the range of $75 million to $100 million of principal cash flows from the securities portfolio over the year, which is coming off at a weighted average FTE rate of approximately 4.75%. Replacement yields in January thus far have modestly exceeded that rate. As you can see on Slide 10, reported noninterest income results were broadly in line with expectations at $11.5 million for the quarter. Excluding securities losses in the comparable period, total fee income was up 7% year-over-year, led by strong results in wealth management and total mortgage fees, which grew 19% and 14%, respectively. Results in Q4 did include a BOLI death benefit of just under $600,000, which is included in other income. On Slide 11, at $40.6 million, expenses were generally in line with expectations and as planned, included $0.7 million related to the write-off of the remaining unamortized issuance expense for the subordinated notes we called on October 1. Absent this item, expenses were up modestly from the linked quarter related to seasonal occupancy-related expenses and higher marketing costs. Results also include episodic legal fees related to certain legacy items that have now largely concluded. Turning to capital on Slide 12. Capital ratios have improved quite strongly in the quarter on the heels of a much more profitable balance sheet. Additionally, you'll recall in our prepared remarks last quarter that we anticipated the leverage ratio and the total risk-based ratio to revert closer to Q2 '25 levels as average assets caught up with the mid-Q3 balance sheet activities and the prior subordinated debt issuance was repaid in early Q4. You can see that these results were consistent with those expectations. As we have previously communicated, we are comfortable with the company's current capital position, particularly against what is a significantly derisked balance sheet. Additionally, as our 2026 outlook suggests, our peer-leading levels of profitability will accrete capital very quickly, which you will see over the course of the coming year. Turning to our 2026 guidance on Slide 13. Our overall outlook has generally improved from the preliminary commentary provided last quarter, which I will make a few comments about. Period-end loans and deposit balances are expected to grow mid-single digits. This outlook would suggest deposit balances will grow modestly more than loan balances. We anticipate balance sheet growth to be driven by organic deposit funding going forward, leveraging our relationship banking model and well-positioned 70-plus branches located throughout Indiana and Michigan. Non-FTE net interest income is now expected to grow in the low teens year-over-year. This will be driven by the FTE net interest margin in the range of 4.25% to 4.35%. Average earning asset balances are likely to modestly exceed $6 billion for the full year. The first quarter average earning assets are likely to be down from the fourth quarter averages, but should represent the low point for 2026. This outlook includes the assumption for two, 25 basis point rate cuts, one in April and October, but neither moves the needle much on the outlook as intended. Fee income in the mid-$40 million range generally expresses the continuation of trends we have seen over the back half of 2025. Expenses in the mid-$160 million range represents standard inflationary expense growth, modestly higher expenses in medical benefits compared with 2025 and the continuation of ongoing growth and marketing efforts. Finally, the effective tax rate is still anticipated to land in the range of 18% to 20%. Overall, 2026 should be a strong year for Horizon, steady growth with durable peer-leading returns on assets, returns on tangible common equity and top quartile internal capital generation. With that, I'll turn the call back over to Thomas. Thomas Prame: Thank you, John, and I appreciate the summary of the quarter and the updated outlook for the year. As you can see from our financial results, we're very well positioned entering 2026 to create significant shareholder value through durable top-tier financial metrics, excellent capital generation and a premier community banking franchise located in some of the best markets in the Midwest. As the leadership team, we'll continue to be front-footed in our execution and disciplined in our operating model, focusing on profitable growth and continued smart stewardship of capital decisions for our shareholders. We look forward to what we believe will be a very positive outlook for our shareholders, clients and the communities that we call home. At this time, I would like to turn the presentation back over to our moderator to open up the lines for questions for the management team. Operator: [Operator Instructions] The first question comes from Brendan Nosal with Hovde Group. Brendan Nosal: Maybe just to kind of start here at a top level, if you guys look at your outlook for 2026, pretty similar to what you guys offered last quarter. As you look at kind of the opportunities and risks, like what in that outlook could end up going better for you guys? And conversely, what are some downside risks as you look at the year ahead? John Stewart: Brendan, this is John. I think first and foremost, I commented on this in my prepared remarks. We actually view the outlook to be slightly more favorable than it was when we initially gave it. The NII, in particular, is where the leverage is higher base and more growth in the low teens. I think as you kind of generally push that through the numbers, you'll get a non-FTE number that's closer to $260 million. I think that guidance was maybe closer to mid-250s last quarter. FTE would be then about $4 million above that. So we do view there to be a more optimistic outlook. Maybe the very modest offset to some of that NII upside would be on the expenses, but really nothing materially there, just maybe $1 million delta or something from what we had initially put out there. I think some of the levers as you kind of work your way through the year, it's really going to come down to the ability to grow organic core deposits to fund organic core commercial loan growth. And I think a favorable outcome on that front is probably the biggest leverage point to upside to the outlook. And conversely, the opposite would be true. The loan growth pipeline, Lynn can talk a lot more about this. We feel really good about it. Spreads have held up really well. The team has done a fantastic job on the asset side, and it's going to come down on the liability side, I think, most notably. Brendan Nosal: Okay. All right. That's helpful, John. Maybe pivoting here to that topic of loan growth. Is there a point at which like the modest decline in the consumer category of the loans eases, which would allow the high single-digit commercial loan growth to shine through more visibly in that net growth number? Thomas Prame: Thomas, thanks for the question again. As we look at the portfolio of our loans, our business model is truly a commercial banking model. That has been our lead strategy and Lynn and her team has just done a fantastic job on that. our consumer loan portfolio right now is primarily made up of HELOCs and consumer closed-end mortgages that deal with real estate. We feel as though we are well positioned there. We have a great credit profile in that area. Again, that's something we feel like we're going to stretch and try to create demand and/or try to create excess growth in that with taking on extra risk. So for us, it's a good product, but we're not seeing the consumer side to be something that we're going to probably push to accelerate. We really found great value not only on the lending side in commercial, but truly getting the full relationships with the deposits. Brendan Nosal: Let me sneak one more in here. Just on asset quality, can you unpack the rise in NPAs over the past couple of quarters? Like each quarter's increase is relatively small, but I think they've been up in 5 in the past 6. Like is this normalization from a low base? Or is there perhaps pockets of stress that you're seeing at this point? Lynn Kerber: Thanks for the question. I appreciate your observation. We had a very low base that we're starting from, and our overall metrics continue to be very strong and within the expected ranges for our portfolio and credit risk appetite. So recognizing that we're starting from a very low point, any increase, while modest, may appear to be a larger percent. As I noted in my comments, substandard loans did increase this quarter, roughly $2.2 million of it was commercial, $800,000 mortgage, nonaccrual and over 90 days, $800,000 consumer. These are all relatively modest numbers. I don't see it as reflective of any one sector, any particular product. When I look at our commercial nonperforming, it's really more episodic with the customer. As I shared in some previous calls, we had one customer that started up a new business, they had road construction. It just caused some delays. Sometimes we use nonaccrual as a tool to help them weather some of those challenges that they have. And the goal always is to hopefully get them back on the right path and upgrade them. Sometimes, however, we recognize that it might be a liquidation and try to work hand-in-hand with the customer. I think ultimately, though, if you look at the bigger picture, substandard loans have decreased for the last 3 quarters and roughly 8% for 2025. And if you look at commercial specifically, our criticized loans have actually decreased 17% since December '23 and 7% since December '24. So I think our overall metrics are good. I look at this just really as the migration through the buckets. Operator: The next question comes from Nathan Race with Piper Sandler. Nathan Race: John, I was hoping you can just unpack some of the margin drivers over the course of this year? It seems like you guys are pretty well matched in terms of short-term rate-sensitive liabilities and assets. So I wonder if you could just hit on kind of what the asset repricing tailwinds look like and kind of where you're originating new loans these days relative to the portfolio yield? John Stewart: Yes, sure. Thanks for the question. Yes, as I said in my prepared remarks, new originations spreads continue to be really good. We see that continuing here in January. New origination yields continue to sit on a coupon basis above 6.5%. We've got cash flows coming off the portfolio on the loan side that are still below 6%. So you do have some front book, back-book repricing that will help as we just kind of grow through the year. On the other side, it's going to come down to just deposit -- core deposit generation. I think those are going to be the big drivers for the margin, as I mentioned earlier. The only other margin leverage that will flow through over the course of the year is just whatever the cash balance ends up looking like. So as the guidance suggested, based on where cash ended the year, the averages might be down in Q1 on a cash basis, the expectation deposit growth versus loan growth, the assumption there is that the excess is just flowing back into cash for the time being for liquidity purposes and nothing else. And of course, that's not -- that's NII accretive, but maybe at the margin on a NIM percentage, modestly dilutive. So those are -- where the cash kind of lands is going to be whether or not it's up a bit flat, whatever the outcome ends up being, but I think those are the big drivers. Nathan Race: Okay. That's really helpful. And changing gears a bit, as you guys alluded to in your comments, capital levels just with the profitability profile are going to build a pretty strong clips. I could see most capital ratios increasing by 100 basis points year-over-year by the end of this year. So just curious, maybe, Thomas, if you can update us on some of your capital deployment priorities. I imagine supporting growth is still #1, but would be curious to get your thoughts on the opportunity to deploy excess capital via acquisitions and kind of what you're seeing across that landscape these days? Thomas Prame: Thanks for the question. And also, thanks for the recognition of the strong capital generation of the new profile of the organization. We're very pleased with the performance of the company and also the positive capital generation from the results coming from the fourth quarter. As we have discussed previously, there's ample opportunity internally to grow and expand our organic business model. We are located in some of the best markets in Michigan and Indiana, and we still see significant upside potential just through organic growth in our community banking model. This is going to continue to be our primary focus. As we look at our capital going forward, as we mentioned in the third quarter, this isn't going to burn a hole in our pockets. In the near term, we believe we have ample runway to build capital to align with some of our industry peers. And again, as we review capital decisions in the future, we're going to continue to be disciplined about this and make sure that we focus on logical deployment that's accretive to our shareholder value proposition. Nathan Race: Got it. That's helpful. If I could just sneak one last one in. I appreciate the expense guide. Curious if that contemplates any additional commercial hires? Obviously, you guys have been active taking advantage of M&A disruption across your footprint in the past. And there's obviously been some notable M&A announcements with some larger competitors that are maybe more focused on some southern geographies these days. So just curious what you see in terms of the opportunity to either add talent or just benefit from the existing team to grow share on the commercial side? Lynn Kerber: Yes. Thank you for that. First of all, I'd say we have a stellar team. At this point, I don't see that we're going to be adding, although there may be some opportunities presented that we consider with some of the changes in the market. But our team has been performing really well, as you can see with our growth numbers, just doing a fantastic job, not only in volumes, rate management and credit quality. So really pleased with them. We do have a few retirements that are occurring. Really pleased with the candidates that we've hired and the talent there. So I would say that we're probably benefiting from some of that disruption in talent there. We have expanded our treasury management team over the last year. We may look at some opportunistic additional adds throughout the year there, too. Operator: The next question comes from Damon DelMonte with KBW. Damon Del Monte: First question, just on the outlook for fee income. I was hoping you could just talk a little bit about some of the drivers that you see leading to the kind of that mid-$40s million of revenues for 2026? I don't know if it's going to be driven more by fiduciary duties or do you have other treasury management services? Kind of I guess, what are your key assumptions behind that growth? John Stewart: Thanks for the question. This is John. As we kind of roll the year forward and look at our budgeted assumptions, there's not one piece of that fee business that is towing the line, so to speak, modest kind of low- to mid uptick in service charges and interchange would be the assumption. We've got some specific initiatives in the market around interchange, but nothing -- we're not assuming anything in that outlook that would significantly change that view for 2026 anyway. Fiduciary activities expect them to continue to be strong. Mortgage should continue to grow and hopefully benefit rates. We'll kind of see what the rate environment does. But as we get back into the seasonally strong years, we'll get a better -- strong quarters, excuse me, we'll get a better outlook there. But there's nothing in particular, Damon, that is really pushing the growth number for 2026. It's pretty well balanced. Damon Del Monte: Okay. That's helpful. And then just quickly on the margin. Do you happen to have what the spot margin was for December, kind of where you exited the year? John Stewart: Yes. It was slightly a couple of basis points above where the full quarter average was, Damon. Damon Del Monte: Okay. And I mean, based on your commentary, John, it seems like your guidance is including 225 basis point rate cuts. So it kind of seems like, again, based on what you've been saying, you guys seem to be pretty neutral. So we shouldn't see much movement either way if we do have a couple of cuts here in '26. Is that a fair characterization? John Stewart: Yes. We continue to believe that's the case. I mean, if you -- we've walked through some of these numbers before. If on a static balance sheet, what happens inside 30 days, it's -- we'll probably need about a 30% beta on our non-time deposit balances, interest-bearing deposit balances to be neutral. We exceeded that in the fourth quarter. The assumption is that we would be able to kind of just achieve that in 2026. And so with that outcome, with that set of assumptions, I think, yes, your statement is correct that the rate cuts would not significantly change the trajectory of NII or the margin for the year. Similarly, it's not a headwind if there is not a rate cut. Operator: The next question comes from Terry McEvoy with Stepehns. Terence McEvoy: Looking at the loan growth in 2025 on the commercial side, do you expect it to be weighted more towards CRE like we saw in the fourth quarter? Or do you expect more of a mix between C&I and CRE? And then I'm just curious, is leasing still, call it, a priority for Horizon? Lynn Kerber: Terry, in regards to your question, we've been really consistent with our commercial portfolio. Our mix hasn't changed much over the last 3 years that I've been in the seat. If you look at our quarterly origination mix, it's generally pretty consistent with the overall book mix. We have been intentionally looking to add some additional C&I. Our equipment finance division has been a very nice complementary piece to that. When I say it's a priority, I would say it's one of our core products. And so is it going to be outsized? No. It's going to be complementary to what we're doing. Nathan Race: And then as a follow-up, you opened up a pretty cool office in Kalamazoo last summer in terms of just history there. Lynn, I think you mentioned loan growth in that market. So my question is, are you planning to open up more offices, which, to John's point about funding loan growth, a new office would definitely help on the deposit generation side? Thomas Prame: Thanks for the question. And I appreciate the commentary on the Kalamazoo office. Very excited about that and glad to be part of the renovation that's happening in what we feel is just an outstanding community. We do have another office that will be opening up this summer in Indianapolis that we started about 1 year ago, and that should be coming to fruition. We will look at some different opportunities throughout Michigan and some of the core markets that we've talked about that we feel like there's an opportunity for additional distribution where our teams have just have done extremely well, in both loans and deposits and get benefit from perhaps a second or third location. Those will primarily be in the Grand Rapids, Lansing, the Holland area that we feel as though we've got the right people, the right teams, the right penetration, just again, need a little bit more market reach through distribution. But I wouldn't say it's going to be a wholesale branch strategy versus very optimistic as we see opportunities come to fruition in the marketplace. Operator: [Operator Instructions] The next question comes from Brian Martin with Janney Montgomery. Brian Martin: Just wondering, can you -- how has the pricing been both on the loan and deposit side in the markets? Have you seen any irrational pricing? Has it been -- it sounds as though it's not been irrational, but just hearing mixed commentary from other banks. So just thinking about that. Lynn Kerber: Yes, I'll speak to commercial. I would say that it really just depends on the segment of the customer and their profile. I mean we are seeing some rates that -- for commercial real estate credit tenant, very attractive deal profile, it's pretty aggressive. And we've been seeing some 180, 190 spreads, which is pretty low. And so is it irrational? I guess every organization has to make a decision on what works in the balance sheet. But it just -- it depends on the sector. I think for us, we're priced appropriately for the types of deals that we're doing. We're in market generally, and there's going to be some that are higher and a little bit lower. So I wouldn't say it's irrational. There's just some competitiveness in certain segments. Thomas Prame: This is Thomas, I completely agree with Lynn's answer there. Horizon has positioned itself for decades of being a relationship bank, not a price lead bank. And so for us in our markets where we are, there's always been great competition. And for us, I think whether rates are up or down, we've seen recovery in our marketplace, there's always rational pricing out there, both on loans and deposits. And I think it gets to your go-to-market strategy. Our go-to-market strategy is really about being embedded in our communities, doing more than just price and really about being a consultant to our clients, both on the loans and deposit side. So again, I think for us, how we approach our clients, how we approach our communities probably gives us a little bit of insulation from the edges on pricing and for us also from not just the pricing, but also a discipline around credit, I think it's been a forefront of the success we've seen over the years. Brian Martin: Got you. And last couple. Just in terms of the commercial pipeline, Lynn, did you talk about kind of the commercial loan pipeline here? I know you talked about what areas did well here in the fourth quarter and geographically, we did better. But just the pipeline today, where that stands heading into first quarter? Lynn Kerber: There's always a little bit of seasonality. And so you look at the first couple of months of the year, it's usually a little bit quieter. It tends to pick up in the second quarter or third quarter. So you'll hear me talk about fluctuations from quarter-to-quarter. That being said, our pipeline is pretty strong and steady. You're just going to see some fluctuations from quarter-to-quarter. We might have a couple of larger loans one quarter. We might have a larger commercial real estate project that goes to the secondary market or is sold that could impact results. But usually, it's pretty even. So at this point, I feel like it's steady as she goes. You just might see some fluctuation quarter-to-quarter based on seasonality. Brian Martin: Okay. So pipeline is likely down from what it was last quarter and just given seasonality. And I guess your expectation will be as you kind of build the loan growth, it's more second quarter and beyond, maybe less in the first quarter. Does that seem fair based on your comments? Lynn Kerber: I don't know that I would infer that. It's just first quarter is traditionally a little bit softer as far as originations, but the pipeline itself is solid, and we look out more than 90 days, we're tracking 30, 60, 90, 120 up to 190 days. So I don't see the pipeline softening at all. It's just -- my point was is you're just going to have some timing differences month-to-month. Brian Martin: Got you. Okay. That's helpful. And I don't know if it's maybe for John, but I think someone talked about the loan repricing or kind of the back book repricing being one opportunity. What -- can you just remind us what that that loan repricing looks like throughout the year? John Stewart: Sure. Yes, what I said before was new origination coupon yields have held up very well. Spreads have held up well. New production continues to be in excess of 6.5%. The roll-off amortizing, non-amortizing maturities, the cash flow coming off the book is still sitting below 6% in that 5.5% to 5.75% range. And it's pretty evenly distributed by quarter throughout the year in 2026. Brian Martin: Right. And how much is repricing, John, I guess, in terms of throughout the year? It's pretty even by quarter, but just in aggregate, what's repricing this year at kind of that range? John Stewart: Plus or minus $150 million a quarter. Brian Martin: Okay. So $150 million coming across the quarter. Okay. And last one for me, just more housekeeping. I think, John, you said the average earning asset level. I missed what you said there, but I thought it was down linked quarter, but up thereafter. Is that kind of what you suggested? John Stewart: Yes, that's right. Just based on where cash balances kind of ended the year, you might see that pull through the averages, slightly lower cash balances in Q1. We would anticipate that from -- that's the low point for the year, and it would grow and that the full year average would slightly exceed -- modestly exceed $6 billion. That's -- we had scripted that in the guidance slide as well. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Mark Secor: Again, we want to thank everyone for participating in today's earnings call. We appreciate your time and also your interest in Horizon, and we look forward to sharing our first quarter results in April. Have a wonderful day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Jacob Lund: Good morning, and welcome to Investor's Q4 and year-end results for 2025. I'm joined here in the studio in Stockholm by our CFO, Jenny Ashman Haquinius; and our CEO, Christian Cederholm and both will soon be giving their presentations. After that, as usual, we'll be opening up for questions, both on the call via our operator and online. And with that, over to you, Christian. Christian Cederholm: Thank you, Jacob, and hello, everyone. As we look back on the past year, it's clear that 2025 was anything but straightforward. The world remains impacted by significant geopolitical uncertainty. Now despite these headwinds, the global economy delivered decent growth. And in this environment, our companies are doing a good job balancing profitable growth here and now, including focus on efficiency and cost out whilst continuously investing to future-proof their businesses. Let's take a closer look at how we performed over the last year. So 2025 turned out a strong year for Investor. Adjusted net asset value grew by 14%, and our TSR, total shareholder return, was 15%. Listed companies total return amounted to 22%, and we strengthened our ownership in Ericsson and Atlas Copco for a total investment of about SEK 2.3 billion. Patricia Industries total return was minus 9% with considerable headwind from the weaker U.S. dollar. Operationally, it was a good year in total for the major subsidiaries. And in addition to organic growth of 4%, the companies made add-on acquisitions for a total of SEK 24 billion, of which Patricia funded about SEK 16 billion with the rest funded by the portfolio companies themselves. The biggest one by far, of course, being the acquisition of Nova Biomedical. Investments in EQT generated a total return of 15%. And here, we also made our first co-investment, Fortnox, alongside EQT X, exploring another way to create value together with EQT. Lastly, supported by a strong balance sheet and cash flow generation, Investor's Board of Directors proposes a dividend of SEK 5.60 per share for fiscal year 2025. This represents an increase of SEK 0.40 or 8% over last year. At the end of the year, adjusted net asset value stood at SEK 1,087 billion. Now let me briefly go through the 3 business areas. Starting with Listed that represents about 70% of our assets. Listed Companies generated a total return of 6% in the fourth quarter. Investor received proceeds of close to SEK 900 million or SEB shares divested in Q3, so the last quarter to maintain our ownership level as the bank continued to buy back shares. Portfolio companies continued activities focused on future-proofing their businesses. So as an example, Sobi announced its acquisition of Arthrosi, expanding its portfolio within gout with a promising Phase III drug. Wärtsilä announced the divestment of its gas solution business, further focusing the Wärtsilä portfolio. Now over to Patricia Industries, which represents about 20% of our portfolio. Total return in the fourth quarter was 1%, driven by earnings growth and multiple expansion, offset by significant negative currency impact. While reported sales declined by 5%, our major subsidiaries grew sales 5% organically. Adjusted EBITDA declined by 6%, heavily impacted by the same negative currency effects I mentioned and with some costs relating to restructuring initiatives in a couple of the companies. We saw continued high activity in Patricia. For example, Laborie announced the acquisition of the JADA system, expanding its offering within obstetrics for a potential maximum value of USD 465 million. Sarnova completed 2 add-on acquisitions for a total of $165 million, strengthening Sarnova's software offering for revenue cycle management. Also, we contributed SEK 200 million to Atlas Antibodies to strengthen the balance sheet after a period of weak demand and performance. Mölnlycke and BraunAbility distributed a total of SEK 4.1 billion to Patricia Industries in the fourth quarter. All the major subsidiaries and our 40% in 3 Scandinavia in aggregate, including the combined Nova Biomedical from Q3 and onwards, reported last 12-month sales stood at SEK 68.4 billion, and EBITDA was SEK 17.2 billion. We should note here that this is in Swedish krona, so of course, rather sensitive to FX. And finally then, investments in EQT, our third business area, which represents about 10% of the portfolio. In Q4, total return for investments in EQT was 8%, driven by strong share price development in EQT AB. Net cash flow to Investor was SEK 1.2 billion with approximately SEK 0.9 billion net inflow from EQT funds, driven by continued healthy exit activity in the funds. During the quarter, we also completed the very last part of our SEK 4.5 billion investment in Fortnox. So it was a strong quarter and a strong year. But as always, our focus is on the future. I'm confident in our strong platform. Investor has a clear purpose and a focused strategy, a portfolio of high-quality companies, an ownership and governance model that is well proven and great people, both at Investor and in our network and in the companies. And we have financial flexibility with low leverage and strong underlying cash flow. Our strategy towards 2030 is clearly defined and well aligned with our purpose with the ultimate target, of course, of generating an attractive shareholder return. Our objectives are to grow net asset value, to pay a steadily rising dividend and to operate efficiently and sustainably. We will remain focused on our 3 strategic pillars: Performance, portfolio and people. And let me say a few words about each of these. Performance first. While it varies between industry segments and geographies, overall demand remains lukewarm. In addition, the U.S. dollar is down significantly and tariffs need to be managed and the geopolitical situation remain profoundly unpredictable. Against this backdrop, companies need to focus on efficiency here and now to drive profitable growth. At the same time, focus on future-proofing initiatives is critical to ensure long-term competitiveness. This includes, for example, R&D, other investments for innovation, expansion of sales, including to new geographies and investments to leverage the potential of AI and other new technologies. So moving to portfolio then. Based on our financial strength and strong cash flow generation, we continue to seek attractive investment opportunities across all 3 business areas. This includes additional investments in our listed companies, add-on investments and potential new platform companies within Patricia Industries and continued investments, of course, in and together with EQT. Ultimately, the allocation will depend on where we find the best opportunities. And finally, people. Given the rapid transition pace in all industries, we have to ensure that the right people are driving our companies. With 24 portfolio companies and around 200 board seats across the portfolio, talent sourcing and succession planning is a top priority for us. So near-term priorities are clear, and we have a lot of work cut out for ourselves. With that, I'd like to leave the word to Jenny to talk more about our financials. Please, Jenny. Jenny Haquinius: Thank you, Christian. Yes, so let me take you through the financials for the quarter. So in Q4 2025, adjusted net asset value was SEK 1,087 billion, and this implies an increase of 6% compared to Q3. For the quarter, all business areas contributed positively. Investments in EQT increased with 8%, Listed Companies with 6% and Patricia Industries with 1%. So this implies a total return of 6% for the quarter and 14% for the full year. And now double-clicking on each of the business areas, and I will start with Listed Companies. So within Listed Companies, share price performance was mixed, but with positive share price development in almost all companies, particularly strong quarter for the Electrolux share, followed by AstraZeneca, Wärtsilä, Ericsson and Sobi. Saab and Husqvarna, however, had a tougher quarter looking at total return. Total return for the Listed Companies portfolio was 6% and largely in line with SIXRX. And as for absolute contribution, it paints a similar picture, but with AstraZeneca and Atlas Copco in the top due to the weight in our portfolio. All in all, a solid quarter for the Listed Companies portfolio. And then moving on to Patricia Industries. For the quarter, the Patricia Industries portfolio, so the major subsidiaries, grew 5% organically, while the adjusted EBITA declined by 6%. For the full year, organic growth was 4% and the adjusted EBITA declined by 1%. And as a reminder, we are restrictive when it comes to EBITA adjustments. So in the 6% drop in EBITA for the quarter, we have only adjusted for transaction costs related to M&A and one-off costs related to CEO transitions. Other than that, and of course, then not adjusted for and hence, still weighing on the adjusted EBITA margin, we have negative impact from FX, so the stronger SEK and also tariffs as well as restructuring costs to unlock efficiencies in several of the companies, and we deem this as part of ongoing operations. And now double-clicking on performance across the companies in Patricia Industries. And first to highlight a few positives. We saw a second strong quarter for BraunAbility, in part explained by a relatively weak comparison quarter, but also due to strong demand. Profitability improved, but coming from a depressed level in Q4 2024. Nova Biomedical had a solid quarter in terms of growth and profitability. Growth was partly helped by recovery following the cyber incident in Q3. Integration is progressing according to plan, and this includes initiatives such as merging the organizations and implementing a common ERP system. And this, as we mentioned last quarter, may have an impact on sales and earnings near term. We also do know that Q1 last year was a particularly strong quarter for the acquired part of the business. Laborie continued to see solid growth, driven by a large extent the Optilume urethral strictures product. Reported profitability for Laborie was down as it includes USD 11 million in cost for the JADA acquisition and the CEO transition. If we were to adjust for this, profitability was still down, but only slightly on the back of commercial investments. Permobil and Piab had a more challenging quarter. Permobil is experiencing muted growth, and that's primarily explained by negative impact from the voluntary product recall of the Power Assist device announced in Q3. But positive to see good cost containment and a slight increase in EBITA margin, and this is despite SEK 32 million in restructuring costs. Piab had a quarter with negative organic growth, and that's on the back of weaker customer demand, particularly in the semiconductor market. Generally, Piab's end markets have been more choppy following the introduction of tariffs and increased geopolitical disruption. Lower sales impacts margins together with negative FX and tariffs as well as SEK 37 million in restructuring costs to drive efficiencies. And finally, on to Atlas Antibodies, we contributed SEK 200 million to strengthen the balance sheet. And this is to give room to the relatively new management to execute on the plan. And we do see that roughly 70% of the business is recovering, but we still see challenges in terms of soft market and competition for the evitria part of the business. And over to Mölnlycke. So Mölnlycke had a solid quarter with 3% organic growth, and this was primarily driven by Wound Care. So Wound Care grew 5% organically and Gloves 3% organically, and this was somewhat offset by a contracting ORS. On a general basis, we see continued good momentum in U.S. and China, while softer markets in Europe and the Middle East. In Europe, as mentioned before, there are pressures on health care budgets and that's specifically in Germany and France. And in the Middle East, we see customers with relatively high inventory levels. Profitability for Mölnlycke improved, and this is despite negative impact from FX and tariffs, and this is driven by positive product mix, but also lower cost on the back of continuous work with efficiency improvements. And Mölnlycke distributed EUR 200 million to Patricia Industries in Q4. We saw a 1% increase in estimated market values compared to Q3, so from SEK 223 billion to SEK 225 million. And this increase was explained by earnings growth in the portfolio companies as well as cash flow generation and, to a lesser extent, also expansion in valuation multiples. However, the increase was essentially offset by a negative impact from currency. And looking at value development across the companies, we can say that the main contributors for Q4 were Nova Biomedical and Laborie, while Sarnova and Piab was a drag on total value. For Sarnova, mainly due to multiples and for Piab, mainly lower earnings. Also worth highlighting is the distribution, so roughly SEK 2 billion from Mölnlycke and BraunAbility, respectively as well as the already mentioned equity contribution to Atlas Antibodies of SEK 200 million to strengthen the balance sheet. And now moving on to investments in EQT. So total value change was 8% in the quarter, and that's primarily driven by EQT AB, which was up 14%. Fund investments were essentially flat. And as a reminder, we report EQT fund investments with 1 quarter lag. So the 0% is based on EQT's Q3 report. On the right-hand side, we illustrate the net cash flow from EQT to Investor, which was roughly SEK 1 billion in the quarter, and this is driven by exit proceeds as well as dividend from EQT AB. And here, we have an illustration of the net cash flow from investments in EQT over time. While it's quite lumpy on a quarterly basis, over the past 10 years, we've received a net cash inflow of SEK 1.6 billion on average per year. And the LTM net cash flow is a negative SEK 2.4 billion. However, this includes SEK 800 million in acquisition for EQT AB shares and also SEK 4.5 billion in investment in Fortnox. If we were to adjust for this, net cash flow on an LTM basis is a positive SEK 3 billion. Our balance sheet remains strong. Our leverage as of Q4 is 2.1%. So it remains in the lower end of our policy range despite significant investments. And we closed the year with SEK 27 billion in cash at hand. All of our 3 business areas generate cash flow to support investments and a steadily rising dividend to shareholders. And as you know, from Listed Companies, we receive ordinary dividends as well as extraordinary dividend. In Patricia Industries, the portfolio companies generate cash flow, which can be reinvested in the companies or paid in distribution. And for investments in EQT, we have an ownership in EQT AB, which yields an annual dividend as well as fund investments where cash flow is, by definition, lumpy because it's dependent on drawdowns and exits, but it remains a strong contributor to cash flow over time. Since 2015, we have received total funds from all of these 3 business areas of SEK 216 billion, and note here that EQT is net cash flow in the pie chart to the left. The use of proceeds is illustrated on the right of more than 50% has been distributed to shareholders, roughly 30% has been reinvested in Patricia Industries and north of 10% in Listed Companies. So this platform with 3 strong business areas provides a broad-based cash flow that supports continued growth and distributions. The incoming funds provide strong investment capacity and have been deployed across all of our 3 business areas. 2025 was a record year in terms of investments, and this has been executed on while maintaining a strong balance sheet going into 2026. While sustaining this high level of investment activity, as mentioned, more than 50% of incoming funds have been distributed to our shareholders. We have continuously delivered on our commitment to pay a steadily rising dividend, and we continue to do so also in 2025. So the dividend proposal for 2025, as Christian has already mentioned, is SEK 5.6 per share, which is an increase of SEK 0.4 per share compared to 2024. And this applies an average annual growth of 8% over the last 10 years. And then on to my final slide. So looking at the longer-term perspective, the performance of the Investor ABB share truly illustrates the strength and the resilience of our portfolio and strategy. So with that, I will leave the word back to Jacob. Jacob Lund: Thank you, Jenny. Thank you, Christian as well. We are now ready to take your questions, and we will start with the questions through our operator, Sharon. Sharon, please. Operator: [Operator Instructions] And your first phone question comes from the line of Linus Sigurdson from DNB Carnegie. Linus Sigurdson: Starting off with a question on Mölnlycke and Mölnlycke growth. Is there any visibility on these France and Germany headwinds subsiding? Or should we expect this effect to persist in the foreseeable future? Jenny Haquinius: I can start. Thank you for the question, Linus. It's quite hard to say. We are seeing muted growth across many sectors at the moment, given what we're seeing globally. And specifically for Mölnlycke in Europe, there's weakness in France and Germany, and that is because there's a lot of pressure on health care budgets. But it's really hard to say if that would look any different in the next quarter, but really good to see continued momentum in the U.S. and China. Christian Cederholm: And maybe just to add, I think it's fair to say that this started somewhere during the first half of last year. But to Jenny's point, we don't really have visibility on the future development. Linus Sigurdson: That's fair. And then on the margin in Mölnlycke, is it fair to assume that the sort of tariff and currency impacts on profitability there are in line with previous quarters? And I mean, with 30-plus EBITDA margin, have we sort of already reached the potential for the efficiency program? Jenny Haquinius: Well, I can start. I would say that for the companies impacted by the tariffs, on a general basis, they're doing a really good job to mitigate, but it's roughly 1 percentage point or so still impacting margins. In terms of FX for Mölnlycke for this quarter, it's roughly 3 to 4 percentage points in negative FX. And Mölnlycke is doing a really good job working with efficiencies and really demonstrated that in this quarter. Then, of course, that's ongoing work because it's a mix of travel restrictions, using less consultants and also finding more sustainable efficiencies. So I think that work will continue also through 2026. Linus Sigurdson: Okay. And then my final question is a more general one. When you talk about solid cash flow in the coming years and this ambition to accelerate investments, could we view this as a comment on, say, EQT exit markets and the potential for, for example, Nova Biomedical start generating dividends to investors after the integration? Christian Cederholm: Sorry, can you repeat the question? You were asking about our comment on accelerated investments and the cash flow, and then I didn't quite follow. Linus Sigurdson: Yes. I mean, implicit in that statement is accelerating cash flows to fund those investments. So just -- is there anything you can comment on in terms of where those cash flows will come from? Christian Cederholm: Okay. I can take a first crack. So thanks, and it's a good question. And really, the way we think about it is we look at the cash generation from the 3 business areas. And when it comes to Patricia and you were asking about Nova, the way we think about it there is that really the cash flow generated and the debt capacity generated in the subsidiaries is all a potential funding source for acquisition and/or distribution. And really, cash is sort of a corporate asset. So whether it's distributed or not is maybe not the key point, but rather that the underlying cash generation in these businesses is solid. Does that answer your question? Linus Sigurdson: Yes. Operator: And your next question comes from the line of Derek Laliberte from ABG Sundal Collier. Derek Laliberte: I wanted to ask on Mölnlycke. You say the prevention and post-op were strong product segments in the U.S. I was wondering if you could give some more insight on why these areas are performing so strongly now and which product areas perhaps aren't doing as well. Also, I'm wondering if the product mix is similar in Europe in terms of performance right now. Christian Cederholm: I can start on that. I think the main difference we see is relating to the different geographies, as Jenny mentioned. And when it comes to product mix and channel mix, maybe the one thing to say there is that in the U.S., we're more heavily leaning on acute and hospital, while in Europe, including in France, for example, we have more towards post-acute and even some home care. Jenny Haquinius: And I could also add to that maybe that the Prevention segment is larger in the U.S. because of the reimbursement structure. So there's a clear market for that in the U.S., which is very different compared to Europe as well. Derek Laliberte: Okay. Great. That's very helpful. And on Laborie, what's the status on this BPH product, is it reasonable to expect any meaningful contributions from that during '26? Jenny Haquinius: Well, we don't really provide guidance, but what we can do say is that for this quarter, as we mentioned, the growth is a lot driven by the urethral strictures product. But as of now, we do have an active reimbursement in the U.S. for the BPH product. So we continue investing behind that launch. And of course, it will also depend on the reception in the market, et cetera. But the launch is very much ongoing, and we are very optimistic about the long-term runway with both of these products. Derek Laliberte: All right. And regarding Nova Biomedical, looking at the combined company now, I was wondering how the geographical split looks like, how high is the share of U.S. sales, for example? Christian Cederholm: We provided that in the last quarter. Let us come back to that. Derek Laliberte: Yes, absolutely. That's fair. And on Three Scandinavia, I was wondering generally here, the background, I think the growth looked pretty strong here in Q4 and actually over the year. What's driving this growth? Is it mainly continued market share gains or also some price increases involved here as a contributing factor? Christian Cederholm: Well, yes, we agree. Three has been continuing to gain market share, as you can also tell from the subscriber growth numbers. And then with regards to price, I mean, it remains a fiercely competitive market, of course, but at least they have been good at holding prices. That's what I would say on that. Derek Laliberte: Okay. Great. And finally, if I recall correctly, on Sarnova, you have this high inventory situation with distributors affecting market demand and so on. Is it fair to say that this has subsided now? Christian Cederholm: Thank you. Yes, this is primarily relating to the AED or cardiac response business. And really, what we see there is it is continuing to be a tough market. However, on a sequential basis, it has been more stable recently. And then, of course, inventory could be one part in that. Operator: We will now take the next question. And the question comes from the line of Jakob Hesslevik from SEB. Jacob Hesslevik: First, on demand navigation. So several businesses face weak demand and cautious demand in their segment. How do you differentiate between cyclical weakness that require patience versus structural challenges requiring strategic pivots? Christian Cederholm: I can start there. Well, so really, what we try to track, if I start there is, one, of course, total market development, but also we're benchmarking with a certain cadence so as to make sure that we understand whether we're gaining, holding or potentially losing market share. And there, I think it's fair to say that for the majority of the portfolio, we're confident that we're holding or increasing market share. And then the other part of your question was whether -- to what extent we see structural weaknesses in markets. And that's, of course, something we continuously evaluate. And generally, when it comes to investments, we're quite keen and that's one of our top criteria to make sure that we are in industries where we see, call it, GDP plus rather than GDP or GDP minus growth. And of course, sometimes that changes over time. And then we make sure we keep track of that. Jacob Hesslevik: Great. And then double-clicking on the currency exposure management. So FX headwinds significantly impacted Patricia Industries performance during this year. It should have affected your Listed portfolio as well given its large exposure towards exports. But beyond the operational efficiency improvements mentioned, what strategic actions are you considering in order to manage your FX exposure across the portfolio more efficiently, especially to hedge the Patricia portfolio that seems to be more sensitive to USD weakening while not having a professional treasury department helping out, which you can maybe found in most of your listed portfolio. Is this something you're looking into how you can help out Patricia more in managing their exposure? Christian Cederholm: Thank you for the question. Well, as you allude to, our main way of, let's say, balancing FX exposure is by way of operational hedging, i.e., to try to have the costs where we have the revenues and the income. Now despite that, we do have a significant earnings stream in U.S. dollar, thanks to our presence and strong market positions in the U.S. When it comes to sort of further hedging within the companies, we typically don't engage much in that. But rather, we want the FX effect to be seen immediately and then addressed and dealt with. So with a long-term perspective, the changes and the FX environment will be a reality and will hit. So we'd rather just see it upfront and then try to deal with it. The only additional hedging we do is we try to match our debt currency with what our underlying cash flow is per currency. So for example, if you have a company with a lot of earnings in U.S. dollars, it's appropriate to have some level of U.S. debt there as well. Jacob Hesslevik: Okay. And then just finally on Atlas Antibodies. Following the goodwill impairment and now equity contribution, what strategic options are you evaluating for Atlas Antibodies? I mean it's a holding from back in the days when it was called investor growth capital. It is still a very small investment and contribute limited to NAV. Why are you not looking into divesting this holding? Jenny Haquinius: Yes. Well, thank you for the question. First and foremost, so we are contributing the SEK 200 million, and that is to give management some room to execute on the plan. And we have a clear plan. I think we also mentioned in the presentation that roughly 70% of the business is doing well, while we have the 30% evitria business, which is struggling, and that's on the base of weaker market demand. But we have belief in management and also the plan to continue to build on Atlas Antibodies. So that's what we are focusing on here and now. I don't know if you want to add something. Christian Cederholm: No. As alluded to previously, I mean, you have 2 out of 3 business areas that are performing well. And the struggle we see is within evitria. Jacob Hesslevik: Yes. Fair enough. I'm just thinking about the time it takes versus the size of the company relative to the rest of your portfolio, maybe we can come back to Atlas in the future? Christian Cederholm: No, but I think the one thing to say there is maybe that, of course, with Atlas Antibodies as with the other companies, our ambition is to grow it bigger over time, for sure. Jacob Hesslevik: No, I agree. It should -- it's just it hasn't really grown over the past 15 years. It's not that much larger than it was when it came out of Investor Growth Capital. But it's clear. Thank you for the elaboration at least on the business performance in the name. That makes a lot of sense. Christian Cederholm: May I just, before we take the next question, come back to the question on the geographic split on the combined Nova Biomedical business. And then the numbers are roughly 60% North America and then the other 40% is roughly equally divided between Europe and rest of the world. Operator: [Operator Instructions] And your next question comes from the line of Johan Sjöberg from Kepler Cheuvreux. Johan Sjöberg: I hope you can hear me. My question is, if you start off with the Wound Care business and looking at the growth rates over the last year, it seems like you continue to be in the high single-digit growth area. And my question here, going forward here, I heard your comments on especially what's going on in Europe here. But do you see any change to that or any -- I mean, over the next, say, like 3 years, whatever, is that the sort of -- do you see any change to the market that would sort of change that picture, if you take some sort of a helicopter view on that one, please? Jenny Haquinius: Yes, I can start. And I think the short answer is, not really. So no clear change. I think looking at the full year, Wound Care specifically grew 7% organically and was 5% in the last quarter. And that is, as we've talked about before, in a market that's growing low to mid-single digit. So Mölnlycke has continued to take market share within Wound Care on the back of a strong product offering, very much focused on the customer. And we, of course, have the absolute aim to continue to do so by continuing to investing in innovation and also go-to-market. And then in addition to that, we also have new geographies. So we are investing in China, where we now have local production. And there we, of course, are seeing potential for higher growth. And then also the investments and the building presence in the post-acute channel, which is also an addition because Mölnlycke has historically had the strong position in acute, and that will also add potential avenues for higher growth. So we're not seeing anything differently now. But of course, in the more short-term perspective, we will always have markets that can be under pressure like we're seeing now in Europe. Johan Sjöberg: That's great. And also, Jenny, can I ask you on EQT funds, EQT reported today also and sort of you -- given a quarter lag on your -- the reported value of EQT funds. Should we expect any shift -- or put it like this, is there any material change if you were to use the Q4 numbers compared with the Q3 numbers? Jenny Haquinius: No, the short answer is that there will not be a material change, at least not for this quarter. Johan Sjöberg: No, good. Then also FX is all over the place right now or rather going in the wrong way, you can say, to some extent. How -- what -- could you sort of give some sort of indication? We know about the domicile of all the companies, but just to get a feeling for what is sort of the -- what is the most important currency to look at? Is it Euro-Dollar, is it the Euro-SEK or the U.S. dollar-SEK, just to see sort of the flows within the company, so to speak here, because it is a little bit big movements, to put it mildly. Christian Cederholm: I assume you're referring to the Patricia portfolio? Johan Sjöberg: Yes. Christian Cederholm: So this is what I would say. First of all, the #1 exposure is, of course, to the U.S. dollar, just given our big presence there with some U.S. domiciled companies, but also for a company like Mölnlycke and Permobil, I mean, the U.S., clearly the single biggest market for many companies. And then in Swedish krona, for most of the Swedish domiciled companies or the global, I should say, Swedish domicile companies, you would typically look at SEK exposure that is or krona exposure, where we sort of short the krona because we have headquarters here, R&D, et cetera. But of course, sales in Swedish krona is typically quite limited. And then thirdly, just to comment on the euro, I think from Mölnlycke, in particular, it's worth to highlight that we do have manufacturing for Wound Care, for example, in the U.S., in Maine. That said, we are still net exporting from Mikkeli in Finland and so from euro into U.S. dollar. So that's another one to keep track of. Johan Sjöberg: Okay. Cool. My last question, it's really about -- I mean, some of your portfolio companies are talking about also the hesitance among customers to place orders due to tariff uncertainty, geopolitical stuff and everything like that. I would like to hear your thoughts upon, especially when you're looking at -- or you are looking for a platform acquisition or if your companies are doing an add-on acquisition, do you see that being impacting, well, sellers and buyers also here in terms of hesitance. I know one thing is the sort of valuation, but that's always a thing you can say. But this geopolitical stuff here, is that something which is also sort of hindering your M&A ambitions in both platform and add-on? Christian Cederholm: Thanks for the question. I would not say that it's sort of the major obstacle. But of course, all the factors that you point to just add to the general sort of uncertainty in terms of deciding what's the underlying earnings, et cetera. That said, on a lot of things that we're looking at, for example, in the health care and life science market, tariffs, for example, is sort of not the biggest factor driving that. So it certainly adds to the unpredictability and uncertainty, but it's not a -- I would not call it out as a major obstacle for doing transactions as proven also in the recent year where we've done lots of add-on acquisitions, for example. Operator: Thank you. There are currently no further phone questions. I will now hand the call back to Jacob for webcast questions. Jacob Lund: Thank you very much, Sharon, and let's take the questions from the web. We can start with one from [ Tommy Falk ] around the dividend for 2025. Maybe add some flavor to that, Jenny. Jenny Haquinius: Yes. Well, thank you for the question. Well, I think, first of all, the dividend proposal is the Board's proposal to the AGM and for the AGM to decide. But maybe some flavor commenting on the SEK 0.40 increase. It seems balanced looking at our robust balance sheet and also view on cash flow generation and investments. And I think the SEK 0.40 is also really a testament to the fact that we have 3 business areas generating cash flow that really supports continued growth, also investments and delivering on our dividend policy to pay a steadily rising dividend. Jacob Lund: Next question, [indiscernible]. Please, how Investor AB is engaged in rearm Europe programs or other defense investments globally? Would you like to pick that up, Christian? Christian Cederholm: Yes, I'll take a crack at it. So Investor AB as such is not particularly involved in this. But of course, the build-out of the defense of Europe means business opportunities for Saab quite obviously, but also for other companies. And as an example, Ericsson do see a potential from the rebuilding of the European defense. Jacob Lund: Next question comes from Oskar Lindstrom, Danske. On Mölnlycke, are there opportunities to growth, more through acquisitions in the Wound Care or adjacent segments given weak main markets? That's the first one. And then on Patricia acquisitions, for some time now, you've been talking on and off about adding a new major leg in Patricia, mentioning industrial automation as a segment of interest. Is that still the case? What does the pipeline look like? And what is your thinking on valuations? Jenny Haquinius: Yes, I can start with Mölnlycke. Yes, well, add-ons is a priority for all of our subsidiaries and Mölnlycke included. So there is a lot of time spent to, of course, understand the different segments within Wound Care, but also adjacencies. And I think so far, there has not been any major available targets that have made sense because Mölnlycke has been able to grow so strongly organically. What Mölnlycke has done and is, of course, also continuing doing is add-ons that are smaller and more focused on innovation. So early-stage research, for example. And I think a recent example of that is a product for potential debridement of wounds, which would be a good addition to the Mölnlycke portfolio. But as for the other subsidiaries, it's also an important focus for Mölnlycke, of course. Christian Cederholm: And then the question on new platforms. And just to recap, our capital allocation priorities are quite clear in that we always put development and growth of our existing companies first. So that's our top priority. And as we've said, we are also open for and actively looking to add new platform companies, not the least in Patricia. And yes, industrial automation or industrial technology has been pointed to as one area that we're looking in, but we are also looking more broadly than that. And as for the pipeline, I think all I can say there is the work with identifying, scouting and potentially executing on acquisitions is a continuous process. And then when it comes to sort of closings and actual execution, that is inherently volatile and will remain so. Jacob Lund: Then the next one is from [indiscernible]. Will you organize another Capital Markets Day in 2026 for us, long-term shareholders? This is helpful to gauge the development of nonlisted companies. I think I can answer that briefly. It's been a while since we had the last Capital Markets update, and we'll be getting back with more information on that in due course. Next question and the final question I can see is from Jens [indiscernible]. From a strategic perspective on China, how do you assess the competitive risks and opportunities, the latter in terms of growth, investment and cooperation? Christian Cederholm: So as we comment on in the CEO statement in this report, we do see China as a very important region and for several reasons. I mean, one is that for many of our companies, both on the listed side and in Patricia, China is a large and growing market. So that's one thing, the market potential. But also, it's increasingly clear that competition in China or from China is evolving and evolving quite fast. So as we comment on, it's important for many of our companies to be in China, not just for the market opportunity, but also to be where and to compete where some of our toughest competitors are. And it's quite clear to me that comparing China today to a number of years ago, they're not just leading on low cost, but also on implementation of new technology, on fast innovation cycles, et cetera. So even more reasons to be there. Jacob Lund: Thank you very much. There are no further questions on the web. That means it's time to wrap up. Thanks to both of you. Our next scheduled call is the Q1 results for 2026 scheduled for April 21. And until then, thank you, and goodbye.
Operator: Good morning, ladies and gentlemen, and welcome to the Fourth Quarter of 2025 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Sherry, and I'm your operator for today. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the presentation over to your host for today's call, Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed. E. Nicholson: Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter of 2025. Joining me this morning is Dave Brager, President and Chief Executive Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2024, and in particular, the information set forth in Item 1A, Risk Factors therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I'll now turn the call over to Dave Brager. Dave? David Brager: Thank you, Allen. Good morning, everyone. For the fourth quarter of 2025, we reported net earnings of $55 million or $0.40 per share, representing our 195th consecutive quarter of profitability, which equates to more than 48 years. We previously declared a $0.20 per share dividend for the fourth quarter of 2025, representing our 145th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 14.4% and a return on average assets of 1.40% for the fourth quarter of 2025. Our net earnings of $55 million or $0.40 per share compares with $52.6 million for the third quarter of 2025 or $0.38 per share and $50.9 million or $0.36 per share for the prior year quarter. Pretax income grew by $5.4 million quarter-over-quarter and $6.3 million over the prior year quarter. Both the quarter-over-quarter increase in pretax income as well as the increase from the fourth quarter of 2024 were primarily the result of growth in net interest income. Net interest income grew by $7 million or 6% over the third quarter of 2025 and by $12.2 million or 11% over the fourth quarter of 2024. During the fourth quarter, we collected $3.2 million of interest on a nonperforming loan that was paid off during the quarter and incurred a $2.8 million loss on sale of investment securities. We also incurred $1.6 million of acquisition expense related to the pending merger with Heritage Bank of Commerce. Changes during the first quarter to our allowance for credit losses and reserve for unfunded loan commitments had the net impact of increasing pretax income by $3 million compared to the prior quarter and pretax income decreasing by $1.5 million compared to the fourth quarter of 2024. Noninterest income was $11.2 million in the fourth quarter, which was $1.8 million lower than the third quarter and $1.9 million lower than the fourth quarter of 2024. Trust and investment services income grew by $156,000 or 4% from the third quarter of 2025 and grew by $519,000 or 15% over the fourth quarter of 2024. Bank-owned life insurance income decreased by $1.1 million from the third to fourth quarters due to the annual amortization of revenue enhancements. In addition, other income declined by $800,000 from the prior quarter. This decrease in other income was the result of a smaller loss on sale of investments during the fourth quarter as we incurred a $2.8 million loss during the fourth quarter compared to the $8 million loss on sale incurred in the third quarter and the $6 million of income earned in the third quarter from a legal settlement. Now let's discuss loans. Total loans at December 31, 2025, were $8.7 billion, a $228 million or 2.7% increase from the end of the third quarter of 2025 and a $163 million or 2% increase from the end of 2024. The quarter-over-quarter increase in total loans was due to growth in nearly all loan categories. As typically happens at year-end, we experienced seasonal increases in dairy and livestock borrowings. Dairy and livestock loans grew by $139 million compared to the end of the third quarter, driven by higher line utilization. from 64% at the end of the third quarter to 78% at the end of the fourth quarter. Loan growth was also positively impacted by increases in line utilization for C&I lines of credit, increasing from 28% at the end of the third quarter to 32% at the end of the year. Compared to the end of the third quarter, C&I loans grew by $34 million, CRE loans grew by more than $39 million and SBA 504 loans grew by $17 million. The $163 million year-over-year increase in loans includes growth of CRE loans of $67 million, $49 million of growth in C&I loans, $25 million of growth in SBA 504 loans and $22 million of growth in construction loans. Loan originations were approximately 70% higher in 2025 than 2024, and the fourth quarter production was approximately 15% higher than the third quarter of 2025. Our loan pipelines remain strong going into 2026, although rate competition for the quality of loans we compete for continues to be intense. Loan originations in the fourth quarter had average yields of approximately 6.25%, which was consistent with the prior quarter. We experienced $325,000 of net recoveries during the fourth quarter compared to $333,000 of net recoveries for the third quarter of 2025. Net recoveries for the full year of 2025 were $539,000. Total nonperforming and delinquent loans decreased by $20 million to $8 million at December 31, 2025. A $20 million nonperforming loan was paid in full at the beginning of the fourth quarter. The sale of the building collateralizing this loan resulted in the bank receiving all principal and $3.2 million of interest income. Classified loans were $52.7 million at December 31, 2025, compared to $78.2 million at September 30, 2025, and $89.5 million at December 31, 2024. Classified loans as a percentage of total loans were 0.6% at December 31, 2025. Now on to deposits. Our average total deposits and customer repurchase agreements were $12.6 billion during the fourth quarter, which compares to $12.5 billion for the third quarter. Our noninterest-bearing deposits declined on average by $122 million compared to the third quarter of 2025, while interest-bearing nonmaturity deposits and customer repos grew by $234 million. On average, noninterest-bearing deposits were 58% of total deposits for the fourth quarter of 2025 compared to 59% for both the third quarter of 2025 and the fourth quarter of 2024. At December 31, 2025, our total deposits and customer repurchase agreements totaled $12.6 billion. Noninterest-bearing deposits declined from the end of the third quarter to the end of the year by approximately $440 million as we typically experience seasonal deposit declines at year-end. However, interest-bearing deposits and customer repurchase agreements increased by $430 million between the third and fourth quarter. Our cost of deposits and repos was 86 basis points for the fourth quarter compared to 90 basis points in the third quarter of 2025 and 97 basis points for the year ago quarter. I will now turn the call over to Allen to further discuss additional aspects of our balance sheet and our net interest income. Allen? E. Nicholson: Thanks, Dave. Net interest income was $122.7 million in the fourth quarter of 2025. This compares to $115.6 million in the third quarter of 2025 and $110.4 million in the fourth quarter of 2024. Interest income was $156 million in the fourth quarter of 2025 compared to $150.1 million in the third quarter and $147.6 million in the fourth quarter of last year. Average earning assets increased by $153 million in the fourth quarter when compared to the third quarter, and the earning asset yield increased by 11 basis points from 4.32% to 4.43%. The fourth quarter loan yield was 5.47% compared to 5.25% in the prior quarter. Excluding the $3.2 million of interest income on the nonperforming loan we previously discussed, the yield on loans would have increased quarter-over-quarter by 7 basis points. Interest expense was $33.3 million in the fourth quarter and $34.5 million in the third quarter of 2025. Our cost of funds decreased from 1.05% for the third quarter of 2025 to 1.01% in the fourth quarter of 2025. The average balances of interest-bearing deposits and repos increased by $232 million over the prior quarter. However, interest expense decreased as interest-bearing deposit costs declined by 17 basis points and the cost of customer repurchase agreements decreased by 24 basis points. Our allowance for credit loss was $77 million at December 31, 2025, or 0.89% of gross loans. In comparison, our allowance for credit losses as of September 30, 2025, was $79 million or 0.94% of gross loans. The decrease in the ACL resulted from a $2.5 million recapture of credit loss and net recoveries of $325,000. Our $77 million ACL is 133% of our combined nonperforming assets and classified loans. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast at December 31, 2025, was modestly different from our forecast at the end of the third quarter, with loss rate assumptions for C&I loans experiencing a negative impact from the economic forecast. Real GDP is forecasted to stay below 1.5% through 2027 and not reach 2% until 2029. The unemployment rate is forecasted to reach 5% by the beginning of 2026 and remain above 5% through 2028. Commercial real estate prices are forecasted to continue their decline through the third quarter of 2026 before experiencing growth through 2029. So now switching to our investment portfolio. Available for sale or AFS investment securities were $2.68 billion at December 31, 2025. During the fourth quarter, we sold $30 million of securities with an average book yield of 1.5%, realizing a $2.8 million loss and then purchased $239 million of new securities at an average book value yield of approximately 4.75%. The unrealized loss on AFS securities decreased by $26 million from $334 million at September 30, 2025, to $308 million on December 31, 2025. The net after-tax impact of changes in both the fair value of our AFS securities and our derivatives resulted in a $20 million increase in other comprehensive income for the fourth quarter. Our held-to-maturity investments totaled $2.27 billion at December 31, 2025, which is $109 million lower than the balance at December 31, 2024. Now turning to the capital position. At December 31, 2025, our shareholders' equity was $2.3 billion, a $109 million increase from the end of 2024, including the $84 million increase in other comprehensive income. There were 1.96 million shares of common stock repurchased during the fourth quarter of 2025 at an average purchase price of $18.80. For all of 2025, we repurchased 4.3 million shares at an average share price of $18.60. The company's tangible common equity ratio was 10.3% at December 31, 2025, while our common equity Tier 1 capital ratio was 15.9%, and our total risk-based capital ratio was 16.7%. I'll now turn the call back to Dave for further discussion of our expenses. David Brager: Thank you, Allen. Noninterest expense for the fourth quarter of 2025 was $62 million compared to $58.6 million in the third quarter of 2025 and $58.5 million in the fourth quarter of 2024. During the fourth quarter, we incurred $1.6 million of onetime merger-related expenses associated with the pending merger with Heritage Bank of Commerce. The fourth quarter of 2025 also included a $1 million provision for off-balance sheet reserves compared to a $500,000 provision in the third quarter. Excluding acquisition expense and the provision for off-balance sheet reserves, operating expenses grew by 2.3% or $1.4 million over the third quarter of 2025 and by 1.6% or $1 million over the fourth quarter of 2024. Excluding the impact of acquisition expense and the provision for off-balance sheet reserves, we achieved positive operating leverage from both the prior quarter and the year ago quarter of 2% and 6%, respectively. Noninterest expense, excluding acquisition expense, totaled 1.53% as a percentage of average assets in the fourth quarter of 2025 compared to 1.50% for the third quarter of 2025 and 1.49% for the fourth quarter of 2024. This concludes today's presentation. Now Allen and I will be happy to take any questions that you may have. Operator: [Operator Instructions] And our first question will come from the line of Matthew Clark with Piper Sandler. Matthew Clark: Good morning, Matthew. I just want to start on the interest-bearing deposits. You mentioned some seasonality. It looked also like some mix change towards savings money market. Can you just speak to what you saw there and maybe whether or not there was some behavioral change among customers seeking rate. David Brager: Yes. No, I don't think there was any behavioral change. It's pretty standard for us. People pay bonuses, accrue for taxes, do different things. So I don't really think there was any major change. There wasn't any movement of any large relationships or deposits from noninterest-bearing to interest bearing. I think for the most part, it just was normal seasonality. The part that was different was that we actually grew the noninterest-bearing deposits, and that is something that is a little different, but it wasn't necessarily coming from the noninterest-bearing and moving to the interest-bearing . E. Nicholson: I mean, Matthew, I would just consistently say look at quarterly averages. Our deposit customers move fairly large amounts of money at any point in time. So point in time balances don't necessarily reflect exactly what's going on. So average balances, I think, are just more important. Matthew Clark: Yes. Yes. Okay. And then just on the nondairy and livestock loan growth. If you exclude it, it's up over 4% annualized this quarter. I know some of it was higher line utilization. But maybe speak to the higher line utilization, whether or not you think that might be more sustainable? And your thoughts overall on kind of nondairy and livestock loan growth this year. David Brager: Yes. It's kind of interesting. I think we ended the year year-over-year up about 2% in total loans. And it's kind of in line with what I thought at the beginning of the year. It just took us a little while to get their point-to-point. But loan pipelines remain strong. I think the utilization is normalizing I think people are a little more positive, I mean, as evidenced by just some of the GDP growth that we're seeing. So I think that that's probably going to remain a little more stable than it has been over the last 1.5 years or so. And candidly, that's anecdotal, but everybody we talk to is basically saying that they're ready to go and they think things are going to be okay. So that's a good sign. That's also evidenced, obviously, by the classified loans and the nonperforming loans that we reported at the end of the quarter. So I think all in all, the pipelines are strong. at least for the foreseeable future. And I believe that we'll be able to do more with our existing customers, and we're still attracting some pretty good relationships going forward. So all in all, I'm cautiously optimistic, maybe even positive and optimistic about 2026 so far. Matthew Clark: Great. And then last one for me. Just on the Heritage deal. Any update on how it's progressing? David Brager: Yes. So everything is going well. We've toured their offices and their headquarters, almost all of their offices. We are in -- we're getting ready from an application perspective and the proxy perspective. But everything is going according to plan right now. We still anticipate second quarter close and a second quarter systems conversion. And I think that's where we are. Obviously, there's still game to be played there, but everything is looking good so far. Operator: One moment for our next question, and that will come from the line of David Feaster with Raymond James. David Feaster: I wanted to circle back to the core deposit side. Obviously, we talked about the seasonal dynamics within NIB. But Wanted to get your thoughts on the competitive landscape for deposits from your standpoint. Where are you winning deposit business? And your thoughts on the -- obviously, you saw good interest-bearing deposit growth. And then just your thoughts on the ability to push through the Fed cuts and expectations for betas near term. David Brager: SPYes. So I think just from your first part of your question, I think the type of clients that we go after generally is an operating company. And so the majority of the new deposit relationships that we're bringing to the bank are 75% plus noninterest bearing. If you look back over the last 10 years of the bank, we always seem to have this sort of dip. And as Allen said, on any one given day, that money can move out and move back and there's a number of things that happen. And that's why I think the average number is better as well. But we are winning relationships. As you know, we are not a bank that goes out and offers the highest rate on our deposit accounts. And we're not really trying to attract that type of customer. So I think for the most part, it's pretty standard on the type of relationship. As far as the Fed rates are concerned, we basically -- during the last cut, we basically lowered everything by 25% that was earning over 1%. And so we're trying to capture as much of that as possible. I think the combination of -- on the interest-bearing deposit side with be trying to offset to the extent we can on the asset side of those rate cuts. I mean I think it was a good sign for us that our asset -- our loan yield still went up despite a Fed rate cut. And we added a slide in our investor deck in the appendix that really gives a very good overview of sort of the repricing reset time frames both on the truly variable stuff as well as the fixed rate stuff that's maturing or resetting over the next -- I think it's we go all the way up to 10 years and over. It's a very small number in that category. But there's a lot more granularity there than we had in the previous deck as well. But on the deposit side, David, it's pretty much the same type of thing. And -- and I think from a competition standpoint, we are seeing more competition utilizing earnings credit and that ability to pay. I mean we just had a relationship that came to us and said, that there was a bank, and I won't mention the name, but there was a bank that was offering them a 3% guaranteed ETR rate for 5 years with paying their accounting system, which is $120,000 a year as part of that 5-year deal. I don't know the outcome of that 1 yet, but we -- that's not something we would do. So -- that's what I'm seeing out there. And I don't know if that's just for the other banks to drive their noninterest-bearing or just deposits in general. But there is loan growth. So there's going to be funding pressure. So I think that's something that we need to stay on top of. But for the most part, it's pretty much status quo and business as usual for us. David Feaster: Okay. That's helpful. And to that point on the growth side, I was hoping you could touch on the competitive landscape state there. It sounds like you're seeing primarily just on the pricing side. But wanted to see if you're getting any more aggressiveness from competitors on the underwriting side? And then just -- how do you think about payoffs and paydowns. Obviously, there's pretty significant back book repricing in your story. But I'm just curious, with competition and potential Fed cuts still on the horizon. How do you think about payoffs and paydowns next year? Is that something that you would expect could be headwind? David Brager: Yes. Well, it's always a little bit of a headwind. The payoff and prepayment penalty activity in the fourth quarter was lower than the third quarter. But it's always something we have to deal with, and we anticipate that happening when we model and forecast internally, we look at those numbers and just sort of from a historical perspective. The one thing to your comment about the back book repricing -- the one thing that is becoming or not in a major way, but is an issue is that when there is a reset, we still have prepayment penalties in our loan. But when there is a reset there are people that are getting quotes theoretically from competitors that are lower than ours. I don't always see the actual quotes. So I always question whether that's true or not. But they're theoretically getting quotes from competitors out there saying they'll do the loan that lower rate than what our repricing rate would be or reset rate would be. And so we have a little protection with the prepayment penalty. But on the maturing book, we don't have any protection there. So we have to be a little more aggressive I was candidly very happy that our fourth quarter average yield was 6.25% because I would say some of the stuff we're doing now is closer to the 6% range just to be competitive on that. And look, treasuries are going up, at least in the last week or so, they're going up pretty good. So hopefully, people will remain disciplined. But it's really more pricing than credit. We're not we're not going to do something that we wouldn't do from a credit underwriting perspective, but we especially to protect relationships, we'll be a little more aggressive on the pricing aspect of it. David Feaster: Are you seeing more... E. Nicholson: We're seeing more short-term loans as well. So people are doing 5, 3-year instead of going out 7 or 10 years. So I think that's also part of the yield we're seeing. David Feaster: Okay. Have you started to see... David Brager: I'm sorry, David, I was just going to add one thing, and that's a very good point that Allen brought up. I don't know that, that's a good bet. Like trying to keep things 2 or 3 years. We'll see -- but if you just look at forward rates are especially on the longer end, could be higher just based on a lot of different factors. David Feaster: Yes. And so it doesn't sound like other than the duration that you've really seen much pressure on the underwriting structures or standards. . David Brager: No, not really. I mean, we wouldn't really consider it anyway. So it might not come all the way up to me... Operator: And that will come from the line of Andrew Terrell with Stephens. Andrew Terrell: If I could just start maybe asking on expenses, I think, post the adjustments you guys call out, it's around $59 million or so. But compensation up this quarter. Was any of that incentive accrual adjustments kind of at year-end? And then maybe just looking for a little bit of help around thoughts on organic expense growth into 2026 or kind of run rate expectations you guys have? E. Nicholson: Yes, Andrew, you're correct. There were some adjustments to our private bonus share accruals that elevated the expense quarter-over-quarter. We also -- every fourth quarter with the holiday season, there is extra benefit expense. So Q4 to Q4 might be a better indication of where dense growth is, and I think that was less than 2%. I think once again, particularly if you look at the full year numbers, the only expense line that's really growing more than very low single digits is the technology side, the software expense. And we'll continue to invest in that. And the percentages may not be quite as high as 24% to 25%, but an area we'll continue to invest in. Andrew Terrell: Yes. Okay. And then just on the margin overall, I appreciate the slide you guys gave on the loan repricing in the presentation. But if we look at margins for the industry right now, a lot of the banks out there approaching kind of that peak level or fairly close from back in 2019, you guys are still 50 or 75 basis points light versus the 4.25 level from 2019. So I guess the kind of question is, has anything structurally changed preventing you from getting back there? And then just keeping that loan repricing in mind, I know some of it looks decently far out there up to 10 years. How long does it take you guys to get margin back to what you would view as a normalized level? E. Nicholson: Well, of course, the yield environment plays a lot into that, Andrew. But yes, I mean, obviously, if you go back pre-pandemic, our securities book still has a much lower yield than it would have had back then. And so that's obviously going to play into it. And the loan book still as well. So it will take a little time for both cash flows and the security book to reprice as well as the loan book reprice. And that's why we added that slide. So I mean it's hard to tell. I don't know if I would comment on it knowing that there's so many variables, but I wouldn't be surprised if we get there over the next couple of years, but there's a lot of things that could change that. David Brager: Yes. And the only thing I would add to that, Andrew, is to the point that we have not done any large restructuring loss trade type transactions. And so in the fourth quarter, with the gain that we had or with the recapture of the interest income that we had, use that to take advantage of. So sort of all these onetime things that happen, we will still look at that and make determinations. And that's really part of the reason that we looked at the loss trade to utilize that $3.2 million where we recaptured an interest. So we'll just continue to do that. It's more singles. We're not planning on doing anything like we've said all along, anything larger than that. Matthew Clark: Yes. Okay. Yes, my follow-up to that was going to be on the securities, so I appreciate it. Operator: And that will come from the line of Gary Tenner with D.A. Davidson. Gary Tenner: I had just a follow-up on the loan yields in the quarter. Even excluding the interest recovery, as you pointed out, Allen, the loan yield was up 7 basis points. Was that pretty exclusively driven by the increased C&I outstandings between general C&I and the ag portfolio? I just wanted to make sure there weren't any other dynamics during the quarter that impacted. E. Nicholson: I mean I wouldn't point to anything -- one thing. I mean, dairy goes up, but really, I think the dairy borrowing to a higher percentage of our overall loans probably drove about a basis point improvement in loan yields. So a little bit on the mix. But once again, I think the bulk of our loans are commercial real estate, and it really goes back to the back book conversation. They're slowly repricing -- and as we have the payoffs, we're replacing them with higher yields. So that concept is probably still the biggest driver... David Brager: And new production. E. Nicholson: New production versus what's rolling off out there. Gary Tenner: Okay. Great. And then just looking forward to the HCP transaction, any expectations at this point of kind of any day 1 restructuring of their balance sheet or otherwise? E. Nicholson: The only thing we've announced, Gary, is that we do plan on selling approximately $400 million of single-family loans that Heritage has -- these are not really customers they were purchased. And the duration is very long on them. So even though we'll get to mark them to market, and there's a lot of accretion there that if we kept them at significant accretion, but still they're very low coupon, 30-year mortgages. We don't really care for the duration, and they're not associated with customers. So we'll sell those and reinvest into investments with shorter durations. Gary Tenner: Okay. And I was in the merger announcement, but beyond that, no other -- nothing at this point. Operator: And that will come from the line of Kelly Motta with KBW. Kelly Motta: Good morning. Thanks for the question. apologize. I joined a little bit late. I may have missed this. But just circling back to the noninterest-bearing flows. With those balances down a bit, can you just elaborate? I know you guys sold an NPL if there was any attrition of customers related to exits or anything that? Or if it was just normal seasonal movements post COVID getting back to more normal trends. David Brager: Yes. I think maybe you're just back checking me, Kelly, but no, there was no loss of relationships that, that represented and the comment that we made was really just around the point in time on December 31. There's a lot of movement around the deposits going back and forth or going out and this is actually pretty standard. The part that was a little surprising. I mean, I watch it every day, but not surprising, but a part that was different is we did grow noninterest-bearing deposits. The new relationships that we're attracting to the bank are probably in the 75% noninterest-bearing range. interest-bearing. So this is really just kind of normal stuff. If you go back 10 years, we always have this seasonality in the fourth and first quarter. I think, Allen, a while back, we had done an analysis of that. I think in the fourth quarter, we normally lose about 4% of our deposits going back like 10 years. This, on averages, that didn't occur this year. We sort of had the normal noninterest-bearing stuff that went out for taxes or bonuses or whatever the case may be. But no, there was nothing abnormal about it and no loss of relationship that -- and I'd say no loss, any material or significant relationship, nothing changed. E. Nicholson: And Kelly, I just mentioned that I think it's better to look at average balances. They are more indicative. Our customers move a lot of money. There's patterns day of the week and things like that, that depending on how a quarter end happens to land you're not really getting the -- probably the 2 picture. Kelly Motta: Got it. That's helpful. Maybe switching to the buyback. You were really this quarter. And then obviously, you had announced Heritage Commerce site in the quarter. Wondering, is it fair to say that you're out of the market at least until the deal closes, just wondering... E. Nicholson: Yes. I mean, obviously we're -- we'll be issuing an S-4 prospectus. So we've been out of the market since the beginning of December. And the Board reevaluate that once we close the merger. Operator: And our next question will come from the line of Tim Coffey with Janney Montgomery Scott. Timothy Coffey: Question on the loan modifications. Is there anything special causing the balances in that bucket to [indiscernible]. David Brager: Go ahead, Allen. I would have small on to say [indiscernible]. E. Nicholson: I wouldn't say there's anything abnormal about it. Timothy Coffey: Okay. What causes somebody to fall into that bucket? E. Nicholson: I'm sorry... David Brager: You're talking about the loan modifications. Timothy Coffey: Yes. David Brager: Yes. Well, it depends. I mean when we -- there's a lot of different reasons they can fall into that if they come to us and ask for help and they need to do something to make the payment. That's one way that they would get in there. Another way would be just through our normal evaluation when we're doing our annual term loan reviews, if we see something that's not accurate or not -- that isn't meeting our minimum debt service coverage or some other covenant that could cause us to go in there. That number in and of itself is still a material number relative to the total loan portfolio. But there's a lot -- there's a few different reasons that it could fall into that category. Timothy Coffey: Okay. And then post the closed deal with Heritage Commerce Bank, we look out back half of this year and the next year. Dave, do you anticipate the addition of Heritage Commerce to materially change your outlook for loan growth? David Brager: Yes. Well, look, I think it just depends on a couple of different factors. We are, as you know, sort of slow and steady wins the race. Heritage has been growing a little faster than we have. I'm sure there'll be some combination of that. We're going into new markets. We're going to be able to help their clients grow even -- they'll be able to do more for their clients than they can do for them today. So I think there's some definite tailwinds with respect to that. But we got to make sure we get to close, we get it integrated. We we go through the culture things to make sure they understand how we do things. So I think for the most part, there could be some benefit to that for our overall loan growth, but we're going to maintain the same credit quality that we've maintained and the same credit quality that they've maintained. So we'll have to evaluate that as we combine everything and see where we are. But I do think there's a lot of opportunity in those markets for what we have to offer, not just from the loan perspective, but also from just the overall product array that we have relative to the product array they have. Timothy Coffey: Sure. Yes. And a bigger balance sheet will help them a lot. David Brager: Exactly. Timothy Coffey: And then [Audio Gap] No check -- final no check for me, Allen. What was the core loan yield in the quarter? E. Nicholson: I would point you to the slide we added on Page 43. And that is what I would call a basic coupon, no loan fees, nothing else. And you can see where it ended the year. And then you can obviously see the relative repricing for the different buckets. David Brager: And Tim, that number was 5.12%. Operator: Thank you. I'm showing no further questions in the queue this time. I owuld now like to turn the call back over to Mr. Brager for any closing remarks. David Brager: Great. Thank you. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 195 consecutive quarters or more than 48 years of profitability and 145 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small- to medium-sized businesses and their owners through all economic cycles. I'd like to thank our customers and associates for their commitment and loyalty, and we look forward to a successful 2026 and the pending merger with Heritage Bank Commerce. Thank you for joining us this quarter. We appreciate your interest and look forward to speaking to you in April for our first quarter 2026 earnings call. You can always let Allen and I know if you have any questions. Have a great day. Thank you. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Fourth Quarter and Full Year 2025 Earnings Conference Call. My name is Ashia, and I'll be your coordinator for today. [Operator Instructions] Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com. Now I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Georgia Lo: Thank you, Ashia, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer; and Mr. Heng Chen, our Executive Vice President and Chief Financial Officer. Before we begin, we wish to remind you that the speakers on this call may make forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 concerning future results and events, and that these statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are further described in the company's annual report on Form 10-K for the year ended December 31, 2024, at Item 1A in particular, and in other reports and filings with the Securities and Exchange Commission from time to time. As such, we caution you not to place undue reliance on such forward-looking statements. Any forward-looking statements speak only as of the date on which it is made, and except as required by law, we undertake no obligation to update or review any forward-looking statements to reflect future circumstances, developments or events or the occurrence of unanticipated events. This afternoon, Cathay General Bancorp issued an earnings release outlining its fourth quarter and full year 2025 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at cathaygeneralbancorp.com. After comments by management today, we will open up this call for questions. I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu. Chang Liu: Thank you, Georgia, and good afternoon. This afternoon, we reported a net income of $90.5 million for the fourth quarter of 2025, a 16.5% increase from $77.7 million in Q3. Diluted earnings per share increased by 18.3% to $1.33 in Q4, up from $1.13 in Q3. For the full year 2025, our net income was $315.1 million, a 10.1% increase from net income of $286 million in 2024. In Q4, we repurchased 1.1 million shares of common stock for $51.9 million at an average cost of $47.15 per share under our June 2025, $150 million stock buyback program. There is $12 million remaining under our June 2025, $150 million buyback program, which we expect to complete in early February. We plan to announce a new buyback program after approvals are received. Total gross loans grew by $42 million, driven primarily by increases of $18 million in CRE loans and $17 million in residential loans. We expect loan growth in 2026 to be between 3.5% and 4.5%. Slide 7 of our earnings presentation shows the percentage of loans in each major loan portfolio are either at a fixed rate or hybrid rate. Aggregate fixed rate and hybrid loans account for 60% of the portfolio, excluding fixed to float interest rate swaps, which represent 3.1% of total loans. Fixed rate loans make up 30% of total loans and hybrid in fixed rate period account for 30% of total loans. We expect these fixed rate loans to support our loan yields as market rates are expected to decline. We continue to monitor our CRE portfolio. Turning to Slide 9. The average loan-to-value of our CRE loans remained steady at 49%. Our retail property loan portfolio represents 24% of our total CRE loan portfolio or 12% of total loans. As shown on Slide 10 of the $2.5 billion in retail property loans, 90% are secured by retail store, neighborhood, mixed use or strip centers, only 9% are secured by shopping centers. Turning to Slide 11. Office private loans represent 13% of our total CRE loan portfolio or 7% of our total loans. Of the $1.4 billion in office loans, 30% secured by a pure office, only 3% are in central business districts. Another 42% are collateralized by office retail stores, office mixed use and medical office properties, with the remainder 28% secured by office condos. For Q4, we reported net charge-offs of $5.4 million as compared to $15.6 million in the prior quarter. Nonaccrual loans were 0.6% of total loans as of December 31, 2025, down $53.3 million to $112.4 million compared to the prior quarter. The decrease in nonaccrual loans during the fourth quarter of 2025 included the sale of a $15.8 million CRE loan at par and a $10.8 million CRE loan brought current and restored to accrual status. Turning to Slide 13. Classified loans decreased from $420 million to $391 million for Q4. Special mention loans increased from $455 million to $535 million in Q4. The bank downgraded 5 loan relationships totaling $92 million to a special mention that have not met certain debt covenants and have exhibited short-term financial issues for closer tracking. The bank believes that these credits will resolve within the next 12 months by either credit upgrades or partial or full payoff. We recorded $17.2 million in provisions for credit losses in Q4 compared to $28.7 million in Q3. The ALLL to gross loan ratio increased to 0.97% from 0.93%. And excluding our residential loan portfolio, the total reserve to loan ratio would be 1.22%. Total deposits increased by $373 million or 7.6% on a annualized basis during Q4, driven primarily by $366 million increases in core deposits and $7 million in time deposits. The growth in core deposits reflected seasonal factors in targeted marketing activities. For 2026, we expect deposit growth to range between 4% and 5%. As of December 31, 2025, total uninsured deposits were $9.3 billion, net of $0.9 billion in collateralized deposits, representing 44.6% of total deposits. The bank has $7.5 billion of unused borrowing capacity from Federal Home Loan Bank, $1.3 billion from Federal Reserve Bank and $1.6 billion in unpledged securities. Altogether, these available liquidity sources provide more than 100% of the uninsured and uncollateralized deposits as of December 31, 2025. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss the quarterly financial results in more detail. Heng Chen: Thank you, Chang, and good afternoon, everyone. For Q4 2025, net income increased $12.8 million or 16.5% to $90.5 million from $77.7 million for Q3, primarily due to $11.5 million lower in provision for credit losses, $5.4 million higher in net interest income and $6.8 million higher in noninterest income, partially offset by a $4 million increase in noninterest expenses and $6.8 million higher in provision for income taxes. The net interest margin increased to 3.36% in Q4 from 3.31% in the prior quarter. The increase in net interest income was driven by a lower cost of funds. We anticipate further benefits to the NIM from declining deposit costs supported by the fixed rate proportion of our loan portfolio. Based on the Fed fund futures, we project 2 rate cuts in 2026, one in June and a second cut in September and anticipate that the net interest margin for 2026 to range between 3.4% and 3.5%. In Q4, interest recoveries and prepayment penalties added 5 basis points to the net interest margin compared to adding 4 basis points to the net interest margin in Q3. Q4 noninterest income increased $6.8 million to $27.8 million compared to $21 million in Q3, mainly reflecting a $6.4 million change in mark-to-market unrealized gain on equity securities in Q4. Noninterest expense increased by $4.1 million from $88.1 million in Q3 to $92.2 million in Q4, primarily due to a $4.3 million higher bonus accrual in Q4 as a result of the above budget financial performance for 2025. We expect core noninterest expense, excluding tax credit and a core deposit intangible amortization to increase between 3.5% and 4.5% in 2026. The effective tax rate for Q4 2025 was 20.33% as compared to 17.18% for Q3. We expect effective tax rate between 20.5% and 21.5% for 2026. As of December 31, 2025, our Tier 1 leverage capital ratio increased slightly to 10.91% as compared to 10.88% in Q3. Our Tier 1 risk-based capital ratios increased to 13.27% from 13.15% in Q3 and our total risk-based capital ratio increased to 14.93% from 14.76% in Q3. Chang Liu: Thank you, Heng. We will now proceed to the question-and-answer portion of the call. Operator: [Operator Instructions] The first question comes from Kelly Motta with KBW. Kelly Motta: Maybe kicking it off on deposits. I appreciate the updated margin guidance -- or the new margin guidance for 2026. It looks like you did a pretty nice job lowering interest-bearing deposit costs here. Can you speak more in terms of what you're assuming for deposit betas embedded in that NIM outlook here? And just any market commentary as to the level of competitiveness now at this stage. Heng Chen: Yes. I think we're assuming deposit betas in the 60% range or so. And in terms of market competition, I think it's about the same. Yes, we haven't -- it's pretty rational in Q4. Chang Liu: So Kelly, kind of for me looking forward for 2026, I think the local L.A. and New York landscape is still pretty competitive. I mean we have about nearly $4 billion of maturing CDs in the first quarter with an average yield of about 3.8%. We'll run our -- the Lunar New Year campaign and likely if we can price somewhat below that, that's kind of the goal, but we're going to be sensitive about defending that base that we have, while we try to transition some of that into noninterest-bearing. Kelly Motta: Got it. That's helpful. And just a point of clarification on that beta hang that 60%, is that for interest-bearing or total deposits? Heng Chen: Interest bearing. Kelly Motta: Got it. And then maybe on -- it was nice to see the NPA improvement, and it seems like you had both a payoff and a resolution there. As we kind of look ahead, what are you seeing in terms of credit and any migration into criticized and overall trends? Chang Liu: So maybe some of that I can help with this is some of the migrations into special mention, we don't see any particular trends in particular, 3 of the 5 that we were talking about the top 3, they're different in their own nature. One, for example, is a project in New York. It's a mixed-use project. It's completed. It's fully occupied. The ownership is just waiting for a lower property tax status approval to get through. And once that status approval gets through, then they'll be back up to compliance with sort of the debt coverage with that one. Another one is a multifamily mixed use, primarily in the Pacific Northwest. They have a new commercial tenant coming in, not quite there yet. And so that's contributing to the -- not being able to meet the covenant requirement and as well as some of the more competition in the area. So it's -- they're finding some more challenges, but they're going to return that back to stabilization and it's got a great guarantor support and they're paying us as agreed. And then lastly, it's a bit of a C&I story, and it's a distributor of exercise equipment and their own warehouse and they got some quarterly -- not being able to meet the quarterly financial requirements. But overall, for the year, they're expecting a full year on a positive note. So once we get the CPA financials, we hope to be able to upgrade that if they can show a full year profit. Operator: [Operator Instructions] The next question comes from Andrew Terrell with Stephens. Andrew Terrell: Maybe just on the margin quickly. The loan yield performance this quarter was also a decent amount better than I kind of was expecting. Was there any level of interest recovery in the loan yields this quarter, just looking at some of the NPL reduction? Heng Chen: Yes. It was 5 basis points to the NIM versus 4 basis points in Q3. Andrew Terrell: Got it. Okay. So relatively close to the baseline amount? Heng Chen: Right, yes. Andrew Terrell: Okay. And I appreciate all the color on the deposit and kind of cost dynamics in the market right now. What about on the lending side? Have you seen an elevated level of competition for incremental loan growth? And just what's the kind of status of the market on the lending side? Chang Liu: Yes. So surprisingly, I looked at those numbers for 3 segments. On the residential mortgage, believe it or not, we had a pretty strong growth last year in '25 and the rates of the entire portfolio actually held up pretty nicely. As a matter of fact, I think improved by a couple of bps there. On the CRE side, I think there's still pretty strong competition for the right type of assets and loans. So that declined by, don't quote me on this, about 15, 20 bps on the entire portfolio there. I think the most amount of competition we saw probably was on the C&I side. I think the C&I side, we're still trying to push for growth and find some new lenders, new relationship kind of teams and those kind of things. But our existing portfolio on the C&I side, that we saw probably the most amount of competition there, and that rate declined steeper than the other 2 segments. Andrew Terrell: Got it. Okay. If I could just sneak one more in. Do you have the amount of the expected amortization in 2026? Heng Chen: For low income housing, it's probably $11 million a quarter, Andrew. Operator: Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks. Please go ahead. Chang Liu: I want to thank everyone for joining us on our call, and we look forward to speaking with you at our next quarterly earnings release call. Operator: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
Operator: Morning, and welcome to The Procter & Gamble Company's Quarter End Conference Call. Today's event is being recorded for replay. This discussion will include a number of forward-looking statements. If you will refer to The Procter & Gamble Company's most recent 10-K, 10-Q, and 8-K reports, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections. As required by Regulation G, The Procter & Gamble Company needs to make you aware that during the discussion, the company will make a number of references to non-GAAP and other financial measures. The Procter & Gamble Company believes these measures provide investors with useful perspective on underlying business trends and has posted on its investor relations website www.pginvestor.com a full reconciliation of non-GAAP financial measures. Now I will turn the call over to The Procter & Gamble Company's Chief Financial Officer, Andre Schulten. Andre Schulten: Good morning, everyone. Joining me on the call today is Shailesh Jejurikar, Chief Executive Officer, and John Chevalier, Senior Vice President, Investor Relations. I will start with an overview of results for 2026, and Shailesh will discuss strategy, innovation, and focus areas as we start calendar year 2026. I'll close with guidance for fiscal '26, and then we'll take your questions. As we expected, second-quarter top-line results heavily reflect underlying market trends and impacts from base period dynamics. As a reminder, the base period included trade and consumer pantry loading, driven by port strikes and hurricanes in early October, and the fear of additional port strikes in late December. The biggest impacts were on the baby, feminine and family care sector, the fabric and home care sector. These base period impacts were concentrated in the US market. The balance of the company grew organic sales nearly 3% with almost all regions outside the US growing or accelerating in the quarter. Bottom-line results followed the top line. We continue to prioritize full investment in the business. We anticipated this would be the softest quarter of the fiscal year and we remain confident in stronger growth in the back half. So moving to the details. Organic sales were in line with the prior year. Volume was down one point, pricing up a point, and mix was flat for the quarter. Seven of 10 product categories held or grew organic sales. Hair Care grew mid-single digits, Skin and personal care, personal health care, home care, and oral care, were each up low single digits. Grooming and Fabric Care were each in line with a year ago, Baby care and feminine care were each down low singles, and family care was down approximately 10%, primarily due to the base period dynamics we described. As a side note, organic sales excluding Family Care were up 1% for the quarter. Seven of 10 regions grew organic sales, Focus markets were down 1%. Organic sales in North America were down 2%. Volume was down three points, including a roughly two-point headwind. From the base period trade inventory impacts I mentioned. Pricemix added a point of growth. European focused market organic sales were up 1%, Strong growth in France, Spain, and Italy largely offset by a softer period in Germany. Greater China organic sales grew 3% another quarter of growth in what remains a challenging consumer environment, Pampers and SK-II led the growth, each up mid-teens or more. Enterprise markets grew mid-single digits for the quarter, Latin America organic sales were up 8%, with solid growth across Mexico, Brazil, and the balance of smaller markets. In the region. Organic sales in the Europe enterprise market region were up 6% versus prior year, and the Asia Pacific, Middle East, Africa enterprise region grew 2%. Global Exhibit market share was down 20 basis points. 25 of our top 50 category country combinations held or grew share for the quarter. On the bottom line, core earnings per share were $1.88 in line with the prior year. On a currency-neutral basis, core EPS was 1.85 Core gross margin was down 50 basis points and operating margin was down 70 basis points versus prior year, Strong productivity improvement of 270 basis points with healthy reinvestment in innovation, and demand creation. Currency-neutral core operating margin was down 80 basis points. Adjusted free cash flow productivity was 88%, and we returned $4.8 billion of cash to shareholders this quarter, $2.5 billion in dividends and $2.3 billion in share repurchases. In summary, we've now completed what we fully expected will be the softest quarter of the fiscal year, We have strong innovation and productivity plans for the back half of the year, We continue to invest in creating superior propositions for our consumers and retail partners. With relevant innovation, powerful brand campaigns, across every touchpoint and continuously improving in-market execution across all channels and platforms. We are fully activated, It's working. So we move with confidence into half two of the fiscal year And with that, I'll turn it over to Shailesh. Shailesh Jejurikar: Thanks, Andre. Good morning, everyone. I want to start by underscoring the point Andre just made. We are confident the interventions and investments we are making now will improve our near-term performance. Strong innovation supported by sharper, consumer communication and retail execution. We are already seeing strong results in parts of the business that have made these near-term interventions. Greater China Baby Care was one of the first categories to make step change and continues to lead growth of the premium and super-premium segments of the market behind consumer insight-driven innovation, and brand communication. Chinese parents want only the best for their baby. Softness and comfort in addition to dryness. The China team created a product that delivers on this insight from first seeing and touching the packaging to feeling the diaper on their baby. They leveraged the Chinese history with silk, The shiny, soft yet strong, luxurious material has been a status symbol for more than two thousand years. Pampers Prestige is the only leading diaper brand that has real silky ingredients in the product. Delivering the ultimate experience of skin comfort and protection. The shiny soft feel package conveys superiority at first touch. Reframing our superior premium line has driven Greater China Baby Care double-digit organic sales growth over the past eighteen months, and increased share nearly three points. More recently, our fabric enhancers team has disrupted a sleepy category through deep consumer understanding. Mexican consumers describe the gold standard smell of clean as rich, tasty, fruity, and floral. Like the scents from shampoos. Downy Intense leverages our internal perfume innovation expertise to create the new high-intensity perfume. The packaging highlights the intensity of fragrance blooming on the bottle like a flower, Brand communication drives awareness of an experience of twenty-four seven smelling, like freshly washed hair. In-store execution of impactful displays with stopping power is increasing trial. These deep consumer insights driving innovation and executed with shopper brand communication and retail execution as spurred Mexico fabric enhancer category growth, and led Downey to double-digit organic sales growth and over two points for value share growth. Other examples where we've accelerated results include the Brazil hair care business, U. S. Old Spice and US liquid laundry detergents businesses. Most of these interventions are starting now in The US The biggest most impactful part of the business. We'll go deeper on these at the CAGNY conference next month. While we work to improve our near-term results, we've also begun a longer-term reinvention of The Procter & Gamble Company. Think of this as the next important phase of constructive disruption that will create and extend our competitive advantages in each element of our strategy. We remain fully committed to the integrated growth strategy that has enabled us to deliver significant growth and value creation over the better part of the past decade and it will in the future. A portfolio of daily use products in categories where performance drives brand choice. In these categories, The Procter & Gamble Company is uniquely positioned to deliver irresistible superiority across product, package, communication, retail execution, and value. We will do this to drive market growth and create value for The Procter & Gamble Company and our retail partners. We will double down on productivity with multiyear visibility to fund capabilities, innovation, and demand creation and to mitigate cost headwinds while delivering financial results at the levels you and we expect. Constructive disruption to stay ahead of and to create emerging trends and opportunities in our fast-changing industry, We will disrupt ourselves. At the core of it all is our organization. Fully engaged, enabled, and excited to serve consumers and win in the marketplace. These strategies, taken alone, are just words that any company could say. The words alone have become a point of parity. The Procter & Gamble Company's point of difference, our competitive advantage, comes from outstanding integrated execution of these strategies across all activity systems in the company and from anticipating what is needed next. We've executed the strategy well for many years. Now we see the landscape around us changing faster than it's ever been in recent memory. Neither we nor our industry in aggregate have adapted as fast as needed. This shows in the growth trends of our categories. Consumer media preferences and information collection are increasingly fragmented with new media platforms, including social media and retail media. Inflation across food, energy, health care, and many other areas of spending has taken a toll on consumers, and how they assess value. This will continue to evolve. The retail landscape is changing. More concentration, but also brand proliferation. Retailers are becoming media platforms. And media platforms are becoming retailers. In summary, the consumer path to purchase is changing every day, is nonlinear, and littered with millions of possible distractions. We expect an even more intense pace of change in the next three to five years. We will adjust to and leap ahead of these disruptions to invent CPG company of the future. The way to break through consistently is to build the strongest brands in the industry. The Procter & Gamble Company has the capabilities and unique opportunity to redefine the brand-building framework to deliver consumer-relevant superiority every day every week, every month, putting the consumer at the center of everything we do. Leading the consumer-relevant brand building and superiority at this space can and will only be delivered by leveraging superior data, superior technology, and superior capabilities to create and extend competitive advantage with consumers, and with retail partners. We define our strengths and opportunity here across three areas. First, we know how to build brands rooted in deep connections with consumers and our industry-leading innovation capability. We have an enormous wealth of consumer data and understanding and we receive a continuous flow of new data every day. Our teams connect with consumers across more touchpoints than anyone in our industry. Product research, shopper research, connected homes, ratings and reviews, social media posts, brand fan websites, and many more. We mine for insights that lead to new product innovation, brand ideas, performance claims, marketing campaigns. Now we are building the consumer connectivity the integrated data platforms, and the technologies that will enhance our team's ability to do this work better faster, and even more consumer-centric than ever before. We have a unique set of innovation capabilities in our industry. Substrate technologies, formulaic chemistry, devices, and now biology. We have years of experience integrating these capabilities to launch new platform technologies and innovations and we see many more ways to bring combinations of these technologies to life in new consumer products. Tide e Tide Evo is just one current example. Technologies, like AI-enabled molecular discovery will enable faster, and more powerful integration of innovation capabilities for faster growth. The second and related opportunity is to create a deeper, holistic connection with consumers to build brand relationships with them in the new media reality. Media fragmentation and emergence of new platforms creates an opportunity for brand builders who can best integrate across touchpoints. AI and Gen AI capability help our teams discover consumer-relevant insights at every step of the consumer path to purchase, grounded in a unifying brand idea. We are creating the individual touchpoint experiences for each consumer at a time. These ideas are activated in claims, demonstrations, visuals that communicate the performance and value of the brand across connected and broadcast TV, online video, social media, e-commerce sites, and in stores. Deep insights translated into a compelling brand idea repeated wherever consumers engage, making the brand easy to remember, reinforcing superior performance, that is worth it for the price paid. The third opportunity is integration with retail partners across the full supply chain and merchandising activity system. Again, the consumer understanding and brand-building capabilities we have from initial brand impulse to purchase transaction to in-home consumption are valuable assets. Integrating these with each retailer's category strategy and business model will enable our brands to create value across all retail formats. This includes activation of our brands in retail media, to convey our superiority and value messages close to the point of consumer purchase decision. Our supply chain capability is already a leader in the industry. Supply Chain 3.0 has driven a more complete system connection from purchase signal back through inventory systems to our production planning and material ordering to ensure consumers find the product they want each time they shop. We are well on our way in this journey across capabilities, data, and technology. We are freeing up capacity and capabilities with the organization redesign we announced, as part of the restructuring in June. We have built a structured data lake stock with petabytes of relevant data. We have built data platforms, AI capabilities, programmatic shelf tools, and media creation and evaluation systems. We have supply chain platforms that can run autonomously reacting to retail demand signals, consumer innovation needs, or productivity opportunities faster than ever before. The next step is to connect the dots. To integrate the pieces from identifying consumer friction point to product idea, to product design, to supply, the creative concept, to purchase transaction, to usage in-home, to post-use evaluation. We will close the loop, and we believe this will create a different s curve for our future growth and value creation centered around our consumer. We are doing many things right in how we are innovating, operating, and building brands today. And I'm confident in the near-term progress we are seeing. We know the opportunities ahead of us are even bigger and we will capture them with conviction and discipline. It took years to build the underlying platforms and capabilities and it will take some time to fully integrate and activate these assets across the company. We know what we need to do and we are excited by the opportunities ahead. In summary, we are confident in the short-term delivery and excited about the mid to long term as we leverage our strengths and unique capabilities to set us apart from the industry. We are inventing the CPG company of the future. We'll expand on these thoughts with some examples at CAGNY, and even more as we get to Investor Day later this year. With that, I'll hand it over to Andre to cover the guidance update. Andre Schulten: Thank you, Shailesh. It's been a challenging start to the fiscal year. With softer consumer markets, aggressive competition a dynamic geopolitical landscape. We expect stronger results in the second half which enables us to maintain fiscal year 2026 guidance ranges across organic sales core EPS and adjusted free cash flow productivity. The growth rates embedded in our near-term guidance should return us to the lower half of our long-term growth algorithm as we exit fiscal twenty-six. And head into fiscal 'twenty-seven. For fiscal 'twenty-six, we continue to expect organic sales growth of in line to plus 4%. Global market growth for our portfolio footprint is around 2%, on a value basis, at the center of our guidance range. We're seeing progress in most regions, and we expect stronger growth in The U. S. As interventions take hold. As a reminder, this guidance includes 30 to 50 basis points of headwind from product and market exits, that are part of our restructuring work. Our bottom line outlook is for core EPS growth of in line to plus 4% versus prior year. This equates to a range of €6.83 to $7.09 per share. This guidance includes commodity costs roughly in line with the prior year. And a foreign exchange tailwind of approximately $200 million after tax, Taken together, no change versus prior guidance. Our fiscal 'twenty-six outlook continues to expect approximately $500 million before tax and higher costs from tariffs. Below the operating line, we continue to expect modestly higher interest expense versus last fiscal year. And a core effective tax rate in the range of 20% to 21%, for fiscal 'twenty-six, combined a $250 million after-tax headwind to earnings growth. We continue to forecast adjusted free cash flow productivity in the range of 85% to 90% for the year, and this includes an increase in capital spending as we add capacity in several categories that we incur the cash costs from the restructuring work. Expect to pay around $10 billion in dividends and to repurchase approximately $5 billion in common stock. Combined a plan to return roughly $15 billion of cash to shareholders in fiscal 'twenty-six, This outlook is based on current market growth rate estimates, commodity prices and foreign exchange rates, significant additional currency weakness, commodity or other cost increases, geopolitical disruption, major supply chain disruptions or store closures are not anticipated within the guidance ranges. With that, I'll hand it back to Shailesh for a few closing thoughts. Shailesh Jejurikar: We continue to believe the best path to sustainable, balanced growth is to double down on the strategy. Stronger integrated execution, to delight consumers with superior products at a superior value. Challenging markets like the ones we compete in today are an opportunity for The Procter & Gamble Company to step out from the back and lead. We're focused on leveraging the industry's best insights assets, capabilities, and people and you expect. to return to the levels of growth and market leadership that we, With that, we'll be happy to take your questions. Operator: If your question has been answered or you would like to withdraw your question, press star followed by 2. Your first question comes from the line of Lauren Lieberman of Barclays. Please go ahead. Lauren Lieberman: Great. Thanks so much. Good morning. So two kind of clear themes in the remarks that I wanted to ask about. So Andre, first, kind of what gives you confidence in the near-term acceleration that you mentioned a couple of times? And to what degree is that about kind of comparisons and base period dynamic versus, like, you know, real fundamental improvement and acceleration. And then, Shailesh, I know we'll get a lot more from you. At CAGNY. But what gets you excited about this longer-term, quote, reinvention of The Procter & Gamble Company? It was a notable choice of words. In the press release and then also in the prepared remarks. Thanks. Andre Schulten: Good morning, Lauren. Thanks for the questions. So let me start with half two acceleration. I think the first positive element of quarter two results is the strength of the business outside of The U. S. If you look at Latin America, 8% growth Europe in aggregate growing 3%. China growing 3% on top of 5% growth last quarter Asia, Middle East, Africa is up 2%. And if you exclude the restructuring exits, it'll be up 4%. So there's real underlying acceleration in the business outside of The US, that is grounded in interventions that we've made in terms of innovation, in terms of commercial strategies, and in terms of doubling down on the precision and quality of execution in those markets. With Latin America really being ahead of the game here. And that's proof for us that the core strategies we're implementing, I think, are the results that we want to see. The US, underlying results, we believe will improve because we don't have the base period headwinds that we saw in quarter two. As you point out, I think that's part of the acceleration we expect in half two versus quarter two, not having inventory headwinds to the degree that we saw in quarter two. But the main element here, I think, is the fundamental execution of the same interventions we made outside of The US earlier. If you recall, The US slowdown was really a little bit delayed versus the balance of the markets. So we started in the rest of the world earlier with the innovation, commercial interventions, and execution. That same playbook is being executed in The US. Early indications where we have done this, for example, the Tide boosted launch, that is now in full distribution as of December, We're seeing results that are giving us confidence The innovation we're launching on Olay, just now on the jars with a new campaign and the launch of treatments at the same time with a new architecture, gives us confidence. The innovation we have on baby care first wave executed now, second wave coming later, TideEVO Coming In The Back Half Of The Year, So There's A Wealth Of Innovation We're Launching. We've Clearly Identified With Our North America leadership the opportunity in sharper execution, across all retail channels, And the team is committed and is turning that into execution changes And then the simple opportunity to leverage the strength of our brands by staying fully invested across the second half in media with even better execution. So all of those elements that we executed outside The U. S. That are showing progress, we feel will work in The US and if we don't see any one-timers anymore in terms of base period headwinds, that will translate into stronger growth. And our objective clearly is to leave the year with share growth in The U. S. Felix, you take the second Yes, I will. Thanks, Lauren. So first, what excites me is plenty of growth opportunities. We see that everywhere. But it's not gonna happen on its own. It will require us to create our own tailwinds Be it playing in a growth segment and driving it like personal care or playing in a segment which wasn't growing like best with Zevo and then having that category grow high singles. We see growth or you take China baby care, another example, where you take an put the odds of growth with the lowest birth rates and all of that and we find a way to grow there. So that's one thing that excites me. The second one is a unique once-in-a-generation opportunity to leverage the shifts in the landscape and our unique strengths and capabilities to set ourselves apart. The media landscape is changing. The retailer landscape is changing. There is a tremendous amount of technology both from a point of what is applicable using AI enabling a lot of other things, but even fundamentally our own product and packaging technologies. And then consumer preference and demographics which are evolving. Then you take those and take our strengths and capabilities brands with large consumer base, If you have a large user base and you're really delivering amazing products you probably have the biggest fan club already right off. The bat. Consumer understanding and consumer data. We have so much data that we have put in. Can get an answer even before getting started. And that flow just continues, and we are further strengthening that. Take the media spend leverage and take the different places we could be using it. That is another huge opportunity. Our R&D spending and capability across multiple areas of technology from formulaic chemistry, sub devices, biology, That just enables us to innovate much more broadly. Shailesh Jejurikar: Product. Another thing to be able to communicate it to consumer. Bring it into packaging, bring it to life with user-generated content. So it's the ability to bring all of that together And the technology platforms and applications we've been building and Andre talked a bit about this, we are I would say we have been building a lot and I would say the future is here. It's just a little uneven. So our job is to integrate and bring it all together. Operator: Your next question will come from the line of Steve Powers with Deutsche Bank. Please go ahead. Steve Powers: Great. Thank you very much, and good morning. I'm gonna ask a question that kinda follows the same structure as Lauren's question. So the first one, on the second half, improvements, if we think about things by category segment versus by geography, I guess, maybe a little bit more detail on where you expect progress and sequential acceleration to manifest most clearly. It sounds like laundry and baby and perhaps skincare what you said, Andre, but maybe just you could elaborate a bit more from that perspective. And then Shailesh, you know, Andre Schulten: You take the China Baby Care. It's one thing to get the insight. Another thing to find a way to put silk in the Steve Powers: If you think about all those different pieces of operational enhancement and reinvention initiatives, How do you think about the path and timeline from here for the company to put all of them together and create those own tailwinds and win in the marketplace you know, across the portfolio consistency? How long does that take in your mind? Morning, Steve. If I look across the businesses, the innovation interventions, the commercial interventions, the execution focus is consistently applied across every part of the portfolio. I would tell you the base period effects are probably a strong help when you look at family care baby care, and even fem care, They were most heavily impacted in the first half of the year. So Family Care, for example, will see strong growth in January, even turning into share growth now. And we expect similar dynamics to happen across Baby and Fem. Baby at a global level is actually growing share, so has returned to share growth in the most recent reading. So the momentum is there. We continue to work on the mid-tier proposition You recall we had innovated on the top tier. That continues to work well. Swaddlers, cruisers three sixty. We've made the innovation interventions on Luvs a year ago. That's working. On Baby Dry, we have a two-phased approach. Phase one is executed. Phase two is coming later, So that's still work to be done. On laundry, fabric enhancers, we have very strong innovation, tight boost that I mentioned before, the biggest laundry liquid upgrade in twenty years. For consumers, and that is taking hold and working. And we're preparing for the TideEVO launch. We have strong innovation across fabric enhancers as well. And as you know, that's still a huge opportunity in terms of household penetration So communication effectiveness and copy quality is improving. In beauty in aggregate, beauty is growing 4%. And we have an opportunity to strengthen growth in skincare in The US. Making strong progress on SK-II, outside of The US, on Olay Outside Of The US, And I think the new launch of Olay that is just coming out with strong retailer support, I think, will accelerate that business. Personal Care has momentum and will continue momentum in The U. S. And globally. So I can continue to go down the list, but think I've given you enough depth to say this is really across the portfolio. It's the same idea, double down on the consumer. Double down on the execution. A double down on the quality of the brand campaign, And I think that's where, you know, Shailesh is putting his focus, if I can speak for him. He's really doubling down in every review on the quality of the brand campaign, the quality of the architecture thinking. And it's stimulating thought. It's stimulating quality of execution. And I think that gives us confidence from a geographic standpoint as we talked earlier to Lauren's question, but also from a category standpoint. Shailesh Jejurikar: Well, thanks, Andre. And I'll just bridge Steve from what Andre said what I'm gonna say. But some of it will be sequential just simply because in US, also, when we make the interventions, we are extremely deliberate about making sure those interventions also drive category growth. So that's also why some of this has to happen with big innovations. But switching to your question. So I think a lot of the way to think about the future is we have, in many cases, already built platforms. Take the core data lake. That I talked about earlier. I mean, that did not happen overnight, cannot happen overnight, requires data capabilities, requires partnerships, but also importantly requires internal cultural change. For people to work the data and systems in a certain way is not a change that you can just do overnight. Even if you have the technology solution, very often the culture chain needs to go along with it. And so a lot of that work has happened or is happening. The timeline, if you asked as you specifically did ask, is I think by the time we really get the future evenly distributed, I think we're talking twelve to eighteen months. But it is not one which is a line of demarcation. So you will see parts of the business and certain businesses better equipped to take on all aspects of the transformation So some businesses may be ahead of others. Some regions may get ahead of others. But the simple answer to your question is really, I think, to get the future evenly distributed will be twelve to eighteen months. Operator: The next question will come from the line of Chris Carey with Wells Fargo. Please go ahead. Chris Carey: Hi, everyone. I wanted to ask about investment levels. The Procter & Gamble Company has recently announced a restructuring program and you're going through some initiatives today, new media platforms. Supply chain integration with an evolving retail landscape, Obviously, there's an expectation for improvement. In sales growth, rebalancing of this I guess, top line and move toward algorithm over time. Can you give us a sense of the sort of cost of this progress, I suppose? And kind of the balance between the restructuring and some of the savings that that's going to allow for you relative to what you feel like is going to be needed You know, potentially, you know, especially if you don't, you know, see that that acceleration that you're gonna be looking for you know, in the coming months. If you if you really wanna stimulate top line for this business over the next twelve to eighteen months? Thanks so much. Andre Schulten: Hey, Chris. Let me take a crack at this. The first part of the answer is many of the investments have been made over the last decade. If you think about the amount of money it takes to build a consistent global ERP platform, the data lake, the data governance structure, data engineering. All of that has been done. So that was part of the results that we that we delivered over the past, I would say, five to ten years. The investment to activate the technology specifically around the innovation capabilities, the media capabilities, won't be significant. It's an investment in scaling, but the underlying technology, the underlying data, that heavy investment is already done. So in that sense, I don't expect major capital or expense investments. On the supply chain side, you see us build capacity. And as we build capacity, that capacity is built in a way that it leverages automation. Digitization, both on the manufacturing side and on the warehouse side, So the elevated investment level in terms of capital is really related to building capacity building capacity in a different way, but not fundamentally more expensive So I don't expect, again, on the capital side, a significant shift. The restructuring we have announced in June, the two-year program, I think, will take us through the majority of the org changes and portfolio changes that we need to make. From there on out, if this works the way we want to, it will basically allow us to grow without incremental investments in organization or people. If you think about it, the objective is to grow productivity sales per head disproportionately once these capabilities are implemented. But we don't think it requires another wave of significant restructuring beyond what we typically have as part of our core earnings. So I wouldn't look at a cliff of investment that comes with this. The second part of your question on return to algorithm, I would say let us get through the next two quarters. And focus on acceleration. And then we'll talk about where we see the next year and how close algorithm we come once we have that reality under our belt. Operator: The next question will come from Dara Mohsenian of Morgan Stanley. Please go ahead. Dara Mohsenian: Hey. Good morning. So, Shailesh, I just want to dial down a bit more into The US market. There's always an opportunity under a new CEO to refocus the organization and tweak areas of emphasis Obviously, there's broad changes in the retail environment, as you mentioned, AI technology, consumer landscape, etcetera, etcetera. And, also, we're coming off a very difficult category growth environment in The US in calendar '25. So just as you look going forward, what are the most important priorities for the organization in terms of driving better execution, reaccelerating that organic sales growth? And specifically The Procter & Gamble Company's part of driving category growth. And part of the question is I'd like to better understand what's changing in terms of areas of emphasis to the strategy plans versus more where you're doubling down on execution and existing plans? Shailesh Jejurikar: Sure. Thanks, Dara. Few areas. So I think as I said, I think if we get the elements of a plan right, I think there is an opportunity to grow the market. So I think that is doable. What are some of the changes, as Andre talked about, the interventions short to midterm that we're looking at and which also bleed into the long term. So it isn't just one separate short and long-term intervention. One is the media landscape has changed very dramatically over the last few years. I think, probably driven somewhat by COVID habits, a bunch of other things. The way people consume media and content has changed dramatically. Adjusting our brand-building plans to fully reflect that change and leverage it is the first. Big intervention we are focused on as we review plans including in The US. The second one linked to the retail landscape, there are a couple. But the first one is linked to when you see which channels are growing where the growth is coming, We need to adjust the kind of innovation we do. The way we are calling it is stronger core, bigger more. Because by definition, what we are finding is just given how challenging it is to get awareness, how important it is for the big items to be there, For instance, even on e-commerce where you can list everything. It's really the first screen or two that matters. And so having the item which has the velocity is extremely important. And so the way to think about it is a stronger core, for example, is the Tide Liquid relaunch. You have an amazing user base You give them a delightful product. They continue using it, use more of it. Attract other people to come use it as well. The bigger more, a good example is the launch of something like TideEVO, which is transformational. So you are going to get consumer attention and engagement. So we're changing the innovation to reflect that both from a point of view of how the media is being consumed, but also how the retail landscape is playing out. The third area of change is, of course, very deliberate on consumer value. Particularly in a market like the US, a lot of it is about strengthening our proposition Again, Tide is a great example of it, but we are gonna have that pretty much across every category where we significantly improve the value by significantly improving the product performance. So that the consumer notices it and feeds the value. So one of the areas that we're looking at across categories is significant strengthening of the propositions and in many of these cases, that do not come with the change in price. So we will be significantly strengthening value. So if I were to just summarize what I just said, it would be adjust to the new media landscape with how we do our brand campaigns. Adjust how we innovate with much more emphasis on a strong core and a bigger mold, And then ensure we're delivering really good consumer value. Operator: The next question will come from Robert Ottenstein of Evercore ISI. Please go ahead. Robert Ottenstein: Great. Thank you very much. And I think you've kinda hinted at this. But let's just talk about The US. And Amazon. You know, our data is showing that it's driving a disproportionate amount of the growth in your categories depending on category anywhere from 60 to 80% or so. You know, how specifically is that impacting your media efficiency and competitive dynamics against smaller brands what do you need to do differently? And perhaps you know, do you have any particular learnings from China that are relevant here? Thank you. Andre Schulten: Yeah. Can I do one? Yeah. I can start. Hey, Robert. A couple of points that I think Shailesh hinted towards I think having the core brand as strong as possible by improving the performance, improving the claims, the e-content, all of that, I think, is the best and most urgent thing to do across the entire portfolio. So when it shows up on the landing page, it shows up as strong as possible. I think that's number one. I think there's an opportunity, specifically if you look at online businesses, The willingness of consumers to go into higher-priced items is still very, very strongly developed. You think about categories like hair care, if you think about categories like skincare, where small brands tend to play is in the upper end of the spectrum from a price per usage component, I think that's an opportunity for us to innovate. Which is you know, stronger core, and a bigger more. And the more, especially online, I think can be premium priced that's where you see innovation. Innovation happening. And in general, the last thing I'll leave you with is taking smaller brands and looking at some of the ideas that these creators are bringing, I think, is good inspiration. So looking at some of these brands and saying, that could be an interesting idea maybe on some of our core business, or it could be an interesting idea to replicate as a line extension There's nothing unique if you think about the ability that the ecosystem of small brands can bring. Not technology-wise, certainly not from a marketing scale perspective, certainly not from a supply chain perspective, but the creative stage is something interesting for us to look at. Shailesh Jejurikar: I'll just add a couple of points, Andre, on this. To what you said, which is firstly, at a broad strategic priority level, we are very, very deliberate about ensuring we win in the fast-growing segments, which may be channels or segments of a market. What is exciting to the point you made, Robert, about the e-commerce growth at a variety of retailers and variety of countries is very often if we can channel that right, it can dramatically grow the market size and category. And if you want to take a stark example and move away from The US for a second, we go to India where our portfolio is slightly different and has been evolving differently. E-commerce is growing probably at 10 times the pace almost of offline. And our share is about 1.8 x. Of our offline business. So we are very deliberate about that, whether it's The US or India or any other market to make sure that happens. The drivers, as Andrew pointed out, of winning there need certain things, which we are making sure we have across the board, which includes content, which includes the item specificity, and making sure those are strong. And growing. And playing with the right portfolio. So those all become very critical elements, whether it's Amazon in US or any other ecom player in The US or outside Operator: The next question will come from the line of Peter Galbo with Bank of America. Please go ahead. Peter Galbo: Hey, guys. Good morning. Thanks for taking the question. And I'm now happy to be contributing very much to the baby care comps in the Galbo household. So I wanted to ask just regarding, Andre, your comments around you know, returning to kinda the lower half of algorithm in the back half on the near term, maybe a bit of clarification there. I think one point in the prepared remarks, talked about your category is growing at maybe two Then there was another comment about if we if we took out, you know, the the the lap, you would have seen organic sales a breeze. So just maybe you can help clarify a bit on what you were trying to say with that comment as I've I've gotten some inbound from folks. On that. Andre Schulten: Hey, Peter. Glad to welcome you to the 2% in terms of terms of value. Enterprise markets are growing at about mid-single digits. China is still negative by about one point. Europe, flat in volume about 1% in value. And the most recent reading in The US, all outlet read, so our data, would indicate about 2% one to 2% of value growth. If you look specifically at the O And D Quarter, They Are There Might Be A Point Of There Is A Point Of Inventory Within Those Numbers. So You Want To Be Optimistic, You Could Say The US structurally could be growing at two to three points. But we have to see where that goes. From our point of view is the actual results, we've delivered 3% growth outside of The US. So that's roughly in line with market growth outside of The US. And we have delivered minus 2% in The US, which is below the market, And a good part of that is the inventory effects. There is a component of reduced share. So I don't wanna gloss over the fact that we have work to do to recover share, Partially, that's already in progress. I talked about family care. We're making progress on laundry. But the recovery in the second half will include both the base period effects moving out of the market and us recovering share So our objective is really to leave the fiscal year with share momentum out in The U. S. And at a global level. Operator: The next question will come from Kevin Grundy of BNP Paribas. Please go ahead. Kevin Grundy: Great. Thanks. Good morning, everyone. Shailesh, I wanted to take a step back and ask for your assessment overall. On the portfolio from a strategy perspective. So it's been over a decade since The Procter & Gamble Company completed its portfolio review. Success as you know the income right away, but ultimately did. And set the company on a very strong path for growth. Now as we talked about on this call, the company finds itself in more of a transitional sort of phase of a reinvention, if you will, as growth has slowed. With that as context, I'd like your view here on whether you are generally pleased with the current portfolio Is The Procter & Gamble Company still in the right segments with in big total addressable markets? Attractive returns on capital and stronger growth? Or do you see it possible certain businesses may make less sense today in The Procter & Gamble Company's portfolio than they may have in years past. So, your thoughts there would be appreciated. Thank you. Shailesh Jejurikar: Thanks, Evan. I split it into a few parts. So first is, I think we are clear that we play in daily use categories where performance matters. So I think we feel very good about that choice. We feel very good about that choice because it's extremely well integrated with the total strategy That's where superiority becomes critical. Whole model works well when we are in categories where daily use categories where performance matters. So I think that is one part of it. Second part of it is what we call the day one loop. We were starting our company today, we would look at our portfolio and say, okay. Are we in the right places? That has been really the genesis or driver of the restructuring that we talked about about six months back. Where we said we need to get out of certain parts of the business because simply them being a drag or we're not where we saw future growth. So there's another part of it, which is just disciplined look, continuous review of which are the right segments, and are we playing adequately in higher growth segments or not. There's a third element of it, which is when we look at categories, are we playing in the right segments? And something Andre just talked about, which is if you look at ecom, you see which category, what segments are growing, and are we present enough in some of those. If you look at social commerce, in some categories and see are we well represented in all segments, And we actually find a lot of opportunity at some of the higher price points in some of the categories in things like social commerce. So that's another aspect of the portfolio that we continue to strengthen. And the final point I would make is we continue to look at where we can build greater strength, and we've always talked about the fact that health and beauty are two areas where we find we have still opportunity to build a stronger presence, and we continue to look at opportunities which come our way there. Operator: The next question will come from the line of Peter Grom with UBS. Please go ahead. Peter Grom: Yes. Thank you, operator, and good morning, everyone. So I guess I just wanted to follow-up on The U. S. And I guess it sounds you sound confident in your ability to see performance improve But I I guess I was trying to just pin down what you're expecting in terms of category growth for the back half of the year. And I wasn't sure in your response to Peter's question around 1% to 2% growth, whether that's kind of the right runway we should expect moving forward or whether the guidance expects to get back to that 2% to 3%. So maybe if you could just elaborate on that, that would be helpful. And then I guess just related, you know, at CAGNY last year, know, there's a lot of discussion around inventory destocking. So just any thoughts or comments on what investors should expect as we anniversary those impacts? Thanks. Andre Schulten: Hey, Peter. Yeah. Thanks for the push on clarifying US category growth. Our base expectation is 2% category growth in the back half. That's what we know. And that's what we're planning on. From an inventory standpoint, hard to predict The only thing I'll leave you with is I would not expect any significant inventory built. In the second half. That's not part of our plan. We expect some level of inventory efficiency to be driven across retailers like they always do. Some of our retail partners are finishing up supply chain interventions, and that will probably lead to some efficiency in terms of inventory levels. So I'm I would tell you a slight headwind from inventory is probably adequate to assume. On a market base that has about 2% of value growth. Operator: The next question will come from Filippo Falorni of Citi. Please go ahead. Filippo Falorni: Hi. Good morning, everyone. I wanted shift maybe to margins. For the second half of the year, is it the right expectation to think that we should see an improving margin trajectory as well considering the assumed improvement that you're embedded in The US market, your highest margin business. And given the commodity outlook looks a little bit more favorable in your guidance, And then below the gross margin line, Shailesh, you mentioned a lot about the interventions that you planning, including The US business. Can you help us quantify where the sizing of those intervention, where would they show up, whether it's with more advertising, more R&D, more promotional investment. Any help, like, sizing and quantifying those impacts will be helpful. Thank you. Good morning, Filippo. Let me start Andre Schulten: At the risk of disappointing you I will not give you margin guidance for the back half. I think the margin will be an outcome and we will have to tactically maneuver to see where we want to invest for the strongest possible growth We focus on top line and we focus on EPS. And as you will have noticed, our guidance ranges on both are relatively wide. And they are wide because the outcomes will vary. There's still a lot of variability. And the most important variability to the margin line will be our conviction and need to invest. And so it's hard for me to give you a good indication of where that's gonna land because it's gonna be entirely driven by our ability and conviction to continue to invest in brands. Where that investment comes, I can start, Shailesh, and you jump in? Think it's mostly in the range of again, the innovation we're launching, and Shailesh talked about improving value by driving significant performance improvements on the core propositions, That will be an investment we're making. That's baked into our assumptions. And the second component is to communicate those investments effectively and consistently across the balance of the year. So the media side is an important part. I wouldn't expect a significant increase year over year. But consistent media spend across the second half. And the third one is trade-related spending to drive trial. Create display visibility, secondary placement in-store, Again, our path chosen is not heavy investment in promotion depth and price. We don't believe that's market constructive. But it will be to drive trial of those superior propositions So that's the third bucket. So product, media and communication, and in-store visibility and trial. Shailesh Jejurikar: No. I think you covered it. Only thing I would say is the ratios of that vary based on the category. So the mix of which one needs a little more on product, which one needs a little more on advertising or visibility will vary. So that's the only point I would add to what you said, Andrew. Operator: Our next question today will come from Bonnie Herzog of Goldman Sachs. Please go ahead. Bonnie Herzog: All right. Thank you. Good morning, everyone. Guess I had a question on your Grooming segment. Organic sales were flat in the quarter, which was a pretty big deceleration versus last quarter with volumes inflecting negative and then margins contracting nearly 300 bps. So could you provide a little more color I guess, on what drove the weakness on volumes? And if there are any other factors behind the margin contraction outside of volume deleverage And then maybe lastly, how should we think about this segment for the second in terms of whether it's innovation and whether the business can accelerate? Thank you. Andre Schulten: Good morning, Bonnie. Think you answered the first part of the question. I think the margin component and the bottom line component is an outcome of the top line. It's obviously a high-margin business. And so if the volume's slowing, that translates into the bottom line slowing, specifically since we don't curtail the investment in the business. Superiority investment across grooming is very important. The timing of the grooming business is heavily related to initiative timing. So year over year, the phasing of Braun initiative, female grooming, and male grooming initiatives is a driver in the quarterly profile that you see. On the second half, like other business, we expect modest acceleration in grooming. Related mostly to The US, And I think the biggest opportunity for our grooming business has continued activation of the portfolio in The U. S. And quality of execution in US stores, and that's what the team is entirely focused on. Shailesh Jejurikar: Just to add maybe a couple of points, Bonnie, to that. One is we see within grooming, a huge opportunity in continuing to drive Venus. That has upside in pretty much every region In many regions, that's growing in the tens and twenties percent growth. So we see a lot of upside on the female grooming side. We see a lot more on appliances as well. And then we are working on innovation, which will have which comes in the in calendar '26, which hope which should further drive category growth. And probably the last point I would make is in US, we are also looking at changing the way our shelves are in many of the retailers and significantly improving how grooming comes across as a shopping experience. Operator: Our next question will come from the line of Kaumil Gajrawala of Jefferies. Please go ahead. Kaumil Gajrawala: Hey, guys. Good morning. If we could talk a bit about usage and volumes, there's so many puts and takes on your quarter. But, know, to the extent that you're able to calculate what actual usage is in the households, has that sort of trended off as we got into the front half of this fiscal year? Is it about the same in the rest sort of within it is just noise? Andre Schulten: I think, Kaumil, it's that is still a huge opportunity in our categories. Usage volume growth is slow. To honestly flat if you look at the front half of the year. Even in the last quarter, both in The U. S. And in Europe. So reacceleration household penetration, reaccelerating user growth is a big part of what we're focusing on. And if you think about it, a lot of the growth in the past few years has been price-driven, right, as we came through the inflationary cycle, the supply chain crisis, all of our categories, And so I think the opportunity for us now is exactly what Shailesh described, It is to improve the value proposition for consumers by diligently constructing propositions that have a perfectly matching performance profile well communicated and executed, without raising the price so we can make the proposition attractive to more households, more consumers, more consistently. So the volume component will have to be a part of how we grow markets. As we talked about the second half, we believe this will take time. So we don't think this is an easy fix nor will it come quickly. So our growth trajectory that I just highlighted, the 2% value growth in The US, which is the assumption for half two, largely assumes that the volume component remains slow. Shailesh Jejurikar: Just add one point reinforcing, Andrew, what you said But as we get on the journey of growth, I think user growth will be one which we place a lot of emphasis on. As Andre said, between user, usage and price mix, I think last five years probably had a due to inflation, a bigger component of price mix. We think the future is gonna be a lot more about user growth as the foundation, and then that typically we get that, we also get the usage growth. Operator: The next question will come from the line of Andrea Teixeira with JPMorgan. Please go ahead. Andrea Teixeira: Thank you. Good morning, everyone. So I was hoping if you have a clear clarification and one question. On the clarification you just mentioned, Shailesh, and Andre, like you're assuming that your 2%, you know, category growth, but are you thinking you can stabilize or even perhaps have share gains with the interventions you were making? And within that, are still seeing some trade down within your branch from, let's say, parts to liquid? Or if that has stabilized. And my real question is on the productivity reinvestment. As you had a very strong productivity in the quarter. So are you thinking of like as you go in terms of reinvestments and all the media initiatives, innovation you've made, and perhaps by spec architecture for affordability. Should we expect that to be canceled out? Or perhaps, as you see this environment and the opportunity to lean into more of a value proposition? How are you thinking of, like, the balance between top line and bottom line? Andre Schulten: Thanks, Andrea. From a share perspective, it certainly is our objective to leave the year with share growth. Both in The US and in the rest of the world. But we also acknowledge that that is an outcome of how well we execute, the competitive environment, other in terms of geopolitical dimensions, consumer health, So that's why we still maintain the range And within the range, you know, if we end up in the mid to higher section, that will probably have an element of share growth If we end up in the lower section, it won't. But be assured, our team's energy is exactly that. We need to grow share, by growing more users, growing more households, and that's where all the innovation and the investment is focused. On the balance between productivity flow through top line and bottom line, I'll go back to what I said earlier, It depends on what we see happening. We will certainly on the side of more investment to drive more user growth drive household penetration in the short term, If we are convinced that we have the right innovation, if we are convinced that we have the right marketing program, the right commercial program, We will double down but we would be diligent in that assessment. So if we feel we've got the right program, we absolutely will continue to reinvest productivity. Operator: The next question will come from Olivia Tong of Raymond James. Please go ahead. Olivia Tong: Great. Thanks. Good morning. I want to talk a little bit about the margin with productivity savings about 70 basis points this quarter. You reinvested two twenty of that which I think highlights your you know, pricing productivity and reinvestment even as demand remains lower. So could you drill into that a little bit more in terms of what limitations there could be over the balance of the year on the price and productivity lever levers, particularly on price. Your implied second-half guidance assumes some fairly strong margin leverage but I want to understand those moving parts. And then in terms of the guidance range, you mentioned to in answer to another question that you can grow even without additional headcount, leveraging sales per employee. What's the risk that you might need to adjust those investment levels you know, as you think about delivering on EPS? Thanks. Andre Schulten: I'll give it a shot, Olivia, but you can certainly follow-up with the IR team to get you more detail. I think the margin productivity side, I feel very good about We will continue to deliver in the range that we've delivered on. Have visibility to the productivity components for the next two to three years. So I think and we have the effect of the restructuring program kicking in. So I feel good about our ability to continue to drive productivity. At the level we need to deliver investment and a reasonable EPS outcome. Again, I won't get into guidance for next year, but it's certainly our objective to make progress towards algorithm. Over the next few quarters. The extent of that progress will not depend on our ability to deliver productivity. I feel very confident about that. It will entirely deliver depend on our ability to stimulate top-line growth, in the market conditions we're facing. And the level of confidence and conviction we have to invest behind that growth in the market. So I'll leave it there. For the longer term, I'll tell you I am fairly convinced that Shailesh will jump in here. That with the restructuring program, the way we're approaching the organization design the way we're integrating technology into the way we work, and the way we want to decrease functional barriers we think that's a powerful path forward to continue to drive organizational effectiveness and honestly free up a ton of capacity of our teams from internal work to focus on what really matters, which is the consumer innovation and execution. Shailesh Jejurikar: I agree with everything, Andre. I would just add a couple of points. To frame what we are trying to do, which is productivity as fuel for growth. Growth as a fuel for EPS. So we really think productivity enables us to do what we need to to get the growth, which gives us balanced top and bottom line growth. So that is really the effort. So as you think of that, and that's really what Andrew was also saying is we're doing the productivity. We're very confident, by the way, in the productivity. But that finally is going success on that is getting us a growing top and bottom line. Operator: The next question will come from the line of Robert Moskow of TD Cowen. Please go ahead. Robert Moskow: You know, The Procter & Gamble Company probably does more than any CPG company to grow categories through innovation and improving performance That that's always been your mantra. But know, when you look at the data, as in terms of, like, the past twelve weeks or even the past year, the percent of products sold on promotion at The Procter & Gamble Company is substantially higher by about 200, 300 basis points. So I'm wondering, do you think this data, like, accurately represents what's what your approach is in market? Or because it would indicate that there is more need to move volume And or or is it inaccurately? Depicting what you're what you're trying to do to improve the volume? Thanks. Andre Schulten: Hey, Robert. I'll give you a two-part answer here. Good question. I think I've repeatedly said that I don't see a reason why the categories will not move back to pre-COVID levels of promotion, which are around 30%. That will happen. It's just a competitive dynamic, a retailer dynamic, a consumer dynamic. And it's happening sequentially over time. The promotion read you're getting is not wrong, but it only captures part of what the market reality is. It doesn't capture forward gift cards. It doesn't capture layered couponing. Which is a significant part of competitive promotion that we're seeing. You're right. Our promotion volume is increasing and probably will increase in the second half, as we execute the innovation part of creating trial for those innovations is to deliver promotion visibility. Not all of those promotions come with deep price discounting. In many cases, they don't. But they show up in the promotion line. So what I'll tell you is our objective is to grow categories. Have we done this consistently over the past twelve months? No. That's our when Shailesh talks about we need to grow users and we need to grow usage, That is the part of category growth that we're striving to drive. And part of that has to be to generate trial because if you don't have new users try superior propositions, you don't get repeat, and you don't get the growth. Shailesh Jejurikar: Thanks. I'll just add one thing to this, which is that as we strengthen our propositions it should strengthen our promotion elasticities as well. Which means we will be less impacted as our propositions get stronger. So that is always something we look for. So there's a balance between ensuring are building a future business, which is less dependent on promotions, but making sure we are not completely losing the plot on competitiveness. Operator: The next question will come from the line of Edward Lewis of Rothschild and Co. Redburn. Please go ahead. Edward Lewis: Yes. Thanks very much. I just Shailesh, wanted to touch on the regional mix of the business. Clearly, your elevated presence in The U. S. Has served you well of late. But as The U. S. Growth slows back to sort of, I guess, more normalized levels, we see continued growth in emerging markets, for example, what you're seeing in Latin America. Do you think about the regional mix of the business? And the advantages that you see the business as having are those regionally agnostic or can they be applied globally? Shailesh Jejurikar: Great question. Let me take a crack at it. So I would say our task always given our business size, and other things is first and foremost to get US growing faster. And I believe it is doable and we have plans to try and do it. That is really part of what we talk about when we say we want to create the future. But we don't we think there are tremendous opportunities on the outside The US, which we are very focused on. And what we have tried to do is get very deliberate about which markets have that potential and then really double down and making sure we are playing to the future there. So a lot of the portfolio choices we have made over the past six to nine months have really been to put us in a position that we are playing in winning segments. Even if I take Latin America, we made the choice to change our business model in Argentina A large part of that enabled us to much better focus on Mexico and Brazil, and we changed the organization structure in the rest of Latin America. Which then enabled us to get much more consumer focused And now we are seeing, as Andrew mentioned earlier, 9% growth in Brazil, That's not the pace the market is growing at. Double digit in Mexico, that's definitely not the pace the market is growing at. So talked about India. A bit earlier in a different context. But, again, playing to the future growth there, which is heavily e-com, mean, having spent a lot of my life there, it's staggering to see the pace of change over the last five years in that space. So very deliberate on the big markets outside The US on how we're going to get the growth. Of course, China still remains a big one. Has a slightly different profile of where it coming from, but still a lot of future opportunities. So we do believe many of these large markets, we are well positioned to play to where the future is going. Andre Schulten: And I would just say it's an end. We need to get The US growing, and we need to grow outside. And I think the good news is, maybe only one point to add, is the margin structure that John and then Shailesh have built in enterprise markets allows consistent investment because we have we can cover the cost of capacity, the cost of capital, So it's not dilutive. It funds itself, and that's the core idea behind expansion and growth in enterprise markets. Operator: Your final question will come from the line of Michael Lavery of Piper Sandler. Please go ahead. Michael Lavery: Good morning, and thanks for the question. Just wanted to come back to some of the share opportunities and how to think about it relative to value for the consumer You've you've talked about the importance of that, but also it sounds like no real price changes are under consideration. You've pointed out some of the premiumization some smaller brands are doing effectively and maybe delivering better benefits and value in that way. But you've also had, of course, some private label strength and share pressure. I guess how do we reconcile all of it? And maybe is it as simple as just a waiting game for the consumer health to improve, or is there more to do to move the needle on how the consumer sees value other than just sort of, you know, trading them up? Shailesh Jejurikar: Yeah. I no. Great question. I would say it's not one thing because a very critical part of delivering value is also having a portfolio. So Luvs plays an important role in baby care in that sense. Similarly, on laundry, we have a portfolio with Gain and Tide Simply, So across markets, we do build that portfolio to ensure we are playing at a variety of price points. And making our products accessible. But if I were to look at the largest opportunities to address growth through value, I would say bulk of them are really in strengthening propositions. And if I look at probably one of our largest core items, which would be tied Liquid, which is a huge, huge business. We're seeing real momentum as we've just significantly improved the product performance. So it's a combination to answer your question. And k. With that, it looks like we have no further So just thank you for joining us this morning, and look forward to seeing you at CAGNY next month. Have a great day. Andre Schulten: Thanks, everyone. Operator: That concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.
Operator: Good morning, and welcome to the Pinnacle Financial Partners fourth quarter 2025 earnings call. All participants will be in a listen-only mode. Should you need assistance, signal a conference specialist by pressing 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. We'd like to limit this call to approximately one hour. I'll now turn the call over to Jennifer Demba, senior director, investor relations. Please go ahead. Jennifer Demba: Thank you, and good morning. During today's call, we will reference the presentation and press release that are available within the Investor Relations section of our website pnfp.com. President and Chief Executive Officer Kevin Blair will discuss our newly combined company's future and outline our 2026 financial outlook. Chief Financial Officer, Jamie Gregory will review Pinnacle and Synovus' standalone fourth quarter 2025 results. Finally, Chairman Terry Turner will make some closing remarks. And then our team will be available to answer your questions. Our comments include forward-looking statements. These statements are subject to risks and uncertainties. And the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments, otherwise. Except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendix to our presentation. And now, President and CEO Kevin Blair will open the call. Kevin Blair: Thank you, Jennifer. Good morning, and welcome to our fourth quarter 2025 earnings call. As Pinnacle Financial Partners enters its next chapter, we do so with the belief that true success comes from staying grounded in who we are, inspired by where we're headed, and united by a relentless commitment to outperformance. As we do so, we reaffirm our commitment to the investment community with renewed energy clarity, and confidence in the path ahead. Pinnacle's focus is producing strong above-peer revenue earnings per share, and tangible book value growth. Our strategies and plans for execution are clear. Are committed to delivering exceptional client service and industry-leading loyalty as verified by external sources such as Crystal Coalition Greenwich, and J. D. Power. At the same time, we aim to be the employer of choice in regional by fostering a uniquely collaborative empowered, and rewarding culture. These priorities enable us to attract and retain revenue producers at an outsized pace, fueling our continued growth. By pursuing these goals with passion and purpose across the entire franchise, we strive to continue to create exceptional value for our shareholders, and set the standard for growth and profitability in the industry. Our strong performance in 2025 demonstrates the focus of our teams during more volatile economic times in the midst of a pending merger. Legacy Pinnacle grew adjusted diluted earnings per share by 22% in 2025, while Legacy Synovus grew adjusted diluted earnings per share by 28%. The commitment and focus of both firms on creating a differentiated client experience resulted in Legacy Pinnacle's number one Net Promoter Score ranking in its footprint and Legacy Synovus' number three Net Promoter Score ranking in its footprint amongst top market share banks. These results underscore that our team is fully engaged, focused on our clients, and delivering meaningful value for our shareholders. We are a competitive team committed to sustaining top quartile growth profitability. The merger between Pinnacle and Synovus was completed on January 1, just one hundred and sixty days after announcement, demonstrating the strengths of both companies and our resolve to swift and effective integration. Over the past two quarters, both organizations have successfully completed key milestones. These achievements highlight our strategic focus and reinforce a solid foundation for continued growth and operational excellence. The team has hit the ground running in January, already executing across all elements of the proven Pinnacle operating model. For example, the firm has brought legacy Synovus team members into the money morning sales and service meeting series, an anchor of the pinnacle operating rhythm, led by chief banking officer Rob McCabe. This long-standing practice helps teams align around core priorities promotes cross-team collaboration, and establishes shared ambitions and goals around growth hiring, pipeline activities, and service expectations. We are thoughtfully combining the strengths of Synovus and Pinnacle building on similar legacies and shared values, and remaining true to what really sets us apart. Pinnacle's exceptional operating model is our foundation and the engine of our growth guiding us through every opportunity and challenge. We're not just building another big bank, We're scaling with a soul. And now, Jamie will review both Pinnacle and Synovus' standalone fourth quarter 2025 financial results. Jamie? Thank you, Kevin. Jamie Gregory: Even in the midst of a merger integration, both Pinnacle and Synovus continued to demonstrate strong financial performance over the past two quarters. Pinnacle reported fourth quarter adjusted EPS of $2.24 which was stable quarter over quarter and up 18% from the prior year. Net interest income increased 3% from the third quarter and 12% year over year. Balance sheet growth remained well above peers. Period end loans grew at a strong 3% from the prior quarter and 10% year over year, driven by recruiting. Particularly in our expansion geographic markets. Core deposit growth was also quite healthy at 3% quarter over quarter, and 10% year over year. The net interest margin increased one basis point to 3.27%. Meanwhile, adjusted noninterest revenue declined 6% from the third quarter but jumped 25% year over year. Year over year growth was largely as a result of higher service charges, wealth management revenue and income from BHG. As expected, BHG contributed $31,000,000 in fee revenue to Pinnacle. Adjusted noninterest expense was stable quarter over quarter, and up 13% year over year. Pinnacle's fourth quarter credit metrics remained healthy, and capital levels continue to build. Net charge offs were contained $27,000,000 or 28 basis points. 63% of which was from a single non-owner occupied CRE loan. The CET1 ratio ended the quarter at 10.88%. Meanwhile, Synovus reported strong fourth quarter adjusted diluted EPS of $1.45 which was stable quarter over quarter and increased 16% year over year. Results were highlighted by healthy loan core deposit, and noninterest revenue growth. Net interest income increased 2% quarter over quarter and 7% year over year. Period end loan growth was a healthy $872,000,000 or 2% from the prior quarter and 5% from the previous year. Driven by broad-based C and I lending. Core deposits grew a solid 895,000,000 or up 2% quarter over quarter. The net interest margin continued to expand, up four basis points sequentially to 3.45%. NIM was supported by various factors, including continued fixed rate asset repricing the funding cost benefits of the core deposit growth. Synovus also continued to generate healthy, consistent growth in adjusted non-interest revenue. Which grew 6% from the prior quarter and 16% year over year $144,000,000 The drivers were broad-based, and I would highlight $16,000,000 in capital markets fees, up 30% year over year. This performance highlights the team's focus on delivering for our clients while also focusing on the merger integration. Adjusted noninterest expense increased 2% from the third quarter and was up 5% year over year. The linked quarter increase included higher incentive payments and charitable donations. Credit metrics remained healthy. Net charge offs were $24,000,000 or 22 basis points in the fourth quarter. Our common equity Tier one ratio ended the year at an all-time high of 11.28% as we prepared for the merger closing. Also, we retired $200,000,000 of subordinated tier two notes in October before issuing $500,000,000 in December. Both Pinnacle and Synovus continue to be successful in hiring new team members in the fourth quarter, with 41 new revenue producers. This brings the total to $2.17 for both firms together and twenty twenty five. We continue our work to finalize the valuation marks on the Synovus book. Which we expect to be completed later in the first quarter. Our current estimated mark on the balance sheet is generally in line with the original merger expectations. We expect this valuation impact as well as other considerations to result in a CET1 ratio of approximately 10% at the end of the first quarter. Estimate includes the realization of $225,000,000 to $250,000,000 of first quarter merger related expense and excludes legacy Pinnacle equity acceleration costs, which are capital neutral. Since the transaction closed, we have undertaken a meaningful repositioning within the legacy Sonova securities portfolio. As part of that effort, we sold approximately $4,400,000,000 and purchased roughly $4,400,000,000 of new securities with an average yield of 4.7% and estimated duration of four point two five years. These transactions helped us support our level one HQLA position, reduce risk weighted assets, and also serve to eliminate approximately 98% of the PAA associated with the securities portfolio. I will now hand it back to Kevin to review our 2026 financial outlook. Kevin Blair: Thank you, Jamie. Pinnacle's proven revenue producer hiring model allows our balance sheet growth to be more resilient and sustainable regardless of economic growth, interest rate levels, and the like. Loan and core deposit growth in 2026 should be supported by revenue producers who have not yet completed the consolidation of their portfolio to us. We also expect to continue hiring revenue producers at an accelerated pace this year, especially as the former Synovus team embraces the rigors of the Pinnacle hiring process. Our goal is to 250 total revenue producers in 2026. As we look to our first year as a combined company, we expect our period end loans to grow to $91,000,000,000 to 93,000,000,000 or up 9% to 11% versus our combined loans at year end 2025. We expect 35% of this growth to come financial advisers who have been hired in the past three years as they build their book Another 35% to come from specialty verticals and the remainder to come from the legacy market growth. Our loan growth assumptions do not assume any change in line utilization rates or recent pay down or pay off levels. On the funding front, we expect total deposits to grow to $106,500,000,000 to $108,500,000,000 or up eight to 10% this year, driven by the previously mentioned recruiting, core commercial client growth, and momentum from our specialty deposit verticals that support our markets. Our adjusted revenue outlook is $5,000,000,000 to 05/2026, The net interest margin is estimated in the three forty five to three fifty five range, which assumes the immediate benefit of purchase accounting balance sheet marks and more near to medium term fixed rate asset repricing of the legacy Pinnacle loan portfolio. Those benefits are somewhat offset by an increase in balance sheet liquidity over the next several quarters and marginal headwinds from two twenty five basis point interest rate cuts as implied by the recent market expectations. We expect our initial balance sheet profile to be modestly asset sensitive, split between short rate and long rate exposures. We anticipate adjusted noninterest revenue of approximately $1,100,000,000 this year. Growth should be primarily attributable to continued execution in areas such as treasury management, capital markets, and wealth management, as well as a 125 to $135,000,000 in BHG investment income. Adjusted noninterest expense is expected to be 2,700,000,000.0 to $2,800,000,000 in 2026. We expect to realize 40% or $100,000,000 of our annualized merger related expense savings in 2026. Underlying expense growth should be driven by revenue producer hiring from the 2025 and continued hiring in 2026. Also, real estate expansion to support market growth as well as normal inflationary expenses. Excluding legacy Pinnacle equity acceleration costs, an estimated 450 to $500,000,000 of the $720,000,000 in nonrecurring merger related and LFI expense should be incurred this year versus $64,000,000 recognized in 2025. We continue to operate in a constructive credit environment We estimate that net charge offs should be in the range of 20 to 25 basis points for the year which is consistent with 2025 performance for the combined company. Moving to capital, we will target a common equity tier one ratio of 10.25 to 10.75%. Beginning in the first quarter, our quarterly common equity dividend will be $0.50 per share. Our priority on capital deployment remains client loan growth, The board recently authorized a $400,000,000 common share repurchase program that gives us flexibility to manage capital in multiple growth scenarios. Finally, we anticipate the tax rate should be approximately 20% to 21% in 2026. It is a privilege to lead this team at such a defining moment, with our above peer revenue trajectory and the growing benefits of merger related efficiencies, we expect strong earnings performance in 2026. I am more excited than ever about the road ahead. Together, we lay the foundation to build the best financial services firm in the country. We fully recognize that 2026 will bring its own challenges, especially as we prepare for conversion in the 2027. But we are more than ready for the task. Our momentum, unity, and shared ambition give me tremendous confidence in what we will achieve. And now I will turn it over to Terry for some closing remarks before we open the call for questions. Terry? Thanks, guys. Terry Turner: Me start here. As you listen to Kevin and Jamie, I hope you can see why I'm so fired up about what we've created with this merger. Next month will be twenty six years since we put our original founder group together to form a bank specifically to take advantage of the rapidly declining service levels at the large banks that dominated the Southeast at that time. All we had were some deeply held convictions about how you produce long term sustainable shareholder value. First of all, we intended to differentiate ourselves from the competitors based on distinctive service and effective advice. Of course, distinctive service and effective advice sounded like blah blah blah back then, and still does to many even today. I know as an investors, you've never had anybody say they intended to give poor service and bad advice, but truthfully, many do. According to Greenwich, with an 84% net promoter score, we've created the single best client engagement, not just in the Southeast, but in the country. And their data also suggest we've amassed the best relationship managers, the best treasury management capabilities, and the best credit processes in the Southeast. And that talent attraction model, which is proven to be the best in the Southeast, based both on the quantity of talent we've been able to attract and the quality of talent we've been able to attract goes forward in the combined firm under Kevin's leadership led by long term friend and partner Rob McCabe as the chief banking officer. Those proven credit processes that have provided best in class service from our client's perspective and such strong asset quality over decades, continue forward in the combined firm under Kevin's leadership led by Carissa Summerlin as chief credit officer going forward who was the chief credit officer for Legacy Pinnacle. Secondly, we intended not only to attract the best talent, but to excite and engage them in such a way so as to get their best effort. Their discretionary effort, which will always be better than the stereotypical scorecard management approach used by all of our peers. As a matter of employee engagement, Fortune Magazine ranks us as the third best financial services firm to work for in the country. Behind only American Express and Synchrony. Things like granting equity to every single employee so they feel like owners, and including every salary based employee in the annual cash incentive plan are critical to the reliability of our outsized growth that we produced for twenty five years. And, of course, all of that goes forward the combined firm under Kevin's leadership. Thirdly, one of our most important principles was alignment. Aligning shareholders with management and employees. I believe there's overwhelming evidence that shareholder returns are primarily correlated to only three metrics, revenue per share growth, earnings per share growth, and tangible book value accretion. And so at Legacy Pinnacle, all annual management and employee incentives were linked to revenue per share growth and earnings per share growth. Think about that. All 3,500 employees incented to grow revenue and earnings. Over our first twenty five years, we were the fastest revenue grower among banks greater than 10,000,000,000 in assets and the second compounder of earnings per share in the country. And of course, that same incentive methodology now aligns our almost 9,000 employees under Kevin's leadership. All around revenue and earnings growth going forward. And finally, we've always relied on the principle that expectations shape behavior. It wasn't just that we incented all our employees based on revenue and EPS growth rates. We always set our targets for revenue and EPS growth rates to be at least top quartile performance. Think about that. To have targeted top quartile revenue and EPS growth for twenty five years in a row, led to this extraordinary compounding of the metrics that matter most in terms of shareholder return, which again explains the fact that over our twenty five year history, we had the second highest total shareholder return of all the publicly traded banks in the country. And that same target setting methodology is continuing forward in the combined firm under Kevin's leadership. Frankly, we both have been asked if Kevin can run the Pinnacle model. I wanna make sure you understand that I know he can. He is my handpicked successor, and it's my expectation that executing this now proven model with his proven leadership capabilities will propel this firm to levels we would never have achieved on our own. Operator, we'll stop there and take questions. Operator: Certainly. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. In the interest of time, please limit yourself to one question and one follow-up. Your first question is coming from Ebrahim Poonawala from Bank of America. Your line is live. Ebrahim Poonawala: Hey. Good morning. Good morning. Guess maybe just starting at the top, Kevin and Terry, around with the module conversion systems conversion next year, Just talk to us two things. One, what can the combined bank not do today that it will be able to do a year from now post conversion? And secondly, as we think about the new banker hiring, new sort of client onboarding, how are you handling that in terms of are they coming on the new systems, old systems? Just color around all of that would be helpful. Thank you. Kevin Blair: Yeah. Ibrahim, this is Kevin. Obviously, as we move to conversion in '27, both companies will be operating on their existing legacy platforms. And so that doesn't encumber our ability to originate new business. It doesn't encumber our ability to be able to expand the share of wallet. We have been successful in both companies being able to use our existing system So there's nothing that's missing. What will change is that we'll move to an end state platform that takes the best best of both organizations. And so there will be capabilities that arise on both sides. When we move to the new platform, there'll be new capabilities, new functionality, new products that we'll be able to offer. So there's revenue synergies that come with that. In the interim, when we bring on, we we know which systems we are moving to when we have a client that's a more complex client, and we onboard them in '26, we're gonna onboard that client onto the end state platform and start to service that, relationship there. Versus having to do another conversion in '27. So the real challenge is you're just having to manage a workforce, a Salesforce that has two sets of products and two systems but it's not stopping our ability to grow the business. As it relates to hiring, again, same situation. As we bring on new team members, if it's in the legacy Pinnacle market, they would be onboarded onto the Pinnacle platform. If it's on a legacy Synovus market, they would, start to sell these Synovus products and use those systems. But again, we have lots of workarounds that we can leverage that it's not gonna create a bad client experience when we go to that, migration. The other thing I would just mention, Terry mentioned it in prepared remarks, the number one thing we're focused on is the Net Promoter Scores. And ensuring that our clients continue to receive that distinctive service and effective advice. And that all comes down to the people. So we can talk about the products and the technology, but the people are staying the same. And that's what builds the strong relationships. Ebrahim Poonawala: Got it. And I guess maybe just another follow-up on I think you mentioned the board approved a $400,000,000 buyback authorization. Give us a sense of when you think you would actually initiate buybacks? Is it more to do with if there's a pullback in the stock, you step in? Or should we expect some level of buybacks to resume starting as early as this quarter? Jamie Gregory: Ibrahim, it's Jamie. Great question. You know, first, first thing I would say is you know, we would love to be buying back stock at these prices. We think we think it's pretty attractive, but you know, as we look at capital ratios and look at, you know, our expectation is that we close the deal. And at 03:31, our CET one ratio is 10%. If you include AOCI, it's 9.8%. Looking at that ratio, we are fine with regards to internal stress tests. We're fine with how we expect CCAR or SCB or any of that to play out. We feel like we do have excess capital. From a headline number, we would screen low relative to category four peers. If you include AOCI at 9.8, we would screen higher than median compared to category four peers. But I kinda give that background as just the fundamental how we think about it. We do not want to screen, the lowest of of a peer group. We don't wanna be at the low end. So it's likely that we will accrete capital, for a time period. And just allow earnings to drop, to to our capital ratios as we go through early twenty twenty six. And then reassess. That's why we put that range of ten twenty five to ten seventy five out there. The one thing I will note is in the first quarter, you can see the capital waterfall The earnings impact of merger expenses, etcetera, will lead to you know, not a lot of capital accretion this quarter. So you should not expect to see share repurchases this quarter It's unlikely you would see them you know, in the second quarter. But then we will reassess as we get into later into the year. Ebrahim Poonawala: Helpful. Thank you both. Operator: Thank you. Your next question is coming from John Pancari from Evercore. Your line is live. John Pancari: Morning. I'm done. On the loan growth front, the loan growth projection implies a a nine or eleven percent range on a pro form a basis. Can you just kind of walk us through your degree of confidence in achieving this given the know, we're hearing the backdrop is getting a bit more competitive. There's a little bit of uncertainty around CapEx related demand. So I guess from a demand perspective as well as from a, underlying organic and the hiring perspective, can you help us just kinda walk through your confidence in achieving that target? Kevin Blair: You know, John, I it starts with, you know, not just talking qualitatively, but when you look at the fourth quarter for the pro form a company, we generated 10% loan growth already. And so to your point, our growth as we shared in the slide deck is gonna come from existing team members that are already in the market. The recent hires that we made in the last three years is well as our specialty growth businesses. And for me, you asked the question about just general client sentiment. We we do a quarterly survey in Legacy Synovus. The clients continue to remain relatively constructive. The backdrop, continues to have some uncertainty. It's no it's not lost on anyone that tariffs still play a risk factor for our clients, but we've seen the economic growth pick up. And when we queried those clients, they expect their business activity to pick up over the next twelve months. So part of that is being in the Southeast. We know we're in a great footprint. So I think our client sentiment is positive. There's still headwinds, but there's been this appetite for capital that I think was delayed resulting from the uncertainty that happened in '25 that we expect to get. But look, said this in the prepared remarks. Unlike other banks, we're not waiting for the economy to grow to be able to generate growth. past year, Jamie mentioned 217 new revenue producers. And although that number needs to go to two fifty on the Sunnova side, I was pleased that our our growth, picked up about 20% year over year. And as Terry said, the real opportunity is for Synovus to start hiring at the same pace that Legacy Pinnacle was hiring. Hiring. And that will generate some growth this year, but the real growth has come from the people that we've hired over the last three years. And and the embedded growth that will come from those individuals continue to build out their book. So I think it's a constructive environment. It will come from being able to hire folks. You've seen this I think we have all the tools, and resources to be able to generate the growth. As we've talked about in the past, the biggest headwinds have been unexpected payoff activities. And we've kind of built that into our forecast this year. Fourth quarter was no exception to that. We saw elevated pay down activities. But the first time, we actually saw a little bit of line utilization, help to offset that. So our production goals are not predicated based on economic growth. It's based on going from a bottoms up forecasting perspective, looking at what each individual can can bring to the table. And that gives us great confidence in being able to deliver that 9% to 11%. John Pancari: Got it. All right. Thanks, Kevin. That's helpful. And then separately on expenses, I know in December, I think, a conference disclosure, you you pushed back your timing of your cost save recognition from 50% in '26 to 40% Can you just remind us what that related to? Is there a risk of future delay in the recognition of the cost saves as you work through the integration. Jamie Gregory: Hey, John. It's Jamie. As we work through this merger, our prioritization first was let's get to close. And we were very successful having a Jan one close on on the deal. And when you, you know, because that moved as quickly as it did, it it basically pushed back some of the systems because they weren't as fast as the close. And so that delay in there pushed back a little bit of the call synergies. I would also say that we've been leaning in on some of the benefits associated with with the deal and and how we've, decided to take best in class benefits on both sides. But those two things really drove the 50% down to 40% on the year one cost saves. But you will note that we didn't change year two. We didn't change the total phase. So it's really a timing, difference. We feel really good about all of the merger math from there. I feel good about our ability to achieve those synergies. But it's really in year one. We just dropped it from the 50 to the 40. John Pancari: Got it. Alright. Thanks, Jamie. Appreciate it. Operator: Thank you. Your next question is coming from Jared Shaw from Barclays Capital. Your line is live. Jared Shaw: Thanks. Good morning, guys. Looking at the the fee income side, you know, what's what's embedded in the fee income guidance for the capital markets business And maybe just some color on how long you think it takes to integrate some of those so those fee income lines? Jamie Gregory: Yeah. Jared, it's it's a great question. I mean, I love that you're focusing in on capital markets because we view that as a big area of opportunity for us. Just in general, both Pinnacle and Synovus have had great success in growing fee revenue. If you look at 2025 and you combine the companies, you have over 10% growth in account analysis fees. You have over 10% growth in overall core banking fees. You have over 10% growth in wealth management fees. But in capital markets that you mentioned, that's been a great success. And and, you know, we've had over 15% growth in swaps, swap fees. But the capital markets platforms are a great area to show what are the opportunities for revenue synergies because we have, you know, the effectiveness of the, swap delivery We also have lead arranger fees and syndications that we can actually grow on both sides But then on the Pinnacle side, they're bringing to the table the ability, for m and a advisory, and that's something that's new to the Sunnova side. So we see strong growth in capital market fees in twenty twenty twenty six, consistent with kinda what you've seen in the past. Double digit growth. Jared Shaw: Okay. Thanks. I guess maybe shifting to the to the loan growth side or back to the loan growth side, you called out the ability to hold higher balances as a result of the bigger balance sheet. How quickly do those higher hold limits flow through? And if we look sort of the slide 25 drivers of loan growth, do you think of that as more part of the contribution from the existing legacy markets? Kevin Blair: That's correct. Yeah. So, Jared, you know, when you it it can happen immediately. I mean, we have new hold limits today. But as you can imagine, not every client needs additional capital above where they are today. But what we've done with our bankers is cross tabulate the current hold limits versus where our appetite is, and it shows where we have the ability to give more capacity to our clients, and we're gonna communicate that so that we're, we'll we'll be able to to generate incremental loan growth as a result of that. Starting this quarter and moving into the future. And I consider that we we included that in the bucket for revenue synergies along with just hiring because I think that's just blocking and tackling. That's allowing us to fully use the capacity of our balance sheet to meet our clients' needs. We're still gonna be, as Jamie said, in the lean arranger business. We're gonna be syndicating deals but there will be some incremental growth there that will allow us to grow loans. But you know, it's not big enough to call out an individual number. I think between hold limits and and utilization, which we would expect, although we didn't build it into our forecast given lower interest rates, we would think both of those areas would just serve as tailwinds to growth for '26 and beyond. Jared Shaw: Thanks. Operator: Thank you. Your next question is coming from Ben Gurlinger from Citi. Your line is live. Ben Gurlinger: Hi. Good morning. Good morning, Ben. Pretty clear that you guys are are are now clearly focused on the the Outlook, and you have a pretty high degree of confidence in the continued legacy Pinnacle hiring trends When you look at kind of what you see today in the market, disrupt disruption, it's not necessarily the legacy footprint of either one of you two, or is is there opportunity to kind of expand hires or even LPOs or is it or is is it something that's still in footprint only focused? I'm just trying to figure out where the the additional or incremental revenue producer might come from. Geographically? Well, look. You we've said we try not to highlight specific markets. It kinda let your competition know where you're coming to play. But I think you should think about any metro market in any of our nine state footprint provides us with an opportunity. And it's I would tell you that disruption is our friend. But the biggest opportunity we have is what Terry said earlier. Is continuing to make this a great place to work. And when, bankers evaluate opportunities to hone their craft, they wanna work for an institution that removes bureaucracy. They wanna work for an institution that allows them to do what they do best, which is serve their clients. And so the best tool we have is continuing to create a team member base that is actively engaged and becomes our biggest recruiters. Because when they join our company, everyone hears from, their peers. And and when they say what a great company it is, it just gives us the opportunity to continue to hire. So we'll hire across the nine state footprint. The biggest opportunity as you've seen on the slides, Pinnacle has been adding at an outsized pace and doing a wonderful job. Rob McCabe and his team have worked with our Synovus geographic leaders to install that hiring model. Which is not an overnight model. As Terry said in the past, we're not hiring headhunters. We're not taking, applications on LinkedIn. Identifying who the best bankers are in each market and continuing to call on those bankers. And, in really emboldening ourselves and showing why this is the best platform for them. So I don't think there's a big risk in generating 250 new hires this year. I don't think there's a big risk in generating 275 the year after that. I think there's adequate opportunity across the market. And that doesn't include where we could continue to expand some of our specialty offerings. Where you could bring on new teams and continue to add more errors to our quiver to support that geographic banking, model. So I'm very confident. And and what I've been impressed with told Terry this, the rigors of their model and the success factor is not by happen chance. It is because they are very good at what they do in identifying those prospects and continuing to follow-up and ensuring that they bring them onto the platform. Ben Gurlinger: Gotcha. That's that's helpful. So it's it's I mean, pretty confidence in in in the net loan growth. Outlook. Via those hires over the next two or three or four years, So I was I was kinda curious. In in terms of just kind of growth, generally, lead with a credit, and you get the whole relationship quickly thereafter. Jamie, if we're thinking about like, if loan growth starts to get overly accelerated, is there an area or avenue that you might gravitate towards rate dependent on kind of backfilling the funding side of that? Before the deposits arrive. Jamie Gregory: Well, you know, if if loan growth happens before deposit growth, which actually is somewhat consistent with the forecast because deposit growth is more back end loaded yes. We would use some higher cost sources to fund that growth. But all of that is embedded in our Everything that we're saying about our margin outlook, etcetera, include seasonality of deposit growth relative to loan growth and our expectations of these bankers that we've hired over years bringing their books over. So you know, it all holds together when you see the loan forecast deposit forecast, and then the underlying quarterly impacts. But, yes, you know, if if loans come in before deposits, yes, we will use, you know, wholesale funding to bridge the gap. Terry Turner: Know, I might just jump in and add, for clarity. I think on the hiring hiring, is what gives us confidence in the long term sustainability of the growth And if you look at the pace at which we're accelerating the growth in hiring, it's a really modest increase in 2026 and not a I wouldn't say a huge increase in 2027. So those are pretty reasonable targets. And what that has to do with is the long term sustainability of the balance sheet growth and, therefore, the earnings of the company. What gives us confidence in the short term ability to grow loans is the people that we have onboarded over the last three or four years. Those people are in the process of consolidating their books of business from where they used to work to us. And we're not looking for anything special. We're simply looking for those people to produce at average rates they have produced for twenty five years. And so, again, the confidence on the loan growth comes from the people that we have already on board. Ben Gurlinger: Gotcha. Thank you. Operator: Thank you. Your next question is coming from Bernard Von Jaszczyki from Deutsche Bank. Your line is live. Bernard Von Jaszczyki: Hey, guys. Good morning. Just just on the NIM, in your '26 outlook, you assume a range of three forty five to three fifty five. Inclusive of the purchase accounting accretion. I know back in mid December, you laid out in size the contributions from from the accretion, from the fixed rate asset repricing. And you know, offset by some of the the the debt and the adding securities, the liquidity measures you're doing. Given the changes you laid out, could you just provide updates there? Jamie Gregory: Yeah. As you look at the margin, the way I would think about it is clearly, the fourth quarter, had Pinnacle had a three twenty seven tax equivalent. Margin. For the Sunnova side, when you mark the book, when you mark all of our assets, you should expect to get to a margin in the three seventy five three eighty area. When you combine those two, you get to, you know, three fifty, low three fifties. And so that's generally how we think about these coming together. The yields on the Synovus book are a little bit lower than they we originally modeled, with the merger because interest rates have declined a little bit when you look at the belly of the curve. And so that's generally the math. That's why the CET one ratio at close will be a little bit higher than we we originally modeled It's why the PAA will be a little bit lower than we originally modeled. Bernard Von Jaszczyki: And then, just on the, the revenue synergies, on Slide 28, the 100,000,000 to 130,000,000 I know it's supposed to be realized over the next two to three years. Does that start you know, in 2027 post the completion of the integration process? Any color you can share? Kevin Blair: It it starts today. I mean, we're we're already working it. So our guidance that we provided for '26 would incorporate some of those revenue synergies as they materialize. Things like we talked about earlier, like hold limits being able to hire new folks, There are certain capabilities on the capital market side that we don't have to be on the same platform. Platforms. Syndication fees, FX. Those, those are being cross pollinated across our organization. And then when you add on some of these specialty verticals I've mentioned in the past, like equipment finance, The the Pinnacle legacy team is already calling in the legacy Synovus footprint. So instead of trying to give you a line item, reconciliation of all those, we'll start to incorporate those into our annual guidance. And we sit here today, I think we're as excited about the 100 to $130,000,000, and and we think we can exceed that target over the next three years. But, yes, the '26 guidance would incorporate the benefits that we see in these early stages. Bernard Von Jaszczyki: Okay. Great. Thanks for taking my questions. Operator: Thank you. Your next question is coming from Michael Rose from Raymond James. Your line is live. Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Maybe just going back to the to the comment in the slide deck just around higher hold limits. I assume that just a step function of a larger balance sheet if you can kind of expand upon that, I mean, do you plan to kind of move upstream? Or is this just hey, we're going to do the same types of loans that we've always done on both sides? And then maybe just syndicate out, you know, less. Just trying to get some better color around that. And then secondarily, if you can just comment on outlook for some of the specialty businesses. I know that's been a big focus, at least Legacy Synovus over the past couple of years. What does that look like as we kind of move through this integration? Thanks. Yeah, Michael. I I think it's the latter of your question. I I don't think that it allowing us to pursue new opportunities up market. We've both companies have been moving up market with middle market banking some of our corporate banking initiatives that we've had in some of the specialty areas. What it really does is just increase that ability to have slightly larger hold limits on those clients. And so as I said earlier, we're not talking about major step functions. It's not doubling the size of the hold limit, but it gives us a little more capacity. And so what you should see from that is slightly, higher, loan size that we would keep on balance sheet. But again, we built a strong syndicated platform to be able to manage our risk overall. And so we'll continue to out some of the larger loans, but it just gives us a little extra capacity. As it relates to the specialty units, you know, as I've said in the past, both sides bring some unique businesses to the table. I get really excited about the equipment finance area, the auto dealer, business that Pinnacle has been building. On the Sunnova side, we have things like asset based lending, structured lending. We have a family office on the wealth management side. Those organizations are working across the broader organization to make sure that their capabilities are well known. And when we have an opportunity to introduce client, we're gonna make those introductions. And so we haven't gone through and shared what the individual growth of each of those businesses will be. But I can tell you, a large portion, as you saw in the pie chart, of our loan growth will come from those specialty businesses. And it's just from the introduction to the other side's footprint and a client base that we haven't called on in the So again, excited about it. We've been having sales meetings on Mondays. Where those individuals have been working to share their products and capabilities, and there's already been joint calling efforts. So we're well underway there, and again, it's gonna generate a large percentage of our growth as we look both on the loan side as well as the deposit side, we have some deposit verticals that we've been focused on that we'll be able to introduce to the to, the other legacy, bankers. Very helpful. And then maybe just as a a follow-up. I know there's some debate about if the asset thresholds get lifted here at some point. I know you guys have some onetime costs built in for that. But you know, those rules do get changed, I assume you'll still use some of that, but I assume some of it that you probably wouldn't or you could slow that pace What would you do with those extra dollars? Would it be kind of further acceleration on the hiring front? Is there other projects or systems that you'd you'd like? I know we're not talking a huge number, but certainly would be helpful for any color. Jamie Gregory: Yes, Michael. Those costs, as we look at it, if a 100,000,000,000 was raised and it was not in our near term horizon with strong organic growth, we would still do the data work we're doing now, which is a large portion of that expense. And so you know, we will still incur a good bit of that expense that we've modeled out even if if that's increased. We would surely save on some headcount in our back office functions. But but we would still continue the work on the on the data side But when you think about what will we do with those expense dollars I I guess I would just reframe that and say that we will spend for good hires with or without those savings from, you know, LFI changing. And so we're gonna lean in to hiring the right talent because we see the, the value to long term sustainable growth, long term sustainable growth in assets and tangible book value. And that's our strategy. So I just would disassociate the savings from LFI or really anything else with the hiring because you know, we are leaning into that really in all scenarios. Michael Rose: Okay. Great. Thanks for taking my questions. Kevin Blair: You, Michael. Operator: Thank you. Your next question is coming from Catherine Mealor from KBW. Your line is live. Catherine Mealor: Thanks. Good morning. Jamie, talked in your prepared remarks about some restructuring that you've already done to the bond portfolio. Can you talk to us a little bit about what you're expecting in terms of the timing for further build in liquidity as we move through '26? Just trying to frame you give us loan growth expectations, but trying to think about what the size of the bond book could look like over the course of the year and how average earning asset growth will build through the year. Thanks. Jamie Gregory: Yep. It's a great question, Catherine. And first, I'll give a little bit of color on the trade. So I mentioned it on the call, but we did a $4,400,000,000 swap in the securities portfolio The way I would think about the securities portfolio from legacy Synovus is our book yield was about three fifty coming, you know, at the end of the year. When you marked it to market you got to about a four forty yield on the securities portfolio. And then we did the repositioning. And the repositioning did multiple things. First, we shortened duration. Second, an improved, liquidity, high you know, HQLA improved. Third, it reduced risk weighted assets Fourth, it eliminated 98% of the PAA associated with securities portfolio. So it achieved a lot of objectives to us. I mean, we're trying to reduce AOCI volatility. We're trying to reduce, PAA. All those things played out with this repositioning. So we're very pleased with how that happened. Those trades, because we did shorten duration, reduced the legacy Synovus security yield to about four thirty five. So when you bring those together, you get a securities portfolio that has a nominal yield of around 4%, a tax equivalent yield of around four fifteen. And so that's kind of where we are in the securities portfolio. As we proceed, through 2026, we do have debt issuances in the forecast. You know, we're contemplating a couple debt ish ones that could be a billion dollars this calendar year. Likely two different issuances. One in the first half, one in the second half of the year. And that's embedded in there. Now consistent with the prior conversations, the impact to average earning assets just depends on the growth of loans and deposits and how all that plays out. But that's at a high level how we're thinking about 2026. Catherine Mealor: Right. Because you still put that $1,000,000,000 of debt in into the '26 number. Feels like. That's right. Jamie Gregory: That's right. Okay. Great. Okay. Catherine Mealor: That help that that's really helpful. And then maybe within that on on deposits, they both on a legacy basis, Pinnacle and Synovus, had a had a nice reduction in deposit cost. Those came in on to better than I was expecting, so that was was great to see. And so maybe can you help us think about as you see this accelerated growth into next year, and I know rates are moving, but let's just kind of on a static basis, where are kind of new deposit costs coming in today, and where should we expect maybe on a pro form a basis deposit cost to kinda settle in outside of any kind of move big move in rates on a pro form a basis. Kevin Blair: So we look at just like the going on rates this quarter, Catherine, on the Sunnova side, it around $3.14, a little higher on the on the, Pinnacle side. But yeah, we expect those to continue to come down. Obviously, we built into rate cuts Just quarter on quarter, our rate paid was off about 30 basis points. So it's still a rational pricing market where, you know, where where you're seeing continued competitive tension is when you're going after high rate CDs. And I think both sides have really rationalized our demand for those. But as we go forward, as Jamie said earlier, part of our growth story is relying on these bankers to bring over their relationships when when when they get the loan. So we're not having to go out and rely on promotional deposits to have to generate the $8,000,000,000 in deposit growth this year. So think you would continue to see those going on rates come down as rates come down. And we'll be very thoughtful. As we've said in the past, can grow deposits as much as we would like. It's just at what rate. And and we're trying to grow them at a marginal rate I always like to give you this from a Sunnova standpoint. When you look at loan rates, for the quarter, we are at $6.23. Deposits, as I said, at $3.14. So you're still getting almost a three ten basis point spread on your new production which, again, we monitor that just to make sure that we're balanced in how we think about the going on yields for loans and what we're having to pay for deposits. Catherine Mealor: Great. Very helpful. Thank you. Jamie Gregory: Thank you. Operator: Your next question is coming from Casey Haire from Autonomous. Your line is live. Casey Haire: Great. Thanks. Good morning, everyone. I wanted to circle back on on the recruiting strategy. So the I think you guys mentioned 41 hires in the fourth quarter. Just wondering what the the success rate was on that. I think it was 90% historically. And then just looking forward, you know, what is the pipe looking like as you guys target two fifty this year? You know, how many offers do you have outstanding? Thanks. Terry Turner: Yeah. I would say on the, success rates or the kill rates for hiring, it remained roughly the same as it has, as it was all year. You know, the average number hired resembled the average for the year. The kill rate was similar for the year. I wouldn't detect any particular difference in our success at closing the recruitment cycle and turning them into hires. I think as we go forward, you heard, what Kevin said, This methodology is just it's just that. It's a routine methodology that we have run for an extended period of time, and it feels like it will produce I would say at least what we've committed, in in our guidance there. Again, if you look at the relative increase for 2026 over 2025, it's pretty modest increase with at least for me, I don't feel like we've hung ourselves out on on some big, big lift here. But, anyway, that that's my thought. Kevin Blair: I don't care if you wanna spot on. And and, look, again, you you don't have to go to the legacy Pinnacle leaders and ask them about their pipelines. They they work them three times a week. What's changing is, you know, our legacy Synovus team is starting to exercise that same process. And they're building their pipeline. So it won't that's why we said over time, that Synovus and twenty six would still lag the hiring that happens at Pinnacle. But by '27, we expect both sides to be adding a similar rate just based on that that building of the pipelines. And I've had the opportunity to be on a lot of, recruiting calls in the the last thirty days, and I can tell you that that they're not slowing down. People wanna be part of this company And ultimately, they have validation from the people that have already joined that this is a great place to work. I I joke with Terry all the time when I talk with the folks at Pinnacle. That have just joined. I said, how's it going? They said, I wish I had joined ten years ago. That's the number one answer I get from those folks. Casey Haire: Okay. Great. And then just so you guys restructured the the Synovus bond book. Just anything else that that you guys are kinda entertaining as you look at the pro form a balance sheet and maybe some updated thoughts on the BHG liquidity event given what's a pretty favorable backdrop for them? Jamie Gregory: You know, we we have a lot different things that we are working on the background on the balance sheet, but it's really too early to to think about you know, whether or not they're they're viable or you know, attractive to us. None of which are are that material to to their earnings outlook. And so we will continue to to look at options to either improve liquidity of the securities portfolio or, you know, reduce risk weighted assets or any anything similar to what we've what we've done in the past. With regards to BHG, you know, those that the team down there just continues to deliver. You can see that. With their performance in 2025. You can see it with the outlook we have in 2026. If you look at the fourth quarter of fee revenue, from BHG, we we had 30,000,000 in in the fourth quarter. Including a true up of $5,000,000 from the third quarter BHG earnings. And so to use the baseline $25,000,000 in the fourth quarter, that's really strong growth as you play it out through 2026. I mean we're talking 25% to 35% growth for for the company. So they continue to perform. And I I go through all that because it just shows that they are focused on their core business. They're focused on growing it, adding value. I think, you know, you know, what whatever they do with liquidity event or how they approach that, all I would just say is that they are positioning themselves well for you know, choosing their own destiny with regards to that. Casey Haire: Great. Thank you. Operator: Thank you. Your next question is coming from Anthony Elian from JPMorgan. Your line is live. Anthony Elian: Hi, everyone. Jamie, on slide 20 through 23, could you provide us with the updated assumptions specifically on the loan marks for 2026? You have a comment in the footnote that says you shifted the mark to longer duration loans, but I'm curious if you could give us some sensitivities to NII if you shift the loan mark back to a shorter duration. Jamie Gregory: Yeah. You know, as we look at our current expectation for the loan marks, we believe that approximately two thirds of the PAA is going to come from residential mortgages, which are clearly long long duration. And so that's the shift that we're referring to there. I would not expect these marks to move materially between products between now and finalization, but that's something that the team continues to work on. And that's that's what basically reduces that PAA benefit, that plus the rate decline in 2026. Anthony Elian: Okay. And then my follow-up I'm curious, could you give us updated thoughts on deposit beta going forward for combined company, assuming the forward curve plays out this year? Thank you. Jamie Gregory: Yes. If you look at the blended deposit beta, in this easing cycle, to now. For both companies combined. You get to about a 48% deposit beta. And when we look forward at the next two cuts, which is our current expectation, we think that a 45% to 50% deposit beta is appropriate for the rest of this year. And clearly, there's a lot of uncertainties that go into that with deposit mix and and pricing and you know, what the Fed actually does. But we think that that's a reasonable assumption, and that's what we're working towards in '20 Thank you. Operator: Thank you. Your next question is coming from John McDonald from Truist Securities. Your line is live. John McDonald: Hi. Good morning. Thanks. Lots of good thoughts on the '26 outlook. Thank you. As we pull up a bit and think about the long term promise of the merger and the case for the stock, could you share some thoughts on the long term earnings power of the company? At announcement, you showed an illustrative EPS of 11.63 using consensus 27. As a base. So maybe just any updated thoughts on that or broadly any puts takes against that or we might think about the The most profitable regional bank, the most efficient regional bank, and the bank that has the highest level of client service that's what gets me excited. Kevin, it feels sustainable over time to me, which is an important idea. I talked about it a minute ago, but the fact that we've already hired people that produce the growth that's immediately in front of us is important. The fact that we can continue to hire people sustains the growth over an extended period of time. And when you put that on top of the footprint, which is the most advantaged footprint in The United States, and then look at the market share vulnerability chart, it just hard to keep me from being excited about what the long term earnings opportunity are for this company. John, you're you're we're passionate about that that that question. John McDonald: Thank you. That's really helpful. Makes sense. Maybe one follow-up just to clean up some credit that have come in. Jamie, just in the world where there's no CECL double count, how does the mark kind of affect, you know, provisioning going forward? Does does taking that mark you know, pre provide for some losses and let you provide a little less and maybe just where the loan loss ratio is starting and how should we think about provision relative to charge offs going through '26? Yeah. John, you know, just think it as you would normally think about it where you know, the the allowance we have today, we we expect to kinda stay in this same area. Given our outlook of of allowance to loan ratio. The only you know, areas where I would say it it kinda prefunds charge off is if it if it's for something that we see in the near term. If you have a specific reserve on on a loan, And so I would just think of it as normal going through 2026. Okay. And then flattish charge offs in the first quarter, you you both had, some in individual kind of one offs in the fourth quarter. Are there still some cleanups that happened in the first quarter? Or maybe just comment on Yes. I mean, look, I think if you step back and look at this quarter, noted a couple of items, not because they're discrete, but we just wanted to provide some attribution for what drove the charge off levels. I think it's important to note if you look at pro form a charge offs, it would have been roughly 25% or 25 basis points for the combined company. And as you saw, our full year guidance is still 20% to 25 But, you know, we're we're working through a couple credits to your point. That we've already reserved for and and likely taking charge offs in the first quarter. So we just expect the levels to stay stable versus where they were this quarter. But we are not seeing anything that's indicative of any systemic change, any asset classes. It's really kind of a status quo for for charge offs. But the first quarter will will kind of be stable with where we're working for. John McDonald: That's clear. Thank you. Operator: Thank you. Your next question is coming from David Chiaverini from Jefferies. Your line is live. David Chiaverini: Hi. Thanks for taking the question. So you mentioned that loan growth should accelerate through the year. Is it reasonable to think kind of mid to high single digit in the first half of the year? And kind of high single to low double digit in the second half of the year? Any any color there would be helpful. Jamie Gregory: Yes. I think that's reasonable. And it's reasonable just based on, as Terry said earlier, as the portfolios continue to be moved over from new hires, it will build throughout the year and and it will accelerate. So I think mid single digit to high single digit in the first half and then accelerating to double digit in the second half. David Chiaverini: Helpful. Thanks. And then in terms of loan pricing, can you talk about any changes in spreads that you've observed in recent months? Jamie Gregory: You know, this quarter, we saw about a 10 basis point decline in spreads versus our internal transfer pricing. So just think about a one and ninety spread on production. That compares to about a 200 basis point spread that we had seen for the first three quarters. So some of that has to do with mix. And the size of we moved up market with our production this quarter. I think maybe that's what's lost and and hopefully I can highlight that now is our production for the combined companies was up 63% versus the same quarter last year. So back to hitting on all cylinders, the team's producing. Some of those loans were in in, kind of our upper market businesses that generally carry lower spreads. But about a 10 basis point decline I you know, we've we've said that that's been a trend that we've been monitoring. I think it's with our expectations, and our guidance for next year would include spreads in that general range. David Chiaverini: Helpful. Thank you. Operator: Thank you. Our next question comes from Christopher Marinac from Janney Montgomery Scott. Your line is live. Christopher Marinac: Hey. Good morning. Just real quick on deposit incentives. Are these any different for the combined company as it would have been separate at Pinnacle and Synovus? Just curious on how deposit incentives are compared across the new company. Kevin Blair: It's what Terry said earlier. Chris, our company is going to be everyone will be incented on the same measurements, which is revenue growth and EPS growth And it's our job as the leadership team to ensure that deposit growth is a key component of that and being able to manage our margin. So everyone's incented on the company making its top of house goals. There are no individual incentives for production any longer, and people won't be focused on filling buckets or meeting a scorecard. It's all gonna be based on top of house. And it's our job to make sure, as I said earlier, that 8 to $9,000,000,000 in deposit growth And support our path forward. For both of you, truly, a job exceptionally well done. With that operator, I'd like to conclude today's call. Thank you for joining us today. That concludes the Pinnacle Financial Partners fourth quarter 2025 earnings call. Have a good day.
Operator: Good day, and thank you for standing by. Welcome to Atlantic Union Bankshares 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 will need to press star 11 on your telephone. You will then hear an automated message advising your name is Ray. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Bill Samia, Senior Vice President of Investor Relations. Please go ahead. Bill Samia: Thank you, Olivia, and good morning, everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury, and Executive Vice President and CFO, Rob Gorman with me today. We also have other members of our executive management team with us for the question and answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on this webcast are available to download on our investor website investors.atlanticunionbank.com. During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix to our slide presentation and in our earnings release for the fourth quarter and full year 2025. We will also make forward-looking statements, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement except as required by law. Please refer to our earnings release and our slide presentation issued today as well as our other SEC filings for further discussion of the company's risk factors including other information regarding the forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in the forward-looking statements. All comments made during today's call are subject to that safe harbor statement. And at the end of today's call, we will take questions from the research analyst community. Now, I will turn the call over to John. John Asbury: Thanks, Bill. Good morning, everyone, and thank you for joining us today. Atlantic Union Bankshares reported strong fourth quarter financial results, reflecting disciplined execution and successful integration of the Sandy Springs acquisition. We believe the adjusted operating financial results for the quarter showcased the organization's earning capacity. While merger-related charges continue to affect this quarter's results, the underlying operating performance supports our continued confidence in achieving the strategic goals associated with the Sandy Spring acquisition, namely, the targets for adjusted operating return on assets, return on tangible common equity, and efficiency ratio. With the core systems conversion completed in October and only modest residual merger-related expenses anticipated in the first quarter, we expect the noise associated with our merger-related expenses to decline. This means that we will be positioned beginning with Q1 2026 to report unadjusted results that more clearly demonstrate the financial strength and operating efficiency we are committed to delivering for our shareholders. Our commitment to creating shareholder value remains unwavering. We believe Atlantic Union is well-positioned to deliver sustainable growth, top-tier financial performance, and long-term value creation for our shareholders. We believe the strategic advantages gained from the Sandy Spring acquisition combined with continued organic growth opportunities due to our robust presence and attractive markets reinforce our status as the premier regional bank headquartered in the Lower Mid-Atlantic. I'll briefly cover our Q4 and full year 2025 highlights and share market insights before Rob presents the financial review. Here are the highlights for our fourth quarter. Quarterly loan growth was approximately 6.3% annualized, ending the year at $27.8 billion. Our pipelines were higher at the end of the fourth quarter than they were at the start of the quarter, which suggests we are on track for loan growth consistent with our full year 2026 outlook. While forecasting loan growth remains challenging in the still uncertain economic environment, we continue to expect 2026 year-end loan balances to range between $29 billion and $30 billion inclusive of the negative impact from loan fair value marks. We observed a return to more typical commercial line utilization levels in the fourth quarter. Loan production reached a record high in Q4 as our team gained momentum. Despite ongoing economic uncertainty, the Sandy Spring core system conversion and the CRE loan sale executed at the end of 2025. Additionally, we observed growing confidence among our client base which combined with seasonally strong lending trends further supported our robust performance in the quarter. Our deposit base experienced typical year-end fluctuations due to activity from large commercial depositors with some of these balances returning during the early weeks of the first quarter. Our FTE net interest margin increased by 13 basis points to 3.96%. While improvement in accretion income contributed modestly, the main driver was our ability to reduce deposit costs while holding loan yields relatively flat compared to the prior quarter. Loan yields stayed relatively steady despite the Fed rate cuts and its impact on our variable rate loan yields due to increased accretion income, higher loan fees, and the repricing of renewed and new fixed-rate loans at current market rates. Importantly, this also demonstrates we are putting our interest rate accretion income and principal repayments from the acquired fixed-rate loan portfolios to work as those loans renew or reprice to higher market rates. Fee income was strong, primarily driven by loan-related interest rate swap fees and fiduciary and asset management fees, with both benefiting from the Sandy Spring acquisition. About 27% of interest rate swap income this quarter came from former Sandy Spring customers. While Sandy Spring had a nascent swap program, AUV swap program is well established and mature. We expect ongoing growth in this area, though it's important to note that swap income may vary from quarter to quarter. Overall, credit quality showed continued strength and improvement. With our fourth quarter annualized net charge-off ratio coming in at one basis point. The net charge-off ratio for the full year was within our guidance at 17 basis points. Leading asset quality indicators remain encouraging. Fourth quarter non-performing assets as a percentage of loans held for investment declined a further seven basis points to 0.42% from 0.49% in the prior quarter. Criticized and classified assets remain low, 4.7%. We believe credit underwriting, client selectivity, and loan loss performance have consistently been traditional strengths of Sandy Spring Bank and American National Bank, reinforcing our continued confidence in asset quality. Before we discuss unemployment rates, I want to clarify we are comparing November to September figures since October data is unavailable due to the government shutdown. Taking a step back, Virginia's unemployment rate remained unchanged at 3.5% in November, compared to September. Demonstrating notable resilience, especially since the national unemployment rate rose by 0.2 percentage points to 4.6% during the same time frame. Maryland's unemployment rate rose to 4.2%, a 0.4 percentage point increase at September. This change aligns with our expectations, particularly considering the November data now includes federal government workers who took buyout plans. Despite the uptick, Maryland continues to outperform the national average during the same period. North Carolina's unemployment rate edged up 0.1 percentage point to 3.8%, remaining well below the national average. Although we do anticipate some further increases in unemployment across our markets in our CECL modeling, we expect these levels in Virginia, Maryland, and North Carolina to stay manageable and below the national average consistent with Moody's current state-level forecast. We remain confident in our markets and consider them among the most attractive in the country. For those who missed our Investor Day last month, I want to revisit a key slide from our Investor Day presentation as its message remains essential. We have deliberately and thoughtfully built a distinctive valuable franchise outlined in our strategic plan delivering on our commitments, and establishing the banking platform we set out to create. With this strong foundation, we believe we're well-positioned to capitalize on the expanded markets gained through the Sandy Spring acquisition, drive continued growth in Virginia, and pursue new organic opportunities in North Carolina and across our specialty lines. Our full Investor Day presentation details our market approach for the next three years, and I encourage everyone to watch it. With disciplined execution of our prior acquisitions and no additional acquisitions currently planned during this phase of our strategic plan, our focus now shifts to demonstrating the franchise's earnings power and capital generation ability. It's time to show that our efforts and investments have been worthwhile. After dedicating capital to strategic investments over the past two years, to complete the company we envisioned and worked so diligently to build, and consistently communicated our plans to do so, we believe we are now seeing clear tangible benefits from these efforts. In summary, 2025 was a pivotal year for AUB. We remained agile and responsive while managing a significant merger integration, a major CRE loan sale, and navigating macroeconomic headwinds including federal government restructuring and unpredictable tariff policies. Despite these challenges, we delivered operating results that we believe will stand out among our peers. With that, I'll turn the call over to Rob for a detailed review of our quarterly financial results before we open the floor for questions. Rob? Rob Gorman: Well, thank you, John, and good morning, everyone. I'll now take a few minutes to provide you with some details of Atlantic Union's financial results for the fourth quarter and full year 2025. My commentary today will primarily address Atlantic Union's fourth quarter and 2025 financial results presenting on a non-GAAP adjusted operating basis, which for the fourth quarter excludes $38.6 million in pretax merger-related costs from the Sandy Spring acquisition. For the full year 2025, it excludes the following items: pretax merger-related costs of $157.3 million, pretax gain on the sale of CRE loans of $10.9 million, and the pretax gain on the sale of our equity interest in Cary Street Partners of $14.8 million. That said, in the fourth quarter, reported net income available to common shareholders was $109 million and earnings per common share were $0.77. For the full year 2025, reported net income available to common shareholders was $261.8 million, and earnings per common share were $2.03. Adjusted operating earnings available to common shareholders were $138.4 million or $0.97 per common share in the fourth quarter, resulting in an adjusted operating return on tangible common equity of 22.1% and adjusted operating return on assets of 1.5% and an adjusted operating efficiency ratio of 47.8% in the quarter. For the full year 2025, adjusted operating earnings available to common shareholders were $444.8 million or $3.44 per common share. Resulting in an adjusted operating return on tangible common equity of 20.4% and adjusted operating return on assets of 1.33% and an adjusted operating efficiency ratio of 49.7%. As John mentioned, we believe these adjusted operating results for return on tangible common equity and the efficiency ratio put us in the upper quartile of our peer group for the full year of 2025. Turning to credit loss reserves at the end of the fourth quarter, the total allowance for credit losses was $321.3 million, which was an increase of approximately $1.3 million from the third quarter primarily driven by loan growth in the fourth quarter. As a result, the total allowance for credit losses as a percentage of total loans held for investment decreased one basis point to 116 basis points at the end of the fourth quarter. Net charge-offs decreased to $916,000 or one basis point annualized in the fourth quarter from $38.6 million or 56 basis points annualized in the third quarter due to the charge-off of two commercial and industrial loans in the third quarter. The net charge-off ratio for the year came in at 17 basis points in line with our 15 to 20 basis points guidance. Now turning to the pretax pre-provision components of the income statement for the fourth quarter. Tax equivalent net interest income was $334.8 million, which was an increase of $11.2 million from the third quarter primarily driven by a decrease in interest expense resulting from lower deposit costs and increases in interest income on loans held for investment and the securities portfolio, which was partially offset by a decline in other earning asset interest income primarily driven by lower average cash and cash equivalent balances in the fourth quarter. As John noted, the fourth quarter's tax equivalent net interest margin increased 13 basis points from the prior quarter to 3.96% primarily due to lower cost of funds, partially offset by a slight decrease in earning asset yields. Cost of funds decreased 14 basis points from the prior quarter to 2.03%. The fourth quarter due primarily to lower deposit costs reflecting the impact of Fed funds rate decreases starting in September 2025. Earning asset yields for the fourth quarter decreased one basis point to 5.99% as compared to the third quarter due primarily to lower investment in other earning asset yields, partially offset by slightly higher loan yields. As John mentioned, loan yields stayed relatively steady despite the Fed rate cuts and its impact on our variable rate loan yields due to increased accretion income, higher loan fees, and the repricing of renewed and new fixed-rate loans at current market rates. Noninterest income increased $5.2 million to $57 million for the fourth quarter from $51.8 million in the prior quarter. Primarily driven by a $4.8 million pretax loss in the prior quarter related to the final settlement of the sale of CRE loans executed at the end of 2025 as part of the Sandy Spring acquisition. Adjusted operating noninterest income, which excludes the pretax loss on the CRE loan sale in the third quarter, the pretax gain on the sale of our equity interest in Cary Street Partners in the fourth quarter, and the pretax gains on the sale of securities in both the third and fourth quarters remained relatively consistent with the prior quarter at $56.5 million primarily due to a decline in service charges on deposit accounts of $1.1 million, $400,000 of which was driven by temporary post-conversion fee waivers for Sandy Spring customers. A decrease in other operating income of $807,000 primarily due to lower equity method investment income and seasonally lower mortgage banking income of $727,000 offset by higher loan-related interest rate swap fees of $2.5 million due to higher transaction volumes, and increases in fiduciary and asset management fees of $1.3 million primarily due to increases in estate fees, personal trust income, and investment advisory fees. Reported noninterest expense increased $4.8 million to $243.2 million for 2025 primarily driven by a $3.8 million increase in merger-related costs associated with the Sandy Spring acquisition. Adjusted operating noninterest expense, which excludes merger-related costs in the third and fourth quarters and amortization of intangible assets in both quarters, increased $1.4 million to $186.9 million for the fourth quarter up from $185.5 million in the prior quarter. This was primarily due to a $2.4 million increase in other expenses driven by an increase in noncredit related losses on customer transactions. A $1.7 million increase in marketing and advertising expense. These increases were partially offset by a $1.4 million decrease in FDIC assessment premiums due to lower assessments in 2025 and a $1.2 million decline in furniture and equipment expenses, which was primarily driven by lower software amortization expense related to the integration of Sandy Spring. At December 31, loans held for investment net of deferred fees and costs were $27.8 billion, an increase of $435 million or 6.3% annualized from the prior quarter. At December 31, total deposits were $30.5 billion, a decrease of $193.7 million or 2.5% annualized from the prior quarter. Primarily due to decreases of $260 million in demand deposits largely driven by typical seasonal patterns and $14.5 million in interest-bearing customer deposits. These were partially offset by an increase of approximately $81 million in brokered deposits. At the end of the fourth quarter, Atlantic Union Bankshares and Atlantic Union Bank's regulatory capital ratios were comfortably above well-capitalized levels. In addition, on an adjusted basis, we remain well-capitalized as of the end of the fourth quarter. If you include the negative impact of AOCI and held-to-maturity securities unrealized losses, in the calculation of the regulatory capital ratios. During the fourth quarter, the company paid a common stock dividend of $0.37 per share which was an increase of 8.8% from the third quarter's and previous year's fourth quarter dividend amount. Of note, on a linked quarterly basis, tangible book value per common share increased approximately 4% to $19.69 per share in the fourth quarter. As noted on Slide 17, we are maintaining our full year 2026 financial outlook for AUB that was provided at our Investor Day in December. We expect loan balances to end the year between $29 billion and $30 billion while year-end deposit balances are projected to be between $31.5 billion and $32.5 billion. On the credit front, the allowance for credit losses to loan balances is projected to remain at current levels in the 115 to 120 basis point range and the net charge-off ratio is expected to fall between 10 and 15 basis points in 2026. Full tax equivalent net interest income for the full year is projected to come in between $1.35 billion and $1.375 billion inclusive of accretion income. As a reminder, we consider accretion income resulting from acquired loan interest rate marks as a built-in scheduled accounting tailwind to our GAAP earnings and net interest margin as the accretion income related to the loan interest rate marks gradually transitions to core cash earnings over time as the loans obtained through acquisitions either mature or get renewed at current market rates. As a result, we are projecting that the full year fully tax equivalent net interest margin will fall in a range between 3.94% for the full year driven by our baseline assumption that the Federal Reserve Bank will cut the Fed funds rate by 25 basis points in April and in September in 2026, and that term rates will remain stable at current levels. On a full year basis, noninterest income is expected to be between $220 and $230 million while adjusted operating noninterest expense is expected to fall in the range of $750 million to $760 million, including the expense impact of our North Carolina investment and other 2026 strategic initiatives. Based on these projections, we expect to generate annual growth in tangible book value per share of between 12-15% and produce financial returns that will place us within the top quartile of our proxy peer group, and meet our objective of delivering top-tier financial performance for our shareholders. In summary, Atlantic Union delivered strong operating financial results in the fourth quarter, and in 2025. And we remain firmly focused on leveraging this valuable Atlantic Union Bank franchise to generate sustainable profitable growth and to build long-term value for our shareholders in 2026 and beyond. I'll now turn the call over to Bill to see if there are any questions from our research analysts community. Bill Samia: Thanks, Rob. And, Lucia, we're ready for our first caller, please. Operator: Thank you, ladies and gentlemen. Just as a reminder, if you would like to ask a question at this time, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, simply press 11 again. Please stand by while we compile the Q&A roster. First question coming from the line of Janet Lee with TD Cowen. Your line is now open. Janet Lee: Good morning, Janet. John Asbury: Yeah. Good morning. Janet Lee: I want some more clarifications on your 2026 guide, which was reiterated from your Investor Day in December. Is there any sort of range that you're gravitating towards, whether that's higher end or lower end of that interest income given the higher launching point for QNIM, but although I do expect that NIM will grind down from there in 2026. And it looks like there are different puts and takes in terms of deposits coming in below given seasonality and loans were a little bit above what you guided. So I wanted to see what would put you at the higher end versus lower end, what your baseline expectation is. Rob Gorman: Yeah. So as we've said, Janet, you know, we're guiding to mid-interest income between $1.35 billion and $1.375 billion. To come on the higher end of that, it's really gonna depend on somewhat of do we get elevated accretion income as we saw this quarter? We're not modeling that going forward into 2026. We've got that coming down a bit. Also, I think the other component there is, can we continue to lower deposit costs as the Fed reduces the Fed funds rate? We're taking a bit of a conservative approach on that. Of course, that's dependent on the competition out there and the needs for funding loan growth that we anticipate. So really, we're kind of in that range, but on the higher end, if we could see cost of funds come down a bit more than we're projecting, that would probably lead us to the higher end and accretion income would also add to that confidence if we see that coming in a bit higher. Also, as you know, loan growth could also play a part in that regarding to mid-single digits if we see a higher loan growth and term rates remain high with a steep curve. We could see that coming in at the higher end as well. Janet Lee: Got it. Thanks for the color. And if my calculation is correct, I see the cumulative interest-bearing deposit beta to the rates coming down in the high 40% range, do you still forecast that mid-fifties beta? Or is that a little lower heading into 2026? And I see that there was a deposit remix into more interest-bearing checking, which I assume are lower cost than the other ones. I wanted to see what drove that remix in the quarter and whether that's going to reverse in the quarters ahead. Thank you. Rob Gorman: Yes. So on that, Janet, in terms of the betas, we're still guiding to an interest-bearing deposits guidance of mid-50s, 50 to 55 percent, which is in line with when rates were going up. I think we ended up the prior through the cycle. Beta was around 55% for interest-bearing deposits. On a total deposit basis, we're in that 40 to 45 range. I calculate that we're about 50% betas to date if you go back to when the Fed started cutting in September. And about 40% total deposits. So we're kind of staying in that range. We have seen we've been aggressive on lowering deposit rates. About $12 billion to $13 billion, we've been able to reprice fairly quickly as the Feds come down. That's a good thing to offset our variable rate loan book that reprices with Fed funds. So that kind of is a balancing act there. So in terms of what was the other the end of the other question you had there? Just Janet Lee: Deposit remix? Rob Gorman: Oh, yeah. So there have been some reclasses that have occurred post the Sandy Spring conversion. So there's some of that that's kind of moved in one category to another. That's primarily probably the main driver of that. So don't expect that to shift too much going forward. Level set that now. Janet Lee: Got it. Thank you. Bill Samia: Thanks, Janet. And, Olivia, we're ready for our next caller, please. Operator: Our next question coming from the line of David Bishop with Group. Your line is now open. David Bishop: Hi, Dave. John Asbury: Hey, John. How are you doing? David Bishop: Good. Thank you. Hey. I think I heard you say during the preamble that the loan pipeline had increased relative to that coming into the quarter. Just curious if there's any numbers you can put around it or percent increase and how you're thinking about near-term loan growth here as you talk to your commercial clients? Are you starting to see some traction across the legacy, Sandy Spring portfolio, and is that some of the drivers we saw in the C&I growth this quarter? John Asbury: Yeah. I would say that we had a modest increase in total pipeline by end of year end of quarter versus beginning of quarter. That's really important and a bit unusual for Q4 because as you can see, Q4 was a big quarter. Now as we expected, it was very much back-end loaded. We were teams were super busy over the month of December. The typical phenomena is you would expect to see the pipeline somewhat clean down. In other words, normally, it takes a while for it to rebuild. So we were pretty excited to see that it was continuing to refill, so to speak, over the course of the quarter. And I would just say that what we're hearing, we can see the pipeline. The feedback we're getting from our market leaders is quite encouraging. So we feel pretty good about things. In terms of the outlook. That's part of what's giving us confidence in our mid-single-digit guidance. And it feels pretty Dave Ring, you can comment on this, but what we heard is pretty broad-based in what we see. David Ring: Yeah. I guess I would only add that our folks are very optimistic going into the year. With good pipelines across the footprint. Yep. It's not in one place. Yeah. Including the former Sandy Spring franchise, to be clear. David Bishop: Great. And then, John, maybe a holistic question. You know, change in the governor's branch in there. Just your view here from a business-friendly climate, do you think that's gonna have much of an impact in terms of the Commonwealth's growth capacity and business climate? Thanks. John Asbury: Yes. Thank you. No, we feel good about the outlook here in our home state of Virginia. Virginia has a long tradition of business-oriented moderates in these statewide offices, governor of US senate, and I feel quite confident that, you know, the new governor will continue that tradition. David Bishop: Great. I'll stop there and hop back in the queue. John Asbury: Thank you, David. And, Olivia, we're ready for our next caller, please. Operator: Our next question coming from the line of Steve Moss with Raymond James. Your line is now open. Steve Moss: Hi, Steve. John Asbury: Good morning, John, Rob, Bill. Maybe just following up on the loan pipeline here. Just kind of curious where are you guys seeing loan pricing shake out these days? And also, where is in order reverse deposit costs were at quarter end? Rob Gorman: Yeah. So on the loan pricing side, we're seeing about, you know, $6 to $6.20 loan pricing both on the variable and the fixed-rate loans. So we expect that will continue. It really depends on where short-term rates are, obviously, the variable rate side. And where term rates are. But the spreads seem to be holding up pretty well on top of those indexes. And in terms of the deposit cost at the end of the at December is what you're asking, Steve? Yeah. We're below 2% on that. It's about $1.96 coming out of December. Steve Moss: Okay. Appreciate that. And then in terms of just kind of thinking about the core margin here, I apologize if I missed it, but just curious do you continue to expect core margin expansion here throughout the year and kind of how you're thinking about the cadence if that's the case? Rob Gorman: Yeah. We think core margin will expand a bit. Some of that's coming off, you know, where we talked about the acquired loan book is repricing and coming back into core. So from a loan yield point of view, that's helpful. In terms of fixed-rate loans, coming on about 100 basis points or so higher than what the portfolio yield is. If the Fed cuts more than a couple of times, we probably will see some stable loan yields or margin, or we could see some contraction a bit. But our call is a couple of cuts next year, which is manageable. And as I mentioned, we're able to reduce some of our deposit costs, which I think that's the Fed funds fairly quickly, which will offset some of the variable rate loan impacts of further cuts. So in all, I think we'll see some modest core margin expansion based on those factors. Steve Moss: Okay. Appreciate that. And then just in terms of following up on the purchase account accretion, just curious updated thoughts around the full year number for that? Rob Gorman: In terms of 2026, Steve. Yeah. We thought you know, we're currently modeling $150 and $160 million in 2026. As you know, that can fluctuate. We saw a bit higher than expected in the fourth quarter. So that can fluctuate, but give or take our baseline modeling in the guidance we provided from a margin perspective and net interest income perspective is in the $150 to $160 range. Steve Moss: Okay. Appreciate that. And John, maybe just one for you on, you know, North Carolina's expansion. I know you talked about it a fair amount last month. Just kind of curious as you continue to expand down there in the market, what are the good things you're seeing? Maybe what are some of the challenges you know, as you're building out down there? John Asbury: Yeah. Well, I think that we're making good progress in terms of the efforts to expand the commercial teams, and Sean O'Brien is your head of consumer and business banking. Sean, you can speak to just sort of the latest in terms of the branch build-out. Sean O'Brien: Yeah. We continue to move quickly and have plans for our 10 branches to be open in Raleigh and Wilmington here in the next year and a half, two years, and we're hiring staffing across the bank to make sure there's teams to support on both the wholesale and consumer side. So progress has been very good there as far as finding good sites and finding teammates. We think we're on track, Steve. Steve Moss: Okay. Great. I appreciate all the color here, I'll step back. John Asbury: Thank you. And, Olivia, we're ready for our next caller, please. Operator: Next question coming from the line of Brian Wudzinski with Morgan Stanley. Your line is now open. Brian Wudzinski: Hey, good morning. John Asbury: Hi, good morning. Brian Wudzinski: Yeah. So sticking with the loan growth. So at Investor Day last month, you talked about several different focus areas for organic loan growth over the next few years. There's the Sandy Spring footprint, North Carolina, and also the specialty banking businesses. I was wondering if you could talk a little bit about where you're seeing the most traction in the fourth quarter given how strong growth was. What you see is sort of the near-term driver across those three buckets? Versus what may take some more time to materialize. David Ring: Yeah. We could talk for hours on this one. Let's not do that. You know, we've seen the Sandy Spring part of the franchise really turn the corner from integrating the bank and getting trained up to positive results in the fourth quarter and a really good pipeline going into the first quarter. North Carolina, steady as she goes there. We're hiring into that market. So there's ramp-up periods for folks that we'll see, I think, really nice results over the course of 'twenty-six. But they also have turned the corner. They're also growing, and their pipelines are good as well. And on the specialty side, we have hired the head of healthcare banking, which we talked about in that meeting. And the other specialty businesses actually contributed largely to some of the growth we've had. John Asbury: And then here in Virginia, which would be, you know, the single largest concentration what we were so pleased to hear this week as we did our check-in with all of the commercial market leaders and credit officers is seeing strength across the state. Not and so that's actually really good to see. So we feel pretty good about the setup, Brian. It feels pretty well diversified. Brian Wudzinski: That's great to hear. And, you know, you highlighted the 6% annualized growth in the fourth quarter. Pipeline is up, sounds like production is up. Any puts and takes in terms of how we think about, say, 2026 relative to what you just did in the fourth quarter? Is there any seasonal benefit in the fourth? Was the end of the government shutdown a material tailwind? Or does it feel like you can sort of maintain this cadence over the course of the year? John Asbury: Q4 is traditionally seasonally strong. In my experience, across the industry and that's because businesses are strongly motivated to get things done before year-end for reporting purposes, planning purposes, tax purposes, you name it. So you can always expect to see a seasonally high Q4. Q1 traditionally is somewhat slow. Normally, because so much goes on at the very end of the year. So, you know, we would expect to see the typical pattern, which is it'll build as the year goes on. There's usually a little dip in Q3 as people go on vacation. Frankly. There are some yeah. There are there's normally some element of seasonality, but we see the opportunities there. So we'll see what happens. Brian Wudzinski: Really appreciate the detail, and thanks for taking my questions. John Asbury: Thank you. Thanks, Brian. And we're ready for our next caller, please. Operator: Our next question coming from the line of Catherine Mealor with KBW. Your line is now open. Hannah Wen: Good morning. This is Hannah Wen stepping in for Catherine. Thank you for taking my question. John Asbury: Of course, Hannah. Hannah Wen: Had a question on deposits. We saw a decline in deposits this quarter, and I was wondering if you could provide any guidance on the outlook for deposit growth into next year. John Asbury: Yeah. Let me start by saying we saw the typical, for us, end-of-year decline that happens really in the last two weeks of December. It's not at all uncommon, and we saw it again to where some of the larger commercial depositors will have various payments that they're making. And so you see this downdraft in noninterest-bearing deposits. It happens late, and that's what was going on. Over the course of the quarter, we did continue to run down some higher-cost sort of less relationship-oriented deposits that came out of Sandy Spring in particular. So you've got a seasonal element going in there, and you see the deposit base kind of settling in. Rob, do you want to speak to the outlook for 2026? Rob Gorman: Yeah. So, you know, if you look at our guidance, we're really guiding to about off the fourth quarter base. About 3% to 4% deposit growth for the year. We think that's achievable. Both on the commercial and on the consumer side. You know, we've got more treasury management opportunities in the former Sandy Spring footprint. So there's some opportunities to grow there. So we're feeling pretty good because really low single digits is what we're calling for. Hannah Wen: Okay. Thank you. John Asbury: Thank you. Thanks, Hannah. And, Olivia, we're ready for our next caller, please. Operator: Our next question coming from the line of Steven Skun with Piper Sandler. Your line is now open. Steven Skun: Hi, Steven. John Asbury: Good morning. Steven Skun: Yeah. Good morning, guys. Thanks. So one quick clarification, John. I think you said most of the expenses related to the Sandy Spring deal are kind of in the numbers here, maybe some marginal benefit in 1Q? How should we think about I know we've got the full year guide, but just the run rate for expenses in the first quarter off of this, you know, what I think was around $204, $205 million here this quarter? On an adjusted base? Rob Gorman: Yeah. So Steven, the way to think about that is you're gonna see kind of a flattish quarter in the way we're modeling it. Flattish quarter, first quarter, and it starts coming down a bit over the remaining years. Of course, you understand there is some seasonality in the first quarter as FICO resets, bonus payments are made, unemployment taxes go up. And then we have some merit increases going in. So that'll be kind of the high watermark as well, which is typical. And then start to come down. If you look at it from an operating excluding the amortization of intangible expense, we're calling for, on average, call it, about $188 million a quarter going forward, but it will skew a bit higher in the first quarter and starts to drop off in the subsequent quarters. John Asbury: Rob, what can we say about what's left of Sandy Spring related expenses? Rob Gorman: Yeah. So our well, I think we it's not all in the numbers yet. But we've achieved the cost savings. About $80 million is what we had projected. 27.5%. In the numbers, it's probably about annualized, about 60 some odd million there, call it 60. We're getting another five coming out of the fourth quarter. So that will get you to that $80 million mark. So there is some benefit that you'll see in the first quarter. That's why we're kind of calling for flattish in the first quarter because it's offset by some of these other seasonal items. But you should see that come through going out in the second to fourth quarter. Of course, we also have investments that are being made in North Carolina in some strategic investments we made, which we noted in Investor Day. So those are kind of all in the numbers that I'm talking about. And I referenced there's some residual remaining expenses in Q1, which is think meaning from a merger-related Yes, like merger one Yes. We have a couple of IT decommissioning expenses and a few related to some leases that we're getting out of maybe less than $5 million is our projection for the first quarter. And then merger-related. That's it. It's all over. That is done. Steven Skun: That's great. That's extremely helpful detail. Appreciate it. And maybe I know you kind of noted the progression in North Carolina that potential expansion is still pretty much on path for build out over the next year and a half to two years. Is there any impetus to kind of accelerate any of your plans? Or push maybe deeper into the hiring activity? It seems to be the norm across the spectrum today. Everybody seems to want to hire as many people as they can. With the dislocation we're seeing across the industry. So just wondering if that any of your plans there could accelerate or if you feel like there's a lot of capacity still within the team just given the integration with legacy Sandy Springs into the AUB platform? John Asbury: That would principally be, I think, a commercial or wholesale banking question. Do you want to answer that, Dave? David Ring: Yeah. I mean, this is not the time you necessarily want to hire a banker because you're gonna have to pay their bonus. You mean this time of year? Yeah. This time of year. But we have a pipeline, a strong pipeline of people that we would expect to bring on board, you know, after bonuses are paid at the other institutions. And we currently have a lot of capacity within the team. We have 20 bankers sitting in the market already in Carolina. New Carolinas. And they're very active. And so we're gonna continue to grow using those bankers, but also build out the rest over time. But you should expect to hear about more hiring, you know, March between March and August during the year. We feel we do feel good about the team and our capacity. We're sort of always in the market to some extent, but it yeah. Yeah. We wouldn't expect to see, like, some big announcement that there's some big expansion per se but we'll see how it goes. But there's no constraints on Correct. Hiring. It's just Yes. Hire at least you can. We have a long track record of you know, as we can expand, you know, with the right talent, we tend to do that. And it to make it work out. Little harder to accelerate on the consumer side because you got the branch build-out and things to get yeah. So it's more of a wholesale side. We'll, yeah, we'll push as hard as we can. But it's depending on the hiring capabilities there. Steven Skun: Great. And then just maybe lastly for me, I mean, you've got a lot on your plate clearly in terms of the North Carolina expansion. Obviously, hoping to accelerate growth overall. In terms of uses of capital. But as earnings continue to ramp higher and capital build should accelerate here, at what point do you think you entertain maybe share repurchases or other paths for that you know, soon to be building excess capital over time? And is there a kind of a threshold you wanna hit a capital level first before you'd entertain that? Rob Gorman: Yeah. I think we've been clear that we will entertain share repurchase probably the 2026 of this year. Really looking at excess capital, anything beyond the 10.5% CET one would be what we'd be looking for. To utilize consider excess capital to be in the repurchase market. So we're on track for that as we go through the first for the second quarter of this year. So we said, we could be in the market late in the second quarter or in the third quarter. John Asbury: And I'm glad you asked that question. You saw that we grew tangible capital by 4%, approximately 4% in one quarter. And we're doing exactly what we said we would do. We've invested capital to build the franchise, to secure our positioning, to put us on this profitability and capital generation footing, and now we're receiving the benefits of that. And we've been clear that we are guiding toward 12 to 15% annualized tangible capital growth. So we are going to be in a good position, as Rob said, where we'll be able to consider share buybacks. Steven Skun: Yeah. Fantastic. It feels like everything's laid out before you. Appreciate the color, guys. John Asbury: Thank you, Steven. And, Olivia, we're ready for our last caller, please. Operator: We have a follow-up question from David Bishop. Your line is now open. David Bishop: Hi, Dave. John Asbury: Hey, John. Real quick, I guess, a question for Rob. You noted the in other expenses, noncredit related customer losses. Is that is that fraudulent? Type losses? Just curious what sort of drove those other expenses higher. Rob Gorman: Yeah. That's mostly what that is. Fraud is episodic. And, you know, it can come and fit some spurts and that's what you're looking at. Because it was elevated just a couple of items or issues that came up in the fourth quarter. Hopefully, they don't recur, but yeah, you know, they're here to yeah. Do you get these scams that move around the industry? And then there'll be something else. That's episodic. Yeah. We don't But that's what that run rate. Issue. David Bishop: Got it. So within your OpEx, you know, guidance, for the first quarter to flattish, would that be flattish off the reported sort of 2.04 you know, point six on an adjusted basis, or would it be know, sort of two zero two adjusting for the fraud? Rob Gorman: Yeah. It's kind of in each yeah. Kind of around that range, you know, two zero three, two zero two, two zero three, including the amortization. Just because there's, you know, ads. Think about it as yeah. We may not see that level, but there's other things that'll come in from a seasonal point of view. David Bishop: Got it. Appreciate that color. John Asbury: Thanks, Dave. And thanks, everyone, for calling. We look forward to speaking with you in three months. Have a good day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Sandra Åberg: Good morning, and welcome to Essity's presentation of the Q4 and full year 2025 results. Here to take us through the highlights, we have our CEO, Ulrika Kolsrud; and our CFO, Fredrik Rystedt. After the presentation, we will open up for your questions. [Operator Instructions]. With that, let's get started. I'll leave over to our CEO, Ulrika. The floor is yours. Ulrika Kolsrud: Thank you, Sandra. And also from my side, welcome to this webcast. The final quarter of 2025 confirms that we are standing strong in a continued challenging market environment. We continue to grow in our strategic segments, such as Incontinence Care, Wound Care and premium products in Professional Hygiene, and we strengthened market shares across our different branded categories. We're also strengthening our profit margins. Actually, we are strengthening our profit margins in all 3 business areas in the quarter, and we delivered a stronger result than last year's same quarter. When it comes to volumes, sequentially, we have a stronger volume, so stronger volume in Q4 versus Q3. Looking at quarter over last year's quarter, however, there was a flat volume growth. And that, together with the fact that we are then lowering prices in order to compensate for lower input costs is resulting in that we are reporting a negative organic sales growth. And that underpins the importance of the initiatives that we took last quarter to accelerate profitable growth. We are now operating in the new organizational setup with decentralized decision-making with end-to-end accountability and with even sharper focus on our most attractive categories and segments. And we are starting to implement our cost-saving program. In the quarter, we also strengthened our position for profitable growth by acquiring the Edgewell Feminine Care business in North America. And now with the brands Carefree, Stayfree and Playtex in our bag, we are more than doubling our Personal Care sales in the U.S., in line with our focus on high-yielding categories in attractive geographies. Another key highlight of the quarter is that we again got recognized for our strong sustainability performance. So we were awarded for the EcoVadis Platinum Medal, recognizing our sustainability performance, placing us among the top 1% companies worldwide that they are assessing when it comes to sustainability performance. And also, we have been placed on the CDP prestigious A list. I would say sustainability performance is important in all of our business areas, but not the least in the health care sector. Many of our customers in the health care sectors have high ambitions when it comes to sustainability. One good example of that is one of our biggest customers, NHS, in the U.K. They continue to pursue ambitious sustainability agenda even if there is financial pressure, with increasing demand for health care and funding under pressure. And speaking about funding under pressure, we talked already last quarter about that we see in some selected markets that there are some cuts in funding, and we continue to see that, for example, in Indonesia. That does not, however, prevent us from growing. Quite the contrary, we have a positive organic sales growth in Health & Medical, and we grow volumes both in incontinence Care as well as in Medical Solutions. If we double-click on the Medical business, this is the 19th consecutive quarter that we grow the Medical business, and we grow in all 3 therapy areas. A critical success factor behind this good performance in Health & Medical is, of course, our strong and unique offers that we have. And we continue to strengthen those offers. In the quarter, we upgraded one of our flagship products in the TENA assortment, the belted TENA Flex product. This product is specifically easy and ergonomic for caregivers to use on bedridden patients. And in this quarter, then we upgraded it with an even better comfy stretch belt. The elasticity is better, so it adapts easier to different body types and thereby, you can use this product for more patients. Also in the quarter, we relaunched one of our unique offers in the Advanced Wound Care assortment, the Cutimed Siltec Sorbact product. And in connection with that, we kicked off a new brand campaign for Cutimed on the theme of imagine a world where wounds would heal faster. And in this campaign, we showcase how our unique offers are helping health care to improve patient outcomes and reduce health care costs, thereby improving health economic -- or bringing health economic benefits. And it's, of course, leveraging these unique advanced solutions that is helping us and contributing to our performance in Wound Care and allowing us to gradually strengthen our positions in this category. Strengthened positions is also the theme if we go to consumer goods. In the quarter, we strengthened our branded market shares in 65% -- more than 65% of our business. And this is not only attributed to one of the categories, but it's actually contributing from all different -- all 4 categories. Looking at Incontinence Care, there, we strengthened our market shares, and also it's a fast-growing category. So as a result of that, we saw very good growth in Incontinence Care. In Feminine Care, we were impacted by a one-off, but underlying, we continue to perform very nicely also in this category, and that is demonstrated through the market share development that we see. In fact, in feminine, we grew our market shares in 80% of our business. And we had also some good records that we saw in the quarter. One very exciting of those is that we now in Mexico have 62% market share in Feminine Care. And as you know, Mexico is one of our most important markets for Feminine. Another exciting development in the quarter in Feminine was that we now are back to growth in Knix washable absorbent underwear. And that is thanks to new retail listings, higher prices, as well as product launches. Then if we move to Baby Care and Consumer Tissue, here, we saw an organic net sales decline. And this is for the same reasons that we have talked about previous quarters. So in Baby, we are impacted by the lower birth rates and also the fierce competition that we see, and consumers being more price sensitive than what we have seen before. And in Consumer Tissue, it's the weak consumer sentiment that makes the growth happening mostly in the mid- and low-tier segments, and we also lost some private label contracts due to pricing. Then it's very encouraging to see that we are growing our branded business, both in Baby as well as in Consumer Tissue. And that's a testament to the effect of our launches and our marketing activities. They are really paying off. And we continue to have a very high activity level in Consumer Goods. As you can see here on the slide, there are many different launches to talk about in the quarter. But in the interest of time, I have to choose one of them. And I choose to talk about the upgrade of our thin assortment, our thin towels in feminine care in Latin America. So having thin feminine pads is, of course, more discrete and comfortable than using thick pads when you have menstruation. But even so, many women actually choose thick pads because they don't fully trust the leakage security of the thinner ones. Now with this upgrade, we are introducing a new core technology that we call SmartPROTECT that manage even sudden gushes and thereby increased leakage security. And for that benefit, we have 2 -- actually 2 benefits of that. One is, of course, that we strengthen our superiority even further in this ultra-thin segment in the market, but also that we move consumers from the thicker pads to the thinner pads, which is a benefit because we normally have higher profitability in this segment. Now the activity level was also very high in Professional Hygiene in the quarter. Here, market growth continues to be depressed following the weak consumer sentiment, and we see that as impacting our sales. But we are responding to that by continuing to have selective price adjustments, continuing to work with joint sales plans together with our distributors, and also adapting our assortment. In this situation, it's super important to be competitive in all different price tiers. And in the quarter, we launched some what we call volume fighter specifications to make sure that we are at the right price point for the customer. We expect this to pay off in the coming quarters, but what has already paid off is really our push in the premium segments. So we continue to see strong growth in our premium segments in Professional Hygiene like Tork skincare and Tork PeakServe. We also continue to develop these products even further. So in the quarter, we launched an automated sensor-based dispenser for PeakServe in addition to the manual one that we have already. And that will broaden the relevance of this premium solution in the market. We are also broadening the relevance of our center feed dispenser solutions. The center feed dispenser solution allows you to take one sheet at a time, which is more hygienic and it also controls consumption. So it's cost efficient for our customers. Now in some segments, it's more important with design than in others. A good example of that is in restaurants that have an open kitchen. Then, of course, you are very dependent on a good-looking dispenser. And if you see on this picture, the black stylish dispenser here is what we launched in the quarter, and that is really a very strong fit into these type of environments. I would even call it decoration. It's really nice. Also, we launched a new refill paper with natural color that also has a lower price point. And that is then an excellent choice for those customers who are either very price sensitive and/or want to work with their sustainability image. Now all of these innovations that I'm talking about, they have 2 purposes. I mean, one is to expand the relevance of the product, but also, of course, to drive product superiority. And with product superiority, we mean that it's the preferred choice by customers and consumers. And looking across categories in 2025, we reached a record level when it comes to product superiority. And that, of course, makes us very well equipped to continue on that positive market share growth that we have seen in the fourth quarter of 2025. And now after all of these talk about products and innovations, I'm sure you guys want to hear a bit about the figures behind this. So over to you, Fredrik. Fredrik Rystedt: Thank you, Ulrika, and I will put a few numbers to what you have been talking about here. And as you can see, and you've already mentioned it, we actually had, in terms of organic sales, a negative development during Q4. And this is basically driven by price decline and a slight volume decline. It's maybe worth noting or perhaps repeating what you said, Ulrika, we are taking market share. So this is very much a market issue. And if we actually look at the sequential development of volume, it's always a little bit of seasonality. But nevertheless, you can see that we actually grew our volume sequentially between Q3 and Q4 with just under 2%. So it's a good momentum despite the fact that we have a decline versus Q4 of 2024. I mean, some of you will actually remember that Q4 of '24 was very strong. So we also have a bit of difficult comparable. Now as before, the volume decline is very much driven by Baby, or same as in Q3, our Baby business, our Consumer Tissue business and also Professional Hygiene, and these all are leading to the group decline of volumes of minus 0.2%. So just really brief, Health & Medical, you've said it, Ulrika, we had a good volume development in Inco Health Care and Medical. And if you look at the Medical area, actually all therapy areas and especially Wound Care, so that story you will remember. And if you talk about price and mix, largely flat in Health & Medical. Consumer Goods, Inco really, really doing very well in terms of volume, Inco Retail. Feminine is as well. It's a little bit -- it's positive volumes, just under 1% of positive volumes. And that is actually despite a fairly weak market in Europe. So overall, you can say we are growing, but the European market is a bit challenging. Ulrika talked about a onetime issue in Feminine, and that is related to an adjustment that we have made of customer rebates in Latin America. So we've increased those, and that has actually impacted sales and the pricing components, and this is why you see a negative organic sales growth for Feminine. And this is temporary for the quarter. It will go back to normal in the next quarter. And if you actually adjust for that, we have stated that the underlying growth is good. And so what we mean by that is that growth would have been -- organic sales growth would have been low single digits, to give you a little bit of perspective. When it comes to Baby, again, we are gaining in our branded business in the Nordics, but we are continuing to lose in the rest of the retail branded business in Europe. And overall, volumes are down with approximately about 4%. That's also for the market as a whole. So it's not just us, but it is a very competitive market in Europe. And this is also why we are losing volumes. And finally, Consumer Tissue, we're struggling a bit with volume there, minus 2%. And this is all actually related to private label. We have talked about this before. So there is no news here. We have lost a few contracts on the back of pricing. And of course, we have always prioritized margin over volume. But of course, we don't want to lose volume. So we have selectively actually reduced prices in Consumer Tissue. And hopefully, that will pay off as we go forward. HoReCa, we've talked about Professional Hygiene, and this is, of course, still leading to a slight volume loss of about 0.5%. And there are signs here of at least stabilization of the HoReCa markets. So here, we're hoping for better conditions going forward, but there time will tell. And to summarize maybe for the group, minus 0.2% in terms of volume, minus 0.9% in terms of price and mix is actually flat. So that sums it up a bit. Then if I go to the margin, you can see that we've actually -- we've improved our margins, both if you compare between Q4 of '24 and Q4 of '25 and sequentially. And it's not only for the group, it's actually for all the business areas. Gross profit, as you can see, increasing by 180 basis points, and this is on the back of lower COGS as we flagged when we talked to you last or after Q3. So that actually happened. And we've maintained a very good price management in the quarter, all of that leading to that very good improvement of the gross profit margin. The COGS reduction is all about, I should say, raw material energy, but we actually -- and this is a little bit of -- we're proud of that. We managed under tough conditions to reach also our COGS savings of just above SEK 500 million. So you will know our target for the year was SEK 500 million to SEK 1 billion, and we said we were struggling to reach that range, but in the end, we actually managed to do that, and that contributed to that margin enhancement. As you can see, and we've said that, we want to fuel our growth. We want to fuel our innovations that we put on the market. So we are spending more in terms of A&P, and that's both percentage of sales-wise and as an absolute number. When it comes to SG&A here, you see that it's actually favorable. So we have reduced in terms of absolute. Also in constant currency, we have reduced our spending in terms of SG&A. And this is due to, of course, a tight cost control. That's not surprising to you. We've reduced our travel, as an example, with more than 30%. We have a bit of lower bonus accruals. And there is also a bit of onetime here that is positive. So it's not as good as you see here. There is a bit of onetime. But if you look at the overall group, there is also positive and negative onetime impacts in the result. So overall, all the onetime impacts are balancing off for the group as a whole. But all in all, we're quite proud of our SG&A performance. So let me then just talk a little bit about the SG&A program, the cost saving program that we have launched previously. And as you know, we're aiming for a run rate saving of SEK 1 billion towards the end of '26. Now we are actually aspiring to reach quite part of this saving already throughout this year, but that will be more towards the latter part. So you can expect more of the savings. So far, we have realized very, very little, and we've also put fairly little in terms of restructuring charges. We expect the cost of this program to be a bit over SEK 1 billion, so approximately SEK 1.1 billion in restructuring charges. Let me end this part with a little bit of guidance for Q1, as we normally do. We expect actually COGS to be slightly lower, partly from savings, but also a little bit from currency or positive currency impact in raw materials. So slightly lower COGS, that is what we expect. And we are expecting a slightly higher SG&A. And please remember, I'm now giving you guidance Q1 of '26 versus Q1 of '25. So we are expecting slightly higher SG&A, and this is primarily driven by higher A&P in line with our ambition to fuel growth. And customary, and you know that, we also give you a little bit of guidance for the full year, and we expect CapEx, to start with that, between SEK 8 billion to SEK 8.5 billion, a bit higher than we had in '25. And this is actually partly phasing and just ambitions to grow as we go forward. We expect other cost or the corporate cost, if you will, to be approximately SEK 1.3 billion, so very similar to this year -- or to 2025. The structural tax rate to be between 25% to 26%. And then finally, on the COGS savings, we remain with our estimated range of SEK 500 million to SEK 1 billion. So let me move on then to the cash flow side. We're quite pleased with the cash flow here in Q4. This is driven by obviously a good cash surplus. The margin was good. So this was a good operating cash surplus, but we also had good working capital management. So inventory days came down a little bit, continue to do that. And we had unchanged credit days, both in receivables and payables. So all fine in terms of working capital. And net cash flow was also quite strong. And this cash flow has driven a continued strengthening, of course, of our balance sheet. So net debt-to-EBITDA is approximately 1.0 here, as you can see at the end of the year. We've continued to repurchase shares in line with our program that we launched with SEK 3 billion. And so far, we have purchased 9.2 million shares or totally SEK 2.4 billion. So we are roughly about 80% through this year's program. So let me then finalize with a little bit of overview of 2025. In many aspects, this was a good year. We had an organic sales growth of 0.9%, and this is despite challenging market conditions. We actually had growth in all our business areas. We maintained our volumes and price management remained strong for the entire year. In terms of margin, we've already talked about that, but it was a very good year in terms of margin. In fact, if you look at that operating margin of 14.1%, it's the second highest we've ever had. It's second only to the artificially high margin during the pandemic that was caused by all the panic buying, for those of you who remember. So this is, from a historic perspective, a very attractive margin. And then turning a little bit to what does that imply? And some of you may have seen from the report that our EPS growth was, if you look at it, between 2024 and 2025 in nominal terms, roughly about 1% growth. Now of course, the Swedish krona has strengthened a lot. So if you actually look at the EPS growth in comparable currencies, you will see a growth of roughly about 8%. And this is quite consistent with the long-term growth of about 6% if we start with the birth of Essity as the first year. So continued good performance. And this is, of course, on the back of good margins, the growth we've had and of course, also a shrinking finance net as our net debt has reduced. Finally, then the Board has -- or will propose to the AGM a dividend increase of SEK 0.50 to SEK 8.75. This represents an increase of about 6%. And if you look at, once again, from the birth of Essity, you can say this is consistent with the growth that we've had, roughly about 6% or a total growth of 52%. So with those words, leaving over to you, Ulrika. Ulrika Kolsrud: Yes. Thank you, Fredrik. And with that, we are leaving a solid 2025 behind us. We finished the year with stronger market shares with continued growth in our strategic segments and not the least with strengthened profit margins. It's been, from an external perspective, a quite turbulent year with a lot of geopolitical uncertainty and the weak economy. And that has, of course, impacted also our industry. And we see that the resilience that we have shown during this is really a sign of strength. As Fredrik has shared, we have grown organically during the year. We have strengthened our profit margins, and we have now the strongest profit margin in 5 years, and we have delivered a solid result. So we are proud over this, but we're also determined to accelerate our profitable volume growth and to speed up our progress towards our financial targets. And therefore, the initiatives that we've launched earlier than in 2025, with the reorganization with the cost saving program and with the acquisition of the Edgewell Feminine Care business in North America. And we bring those initiatives with us together with then the very strong financial position we have into 2026, where we remain fully committed to our strategy to drive profitable volume growth. And we will do that by, first and foremost, making sure that we have the customer and consumer at the center in everything we do. We will also do that by continuing on the path to strengthen our market shares and our product superiority. We will, of course, integrate the Edgewell acquisition to strengthen our Personal Care position in North America. And we will implement our cost save programs, both the COGS cost save program that Fredrik was talking about as well as then the SG&A cost save program, where we have the ambition to reinvest the majority of that into fueling profitable growth. And also, we will fully leverage our new organizational setup with end-to-end accountability with more decentralized decision-making and also with even sharper focus on our most attractive parts of our business, so that we can unleash the full power of our fantastic Essity teams, and also to make the boat go faster. Speaking about our fantastic Essity teams, you have the opportunity to meet some of them if you join us in our Capital Market Day on the 7th of May. We will host that in our Mölndal office in Sweden, which is our largest office. And you don't want to miss the opportunity of hearing more about our strategy to drive profitable growth and to be able to see some of our R&D laboratories in this facility as well as production facility in the neighborhood. So I really hope to see all of you there. Sandra Åberg: Thank you, Ulrika, and thank you, Fredrik, for that walk through. Now we are ready to take your questions. [Operator Instructions]. Ulrika and Fredrik, are you ready to open up for questions? Ulrika Kolsrud: Yes. Sandra Åberg: Perfect. We have the first question from Niklas Ekman, DNB Carnegie. Niklas Ekman: Can I start asking about kind of your priorities for '26 here? Obviously, volumes have been weak now for some time. And now you have a couple of quarters with a pretty strong margin expansion. How do you view that now in '26? Are you willing to sacrifice some of that margin in order to restore volume growth? Or are you more optimistic maybe about the market now having had some kind of cyclical headwinds, that they might turn to some tailwinds in '26? Or you're thinking there on the mix between organic volume growth and margins and what your priorities are? Ulrika Kolsrud: Well, as we have talked about previous quarters as well as in this quarter, we are doing selective price adjustments in order to fuel volume growth. And also, we have the intention to increase our A&P investments. We have seen that the investments that we do in A&P is paying off very nicely, as you saw in the market share development. So that we will do. And then the volume growth will give us operating leverage and thereby also securing the profit margins. And since we talk about this and how to drive volume growth, I want to mention one thing that we're also very proud of in 2025 that will support volume growth in '26, and that is our innovation delivery in the year. We increased our share of sales that is generated through innovations and also the superiority record that I talked about earlier. That shows that we are strengthening our offers to consumers and customers, and that is the base for driving volume growth. And then, of course, we need to make sure we have the right price positioning and that we support those fantastic offers with A&P investments. Niklas Ekman: Very good. But do you see any risk of margins? Or are you looking at maybe sacrificing some of these strong margins now to accelerate growth? Or do you think that you can do both? Ulrika Kolsrud: Our ambition is to do both. I mean, in some areas, of course, when we have selected price adjustments, that will have an impact on margin short term. But in other areas, we have opportunities to go in the other direction. So that is a continuous work that we do to optimize this. Fredrik Rystedt: Maybe to add, if I may, Niklas, as you are aware of, and we communicated last quarter that the cost saving program will generate fairly significant savings. And of course, we are aiming to use those funds to actually do what Ulrika was talking about here in terms of fueling growth, both in terms of selective price decline, but also A&P spend. So this is a way to make sure that we can do both, just to emphasize. Sandra Åberg: Next up is Charles Eden from UBS. Charles Eden: You mentioned the lower volumes and prices in Consumer Tissue private label. Are you able to quantify the organic sales decline for that business in Q4? And can I ask whether the continued challenges of this unit makes you reconsider whether this asset is indeed core to Essity going forward as you concluded at the most recent strategic review of this asset? And then if I can sneak a clarification question, it's the usual one for me, Fredrik, on the group EBITA bridge. Of the SEK 749 million cost of goods sold tailwind in the quarter, can you help break that down between raw mats and energy distribution? I've got the SEK 190 million benefit from COGS savings in Q4 from the press release. Ulrika Kolsrud: If we start with the second question, maybe there with the reconsidering, I mean, we are continuously looking at our portfolio in evaluating and optimizing our portfolio. Then Fredrik, maybe you can help on the details of private label... Fredrik Rystedt: COGS... Ulrika Kolsrud: Yes, and the private label part. Fredrik Rystedt: Yes. Charles, we are not giving the details specifically as to the individual components. So I'm not going to say that. But of course, we already alluded to that the majority of the decline in volumes of the 2% or just under 2% is coming from there. But it's worth noting that the performance or actually EBITA is really, really good with Consumer Tissue private label. And we always have a bit of volume volatility in Consumer Tissue private label. So I don't think you can draw the conclusion that it's a bad business. In fact, it actually is generating quite a healthy margin and good profit. It's just that for the time being, volume is actually low. Should I answer also -- you were asking for the breakdown of COGS, right? Was that your question there? Charles Eden: Yes. Fredrik Rystedt: So the majority was related to raw materials. So that was about 2/3, give and take. And then we had energy, how should I say, more or less the rest. And then if you look at the other COGS, which was basically volume decline or less absorption plus new lines, et cetera, that was about the same as the cost saving program, so to give you a little bit of indication. Does that answer your question, Charles? Charles Eden: Yes, it does. Thanks, Fredrik. Sandra Åberg: Then let's move to the next question. Warren Ackerman from Barclays. Warren Ackerman: Warren Ackerman here at Barclays. Could you maybe sort of dive a little bit deeper on the A&P spend? You're talking about the increase to help drive the volume. I get it's going to be funded from the savings. But are you able to say -- I think it's around 5% of sales at the moment. But how much do you want to increase that by? And what is your current A&P mix in terms of online digital, and how do you measure the returns on that investment? What kind of tools do you have to sort of figure out where and how you allocate that spend? It sounds like it's going to be a big part of the story for this year. So just keen to understand a bit more on the details. Ulrika Kolsrud: And I can answer to some extent today, but I would also then invite you to the Capital Markets Day and talk more about this in detail. But of course, we are eager to measure the return of our marketing investments. So we do that on a regular basis. And it's by doing research on what we produce as well as following up that the activation is having the effect that we expect, both when it comes to purchase intent, when it comes to awareness and, at the end of the day, that it's generating the sales and the repurchase that we are expecting. So that we do on a continuous basis to make sure that we allocate the investments to where they do the best job for our brands. That was one question. The other question was more about how much we intend to increase A&P. Fredrik Rystedt: Yes, we haven't specified that. And of course, it's connected also to the innovation that we put on the market, because that always has an impact on the A&P spend. But generally speaking, we are, of course, convinced and, Ulrika, you gave a couple of examples here that A&P in general is fueling growth and is also profitable. You were asking there, Warren, about how we actually track profitability, return on market investments that we do. We believe we are reasonably good at it. Of course, as you always know, it's really very difficult to exactly have a scientific way of measuring. But we think we are pretty okay with measuring return of market investment. So to allocate where to put it, I think we are doing it reasonably okay. So we can't give you exact answers to your question as to how much or exactly how much the return is. It varies a lot. But generally speaking, we will increase, and we think we know where to increase. Warren Ackerman: And maybe just to clarify quickly, Fredrik. I guess I'm going to press you a little bit from a modeling point of view, I mean another way to ask it is, of that SEK 1 billion savings, how much of that will be sort of allocated to reinvestment? Or maybe another way to ask it is that 5%, how does that benchmark against peers? I mean, from a modeling point of view, do we stick in 6%? Or I mean, because it's sort of like it's quite a big swing factor. So any kind of help would be useful. Fredrik Rystedt: Yes. It's a great question. And of course, we got this question last quarter that is this going to impact in the end the EBIT margin or EBIT line. And we said, yes, it will, indirectly. So it's not so that we are putting the savings to our income statement or to the EBIT line immediately. We are investing it. And through that return on market investment, we believe that over time, we will both get operating leverage for growth and then, of course, margin enhancement. And it's not all about A&P, it is also about a combination of selective price increases that we partly have already done, but will do and A&P increases. So it's actually both. It's very difficult to give you specific details on exactly where, it's many different combinations. But over time, we think it will be profitable. Your final question as to how do we compare. Quite difficult to answer that. We are making a lot of benchmarking and trying to kind of adjust for the differences in structures and categories. But I think overall, there is an upside for us to do this. Sandra Åberg: Let's continue then with a question from Johannes Grunselius from SB1 Markets. Johannes Grunselius: I have a question on COGS again, if you can dive in a bit more there. Because Fredrik, you mentioned here, you will have slightly lower COGS year-over-year in Q1. In Q4, you obviously had a tailwind year-over-year of SEK 749 million. It's such a huge COGS base. So maybe you can provide a range or something on the year-over-year tailwind in Q1, that would be very appreciated, if you can give any indications, please. Fredrik Rystedt: Yes, we can. So thanks, Johannes, for the question. And we have chosen to guide only on COGS as a totality, because understanding all the ins and outs doesn't make things easier to actually grasp. So we are typically reasonably accurate when it comes to the estimate of the entire COGS number, and this is why we are giving it to you. But as I said, raw material is largely -- they're a bit in and out there, or positive and negative, but it's largely going to be a bit positive as energy as well, perhaps, if we compare then Q1 versus Q1. We're going to continue to have a little bit of unfavorable volume comparisons. We're going to have a bit of new -- or cost for new lines that we will have -- we're putting in place in Q1, and then we'll have a bit of cost savings. So all in all, this will give a slightly lower cost. The main driver actually still being raw material. And if you think about the main driver of raw material, it's actually mainly favorable FX actually. Johannes Grunselius: Okay. Okay. Can I put it the question in this way, if we look at COGS sequentially, are you thinking about more stable COGS? Or are COGS perhaps up a bit Q1 over Q4? Fredrik Rystedt: It's mainly stable. Mainly stable, you can say. Sandra Åberg: So let's move to the next question. Aron Adamski from Goldman Sachs. Aron Adamski: First, I had a follow-up on growth expectations for 2026. I mean, against the backdrop of lower input cost environment that you highlighted, would you expect price to be negative for the entirety of '26? And given that context, would you expect to achieve a better organic sales growth in '26 than you have done in '25? And then second, a quick follow-up on the A&P discussion. Can you please give us a sense of how the advertising step-up is going to be phased through 2026? Is it going to be more front-loaded? And therefore, could we expect the margin delivery to be relatively weaker in the first half of the year, given everything you said on volume, price adjustments and the cost savings delivery? Ulrika Kolsrud: I almost forgot the first question after the third question. What was the first question again? Sorry. Aron Adamski: Sorry, just on pricing expectations for '26. Ulrika Kolsrud: Yes, it was pricing and volume expectation, that's true. So I mean, we need to be agile and want to be agile when it comes to pricing because it's, of course, dependent on what happens in the market environment. So we are adapting to both, of course, what happens with input costs, but also what happens when it comes to demand and need to adapt to that situation as well as being fully equipped to capture the market growth when the wind is turning. So therefore, of course, there are scenario planning and so on, but to be agile is most important. When it comes to organic growth, yes, our ambition is clearly to move towards our financial target with 3% organic growth. So our ambition is to accelerate our growth. But again, we are in a volatile environment. So it's so important for us, and that's why it's so great to see that we are strengthening market shares in this quarter, because when the market is as volatile as it is, what we can focus on a lot is to win the relative game. And what we see in the quarter is that we're doing exactly that. And what's also important for us is that we win where it matters the most, and that is to drive our strategic segments. So that was an answer to say that we need to stay agile and see what happens in the market and then adapt to that. Sandra Åberg: Perfect. Aron, does that answer your question? Aron Adamski: Yes. Just on the second question on the phasing of margins, I suppose, for 2026, maybe if you could give us a bit more color on how the step-up in A&P is going to be phased and how is that going to impact the margin phasing through the year? Fredrik Rystedt: Maybe I can -- we don't give those kind of detailed guidance, as you've seen, Aron, but just maybe as a little bit of still a hint or 2, maybe even. First of all, you can see that Q4, as we have just reported, was higher than Q4 of '24. So that step-up has already actually happened. And if you remember, I mentioned -- maybe you weren't participating, but I actually mentioned that we do expect higher SG&A cost in Q1 on the back of higher A&P. So this gives you a little bit of hint. So we believe that the higher A&P cost will be there immediately -- actually already is there, higher, if you see the numbers. Sandra Åberg: Now let's move to Tom Sykes, Deutsche Bank. Tom Sykes: Would you be able to say how the A&P to sales for you differs by category? And just what are the categories which would have the greatest elasticity to increased A&P spend, please? And maybe just in addition is, what's happening to your trade retail spend? And how big is that in the COGS costs presumably? Ulrika Kolsrud: Well, if we look at A&P to sales, it's the categories that you find in Personal Care that has the consumer brands that has the biggest A&P spend in relation to sales, or I should say A&P investment rather in share of sales. Then if you look at a category like Wound Care, for example, you have a much lower A&P in relation to sales. There, it's much more about the sales force and equipping the sales force with the right products and support. And you find that fueling growth is through the sales force. And then we have everything in between there. Tom Sykes: Okay. And in terms of sort of the elasticity, where do you think the best place to allocate incremental A&P is? Was it just across the board? Ulrika Kolsrud: Yes. This is more about where we have our most attractive segments and categories. We want to invest the most where we have the highest potential for profitable growth and the strongest reason to win. So I think what you've seen here also now is that we have had good effect of investing, for example, in Feminine Care as well as in Incontinence Care. But we do want to fuel growth across our categories, but that should give you an indication. Fredrik Rystedt: And I guess, Tom, your question on trade spend, are you referring then to promotional activity there, I guess, right? Tom Sykes: Yes. I guess it's yes. That's spend with retailers. Fredrik Rystedt: Yes. And that is by far Consumer Tissue traditionally. So the promotional -- the percentage of all products sold under promotion is by far highest in Consumer Tissue. Tom Sykes: Okay. So that's just sitting in reduction of your revenues? Is it... Fredrik Rystedt: It's a pricing issue. It's a way -- you can say the pricing activity, they're strategic, so kind of headline pricing, and then you've got tactical pricing. And so promotion is a tactical -- it's what you do on a more temporary basis. So it's not list price adjustment. Tom Sykes: I get some of it. Sorry. Is there not spends that you would do on the websites of major retailers to get up the ladder of people searching for particular categories? I mean, that wouldn't -- or do you just include that in pricing? Ulrika Kolsrud: No, there is also brand communication and marketing that we do through the retailers or in connection with the retailers. So that is one element. But to Fredrik's point, when it comes to price campaigns, that you see in the sales. Tom Sykes: Okay. But just to clarify, does all your, if you like, A&P type spend, setting aside any promotion and price reductions, does all of that sit in the A&P line? Or does some of it sit also in the COGS line, because it's trade spend that goes on? Fredrik Rystedt: Not in COGS. It's not in COGS. It's either sales or A&P. So in this case, what you're referring to is A&P. So it's not COGS. I'm not sure how that could be possible. But we can talk about that offline, but it's not in COGS. Promotion is in sales and marketing in A&P. Sandra Åberg: Perfect. Next question comes from Karel Zoete from Kepler. Karel Zoete: I have 2 questions, if I may. The first one is in relation to M&A. You've done last year, one acquisition, but the market is difficult certainly in places such as Latin America. What's hindering you from doing more M&A? Or why haven't we seen more acquisitions over the last 18 months given the difficult markets? And then the second question is more in relation to Asia. I think there's still an agreement within that they can use some of your brands. What's the status of this? Is this going to be renegotiated in the coming year? Or do you have plans to build operations yourself selectively to capture some of the growth in the Asian market? Ulrika Kolsrud: If I start with the M&A question, maybe you can answer to Asia later. We continue to work actively with M&A, identifying potential targets and assessing potential targets. As you know, it's part of our strategy to grow both organically, but also inorganically. So we clearly have the ambition to do value-creating M&As. But we are, to that point, very disciplined to make sure that they are value creating. So that is, of course, always what we're doing in the screening to make sure that, that is the case, and always judging what is the most value creating, is it organic growth or inorganic growth. And you could argue, of course, when it comes to valuation, that in order to bridge the potential valuation gap, we need to find quite a lot of synergies then to secure that value creation. So the short answer is that we have the ambition to drive more M&As and are working on that actively. Fredrik Rystedt: So Karel, when it comes to Asia, the story isn't really different there. When we divested Vinda in 2024, there was a license agreement for these brands, and that expires in 2027. Now as we sold the company, we also granted an option for the buyer to continue licensing these brands also in the future against, of course, a license fee. And that option has not yet been translated into an agreement. And of course, we remain unsure of whether that will actually happen. So there are 2 possibilities here. One is that we continue with the license agreement subject to the buyer actually exercising on that option, or if they don't, then, of course, we get those brands back in Asia. So we cannot give you an answer at this point of time as we actually don't know. Sandra Åberg: Let's move then to Misha Omanadze, BNP Paribas. Mikheil Omanadze: I just wanted to zoom in a bit more on your end market dynamics where you already provided some helpful color. And overall, it seems that the markets remain challenging. If you were to look at your biggest category geography exposures, where would you say you saw the biggest sequential change from the previous quarter in both positive and negative direction in terms of end market trends and consumer environment? Ulrika Kolsrud: I wouldn't say that we've seen any big movements between quarter 4 and quarter 3. It's been quite stable when it comes to market environment. Sandra Åberg: Next question comes from Henrik Bartnes from ABG. Henrik Bartnes: One question for me, please. You have historically talked about seasonally lower volumes in Q1 compared to Q4. And if we look at Q1 sequentially, how should we think about volumes this year? Are there any indications that this year won't show any seasonally lower volumes? Fredrik Rystedt: I can maybe answer. First of all, we don't give volume estimates. We can only report what has historically been the case in terms of seasonality. So as you rightly say, seasonality would suggest that volumes in Q1 are lower than Q4. It's not actually one and the same for all our business areas or categories. Some don't have that. But in general, if you look at the group as a whole, clearly, volumes are typically, I should say, lower in Q1 versus Q4, but we are not giving an estimate for '26 specifically. Sandra Åberg: Let's now move on to Celine Pannuti from JPMorgan. Celine Pannuti: So my question is coming back on the Consumer Goods performance with price/mix negative. I think you mentioned that you had to roll back some pricing in order to keep some of your customers. I think it was in private label. Does that mean that going forward, we still have to annualize that, and so we'll have continuous negative pricing. I also said you mentioned there was a one-off impact from Latin America. So if you could give us a bit of an idea on that go forward. [indiscernible]. Sandra Åberg: Sorry, your sound is not working really. So we can't really hear your question. Maybe we can just start with the 2 questions you had now, because then we have to move on. Is that okay? Celine Pannuti: Perfect. Sandra Åberg: Good. Fredrik Rystedt: Yes. I think I got the question whether the price/mix -- the negative price/mix in consumer goods would flow into Q1 or Q2? Was that the question, Celine? Celine Pannuti: Yes. I mean, I would presume it annualizes if you have made some pricing concessions. And then the question, is there any other price negotiation that you are going through now in retail? Fredrik Rystedt: Yes, right. No, again, we can't comment on, obviously, price negotiations. That's more commercially related, I can't do that. But of course, as we have lower prices now in Q3 and Q4 and especially here in Q4. So there has been a price decline in Consumer Tissue. That will, of course, obviously continue into Q2. So in short, we'll see those price impacts coming or continuing in Q1 and Q2 potentially. Celine Pannuti: And just how material is the Latin America impact that you mentioned? Fredrik Rystedt: Yes, we are not actually giving you the exact number there, Celine, and this is for commercial reasons basically. But if you actually look at -- I gave you a little bit of guidance. It's always interesting when you say you're not going to give a number and then you almost do it anyway. But I'll do it because if you look at the minus 0.6% in terms of organic sales growth for Feminine in the quarter. And then we also stated that without that sales, organic sales growth would have been low single digit. That gives you a little bit of indication as to the size. So this is a bit -- of course, for the group, not a lot, but for Feminine, it is a bit, and it comes out as pricing. So that's temporary. That will not be there in the next quarter. Sandra Åberg: Perfect. Thanks for your question, Celine. Now we will move to our final question, and that question is from Oskar Lindstrom, Danske Bank. Oskar Lindström: Just a slightly different question from me. Following the Edgewell acquisition and an acquisition by another company, you're not going to be sharing, I understand, the brands Stayfree and Carefree between you. Who owns those brands? And who is paying royalties or fees to whom? Ulrika Kolsrud: Well, we own the brands in the geographies that we are operating the brands with. So in those geographies, it's our -- we can actually then do what we think is commercially right to do with those brands. Fredrik Rystedt: So in short, no royalties paid to anyone. Oskar Lindström: Wonderful. That's all the questions I had. Ulrika Kolsrud: That's what you wanted to know. Thank you for that interpretation. Sandra Åberg: Thank you, Oskar, for that question. And now it's time to wrap up. But before we end, I would like to hand over to you, Ulrika, again, for final remarks. Ulrika Kolsrud: Yes. Well, thank you, Sandra. Thank you for joining us today. We are leaving, as I said, a solid 2025 behind us, where I think our resilience has really been a critical success factor. And it's especially great to go into 2026 with this good market share momentum that we have talked about today. And finally, I look forward to see you all on the 7th of May in Mölndal, Sweden. Sandra Åberg: Yes. Thank you for that, Ulrika, and thanks to you for joining. If you have any further questions, just reach out. We will be road showing in Stockholm today virtually next week, and we will also be in London next week. So see you there. And take care, and have a good rest of the day. Bye for now.